0000930236rwt:StrategicInvestmentsMember2022-07-012022-09-30

UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 20172023


OR

o

☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Transition Period from _______________ to _______________.
Commission File Number 1-13759
REDWOOD TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland68-0329422
(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,California94941
(Address of Principal Executive Offices)(Zip Code)

(415) 389-7373
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x ☒No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerx☒Accelerated filero☐
Non-accelerated filero☐(Do not check if a smaller reporting company)Smaller reporting companyo☐
Emerging growth companyo☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareRWTNew York Stock Exchange
10% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock, par value $0.01 per shareRWT PRANew York Stock Exchange
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value per share77,114,790 118,636,302 shares outstanding as of November 3, 20176, 2023




REDWOOD TRUST, INC.
20172023 FORM 10-Q REPORT
TABLE OF CONTENTS
 
Page
PART I —
FINANCIAL INFORMATION
Item 1.
Note 1. Organization
Note 2. Basis of Presentation
Note 3. Summary of Significant Accounting Policies
Note 4. Principles of Consolidation
Note 5. Fair Value of Financial Instruments
Note 6. Residential Loans
Note 7. Business Purpose Loans
Note 8. Consolidated Agency Multifamily Loans
Note 9. Real Estate Securities
Note 8. Mortgage Servicing Rights10. Home Equity Investments (HEI)
Note 9.11. Other Investments
Note 12. Derivative Financial Instruments
Note 10.13. Other Assets and Liabilities
Note 11.14. Short-Term Debt
Note 12.15. Asset-Backed Securities Issued
Note 13.16. Long-Term Debt
Note 14.17. Commitments and Contingencies
Note 15.18. Equity
Note 16.19. Equity Compensation Plans
Note 17.20. Mortgage Banking Activities, Net
Note 18. Investment Fair Value Changes,21. Other Income, Net
Note 19.22. Operating Expenses
Note 20.23. Taxes
Note 21.24. Segment Information
Item 2.
Item 3.
Item 4.
OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



i



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(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
——————
(1)
Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At September 30, 2017 and December 31, 2016, assets of consolidated VIEs totaled $995,768 and $798,317, respectively. At September 30, 2017 and December 31, 2016, liabilities of consolidated VIEs totaled $945,873 and $773,980, respectively. See Note 4 for further discussion.
(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.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEBALANCE SHEETS
(In Thousands, except Share Data)
(Unaudited)		September 30, 2023December 31, 2022
ASSETS (1)
Residential loans, held-for-sale, at fair value$610,946 $780,781 
Residential loans, held-for-investment, at fair value5,236,391 4,832,407 
Business purpose loans, held-for-sale, at fair value102,777 364,073 
Business purpose loans, held-for-investment, at fair value5,146,553 4,968,513 
Consolidated Agency multifamily loans, at fair value420,554 424,551 
Real estate securities, at fair value129,445 240,475 
Home equity investments, at fair value431,272 403,462 
Other investments340,361 390,938 
Cash and cash equivalents203,622 258,894 
Restricted cash56,101 70,470 
Goodwill23,373 23,373 
Intangible assets31,570 40,892 
Derivative assets37,686 20,830 
Other assets250,487 211,240 
Total Assets$13,021,138 $13,030,899 
LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net$1,476,654 $2,029,679 
Derivative liabilities8,781 16,855 
Accrued expenses and other liabilities208,294 180,203 
Asset-backed securities issued (includes $7,910,345 and $7,424,132 at fair value), net8,392,050 7,986,752 
Long-term debt, net1,829,560 1,733,425 
Total liabilities11,915,339 11,946,914 
Commitments and Contingencies (see Note 17)
Equity
Preferred stock, par value $0.01 per share, 2,800,000 shares authorized; 2,800,000 and zero issued and outstanding66,923 — 
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 118,503,762 and 113,484,675 issued and outstanding1,185 1,135 
Additional paid-in capital2,395,247 2,349,845 
Accumulated other comprehensive loss(64,738)(68,868)
Cumulative earnings1,125,126 1,153,370 
Cumulative distributions to stockholders(2,417,944)(2,351,497)
Total equity1,105,799 1,083,985 
Total Liabilities and Equity$13,021,138 $13,030,899 
(In Thousands, except Share Data) Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) 2017 2016 2017 2016
Interest Income        
Residential loans $38,541
 $35,595
 $109,538
 $102,149
Commercial loans —
 6,453
 345
 28,834
Real estate securities 23,425
 18,600
 65,068
 58,112
Other interest income 771
 258
 1,638
 926
Total interest income 62,737
 60,906
 176,589
 190,021
Interest Expense        
Short-term debt (10,182) (5,405) (23,985) (17,439)
Asset-backed securities issued (3,956) (3,193) (11,191) (11,457)
Long-term debt (13,305) (12,999) (37,532) (39,095)
Total interest expense (27,443) (21,597) (72,708) (67,991)
Net Interest Income 35,294
 39,309
 103,881
 122,030
Reversal of provision for loan losses —
 859
 —
 7,102
Net Interest Income after Provision 35,294
 40,168
 103,881
 129,132
Non-interest Income        
Mortgage banking activities, net 21,200
 9,766
 50,850
 24,712
Mortgage servicing rights income, net 1,615
 3,770
 6,106
 12,834
Investment fair value changes, net 324
 11,918
 9,990
 (18,686)
Other income 1,197
 1,643
 3,367
 4,157
Realized gains, net 1,734
 6,615
 8,809
 26,037
Total non-interest income, net 26,070
 33,712
 79,122
 49,054
Operating expenses (19,922) (20,355) (56,789) (70,962)
Net Income before Provision for Income Taxes 41,442
 53,525
 126,214
 107,224
Provision for income taxes (5,262) (972) (16,741) (1,327)
Net Income $36,180
 $52,553
 $109,473
 $105,897
         
Basic earnings per common share $0.46
 $0.67
 $1.39
 $1.34
Diluted earnings per common share $0.41
 $0.58
 $1.26
 $1.23
Regular dividends declared per common share $0.28
 $0.28
 $0.84
 $0.84
Basic weighted average shares outstanding 76,850,830
 76,680,183
 76,803,324
 76,827,026
Diluted weighted average shares outstanding 102,703,108
 97,831,617
 99,397,866
 97,991,678
——————

(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At September 30, 2023 and December 31, 2022, assets of consolidated VIEs totaled $9,639,117 and $9,257,291, respectively. At September 30, 2023 and December 31, 2022, liabilities of consolidated VIEs totaled $8,635,696 and $8,270,276, respectively. See Note 4 for further discussion.
The accompanying notes are an integral part of these consolidated financial statements.

2



REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands, except Share Data)Three Months Ended September 30,Nine Months Ended September 30,
(Unaudited)2023202220232022
Interest Income
Residential loans$62,512 $61,002 $177,137 $191,252 
Business purpose loans93,020 95,197 288,580 270,430 
Consolidated Agency multifamily loans4,677 4,762 13,992 14,247 
Real estate securities5,111 6,989 17,762 30,772 
Other interest income11,754 9,712 37,100 27,816 
Total interest income177,074 177,662 534,571 534,517 
Interest Expense
Short-term debt(27,323)(23,944)(87,862)(49,093)
Asset-backed securities issued(91,323)(90,910)(268,881)(285,464)
Long-term debt(38,077)(27,873)(104,944)(71,435)
Total interest expense(156,723)(142,727)(461,687)(405,992)
Net Interest Income20,351 34,935 72,884 128,525 
Non-Interest (Loss) Income
Mortgage banking activities, net19,440 16,535 52,663 2,833 
Investment fair value changes, net(31,430)(57,697)(36,153)(151,789)
Other income, net2,346 4,027 11,060 17,016 
Realized gains, net50 — 1,104 2,581 
Total non-interest (loss) income, net(9,594)(37,135)28,674 (129,359)
General and administrative expenses(29,697)(38,244)(96,057)(101,719)
Portfolio management costs(3,661)(1,863)(10,271)(5,208)
Loan acquisition costs(1,880)(2,426)(4,613)(10,371)
Other expenses(4,633)(4,261)(13,292)(11,814)
Net Loss before (Provision for) Benefit from Income Taxes(29,114)(48,994)(22,675)(129,946)
(Provision for) benefit from income taxes(1,696)(1,417)(642)10,484 
Net Loss$(30,810)$(50,411)$(23,317)$(119,462)
Dividends on preferred stock(1,750)— (4,927)— 
Net Loss related to common stockholders$(32,560)$(50,411)$(28,244)$(119,462)
Net loss related to common stockholders - Basic$(0.29)$(0.44)$(0.27)$(1.04)
Net loss related to common stockholders - Diluted$(0.29)$(0.44)$(0.27)$(1.04)
Basic weighted average common shares outstanding115,465,977 116,087,890 114,381,548 118,530,172 
Diluted weighted average common shares outstanding115,465,977 116,087,890 114,381,548 118,530,172 
(In Thousands) Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) 2017 2016 2017 2016
Net Income $36,180
 $52,553
 $109,473
 $105,897
Other comprehensive income (loss):        
Net unrealized gain on available-for-sale securities (1)
 13,158
 9,038
 17,899
 5,195
Reclassification of unrealized gain on available-for-sale securities to net income (853) (1,319) (7,103) (19,983)
Net unrealized gain (loss) on interest rate agreements 321
 647
 (375) (22,545)
Reclassification of unrealized loss on interest rate agreements to net income 14
 18
 42
 55
Total other comprehensive income (loss) 12,640
 8,384
 10,463
 (37,278)
Total Comprehensive Income $48,820
 $60,937
 $119,936
 $68,619
——————
(1)
Amounts are presented 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.


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





4
3



REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYCOMPREHENSIVE (LOSS) INCOME


For the Nine Months Ended September 30, 2017
(In Thousands)Three Months Ended September 30,Nine Months Ended September 30,
(Unaudited)2023202220232022
Net (Loss) Income$(30,810)$(50,411)$(23,317)$(119,462)
Other comprehensive income (loss):
Net unrealized (loss) gain on available-for-sale securities(3,921)(8,731)398 (60,013)
Reclassification of unrealized loss on available-for-sale securities to net income (loss)234 544 645 918 
Reclassification of unrealized loss on interest rate agreements to net income (loss)1,040 1,040 3,087 3,087 
Total other comprehensive (loss) income(2,647)(7,147)4,130 (56,008)
Comprehensive (Loss) Income$(33,457)$(57,558)$(19,187)$(175,470)
Dividends on preferred stock$(1,750)$— $(4,927)$— 
Comprehensive Loss Related to Common Stockholders$(35,207)$(57,558)$(24,114)$(175,470)
(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.





4

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS' EQUITY


For the Three Months Ended September 30, 2023
(In Thousands, except Share Data)Preferred StockCommon StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
(Loss)		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesPar Value
June 30, 2023$66,923 114,177,992 $1,142 $2,358,675 $(62,091)$1,157,686 $(2,398,197)$1,124,138 
Net (loss)— — — — — (30,810)— (30,810)
Other comprehensive (loss)— — — — (2,647)— — (2,647)
Issuance of common stock4,244,580 42 33,286 — — — 33,328 
Employee stock purchase and incentive plans— 81,190 1 (124)— — — (123)
Non-cash equity award compensation— — — 3,410 — — — 3,410 
Preferred dividends declared ($0.625 per share)— — — — — (1,750)— (1,750)
Common dividends declared ($0.16 per share)(1)
— — — — — — (19,747)(19,747)
September 30, 2023$66,923 118,503,762 $1,185 $2,395,247 $(64,738)$1,125,126 $(2,417,944)$1,105,799 
For the Nine Months Ended September 30, 2023
(In Thousands, except Share Data)Preferred StockCommon StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
(Loss)		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesPar Value
December 31, 2022$— 113,484,675 $1,135 $2,349,845 $(68,868)$1,153,370 $(2,351,497)$1,083,985 
Net (loss)— — — — — (23,317)— (23,317)
Other comprehensive income— — — — 4,130 — — 4,130 
Issuance of common stock— 4,244,580 42 33,286 — — — 33,328 
Employee stock purchase and incentive plans— 774,507 8 (2,836)— — — (2,828)
Non-cash equity award compensation— — — 14,952 — — — 14,952 
Issuance of preferred stock66,923 — — — — — — 66,923 
Preferred dividends declared ($1.85417 per share)— — — — — (4,927)— (4,927)
Common dividends declared ($0.55 per share)(1)
— — — — — — (66,447)(66,447)
September 30, 2023$66,923 118,503,762 $1,185 $2,395,247 $(64,738)$1,125,126 $(2,417,944)$1,105,799 
5

(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
For the Three Months Ended September 30, 2022

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

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

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


6

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)		Nine Months Ended September 30,
20232022
Cash Flows From Operating Activities:
Net income (loss)$(23,317)$(119,462)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of premiums, discounts, and debt issuance costs, net14,137 2,041 
Depreciation and amortization of non-financial assets11,082 12,115 
Originations of held-for-sale loans(577,098)(913,477)
Purchases of held-for-sale loans(1,051,236)(3,734,972)
Proceeds from sales of held-for-sale loans692,392 4,110,949 
Principal payments on held-for-sale loans45,326 160,985 
Net settlements of derivatives(5,023)158,868 
Non-cash equity award compensation expense14,952 18,505 
Market valuation adjustments(1,275)183,487 
Realized (gains) losses, net(1,104)(2,581)
Net change in:
Other assets14,687 56,156 
Accrued expenses and other liabilities(984)(62,046)
Net cash used in operating activities(867,461)(129,432)
Cash Flows From Investing Activities:
Originations of loan investments(674,500)(1,377,714)
Purchases of loan investments— (22,006)
Proceeds from sales of loans5,351 — 
Principal payments on loan investments1,126,609 1,666,514 
Purchases of real estate securities(9,855)(15,006)
Proceeds from sales of real estate securities138,111 27,471 
Principal payments on real estate securities950 26,584 
Repayments from servicer advance investments, net55,828 65,772 
Acquisition of Riverbend, net of cash acquired— (40,636)
Purchases of HEI(25,626)(176,439)
Repayments on HEI26,153 35,187 
Other investing activities, net(3,787)(20,768)
Net cash provided by investing activities639,234 168,959 
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt1,956,373 4,149,726 
Repayments on short-term debt(2,393,313)(5,192,165)
Proceeds from issuance of asset-backed securities1,240,121 1,420,289 
Repayments on asset-backed securities issued(657,638)(1,288,294)
Proceeds from borrowings on long-term debt442,039 1,678,805 
Deferred long-term debt issuance costs paid(1,640)(17,925)
Repayments on long-term debt(451,253)(873,820)
Payments on repurchase of common stock— (56,496)
Taxes paid on equity award distributions(3,288)(1,571)
Net proceeds from issuance of common stock33,788 67,899 
Net proceeds from issuance of preferred stock66,923 — 
Dividends paid on common stock(66,447)(84,712)
Dividends paid on preferred stock(3,449)— 
Other financing activities, net(3,630)(3,659)
Net cash provided by (used in) financing activities158,586 (201,923)
Net decrease in cash, cash equivalents and restricted cash(69,641)(162,396)
Cash, cash equivalents and restricted cash at beginning of period (1)
329,364 531,484 
Cash, cash equivalents and restricted cash at end of period (1)
$259,723 $369,088 
7


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

(In Thousands)
(Unaudited)		Nine Months Ended September 30,
20232022
Supplemental Cash Flow Information:
Cash paid during the period for:
 Interest$436,879 $378,691 
 Taxes (refunded) paid(1,034)3,894 
Supplemental Noncash Information:
Dividends declared but not paid on preferred stock1,478 — 
Retention of mortgage servicing rights from loan securitizations and sales— 4,543 
Transfers from loans held-for-sale to loans held-for-investment2,009,030 2,643,027 
Transfers from residential loans to real estate owned53,906 4,033 
Operating lease right-of-use assets obtained in exchange for operating lease liabilities337 — 
Reduction in operating lease liabilities due to lease modification274 — 
Transfers from short-term debt to long-term debt325,173 — 
Transfers from long-term debt to short-term debt427,021 908,627 
`
(1)    Cash, cash equivalents, and restricted cash includes cash and cash equivalents of $204 million and restricted cash of $56 million at September 30, 2023, and includes cash and cash equivalents of $297 million and restricted cash of $72 million at September 30, 2022.

The accompanying notes are an integral part of these consolidated financial statements.
8

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)







Note 1. Organization
Redwood Trust, Inc., together with its subsidiaries, focusesis a specialty finance company focused on investingseveral distinct areas of housing credit, with a mission to help make quality housing, whether rented or owned, accessible to all American households. Our operating platforms occupy a unique position in 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 well served by government programs. We seekdeliver 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 incomea diverse mix of investors through our mortgage banking activities.best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential and business purpose housing credit assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in twothree segments: Investment Portfolio and Residential Mortgage Banking. Redwood was incorporated inBanking, Business Purpose Mortgage Banking, and Investment Portfolio.
Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income primarily consists of the Stateinterest 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 hereintheir 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 portfolio.
Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are generally not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our operating subsidiaries” or “our taxable REIT subsidiaries” or “TRS.”
We sponsorRedwood Trust, Inc. was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. For a full description of our Sequoia securitization program, which we usebusiness, see Part I, Item 1—Business in our Annual Report on Form 10-K for the securitization of residential mortgage loans. References to Sequoia with respect to any time or period generally refer collectively to all the then consolidated Sequoia securitization entities for the periods presented. We have also engaged in securitization transactions in order to obtain financing for certain of our securities and commercial loans.year ended December 31, 2022.


Note 2. Basis of Presentation
The consolidated financial statements presented herein are at September 30, 20172023 and December 31, 2016,2022, and for the three and nine months ended September 30, 20172023 and 2016.2022. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2016.2022. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the companyCompany at September 30, 20172023 and results of operations for all periods presented have been made.presented. The results of operations for the three and nine months ended September 30, 20172023 should not be construed as indicative of the results to be expected for the full year.
9

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note 2. Basis of Presentation - (continued)
Principles of Consolidation
In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 where we maintain an ongoing involvement ("Legacy Sequoia"), as well ascertain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans ("Sequoia"), entities formed in connection with the securitization of CoreVest BPL term and bridge loans ("CAFL") and an entity formed in connection with the securitization of Redwood Choice expanded-prime loans duringhome equity investment contracts ("HEI"). We also consolidate the third quarterassets and liabilities of 2017certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("Sequoia Choice"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 Legacy Sequoia, Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment, at fair value, the underlying loans at the consolidated Freddie Mac K-Series entity are shown under Consolidated Agency multifamily loans, at fair value, the underlying BPL term and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, and the underlying HEI at the consolidated HEI securitization entity are shown under Home equity investments, at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income, we recordedrecord 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 1215 for further discussion on ABS issued.
We also consolidate two partnerships ("Servicing Investment" entities) through which we have invested in servicing-related assets. We maintain an 80% ownership interest in each entity and have determined that we are the primary beneficiary of these partnerships.
See Note 4 for further discussion on principles of consolidation.

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, valuation allowances, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.
10

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note 2. Basis of Presentation - (continued)
Acquisitions
On July 1, 2022, we acquired Riverbend Funding LLC ("Riverbend"), a private mortgage lender for residential transitional and commercial real estate investors. Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding this acquisition, including purchase price allocations. Additionally, in 2019 we acquired 5 Arches and CoreVest, an originator and portfolio manager of business purpose residential loans. In connection with these acquisitions, we identified and recorded finite-lived intangible assets totaling $95 million. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at September 30, 2023.
Table 2.1 – Intangible Assets – Activity
Intangible Assets at AcquisitionAccumulated Amortization at September 30, 2023Carrying Value at September 30, 2023Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network$56,300 $(27,580)$28,720 7
Broker network18,100 (16,592)1,508 5
Non-compete agreements11,400 (10,292)1,108 3
Tradenames4,400 (4,166)234 3
Developed technology1,800 (1,800)— 2
Loan administration fees on existing loan assets2,600 (2,600)— 1
Total$94,600 $(63,030)$31,570 6
All of our intangible assets are amortized on a straight-line basis. For the nine months ended September 30, 2023, we recorded intangible asset amortization expense of $9 million. For the nine months ended September 30, 2022, we recorded intangible asset amortization expense of $11 million. Estimated future amortization expense is summarized in the table below.
Table 2.2 – Intangible Asset Amortization Expense by Year
(In Thousands)September 30, 2023
2023 (3 months)$3,109 
20249,412 
20258,426 
20266,694 
20271,571 
2028 and thereafter2,358 
Total Future Intangible Asset Amortization$31,570 

On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at September 30, 2023.

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


11

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note 2. Basis of Presentation - (continued)
The potential liability resulting from the contingent consideration arrangement with Riverbend was recorded at its acquisition-date fair value of zeroas part of the total consideration for the acquisition of Riverbend. At September 30, 2023, the estimated fair value of this contingent liability was zero on our consolidated balance sheets. Our contingent consideration liability is recorded at fair value and periodic changes in the estimated fair value are recorded through Other expenses on our consolidated statements of income. During the nine months ended September 30, 2023, we did not record any contingent consideration income or expense related to our acquisition of Riverbend. See Note 17 for additional information on our contingent consideration liability.

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

Table 2.3 – Unaudited Pro Forma Financial Information
Three Months Ended September 30, 2022Nine Months Ended September 30, 2022
(In Thousands)
Supplementary pro forma information:
Net interest income$34,935 $132,475 
Non-interest (loss) income(37,135)(121,614)
Net (loss) income(50,411)(117,090)



Note 3. Summary of Significant Accounting Policies


Significant Accounting Policies
Included in Note 3 to the Consolidated Financial Statements of our 2016 Annual Report on Form 10-K for the year ended December 31, 2022 is a summary of our significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the company’s consolidated financial condition and results of operations for the three and nine months ended September 30, 2017.
Recent Accounting Pronouncements
Newly Adopted Accounting StandardsStandard Updates ("ASUs")
In January 2017,March 2022, the FASB issued ASU 2017-03, "Accounting Changes2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323).Vintage Disclosures." This newASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the current expected credit loss ("CECL") model. The amendments eliminate the accounting guidance requires that companies evaluate ASUsfor troubled debt restructurings by creditors that have not been adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to determinedisclose current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted.vintage disclosures. This new guidance was effective immediately.for fiscal years beginning after December 31, 2022. We adopted this guidance as required, in the first quarter of 2017,2023, which did not have a material impact on our consolidated financial statements.
12

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)
In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method," which will expand companies' abilities to hedge the benchmark interest rate risk of portfolios of financial assets (or beneficial interests) in a fair value hedge. The ASU expands the use of the portfolio layer method (previously referred to as the last-of-layer method) to allow multiple hedges of a single closed portfolio of assets using spot starting, forward starting, and amortizing-notional swaps. The ASU also permits both prepayable and non-prepayable financial assets to be included in the closed portfolio of assets hedged in a portfolio layer hedge. The ASU further requires that basis adjustments not be allocated to individual assets for active portfolio layer method hedges, but rather be maintained on the closed portfolio of assets as a whole. This new guidance was effective for fiscal years beginning after December 31, 2022. We adopted this guidance in the first quarter of 2023, which did not have a material impact on our consolidated financial statements.
In March 2016,December 2022, the FASB issued ASU 2016-09, "Compensation2022-06, "Reference Rate Reform (Topic 848) - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.Deferral of the Sunset Date of Topic 848." This new guidance provides simplificationsdefers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The objective of the accounting for share-based payment transactions, including related income tax accounting, classificationguidance in Topic 848 is to provide temporary relief during the transition period. Through September 30, 2023, we had not elected to apply the optional expedients and exceptions to any of awards,our existing contracts, hedging relationships, or other transactions.
At September 30, 2023, we had no remaining LIBOR-indexed financial assets or liabilities. Our bridge loans and classificationtrust preferred securities that were previously indexed to LIBOR at June 30, 2023, were transitioned to SOFR indexes in the third quarter of 2023.
Other Recent Accounting Pronouncements Pending Adoption
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the statementsale of cash flows. In addition,an equity security should not be considered in measuring its fair value and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this guidance permits the withholding of employee taxes related to the distribution of equity awards up to the maximum individual employee statutory tax rates. This new guidance isupdate are effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. In the second quarter of 2016, we adopted this new guidance. Upon adoption, we elected to account for forfeitures on employee equity awards as they occur, rather than estimating expected forfeitures. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Other Recent Accounting Pronouncements
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." This new guidance amends previous guidance 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. This new guidance is effective for2023, including interim periods within those fiscal years beginning after December 15, 2018.years. Early adoption is permitted. We are evaluating the accounting and disclosure requirements of ASU 2022-03 and we plan to adopt this new guidance by the required date 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.date. 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,August 2023, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees2023-05, "Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Other Costs (Subtopic 310-20).Initial Measurement." ASU 2023-05 requires a joint venture, upon formation, to initially measure its assets and liabilities at fair value. This new guidance shortensgenerally aligns the amortization period for certain callable debt securities purchased at a premium by requiring the premiumtreatment to be amortizedconsistent with the guidance for business combinations. Joint venture entities that are private companies may elect to the earliest call date.include customer-related intangible assets and non-competition agreements within goodwill and not as separate intangible assets. This new guidance is effective for fiscal years beginningall joint venture entities with a formation date on or after December 15, 2018. EarlyJanuary 1, 2025, with early adoption is permitted. Joint ventures formed prior to the adoption date may elect to apply the new guidance retrospectively back to their original formation date. We are evaluating the accounting and disclosure requirements of ASU 2023-05 and we plan to adopt this new guidance by the required date anddate. We do not anticipate that this update will have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." This new guidance amends previous guidance on how to classify and present changes in restricted cash on 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 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. We are currently evaluating the impact that this update will 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 September 30, 2017. Upon adoption of this standard in the first quarter of 2019, we will record a right-of-use asset and lease liability equal 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 or additional amendments to these standards could change our initial assessment.
Balance Sheet Netting
Certain of our derivatives and short-term debt are subject to master netting arrangements or similar agreements. Under GAAP, in certain circumstances we may elect to present certain financial assets, liabilities and related collateral subject to master netting arrangements in a net position on our consolidated balance sheets. However, we do not elect to report any of these financial assets or liabilities on a net basis, and instead present them on a gross basis on our consolidated balance sheets.
13

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)
The following table 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, 20172023 and December 31, 2016.2022.
Table 3.1 – Offsetting of Financial Assets, Liabilities, and Collateral
Gross Amounts of Recognized Assets (Liabilities)Gross Amounts Offset in Consolidated Balance SheetNet Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet
Gross Amounts Not Offset in Consolidated
Balance Sheet (1)
Net Amount
September 30, 2023 (In Thousands)Financial InstrumentsCash Collateral (Received) Pledged
Assets (2)
Interest rate agreements$13,819 $— $13,819 $— $(9,428)$4,391 
TBAs16,613 — 16,613 (1,169)(14,032)1,412 
Futures2,187 — 2,187 (199)(146)1,842 
Total Assets$32,619 $— $32,619 $(1,368)$(23,606)$7,645 
Liabilities (2)
TBAs$(5,495)$— $(5,495)$1,169 $4,326 $— 
Futures(199)— (199)199 — — 
Loan warehouse debt(325,880)— (325,880)325,880 — — 
Total Liabilities$(331,574)$— $(331,574)$327,248 $4,326 $— 
Gross Amounts of Recognized Assets (Liabilities)Gross Amounts Offset in Consolidated Balance SheetNet Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet
Gross Amounts Not Offset in Consolidated
Balance Sheet (1)
Net Amount
December 31, 2022 (In Thousands)Financial InstrumentsCash Collateral (Received) Pledged
Assets (2)
Interest rate agreements$14,625 $— $14,625 $— $(5,944)$8,681 
TBAs1,893 — 1,893 (1,873)— 20 
Futures3,976 — 3,976 (57)— 3,919 
Total Assets$20,494 $— $20,494 $(1,930)$(5,944)$12,620 
Liabilities (2)
TBAs$(16,784)$— $(16,784)$1,873 $4,518 $(10,393)
Futures(57)— (57)57 — — 
Loan warehouse debt(224,695)— (224,695)224,695 — — 
Total Liabilities$(241,536)$— $(241,536)$226,625 $4,518 $(10,393)
(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, we have pledged excess cash collateral or financial assets to a counterparty (which, in certain circumstances, may be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, these excess amounts are excluded from the table; they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.
(2)Interest rate agreements, TBAs and futures are components of derivative instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by certain residential and business purpose loans, is a component of Short-term debt and Long-term debt on our consolidated balance sheets.
14
  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 
Assets (2)
            
Interest rate agreements $3,942
 $—
 $3,942
 $(3,644) $(298) $—
TBAs 2,875
 —
 2,875
 (2,806) —
 69
Futures 135
 —
 135
 —
 —
 135
Total Assets $6,952
 $—
 $6,952
 $(6,450) $(298) $204
             
Liabilities (2)
            
Interest rate agreements $(57,994) $—
 $(57,994) $3,644
 $54,350
 $—
TBAs (3,946) —
 (3,946) 2,807
 976
 (163)
Futures (423) —
 (423) —
 423
 —
Loan warehouse debt (438,243) —
 (438,243) 438,243
 —
 —
Security repurchase agreements (549,811) —
 (549,811) 549,811
 —
 —
Total Liabilities $(1,050,417) $—
 $(1,050,417) $994,505
 $55,749
 $(163)


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


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

  Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in Consolidated Balance Sheet Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet 
Gross Amounts Not Offset in Consolidated
Balance Sheet (1)
 Net Amount
December 31, 2016
(In Thousands)		    Financial Instruments Cash Collateral (Received) Pledged 
Assets (2)
            
Interest rate agreements $24,980
 $—
 $24,980
 $(7,736) $(4,784) $12,460
TBAs 8,300
 —
 8,300
 (3,936) (4,364) —
Total Assets $33,280
 $—
 $33,280
 $(11,672) $(9,148) $12,460
             
Liabilities (2)
            
Interest rate agreements $(56,919) $—
 $(56,919) $7,736
 $49,183
 $—
TBAs (4,681) —
 (4,681) 3,936
 —
 (745)
Futures (928) —
 (928) —
 928
 —
Loan warehouse debt (485,544) —
 (485,544) 485,544
 —
 —
Security repurchase agreements (305,995) —
 (305,995) 305,995
 —
 —
Total Liabilities $(854,067) $—
 $(854,067) $803,211
 $50,111
 $(745)
(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.
(2)Interest rate agreements, 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.
For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be aggregated and treated as a single transaction. For certain categories of these instruments, some of our transactions generally are cleared and settled through one or more clearinghouses that are substituted as our counterparty. References herein to master netting arrangements or similar agreements include the arrangements and agreements governing the clearing and settlement of these transactions through the clearinghouses. In the event of the termination and close-out of any of those transactions, the corresponding master netting agreement or similar agreement provides for settlement on a net basis. Any such settlement would include the proceeds of the liquidation of any corresponding collateral, subject to certain limitations on termination, settlement, and liquidation of collateral that may apply in the event of the bankruptcy or insolvency of a party. Such limitations should not inhibit the eventual practical realization of the principal benefits of those transactions or the corresponding master netting arrangement or similar agreement and any corresponding collateral.






REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)



Note 4. Principles of Consolidation
GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.
Analysis of Consolidated VIEs
At September 30, 2017,2023, we consolidated certain Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. In addition, we consolidated the Sequoia Choice securitization entity beginning in the third quarter of 2017. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for certain securitizations, we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.
We also consolidate two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At September 30, 2017,2023, we held an 80% ownership interest in, and were responsible for the estimated fair valuemanagement of, our investments in the consolidated Legacy Sequoiaeach such entity. See Note 11 for a further description of these entities and the Sequoia Choiceinvestments they hold and Note 13 for additional information on the minority partner’s non-controlling interest. Additionally, we consolidated an entity that was $19 millionformed to finance servicer advances that we determined was a VIE and $31 million, respectively.for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The following table presentsservicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 14 for additional information on the servicer advance financing.
During 2021, we consolidated an HEI securitization entity formed to invest in HEI that we determined was a summaryVIE and for which we determined we were the primary beneficiary. At September 30, 2023 and December 31, 2022, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 13 for additional information on non-controlling interests in the entity. We consolidate the HEI securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.
For certain of our consolidated VIEs, we have elected to account for the assets and liabilities of these VIEs.
Table 4.1 – Assetsentities as collateralized financing entities ("CFE"). A CFE is a variable interest entity that holds financial assets and Liabilitiesissues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of Consolidated VIEsthe CFE. Accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. The net equity in an entity accounted for under the CFE election effectively represents the fair value of the beneficial interests we own in the entity.
September 30, 2017 
Legacy
Sequoia
 
Sequoia
Choice
 
Total
Consolidated
VIEs
(Dollars in Thousands)   
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
December 31, 2016 
Legacy
Sequoia
 Sequoia
Choice		 
Total
Consolidated
VIEs
(Dollars in Thousands)   
Residential loans, held-for-investment $791,636
 $—
 $791,636
Restricted cash 148
 —
 148
Accrued interest receivable 1,000
 —
 1,000
REO 5,533
 —
 5,533
Total Assets $798,317
 $—
 $798,317
Accrued interest payable $518
 $—
 $518
Asset-backed securities issued 773,462
 —
 773,462
Total Liabilities $773,980
 $—
 $773,980
       
Number of VIEs 20
 —
 20
15


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


Note 4. Principles of Consolidation - (continued)

In addition to our consolidated VIEs for which we made the CFE election, we consolidate certain VIEs for which we did not make the CFE election, and elected to account for the ABS issued by these entities at amortized cost. These include our CAFL Bridge securitizations, Freddie Mac SLST re-securitization, and Servicing Investment entities. In January 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS issued.
The following table presents a summary of the assets and liabilities of our consolidated VIEs.     
Table 4.1 – Assets and Liabilities of Consolidated VIEs
September 30, 2023Legacy
Sequoia		Sequoia
CAFL(1)
Freddie Mac SLST(1)
Freddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Residential loans, held-for-investment$150,152 $3,774,090 $— $1,312,149 $— $— $— $5,236,391 
Business purpose loans, held-for-investment— — 3,494,669 — — — — 3,494,669 
Consolidated Agency multifamily loans— — — — 420,554 — — 420,554 
Home equity investments— — — — — — 129,150 129,150 
Other investments— — — — — 252,650 — 252,650 
Cash and cash equivalents— — — — — 15,198 — 15,198 
Restricted cash67 76 24,127 — — — 4,015 28,285 
Accrued interest receivable333 15,263 19,267 4,900 1,275 2,232 — 43,270 
Other assets— — 8,062 2,865 — 7,973 50 18,950 
Total Assets$150,552 $3,789,429 $3,546,125 $1,319,914 $421,829 $278,053 $133,215 $9,639,117 
Short-term debt$— $— $— $— $— $154,128 $— $154,128 
Accrued interest payable310 12,695 11,181 3,398 1,150 385 — 29,119 
Accrued expenses and other liabilities(106)80 2,736 — — 32,062 25,627 60,399 
Asset-backed securities issued149,202 3,568,505 3,134,929 1,058,991 387,650 — 92,773 8,392,050 
Total Liabilities$149,406 $3,581,280 $3,148,846 $1,062,389 $388,800 $186,575 $118,400 $8,635,696 
Value of our investments in VIEs(1)
$950 $205,581 $394,184 $256,023 $32,904 $91,478 $14,815 $995,935 
Number of VIEs20 20 20 2 1 3 1 67 

16

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 4. Principles of Consolidation - (continued)

December 31, 2022Legacy
Sequoia		Sequoia
CAFL(1)
Freddie Mac SLST(1)
Freddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Residential loans, held-for-investment$184,932 $3,190,417 $— $1,457,058 $— $— $— $4,832,407 
Business purpose loans, held-for-investment— — 3,461,367 — — — — 3,461,367 
Consolidated Agency multifamily loans— — — — 424,551 — — 424,551 
Home equity investments— — — — — — 132,627 132,627 
Other investments— — — — — 301,213 — 301,213 
Cash and cash equivalents— — 710 — — 12,765 — 13,475 
Restricted cash69 73 26,296 — — — 3,424 29,862 
Accrued interest receivable284 11,227 18,102 5,144 1,293 342 — 36,392 
Other assets637 — 14,265 2,898 — 7,547 50 25,397 
Total Assets$185,922 $3,201,717 $3,520,740 $1,465,100 $425,844 $321,867 $136,101 $9,257,291 
Short-term debt$— $— $— $— $— $206,510 $— $206,510 
Accrued interest payable282 8,880 10,918 3,561 1,167 492 — 25,300 
Accrued expenses and other liabilities— 81 4,559 — — 24,745 22,329 51,714 
Asset-backed securities issued184,191 2,971,109 3,115,807 1,222,150 392,785 — 100,710 7,986,752 
Total Liabilities$184,473 $2,980,070 $3,131,284 $1,225,711 $393,952 $231,747 $123,039 $8,270,276 
Value of our investments in VIEs(1)
$1,285 $219,299 $385,927 $237,807 $31,767 $90,120 $13,062 $979,267 
Number of VIEs20 17 19 3 1 3 1 64 
(1)Value of our investments in VIEs, as presented in this table, represents the fair value of our economic interests in the consolidated VIEs that we account for under the CFE election. CAFL includes BPL term loan securitizations we account for under the CFE election and two BPL bridge loan securitizations for which we did not make the CFE election. As of September 30, 2023 and December 31, 2022, the fair value of our interests in the CAFL Term securitizations were $316 million and $304 million, respectively, and the remaining values were associated with our interests in the CAFL Bridge securitizations, for which the ABS issued is carried at amortized historical cost. At December 31, 2022, Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a re-securitization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. In January 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS issued. As of September 30, 2023 and December 31, 2022, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election was $256 million and $323 million, respectively, with the difference reflected in the December 31, 2022 table above due to ABS issued and carried at amortized historical cost.


















17

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 4. Principles of Consolidation - (continued)
The following tables present income (loss) from these VIEs for the three and nine months ended September 30, 2023 and 2022.
Table 4.2 – Income (Loss) from Consolidated VIEs
Three Months Ended September 30, 2023
Legacy
Sequoia		SequoiaCAFLFreddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$2,596 $40,180 $52,940 $15,065 $4,677 $8,069 $— $123,527 
Interest expense(2,487)(35,810)(38,273)(10,523)(4,290)(3,410)— (94,793)
Net interest income109 4,370 14,667 4,542 387 4,659 — 28,734 
Non-interest income
Investment fair value changes, net(215)(4,966)(6,562)(32,388)390 3,059 968 (39,714)
Other income— — 377 — — — — 377 
Total non-interest income, net(215)(4,966)(6,185)(32,388)390 3,059 968 (39,337)
General and administrative expenses— — — — — (89)— (89)
Other expenses— — — — — (1,526)— (1,526)
Income (loss) from Consolidated VIEs$(106)$(596)$8,482 $(27,846)$777 $6,103 $968 $(12,218)
Nine Months Ended September 30, 2023
Legacy
Sequoia		SequoiaCAFLFreddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$7,879 $112,302 $161,960 $45,831 $13,993 $23,794 $— $365,759 
Interest expense(7,650)(99,859)(116,360)(32,392)(12,842)(11,054)— (280,157)
Net interest income229 12,443 45,600 13,439 1,151 12,740 — 85,602 
Non-interest income
Investment fair value changes, net(319)(1,596)(4,643)(40,017)1,138 7,265 1,846 (36,326)
Other income— — 761 — — — — 761 
Total non-interest income, net(319)(1,596)(3,882)(40,017)1,138 7,265 1,846 (35,565)
General and administrative expenses— — — — — (82)— (82)
Other expenses— — — — — (4,007)— (4,007)
Income (loss) from Consolidated VIEs$(90)$10,847 $41,718 $(26,578)$2,289 $15,916 $1,846 $45,948 

18

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 4. Principles of Consolidation - (continued)
Three Months Ended September 30, 2022
Legacy
Sequoia		SequoiaCAFLFreddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$1,475 $31,587 $61,439 $16,098 $4,762 $7,800 $— $123,161 
Interest expense(1,486)(27,541)(44,804)(12,829)(4,377)(2,606)— (93,643)
Net interest income(11)4,046 16,635 3,269 385 5,194 — 29,518 
Non-interest income
Investment fair value changes, net(328)(10,936)(4,527)(41,892)316 (3,286)(584)(61,237)
Other income— — 286 — — — — 286 
Total non-interest income, net(328)(10,936)(4,241)(41,892)316 (3,286)(584)(60,951)
General and administrative expenses— — — — — (55)— (55)
Other expenses— — — — — (372)— (372)
Income (loss) from Consolidated VIEs$(339)$(6,890)$12,394 $(38,623)$701 $1,481 $(584)$(31,860)
Nine Months Ended September 30, 2022
Legacy
Sequoia		SequoiaCAFLFreddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$3,595 $95,608 $195,381 $49,851 $14,247 $23,287 $— $381,969 
Interest expense(3,154)(84,041)(145,207)(40,286)(13,099)(6,110)— (291,897)
Net interest income441 11,567 50,174 9,565 1,148 17,177 — 90,072 
Non-interest income
Investment fair value changes, net(1,378)(20,644)(23,972)(74,796)390 (11,259)4,028 (127,631)
Other income— — 631 — — — — 631 
Total non-interest income, net(1,378)(20,644)(23,341)(74,796)390 (11,259)4,028 (127,000)
General and administrative expenses— — — — — (130)— (130)
Other expenses— — — — — (1,158)— (1,158)
Income (loss) from Consolidated VIEs$(937)$(9,077)$26,833 $(65,231)$1,538 $4,630 $4,028 $(38,216)
We consolidate the assets and liabilities of certain Sequoia, CAFL and HEI securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia, CAFL and HEI entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity, including rights to direct loss mitigation activities; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia, CAFL and HEI entities in accordance with GAAP.

19

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 4. Principles of Consolidation - (continued)
We consolidate the assets and liabilities of certain Freddie Mac K-Series and SLST securitization trusts resulting from our investment in subordinate securities issued by these trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.
Analysis of Unconsolidated VIEs with Continuing Involvement
Since 2012, we have transferred residential loans to 3546 Sequoia securitization entities sponsored by us that are still outstanding as of September 30, 2023, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continuecontinued to hold the servicing rights following the transfer, we recorded MSRsmortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining residential MSRsservicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.
The following table presents information related to securitization transactions that occurred during the three and nine months ended September 30, 2017 and 2016.
Table 4.2 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Principal balance of loans transferred $839,264
 $348,537
 $2,223,387
 $693,427
Trading securities retained, at fair value 24,617
 —
 55,607
 —
AFS securities retained, at fair value 4,416
 1,839
 11,476
 3,673
MSRs recognized —
 1,971
 7,123
 4,102
The following table summarizes the cash flows during the three and nine months ended September 30, 20172023 and 20162022 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.
Table 4.3 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Proceeds from new transfers $839,642
 $356,497
 $2,213,151
 $708,539
MSR fees received 3,631
 3,473
 10,804
 10,397
Funding of compensating interest, net (35) (98) (114) (254)
Cash flows received on retained securities 6,882
 6,384
 19,843
 24,314
The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization for securitizations completed during the three and nine months ended September 30, 2017 and 2016.
Table 4.4 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood

  Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
At Date of Securitization MSRs Senior IO Securities Subordinate Securities MSRs Subordinate Securities
Prepayment rates N/A 11% 10% 24% 15%
Discount rates N/A 14% 5% 11% 7%
Credit loss assumptions N/A 0.25% 0.25% N/A
 0.25%

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

Note 4. Principles of Consolidation - (continued)


  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%
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
MSR fees received$664 $737 $2,020 $2,365 
Funding of compensating interest, net(1)(11)(3)(41)
Cash flows received on retained securities3,254 3,096 8,938 20,380 
The following table presents additional information at September 30, 20172023 and December 31, 2016,2022, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.
Table 4.54.4 – Unconsolidated VIEs Sponsored by Redwood
(In Thousands)September 30, 2023December 31, 2022
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading$32,772 $28,722 
Subordinate securities, classified as AFS73,160 74,367 
Mortgage servicing rights11,562 11,589 
Maximum loss exposure (1)
$117,494 $114,678 
Assets transferred:
Principal balance of loans outstanding$3,830,002 $4,052,922 
Principal balance of loans 30+ days delinquent18,498 27,739 
(1)Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.

20
(In Thousands) September 30, 2017 December 31, 2016
On-balance sheet assets, at fair value:    
Interest-only, senior and subordinate securities, classified as trading $94,491
 $41,909
Subordinate securities, classified as AFS 228,764
 234,025
Mortgage servicing rights 60,377
 58,800
Maximum loss exposure (1)
 $383,632
 $334,734
Assets transferred:    
Principal balance of loans outstanding $8,329,635
 $6,870,398
Principal balance of loans 30+ days delinquent 12,651
 21,427

(1)Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 4. Principles of Consolidation - (continued)
The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at September 30, 20172023 and December 31, 2016.2022.
Table 4.64.5 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
September 30, 2023MSRs
Senior
Securities (1)
Subordinate Securities
(Dollars in Thousands)
Fair value at September 30, 2023$11,562 $32,772 $73,160 
Expected life (in years) (2)
81015
Prepayment speed assumption (annual CPR) (2)
6 %5 %8 %
Decrease in fair value from:
10% adverse change$207 $589 $458 
25% adverse change513 1,400 1,086 
Discount rate assumption (2)
13 %14 %9 %
Decrease in fair value from:
100 basis point increase$405 $1,547 $6,878 
200 basis point increase827 2,782 12,831 
Credit loss assumption (2)
N/A0.03 %0.03 %
Decrease in fair value from:
10% higher lossesN/AN/A$31 
25% higher lossesN/AN/A80 
September 30, 2017 MSRs 
Senior
Securities (1)
 Subordinate Securities
December 31, 2022December 31, 2022MSRs
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 December 31, 2022Fair value at December 31, 2022$11,589 $28,722 $74,367 
Expected life (in years) (2)
 7
 5
 13
Expected life (in years) (2)
7716
Prepayment speed assumption (annual CPR) (2)
 9% 10% 11%
Prepayment speed assumption (annual CPR) (2)
8 %10 %8 %
Decrease in fair value from:      Decrease in fair value from:
10% adverse change $1,694
 $1,575
 $667
10% adverse change$311 $970 $386 
25% adverse change 4,278
 3,734
 1,683
25% adverse change779 2,344 907 
Discount rate assumption (2)
 11% 9% 5%
Discount rate assumption (2)
11 %12 %9 %
Decrease in fair value from:      Decrease in fair value from:
100 basis point increase $2,311
 $1,281
 $25,377
100 basis point increase$430 $980 $7,198 
200 basis point increase 4,453
 2,472
 47,107
200 basis point increase832 1,894 13,394 
Credit loss assumption (2)
 N/A
 0.25% 0.25%
Credit loss assumption (2)
N/A0.03 %0.03 %
Decrease in fair value from:      Decrease in fair value from:
10% higher losses N/A
 $4
 $1,505
10% higher lossesN/AN/A$31 
25% higher losses N/A
 9
 3,764
25% higher lossesN/AN/A76 

(1)Senior securities included $33 million and $29 million of interest-only securities at September 30, 2023 and December 31, 2022, respectively.
(2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.


21

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


Note 4. Principles of Consolidation - (continued)


December 31, 2016 MSRs 
Senior
Securities (1)
 Subordinate Securities
(Dollars in Thousands)   
Fair value at December 31, 2016 $58,800
 $26,618
 $249,317
Expected life (in years) (2)
 7
 6
 12
Prepayment speed assumption (annual CPR) (2)
 11% 8% 12%
Decrease in fair value from:      
10% adverse change $2,226
 $1,075
 $997
25% adverse change 5,284
 2,569
 2,494
Discount rate assumption (2)
 11% 8% 6%
Decrease in fair value from:      
100 basis point increase $2,088
 $1,105
 $19,574
200 basis point increase 4,032
 2,128
 36,574
Credit loss assumption (2)
 N/A
 0.25% 0.25%
Decrease in fair value from:      
10% higher losses N/A
 $19
 $1,174
25% higher losses N/A
 49
 2,933

(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.
Analysis of Unconsolidated Third-Party VIEs
Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at September 30, 2017,2023 and December 31, 2022, grouped by securityasset type.
Table 4.74.6 – Third-Party Sponsored VIE Summary
(Dollars in Thousands) September 30, 2017
(In Thousands)(In Thousands)September 30, 2023December 31, 2022
Mortgage-Backed Securities  Mortgage-Backed Securities
Senior $181,723
Senior$8,397 $145 
Re-REMIC 39,033
Subordinate 812,260
Subordinate15,116 137,241 
Total Mortgage-Backed SecuritiesTotal Mortgage-Backed Securities23,513 137,386 
Excess MSRExcess MSR5,590 7,082 
Total Investments in Third-Party Sponsored VIEs $1,033,016
Total Investments in Third-Party Sponsored VIEs$29,103 $144,468 
We determined that we are not the primary beneficiary of anythese third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.
Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)



Note 5. Fair Value of Financial Instruments
For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.
In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.




22

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


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


The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at September 30, 20172023 and December 31, 2016.2022.


Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
September 30, 2023December 31, 2022
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value$610,918 $610,918 $780,781 $780,781 
Residential loans, held-for-investment, at fair value5,236,391 5,236,391 4,832,407 4,832,407 
Business purpose loans, held-for-sale, at fair value102,777 102,777 364,073 364,073 
Business purpose loans, held-for-investment, at fair value5,146,553 5,146,553 4,968,513 4,968,513 
Consolidated Agency multifamily loans, at fair value420,554 420,554 424,551 424,551 
Real estate securities, at fair value129,445 129,445 240,475 240,475 
HEI431,272 431,272 403,462 403,462 
Servicer advance investments (1)
219,813 219,813 269,259 269,259 
MSRs (1)
26,033 26,033 25,421 25,421 
Excess MSRs (1)
38,427 38,427 39,035 39,035 
Other investments (1)
5,583 5,583 6,155 6,155 
Cash and cash equivalents203,622 203,622 258,894 258,894 
Restricted cash56,101 56,101 70,470 70,470 
Derivative assets37,686 37,686 20,830 20,830 
Margin receivable (2)
10,536 10,536 13,802 13,802 
Liabilities
Short-term debt (3)
$1,329,017 $1,327,134 $1,853,664 $1,853,664 
Margin payable (4)
25,210 25,210 5,944 5,944 
Guarantee obligations (4)
5,913 3,734 6,344 4,738 
HEI securitization non-controlling interest25,627 25,627 22,329 22,329 
Derivative liabilities8,781 8,781 16,855 16,855 
ABS issued, net
at fair value7,910,345 7,910,345 7,424,132 7,424,132 
at amortized cost481,705 454,973 562,620 524,768 
Other long-term debt, net (5)
1,320,733 1,315,014 1,077,200 1,069,946 
Convertible notes, net (5)
517,662 489,828 693,473 638,049 
Trust preferred securities and subordinated notes, net (5)
138,802 97,650 138,767 83,700 
(1)These investments are included in Other investments on our consolidated balance sheets.
(2)These assets are included in Other assets on our consolidated balance sheets.
(3)Short-term debt excludes short-term convertible notes, which are included below under "Convertible notes, net."
(4)These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.
(5)These liabilities are primarily included in Long-term debt, net on our consolidated balance sheets. Convertible notes, net also includes convertible notes classified as Short-term debt. See Note 14 for more information on Short-term debt.
During the three and nine months ended September 30, 2023, we elected the fair value option for zero and $8 million of securities, respectively, $858 million and $1.1 billion (principal balance) of residential loans, respectively, and $411 million and $1.26 billion (principal balance) of business purpose loans, respectively. Additionally, during the three and nine months ended September 30, 2023, we elected the fair value option for $0.1 million and $26 million of HEI, respectively. For the three and nine months ended September 30, 2023, we elected the fair value option for zero and $1 million, respectively, of Other investments. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities, HEI and certain equity investments.
23
  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, 20172023
(Unaudited)


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


During the three and nine months ended September 30, 2017, we elected the fair value option for $16 million and $32 million of residential senior securities, $167 million and $412 million of subordinate securities, $1.43 billion and $3.72 billion of residential loans (principal balance), and $0.3 million and $8 million of MSRs, respectively. We anticipate electing the fair value option for all future purchases of residential loans that we may sell to third parties or transfer to securitizations, for 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, 20172023 and December 31, 2016,2022, as well as the fair value hierarchy of the valuation inputs used to measure fair value.
Table 5.2 – Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2023Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$5,847,309 $— $— $5,847,309 
Business purpose loans5,249,330 — — 5,249,330 
Consolidated Agency multifamily loans420,554 — — 420,554 
Real estate securities129,445 — — 129,445 
HEI431,272 — — 431,272 
Servicer advance investments219,813 — — 219,813 
MSRs26,033 — — 26,033 
Excess MSRs38,427 — — 38,427 
Other investments5,583 — — 5,583 
Derivative assets37,686 18,800 13,819 5,067 
Liabilities
HEI securitization non-controlling interest$25,627 $— $— $25,627 
Derivative liabilities8,781 5,694 — 3,087 
ABS issued7,910,345 — — 7,910,345 
September 30, 2017 
Carrying
Value
 Fair Value Measurements Using
December 31, 2022December 31, 2022Carrying
Value		Fair Value Measurements Using
(In Thousands) 
Carrying
Value
 Level 1 Level 2 Level 3(In Thousands)Level 1Level 2Level 3
Assets      Assets
Residential loans $4,183,833
 $—
 $—
 $4,183,833
Residential loans$5,613,157 $— $— $5,613,157 
Trading securities 820,134
 —
 —
 820,134
Available-for-sale securities 536,138
 —
 —
 536,138
Business purpose loansBusiness purpose loans5,332,586 — — 5,332,586 
Consolidated Agency multifamily loansConsolidated Agency multifamily loans424,551 — — 424,551 
Real estate securitiesReal estate securities240,475 — — 240,475 
HEIHEI403,462 — — 403,462 
Servicer advance investmentsServicer advance investments269,259 — — 269,259 
MSRsMSRs25,421 — — 25,421 
Excess MSRsExcess MSRs39,035 — — 39,035 
Other investmentsOther investments6,155 — — 6,155 
Derivative assets 11,948
 3,010
 3,942
 4,996
Derivative assets20,830 5,869 14,625 336 
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
HEI securitization non-controlling interestHEI securitization non-controlling interest$22,329 $— $— $22,329 
Derivative liabilities $65,238
 $4,369
 $57,994
 $2,875
Derivative liabilities16,855 16,841 — 14 
ABS issued 944,288
 —
 —
 944,288
ABS issued7,424,132 — — 7,424,132 
24
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, 20172023
(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, 2017.2023.
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
 Assets   LiabilitiesAssets
 Residential Loans Trading Securities 
AFS
Securities
 MSRs Guarantee Asset 
Derivatives(1)
 
ABS
Issued
Residential LoansBusiness Purpose
Loans		Consolidated Agency Multifamily LoansTrading SecuritiesAFS
Securities		HEIServicer Advance InvestmentsExcess MSRsMSRs and Other Investments
(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, 2022		Beginning balance -
December 31, 2022		$5,613,157 $5,332,586 $424,552 $108,329 $132,146 $403,462 $269,259 $39,035 $31,576 
Acquisitions 3,791,471
 444,073
 31,654
 7,957
 —
 —
 286,898
Acquisitions1,050,444 — — 7,883 1,979 25,626 — — 500 
OriginationsOriginations— 1,255,680 — — — — — — — 
Sales (3,147,707) (87,092) (60,801) (52,966) —
 —
 —
Sales(226,646)(471,336)— (82,270)(54,339)— — — (272)
Principal paydowns (405,888) (13,219) (42,325) —
 —
 —
 (146,358)Principal paydowns(363,128)(802,610)(6,198)(324)(632)(26,153)(55,828)— (114)
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, net(224,162)(17,809)2,200 14,423 946 28,337 6,382 (608)426 
Unrealized losses in OCI, net —
 —
 10,847
 —
 —
 —
 —
Unrealized losses in OCI, net— — — — 1,304 — — — — 
Other settlements, net (2)(1)
 (3,178) —
 —
 —
 —
 (31,079) —
(2,356)(47,181)— — — — — — (500)
Ending Balance -
September 30, 2017
 $4,183,833
 $820,134
 $536,138
 $62,928
 $3,049
 $2,121
 $944,288
Ending balance -
September 30, 2023		Ending balance -
September 30, 2023		$5,847,309 $5,249,330 $420,554 $48,041 $81,404 $431,272 $219,813 $38,427 $31,616 
(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)
HEI Securitization Non-Controlling InterestABS
Issued
(In Thousands)
Beginning balance - December 31, 2022$322 $22,329 $7,424,132 
Acquisitions— — 1,240,120 
Principal paydowns— — (571,883)
Gains (losses) in net income, net10,086 3,298 (182,023)
Other settlements, net (1)
(8,428)— — 
Ending balance - September 30, 2023$1,980 $25,627 $7,910,346 
(1)     Other settlements, net: for residential and business purpose loans, represents the transfer of loans to REO; for derivatives, represents the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential and business purpose loans; and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.
(2)     For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments and interest rate lock commitments, are presented on a net basis.


25

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


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


The following table presents the portion of fair value gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, 20172023 and 2016.2022. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 20172023 and 20162022 are not included in this presentation.
Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, 20172023 and 20162022 Included in Net Income
Included in Net Income (loss)
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Assets
Residential loans at Redwood$(3,963)$(28,762)$(4,404)$(42,952)
Business purpose loans at Redwood and CAFL Bridge(15,646)(10,967)(25,876)(39,019)
Net investments in consolidated Sequoia entities (1)
(4,471)(11,264)(1,952)(22,467)
Net investments in consolidated Freddie Mac SLST entities (1)
(32,397)(41,969)(40,398)(75,043)
Net investments in consolidated Freddie Mac K-Series entities (1)
390 316 1,138 390 
Net investments in consolidated CAFL Term entities (1)
(3,800)(6,585)(1,903)(24,365)
Net investment in consolidated HEI securitization entity (1)
2,700 (1,652)5,145 11,348 
Trading securities4,408 (12,668)5,795 (34,104)
Available-for-sale securities66 — (32)— 
HEI at Redwood8,705 (4,903)19,592 (2,272)
Servicer advance investments4,069 (3,905)6,383 (10,218)
MSRs160 1,653 1,425 9,118 
Excess MSRs(1,450)(351)(608)(3,779)
Loan purchase and interest rate lock commitments5,061 723 5,067 744 
Liabilities
Non-controlling interest in consolidated HEI entity$(1,732)$1,068 $(3,298)$(7,320)
Loan purchase commitments(3,087)(212)(3,087)(212)
  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)
(1)    Represents the portion of net fair value gains or losses included in our consolidated statements of income related to securitized loans, securitized HEI, and the associated ABS issued at our consolidated securitization entities held at September 30, 2023 and 2022, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election, excluding REO.
The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2017.2023. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance sheetsheets at September 30, 2017.2023.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 20172023
Gain (Loss) for
September 30, 2023Carrying
Value		Fair Value Measurements UsingThree Months EndedNine Months Ended
(In Thousands)Level 1Level 2Level 3September 30, 2023September 30, 2023
Assets
Strategic investments$6,750 $— $— $6,750 $100 $(2,550)
REO423 — — 423 (65)(65)
26
          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, 20172023
(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, 20172023 and 2016.2022.
Table 5.6 – Market Valuation Gains and Losses, Net
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Mortgage Banking Activities, Net
Residential loans held-for-sale$(8,683)$(20,060)$(2,774)$(71,776)
Residential loan purchase commitments5,864 (2,716)8,045 (53,236)
BPL term loans held-for-sale1,600 (19,325)13,214 (83,827)
BPL term loan interest rate lock commitments— 19 — (666)
BPL bridge loans1,438 (9)4,808 2,242 
Trading securities (1)
(482)148 2,188 4,249 
Risk management derivatives, net15,591 48,363 11,802 164,137 
Total mortgage banking activities, net (2)
$15,328 $6,420 $37,283 $(38,877)
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood (called Sequoia loans)$— $(6,614)$183 $(18,876)
BPL term loans held-for-sale— — (14,430)— 
BPL bridge loans held-for-investment(16,899)2,482 (22,867)(9,220)
Trading securities5,738 (12,668)12,271 (34,268)
Servicer advance investments4,069 (3,905)6,382 (10,217)
Excess MSRs(1,450)(351)(608)(3,779)
Net investments in Legacy Sequoia entities (3)
(215)(328)(319)(1,378)
Net investments in Sequoia entities (3)
(4,256)(10,936)(886)(20,644)
Net investments in Freddie Mac SLST entities (3)
(32,388)(41,892)(40,017)(74,796)
Net investment in Freddie Mac K-Series entity (3)
390 316 1,138 390 
Net investments in CAFL Term entities (3)
(3,800)(6,585)(1,903)(24,365)
Net investments in HEI securitization entities (3)
968 (584)1,846 4,028 
HEI at Redwood9,290 (4,774)21,598 (1,986)
Other investments(414)1,445 (4,208)12,028 
Risk management derivatives, net7,471 27,241 6,446 33,609 
Credit losses on AFS securities, net66 (544)(33)(2,315)
Other— — (746)— 
Total investment fair value changes, net$(31,430)$(57,697)$(36,153)$(151,789)
Other Income
MSRs$(209)$1,236 $612 $8,031 
Other(7)(852)(467)(852)
Total other income (4)
$(216)$384 $145 $7,179 
Total Market Valuation Gains (Losses), Net$(16,318)$(50,893)$1,275 $(183,487)

27
  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, 20172023
(Unaudited)


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


Footnotes to Table 5.6
(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the market risks associated with our residential mortgage banking operations.
(2)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases, and other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes.
(3)Includes changes in fair value of the loans held-for-investment, securitized HEI, REO, and ABS issued at the entities, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election.
(4)Other income presented above does not include net MSR fee income or provisions for repurchases of MSRs, as these amounts do not represent market valuation adjustments.
At September 30, 2017,2023, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2016. 2022.

28

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments
September 30, 2023Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average(1)
Assets
Residential loans, at fair value:
Jumbo loans$540,782 
Senior credit spread to TBA price(2)
$1.63 $2.63 $1.71 
Subordinate credit spread(2)
2751020bps438bps
Senior credit support(2)
7 7 %7 %
IO discount rate(2)
10 10 %10 %
Prepayment rate (annual CPR)(2)
15 15 %15 %
Jumbo loans committed to sell70,136 Whole loan committed sales price$98 -$101 $98 
Loans held by Legacy Sequoia (3)
150,152 Liability priceN/AN/A
Loans held by Sequoia (3)
3,774,090 Liability priceN/AN/A
Loans held by Freddie Mac SLST (3)
1,312,149 Liability priceN/AN/A
Business purpose loans:
BPL term loans72,149 
Senior credit spread(2)
185 -185 bps185 bps
Subordinate credit spread(2)
325 -818 bps468 bps
Senior credit support(2)
35 -35 %35 %
IO discount rate(2)
8 -9 %8 %
Prepayment rate (annual CPR)(2)
— -3 %3 %
Dollar price of non-performing loans$60 -$100 $61 
BPL term loans held by CAFL (3)
2,969,217 Liability priceN/AN/A
BPL bridge loans2,207,964 Whole loan discount rate6 -12 %9 %
Whole loan spread520 -520 bps520 bps
Dollar price of non-performing loans$48-$100 $91 
Multifamily loans held by Freddie Mac K-Series (3)
420,554 Liability priceN/AN/A
Trading and AFS securities129,445 Discount rate6 -18 %11 %
Prepayment rate (annual CPR)4 -65 %10 %
Default rate— -14 %0.1 %
Loss severity— -50 %22 %
HEI302,122 Discount rate10 -11 %10 %
Prepayment rate (annual CPR)1 -20 %15 %
Home price appreciation (depreciation)(1)-3 %3 %
HEI held by HEI securitization entity(3)
129,150 Liability priceN/AN/A
Servicer advance investments219,813 Discount rate3 -5 %4 %
Prepayment rate (annual CPR)11 -30 %14 %
Expected remaining life (4)
6-6yrs6yrs
Mortgage servicing income— -18 bps4 bps
29
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, 20172023
(Unaudited)


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

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
September 30, 2023Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average (1)
Assets (continued)
MSRs$26,033 Discount rate12 -73 %13 %
Prepayment rate (annual CPR)3 -21 %6 %
Per loan annual cost to service$93 -$93 $93 
Excess MSRs38,427 Discount rate13 -19 %18 %
Prepayment rate (annual CPR)10 -100 %17 %
Excess mortgage servicing amount8 -20 bps11 bps
Residential loan purchase commitments, net1,980 
Senior credit spread to TBA price(2)
$1.63 $2.63 $1.71 
Subordinate credit spread(2)
275-1020bps438bps
Senior credit support(2)
7 -7 %7 %
IO discount rate(2)
10 -10 %10 %
Prepayment rate (annual CPR)(2)
15 -15 %15 %
Pull-through rate22 -100 %68 %
Committed sales price$102 -$103 $102 
Liabilities
ABS issued (3):
At consolidated Sequoia entities3,717,707 Discount rate4 -19 %8 %
Prepayment rate (annual CPR)3 -25 %8 %
Default rate— -16 %1 %
Loss severity25 -50 %31 %
At consolidated CAFL Term entities2,653,224 Discount rate6 -12 %7 %
Prepayment rate (annual CPR)— -3 %0.1 %
Default rate5 -14 %7 %
Loss severity30 -40 %30 %
At consolidated Freddie Mac SLST entities1,058,991 Discount rate6 -16 %7 %
Prepayment rate (annual CPR)6 -6 %6 %
Default rate12 -14 %13 %
Loss severity25 -25 %25 %
At consolidated Freddie Mac K-Series entities (3)
387,650 Discount rate3 -10 %6 %
At consolidated HEI entities92,773 Discount rate10 -16 %11 %
Prepayment rate (annual CPR)20 -20 %20 %
Home price appreciation (depreciation)(1)-3 %3 %
(1)The weighted average input values for all loan types are based on unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.
(2)Values represent pricing inputs used in securitization pricing model. Credit spreads represent spreads to applicable swap rates unless specified otherwise.
(3)The fair value of the loans and HEI held by consolidated entities is based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At September 30, 2023, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was $206 million, $316 million, $256 million, $33 million, and $15 million, respectively.
(4)Represents the estimated average duration of outstanding servicer advances at a given point in time (not taking into account new advances made with respect to the pool).
30


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
Determination of Fair Value
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 –in isolation — 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 accountAnnual Report on Form 10-K for the consolidated Sequoia securitization entities as collateralized financing entities ("CFEs") in accordance with GAAP. A CFEyear ended December 31, 2022 is a variable interest entity that holdsmore 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. Significanttheir 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 absencegeneral classification of such inputs, management’s best estimate is used (Level 3).
MSRs
MSRs includeinstruments pursuant to the rights to service jumboLevel 1, Level 2, and conforming residential mortgage loans. Significant inputs in the valuation analysis are predominantly Level 3 due to the naturevaluation hierarchy.
Certain of theseour Other investments (inclusive of strategic investments in early-stage companies) are Level 3 financial instruments and the lack of readily available market quotes. Changes inthat 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 inputsequity or debt with conversion features and assumptions. Estimateddo not have readily determinable fair values arevalues. We initially record these investments at cost and adjust their fair value based on applying the inputsobservable price changes, such as follow-on capital raises or secondary sales, and will also evaluate impacts to generate the net present valuevaluation from changing market conditions and underlying business performance. As 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 value of the MSRs.
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 representsSeptember 30, 2023, 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).investments was $6 million.
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, 20172023 and December 31, 2016.2022.
Table 6.1 – Classifications and Carrying Values of Residential Loans
September 30, 2023LegacyFreddie Mac
(In Thousands)RedwoodSequoiaSequoiaSLSTTotal
Held-for-sale at fair value$610,946 $— $— $— $610,946 
Held-for-investment at fair value— 150,152 3,774,090 1,312,149 5,236,391 
Total Residential Loans$610,946 $150,152 $3,774,090 $1,312,149 $5,847,337 
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, 2022LegacyFreddie Mac
(In Thousands)RedwoodSequoiaSequoiaSLSTTotal
Held-for-sale at fair value$780,781 $— $— $— $780,781 
Held-for-investment at fair value— 184,932 3,190,417 1,457,058 4,832,407 
Total Residential Loans$780,781 $184,932 $3,190,417 $1,457,058 $5,613,188 
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

At September 30, 2017,2023, we owned mortgage servicing rights associated with $2.41 billion$653 million (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.

31

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


Note 6. Residential Loans - (continued)

Residential Loans Held-for-Sale
DuringThe following table summarizes the characteristics of residential loans held-for-sale at September 30, 2023 and December 31, 2022.
Table 6.2 – Characteristics of Residential Loans Held-for-Sale
(Dollars in Thousands)September 30, 2023December 31, 2022
Number of loans665 994 
Unpaid principal balance$658,540 $822,063 
Fair value of loans$610,946 $780,781 
Market value of loans pledged as collateral under short-term borrowing agreements$608,649 $775,545 
Weighted average coupon5.43 %5.12 %
Delinquency information
Number of loans with 90+ day delinquencies— 1 
Unpaid principal balance of loans with 90+ day delinquencies$— $208 
Fair value of loans with 90+ day delinquencies$— $170 
Number of loans in foreclosure— — 
The following table provides the activity of residential loans held-for-sale during the three and nine months ended September 30, 2017, we purchased $1.43 billion2023 and $3.72 billion (principal balance)2022.
Table 6.3 – Activity of Residential Loans Held-for-Sale
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Principal balance of loans acquired (1)
$857,974 $336,698 $1,092,992 $3,597,339 
Principal balance of loans sold53,743 662,302 235,821 3,727,993 
Principal balance of loans transferred to HFI337,752 — 995,047 687,192 
Net market valuation gains (losses) recorded (2)
(8,683)(26,674)(2,590)(90,652)
(1)For the nine months ended September 30, 2022, includes $102 million, of loans respectively, for which we elected the fair value option, and we sold $1.05 billion and $3.08 billion (principal balance)acquired through calls of loans, respectively, for which we recorded netthree seasoned Sequoia securitizations.
(2)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 September 30, 2017, loans held-for-sale with a market value of $493 million were pledged as collateral under short-term borrowing agreements.
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.
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.
Residential Loans Held-for-Investment at Fair Value
At Redwood
At September 30, 2017, we owned 3,081 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.23 billion 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 of these loans were greater than 90 days delinquent or 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 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 fair value of $98 million from held-for-investment to held-for-sale. During the three and nine months ended September 30, 2017, 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, loans 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.

32

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


Note 6. Residential Loans - (continued)

Residential Loans Held-for-Investment at Fair Value
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, 20172023 and December 31, 2016,2022.
Table 6.4 – Characteristics of Residential Loans Held-for-Investment
September 30, 2023LegacyFreddie Mac
(Dollars in Thousands)SequoiaSequoiaSLST
Number of loans1,098 5,460 10,448 
Unpaid principal balance$164,904 $4,624,113 $1,641,178 
Fair value of loans (2)
$150,152 $3,774,090 $1,312,149 
Weighted average coupon6.35 %3.73 %4.50 %
Delinquency information
Number of loans with 90+ day delinquencies (1)
24 9 818 
Unpaid principal balance of loans with 90+ day delinquencies (1)
$5,460 $7,599 $139,349 
Fair value of loans with 90+ day delinquenciesN/AN/AN/A
Number of loans in foreclosure14 6 317 
Unpaid principal balance of loans in foreclosure$2,742 $4,842 $52,918 
December 31, 2022LegacyFreddie Mac
(Dollars in Thousands)SequoiaSequoiaSLST
Number of loans1,304 4,624 10,882 
Unpaid principal balance$204,404 $3,847,091 $1,719,236 
Fair value of loans (2)
$184,932 $3,190,417 $1,457,058 
Weighted average coupon4.51 %3.25 %4.50 %
Delinquency information
Number of loans with 90+ day delinquencies (1)
30 10 1,211 
Unpaid principal balance of loans with 90+ day delinquencies (1)
$6,824 $7,799 $209,397 
Fair value of loans with 90+ day delinquenciesN/AN/AN/A
Number of loans in foreclosure11 5 427 
Unpaid principal balance of loans in foreclosure$1,166 $4,654 $72,440 
(1)For loans held at consolidated entities, the unpaid principal balancenumber and UPB of loans 90-or-more days delinquent includes loans in foreclosure.
(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2.

33

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 6. Residential Loans - (continued)
For loans held at our consolidated Legacy Sequoia, Sequoia, and Freddie Mac SLST entities, delinquent greater than 90 days was $14 millionmarket value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines, and $19 million, respectively, andare recorded in Investment fair value changes, net on our consolidated statements of income. The following table provides the unpaid principal balanceactivity of residential loans in foreclosure was $12 million and $11 million, respectively. Duringheld-for-investment at consolidated entities during the three and nine months ended September 30, 2017,2023 and 2022.
Table 6.5 – Activity of Residential Loans Held-for-Investment at Consolidated Entities
Three Months Ended September 30, 2023Three Months Ended September 30, 2022
LegacyFreddie MacLegacyFreddie Mac
(In Thousands)SequoiaSequoiaSLSTSequoiaSequoiaSLST
Fair value of loans transferred from HFS to HFI (1)
N/A$337,752 N/AN/A$— N/A
Net market valuation gains (losses) recorded(2,242)(175,011)(51,046)5,182 (202,825)(104,040)
Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
LegacyFreddie MacLegacyFreddie Mac
(In Thousands)SequoiaSequoiaSLSTSequoiaSequoiaSLST
Fair value of loans transferred from HFS to HFI (1)
N/A$995,047 N/AN/A$684,491 N/A
Net market valuation gains (losses) recorded4,014 (166,909)(62,756)12,286 (685,042)(224,543)
(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with Sequoia securitizations.
REO
See Note 13 for detail on residential loan REO activity during 2023.


Note 7. Business Purpose Loans
We originate and invest in business purpose loans, including term loans and bridge loans. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2023 and December 31, 2022.
Table 7.1 – Classifications and Carrying Values of Business Purpose Loans
September 30, 2023BPL TermBPL Bridge
(In Thousands)RedwoodCAFLRedwoodCAFLTotal
Held-for-sale at fair value$72,149 — $30,628 $— $102,777 
Held-for-investment at fair value— 2,969,217 1,651,883 525,453 5,146,553 
Total Business Purpose Loans$72,149 $2,969,217 $1,682,511 $525,453 $5,249,330 
December 31, 2022BPL TermBPL Bridge
(In Thousands)RedwoodCAFLRedwoodCAFLTotal
Held-for-sale at fair value$358,791 $— $5,282 $— $364,073 
Held-for-investment at fair value— 2,944,984 1,507,146 516,383 4,968,513 
Total Business Purpose Loans$358,791 $2,944,984 $1,512,428 $516,383 $5,332,586 
34

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 7. Business Purpose Loans - (continued)
All of the outstanding BPL term loans at September 30, 2023 were first-lien, fixed-rate loans with original maturities of three, five, seven, or ten years.
The outstanding BPL bridge loans held-for-investment at September 30, 2023 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of 78% one-month SOFR-indexed adjustable-rate loans, and 22% fixed-rate loans (in each case based on unpaid principal balance).
At September 30, 2023, we had $623 million in commitments to fund BPL bridge loans. See Note 17 for additional information on these commitments.
The following table provides the activity of business purpose loans at Redwood during the three and nine months ended September 30, 2023 and 2022.
Table 7.2 – Activity of Business Purpose Loans at Redwood
Three Months Ended 
 September 30, 2023		Three Months Ended 
 September 30, 2022
(In Thousands)BPL Term at RedwoodBPL Bridge at RedwoodBPL Term at RedwoodBPL Bridge at Redwood
Principal balance of loans originated$105,777 $303,284 $99,281 $470,425 
Principal balance of loans acquired— 1,820 — 59,977 
Principal balance of loans sold to third parties27,436 34,061 37,202 48,279 
Fair value of loans transferred (1)
(278,751)(116,679)266,181 (77,362)
Mortgage banking activities income (loss) recorded (3)
1,600 1,438 (19,325)(110)
Investment fair value changes recorded (4)
— (16,899)— (679)
Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
(In Thousands)BPL Term at RedwoodBPL Bridge at RedwoodBPL Term at RedwoodBPL Bridge at Redwood
Principal balance of loans originated$408,477 $828,149 $865,253 $1,424,604 
Principal balance of loans acquired— 19,054 100,349 81,983 
Principal balance of loans sold to third parties425,542 65,868 368,704 48,279 
Fair value of loans transferred (1)(2)
(278,751)(337,657)561,218 (465,966)
Mortgage banking activities income (loss) recorded (3)
13,214 4,808 (83,827)1,129 
Investment fair value changes recorded (2)(4)
(14,430)(22,867)— (6,747)
(1)For BPL term at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL term securitizations. For BPL bridge at Redwood, represents the transfer of BPL bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their inclusion in an existing bridge loan securitization with a replenishment feature.
(2)During the nine months ended September 30, 2023, we substituted a pool of held-for-sale term loans at Redwood for a non-performing held-for-investment term loan at a consolidated CAFL securitization, each with unpaid principal balances of approximately $28 million. The negative investment fair value changes recorded for BPL Term at Redwood during the nine months ended September 30, 2023 were attributable to this substitution, with an equal and offsetting positive fair value change recorded for BPL Term at CAFL (related to the retained bond we own in the associated consolidated CAFL securitization).
(3)Represents loan origination fee income and net market valuation gainschanges from the time a loan is originated to when it is sold or transferred to our investment portfolio and, for bridge loans, when transferred into a securitization. See Table 20.1 for additional detail on Mortgage banking activities income (loss).
(4)For BPL Bridge at Redwood, represents net market valuation changes for loans classified as held-for-investment and associated interest-only strip liabilities.
35

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loans Held-for-Investment at CAFL
    We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying BPL term loans and bridge loans owned by these entities. For loans held at our consolidated CAFL Term entities, market value changes are based on the estimated fair value of $4 millionthe associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines, and $24 million, respectively, on these loansare recorded through Investment fair value changes, net on our consolidated statements of income. DuringThe net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2. We did not elect to account for the CAFL Bridge securitizations under the CFE guidelines.
REO
See Note 13 for detail on business purpose loan REO activity during 2023.

The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2016, we recorded a net2023 and 2022.
Table 7.3 – Activity of Business Purpose Loans Held-for-Investment at CAFL
Three Months Ended 
 September 30, 2023		Three Months Ended 
 September 30, 2022
(In Thousands)BPL Term at
CAFL		BPL Bridge at CAFLBPL Term at
CAFL		BPL Bridge at CAFL
Net market valuation gains (losses) recorded(1)
$(1,360)$(2,560)$(108,980)$1,906 
Transfers278,751 116,679 — — 
Nine Months Ended 
 September 30, 2023		Nine Months Ended 
 September 30, 2022
(In Thousands)BPL Term at
CAFL		BPL Bridge at CAFLBPL Term at
CAFL		BPL Bridge at CAFL
Net market valuation gains (losses) recorded(1)
$(1,961)$(1,960)$(419,182)$50 
Transfers278,751 337,657 — — 
(1)Net market valuation gain of $9 million and a net market valuation loss of $19 million, respectively,gains (losses) on thesebusiness purpose loans held-for-investment at CAFL are recorded through Investment fair value changes, net on our consolidated statements of income. Pursuant to the collateralized financing entity guidelines, theFor loans held at our consolidated CAFL term entities, market valuationvalue changes of these loans isare 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 Sequoiathese securitization entities is presented in Table 4.2.


36

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 5.7. Business Purpose Loans - (continued)
At Consolidated Sequoia Choice EntityBusiness Purpose Loan Characteristics
The following tables summarize the characteristics of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2023 and December 31, 2022.
Table 7.4 – Characteristics of Business Purpose Loans
September 30, 2023BPL Term at Redwood
BPL Term at
CAFL(1)
BPL Bridge at RedwoodBPL Bridge at CAFL
(Dollars in Thousands)
Number of loans45 1,093 1,853 1,344 
Unpaid principal balance$83,300 $3,283,186 $1,704,418 $521,214 
Fair value of loans$72,149 $2,969,217 $1,682,511 $525,453 
Weighted average coupon6.98 %5.35 %10.46 %10.79 %
Weighted average remaining loan term (years)8511
Market value of loans pledged as collateral under short-term debt facilities$789 N/A$91,561 N/A
Market value of loans pledged as collateral under long-term debt facilities$46,915 N/A$1,497,589 N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)
2 43 45 56 
Unpaid principal balance of loans with 90+ day delinquencies(2)
$27,836 $102,676 $80,924 $7,656 
Fair value of loans with 90+ day delinquencies$16,822 N/A$71,277 $7,656 
Number of loans in foreclosure
2 6 42 49 
Unpaid principal balance of loans in foreclosure$27,836 $4,557 $56,272 $4,424 
Fair value of loans in foreclosure$16,822 N/A$49,886 $4,424 
December 31, 2022BPL Term at Redwood
BPL Term at
CAFL(1)
BPL Bridge at RedwoodBPL Bridge at CAFL
(Dollars in Thousands)
Number of loans91 1,131 1,601 1,875 
Unpaid principal balance$389,846 $3,263,421 $1,518,427 $514,666 
Fair value of loans$358,791 $2,944,984 $1,512,428 $516,383 
Weighted average coupon5.98 %5.22 %9.61 %9.67 %
Weighted average remaining loan term (years)10621
Market value of loans pledged as collateral under short-term debt facilities$291,406 N/A$579,666 N/A
Market value of loans pledged as collateral under long-term debt facilities$66,567 N/A$897,782 N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)
1 16 49 48 
Unpaid principal balance of loans with 90+ day delinquencies(2)
$536 $37,072 $34,264 $7,328 
Fair value of loans with 90+ day delinquencies$536 N/A$29,663 $7,438 
Number of loans in foreclosure1 9 48 48 
Unpaid principal balance of loans in foreclosure$536 $13,686 $34,039 $7,328 
Fair value of loans in foreclosure$536 N/A$29,438 $7,438 




37

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 7. Business Purpose Loans - (continued)
Footnotes to Table 7.4
(1)The fair value of the loans held by consolidated CAFL entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for CFEs. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2. Based on this methodology, we value the loans in each consolidated securitization on a pool basis and do not calculate separate fair values for loans that are 90+ days delinquent or in foreclosure.
(2)The number and UPB of loans 90-or-more days delinquent includes all loans in foreclosure.

At September 30, 2017, we owned 409 held-for-investment2023, in addition to bridge loans at the consolidated Sequoia Choice entity,that were 90 or more days delinquent, BPL bridge loans with an aggregate unpaid balancea UPB of $308$216 million and a fair value of $317 million. There$203 million were noon non-accrual status. Included in these amounts were bridge loans heldwith $174 million of UPB that were modified during the third quarter of 2023 with first contractual payments under these modifications due in November 2023.
Note 8. Consolidated Agency Multifamily Loans
We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at September 30, 2023 and December 31, 2022.
Table 8.1 – Characteristics of Consolidated Agency Multifamily Loans
(Dollars in Thousands)September 30, 2023December 31, 2022
Number of loans28 28 
Unpaid principal balance$440,996 $447,193 
Fair value of loans$420,554 $424,551 
Weighted average coupon4.25 %4.25 %
Weighted average remaining loan term (years)23
Delinquency information
Number of loans with 90+ day delinquencies— — 
Number of loans in foreclosure— — 
The outstanding Consolidated Agency multifamily loans held-for-investment at the Sequoia Choiceconsolidated Freddie Mac K-Series entity at 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. Atat September 30, 2017, none2023 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of thesemultifamily loans were greater than 90 days delinquent or in foreclosure.
During bothheld-for-investment during the three and nine months ended September 30, 2017, we transferred loans with a fair value2023 and 2022.
Table 8.2 – Activity 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 netConsolidated Agency Multifamily Loans Held-for-Investment
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Net market valuation gains (losses) recorded (1)
$2,512 $(13,691)$2,200 $(40,120)
(1)Net market valuation loss of $1 milliongains (losses) on thesemultifamily loans held-for-investment are recorded through Investment fair value changes, net on our consolidated statements of income. Pursuant to the collateralized financingFor loans held at our consolidated Freddie Mac K-Series entity, guidelines, the market valuationvalue changes of these loans isare based on the estimated fair value of the associated ABS issued, associated with this transaction. 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 Sequoia Choicethese securitization entityentities is presented in Note 5.Table 4.2.
38

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

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, 20172023 and December 31, 2016.2022.
Table 7.19.1 – Fair Values of Real Estate Securities by Type
(In Thousands) September 30, 2017 December 31, 2016(In Thousands)September 30, 2023December 31, 2022
Trading $820,134
 $445,687
Trading$48,041 $108,329 
Available-for-sale 536,138
 572,752
Available-for-sale81,404 132,146 
Total Real Estate Securities $1,356,272
 $1,018,439
Total Real Estate Securities$129,445 $240,475 
Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. 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-REMICMezzanine securities are thereforeinterests that are generally subordinate to the remaining senior security interests, but seniorsecurities in their rights to anyreceive 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 separatemezzanine. Exclusive of our subordinatere-performing loan securities, into mezzanine and subordinate, where mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later. Nearlynearly 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
(Unaudited)
Note 7. 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. Atmortgage-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, 20172023 and December 31, 2016, our2022.
Table 9.2 – Fair Value of Trading Securities by Position
(In Thousands)September 30, 2023December 31, 2022
Senior
Interest-only securities (1)
$41,169 $28,867 
Total Senior41,169 28,867 
Subordinate
RPL securities— 29,002 
Multifamily securities5,239 5,027 
Other third-party residential securities1,633 45,433 
Total Subordinate6,872 79,462 
Total Trading Securities$48,041 $108,329 
(1)Includes $29 million and $26 million of Sequoia certificated mortgage servicing rights at September 30, 2023 and December 31, 2022, respectively.
The following table presents the unpaid principal balance of trading securities by position and collateral type at September 30, 2023 and December 31, 2022.
Table 9.3 – Unpaid Principal Balance of Trading Securities by Position
(In Thousands)September 30, 2023December 31, 2022
Senior (1)
$— $— 
Subordinate19,354 215,592 
Total Trading Securities$19,354 $215,592 
(1)Our senior trading securities wereare comprised of interest-only securities, for which there is no principal balance, and our subordinatebalance.
39

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table provides the activity of trading securities 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.
Duringduring the three and nine months ended September 30, 2017, we acquired $171 million2023 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 $238 million, respectively, of such securities.2022.
During the three and nine months ended September 30, 2017, we recorded netTable 9.4 – Trading Securities Activity
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Fair value of securities acquired$— $— $7,883 $5,006 
Fair value of securities sold27,183 4,142 82,270 27,471 
Net market valuation gains (losses) recorded (1)
5,967 (12,521)14,423 (30,019)
(1)Net market valuation gains of $1 million and $31 million, respectively,(losses) on trading securities included inare 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 7. Real Estate Securities - (continued)


AFS Securities
The following table presents the fair value of our available-for-sale ("AFS") securities by position and collateral type at September 30, 20172023 and December 31, 2016.2022.
Table 7.39.5 – Fair Value of Available-for-Sale Securities by Position and Collateral Type
(In Thousands)September 30, 2023December 31, 2022
Subordinate
Sequoia securities$73,160 $74,367 
Multifamily securities4,448 7,647 
Other third-party residential securities3,796 50,132 
Total Subordinate81,404 132,146 
Total AFS Securities$81,404 $132,146 
(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, allThe 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.
Duringduring the three and nine months ended September 30, 2017, we purchased $4 million2023 and $32 million of2022.
Table 9.6 – Available-for-Sale Securities Activity
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Fair value of securities acquired$— $— $1,979 $10,000 
Fair value of securities sold12,590 — 55,842 — 
Principal balance of securities called— — — 14,486 
Net unrealized gains (losses) on AFS securities (1)
(3,921)(8,731)398 (60,013)
(1)Net unrealized gains (losses) on AFS securities 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 exchangedare recorded on 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.consolidated balance sheets through Accumulated other comprehensive loss.
We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.
At September 30, 2017, there were $0.1 million of AFS securities with contractual maturities less than five years, $0.4 million with contractual maturities greater than five years but less than 10 years, and the remainder of our AFS securities had contractual maturities greater than 10 years.

40

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)

Note 7.9. Real Estate Securities - (continued)



At September 30, 2023, we had $4 million of AFS securities with contractual maturities less than five years, $4 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.
The following table presents the components of carrying value (which equals fair value) of AFS securities at September 30, 20172023 and December 31, 2016.2022.
Table 7.49.7 – Carrying Value of AFS Securities
(In Thousands)September 30, 2023December 31, 2022
Principal balance$149,991 $221,933 
Credit reserve(23,890)(28,739)
Unamortized discount, net(46,603)(61,650)
Amortized cost79,498 131,544 
Gross unrealized gains13,463 16,269 
Gross unrealized losses(8,984)(13,127)
CECL allowance(2,573)(2,540)
Carrying Value$81,404 $132,146 
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        
(In Thousands) Senior Re-REMIC Subordinate Total
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

The following table presents the changes for the three and nine months ended September 30, 2017,2023, in unamortized discount and designated credit reserves on residential AFS securities.
Table 7.59.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities
Three Months Ended 
 September 30, 2023		Nine Months Ended 
 September 30, 2023
Credit
Reserve		Unamortized
Discount, Net		Credit
Reserve		Unamortized
Discount, Net
(In Thousands)
Beginning balance$25,615 $46,948 $28,739 $61,650 
Amortization of net discount— (296)— (946)
Realized credit recoveries (losses), net101 — 106 — 
Acquisitions— — 1,106 754 
Sales, calls, other(1,207)(668)(5,331)(15,585)
Transfers to (release of) credit reserves, net(619)619 (730)730 
Ending Balance$23,890 $46,603 $23,890 $46,603 
  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
(Unaudited)
Note 7. Real Estate Securities - (continued)



AFS Securities with Unrealized Losses
The following table presents the components comprising the total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at September 30, 20172023 and December 31, 2016.2022.
Table 7.69.9 – Components of Fair Value of Residential AFS Securities in Gross Unrealized Loss Position by Holding Periods
Less Than 12 Consecutive Months12 Consecutive Months or Longer
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
(In Thousands)
September 30, 2023$9,459 $(585)$28,630 $(8,399)
December 31, 202272,679 (12,940)1,414 (186)
41
  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

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 9. Real Estate Securities - (continued)

At September 30, 2017,2023, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 17366 AFS securities, of which 1429 were in an unrealized loss position and six23 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2016,2022, our consolidated balance sheet included 18679 AFS securities, of which 1938 were in an unrealized loss position and 10 wereone was in a continuous unrealized loss position for 12 consecutive months or longer.

Evaluating AFS Securities for Other-than-Temporary ImpairmentsCredit Losses
Gross unrealized losses on our AFS securities were $2$9 million at September 30, 2017.2023. We evaluate all securities in an unrealized loss position to determine if the impairment is temporary or other-than-temporarycredit-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, 2017,2023, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses 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 endedAt September 30, 2017, other-than-temporary impairments2023, 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 $2.6 million. AFS securities for which OTTIan 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 relatedcredit-related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of thesecurity credit loss component of OTTI.losses.
The table below summarizes the weighted average of the significant valuation assumptionscredit quality indicators we used for the credit loss allowance on our AFS securities in unrealized loss positions at September 30, 2017.2023.
Table 7.79.10 – Significant Valuation AssumptionsCredit Quality Indicators
September 30, 2023Subordinate Securities
Default rate0.8%
Loss severity20%

42
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, 20172023
(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 atfor the three and nine months ended September 30, 2017 and 2016, for which a portion of an OTTI was recognized in other comprehensive income.2023.
Table 7.89.11 – ActivityRollforward of theAllowance for Credit Component of Other-than-Temporary ImpairmentsLosses
  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, 2023Nine Months Ended September 30, 2023
(In Thousands)
Beginning balance allowance for credit losses$2,639 $2,540 
Additions to allowance for credit losses on securities for which credit losses were not previously recorded48 278 
Additional increases (or decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period17 63 
Reduction to allowance for securities sold during the period(131)(308)
Ending balance of allowance for credit losses$2,573 $2,573 
Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 7.99.12 – Gross Realized Gains and Losses on AFS Securities
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Gross realized gains - sales$103 $— $3,917 $— 
Gross realized gains - calls— — — 1,914 
Gross realized losses - sales(77)— (2,415)— 
Gross realized losses - calls— — — — 
Total Realized Gains on Sales and Calls of AFS Securities, net$26 $— $1,502 $1,914 
43
  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, 20172023
(Unaudited)






Note 8. 10. Home Equity Investments (HEI)
From time to time, we may purchase home equity investment contracts from third party originators under flow purchase agreements. Additionally, in the third quarter of 2023, we began to originate HEI. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by recording a security instrument (e.g., deed of trust) with respect to the property. Our investments in HEI expose us to both home price appreciation and depreciation of the associated property.
The following table presents our home equity investments at September 30, 2023 and December 31, 2022.
Table 10.1 – Home Equity Investments
(In Thousands)September 30, 2023December 31, 2022
HEI at Redwood$302,122 $270,835 
HEI held at consolidated HEI securitization entity129,150 132,627 
Total Home Equity Investments$431,272 $403,462 
We consolidate the HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. As such, market valuation changes for the securitized HEI are based on the estimated fair value of the associated ABS issued by the entity, including the securities we own in the entity.
The following table details our HEI activity during the three and nine months ended September 30, 2023 and 2022.
Table 10.2 – Activity of HEI
Three Months Ended September 30, 2023Three Months Ended September 30, 2022
(In Thousands)HEI at RedwoodSecuritized HEIHEI at RedwoodSecuritized HEI
Fair value of HEI purchased and originated$113 $— $79,050 $— 
Net market valuation gains (losses) recorded (1)
9,290 4,212 (4,774)(724)
Nine Months Ended 
 September 30, 2023		Nine Months Ended 
 September 30, 2022
(In Thousands)HEI at RedwoodSecuritized HEIHEI at RedwoodSecuritized HEI
Fair value of HEI purchased and originated$25,626 $— $176,439 $— 
Net market valuation gains (losses) recorded (1)
21,598 8,418 (1,986)8,587 
(1)We account for HEI at Redwood under the fair value option and record net market valuation changes through Investment fair value changes, net on our Consolidated statements of income. We account for Securitized HEI under the CFE election and net market valuation gains (losses) for these investments are recorded through Investment fair value changes, net on our Consolidated statements of income. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2.
44

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 10. Home Equity Investments (HEI) - (continued)
The following tables summarizes the characteristics of our HEI at September 30, 2023 and December 31, 2022.
Table 10.3 – HEI Characteristics
September 30, 2023December 31, 2022
(Dollars in Thousands)HEI at RedwoodSecuritized HEIHEI at RedwoodSecuritized HEI
Number of HEI contracts2,644 929 2,599 1,007 
Average initial amount of contract$103 $95 $101 $94 

Note 11. Other Investments
Other investments at September 30, 2023 and December 31, 2022 are summarized in the following table.
Table 11.1 – Components of Other Investments
(In Thousands)September 30, 2023December 31, 2022
Servicer advance investments$219,813 $269,259 
Strategic investments55,854 56,518 
Excess MSRs38,427 39,035 
Mortgage servicing rights26,033 25,421 
Other234 705 
Total Other Investments$340,361 $390,938 
Servicer advance investments
We and a third-party co-investor, through two partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to portfolios of legacy residential mortgage-backed securitizations serviced by the co-investor. Refer to Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding the transactions.
At September 30, 2023, our servicer advance investments had a carrying value of $220 million and were associated with specified pools of residential mortgage loans with an unpaid principal balance of $10.45 billion. The outstanding servicer advance receivables associated with these investments were $185 million at September 30, 2023, which were financed with short-term non-recourse securitization debt. See Note 14 for additional detail on this debt. The servicer advance receivables were comprised of the following types of advances at September 30, 2023 and December 31, 2022.
Table 11.2 – Components of Servicer Advance Receivables
(In Thousands)September 30, 2023December 31, 2022
Principal and interest advances$65,365 $81,447 
Escrow advances (taxes and insurance advances)86,980 123,541 
Corporate advances32,191 35,377 
Total Servicer Advance Receivables$184,536 $240,365 
45

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 11. Other Investments - (continued)
We account for our servicer advance investments at fair value and during the three and nine months ended September 30, 2023, we recorded $5 million and $16 million, respectively, of interest income, through Other interest income, and recorded a net market valuation gain of $4 million and a gain of $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income.
Strategic Investments
Strategic investments represent investments we made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At September 30, 2023, we had made a total of 35 investments in companies through RWT Horizons with a total carrying value of $23 million, as well as seven corporate-level investments. For the three and nine months ended September 30, 2023, we recognized a net mark-to-market valuation gain of $0.1 million and a loss of $3 million, respectively, on our strategic investments. During the three and nine months ended September 30, 2022, we recognized a net mark-to-market valuation gain of $1 million and $11 million, respectively, on our strategic investments. Market valuation changes on our strategic investments are recorded in Investment fair value changes, net on our consolidated statements of income.
During the three and nine months ended September 30, 2023, we recorded losses from our strategic investments of $2 million and $3 million, respectively, in Other income, net on our consolidated statements of income. During the three and nine months ended September 30, 2022, we recorded losses from our strategic investments of $0.3 million and $0.4 million, respectively, in Other income, net on our consolidated statements of income.
In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. During the three months ended September 30, 2023, we sold $29 million of BPL bridge loans to the joint venture and at September 30, 2023, the carrying value of our investment in the joint venture was $1.6 million. We account for our investment in the joint venture under the equity method of accounting as we have a 20% non-controlling interest, but are deemed to be able to exert significant influence over the affairs of the joint venture. We adjust the carrying value of our equity method investment for our share of earnings or losses, dividends or return of capital on a quarterly basis.
Excess MSRs
In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and nine months ended September 30, 2023, we recognized $3 million and $11 million, respectively, of interest income through Other interest income and for both the three and nine months ended September 30, 2023, we recorded net market valuation losses of $1 million through Investment fair value changes, net on our consolidated statements of income.
Mortgage Servicing Rights
We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The following table presentsmajority of our investments in MSRs were made through the fair valueretention of MSRsservicing 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 forsubsequently sold to third parties. For both the three and nine months ended September 30, 20172023, we retained zero MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.
At September 30, 2023 and 2016.
Table 8.2 – Activity forDecember 31, 2022, our 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.
had a fair value of $26 million and $25 million, respectively, and were associated with loans with an aggregate principal balance of $2.07 billion and $2.19 billion, respectively. During the three months ended September 30, 2017, we did not sell any MSRs. During theand nine months ended September 30, 2017,2023, including net market valuation gains and losses on our MSRs, we sold conformingrecorded net income related to our MSRs with a fair value of $53 million.$2 million and $6 million, respectively, through Other income on our consolidated statements of income.

46

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)

Note 8. Mortgage Servicing Rights - (continued)


We make investments in MSRs through the retention of servicing rights associated with the residential mortgage loans that we acquire 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 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 of our MSR income for the three and nine months ended September 30, 2017 and 2016.
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 9.12. Derivative Financial Instruments
The following table presents the fair value and notional amount of our derivative financial instruments at September 30, 20172023 and December 31, 2016.2022.
Table 9.112.1 – Fair Value and Notional Amount of Derivative Financial Instruments
 September 30, 2017 December 31, 2016September 30, 2023December 31, 2022
 
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$13,819 $190,000 $14,625 $285,000 
TBAs 2,875
 985,000
 8,300
 850,000
TBAs16,613 1,560,000 1,893 220,000 
Futures 135
 7,500
 —
 —
Swaptions 297
 300,000
 5,121
 345,000
Interest rate futuresInterest rate futures2,187 136,200 3,976 350,600 
Assets - Other Derivatives        Assets - Other Derivatives
Loan purchase commitments 4,996
 802,550
 3,315
 352,981
Loan purchase and interest rate lock commitmentsLoan purchase and interest rate lock commitments5,067 288,637 336 8,166 
Total Assets $11,948
 $2,604,050
 $36,595
 $2,556,981
Total Assets$37,686 $2,174,837 $20,830 $863,766 
        
Liabilities - Cash Flow Hedges        
Interest rate swaps $(45,093) $139,500
 $(44,822) $139,500
Liabilities - Risk Management Derivatives        Liabilities - Risk Management Derivatives
Interest rate swaps (12,901) 1,838,500
 (12,097) 1,101,500
TBAs (3,946) 950,000
 (4,681) 510,000
TBAs$(5,495)$425,000 $(16,784)$845,000 
Futures (423) 29,000
 (928) 87,500
Interest rate futuresInterest rate futures(199)67,700 (57)60,000 
Liabilities - Other Derivatives        Liabilities - Other Derivatives
Loan purchase commitments (2,875) 683,709
 (3,801) 584,862
Loan purchase and interest rate lock commitmentsLoan purchase and interest rate lock commitments(3,087)606,170 (14)3,532 
Total Liabilities $(65,238) $3,640,709
 $(66,329) $2,423,362
Total Liabilities$(8,781)$1,098,870 $(16,855)$908,532 
Total Derivative Financial Instruments, Net $(53,290) $6,244,759
 $(29,734) $4,980,343
Total Derivative Financial Instruments, Net$28,905 $3,273,707 $3,975 $1,772,298 
Risk Management Derivatives
To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At September 30, 2017,2023, we were party to swaps and swaptions with an aggregate notional amount of $2.65 billion,$190 million, TBA agreements sold with an aggregate notional amount of $1.94$2 billion, and financialinterest rate futures contracts with an aggregate notional amount of $37$204 million. At December 31, 2016,2022, we were party to swaps and swaptions with an aggregate notional amount of $2.46 billion, TBA agreements sold$285 million, futures with an aggregate notional amount of $1.36 billion,$411 million and financial futures contractsTBA agreements with an aggregate notional amount of $88 million.$1.07 billion.
DuringFor the three and nine months ended September 30, 2017,2023, risk management derivatives had net market valuation lossesgains of $9$23 million and $36gains of $18 million, respectively. DuringFor the three and nine months ended September 30, 2016,2022, risk management derivatives had net market valuation lossesgains of $5$76 million and $11gains of $198 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net and Investment fair value changes, net, and MSR income, net on our consolidated statements of income.
Loan Purchase and Interest Rate Lock Commitments

Loan purchase commitments ("LPCs") and interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. For the three and nine months ended September 30, 2023, LPCs and IRLCs had net market valuation gains of $6 million and gains of $8 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income. For the three and nine months ended September 30, 2022, LPCs and IRLCs had net market valuation losses of $3 million and losses of $54 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income.
47

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)

Note 9.12. Derivative Financial Instruments - (continued)


Loan Purchase Commitments
LPCs that qualify as derivatives are recorded at their estimated fair values. Net market valuation gains on LPCs were $13 million and $34 million for the three and nine months ended September 30, 2017, respectively, and were $12 million and $36 million for the three and nine months ended September 30, 2016, respectively. The market valuation gains and losses were recorded in Mortgage banking activities, net on our consolidated statements of income.
Derivatives Designated as Cash Flow Hedges
To manage the variability in interest expense related to portions of our long-term debt and certain adjustable-rate securitization entity liabilities that are 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 of $140 million.
For the three and nine months ended September 30, 2017, changes in the values of designated cash flow hedges were positive $0.3 million and negative $0.4 million, respectively, and were recorded in Accumulated other comprehensive income, a component 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. For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive incomeloss was $44$69 million and $72 million at both September 30, 20172023 and December 31, 2016.
The following table illustrates the impact on2022, respectively. We are amortizing this loss into interest expense over the remaining term of our interest rate agreements accounted for as cash flow hedges fortrust preferred securities and subordinated notes. For each of the three and nine months ended September 30, 20172023 and 2016.
Table 9.2 – Impact on2022, we reclassified $1 million and $3 million, respectively, of realized net losses from Accumulated other comprehensive loss into Interest Expenseexpense. As of Interest Rate Agreements Accounted for as Cash Flow Hedges
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Net interest expense on cash flows hedges $(1,119) $(1,314) $(3,516) $(4,049)
Realized net losses reclassified from other comprehensive income (14) (18) (42) (55)
Total Interest Expense $(1,133) $(1,332) $(3,558) $(4,104)
September 30, 2023, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.
Derivative Counterparty Credit Risk
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2016,2022, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, 2017,2023, we assessed this risk as remote and did not record aan associated specific valuation adjustment.
At September 30, 2017,2023, 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
(Unaudited)

Note 10.13. Other Assets and Liabilities
Other assets at September 30, 20172023 and December 31, 2016,2022 are summarized in the following table.
Table 10.113.1 – Components of Other Assets
(In Thousands)September 30, 2023December 31, 2022
Accrued interest receivable$60,762 $60,893 
REO54,123 6,455 
Deferred tax asset41,931 41,931 
Investment receivable36,816 36,623 
Operating lease right-of-use assets13,367 16,177 
Margin receivable10,536 13,802 
Fixed assets and leasehold improvements (1)
8,453 12,616 
Income tax receivables1,654 3,399 
Other22,845 19,344 
Total Other Assets$250,487 $211,240 
(1)Fixed assets and leasehold improvements had a basis of $17 million and accumulated depreciation of $9 million at September 30, 2023.
48
(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 $6 million and accumulated depreciation of $3 million at September 30, 2017.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note 13. Other Assets and Liabilities - (continued)
Accrued expenses and other liabilities at September 30, 20172023 and December 31, 20162022 are summarized in the following table.
Table 10.213.2 – Components of Accrued Expenses and Other Liabilities
(In Thousands)September 30, 2023December 31, 2022
Accrued interest payable$51,849 $46,612 
Payable to noncontrolling interests48,496 44,859 
Margin payable25,210 5,944 
Accrued compensation23,249 30,929 
Operating lease liabilities15,630 18,563 
Unsettled trades6,110 — 
Accrued operating expenses6,063 5,740 
Guarantee obligations5,913 6,344 
Residential loan and MSR repurchase reserve4,611 7,051 
Current accounts payable4,588 4,234 
Bridge loan holdbacks1,973 3,301 
Preferred stock dividends payable1,478 — 
Other13,124 6,626 
Total Accrued Expenses and Other Liabilities$208,294 $180,203 
(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
Investment Receivable
Investment receivable primarily consists of amounts receivable from third-party servicers related to principal and interest receivable from business purpose loans and fees receivable from servicer advance investments.
Margin Receivable and Payable
Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral. We met all margin calls due through September 30, 2023.
FHLB StockOperating Lease Right-of-Use Assets and Operating Lease Liabilities
In accordance with our FHLB-member subsidiary's borrowing agreement with the FHLBC, our subsidiary is required to purchase and hold stock in the FHLBC. See Note 1317 for additional detail.information on leases.
REO
The following table summarizes the activity and carrying values of REO assets held at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities during the nine months ended September 30, 2023.
Table 13.3 – REO Activity
Nine Months Ended September 30, 2023
(In Thousands)BPL BridgeLegacy SequoiaFreddie Mac SLSTBPL Term at CAFLTotal
Balance at beginning of period $3,012 $544 $2,899 $— $6,455 
Transfers to REO48,864 18 2,340 2,684 53,906 
Liquidations (1)
(2,310)(562)(2,754)— (5,626)
Changes in fair value, net(992)— 380 — (612)
Balance at End of Period$48,574 $— $2,865 $2,684 $54,123 
(1)For the nine months ended September 30, 2023, REO liquidations resulted in $0.6 million of realized losses, which were recorded in Investment fair value changes, net on our consolidated statements of income.

49

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 10.13. Other Assets and Liabilities - (continued)


The following table provides detail on the numbers of REO assets at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL entities at September 30, 2023 and December 31, 2022.
Guarantee Asset, Pledged Collateral,Table 13.4 – REO Assets
Number of REO assetsRedwood BridgeLegacy SequoiaFreddie Mac SLSTBPL Term at CAFLTotal
At September 30, 20239 — 25 1 35 
At December 31, 20222 2 24 — 28 
Legal and Guarantee ObligationsRepurchase Reserves
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 1417 for additional information on our risk sharing arrangements.legal and repurchase reserves.
Investment ReceivablePayable to Non-Controlling Interests
In 2018, Redwood and Unsettled Trades
In accordance with our policya third-party co-investor, through two partnership entities consolidated by Redwood, purchased servicer advances and excess MSRs related to record purchasesa portfolio of residential mortgage loans serviced by the co-investor (see Note 4 and sales of securitiesNote 11 for additional information on the trade date, ifpartnership entities and associated investments). We account for the tradeco-investor’s interests in the entities as liabilities, 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 toat September 30, 2023, the sale of MSRs.
REO
The carrying value of REO at September 30, 2017their interests was $3$23 million, which includesrepresenting their current economic interest in the net effect of $3 million relatedentities. Earnings from the partnership entities are allocated to transfers into REOthe co-investors on a proportional basis and during the three and nine months ended September 30, 2017, offset2023, we allocated $2 million and $4 million, respectively, of income to the co-investors, recorded in Other expenses on our consolidated statements of income.
In 2021, Redwood and a third-party investor co-sponsored the transfer and securitization of HEI through the HEI securitization entity and other third-party investors retained subordinate securities issued by $9the securitization entity alongside Redwood. See Note 10 for a further discussion of the HEI securitization. We account for the co-investors' interests in the HEI securitization entity as a liability, and at September 30, 2023, the carrying value of their interests was $26 million, representing the fair value of REO liquidations,their economic interests in the HEI entity. During the three and nine months ended September 30, 2023, the investors' share of earnings (loss), net from their retained interests was $2 million and $3 million, of unrealized gains resulting from market valuation adjustments. At September 30, 2017 and December 31, 2016, there were 12 and 23 REO properties, respectively, recorded through Investment fair value changes, net on our consolidated balance sheets, allstatements of which were owned at consolidated Legacy Sequoia entities.income.
Accrued Taxes Payable
50
Accrued taxes payable at September 30, 2017 represents the interim period current 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, the accrued taxes payable represents income taxes currently payable to federal and state tax authorities.
Legal and Repurchase Reserves
See Note 14 for additional information on the legal and residential repurchase reserves.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)




Note 11.14. 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, 2017,2023, 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, 20172023 and December 31, 2016.2022.
Table 11.114.1 – Short-Term Debt
September 30, 2023
(Dollars in Thousands)Number of FacilitiesOutstanding BalanceLimit
Weighted Average Interest Rate (1)
Maturity (2)
Weighted Average Days Until Maturity
Facilities
Residential loan warehouse4 $548,334 $1,050,000 7.28 %10/2023-5/2024132
Business purpose loan warehouse2 70,424 455,000 8.12 %5/2024-6/2024259
Real estate securities repo
5 237,835 — 6.99 %10/2023-1/202454
Residential MSR warehouse1 48,470 50,000 8.57 %10/202330
HEI warehouse1 126,803 150,000 9.92 %8/2024306
Total Short-Term Debt Facilities13 1,031,866 
Servicer advance financing1 154,127 240,000 7.67 %11/202332
Subordinate securities financing1 126,506 — 5.71 %9/2024358
Promissory notesN/A16,518 — 6.94 %N/AN/A
Convertible notes, netN/A147,637 — 5.63 %7/2024289
Total Short-Term Debt$1,476,654 
 September 30, 2017December 31, 2022
(Dollars in Thousands) Number of Facilities Outstanding Balance Limit Weighted Average Interest Rate Maturity Weighted Average Days Until Maturity(Dollars in Thousands)Number of FacilitiesOutstanding BalanceLimit
Weighted Average Interest Rate (1)
MaturityWeighted Average Days Until Maturity
Facilities         Facilities
Residential loan warehouse 4
 $438,243
 $1,325,000
 2.80% 12/2017-8/2018 150Residential loan warehouse7 $703,406 $2,550,000 6.16 %3/2023 - 12/2023267
Business purpose loan warehouseBusiness purpose loan warehouse4 680,100 1,650,000 6.93 %3/2023 - 9/2023179
Real estate securities repo 8
 549,811
 —
 2.46% 10/2017-12/2017 28
Real estate securities repo
7 124,909 — 5.22 %1/2023 - 3/202327
HEI warehouseHEI warehouse1 111,681 150,000 8.54 %11/2023306
Total Short-Term Debt Facilities 12
 988,054
     Total Short-Term Debt Facilities19 1,620,096 
Servicer advance financingServicer advance financing1 206,510 290,000 6.67 %11/2023305
Promissory notesPromissory notesN/A27,058 — 6.64 %N/AN/A
Convertible notes, net N/A
 250,142
 —
 4.63% 4/2018 197Convertible notes, netN/A176,015 — 4.75 %8/2023227
Total Short-Term Debt 
 $1,238,196
     Total Short-Term Debt$2,029,679 
  December 31, 2016
(Dollars in Thousands) Number of Facilities Outstanding Balance Limit Weighted Average Interest Rate Maturity Weighted Average Days Until Maturity
Facilities            
Residential loan warehouse 4
 $485,544
 $1,325,000
 2.40% 1/2017-12/2017 206
Real estate securities repo 7
 305,995
 —
 1.91% 1/2017-3/2017 24
Total Short-Term Debt 11
 $791,539
        
(1)Borrowings under our facilities generally are generallyuncommitted and charged interest based on a specified margin over the one-month LIBOR interest rate. At September 30, 2017, all of these borrowings were under uncommitted facilities and were due within 364 days (or less) of the borrowing date.SOFR.
During the three months ended June 30, 2017, $288 million principal amount of 4.625% convertible senior(2)Promissory notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debtpayable on demand 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 accrued interest payable balance on this debt was $5 million. See Note 13 for additional information on our convertible notes.lender with 90-day notice.

51

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 11.14. Short-Term Debt - (continued)


The fairfollowing table below presents the value of held-for-sale residential loans, securities, and real estate securitiesother assets pledged as collateral under our short-term debt facilities was $493 million and $663 million, respectively, at September 30, 20172023 and $534 million and $363 million, respectively, at December 31, 2016. 2022.
Table 14.2 – Collateral for Short-Term Debt
(In Thousands)September 30, 2023December 31, 2022
Collateral Type
Held-for-sale residential loans$608,649 $775,545 
MSRs (1)
79,809 — 
Business purpose loans92,350 871,072 
HEI229,625 191,278 
Real estate securities
On balance sheet4,448 72,133 
Sequoia securitizations (2)
51,542 74,170 
Freddie Mac SLST securitizations (2)
214,443 — 
Freddie Mac K-Series securitization (2)
32,904 31,767 
CAFL securitizations (2)
32,317 — 
Total real estate securities owned
335,654 178,070 
Restricted cash and other assets4,128 1,097 
Total Collateral for Short-Term Debt Facilities1,350,215 2,017,062 
Cash15,162 12,713 
Subordinate securities financing169,565 — 
Servicer advances219,813 269,259 
Total Collateral for Short-Term Debt$1,754,755 $2,299,034 
(1)Includes certificated mortgage servicing rights classified as securities on our consolidated balance sheets.
(2)Represents securities we retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS issued from these securitizations.
For the three and nine months ended September 30, 2017,2023, the average balancesbalance of our short-term debt facilities were $1.07was $1.02 billion and $0.97$1.14 billion, respectively. At September 30, 20172023 and December 31, 2016,2022, accrued interest payable on our short-term debt facilities was $5 millionmillion.
Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and $3 million, respectively.the assets and liabilities are not owned by and are not legal obligations of Redwood.
We also maintainIn 2019, a $10 million committed linesubsidiary of credit withRedwood entered into a financial institution that is secured by certain mortgage-backed securities with a fairrepurchase agreement providing non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of $6 million atthe underlying collateral that is non-delinquent) recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia securitizations ("Subordinate securities financing" in Table 14.1 above). The financing is fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through September 2022, which increased to 5.71% from October 2022 through September 2023, and will increase to 7.21% from October 2023 through September 2024. The financing facility has a final maturity in September 2024. During the three months ended September 30, 2017. At both 2023, we reclassified this facility from long-term to short-term debt as the maturity date on this facility is within one year.
In connection with our acquisition of Riverbend, we assumed promissory notes that are payable on demand with a 90-day notice from the lender or which may be repaid by us with a 90-day notice. These unsecured, non-marginable, recourse notes were issued in three separate series with fixed interest rates between 6% and 8%.
52

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 14. Short-Term Debt - (continued)
During the three and December 31, 2016,nine months ended September 30, 2023, we had norepurchased $2 million and $66 million, respectively, of convertible debt due in 2023 and 2024, and recorded a $0.02 million gain and a $0.2 million gain on extinguishment, respectively. At September 30, 2023 the outstanding borrowings on this facility.principal balance of our convertible debt due in July 2024 was $148 million.
Remaining Maturities of Short-Term Debt
The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt as well as our convertible notes at September 30, 2017.2023.
Table 11.214.3 – Short-Term Debt by Collateral Type and Remaining Maturities
September 30, 2023
(In Thousands)Within 30 days31 to 90 daysOver 90 daysTotal
Collateral Type
Held-for-sale residential loans$46,844 $314,269 $187,221 $548,334 
Business purpose loans— — 70,424 70,424 
Real estate securities38,786 182,275 143,280 364,341 
MSRs48,470 — — 48,470 
HEI— — 126,803 126,803 
Servicer advances— 154,127 — 154,127 
Total Secured Short-Term Debt Facilities134,100 650,671 527,728 1,312,499 
Promissory notes (unsecured)— 16,518 — 16,518 
Convertible notes, net (unsecured)— — 147,637 147,637 
Total Short-Term Debt$134,100 $667,189 $675,365 $1,476,654 
53
  September 30, 2017
(In Thousands) Within 30 days 31 to 90 days Over 90 days Total
Collateral Type        
Held-for-sale residential loans $—
 $120,219
 $318,024
 $438,243
Real estate securities 422,300
 127,511
 —
 549,811
Total Secured Short-Term Debt 422,300
 247,730
 318,024
 988,054
Convertible notes, net —
 —
 250,142
 250,142
Total Short-Term Debt $422,300
 $247,730
 $568,166
 $1,238,196

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)


Note 12.15. Asset-Backed Securities Issued
Through our Sequoia securitization program, we sponsor securitization transactions in which ABS backed by residential mortgage loans areissued represents securities issued by Sequoia entities. We consolidated the Legacy Sequoianon-recourse securitization entities and beginning in September 2017, the Sequoia Choice securitization entity, that we determined were VIEs and for which we determined we were the primary beneficiary. Each consolidated 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. Our exposure to these entities is primarily through the financial interests we have retained, although we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a resultconsolidate under GAAP. The majority of our having sold assets directly or indirectly to these entities.
ABS issued is carried at fair value under the CFE election (see Note 4 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by theseour consolidated securitization entities consistat September 30, 2023 and December 31, 2022, along with other selected information, are summarized in the following table.
Table 15.1 – Asset-Backed Securities Issued
September 30, 2023
Legacy
Sequoia		Sequoia
CAFL (1)
Freddie Mac SLSTFreddie Mac
K-Series		HEITotal
(Dollars in Thousands)
Certificates with principal balance$159,990 $4,384,081 $3,330,287 $1,165,093 $404,528 $100,753 $9,544,732 
Interest-only certificates127 50,992 105,883 13,905 5,300 — 176,207 
Market valuation adjustments(10,915)(866,568)(301,241)(120,007)(22,178)(7,980)(1,328,889)
ABS Issued, Net$149,202 $3,568,505 $3,134,929 $1,058,991 $387,650 $92,773 $8,392,050 
Range of weighted average interest rates, by series(3)
3.73% to 7.26%2.67% to 6.01%2.34% to 6.18%3.50%3.41 %3.83 %
Stated maturities(3)
2024-20362047-20532027-20332028-202920252052
Number of series20 20 20 2 1 1 

December 31, 2022
Legacy
Sequoia		Sequoia
CAFL(1)
Freddie Mac SLST (2)
Freddie Mac K-SeriesHEITotal
(Dollars in Thousands)
Certificates with principal balance$200,047 $3,595,715 $3,322,250 $1,306,652 $410,725 $108,962 $8,944,351 
Interest-only certificates180 57,871 124,928 15,328 7,379 — 205,686 
Market valuation adjustments(16,036)(682,477)(331,371)(99,830)(25,319)(8,252)(1,163,285)
ABS Issued, Net$184,191 $2,971,109 $3,115,807 $1,222,150 $392,785 $100,710 $7,986,752 
Range of weighted average interest rates, by series(3)
2.69% to 5.19%2.57% to 6.13%2.34% to 5.92%3.50% to 4.75%3.41 %3.78 %
Stated maturities(3)
2024 - 20362047-20522027-20322028-205920252052 
Number of series20 17 19 3 1 1 
(1)Includes $485 million (principal balance) of various classes of securities that pay interest on a monthly or quarterly basis. All ABS issued by the Sequoia Choice entity pay fixed ratestwo CAFL bridge securitization trusts sponsored by Redwood and accounted for at amortized cost at both September 30, 2023 and December 31, 2022.
(2)Includes $86 million (principal balance) of interest and substantially all ABS issued by the Legacy Sequoia entities pay variable rates of interest, which are indexed to one-, three-, or six-month LIBOR. Somea re-securitization trust sponsored by Redwood and accounted for at amortized cost at December 31, 2022.
(3)Certain ABS issued by the Legacy SequoiaCAFL and HEI securitization entities pay hybrid rates, which are fixed rates that subsequently adjustsubject to variable rates. ABS issued also includes some interest-only classes with coupons set at a fixed spread to a benchmarkearly redemption and interest rate or set at a spread to the interest rates earned on the assets less the interest rates paid on the liabilities of a securitization entity.step-ups as described below.


54

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)

Note 12.15. Asset-Backed Securities Issued - (continued)


The carrying valuesDuring the second quarter of 2022, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest BPL bridge loans (presented within CAFL in Table 15.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $215 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2023, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $3 million in total, for a net carrying value of $212 million. The weighted average stated coupon of the ABS issued was 4.32% at issuance. The ABS issued by Sequoiathe CAFL bridge entity are subject to an optional redemption in May 2024, and beginning in June 2025, the interest rate on the ABS issued increases by 2% through final maturity in May 2029. The ABS issued by this securitization entities we sponsoredwere collateralized by $237 million of BPL bridge loans and $17 million of restricted cash and other assets at September 30, 20172023. The securitization is structured with $250 million of total funding capacity and December 31, 2016, alonga feature to allow reinvestment of loan payoffs for the first 24 months of the transaction (through May 2024), unless an amortization event occurs prior to the expiration of the 24-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.
During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with other selected information,the securitization of CoreVest BPL bridge loans (presented within CAFL in table 15.1 above), which we determined was a VIE and for which we determined we are summarizedthe primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the following table.trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2023, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $1 million, for a net carrying value of $269 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were backed by assets including $288 million of BPL bridge loans and $29 million of restricted cash and other assets at September 30, 2023. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024), unless an amortization event occurs prior to the expiration of the 30-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of an HEI entity formed in connection with the securitization of HEI, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income. The ABS issued by the HEI securitization entity are subject to an optional redemption in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.
Table 12.1 –During the third quarter of 2020, we transferred all of the subordinate securities we owned from two consolidated re-performing loan securitization VIEs sponsored by Freddie Mac SLST to a re-securitization trust, which we determined was a VIE and for which we determined we are the primary beneficiary. During the first quarter of 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS.

55

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 15. 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 itsthe stated maturity. At September 30, 2017, all2023, 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. Atat September 30, 2017, accrued interest payable on ABS issued by the Sequoia Choice entity was $1 million.2023 and December 31, 2022. Interest due on consolidated ABS issued is payable monthly.
Table 15.2 – Accrued Interest Payable on Asset-Backed Securities Issued
(In Thousands)September 30, 2023December 31, 2022
Legacy Sequoia$310 $282 
Sequoia12,695 8,880 
CAFL11,181 10,918 
Freddie Mac SLST (1)
3,398 3,561 
Freddie Mac K-Series1,150 1,167 
Total Accrued Interest Payable on ABS Issued$28,734 $24,808 
(1)Includes accrued interest payable on ABS issued by a re-securitization trust sponsored by Redwood at December 31, 2022.


56

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 12. Asset-Backed Securities Issued - (continued)


16. Long-Term Debt
The following table summarizestables below summarize our long-term debt, including the carrying value components offacilities that are available to us, the collateral for ABS issuedoutstanding balances, the weighted average interest rates, and outstandingthe maturity information at September 30, 20172023 and December 31, 2016.2022.
Table 12.216.1 – 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. Long-Term Debt

FHLBC Borrowings

In July 2014, 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 weighted average interest rate of 1.3% and a weighted average maturity of approximately eight years. At December 31, 2016, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 0.64% and a weighted average maturity of nine years. Advances 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 billion at September 30, 2017. In addition, cash of $24 million served as collateral for these borrowings 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.
September 30, 2023
(Dollars in Thousands)BorrowingsUnamortized Deferred Issuance Costs / DiscountNet Carrying ValueLimit
Weighted Average Interest Rate (1)
Final Maturity
Facilities
Recourse Subordinate Securities Financing
Facility B$101,247 $— $101,247 N/A5.71 %2/2025
Facility C60,657 — 60,657 N/A4.75 %6/2026
Non-Recourse BPL Financing
Facility D486,099 (596)485,503 $750,000 SOFR + 2.89%N/A
Facility E225,865 (844)225,021 335,000 SOFR + 3.25%12/2025
Recourse BPL Financing
Facility F21,293 (9)21,284 500,000 SOFR + 2.35%-2.60%9/2025
Facility H234,014 — 234,014 450,000 SOFR + 2.40%-2.60%7/2025
Facility I193,007 — 193,007 450,000  SOFR + 2.25%-2.77%3/2025
Total Long-Term Debt Facilities1,322,182 (1,449)1,320,733 
Convertible notes
5.75% exchangeable senior notes162,092 (1,793)160,299 N/A5.75 %10/2025
7.75% convertible senior notes215,000 (5,274)209,726 N/A7.75 %6/2027
Trust preferred securities and subordinated notes139,500 (698)138,802 N/ASOFR + 2.51%7/2037
Total Long-Term Debt$1,838,774 $(9,214)$1,829,560 

57

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 13.16. Long-Term Debt - (continued)



December 31, 2022
(Dollars in Thousands)BorrowingsUnamortized Deferred Issuance Costs / DiscountNet Carrying ValueLimit
Weighted Average Interest Rate (1)
Final Maturity
Facilities
Recourse Subordinate Securities Financing
Facility A$130,408 $— $130,408 N/A5.71 %9/2024
Facility B101,706 (50)101,656 N/A4.21 %2/2025
Facility C68,995 (125)68,870 N/A4.75 %6/2026
Non-Recourse BPL Financing
Facility D404,622 (667)403,955 $750,000 SOFR + 2.87%N/A
Facility E308,933 (838)308,095 335,000 SOFR + 3.25%12/2025
Recourse BPL Financing
Facility F64,689 (473)64,216 500,000 SOFR + 2.25%-2.50%9/2024
Total Long-Term Debt Facilities1,079,353 (2,153)1,077,200 
Convertible notes
5.625% convertible senior notes150,200 (1,282)148,918 N/A5.625 %7/2024
5.75% exchangeable senior notes162,092 (2,410)159,682 N/A5.75 %10/2025
7.75% convertible senior notes215,000 (6,142)208,858 N/A7.75 %6/2027
Trust preferred securities and subordinated notes139,500 (733)138,767 N/AL + 2.25%7/2037
Total Long-Term Debt$1,746,145 $(12,720)$1,733,425 
The following(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table presents maturitiesabove) or SOFR, plus an applicable spread. As a result of legislation that was passed in the state of New York, our FHLBC borrowings by year at September 30, 2017.trust preferred securities and subordinated notes converted to SOFR upon the cessation of LIBOR in 2023.
Table 13.1 – Maturities of FHLBC Borrowings by Year
(In Thousands) September 30, 2017
2024 $470,171
2025 887,639
2026 642,189
Total FHLBC Borrowings $1,999,999
For additional information about our FHLBC borrowings, see Part I, Item 2 of Quarterly Report on Form 10-Q under the heading “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities.”
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 accrued interest payable balance on this debt was $1 million and the unamortized deferred issuance costs were $7 million.
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 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. At September 30, 2017, these notes were exchangeable at the option 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 months 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 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 JuneSeptember 30, 2017, $288 million principal amount of2023, we reclassified Facility H and Facility I in Table 16.1 above from short-term debt to long-term debt as the maturity dates for these facilities were extended to July 2025 and March 2025, respectively. Additionally, during the three months ended September 30, 2023, we reclassified the 5.625% convertible senior notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debtpresented in Table 16.1 above at December 31, 2022, to short-term debt, as the maturity of thethese 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, 2017,2023.
Refer to Note 16 to the outstanding principal amountConsolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for a full description 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.our long-term debt.

58

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 13.16. Long-Term Debt - (continued)



Trust Preferred SecuritiesThe following table below presents the value of loans, securities, and Subordinated Notes
Atother assets pledged as collateral under our long-term debt 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, 20172023 and December 31, 2016,2022.
Table 16.2 – Collateral for Long-Term Debt
(In Thousands)September 30, 2023December 31, 2022
Collateral Type
BPL bridge loans$1,497,589 $897,782 
BPL term loans46,915 66,567 
Real estate securities
Sequoia securitizations (1)
— 178,439 
CAFL securitizations (1)
231,473 237,068 
Total Collateral for Long-Term Debt$1,775,977 $1,379,856 
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.
The following table summarizes the accrued interest payable balance on long-term debt at September 30, 2023 and December 31, 2022.
Table 16.3 – Accrued Interest Payable on Long-Term Debt
(In Thousands)September 30, 2023December 31, 2022
Long-term debt facilities$5,535 $3,364 
Convertible notes
5.625% exchangeable senior notes— 3,896 
5.75% exchangeable senior notes4,659 2,332 
7.75% convertible senior notes4,906 741 
Trust preferred securities and subordinated notes1,924 1,633 
Total Accrued Interest Payable on Long-Term Debt$17,024 $11,966 
Recourse Subordinate Securities Financing Facilities
In the first quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our trust preferredconsolidated CAFL securitizations (Facility B in Table 16.1 above). The financing is fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through February 2023, which increased to 5.71% from March 2023 through February 2024, and will increase to 7.21% from March 2024 through February 2025. The financing facility may be terminated at our option and has a final maturity in February 2025.
In the third quarter of 2021, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations (Facility C in Table 16.1 above). The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024, increasing to 6.25% from July 2024 through June 2025, and subordinated notes was $1 million.to 7.75% from July 2025 to June 2026. The financing facility may be terminated at our option and has a final maturity in June 2026.
UnderDuring the termsthree months ended September 30, 2023, we reclassified a recourse subordinate securities financing facility (Facility A in Table 16.1 above at December 31, 2022) to short-term debt as the maturity of this debt, we covenant, among other things, to use our best efforts to continue to qualify asfacility was less than a REIT. If an event of default were to occur in respectyear at September 30, 2023. See Note 14 for a further description 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.facility.
59

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note 14.17. Commitments and Contingencies
Lease Commitments
At September 30, 2017,2023, we were obligated under fourten non-cancelable operating leases with expiration dates through 20282031 for $18 million of cumulative lease payments. Our operating lease expense was $2 million forFor both the nine-month periods ended September 30, 20172023 and 2016.2022 our operating lease expense was $4 million.
The following table presents our future lease commitments at September 30, 2017.2023.
Table 14.117.1 – Future Lease Commitments by Year
(In Thousands)September 30, 2023
2023 (3 months)$1,253 
20244,554 
20253,629 
20263,520 
20272,588 
2028 and thereafter1,991 
Total Lease Commitments17,535 
Less: Imputed interest(1,905)
Operating Lease Liabilities$15,630 
(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, 2023, we entered into one new office lease. At September 30, 2023, our operating lease liabilities were $16 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $13 million, which were a component of Other assets.
We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the lease commencement date. At September 30, 2023, the weighted-average remaining lease term and weighted-average discount rate for our leases was 4 years and 5.2%, respectively.
Commitment to Fund BPL Bridge Loans
As of September 30, 2023, we had commitments to fund up to $623 million of additional advances on existing BPL bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At September 30, 2023, we carried a $1 million contingent liability related to these commitments to fund construction advances. During the three and nine months ended September 30, 2023, we recorded a net market valuation loss of $0.4 million and gain of $0.3 million, respectively, related to this liability through Mortgage banking activities and Investment of fair value changes, net on our consolidated statements of income.
Commitment to Fund Partnerships
In 2018, we invested in two partnerships created to acquire and manage certain mortgage servicing related assets. See Note 11 for additional detail on these investments. In connection with these investments, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.


60

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)

Note 14.17. Commitments and Contingencies - (continued)

Commitments to Fund Strategic Investments
In the first quarter of 2022, we entered into a $25 million commitment to an investment fund with the mission of providing quality workforce housing opportunities in several California urban communities, including the San Francisco Bay Area. At September 30, 2023, we had funded $15 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.
In 2021, we entered into a commitment to fund a $5 million RWT Horizons investment. At September 30, 2023, we had funded $2 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.
Commitment to Fund Oaktree Joint Venture
In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. In accordance with the terms of the joint venture, we have committed to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices. Additionally, we have committed to contribute up to $50 million to the joint venture to fund the joint venture's purchase of BPL bridge loans. At September 30, 2023, we had contributed $1 million of capital to the joint venture.
Riverbend Contingent Consideration
As part of the consideration for our acquisition of Riverbend, we may make earnout payments payable in cash, based on generating specified revenues over a threshold amount during the two-year period ending July 1, 2024, up to a maximum potential amount payable of $25.3 million. These contingent earnout payments are classified as a contingent consideration liability on our consolidated balance sheets and carried at fair value. At September 30, 2023, our estimated fair value of this contingent liability was zero.
Loss Contingencies — Risk SharingRisk-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 sharingrisk-sharing arrangements with the Agencies. At September 30, 2017,2023, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was fullypartially 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, 2017,2023, we had not incurred anyless than $100 thousand of cumulative losses under these arrangements. For the three and nine months ended September 30, 2017,2023, other income related to these arrangements was $1$0.2 million and $2 million, respectively. For the three and nine months ended September 30, 2016, other income related to these arrangements was $1 million and $3 million, respectively. For the three 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$0.5 million, respectively.
All of the loans in the reference pools subject to these risk sharingrisk-sharing arrangements were originated in 2014 and 2015, and at September 30, 2017,2023, the loans had an unpaid principal balance of $2.19 billion and$406 million, a weighted average FICO score of 758761 (at origination), and LTV ratio of 77%74% (at origination). At September 30, 2017, $32023, $7 million of the loans were 90 days or more days delinquent, andof which three loans with an unpaid principal balance of $1 million were in foreclosure. At September 30, 2017,2023, the carrying value of our guarantee obligation was $20$6 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 sharingrisk-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, 20172023 and December 31, 2016,2022, assets of such SPEs totaled $47$28 million and $49$30 million, respectively, and at both September 30, 2023 and December 31, 2022 liabilities of such SPEs totaled $20 million$6 million.

61

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note 17. Commitments and $22 million, respectively.Contingencies - (continued)
Loss Contingencies — Residential Repurchase ReserveReserves
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.sold. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation.
At both September��September 30, 20172023 and December 31, 2016,2022, our repurchase reserve associated with our residential loans and MSRs was $5 million and $6 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. 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, 20172023 and 2016,2022, we received one and seven repurchase request(s), respectively, and repurchased five and one loan(s), respectively. During the nine months ended September 30, 2023 and 2022, we recorded $0.5reversals of repurchase provision expenses of $1 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 and MSR income, net, on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017
(Unaudited)

Note 14. Commitments2023 and Contingencies - (continued)

December 31, 2022, our repurchase reserve associated with business purpose loans sold to third-parties was zero and $1 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. During the nine months ended September 30, 2023 and 2022, we received six and zero repurchase requests, respectively, for business purpose loans sold to third parties, and repurchased twelve and zero business purpose loans, respectively, that had been sold to third parties. No repurchase provision was recorded during the first nine months of 2023 and, at September 30, 2023, one open repurchase request was outstanding for business purpose loans sold to third parties.
Loss Contingencies — Litigation, Claims and Demands
On or about December 23, 2009,There is no significant update regarding the Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a complaintlitigation matters described in Note 17 within the Superior Courtfinancial 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, 2022 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 andheading “Loss Contingencies - (continued)

four Sequoia mortgage pass-through certificates were issued, Sequoia Residential Funding, Inc.Litigation, Claims 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.Demands.” At September 30, 2017,2023, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described above wasin our Annual Report on Form 10-K for the year ended December 31, 2022 were $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 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.

62

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)

Note 15.18. Equity
The following table provides a summary of changes to accumulatedAccumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 15.118.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component
Three Months Ended September 30, 2023Three Months Ended September 30, 2022
(In Thousands)Available-for-Sale SecuritiesInterest Rate Agreements Accounted for as Cash Flow HedgesAvailable-for-Sale SecuritiesInterest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period$8,165 $(70,256)$16,595 $(74,383)
Other comprehensive loss
before reclassifications		(3,921)— (8,731)— 
Amounts reclassified from other
accumulated comprehensive income (loss)		234 1,040 544 1,040 
Net current-period other comprehensive income (loss)(3,687)1,040 (8,187)1,040 
Balance at End of Period$4,478 $(69,216)$8,408 $(73,343)
 Three Months Ended September 30, 2017 Three Months Ended September 30, 2016Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
(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 SecuritiesInterest Rate Agreements Accounted for as Cash Flow HedgesAvailable-for-Sale SecuritiesInterest 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$3,435 $(72,303)$67,503 $(76,430)
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		398 — (60,013)— 
Amounts reclassified from other
accumulated comprehensive income (loss)		Amounts reclassified from other
accumulated comprehensive income (loss)		645 3,087 918 3,087 
Net current-period other comprehensive income (loss) 12,305
 335
 7,719
 665
Net current-period other comprehensive income (loss)1,043 3,087 (59,095)3,087 
Balance at End of Period $126,669
 $(44,353) $124,568
 $(69,853)Balance at End of Period$4,478 $(69,216)$8,408 $(73,343)
63
  Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
(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
Balance at beginning of period $115,873
 $(44,020) $139,356
 $(47,363)
Other comprehensive income (loss)
before reclassifications (1)
 17,899
 (375) 5,195
 (22,545)
Amounts reclassified from other
accumulated comprehensive income		 (7,103) 42
 (19,983) 55
Net current-period other comprehensive income (loss) 10,796
 (333) (14,788) (22,490)
Balance at End of Period $126,669
 $(44,353) $124,568
 $(69,853)
(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.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 15.18. Equity - (continued)


The following table provides a summary of reclassifications out of accumulatedAccumulated other comprehensive income (loss) for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 15.218.2 – Reclassifications Out of Accumulated Other Comprehensive Income
(Loss)
       
    Amount Reclassified From Accumulated Other Comprehensive Income
  Affected Line Item in the Three Months Ended September 30,
(In Thousands) Income Statement 2017 2016
Net Realized (Gain) Loss on AFS Securities      
Other than temporary impairment (1)
 Investment fair value changes, net $3
 $—
Gain on sale of AFS securities Realized gains, net (856) (1,319)
    $(853) $(1,319)
Net Realized Loss on Interest Rate
Agreements Designated as Cash Flow Hedges		      
Amortization of deferred loss Interest expense $14
 $18
    $14
 $18
Amount Reclassified From
Accumulated Other Comprehensive (Loss)
Affected Line Item in theThree Months Ended September 30,
(In Thousands)Income Statement20232022
Net Realized Loss on AFS Securities
(Decrease) increase in allowance for credit losses on AFS securitiesInvestment fair value changes, net$(66)$544 
Loss on sale of AFS securitiesRealized gains, net300 — 
$234 $544 
Net Realized Loss on Interest Rate
  Agreements Designated as Cash Flow Hedges
Amortization of deferred lossInterest expense$1,040 $1,040 
$1,040 $1,040 
Amount Reclassified From
Accumulated Other Comprehensive (Loss)
Affected Line Item in theNine Months Ended September 30,
(In Thousands)Income Statement20232022
Net Realized (Gain) Loss on AFS Securities
Increase in allowance for credit losses on AFS securitiesInvestment fair value changes, net$33 $2,315 
Loss (gain) on sale of AFS securitiesRealized gains, net612 (1,397)
$645 $918 
Net Realized Loss on Interest Rate
  Agreements Designated as Cash Flow Hedges
Amortization of deferred lossInterest expense$3,087 $3,087 
$3,087 $3,087 
Issuance of Common Stock
We have an established program to sell common stock from time to time in at-the-market ("ATM") offerings. During the three and nine months ended September 30, 2023, we issued 4,243,982 shares of common stock for proceeds of $33 million under this program. At September 30, 2023, the share issuance capacity under this program was $141 million.
Issuance of Preferred Stock
In January 2023, Redwood issued 2,800,000 shares of 10.00% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") for gross proceeds of $70 million and net proceeds of approximately $67 million after deducting the underwriting discount and other estimated expenses. The Series A Preferred Stock will pay quarterly cumulative cash dividends beginning April 15, 2023 to January 15, 2028 at a fixed annual rate of 10%, based on the stated liquidation preference of $25.00 per share, in arrears, when authorized by Redwood's Board of Directors and declared by the Company. Starting April 15, 2028, the annual dividend rate will reset to the five-year U.S. Treasury Rate plus a spread of 6.278%. The Series A Preferred Stock ranks senior to Redwood's common stock with respect to rights to the payment of dividends and the distribution of assets upon any liquidation,
64
    Amount Reclassified From Accumulated Other Comprehensive Income
  Affected Line Item in the Nine Months Ended September 30,
(In Thousands) Income Statement 2017 2016
Net Realized (Gain) Loss on AFS Securities      
Other than temporary impairment (1)
 Investment fair value changes, net $248
 $305
Gain on sale of AFS securities Realized gains, net (7,351) (20,288)
    $(7,103) $(19,983)
Net Realized Loss on Interest Rate
Agreements Designated as Cash Flow Hedges		      
Amortization of deferred loss Interest expense $42
 $55
    $42
 $55
(1)For the nine months ended September 30, 2017, other-than-temporary impairments 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. For the three months ended September 30, 2016, there were no other-than-temporary impairments. For the nine months ended September 30, 2016, other-than-temporary impairments were $3 million, of which $0.3 million were recognized through our consolidated statements of income and $2 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 15.18. Equity - (continued)


dissolution or winding up of the Company. During the three and nine months ended September 30, 2023, the Company declared preferred stock dividends of $0.625 and $1.85417 per share, respectively. At September 30, 2023, preferred dividends payable totaling $1 million for the third quarter 2023 dividend were included in Accrued expenses and other liabilities and were payable on October 16, 2023 to stockholders of record on September 30, 2023.
Direct Stock Purchase and Dividend Reinvestment Plan
During the nine months ended September 30, 2023, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At September 30, 2023, approximately 6 million shares remained outstanding for future offerings under this plan.
Earnings per Common Share
The following table provides the basic and diluted earnings per common share computations for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 15.318.3 – Basic and Diluted Earnings (Loss) per Common Share
 Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, except Share Data) 2017 2016 2017 2016(In Thousands, except Share Data)2023202220232022
Basic Earnings per Common Share:        
Net income attributable to Redwood $36,180
 $52,553
 $109,473
 $105,897
Basic Loss per Common Share:Basic Loss per Common Share:
Net loss related to common stockholdersNet loss related to common stockholders$(32,560)$(50,411)$(28,244)$(119,462)
Less: Dividends and undistributed earnings allocated to participating securities (948) (1,485) (2,800) (3,040)Less: Dividends and undistributed earnings allocated to participating securities(792)(1,158)(3,072)(3,445)
Net income allocated to common shareholders $35,232
 $51,068
 $106,673
 $102,857
Net loss related to to common stockholdersNet loss related to to common stockholders$(33,352)$(51,569)$(31,316)$(122,907)
Basic weighted average common shares outstanding 76,850,830
 76,680,183
 76,803,324
 76,827,026
Basic weighted average common shares outstanding115,465,977 116,087,890 114,381,548 118,530,172 
Basic Earnings per Common Share $0.46
 $0.67
 $1.39
 $1.34
Diluted Earnings per Common Share:        
Net income attributable to Redwood $36,180
 $52,553
 $109,473
 $105,897
Basic Loss per Common ShareBasic Loss per Common Share$(0.29)$(0.44)$(0.27)$(1.04)
Diluted Loss per Common Share:Diluted Loss per Common Share:
Net loss related to common stockholdersNet loss related to common stockholders$(32,560)$(50,411)$(28,244)$(119,462)
Less: Dividends and undistributed earnings allocated to participating securities (986) (1,439) (2,926) (3,226)Less: Dividends and undistributed earnings allocated to participating securities(792)(1,158)(3,072)(3,445)
Add back: Interest expense on convertible notes for the period, net of tax 6,564
 6,115
 18,639
 18,263
Add back: Interest expense on convertible notes for the period, net of tax— — — — 
Net income allocated to common shareholders $41,758
 $57,229
 $125,186
 $120,934
Net loss related to common stockholdersNet loss related to common stockholders$(33,352)$(51,569)$(31,316)$(122,907)
Weighted average common shares outstanding 76,850,830
 76,680,183
 76,803,324
 76,827,026
Weighted average common shares outstanding115,465,977 116,087,890 114,381,548 118,530,172 
Net effect of dilutive equity awards 298,955
 54,696
 215,141
 18,665
Net effect of dilutive equity awards— — — — 
Net effect of assumed convertible notes conversion to common shares 25,553,323
 21,096,738
 22,379,401
 21,145,987
Net effect of assumed convertible notes conversion to common shares— — — — 
Diluted weighted average common shares outstanding 102,703,108
 97,831,617
 99,397,866
 97,991,678
Diluted weighted average common shares outstanding115,465,977 116,087,890 114,381,548 118,530,172 
Diluted Earnings per Common Share $0.41
 $0.58
 $1.26
 $1.23
Diluted Loss per Common ShareDiluted Loss per Common Share$(0.29)$(0.44)$(0.27)$(1.04)
We included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights, in the calculations of basic and diluted earnings per common share as we determined that the two-class method was more dilutive than the alternative treasury stock method for these shares. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances.
During the three and nine months ended September 30, 20172023 and 2016, certain2022, none of our convertible notes were determined to be dilutive and were not included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money)converted) are included in the denominator.
For the three and nine months ended September 30, 2017, the number of outstanding equity awards that were antidilutive totaled 6,149 and 5,843, respectively. For the three and nine months ended September 30, 2016, the number of outstanding equity awards that were antidilutive totaled 6,623 and 6,565, respectively.

65

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 15.18. Equity - (continued)


For the three and nine months ended September 30, 2023, 40,763,478 and 43,910,345 of common shares, respectively, related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2022, 49,137,808 and 37,307,705 of common shares, respectively, related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2023, the number of outstanding equity awards that were antidilutive totaled 24,539 and 81,267, respectively. For the three and nine months ended September 30, 2022, the number of outstanding equity awards that were antidilutive totaled 249,178 and 268,737, respectively.
Stock Repurchases
In February 2016,July 2022, our Board of Directors approved an authorization for the repurchase of up to $100$125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced all previous share repurchase plans and has no expiration date. This repurchase authorizationdate and 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 no2023, we did not repurchase any shares of our common stock acquired under this authorization.program. At September 30, 2017, approximately $862023, $101 million of thisthe 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.


Note 16.19. Equity Compensation Plans
During the second quarter of 2023, Redwood shareholders approved an additional 9,650,000 shares of common stock for grant under our Incentive Plan. At September 30, 20172023 and December 31, 2016, 1,469,9912022, 12,268,074 and 1,787,9742,896,604 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock, and purchases under the Employee Stock Purchase Plan, totaled $18$30 million at September 30, 2017,2023, as shown in the following table.
Table 16.119.1 – Activities of Equity Compensation Costs by Award Type
 Nine Months Ended September 30, 2017Nine Months Ended September 30, 2023
(In Thousands) Restricted Stock Deferred Stock Units Performance Stock Units Employee Stock Purchase Plan Total(In Thousands)Restricted Stock UnitsDeferred Stock UnitsPerformance Stock UnitsEmployee Stock Purchase PlanTotal
Unrecognized compensation cost at beginning of period $2,091
 $11,506
 $4,549
 $—
 $18,146
Unrecognized compensation cost at beginning of period$5,068 $19,849 $15,271 $— $40,188 
Equity grants 2,237
 5,747
 —
 129
 8,113
Equity grants2,092 6,865 — 422 9,379 
Performance-based valuation adjustmentPerformance-based valuation adjustment— — (3,205)— (3,205)
Equity grant forfeitures (174) (472) —
 —
 (646)Equity grant forfeitures(1,088)(719)— — (1,807)
Equity compensation expense (934) (4,866) (1,738) (96) (7,634)Equity compensation expense(2,411)(8,911)(2,895)(318)(14,535)
Unrecognized Compensation Cost at End of Period $3,220
 $11,915
 $2,811
 $33
 $17,979
Unrecognized Compensation Cost at End of Period$3,661 $17,084 $9,171 $104 $30,020 
At September 30, 2017,2023, the weighted average amortization period remaining for all of our equity awards was less than two years.
Restricted Stock Units ("RSUs")
At September 30, 20172023 and December 31, 2016,2022, there were 265,842585,284 and 204,515 shares, respectively, of restricted stock outstanding. Restrictions on these shares lapse through 2021.806,119 RSUs outstanding, respectively. During the nine months ended September 30, 2017,2023, there were 134,364 shares of restricted stock263,590 RSUs granted, restrictions on 61,285 shares of restricted stock lapsed and those shares were354,813 RSUs distributed, and 11,752 shares of restricted stock awards were forfeited.
Deferred Stock Units (“DSUs”)
At September 30, 2017 and December 31, 2016, there were 1,869,577 and 1,848,861 DSUs, respectively, outstanding of which 1,006,394 and 939,899, respectively, had vested. During the nine months ended September 30, 2017, there were 359,501 DSUs granted, 306,911 DSUs distributed, and 31,875 DSUs129,612 RSUs forfeited. Unvested DSUsRSUs at September 30, 20172023 vest through 2021.
During the first quarter of 2016, equity compensation expense of $3 million was recognized in connection with the announced departures of two executives due to the full vesting of their DSUs in accordance with the terms of their employment agreements.2027.

66

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)
Note 16.19. Equity Compensation Plans - (continued)


Deferred Stock Units (“DSUs”)
At September 30, 2023 and December 31, 2022, there were 4,896,376 and 4,831,338 DSUs outstanding, respectively, of which 2,700,517 and 2,495,787, respectively, had vested. During the nine months ended September 30, 2023, there were 936,206 DSUs granted, 821,046 DSUs distributed, and 50,122 DSUs forfeited. Unvested DSUs at September 30, 2023 vest through 2027.
Performance Stock Units (“PSUs”)
At both September 30, 20172023 and December 31, 2016,2022, the target number of PSUs that were unvested was 642,879.2,078,171 and 2,354,002, respectively. Vesting for PSUs will generally occur at the end ofoccurs three years from their respective grant datedates based on various total shareholder return (“TSR”) performance calculations, as discussed in Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
For 275,831 target PSU awards that were granted in December 2019, the performance vesting period ended on January 1, 2023. These 2019 PSU awards failed to reach a threshold level under their performance-based vesting criteria and resulted in the vesting of no shares of our common stock underlying these PSUs. During the nine months ended September 30, 2023, for PSUs granted in 2021 and 2020, we adjusted the cumulative expected amortization expense down by $3 million to reflect our revised vesting estimate regarding the vesting of these awards in relation to the book value TSR performance condition for the second-year vesting tranche of the 2021 PSU grant and the third-year vesting tranche of the 2020 PSU grant.
Employee Stock Purchase Plan ("ESPP")
The ESPP allows a maximum of 450,000850,000 shares of common stock to be purchased in aggregate for all employees. As of September 30, 20172023 and December 31, 2016, 354,8012022, 739,404 and 337,271657,777 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at September 30, 2017.2023.
67

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 17.20. Mortgage Banking Activities, Net
The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 17.120.1 – Mortgage Banking Activities
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)
$(2,819)$(22,776)$5,272 $(125,012)
Trading securities (2)
(482)148 2,188 4,249 
Risk management derivatives (3)
12,158 24,319 10,508 107,573 
Other income, net (4)
107 467 1,422 5,496 
Total residential mortgage banking activities, net8,964 2,158 19,390 (7,694)
Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
BPL term loans, at fair value (1)
1,600 (19,306)13,214 (84,493)
BPL bridge loans, at fair value1,438 (9)4,808 2,242 
Risk management derivatives (3)
3,434 24,044 1,295 56,564 
Other income, net (5)
4,004 9,648 13,956 36,214 
Total business purpose mortgage banking activities, net10,476 14,377 33,273 10,527 
Mortgage Banking Activities, Net$19,440 $16,535 $52,663 $2,833 
(1)For residential loans, includes changes in fair value for associated loan purchase commitments. For BPL term loans, includes changes in fair value for associated interest rate lock commitments.
(2)Represents fair value changes on trading securities that are being used along as hedges to manage the mark-to-market risks associated with our residential mortgage banking operations.
(3)Represents market valuation changes of derivatives that were used to manage risks associated with our mortgage banking operations.
(4)Amounts in this line item include other fee income from loan acquisitions and provisions for repurchases, presented net.
(5)Amounts in this line item include other fee income from loan originations.
68
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Residential Mortgage Banking Activities, Net        
Changes in fair value of:        
Residential loans, at fair value (1)
 $28,135
 $12,671
 $63,122
 $47,456
Sequoia securities —
 —
 —
 1,455
Risk management derivatives (2)
 (7,077) (3,287) (13,787) (22,743)
Other income, net (3)
 142
 382
 1,515
 606
Total residential mortgage banking activities, net 21,200
 9,766
 50,850
 26,774
Commercial Mortgage Banking Activities, Net —
 —
 —
 (2,062)
Mortgage Banking Activities, Net $21,200
 $9,766
 $50,850
 $24,712
(1)Includes changes in fair value for associated loan purchase commitments.
(2)Represents market valuation changes of derivatives that were used to manage risks associated with our accumulation of residential loans.
(3)Amounts in this line item include other fee income from loan acquisitions and the provision for repurchases expense, presented net.



REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)



Note 18. Investment Fair Value Changes,21. Other Income, Net
The following table presents the components of Investment fair value changes, net,Other income recorded in our consolidated statements of income for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 18.121.1 – Investment Fair Value ChangesOther Income, Net
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
MSR income, net (1)
$1,747 $2,890 $6,173 $12,569 
Bridge loan fees (2)
1,895 1,489 6,757 3,952 
Other (3)
(1,296)(352)(1,870)495 
Other Income, Net$2,346 $4,027 $11,060 $17,016 
(1)Includes servicing fees and fair value changes for MSRs and related hedges, net.
(2)Includes asset management fees, extension fees, default interest and other fees.
(3)Includes earnings (losses) from equity method investments.
69
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Investment Fair Value Changes, Net        
Changes in fair value of:        
Residential loans held-for-investment, at Redwood $2,881
 $(655) $8,902
 $22,161
Trading securities 607
 8,898
 30,676
 3,728
Net investments in Legacy Sequoia entities (1)
 (1,045) (255) (3,842) (2,086)
Net investment in Sequoia Choice entity (1)
 (256) —
 (256) —
Risk sharing investments (267) 15
 (985) (689)
Risk management derivatives, net (1,592) 4,222
 (24,557) (41,188)
Valuation adjustments on commercial loans
held-for-sale
 —
 (307) 300
 (307)
Impairments on AFS securities (4) —
 (248) (305)
Investment Fair Value Changes, Net $324
 $11,918
 $9,990
 $(18,686)
(1)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.



REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


Note 19.22. Components of Operating Expenses
Components of our operatinggeneral and administrative expenses, loan acquisition costs, and other expenses for the three and nine months ended September 30, 20172023 and 20162022 are presented in the following table.
Table 19.122.1 – Components of Operating Expenses
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
General and Administrative Expenses
Fixed compensation expense (1)
$12,579 $18,626 $40,724 $45,364 
Annual variable compensation expense3,383 3,521 10,575 8,689 
Long-term incentive award expense (1) (2)
5,013 4,998 19,192 16,190 
Systems and consulting3,108 3,909 9,074 10,796 
Office costs2,131 2,381 6,460 6,489 
Accounting and legal1,307 1,775 3,402 5,026 
Corporate costs959 928 2,845 2,792 
Other1,217 2,106 3,785 6,373 
Total General and Administrative Expenses29,697 38,244 96,057 101,719 
Portfolio Management Costs3,661 1,863 10,271 5,208 
Loan Acquisition Costs1,880 2,426 4,613 10,371 
Other Expenses
Amortization of purchase-related intangible assets3,107 3,891 9,321 10,731 
Other1,526 370 3,971 1,083 
Total Other Expenses4,633 4,261 13,292 11,814 
Total Operating Expenses$39,871 $46,794 $124,233 $129,112 
(1)Includes $2 million of severance and transition-related expenses for the nine months ended September 30, 2023.
(2)For the three months ended September 30, 2023 and 2022, long-term incentive award expense included $3 million and $5 million of expense, respectively, for awards settleable in shares of our common stock, and $2 million and $0.1 million of expense, respectively, for awards settleable in cash. For the nine months ended September 30, 2023 and 2022, long-term incentive award expense included $14 million and $15 million, respectively, of expense for awards settleable in shares of our common stock, and $5 million and $1 million of expense, respectively, for awards settleable in cash.
Long-Term Cash-Based Awards
During the three and nine months ended September 30, 2023, there were $1 million of long-term cash-based retention awards granted to employees. Cash-based retention awards were granted to certain executive and non-executive employees between 2020 and 2023 that vest over one- to three-year periods, and are subject to continued employment through the vesting periods through 2025. At September 30, 2023, the liability associated with these awards was $1 million and the unamortized compensation cost of long-term cash-based awards was $2 million.
70
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Fixed compensation expense $5,233
 $5,253
 $16,556
 $19,022
Variable compensation expense 6,467
 5,802
 14,713
 11,824
Equity compensation expense 2,337
 2,031
 7,634
 7,117
Total compensation expense 14,037
 13,086
 38,903
 37,963
Systems and consulting 1,856
 2,692
 5,183
 7,274
Loan acquisition costs (1)
 1,187
 1,393
 3,397
 4,680
Office costs 988
 1,056
 3,231
 3,501
Accounting and legal 519
 721
 2,322
 3,043
Corporate costs 415
 478
 1,363
 1,589
Other operating expenses 920
 925
 2,390
 2,367
Operating expenses before restructuring charges 19,922
 20,351
 56,789
 60,417
Restructuring charges (2)
 —
 4
 —
 10,545
Total Operating Expenses $19,922
 $20,355
 $56,789
 $70,962
(1)Loan acquisition costs primarily includes underwriting and due diligence costs related to the acquisition of residential loans held-for-sale at fair value.
(2)For the nine months ended September 30, 2016, restructuring charges included $5 million of fixed compensation expense and $4 million of equity compensation expense related to one-time termination benefits, as well as $2 million of other contract termination costs, associated with the restructuring of our conforming and commercial mortgage banking operations and related charges associated with the departure of Redwood's President announced in the first quarter of 2016.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)

Note 22. Components of Operating Expenses - (continued)

Cash Settled Deferred Stock Units
During the nine months ended September 30, 2023, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020, 2021 and 2022, each vest over four-year periods and are subject to continued employment through the vesting periods through 2026. At September 30, 2023, the liability associated with these awards was $3 million, and the unamortized compensation cost was $4 million. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of our common stock at the end of each reporting period.
Refer to Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.
Cash Settled Performance Stock Units
During the nine months ended September 30, 2023, $6 million of cash-settled performance stock units ("csPSUs") were granted to certain executive and non-executive employees which vest over approximately three years through January 1, 2026. The target number of csPSUs that were granted totaled 663,499 units based on a per unit grant-date fair value of $9.75. The equivalent number of underlying shares of common stock that vest and that the recipient becomes entitled to receive at the time of vesting will generally range from 0% to 250% of the target number of csPSUs granted, with the target number of csPSUs granted being adjusted to reflect the value of any dividends declared on our common stock during the vesting period. Upon vesting, the recipient will receive the settlement of the vested shares in cash based on the closing market price of our common stock on the final vesting date. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of the csPSUs at the end of each reporting period. At September 30, 2023, the liability associated with these awards was $1 million, and unamortized compensation cost of the csPSUs was $5 million.
The grant date fair value of these csPSUs of $9.75 per unit was determined through Monte-Carlo simulations using the following assumptions: the common stock closing price at the grant date for Redwood and each member of the comparator group, the average closing price of the common stock price for the 60 trading days beginning January 1, 2023 for Redwood and each member of the comparator group, and the range of performance-based vesting based on absolute TSR over three years from the grant date. For this csPSU grant, an implied volatility assumption of 71% (based on historical volatility), a risk-free rate of 4.23% (the three-year Treasury rate on the grant date), and a 0% dividend yield (the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs) were used.
With respect to the csPSU awards granted during the nine months ended September 30, 2023:
•First, vesting would range from 0% - 250% of two-thirds of the Target csPSUs granted based on the level of book value total shareholder return ("bvTSR") attained over the three-year vesting period, with 100% of this two-thirds of the Target csPSUs vesting if three-year bvTSR is 25%. bvTSR is defined as the percentage by which our book value "per share price" has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.
•Second, vesting would range from 0% - 250% of one-third of the Target csPSUs granted based on Redwood’s relative total shareholder return (“rTSR”) against a comparator group of companies measured over the three-year vesting period, with 100% of this one-third of the Target csPSUs vesting if three-year rTSR corresponds to 55th percentile rTSR.
•Third, if the aggregate vesting level after steps one and two is greater than 100% of the Target csPSUs, but the Company's absolute total shareholder return ("TSR") is negative over the three-year performance period, vesting would be capped at 100% of Target csPSUs. TSR is defined as the percentage by which our common stock “per share price” has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.
Refer to Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

71

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 20.23. Taxes
We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. To qualify as a REIT, the Company must distribute at least 90% of its annual REIT taxable income and meet certain other requirements that relate to, among other things, the assets it holds, the income it generates, and the composition of its stockholders. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and we would not be able to elect to be taxed as a REIT for four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.
For the nine months ended September 30, 20172023 and 2016,2022, we recognized a provision for income taxes of $17$1 million and $1a benefit from income taxes of $10 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at September 30, 20172023 and 2016.2022.
Table 20.123.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate
 September 30, 2017 September 30, 2016September 30, 2023September 30, 2022
Federal statutory rate 34.0 % 34.0 %Federal statutory rate21.0 %21.0 %
State statutory rate, net of Federal tax effect 7.2 % 7.2 %
State taxes, net of Federal tax effect, as applicableState taxes, net of Federal tax effect, as applicable(1.0)%0.5 %
Differences in taxable (loss) income from GAAP income (6.8)% (21.7)%Differences in taxable (loss) income from GAAP income(0.6)%— %
Change in valuation allowance (2.8)% 6.6 %Change in valuation allowance— %— %
Dividends paid deduction (18.3)% (24.9)%
REIT GAAP income or loss not subject to federal income taxREIT GAAP income or loss not subject to federal income tax(22.2)%(13.4)%
Effective Tax Rate 13.3 % 1.2 %Effective Tax Rate(2.8)%8.1 %
We assessed our tax positions for all open tax years (i.e., Federal, 20142019 to 2017,2023, and State, 20132018 to 2017)2023) at September 30, 20172023 and December 31, 2016,2022, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

72

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 21.24. Segment Information
DuringRedwood operates in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. The accounting policies of the first quarterreportable segments are the same as those described in Note 3 — Summary of 2017, we reorganized our segments to align with changes in how we view our segments for making operating decisions and assessing performance. Specifically, we eliminated our Commercial segment and renamed our Residential Investments segment as the Investment Portfolio segment. This Investment Portfolio segment now includes both residential investments and our commercial investments, which are primarily comprised of investments in multifamily securities. Our Commercial segment previously included our commercial mortgage banking operations and our commercial loan investments, which were wound-down and sold, respectively, during 2016. We conformed the presentation of prior periods, whereby commercial loan investments are included in the Investment Portfolio segment and commercial mortgage banking activities are included in Corporate/Other. Following isSignificant Accounting Policies. For a full description of our current segments.
Our Investment Portfolio segment primarily consists of investments segments, see Part I, Item 1—Business in residential jumbo loans and real estate securities. Our securities portfolio primarily includes investments in residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations and RMBS issued by third parties, Agency issued CRT securities, as well as investments in Agency issued multifamily securities. Our residential loan investments are primarily made through a subsidiary of Redwood Trust that is a member ofAnnual Report on Form 10-K for the Federal Home Loan Bank of Chicago ("FHLBC") that utilizes attractive long-term financing from the FHLBC to make long-term investments directly in residential loans. This segment also includes residential loans from our consolidated Sequoia Choice entity. The Investment Portfolio segment’s main sources of revenue are interest income from investment portfolio securities and residential loans held-for-investment. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.
Our Residential Mortgage Banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to our investment portfolio. We typically acquire prime, jumbo mortgages and the related mortgage servicing rights on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. We occasionally supplement our flow purchases with bulk loan acquisitions. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with residential loans we acquire. Our Residential Mortgage Banking segment’s main source of revenue is income from mortgage banking activities, which includes valuation increases (or gains) on the sale or securitization of loans and valuation changes from hedges used to manage risks associated with these activities. Additionally, this segment may generate interest income on loans held pending securitization or sale. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

Note 21. Segment Information - (continued)



year ended December 31, 2022.
Segment contribution represents the measure of profit that we usemanagement uses to assess the performance of our business segments and make resource allocation and operating decisions. Certain corporate expenses not directly assigned or allocated to one of our twothree segments, as well as activity from certain consolidated Sequoia entities, and commercial mortgage banking activities (in the prior year), are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include interest expense associated with certain long-term debt,from our convertible notes and trust preferred securities, indirect operatinggeneral and administrative expenses and other expense.
The following tables present financial information by segment for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 21.124.1 – Business Segment Financial Information
Three Months Ended September 30, 2023
(In Thousands)Residential Mortgage BankingBusiness Purpose Mortgage BankingInvestment PortfolioCorporate/
Other		Total
Interest income$6,063 $4,618 $162,251 $4,142 $177,074 
Interest expense(4,826)(3,888)(131,303)(16,706)(156,723)
Net interest income (expense)1,237 730 30,948 (12,564)20,351 
Non-interest income (loss)
Mortgage banking activities, net8,964 10,476 — — 19,440 
Investment fair value changes, net— — (31,315)(115)(31,430)
Other income, net— 1,278 2,622 (1,554)2,346 
Realized gains, net— — 26 24 50 
Total non-interest income (loss), net8,964 11,754 (28,667)(1,645)(9,594)
General and administrative expenses(4,521)(9,402)(1,340)(14,434)(29,697)
Portfolio management costs— — (3,636)(25)(3,661)
Loan acquisition costs(395)(1,485)— — (1,880)
Other expenses— (3,108)(1,525)— (4,633)
(Provision for) Benefit from income taxes(813)318 (1,457)256 (1,696)
Segment Contribution$4,472 $(1,193)$(5,677)$(28,412)
Net (Loss)$(30,810)
Non-cash amortization (expense), net$(266)$(3,294)$(1,687)$(2,099)$(7,346)
73
  Three Months Ended September 30, 2017
(In Thousands) Investment Portfolio  Residential Mortgage Banking 
 Corporate/
Other
  Total
Interest income $47,023
 $10,626
 $5,088
 $62,737
Interest expense (9,445) (4,135) (13,863) (27,443)
Net interest income (loss) 37,578

6,491

(8,775) 35,294
Non-interest income        
Mortgage banking activities, net —
 21,200
 —
 21,200
MSR income, net 1,615
 —
 —
 1,615
Investment fair value changes, net 1,372
 —
 (1,048) 324
Other income 1,197
 —
 —
 1,197
Realized gains, net 1,734
 —
 —
 1,734
Total non-interest income, net 5,918

21,200

(1,048) 26,070
Direct operating expenses (1,324) (6,107) (12,491) (19,922)
Provision for income taxes (433) (4,829) —
 (5,262)
Segment Contribution $41,739

$16,755

$(22,314)  
Net Income       $36,180
Non-cash amortization income (expense) $5,222
 $(25) $(787) $4,410


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


Note 21.24. Segment Information - (continued)


Nine Months Ended September 30, 2023
(In Thousands)Residential Mortgage BankingBusiness Purpose Mortgage BankingInvestment PortfolioCorporate/
Other		Total
Interest income$14,007 $13,509 $492,514 $14,541 $534,571 
Interest expense(13,392)(11,599)(384,610)(52,086)(461,687)
Net interest income (expense)615 1,910 107,904 (37,545)72,884 
Non-interest income (loss)
Mortgage banking activities, net19,390 33,273 — — 52,663 
Investment fair value changes, net1,076 — (34,166)(3,063)(36,153)
Other income, net— 4,762 8,803 (2,505)11,060 
Realized gains, net— — 858 246 1,104 
Total non-interest income (loss), net20,466 38,035 (24,505)(5,322)28,674 
General and administrative expenses(13,065)(34,718)(3,990)(44,284)(96,057)
Portfolio management costs— — (10,233)(38)(10,271)
Loan acquisition costs(719)(3,894)— — (4,613)
Other expenses— (9,323)(3,969)— (13,292)
(Provision for) Benefit from income taxes(887)2,427 (3,135)953 (642)
Segment Contribution$6,410 $(5,563)$62,072 $(86,236)
Net (Loss)$(23,317)
Non-cash amortization (expense), net$(813)$(10,291)$(6,167)$(6,292)$(23,563)

Three Months Ended September 30, 2022
(In Thousands)Residential Mortgage BankingBusiness Purpose Mortgage BankingInvestment PortfolioCorporate/
Other		Total
Interest income$9,882 $9,082 $156,882 $1,816 $177,662 
Interest expense(8,083)(5,971)(111,876)(16,797)(142,727)
Net interest income (expense)1,799 3,111 45,006 (14,981)34,935 
Non-interest income (loss)
Mortgage banking activities, net2,158 14,377 — — 16,535 
Investment fair value changes, net— — (61,780)4,083 (57,697)
Other income, net— 399 3,906 (278)4,027 
Realized gains, net— — — — — 
Total non-interest income (loss), net2,158 14,776 (57,874)3,805 (37,135)
General and administrative expenses(5,735)(18,535)(1,639)(12,335)(38,244)
Portfolio management costs— — (1,863)— (1,863)
Loan acquisition costs(550)(1,876)— — (2,426)
Other expenses— (3,891)(370)— (4,261)
Benefit from income taxes1,688 2,559 (5,664)— (1,417)
Segment Contribution$(640)$(3,856)$(22,404)$(23,511)
Net (Loss)$(50,411)
Non-cash amortization (expense), net$(185)$(3,609)$(3,658)$(2,843)$(10,295)

74
  Three Months Ended September 30, 2016
(In Thousands) Investment Portfolio  Residential Mortgage Banking  Corporate/
Other		  Total
Interest income $47,176
 $8,831
 $4,899
 $60,906
Interest expense (5,013) (3,826) (12,758) (21,597)
Net interest income (loss) 42,163
 5,005
 (7,859) 39,309
Reversal of provision for loan losses 859
 —
 —
 859
Non-interest income        
Mortgage banking activities, net —
 9,766
 —
 9,766
MSR income, net 3,770
 —
 —
 3,770
Investment fair value changes, net 12,176
 —
 (258) 11,918
Other income 1,643
 —
 —
 1,643
Realized gains, net 6,615
 —
 —
 6,615
Total non-interest income, net 24,204
 9,766
 (258) 33,712
Direct operating expenses (2,751) (5,807) (11,797) (20,355)
Provision for income taxes (732) (240) —
 (972)
Segment Contribution $63,743
 $8,724

$(19,914)  
Net Income       $52,553
Non-cash amortization income (expense) $6,123
 $(28) $(983) $5,112

  Nine Months Ended September 30, 2017
(In Thousands) Investment Portfolio  Residential Mortgage Banking  Corporate/
Other		  Total
Interest income $135,106
 $26,515
 $14,968
 $176,589
Interest expense (21,940) (11,462) (39,306) (72,708)
Net interest income (loss) 113,166

15,053
 (24,338) 103,881
Non-interest income        
Mortgage banking activities, net —
 50,850
 —
 50,850
MSR income, net 6,106
 —
 —
 6,106
Investment fair value changes, net 13,846
 —
 (3,856) 9,990
Other income 3,367
 —
 —
 3,367
Realized gains, net 9,561
 —
 (752) 8,809
Total non-interest income, net 32,880

50,850
 (4,608) 79,122
Direct operating expenses (4,371) (18,009) (34,409) (56,789)
Provision for income taxes (4,490) (12,251) —
 (16,741)
Segment Contribution $137,185
 $35,643

$(63,355)  
Net Income       $109,473
Non-cash amortization income (expense) $16,263
 $(79) $(2,528) $13,656



REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


Note 21.24. Segment Information - (continued)



Nine Months Ended September 30, 2022
(In Thousands)Residential Mortgage BankingBusiness Purpose Mortgage BankingInvestment PortfolioCorporate/
Other		Total
Interest income$36,048 $22,509 $471,932 $4,028 $534,517 
Interest expense(23,316)(12,797)(331,047)(38,832)(405,992)
Net interest income (expense)12,732 9,712 140,885 (34,804)128,525 
Non-interest income (loss)
Mortgage banking activities, net(7,694)10,527 — — 2,833 
Investment fair value changes, net— — (165,297)13,508 (151,789)
Other income, net— 2,028 15,423 (435)17,016 
Realized gains, net— — 2,581 — 2,581 
Total non-interest income (loss), net(7,694)12,555 (147,293)13,073 (129,359)
General and administrative expenses(17,918)(40,076)(4,468)(39,257)(101,719)
Portfolio management costs— — (5,208)— (5,208)
Loan acquisition costs(2,848)(7,523)— — (10,371)
Other expenses74 (10,731)(1,157)— (11,814)
Benefit from (provision for) income taxes8,283 9,009 (6,808)— 10,484 
Segment Contribution$(7,371)$(27,054)$(24,049)$(60,988)
Net (Loss)$(119,462)
Non-cash amortization (expense), net$(699)$(11,563)$4,385 $(6,428)$(14,305)
75
  Nine Months Ended September 30, 2016
(In Thousands) Investment Portfolio  Residential Mortgage Banking  Corporate/
Other		  Total
Interest income $149,985
 $24,610
 $15,426
 $190,021
Interest expense (18,679) (10,719) (38,593) (67,991)
Net interest income (loss) 131,306

13,891
 (23,167) 122,030
Reversal of provision for loan losses 7,102
 —
 —
 7,102
Non-interest income        
Mortgage banking activities, net —
 26,774
 (2,062) 24,712
MSR income, net 12,834
 —
 —
 12,834
Investment fair value changes, net (16,505) —
 (2,181) (18,686)
Other income 4,157
 —
 —
 4,157
Realized gains, net 25,745
 —
 292
 26,037
Total non-interest income, net 26,231

26,774
 (3,951) 49,054
Direct operating expenses (1)
 (7,689) (17,175) (46,098) (70,962)
Provision for income taxes (1,087) (240) —
 (1,327)
Segment Contribution $155,863
 $23,250
 $(73,216)  
Net Income       $105,897
Non-cash amortization income (expense) $20,507
 $(102) $(2,978) $17,427


REDWOOD TRUST, INC. AND SUBSIDIARIES
(1)For the nine months ended September 30, 2016, $11 million of costs associated with the restructuring of our conforming residential mortgage loan operations and commercial operations, included in the direct operating expense line item, are presented under the Corporate/Other column.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)

Note 24. Segment Information - (continued)
The following tables presenttable presents the components of Corporate/Other for the three and nine months ended September 30, 20172023 and 2016.2022.

Table 21.224.2 – Components of Corporate/Other
 Three Months Ended September 30,Three Months Ended September 30,
 2017 201620232022
(In Thousands) 
Legacy Consolidated VIEs (1)
 Other Total 
Legacy Consolidated VIEs (1)
 Other  Total(In Thousands)
Legacy Consolidated VIEs (1)
OtherTotal
Legacy Consolidated VIEs (1)
Other Total
Interest income $4,875
 $213
 $5,088
 $4,837
 $62
 $4,899
Interest income$2,596 $1,546 $4,142 $1,473 $343 $1,816 
Interest expense (3,838) (10,025) (13,863) (3,274) (9,484) (12,758)Interest expense(2,487)(14,219)(16,706)(1,486)(15,311)(16,797)
Net interest income (loss) 1,037
 (9,812) (8,775) 1,563
 (9,422) (7,859)
Non-interest income            
Net interest income (expense)Net interest income (expense)109 (12,673)(12,564)(13)(14,968)(14,981)
Non-interest income (loss)Non-interest income (loss)
Investment fair value changes, net (1,045) (3) (1,048) (255) (3) (258)Investment fair value changes, net(215)100 (115)(329)4,412 4,083 
Total non-interest income, net (1,045) (3) (1,048) (255) (3) (258)
Direct operating expenses —
 (12,491) (12,491) —
 (11,797) (11,797)
Other income, netOther income, net— (1,554)(1,554)— (278)(278)
Realized gains, netRealized gains, net— 24 24 — — — 
Total non-interest income (loss), netTotal non-interest income (loss), net(215)(1,430)(1,645)(329)4,134 3,805 
General and administrative expensesGeneral and administrative expenses— (14,434)(14,434)— (12,335)(12,335)
Portfolio management costsPortfolio management costs— (25)(25)— — — 
Benefit from income taxesBenefit from income taxes— 256 256 — — — 
Total $(8) $(22,306) $(22,314) $1,308
 $(21,222) $(19,914)Total$(106)$(28,306)$(28,412)$(342)$(23,169)$(23,511)
Nine Months Ended September 30,
20232022
(In Thousands)
Legacy Consolidated VIEs(1)
OtherTotal
Legacy Consolidated VIEs(1)
Other Total
Interest income$7,879 $6,662 $14,541 $3,593 $435 $4,028 
Interest expense(7,650)(44,436)(52,086)(3,154)(35,678)(38,832)
Net interest income (expense)229 (37,774)(37,545)439 (35,243)(34,804)
Non-interest income (loss)
Investment fair value changes, net(319)(2,744)(3,063)(1,379)14,887 13,508 
Other income, net— (2,505)(2,505)— (435)(435)
Realized gains, net— 246 246 — — — 
Total non-interest income, net(319)(5,003)(5,322)(1,379)14,452 13,073 
General and administrative expenses— (44,284)(44,284)— (39,257)(39,257)
Portfolio management costs— (38)(38)— — — 
Benefit from income taxes— 953 953 — — — 
Total$(90)$(86,146)$(86,236)$(940)$(60,048)$(60,988)

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


76

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172023
(Unaudited)


Note 21.24. Segment Information - (continued)



  Nine Months Ended September 30,
  2017 2016
(In Thousands) 
Legacy Consolidated
VIEs (1)
 Other Total 
Legacy Consolidated
VIEs (1)
 Other  Total
Interest income $14,576
 $392
 $14,968
 $14,525
 $901
 $15,426
Interest expense (11,046) (28,260) (39,306) (9,842) (28,751) (38,593)
Net interest income (loss) 3,530
 (27,868) (24,338) 4,683
 (27,850) (23,167)
Non-interest income            
Investment fair value changes, net (3,842) (14) (3,856) (2,086) (95) (2,181)
Realized gains, net —
 (752) (752) —
 292
 292
Total non-interest income, net (3,842) (766) (4,608) (2,086) (1,865) (3,951)
Direct operating expenses —
 (34,409) (34,409) —
 (46,098) (46,098)
Total $(312) $(63,043) $(63,355) $2,597
 $(75,813) $(73,216)
(1)
Legacy consolidated VIEs represent Legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.

The following table presents supplemental information by segment at September 30, 20172023 and December 31, 2016.2022.
Table 21.324.3 – Supplemental Segment Information
(In Thousands)Residential Mortgage BankingBusiness Purpose Mortgage BankingInvestment Portfolio Corporate/
Other		Total
September 30, 2023
Residential loans$610,946 $— $5,086,239 $150,152 $5,847,337 
Business purpose loans— 102,777 5,146,553 — 5,249,330 
Consolidated Agency multifamily loans— — 420,554 — 420,554 
Real estate securities9,054 — 120,391 — 129,445 
Home equity investments— — 431,159 113 431,272 
Other investments— — 284,507 55,854 340,361 
Goodwill— 23,373 — — 23,373 
Intangible assets— 31,570 — — 31,570 
Total assets659,520 197,974 11,701,939 461,705 13,021,138 
December 31, 2022
Residential loans$628,160 $— $4,800,096 $184,932 $5,613,188 
Business purpose loans— 364,073 4,968,513 — 5,332,586 
Consolidated Agency multifamily loans— — 424,551 — 424,551 
Real estate securities— — 240,475 — 240,475 
Home equity investments— — 403,462 — 403,462 
Other investments— — 334,420 56,518 390,938 
Goodwill— 23,373 — — 23,373 
Intangible assets— 40,892 — — 40,892 
Total assets660,916 487,159 11,303,991 578,833 13,030,899 
77
(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


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

INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in sixfive main sections:
•Overview
•Results of Operations
–Consolidated Results of Operations
–Results of Operations by Segment
–Income Taxes
•Liquidity and Capital Resources
Off Balance Sheet Arrangements and Contractual Obligations
•Critical Accounting PoliciesEstimates
•Market and Estimates
New Accounting StandardsOther Risks
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part II, Item 8, Financial Statements and Supplementary Data in our most recent Annual Report on Form 10-K, as well as the sections entitled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, as well as other cautionary statements and risks described elsewhere in this report and our most recent Annual Report on Form 10-K. The discussion in this MD&A contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward lookingforward-looking statements as a result of various factors, such as those discussed in the Cautionary Statement below.
References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. Financial information concerning our business is set forth in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”MD&A and our consolidated financial statements and notes thereto, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our website can be found at www.redwoodtrust.com. We make available, free of charge through the investor informationrelations section of our website, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). We also make available, free of charge, access to our charters for our Audit Committee, Compensation Committee, and Governance and Nominating Committee, our Corporate Governance Standards, and our Code of Ethics governing our directors, officers, and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any executive officer or director or senior officer (as defined in the Code).of Redwood. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, and may include disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.
Our Investor Relations Department can be contacted at One Belvedere Place, Suite 300, Mill Valley, CA 94941, Attn: Investor Relations, telephone (866) 269-4976.



78

Our Business
Redwood Trust, Inc., together with its subsidiaries, focusesis a specialty finance company focused on investingseveral 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 well served by government programs. We seekdeliver 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 incomea diverse mix of investors through our mortgage banking activities.best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential and business purpose housing credit assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in twothree segments: Investment Portfolio and Residential Mortgage Banking.
Our primary sources of income are net interest income from our investment portfolioBanking, Business Purpose Mortgage Banking, and non-interest income from our mortgage banking activities. Net interest income consists of the interest income we earn on investments less the interest expense we incur on borrowed funds and other liabilities. Income from mortgage banking activities consists of the profit we seek to generate through the acquisition of loans and their subsequent sale or securitization.
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 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.” Our mortgage banking activities and investments in MSRs are generally carried out through our taxable REIT subsidiaries, while our portfolio of mortgage- and other real estate-related investments is primarily held at our REIT. We generally intend to retain profits generated and taxed at our taxable REIT subsidiaries, and to distribute as dividends at least 90% of the taxable income we generate at our REIT.
Redwood Trust, Inc. was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. Our executive offices are located at One Belvedere Place, Suite 300, Mill Valley, California 94941.
Our Business Segments
During the first quarter of 2017, we reorganized our segments to align with changes in how we view our segments for making operating decisions and assessing performance. Specifically, we eliminated our Commercial segment and renamed our Residential Investments segment as the Investment Portfolio segment. This Investment Portfolio segment now includes both residential investments and our commercial investments, which are primarily comprised of investments in multifamily securities. Our Commercial segment previously included our commercial mortgage banking operations and our commercial loan investments, which were wound-down and sold, respectively, during 2016. We conformed the presentation of prior periods, whereby commercial loan investments are included in the Investment Portfolio segment and commercial mortgage banking activities are included in Corporate/Other. Following isPortfolio. For a full description of our current segments.
Our Investment Portfolio segment primarily consists of investmentssegments, see Part 1, Item 1—Business in residential jumbo loans and real estate securities. Our securities portfolio primarily includes investments in residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations and RMBS issued by third parties, Agency issued credit risk transfer ("CRT") securities, as well as investments in Agency issued multifamily securities. Our residential loan investments are primarily made through a subsidiary of Redwood Trust that is a member of the Federal Home Loan Bank of Chicago ("FHLBC") that utilizes attractive long-term financing from the FHLBC to make long-term investments directly in residential loans. The Investment Portfolio segment’s main sources of revenue are interest income from investment portfolio securities and residential loans held-for-investment. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.
Our Residential Mortgage Banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to our investment portfolio. We typically acquire prime, jumbo mortgages and the related mortgage servicing rightsAnnual Report on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. We occasionally supplement our flow purchases with bulk loan acquisitions. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with residential loans we acquire. Our Residential Mortgage Banking segment’s main source of revenue is income from mortgage banking activities, which includes valuation increases (or gains) on the sale or securitization of loans and valuation changes from hedges used to manage risks associated with these activities. Additionally, this segment may generate interest income on loans held pending securitization or sale. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.

Consolidated Securitization Entities
We sponsor our Sequoia securitization program, which we useForm 10-K for the securitization of residential mortgage loans. We are required under Generally Accepted Accounting Principles in the United States (“GAAP”) to consolidate the assets and liabilities of certain Sequoia securitization entities we have sponsored for financial reporting purposes. However, each of these entities is independent of Redwood and of each other, and the assets and liabilities of these entities are not owned by us or legal obligations of ours, respectively, although we are exposed to certain financial risks associated with our role as the sponsor or depositor of these entities and, to the extent we hold securities issued by, or other investments in, these entities, we are exposed to the performance of these entities and the assets they hold. We refer to certain of these securitization entities issued prior to 2012 as “consolidated Legacy Sequoia entities,” and the securitization entity formed in connection with the securitization of Redwood Choice expanded-prime loans as the "consolidated Sequoia Choice entity." Where applicable, in analyzing our results of operations, we distinguish results from current operations “at Redwood” and from consolidated Legacy Sequoia entities or the consolidated Sequoia Choice entity.year ended December 31, 2022.
Cautionary Statement
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, opportunities, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, and this Quarterly Report on Form 10-Q, in each case2022, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood’sRedwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects;prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, and our ability to pay dividends in the future); (ii) statements related to our financial outlook and expectations for 2023 and future years, including statements regarding our long-term debtthe economic impacts of inflation, monetary policy, volatility and upcoming maturitypotential regulatory changes in the banking sector, and shifting sources of convertible notesliquidity in 2018;the residential mortgage market; (iii) statements regarding our progress in developing private capital partnerships that we expect to enhance our liquidity, operating and distribution capabilities going forward; (iv) statements related to our investment portfolio, including thethat there remains potential impactupside in our portfolio through market discount, and that at September 30, 2023, our securities portfolio had approximately $3.26 per share of changesnet discount to the capital requirement underpar, our FHLB borrowing facility; (iv) statementsexpectations to continue de-emphasizing third-party investments and reducing our exposure to this portion of our investment portfolio to optimize overall returns, and our expectations regarding our mortgage banking activities, including expectations relatingability to finance, renew or extend financing for, and expand financing capacity for, our securities, bridge loan, and HEI investments; (v) statements related to opportunities we see for our residential mortgage banking margins, securitization execution, and BPL platforms, our expanded-prime Redwood Choice loan program; (v)positioning to capture market share, and opportunities to help scale and institutionalize HEI; (vi) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the third quarter of 20172023 and at September 30, 2017, and2023, expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase; (vi) statements relating to our estimate of our available capital (including that we estimate our available capital as ofpurchase, total net jumbo loan exposure at September 30, 2017 was approximately $330 million, expectations relating2023, and residential mortgage loans subject to our upcoming $250 million convertible debt maturity, and that we believe we can source incremental capital on an as-needed basis for redeployment through continued optimization of our investment portfolio);forward sale commitments; (vii) statements we make regarding future dividends, including with respect to our dividend policy, including our intention to pay a regular dividend of $0.28 per share per quarterquarterly dividends in 2017;2023; and (viii) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.



79



Important factors, among others, that may affect our actual results include:
the pace at which we redeploy our available capital into new investments;
interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
changes in the demand from investors for residential mortgages and investments, and our ability to distribute residential mortgages through our whole-loan distribution channel;
our ability to finance our investments in securities and our acquisition of residential mortgages with short-term debt;
changes in the values of assets we own;
•general economic trends and the performance of the housing, real estate, mortgage credit,finance, and broader financial markets, and their effects on the prices of earning assetsmarkets;
•changing benchmark interest rates, and the credit statusFederal Reserve’s actions and statements regarding monetary policy;
•the impact of borrowers;the COVID-19 pandemic;
•federal and state legislative and regulatory developments and the actions of governmental authorities including the new U.S. presidential administration, and in particular those affecting the mortgage industry orentities;
•our ability to compete successfully;
•our ability to adapt our business (including, but not limitedmodel and strategies to the Federal Housing Finance Agency’s rules relating to FHLB membership requirements and the implications for our captive insurance subsidiary’s membership in the FHLB);changing circumstances;
•strategic business and capital deployment decisions we make;
developments related•our use of financial leverage;
•our exposure to the fixed income and mortgage finance markets and the Federal Reserve’s statements regarding its future open market activity and monetary policy;a breach of our cybersecurity or data security;
•our exposure to credit risk and the timing of credit losses within our portfolio;
•the concentration of the credit risks we are exposed to, including due to the structure of assets we hold, and the geographical concentration of real estate underlying assets we own;
own, and our exposure to adjustable-rate mortgage loans;environmental and climate-related risks;
•the efficacy and expense of our efforts to manage or hedge credit risk, interest rate risk, and other financial and operational risks;
•changes in credit ratings on assets we own and changes in the rating agencies’ credit rating methodologies;
changes in interest rates; •changes in mortgage prepayment rates;
•changes in interest rates;
•our ability to redeploy our available capital into new investments;
•interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
•our ability to finance the acquisition of real estate-related assets with short-term debt;
•changes in the values of assets we own;
•the ability of counterparties to satisfy their obligations to us;
•our exposure to the discontinuation of LIBOR;
•our exposure to liquidity risk, risks associated with the use of leverage, and market risks;
•changes in the demand from investors for residential and business purpose mortgages and investments, and our ability to distribute residential and business purpose mortgages through our whole-loan distribution channel;
•our involvement in securitization transactions, the profitability of those transactions, and the risks we are exposed to in engaging in securitization transactions;
•exposure to claims and litigation, including litigation arising from our involvement in loan origination and securitization transactions;
ongoing litigation against various trustees of RMBS transactions;
•whether we have sufficient liquid assets to meet short-term needs;
•our ability to successfully compete and retain or attract key personnel;
our ability to adapt our business model and strategies to changing circumstances;
•changes in our investment, financing, and hedging strategies and new risks we may be exposed to if we expand our business activities;
•our exposure to a disruption or breach of the security of our technology infrastructure and systems;
exposure to environmental liabilities;
our failure to comply with applicable laws and regulations;
our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
•the impact on our reputation that could result from our actions or omissions or from those of others;
•our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
•the impact of changes in accounting principlesto U.S. federal income tax laws on the U.S. housing market, mortgage finance markets, and tax rules;our business;
•our failure to comply with applicable laws and regulation, including our ability to obtain or maintain the governmental licenses;
•our ability to maintain our status as a REIT for tax purposes;
•limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940;
•our common stock may experience price declines, volatility, and poor liquidity, and we may reduce our dividends in a variety of circumstances;
•decisions about raising, managing, and distributing capital;
•our exposure to broad market fluctuations; and
•other factors not presently identified.
This Quarterly Report on Form 10-Q may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.

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OVERVIEW
Business Update
We had a strong third quarterFollowing the release by the Board of 2017 operationally and financially, and are well positioned to achieveGovernors of the operating metrics we set outFederal Reserve of proposed risk-based capital rules for the year and build momentum as we head towards 2018. Perhaps most importantly, we completed our executive search process with the hiring of Dash Robinson, who started with us in late September in his capacity as Executive Vice President. We also completed three successful securitization issuances, including our first expanded-prime Redwood Choice ("Choice") transaction, and issued convertible debt at an attractive level. We deployed $119 million of capital in new investments, much of it after asset pricing declines inU.S. banking system early September. We timed our capital deployment well, as asset prices subsequently reverted, in most cases finishing the quarter at or above June 30, 2017 levels.
In this update, we review our mortgage banking activities, provide our thoughts on capital and investing, and conclude with our outlook for the balance of 2017.
Residential Mortgage Banking
Our mortgage banking team had a strong third quarter of 2017, with our expanded-prime Choice program continuing to drive outperformance. Our initial Choice securitization, backed by $318 million of loans, was received favorably by the market, and attracted a good number of both new and existing investors. The issuance created $31 million of investments for our portfolio, utilizing approximately $13 million of capital - more than double the investment for our portfolio than is produced through a traditional Sequoia securitization. Given the current pace and expected growth of loan purchases under our Choice program, we expect to issue Choice securitizations on a regular basis.
We also completed our fifth and sixth traditional Sequoia securitizations of the year during the third quarter of 2017, backed by loans totaling $839 million; this was followed closely by another traditional Sequoia securitization in early October. In addition, we sold $212 million of whole loans to portfolio buyers during the third quarter.
As loan and RMBS pricing has improved, our loan purchase volumes have risen and we have become more competitive with bank retail and correspondent mortgage channels. Loan purchase commitments, adjusted for fallout, increased to $1.6 billion in the third quarter of 2017, up2023, we expected that while the final rules would likely evolve, bank management teams would follow early adoption, driving a fundamental shift in how financial assets are funded. Three months later, those expectations appear to have been validated thus far and our operating businesses continue to make forward progress, largely ahead of plan. This progress has been concurrent with the emergence of fresh demand for our organically created assets from $1.4pockets of capital complementary to our traditional distribution channels.
Our relationships with banks have deepened in the last few months as banking business models are reconciled with a future of higher capital requirements and more expensive interest rate risk management. And banks' response to these forthcoming regulatory changes reflects the urgency of the moment. Since March, our Residential team has engaged with depositories from coast to coast, securing and onboarding new partners. We now have active relationships with 185 active loan sellers, including over 70 banks, many of which have commenced lock activity with us in recent weeks. This includes a group of the nation’s largest regional banks and large financial institutions, a significant number with assets greater than $200 billion and $1.1 billion inextensive mortgage origination footprints. As we always have, Redwood offers these partners the second and first quarters of 2017, respectively. We had strong growth duringability to sustain operating activities without diluting the overall customer relationship.
Our total Residential Mortgage Banking lock volume for the third quarter with our Choice program, whichof 2023 was $1.6 billion, up 189% from the second quarter of 2023 despite significantly higher mortgage rates and an overall decline in residential mortgage loan originations. Our purchase volume was $814 million, up 344% from the second quarter of 2023. Bank sellers accounted for approximately 30%50% of our total third quarter loanquarterly purchase commitments, adjusted for fallout, versus approximately 20%activity, up from just 10% in the second quarter of 2017. Overall margins remained at or above our long-term expectations2023 and a de minimis amount in the first quarter of 75-100 basis points during the2023. Of note, bulk pool activity was a key driver of third quarter purchase volume, much of 2017.
Capital and Investing
We aggressively pursued new investmentsit seasoned loans acquired at a significant discount to par. Notwithstanding the persistent rise in September when volatility dueinterest rates, we continue to hurricane activity drove asset prices down. Theevaluate bulk pools of residential mortgage loans coming to market, more evidence of the quarter’s $119 milliontransition in process for many banks seeking to balance pressures on capital, liquidity and net interest margin.
Headwinds to near-term growth, including mortgage rates at 20-year highs and very low overall transaction activity in housing, have us focused on leading indicators over the intermediate term as we position our Residential Mortgage Banking business to further scale volume when market conditions begin to turn more favorable. Those indicators include the quality of capital deployment occurred during this period,new loan seller relationships and included $63 million in GSE residential credit risk transfer (CRT) securities, $39 million ina deeper "wallet share" with existing loan sellers. While many of our competitors have scaled back from the prime jumbo mortgage business, we completed our third Sequoia and third-party RMBS, and $17 million in multifamily securities. Year-to-date through September 30, 2017, we have deployed $393 millionsecuritization of capital towards new investments (including $37 million of debt repurchases).
We also sold $49 million of mostly lower yielding securities2023 in the third quarter, followed closely by our fourth Sequoia securitization early in the fourth quarter. Both transactions generated strong margins and were distributed to a broad base of 2017, freeing up $20 millioninvestors. In a market that is defined by so much volatility, we managed to execute these transactions within our target gain on sale range. Consistent with the momentum we see for the business, we nearly doubled our capital allocation to Residential Mortgage Banking in the third quarter and expect that allocation to grow further in 2024.
Our business-purpose lending (“BPL”) business is beginning to observe broader changes in the market as well. Borrowers that have historically sought funding from banks are now covered regularly in our pipeline discussions, and while the overall credit environment calls for continued caution and selectivity, demand from capital partners remains strong for well-underwritten BPL loans to high quality sponsors. While this transition is moving more slowly than in our Residential business, the early indicators are unmistakable. We have been engaged in dialogue with several banks on partnership opportunities that would allow us to access their existing pipelines with the objective of achieving mutually beneficial outcomes. With a life-cycle lending platform that offers both bridge and stabilized term financing, we are well-positioned to capture incremental market share that will continue shifting to private lenders. Our capital for reinvestment, aftermarkets expertise allowed us to complete an accretive term loan securitization and bulk whole loan sale in the repaymentthird quarter.
The BPL sector overall continues to manage through macro crosswinds that have impacted sponsor sentiment and reduced transaction volumes across the industry. Our team has been proactively working with borrowers in advance of associated debt. Additionally, we issued $245 million of six-year, 4.75% convertible debt in August.
As ofloan maturities to assess project plans and ensure management towards successful completions. While 90+ day delinquencies across our bridge and term portfolios declined slightly to 4.0% at September 30, 2017, we estimate that our available capital was approximately $330 million, versus $180 million at June 30, 2017. Although2023, we continue to evaluatemanage through instances of borrower/sponsor stress, particularly in our options with regardbridge portfolio, where certain sponsors have required loan modifications or an infusion of fresh equity from existing or new sponsorship. Though bridge lending continues to be one of our strongest drivers of net interest income, the April 2018 maturitylumpiness of $250the portfolio and intermittent nature of workout and modification activity has contributed to recent volatility in our quarterly GAAP earnings.
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Overall, we funded $411 million of BPL loans in the third quarter, a slight increase from second quarter of 2023 volumes. Within Bridge, our convertible debt, at currentbuild-for-rent (“BFR”) aggregation product has seen increased demand from borrowers and carries a favorable risk profile given the turnkey nature of the homes being financed. Origination of loans secured by multifamily properties continues to be light as more limited capital flows into these types of projects. While we expect volumes for our fixed-rate term loans to remain influenced by benchmark interest rates, our bridge portfolio remains a source for refinances into term loans.
In the third quarter, we formally launched Aspire, our internal home equity investment (“HEI”) platform. After years of investing in and financing HEI, this development was a natural next step in the progression of our support for this nascent but growing sector. Since 2019, Redwood has been a participant in the HEI market, pricespurchasing approximately $350 million in assets, co-sponsoring the excess cost to retire this debt prior to maturity is unattractive relative to alternative short-term usesfirst-ever securitization backed entirely by HEI, and subsequently procuring a dedicated financing facility for the asset class. With our track record of cash. In addition,supporting housing accessibility, we believe we have a unique opportunity to help scale and institutionalize HEI in a way that will benefit consumers. We believe the opportunity to help homeowners access the equity in their homes remains the largest addressable market in housing finance. Through Aspire, we can source incrementalnow directly serve this market by offering HEI to customers of our nationwide correspondent network of loan officers, a significant advantage over more traditional, high-cost marketing campaigns.
As we think more holistically about the overall Redwood enterprise and the significant market opportunities we see ahead, evolving our capital structure and procuring long-term private capital partnerships will be a top priority. We continue to observe a secular transition occurring in our markets, with the roles of banks, private credit institutions, and specialty finance companies such as Redwood rapidly evolving. In particular, regulatory crosscurrents are redefining the most efficient holders of real estate-related assets, as well as those who finance and service them. As evidenced by our previously announced Oaktree BPL bridge joint venture, the value proposition that platforms like ours offer institutional private credit investors has become more visible over the past several years. These types of investors include pension funds, life insurance companies, sovereign wealth funds, and others who have accretive capital and a strong demand for our loan products but lack the origination or sourcing capabilities that our platform possesses. Recently, we have engaged with a handful of large private credit investors who are deeply familiar with our company and track record who have shown interest in forging strategic partnerships that we believe could be beneficial to our shareholders.
In keeping with these trends, our long-term strategic focus will be to position our mortgage banking businesses to meet this market opportunity, with ample working capital and access to a deep set of products. Our investment strategy will evolve in kind, with a continued focus on an as-needed basis for redeployment through continued optimizationdeployment alongside capital partners, in lieu of traditional direct investing. As we did in the third quarter, we also expect to continue de-emphasizing third-party investments and further reduce our exposure to this lower-yielding portion of our investment portfolio.
We continueportfolio to evaluate the potential impact of hurricane activity in Houston and Florida on our investment portfolio, although it is still very early in the process. The vast majority of our non-Agency loans and securities were not impacted by the storms and, to date, we have not incurred any realized losses related to properties in the affected areas. Although we did see some impact to pricing from the hurricanes, most of our investments had positive net market valuation adjustments as the benefit fromfurther optimize overall credit spread tightening exceeded any negative impact from the hurricanes. 


Outlookreturns.
As we progress throughtowards year-end, we are already starting to see a diminution of market activity consistent with a year ago when market participants, from homebuyers to bond investors, took stock of a volatile environment and decided to save investment capital for the fourth quarteryear ahead. If anything, the market is in a more challenging position today than it was then, factoring in the possibility of 2017,a U.S government shutdown, along with a geopolitical backdrop that has deteriorated significantly. The additional volatility from geopolitical events will likely continue to pressure our current operating metrics are in line withnear-term GAAP results, particularly the market valuations of our expectations. While investment portfolio returns have been bolstered by persistent market value increases,assets. And while the resiliency of the U.S. economy has surprised even the most ardent optimists, the prospect of an interest rate-driven recession in 2024 still remains a likelihood, in our view. As such, we have also maintained consistent levels of net interest income and refined our portfolio mix by selling lower-yielding investments and realizing gains where appropriate. Mortgage banking marginswill continue to be robustprioritize liquidity and we are encouraged by the relative mix of Select and Choice loans in our pipeline.
We remain cognizant of forces outside of our control (both financial and otherwise) and their potential impact on our business. With this backdrop, a fully-seated executive team is an important milestoneexercise caution as we continuework to think critically aboutensure our business assumptions and look ahead to next year and beyond.franchise is positioned for the opportunity we see ahead.

Financial and Operational Overview -




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Third Quarter of 2017
Highlights
Our GAAP earnings were $0.41 per share for the third quarter of 2017, as compared with $0.43 per share for the second quarter of 2017. Higher mortgage banking incomeKey Financial Results and interest income were offset by higher interest costs and less benefit from market value increases on our trading securities portfolio relative to the second quarter of 2017.
Our GAAP book value was $15.67 per share at September 30, 2017, as compared with $15.29 per share at June 30, 2017. This increase was primarily driven by our quarterly earnings exceeding our dividend, and higher fair values on our available-for-sale securities.
We deployed $119 million of capital in the third quarter of 2017 toward new investments, including $63 million in Agency residential CRT securities, $39 million in Sequoia and third-party RMBS, and $17 million in Agency multifamily securities. Year-to-date through September 30, 2017, we deployed $393 million of capital into new investments (including $37 million of debt repurchases).
We sold $49 million of securities during the third quarter of 2017, freeing up $20 million of capital for reinvestment after the repayment of associated debt. Year-to-date through September 30, 2017, we sold $148 million of mostly lower yielding securities and $53 million of conforming MSRs, freeing up $131 million of capital for reinvestment after the repayment of associated debt.
We purchased $1.5 billion of residential jumbo loans during the third quarter of 2017, and $3.8 billion year-to-date through September 30, 2017. At September 30, 2017, our pipeline of jumbo residential loans identified for purchase was $1.5 billion.
Residential loan sales totaled $1.4 billion during the third quarter of 2017 and included $0.2 billion of whole loan sales to third parties and $1.2 billion of loans that were securitized. Year-to-date through September 30, 2017, residential loan sales totaled $3.5 billion, and included $0.9 billion of whole loan sales to third parties and $2.6 billion of loans that were securitized in seven separate transactions including our first expanded-prime Choice securitization.
We issued $245 million of six-year, 4.75% convertible debt during the third quarter of 2017.







Key Earnings Metrics
The following table presents key earningsfinancial metrics for the three and nine months ended September 30, 2017.2023.
Table 1 – Key EarningsFinancial Results and Metrics
Three Months EndedNine Months Ended
(In Thousands, except per Share Data)September 30, 2023September 30, 2023
Net income (loss) per diluted common share$(0.29)$(0.27)
Annualized GAAP return on common stockholders' equity(12.3)%(3.5)%
Dividends per share$0.16 $0.55 
Book value per share$8.77$8.77
Economic return on book value (1)
(3.6)%(2.4)%
  Three Months Ended Nine Months Ended
(In Thousands, except per Share Data) September 30, 2017 September 30, 2017
Net income $36,180
 $109,473
Net income per diluted common share $0.41
 $1.26
Annualized GAAP return on equity 12% 12%
REIT taxable income per share $0.26
 $0.73
Dividends per share $0.28
 $0.84

A detailed discussion of our third quarter of 2017 net income is included in the Results of Operations section of this MD&A that follows.
Book Value per Share
At September 30, 2017, our(1)Economic return on book value was $1.21 billion, or $15.67 per share, an increase from $15.29 per share at June 30, 2017 and $14.96 at December 31, 2016. The following table sets forthis based on the changesperiodic change in our book value per share for the three and nine months ended September 30, 2017.
Table 2 – Changes in Book Value per Share
  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
Our GAAP book value per common share increased $0.38plus dividends declared per share to $15.67 percommon share during the thirdperiod. It does not represent an annualized figure.
Third Quarter Operational Highlights
Residential Mortgage Banking
•Locked $1.6 billion(1) of jumbo loans, up from $567 million in the second quarter 2023, and purchased $815 million of 2017. This increase was primarily driven by positive mark-to-market adjustments on our available-for-sale securities and our quarterly earnings exceeding our dividend.jumbo loans, up from $184 million in the second quarter 2023
Unrealized gains on our available-for-sale securities increased $0.19 per share during◦50% of purchase volume in the third quarter 2023 was from depository institutions, up from 10% in the second quarter 2023
◦Achieved gross margins of 2017, primarily as a result of a positive $0.27 per share mark-to-market adjustment on our available-for-sale securities due to credit spread tightening80bps during the quarter. This increase was partially offset by $0.05 per sharequarter, within our historical 75bps to 100bps range
•Significantly grew jumbo loan seller network, including over 50 new or re-established relationships with depository institutions
•Distributed $391 million of discount amortization income recognizedjumbo loans through securitization ($338 million) and whole loan sales ($54 million)
•Increased capital allocated to Residential Mortgage Banking segment to $150 million at September 30, 2023, from $80 million at June 30, 2023
Business Purpose Mortgage Banking
•Funded $411 million of business purpose lending ("BPL") loans in earnings from the appreciation in the amortized cost basis of our available-for-sale securities, and $0.03 per share of previously unrealized net gains that were realized as income from the sale of securities.

Capital Allocation Summary
This section provides an overview of our capital position and how it was allocated at the end of the third quarter of 2017. A detailed discussion of our liquidity2023 (74% Bridge and capital resources is provided26% Term), up from $406 million in the Liquiditysecond quarter 2023
•Distributed $340 million of BPL loans through securitization ($278 million) and whole loan sales ($62 million)
•Began selling BPL bridge loans into previously announced joint venture ("JV") with Oaktree Capital Resources sectionManagement, L.P. ("Oaktree") and established new dedicated financing line for the JV
Investment Portfolio
•Deployed approximately $70 million of this MD&A that follows.capital into internally sourced investments, while generating incremental capital from sales of non-strategic third-party assets
We use a combination•RPL and jumbo securities saw continued declines in 90 day+ delinquencies to 8.6% and 0.9%, respectively; 90 day+ delinquencies for our combined CAFL securities and bridge loan portfolio declined to 4.0%, aided in part by successful loss mitigation resolutions completed during the quarter, and accompanied by an increase in loans transferred to REO(2)
Financing Highlights
•Unrestricted cash and cash equivalents of equity and corporate debt (which we collectively refer to as “capital”) to fund our business. We also utilize various forms of collateralized short-term and long-term debt to finance certain investments and to warehouse some of our inventory of residential loans held-for-sale. We do not consider this collateralized debt as "capital" and, therefore, it is presented separately from allocated capital in the table below. The following table presents how our capital was allocated between business segments and investment types$204 million at September 30, 2017.2023
Table 3 – Capital Allocation Summary•Successfully renewed two maturing loan warehouse financing facilities with key counterparties
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.
Our total capital was $1.78•Maintained $2.2 billion of excess financing capacity across warehouse facilities at September 30, 2017,2023
Footnotes to Business Highlights

1.Lock volume does not account for potential fallout from pipeline that typically occurs through the lending process.
2.Calculated as BPL loans in our consolidated CAFL securitizations, bridge loans held for investment, and included $1.21 billion of equity capitalbridge and $0.57 billion ofterm loans held-for-sale with a delinquent payment greater than 90 days divided by the total $2.57 billionnotional balance of long-term debt on our consolidated balance sheet. This portion of debt included $201 million of exchangeable debt due in 2019, $245 million of convertible debt due in 2023,CAFL securitizations, bridge loans held for investment, and $140 million of trust-preferred securities due in 2037.bridge and term loans held for sale.
Of our $1.78 billion of total capital at September 30, 2017, $1.61 billion (or 90%) was allocated to our investments with the remaining $170 million (or 10%) allocated to our residential mortgage banking activities.
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As of September 30, 2017, we estimate that our available capital was approximately $330 million. Although we continue to evaluate our options with regard to the April 2018 maturity of $250 million of our convertible debt, at current 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 optimization of our investment portfolio.


RESULTS OF OPERATIONS
Within this Results of Operations section, we provide commentary that compares results year-over-year for 20172023 and 2016.2022. Most tables include a "change" column that shows the amount by which the results from 20172023 are greater or less than the results from the respective period in 2016.2022. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the third quarter of 2017,2023, compared to the third quarter of 2016,2022, and increases or decreases induring the "nine-month periods" refer to the change in results for the first nine months of 2017,2023, compared to the first nine months of 2016.2022.
Consolidated Results of Operations
The following table presents the components of our net income for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 42 – Net Income (Loss)
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands, except per Share Data) 2017 2016 Change  2017 2016 Change
Net Interest Income $35,294
 $39,309
 $(4,015)  $103,881
 $122,030
 $(18,149)
Reversal of provision for loan losses —
 859
 (859)  —
 7,102
 (7,102)
Net Interest Income After Provision 35,294
 40,168
 (4,874)  103,881
 129,132
 (25,251)
Non-interest Income     

      

Mortgage banking activities, net 21,200
 9,766
 11,434
  50,850
 24,712
 26,138
MSR income, net 1,615
 3,770
 (2,155)  6,106
 12,834
 (6,728)
Investment fair value changes, net 324
 11,918
 (11,594)  9,990
 (18,686) 28,676
Other income 1,197
 1,643
 (446)  3,367
 4,157
 (790)
Realized gains, net 1,734
 6,615
 (4,881)  8,809
 26,037
 (17,228)
Total non-interest income, net 26,070
 33,712
 (7,642)  79,122
 49,054
 30,068
Operating expenses (19,922) (20,355) 433
  (56,789) (70,962) 14,173
Net income before income taxes 41,442
 53,525
 (12,083)  126,214
 107,224
 18,990
Provision for income taxes (5,262) (972) (4,290)  (16,741) (1,327) (15,414)
Net Income $36,180
 $52,553
 $(16,373)  $109,473
 $105,897
 $3,576
Diluted earnings per common share $0.41
 $0.58
 $(0.17)  $1.26
 $1.23
 $0.03
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, except per Share Data)20232022Change20232022Change
Net Interest Income$20,351 $34,935 $(14,584)$72,884 $128,525 $(55,641)
Non-interest Income (Loss)
Mortgage banking activities, net19,440 16,535 2,905 52,663 2,833 49,830 
Investment fair value changes, net(31,430)(57,697)26,267 (36,153)(151,789)115,636 
Other income, net2,346 4,027 (1,681)11,060 17,016 (5,956)
Realized gains, net50 — 50 1,104 2,581 (1,477)
Total non-interest income (loss), net(9,594)(37,135)27,541 28,674 (129,359)158,033 
General and administrative expenses(29,697)(38,244)8,547 (96,057)(101,719)5,662 
Portfolio management costs(3,661)(1,863)(1,798)(10,271)(5,208)(5,063)
Loan acquisition costs(1,880)(2,426)546 (4,613)(10,371)5,758 
Other expenses(4,633)(4,261)(372)(13,292)(11,814)(1,478)
Net Income (Loss) Before Income Taxes(29,114)(48,994)19,880 (22,675)(129,946)107,271 
(Provision for) benefit from income taxes(1,696)(1,417)(279)(642)10,484 (11,126)
Net Income (Loss)(30,810)(50,411)19,601 (23,317)(119,462)96,145 
Other comprehensive income (loss), net(2,647)(7,147)4,500 4,130 (56,008)60,138 
Preferred dividends(1,750)— (1,750)(4,927)— (4,927)
Total Comprehensive Loss Related to Common Stockholders$(35,207)$(57,558)$22,351 $(24,114)$(175,470)$151,356 
Net Interest Income
The decreaseNet interest income from our investment portfolio decreased by $14 million and $33 million during the three and nine-month periods, respectively, contributing to the majority of the overall declines in net2023. During the three and nine months ended September 30, 2023, $10 million and $16 million, respectively, of interest income was either reversed (from prior periods) or not recognized (for current periods) for our BPL bridge loans on non-accrual status. Additionally, the benefit of higher average asset balances in 2023 from continued deployment into internally-generated assets during the prior twelve months was more than offset by lower yield maintenance income on our BPL term securities, lower accretion income on our AFS securities, and higher financing costs in 2023. Yield maintenance income decreased $3 million and $13 million during the three- and nine-month periods, primarily resulted fromrespectively, as the sale of our commercial mezzanine loans during 2016. This decline was partially offset by higher netsharp rise in interest rates throughout 2022 and 2023 diminished incentives for borrowers to refinance. Accretion income from our residential investments as a result of capital redeployment during 2016on AFS securities decreased $1 million and the first nine months of 2017.
Provision for Loan Losses
The reversal of provision for loan losses in 2016 was related to our commercial mezzanine loans. Prior to their sale in 2016, the commercial loans were reclassified to held-for-sale status, at which point the allowance for loan losses was reversed and no longer maintained for these loans.
Mortgage Banking Activities, Net
Income from mortgage banking activities, net includes results from our residential jumbo mortgage banking operations and, prior to the second quarter of 2016, results from our residential conforming and commercial mortgage banking operations. The increase in mortgage banking activities$10 million during the three- and nine-month periods, respectively, as rising interest rates slowed prepayment speeds and changed our expected timing of calls of our available-for-sale securities, which reduced accretion income after the first quarter of 2022. Additionally, steady deployment of capital into HEI throughout the last 18 months, which does not generate net interest income but is partially financed with debt, resulted in a $4 million and $10 million increase in interest expense during the three- and nine-month periods, respectively.

84

Net interest income from Residential and Business Purpose Mortgage Banking operations decreased by $1 million and $2 million, respectively, during the three-month periods, and decreased by $12 million and $8 million, respectively, during the nine-month periods. These declines were the result of lower average balances of loan inventory and higher financing costs given the rise in benchmark interest rates during the past 12 months. Volume in the residential business was predominantly dueintentionally reduced during 2022 and into the first quarter of 2023, driving the inventory of loans from over $1 billion at March 31, 2022 to higher gross margins from$27 million at March 31, 2023. Given improving market conditions and new opportunities, we increased our jumboresidential loan acquisitions and inventory in the second and third quarters of 2023, and see opportunities to further grow acquisitions in the coming quarters in our residential mortgage banking business.
Corporate net interest expense decreased $2 million and increased $3 million during the three and nine-month periods, respectively. In both periods, interest expense increased for our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates over the past twelve months. For the three-month periods, this increase was more than offset by a decline in interest expense related to our convertible debt, as we repurchased some of our outstanding convertible debt over the past twelve months and repaid one series of our convertible debt that matured in August 2023. Additionally, we earned higher interest income on our cash and cash equivalents during 2023 for both periods, resulting from higher interest rates earned on these balances.
We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. However, over the past year, continued increases in benchmark interest rates and borrowing spreads negatively impacted our net interest income. Further increases in the federal funds rate or widening of borrowing spreads could result in lower net interest income. Additionally, to the extent interest rates remain elevated or increase further, certain fixed-rate term borrowings that mature in the coming quarters could have to be refinanced at higher interest rates, which could cause a reduction in net interest income. To the extent we add incremental leverage to our investment portfolio, particularly for non-interest earnings assets such as HEI, net interest income could temporarily decrease until proceeds from those financings are redeployed into other investments.
Additional detail on net interest income is provided in the “Net Interest Income” section that follows.
Mortgage Banking Activities, Net
Income from Residential Mortgage Banking activities increased $7 million and $27 million during the three and nine-month periods, respectively. Income from Business Purpose Mortgage Banking operations decreased $4 million and increased $23 million, during the three and nine-month periods respectively. For both mortgage banking businesses, while volumes were much higher during the first nine months of 2022 as compared to the same period in 2023, margins were negative for the first nine months of 2022 overall, as rapidly rising interest rates and widening spreads impacted valuations of our loan inventory.
For the residential business, volumes began to ramp up in the second quarter of 2023 and increased significantly into the third quarter and, as margins improved, production was profitable for these periods. While margins in the second quarter of 2023 increased well above 150 basis points, they normalized within their historical range of 75 to 100 basis points in the third quarter.
At the BPL business, higher margins from improving execution on term securitizations and sales during 2023 drove the improvement in mortgage banking income during the three and nine-month periods, as term spreads tightened more significantly in the first quarter, then stabilized in the second and third quarters of 2023. The benefit from higher volume.margins was partially offset by lower funding volumes in 2023, particularly for the nine-month periods, as rising interest rates decreased demand for loans. Going forward, we expect higher benchmark interest rates will continue to pressure origination volumes, while we continue to see opportunities to refinance our bridge borrowers with term products.
A more detailed analysis of the changes in this line item is included in Residential Mortgage Banking portion of the “Results of Operations by Segment” section that follows.

MSR Income, Net
MSR income, net is comprised of the net fee income we earn from our MSR investments as well as changes in their market value and the market value of their associated derivatives. MSR income decreased in 2017 primarily due to lower average balances of MSRs outstanding during 2017, as sales and paydowns outpaced new acquisitions.
Investment Fair Value Changes, Net
Investment fair value changes, net, is primarily comprised of the change in fair values of our residentialportfolio investments accounted for under the fair value option and their associated interest rate hedges. During the three and nine months ended September 30, 2023, negative investment fair value changes were primarily driven by reductions in the value of our investments in reperforming loan securities (our investments in consolidated Freddie Mac SLST entities), which were negatively impacted primarily by rising interest rates, as well as reductions in the fair value of our overall BPL bridge loan portfolio, including certain non-performing and modified BPL bridge loans, held-for-investment and financed with FHLB borrowings, our investmentfor the nine months ended September 30, 2023, losses on certain delinquent term loans. The negative fair value changes were partially offset by fair value increases for HEI, servicing investments, IO securities classified as trading, and interest rate hedges, which benefited from rising benchmark interest rates and home price appreciation. Fundamental performance of our residential assets within our Investment Portfolio continues to be driven by strong employment data, embedded equity protection associated with each of these investments.loan seasoning and borrowers motivated to stay current on their low-coupon mortgages.
85

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. For the nine months ended September 30, 2017, the increase was partially offset by net 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 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, the2022, negative investment fair value changes primarily resulted from decreases in thereflected extreme levels of credit spread widening across many of our longer-duration, fixed-rate investments (re-performing loan securities, residential securities and called loans), partially offset by fair value ofincreases in our loans held for investmentIO securities and their associated hedges. These decreases were primarily the result of hedging costs due to interest rate volatility during the first nine months of the year, as well as decreases in fair value resultinghedges, which benefited from the write-off of premium from loan repayments.rising benchmark interest rates.
Additional detail on our investment fair value changes during 2023 is included in the Investment Portfolio portion of the “Results of Operations bySegment” section that follows.follows as well as Table 5.6 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Other Income
OtherThe decrease in other income in bothfor the three-three and nine-month periods primarily resulted from $1 million and $6 million, respectively, of lower income on our MSR investments. MSR income was primarily comprisednominally impacted by fair value changes in 2023 given the MSR's reduced sensitivity to rising interest rates during that period, while MSRs benefited significantly in 2022 as the sharp rise in interest rates caused a slowdown in prepayment speeds and was more impactful to valuations.
Additional detail on our other income is presented in Table 21.1 of income from our residential loan risk sharing arrangements with Fannie Mae and Freddie Mac.Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Realized Gains, Net
During the third quarter of 2017, we realized gains of $2 million, primarily 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 from the sale of $26 million of AFS securities and $5 million from the sale of $208 million of commercial mezzanine loans.
During the nine months ended September 30, 2017,2023, we realized gains of $9 million, which included $10$2 million of realized gains primarily from the sale of $61$54 million of AFS securities, which was partially offset by $1$0.4 million of realized lossnet losses on early extinguishment of debt, primarily associated with the early extinguishment of securitization debt financing our reperforming loan securities, as well as from the repurchase of $37$66 million of our convertible debt. During the three and nine months ended September 30, 2016,2022, we realized gains of $26zero and $3 million, which included $21respectively, primarily resulting from securities that were called.
General and Administrative Expenses
Beginning in the fourth quarter of 2022, we implemented firm-wide initiatives to rationalize headcount and reduce non-compensation costs, resulting in a net headcount reduction of 28% during the last twelve months and reductions to fixed compensation expense of $6 million of realized gains primarily from the sale of $241 million of AFS securities and $5 million, of realized gains fromrespectively, for the sale of $208three and nine-month periods ended September 30, 2023. Additionally, non-compensation expenses were reduced by $2 million of commercial mezzanine loans.
Operating Expenses
The decrease in operating expenses duringand $6 million, respectively, for the three- and nine-month periods was primarily due toended September 30, 2023. During the restructuringnine-month periods, these decreases in expenses were partially offset by higher expenses for annual variable compensation and long-term incentive award expenses.
Additional detail on our General and administrative expenses is presented in Table 22.1 of our residential conformingNotes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Portfolio Management Costs
The increase in portfolio management costs for the three and commercialnine-month periods resulted from growth in our investment portfolio over the past twelve months. These costs are primarily associated with the management of our BPL bridge loans and also include loan sub-servicing costs.
Loan Acquisition Costs
The decreases in loan acquisition costs for our mortgage banking operations duringfor the first quarterthree and nine-month periods resulted primarily from lower loan origination and acquisition volumes in our mortgage banking businesses in the 2023 periods, compared to the same periods of 2016, which resulted in a lower run-rate of expenses. Excluding $11 million of restructuring charges recorded during the nine months ended September 30, 2016, operating expenses for that period were $60 million.2022.
Provision for Income Taxes
Our provision for income taxes resultis almost entirely fromrelated to activity at our taxable REIT subsidiaries ("TRS"), which primarily includes our mortgage banking activities and MSR investments. For both the three-investments, as well as certain other investment and nine-month periods, the increase inhedging activities. The tax provision for the three and nine months ended September 30, 2023 reflect GAAP income taxes resultedearned at our TRS during those periods, resulting primarily from higher incomeimproved mortgage banking results. The tax benefit for the nine months ended September 30, 2022 was primarily the result of GAAP losses from our mortgage banking activities. operations at our TRS during that period.
For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.

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Other Comprehensive Income (Loss), Net
Other comprehensive loss for the three months ended September 30, 2023 resulted from unrealized losses on our available-for-sale securities, primarily resulting from rising interest rates. For the nine-months ended September 30, 2023, these losses were more than offset by cumulative gains on our available for sale securities, as well as the reclassification of unrealized loss on interest rate agreements into net income (loss). Other comprehensive income for three and nine-months ended September 30, 2022 was primarily related to negative fair value changes on our available-for-sale securities, due to spread widening.
Preferred Dividends
We issued preferred stock in January 2023 and began to declare and pay dividends on that stock in the first quarter of 2023.
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Net Interest Income
The following tables presenttable presents the components of net interest income for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 53 – Net Interest Income
Three Months Ended September 30,
20232022
(Dollars in Thousands)Interest Income/ (Expense)
 Average
   Balance (1)
YieldInterest Income/ (Expense)
 Average
   Balance (1)
Yield
Interest Income
Residential loans, held-for-sale$4,673 $295,050 6.3 %$11,844 $984,365 4.8 %
Residential loans - HFI at Legacy Sequoia (2)
2,594 154,710 6.7 %1,473 199,264 3.0 %
Residential loans - HFI at Sequoia (2)
40,180 3,742,871 4.3 %31,587 3,468,730 3.6 %
Residential loans - HFI at Freddie Mac SLST (2)
15,065 1,370,770 4.4 %16,098 1,600,215 4.0 %
BPL loans - HFS4,546 296,131 6.1 %9,070 535,017 6.8 %
BPL loans - HFI35,534 1,673,626 8.5 %24,688 1,257,222 7.9 %
BPL term loans - HFI at CAFL (2)
40,564 2,780,552 5.8 %50,959 2,960,614 6.9 %
BPL bridge loans - HFI at CAFL (2)
12,376 499,674 9.9 %10,480 529,993 7.9 %
Multifamily loans - HFI at Freddie Mac K-Series (2)
4,677 419,867 4.5 %4,762 439,966 4.3 %
Trading securities(3)
3,276 50,826 25.8 %3,924 131,626 11.9 %
Available-for-sale securities1,835 84,796 8.7 %3,065 136,203 9.0 %
Other interest income11,754 962,736 4.9 %9,712 898,111 4.3 %
Total interest income177,074 12,331,609 5.7 %177,662 13,141,326 5.4 %
Interest Expense
Short-term debt facilities(20,915)1,021,941 (8.2)%(19,436)1,561,146 (5.0)%
Short-term debt - servicer advance financing(3,410)159,993 (8.5)%(2,606)225,002 (4.6)%
Promissory notes(308)17,865 (6.9)%(572)33,302 (6.9)%
Short-term debt - convertible notes, net(2,690)181,663 (5.9)%(1,330)100,895 (5.3)%
ABS issued - Legacy Sequoia (2)
(2,487)153,588 (6.5)%(1,486)198,166 (3.0)%
ABS issued - Sequoia (2)
(35,810)3,613,898 (4.0)%(27,541)3,233,716 (3.4)%
ABS issued - Freddie Mac SLST (2)
(10,523)1,084,889 (3.9)%(12,829)1,325,930 (3.9)%
ABS issued - Freddie Mac K-Series (2)
(4,290)387,263 (4.4)%(4,377)408,164 (4.3)%
ABS issued - CAFL Term (2)
(32,964)2,500,163 (5.3)%(39,401)2,599,746 (6.1)%
ABS issued - CAFL Bridge (2)
(5,249)481,246 (4.4)%(5,276)475,805 (4.4)%
Long-term debt facilities(26,855)1,342,870 (8.0)%(14,464)1,148,700 (5.0)%
Long-term debt - corporate(11,222)531,376 (8.4)%(13,409)761,712 (7.0)%
Total interest expense(156,723)11,476,755 (5.5)%(142,727)12,072,284 (4.7)%
Net Interest Income$20,351 $34,935 
88

 Three Months Ended September 30,Nine Months Ended September 30,
 2017 201620232022
(Dollars in Thousands) Interest Income/ (Expense) 
 Average
   Balance (1)
 Yield Interest Income/ (Expense) 
 Average
   Balance (1)
 Yield(Dollars in Thousands)Interest Income/ (Expense)
 Average
   Balance (1)
YieldInterest Income/ (Expense)
 Average
   Balance (1)
Yield
Interest Income            Interest Income
Residential loans, held-for-sale $10,396
 $980,067
 4.2 % $8,835
 $995,136
 3.6 %Residential loans, held-for-sale$11,133 $246,699 6.0 %$42,201 $1,406,219 4.0 %
Residential loans - HFI at Redwood (2)
 23,145
 2,344,427
 3.9 % 21,923
 2,260,895
 3.9 %
Residential loans - HFI at Legacy Sequoia (2)
 4,873
 682,772
 2.9 % 4,837
 849,234
 2.3 %
Residential loans - HFI at Legacy Sequoia (2)
7,871 163,340 6.4 %3,592 211,707 2.3 %
Residential loans - HFI at Sequoia Choice (2)
 127
 10,365
 4.9 % —
 —
 — %
Commercial loans —
 —
 — % 6,453
 261,194
 9.9 %
Trading securities 12,691
 737,186
 6.9 % 5,831
 301,110
 7.7 %
Residential loans - HFI at Sequoia (2)
Residential loans - HFI at Sequoia (2)
112,302 3,644,384 4.1 %95,608 3,732,108 3.4 %
Residential loans - HFI at Freddie Mac SLST (2)
Residential loans - HFI at Freddie Mac SLST (2)
45,831 1,418,494 4.3 %49,851 1,717,544 3.9 %
BPL loans - HFSBPL loans - HFS12,392 273,526 6.0 %22,823 536,366 5.7 %
BPL loans - HFIBPL loans - HFI114,229 1,619,863 9.4 %52,226 1,003,673 6.9 %
BPL term loans - HFI at CAFL (2)
BPL term loans - HFI at CAFL (2)
124,453 2,846,211 5.8 %173,630 3,070,972 7.5 %
BPL bridge loans - HFI at CAFL (2)
BPL bridge loans - HFI at CAFL (2)
37,506 500,348 10.0 %21,751 412,766 7.0 %
Multifamily loans - HFI at Freddie Mac K-Series (2)
Multifamily loans - HFI at Freddie Mac K-Series (2)
13,992 422,563 4.4 %14,247 451,757 4.2 %
Trading securities(3)
Trading securities(3)
10,371 82,486 16.8 %13,520 151,898 11.9 %
Available-for-sale securities 10,734
 420,896
 10.2 % 12,769
 488,842
 10.4 %Available-for-sale securities7,391 110,729 8.9 %17,252 137,134 16.8 %
Other interest income 771
 202,019
 1.5 % 258
 226,730
 0.5 %Other interest income37,100 1,050,244 4.7 %27,816 917,975 4.0 %
Total interest income 62,737
 5,377,732
 4.7 % 60,906
 5,383,141
 4.5 %Total interest income534,571 12,378,887 5.8 %534,517 13,750,119 5.2 %
Interest Expense            Interest Expense
Short-term debt facilities (7,158) 1,066,695
 (2.7)% (5,405) 1,071,757
 (2.0)%Short-term debt facilities(69,302)1,144,228 (8.1)%(41,081)1,628,316 (3.4)%
Short-term debt - servicer advance financingShort-term debt - servicer advance financing(11,054)185,048 (8.0)%(6,110)241,582 (3.4)%
Promissory notesPromissory notes(1,042)20,484 (6.8)%(572)11,223 (6.8)%
Short-term debt - convertible notes, net (3,024) 250,098
 (4.8)% —
 —
 — %Short-term debt - convertible notes, net(6,464)155,618 (5.5)%(1,330)34,001 (5.2)%
ABS issued - Legacy Sequoia (2)
 (3,852) 667,070
 (2.3)% (3,193) 828,411
 (1.5)%
ABS issued - Legacy Sequoia (2)
(7,650)162,348 (6.3)%(3,154)209,931 (2.0)%
ABS issued - Sequoia Choice (2)
 (104) 9,349
 (4.4)% —
 —
 — %
Long-term debt - FHLBC (6,319) 1,999,999
 (1.3)% (2,892) 1,999,999
 (0.6)%
Long-term debt - other (6,986) 444,440
 (6.3)% (10,107) 674,131
 (6.0)%
ABS issued - Sequoia (2)
ABS issued - Sequoia (2)
(99,859)3,448,545 (3.9)%(84,041)3,491,194 (3.2)%
ABS issued - Freddie Mac SLST (2)
ABS issued - Freddie Mac SLST (2)
(32,392)1,122,024 (3.8)%(40,287)1,424,032 (3.8)%
ABS issued - Freddie Mac K-Series (2)
ABS issued - Freddie Mac K-Series (2)
(12,842)390,307 (4.4)%(13,099)419,954 (4.2)%
ABS issued - CAFL Term (2)
ABS issued - CAFL Term (2)
(100,324)2,540,276 (5.3)%(134,244)2,734,937 (6.5)%
ABS issued - CAFL Bridge (2)
ABS issued - CAFL Bridge (2)
(15,814)479,899 (4.4)%(10,639)370,450 (3.8)%
Long-term debt facilitiesLong-term debt facilities(68,029)1,179,131 (7.7)%(37,664)1,231,057 (4.1)%
Long-term debt - corporateLong-term debt - corporate(36,915)614,698 (8.0)%(33,771)706,504 (6.4)%
Total interest expense (27,443) 4,437,651
 (2.5)% (21,597) 4,574,298
 (1.9)%Total interest expense(461,687)11,442,606 (5.4)%(405,992)12,503,181 (4.3)%
Net Interest Income $35,294
     $39,309
    Net Interest Income$72,884 $128,525 

(1)Average balances for residential loans held-for-sale and held-for-investment, business purpose loans held-for-sale and held-for-investment, 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, short-term debt, long-term debt and certain ABS issued are calculated based upon amortized historical cost. Average balances for ABS carried at fair value are calculated based upon fair value.
  Nine Months Ended September 30,
  2017 2016
(Dollars in Thousands) Interest Income/ (Expense) 
 Average
   Balance (1)
 Yield Interest Income/ (Expense) 
 Average
   Balance (1)
 Yield
Interest Income            
Residential loans, held-for-sale $26,246
 $846,335
 4.1 % $24,062
 $886,777
 3.6 %
Residential loans - HFI at Redwood (2)
 68,591
 2,318,064
 3.9 % 63,562
 2,178,997
 3.9 %
Residential loans - HFI at Legacy Sequoia (2)
 14,574
 718,691
 2.7 % 14,525
 907,617
 2.1 %
Residential loans - HFI at Sequoia Choice (2)
 127
 3,493
 4.8 % —
 —
 — %
Commercial loans 345
 1,424
 N/A
 28,834
 338,390
 11.4 %
Trading securities 31,622
 643,736
 6.5 % 15,639
 271,758
 7.7 %
Available-for-sale securities 33,446
 441,038
 10.1 % 42,473
 553,278
 10.2 %
Other interest income 1,638
 210,765
 1.0 % 926
 318,138
 0.4 %
Total interest income 176,589
 5,183,546
 4.5 % 190,021
 5,454,955
 4.6 %
Interest Expense     

     

Short-term debt facilities (18,174) 967,834
 (2.5)% (17,439) 1,150,206
 (2.0)%
Short-term debt - convertible notes, net (5,811) 159,744
 (4.9)% —
 —
 — %
ABS issued - Redwood —
 —
 — % (1,615) 28,264
 (7.6)%
ABS issued - Legacy Sequoia (2)
 (11,087) 702,084
 (2.1)% (9,842) 885,752
 (1.5)%
ABS issued - Sequoia Choice (2)
 (104) 3,151
 (4.4)% —
 —
 — %
Long-term debt - FHLBC (15,125) 1,999,999
 (1.0)% (8,634) 1,974,582
 (0.6)%
Long-term debt - other (22,407) 481,232
 (6.2)% (30,461) 680,576
 (6.0)%
Total interest expense (72,708) 4,314,044
 (2.2)% (67,991) 4,719,380
 (1.9)%
Net Interest Income $103,881
     $122,030
    
(1)Average balances for residential loans held-for-sale, residential 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)(2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia entities. Interest income from residential loans - HFI at Legacy Sequoia and interest expense at "Legacy Sequoia", "Sequoia", "Freddie Mac SLST", "Freddie Mac K-Series", "CAFL Term", and "CAFL Bridge" reflect activity from consolidated variable interest entities. While we consolidate these entities for GAAP reporting purposes, economically, we earn interest income from the securities we own in these entities, which is represented by the interest expense from ABS issued - Legacy Sequoia represent activity from our consolidated Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia Choice and the interest expense from ABS issued - Sequoia Choice represent activity from our consolidated Sequoia Choice entity.

The following table presents net interest income by segment for the three and nine months ended September 30, 2017 and 2016.
Table 6 – Net Interest Income by Segment
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2017 2016 Change  2017 2016 Change
Net Interest Income by Segment             
Investment Portfolio $37,578
 $42,163
 $(4,585)  $113,166
 $131,306
 $(18,140)
Residential Mortgage Banking 6,491
 5,005
 1,486
  15,053
 13,891
 1,162
Corporate/Other (8,775) (7,859) (916)  (24,338) (23,167) (1,171)
Net Interest Income $35,294
 $39,309
 $(4,015)  $103,881
 $122,030
 $(18,149)
Additional details regarding the activities impacting net(interest income less interest income at each segment are included in the “Results of Operations by Segment” section that follows.
The Corporate/Other line itemexpense) from these consolidated entities presented in the table above primarily includes interest expense related to long-term debt not directly allocated toabove.
(3)We sold nearly all of our segmentssubordinate trading securities over the course of 2023 and net interest income from consolidated Legacy Sequoia entities. Details regarding consolidated Legacy Sequoia entities are included in the "Results of Consolidated Legacy Sequoia Entities" section that follows.

The following table presents the net interest rate spread between the yield on unsecuritized loans andour remaining trading securities and the debt yield of the short-term debt used in part to finance each investment type at September 30, 2017.2023 were interest-only securities, which generate a higher cash interest yield. This interest income is generally offset by a decline in fair value (recognized through investment fair value changes, net on our consolidated statements of income) related to the receipt of cash flows each period, resulting in a lower overall economic yield for these investments.
Table 7 – Interest Expense — Specific Borrowing Costs
89
September 30, 2017 Residential Loans Held-for-Sale 
Residential
Securities
Asset yield 4.09% 5.10%
Short-term debt yield 2.80% 2.46%
Net Spread 1.29% 2.64%
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.

Results of Operations by Segment
As discussed in the Introduction section of this MD&A, we changed our reportable segments in the first quarter of 2017 and nowWe report on our business using two distinctthree segments: Investment Portfolio and Residential Mortgage Banking. Our segments are based on our organizationalBanking, Business Purpose Mortgage Banking, and management structure, which aligns with how our results are monitored and performance is assessed.Investment Portfolio. For additional information on our segments, refer to Note 2124 of our Notes to Consolidated Financial Statements in Part I, Item I1 of this Quarterly Report on Form 10-Q.     
The following table presents the segment contribution from our twothree segments reconciled to our consolidated net income for the three and nine months ended September 30, 20172023 and 2016.2022.
Table 84 – Segment Results Summary
 Three Months Ended September 30,   Nine Months Ended September 30,  Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands) 2017 2016 Change 2017 2016 Change(In Thousands)20232022Change20232022Change
Segment Contribution from:             Segment Contribution from:
Residential Mortgage BankingResidential Mortgage Banking$4,472 $(640)$5,112 $6,410 $(7,371)$13,781 
Business Purpose Mortgage BankingBusiness Purpose Mortgage Banking(1,193)(3,856)2,663 (5,563)(27,054)21,491 
Investment Portfolio $41,739
 $63,743
 $(22,004)  $137,185
 $155,863
 $(18,678)Investment Portfolio(5,677)(22,404)16,727 62,072 (24,049)86,121 
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
Corporate/Other(28,412)(23,511)(4,901)(86,236)(60,988)(25,248)
Net Income $36,180
 $52,553
 $(16,373)  $109,473
 $105,897
 $3,576
Net Income (Loss)Net Income (Loss)$(30,810)$(50,411)$19,601 $(23,317)$(119,462)$96,145 
The following sections that follow provide a detailed discussion of thefurther detail on our three business segments and their results of operations at each of our two business segments for the three and nine months ended September 30, 2017 and 2016.2023.
Corporate/Other
The $2 million decreaseincrease in net incomeexpense from Corporate/Other for the three-month periods was primarily due to a $1 million increase in interest expense from convertible debt issued in the third quarter of 2017, a $1 million decrease in income from 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 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 at 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 forboth 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 million from residential loans, $73 million from residential securities, $18 million from commercial/multifamily securities, and $4 million from MSRs.

Net Interest Income
Net interest income from our Investment Portfolio primarily includes interest income from our residential loans held-for-investment and our securities, as well as the associated interest expense from short-term debt, FHLBC borrowings, and ABS issued. The following table presents the components of net interest income for our Investment Portfolio segment for the three and nine months ended September 30, 2017 and 2016.
Table 11 - Net Interest Income ("NII") from Investment Portfolio
  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 decrease in net interest income from our Investment Portfolio segment during the three- and nine-month periods was primarily due to the saleissuance of new convertible debt in June 2022 and from our commercial mezzanine loans during 2016, as well as from highertrust preferred securities, which are variable rate and were impacted by rising benchmark interest costs on our FHLB borrowings during 2017rates throughout 2022 and higher interest expense associated with securities that were financed during the second and third quarters of 2017.2023. These decreasesincreases were partially offset by higher interest income earned on cash and cash equivalents during 2023, resulting from higher interest rates earned on these balances.
90

Residential Mortgage Banking Segment
This segment consists of a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale to whole loan buyers, securitization through our SEMT® (Sequoia) private-label securitization program, or transfer into our investment portfolio. Subordinate securities that we retain from our Sequoia securitizations (many of which we consolidate for GAAP purposes) are transferred to and held in our Investment Portfolio segment. We typically acquire prime jumbo mortgages and the related mortgage servicing rights on a flow basis from our extensive network of loan sellers. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of residential loans held-for-sale within this segment. This segment’s main source of mortgage banking income is net interest income from real estate securities, primarily resulting from higher average balancesits inventory of these investments from the redeployment of capital.
Investment fair value changes, net
Market valuation changes included in Investment fair value changes, net, result from changes in the fair value of investments and their 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 Note 18 of our Notes to Consolidated Financial Statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional detail regarding the components of Investment fair value changes, net presented on our consolidated statements of income.

The following table presents the components of investment fair value changes for the Investment Portfolio 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.
Table 12 - Investment Portfolio Fair Value Changes, Net by Investment Type
  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, 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 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 fair value changes primarily resulted from decreases in the fair value of our loans held for investment and their associated hedges. These decreases were primarily the result of hedging costs due to interest rate volatility during the first nine months of the year, as well as decreases in fair value resultingincome from mortgage banking activities, which includes valuation increases (or gains) on loans we acquire and subsequently sell, securitize, or transfer into our investment portfolio, and the write-off of premium from loan repayments.
The increase in fair values from commercial/multifamily trading securities and theirhedges used to manage risks 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 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 of our conforming MSRs during the second quarter of 2017. The total net effect of changes in assumptions and rates decreased during the nine-month periods, primarily due to lower hedging expenses on MSRs during the first quarter of 2016.
Realized Gains, net
During the third quarter of 2017, we realized gains of $2 million, primarily 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 from the sale of $26 million of AFS securities and $5 million from the sale of $208 million of commercial mezzanine loans.
with these activities. Direct Operating Expenses and Provision for Income Taxes
The 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 coststax expenses 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 income on certain securities we hold at our TRS.


Residential Loans Held-for-Investment at Redwood Portfoliothese activities are also included in this segment.
The following table provides the activity of residential loans held-for-investmentheld in inventory for sale at Redwoodour Residential Mortgage Banking business during the three and nine months ended September 30, 2017 and 2016.2023.
Table 145 – Loan Inventory for Residential Loans Held-for-Investment at Redwood -Mortgage Banking Operations — Activity
Three Months EndedNine Months Ended
(In Thousands)September 30, 2023September 30, 2023
Balance at beginning of period $196,737 $628,160 
Acquisitions814,964 1,050,366 
Sales(53,845)(91,721)
Transfers between segments (1)
(334,417)(952,106)
Principal repayments(5,210)(24,653)
Changes in fair value, net(7,283)900 
Balance at End of Period$610,946 $610,946 
  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
(1)Represents the fair value of 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.
(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 three and nine months ended September 30, 2017, we had net transfers of $20 million2023, our residential mortgage loan conduit locked $1.6 billion and $227 million, respectively, of residential loans from our Residential Mortgage Banking segment to our Investment Portfolio segment. At September 30, 2017, $2.26$2.3 billion of loans were held by our FHLB-member subsidiary($1.3 billion and were financed with $2.00$1.8 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), and purchased $815 million and $1.05 billion of borrowings from the FHLBC. In connection with these borrowings, our FHLB-member subsidiary is required to hold $43 million of FHLB stock.
At September 30, 2017, the weighted average maturity of these FHLB borrowings was approximately eight years and they had a weighted average cost 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 investments as well as a lower return on the capital 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 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.
The following table presents the unpaid principal balances for residential real estate loans held-for-investment at fair value by product type at September 30, 2017.
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 our real estate securities activity by collateral type in our Investment Portfolio segment for the three and nine months ended September 30, 2017.
Table 16 – Real Estate Securities Activity 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 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%).

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, we had short-term debt incurred through repurchase facilities of $550 million, which was secured by $663 million of real estate securities. The remaining $693 million of our securities 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.
The following table presents our residential securities at September 30, 2017 and December 31, 2016, categorized by portfolio vintage (the years the securities were issued), and by priority 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 increased during the three and nine months ended September 30, 2017, as compared to the same periods in 2016.
The following tables present the components of carrying value 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 impairments 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 $0.32023, we distributed $54 million and $3$92 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 with GAAP. This entity is independent of Redwood(unpaid principal balance), respectively, through whole loan sales 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 weighted average coupon of these loans was 4.98%, the weighted average FICO score of borrowers backing these loans was 744 (at origination) and the weighted average original LTV ratio was 75% (at origination). At September 30, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.
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.
The following table provides the 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
Duringduring the nine months ended September 30, 2017,2023, we sold conforming MSRs with a fair value of $53 million. The remaining $63completed three securitizations backed by $995 million of MSRs are primarily associated with loans transferred to Sequoia securitizations we completed over(unpaid principal balance), including one during 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.
third quarter. At September 30, 2017, nearly all of2023, our MSRs wereresidential loan pipeline was comprised of base MSRs and we did not own any portion$659 million (principal value) 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 presentedloans in Other assetsinventory 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 threesheet and nine months ended September 30, 2017 and 2016.
Table 25 – Residential Mortgage Banking Segment Contribution
  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

The following tables provide the activity of unsecuritized residential loans during the three and nine months ended September 30, 2017 and 2016.
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$895 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 first nine months of 2017, we purchased $3.79 billion of predominately prime residential jumbo loans, sold $874 million of jumbo loans 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 (locked loans, unadjusted for fallout).
The significant increase in lock and purchase volumes from the second to third quarter of 2023 was driven by the onboarding of new depository loan sellers and an increased market share of independent mortgage banks within our seller network, and included increased bulk purchases from certain of these loan sellers. We increased our capital allocation to this segment to $150 million at September 30, 2017 included $1.49 billion2023, from $80 million at June 30, 2023, and could increase it further to accommodate the growth in our flow purchase relationships. As discussed in the business update section of this MD&A, we are continuing to pursue new relationships for purchasing jumbo loans.loans on a flow and/or bulk basis, which could positively contribute to volumes moving forward.
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, 2017,2023, we had $438residential warehouse facilities outstanding with four different counterparties, with $1.05 billion of total capacity and $502 million of warehouse debt outstandingavailable capacity. These included non-marginable facilities (i.e., not subject to fundmargin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent) with $500 million of total capacity and marginable facilities with $550 million of total capacity.
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The following table presents key earnings and operating metrics for our Residential Mortgage Banking segment during the three and nine months ended September 30, 2023.
Table 6 – Residential Mortgage Banking Earnings Summary and Operating Metrics
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20232022Change20232022Change
Mortgage banking income (loss)$10,201 $3,957 $6,244 $21,081 $5,038 $16,043 
Operating expenses(4,916)(6,285)1,369 (13,784)(20,692)6,908 
(Provision for) benefit from income taxes(813)1,688 (2,501)(887)8,283 (9,170)
Segment Contribution$4,472 $(640)$5,112 $6,410 $(7,371)$13,781 
Loan purchase commitments (loan locks, adjusted for expected fallout)$1,272,190 $256,044 $1,016,146 $1,777,919 $2,749,910 $(971,991)
Residential mortgage banking income presented in the table above is comprised of net interest income from residential loans held-for-sale. held-for-sale in inventory and non-interest income, net from this segment (see Note 20 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities, net). Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.
The weighted average cost of the borrowings outstanding under these facilities during the third quarter of 2017 was 2.86% per annum. Our warehouse capacity at September 30, 2017 totaled $1.33 billion across four separate counterparties, which should continue to provide sufficient liquidity to fundincrease in contribution from our residential mortgage banking operations during the three and nine-month periods was attributable to higher mortgage banking activities income resulting from positive margins in 2023, compared to negative margins in 2022, which was partially offset by lower net interest margin in 2023, given the inverted yield curve, each as discussed in the near-term.preceding Consolidated Results of Operations section of this MD&A. Additionally, the net segment contribution in both the three and nine-month periods benefited from lower operating expenses, as we decreased headcount in this segment over the past year, as well as lower loan acquisition costs, given the decrease in volume year-over-year.
Our residential mortgage banking operations created investments that allowed usActivity at this segment is performed within our taxable REIT subsidiary and subject to deploy $57 million of capital into our investment portfolio duringfederal and state income taxes. The provision for income taxes for the first nine months of 2017. At September2023 resulted from GAAP income from these operations at our TRS during that period. The benefit from income taxes for the first nine months of 2022 resulted from GAAP losses from these operations at our TRS during that period.


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Business Purpose Mortgage Banking Segment
This segment consists of a platform that originates and acquires business purpose lending ("BPL") loans for subsequent securitization, sale, or transfer into our investment portfolio. Business purpose loans are loans to investors in single-family rental and multifamily properties, which we classify as either "term" loans (which include loans with maturities that generally range from 3 to 30 2017, we had 446 loan sellers, up from 406 atyears) or "bridge" loans (which include loans with maturities that generally range between 12 and 36 months). Term loans are mortgage loans secured by residential real estate (primarily 1-4 unit detached or multifamily) that the end of 2016. This included 187 jumbo sellersborrower owns as an investment property and 259 sellers from various FHLB districts participatingrents to residential tenants. BPL bridge loans are mortgage loans which are generally secured by unoccupied (or in the FHLB's MPF Direct program.
Net Interest Income
Net interest income fromcase of certain multifamily properties, partially occupied) residential or multifamily real estate that the borrower owns as an investment and that is being renovated, rehabilitated or constructed. We typically distribute most of our term loans through our CAFL® private-label securitization program, or through whole loan sales, and typically transfer our BPL bridge loans to our Investment Portfolio, where they will either be retained for investment or securitized, or sold as whole loans. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of loans held-for-sale. This segment’s main sources of mortgage banking is primarily comprised ofincome are net interest income earned on residentialloans while they are held in inventory, origination and other fees on loans, mark-to-market adjustments on loans from the time loans are originated or purchased to when they are sold, securitized or transferred into our investment portfolio, and gains/losses from associated hedges. Direct operating expenses and tax expenses associated with these activities are also included in this segment.
In the second quarter of 2023, we purchaseestablished a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. During the third quarter of 2023, we began to sell loans into the joint venture. In accordance with the terms of the joint venture, we have committed to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices and will administer the joint venture for ongoing fees. We expect we will sell a portion of our BPL bridge loans to when we sellthe joint venture while continuing to retain a portion in our investment portfolio (including for inclusion in existing or securitize them, offset by interest expense incurred on short-term warehouse debt used in partfuture revolving bridge loan securitizations) or for sale to finance the loans while we hold them on 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 period in 2017, as compared to 2016.other third-party investors.
The amount of net interest income we earnfollowing table provides business purpose loan origination activity at Redwood during the three and nine months ended September 30, 2023.
Table 7 – Business Purpose Loans — Funding Activity
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
(In Thousands)BPL Term
BPL Bridge (1)
TotalBPL Term
BPL Bridge (1)
Total
Fair value at beginning of period$269,886 $12,950 $282,836 $358,791 $5,282 $364,073 
Fundings105,777 305,104 410,881 408,477 847,203 1,255,680 
Sales(27,714)(31,523)(59,237)(405,696)(63,330)(469,026)
Transfers between segments/other (2)
(278,523)(256,653)(535,176)(273,952)(759,744)(1,033,696)
Principal repayments(792)(505)(1,297)(16,975)(2,708)(19,683)
Changes in fair value, net3,515 1,255 4,770 1,504 3,925 5,429 
Fair Value at End of Period$72,149 $30,628 $102,777 $72,149 $30,628 $102,777 
(1)We originate BPL bridge loans at our TRS and either transfer them to our REIT or sell them to third parties. Origination fees and any fair value changes on these loans held-for-sale is dependent on many variables, including the amount of loans and the time theyprior to transfer or sale 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
recognized within Mortgage banking activities, net includeson our consolidated statements of income. 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. For BPL bridge loans held at our REIT that are transferred into our CAFL bridge securitizations, 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. Once loans are transferred into a securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income. For the carrying value and activity of our BPL bridge loans held-for-investment, see the Investment Portfolio section that follows.
(2)For BPL term loans, amounts primarily represent loans transferred into a consolidated securitization reflected within our Investment Portfolio Segment. BPL bridge loan amounts represent the transfer of loans originated or acquired by our Business Purpose Mortgage Banking segment at our TRS and transferred to our Investment Portfolio segment at our REIT, as described in the preceding footnote.
While volumes were down year-over-year due primarily to rising interest rates and lower industry-wide demand, volumes during the first three quarters of 2023 remained relatively steady overall, with a reduction in term loan volume offset by an increase in bridge loan volume. Looking ahead, we expect sustained demand from sponsors seeking fixed-rate bridge loans or term loans with more prepayment flexibility, and will continue to assess our bridge loan portfolio for opportunities to refinance borrowers into term loans.
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We utilize a combination of capital and loan warehouse facilities to manage our inventory of business purpose loans that we hold for sale. At September 30, 2023, we had business purpose warehouse facilities outstanding with seven different counterparties, with $2.94 billion of total capacity (used for both SFR and bridge loans) and $1.71 billion 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 solely on the lender's determination, in its discretion, of the 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.underlying collateral that is non-delinquent).
The following table presents the components of residential mortgage banking activities, net. Amounts presented include both the changes in market valuesan earnings summary 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 Residentialour Business Purpose 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 billionsegment for the three and nine months ended September 30, 2017, respectively. Our gross margins for our jumbo loans, which we define as2023 and 2022.
Table 8 – Business Purpose Mortgage Banking Earnings Summary

Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20232022Change20232022Change
Mortgage banking income (loss)$12,484 $17,887 $(5,403)$39,945 $22,267 $17,678 
Operating expenses(13,995)(24,302)10,307 (47,935)(58,330)10,395 
Benefit from income taxes318 2,559 (2,241)2,427 9,009 (6,582)
Segment Contribution$(1,193)$(3,856)$2,663 $(5,563)$(27,054)$21,491 
Business purpose mortgage banking income presented in the table above is comprised of net interest income plus income from our loans held-for-sale in inventory, mortgage banking activities, dividednet (see Note 20 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities), and other income, net for this segment. Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses (including amortization of purchase intangibles) for this segment.
The improvement in segment contribution from our business purpose mortgage banking operations during the nine-month period was primarily attributable to higher mortgage banking income, as discussed in the preceding Consolidated Results of Operations section of this MD&A, as well as lower general and administrative costs, given a reduction in headcount year-over-year, and lower loan acquisition costs, given the decrease in volume year-over-year.
Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit from income taxes during each of the three- and nine- month periods was due to GAAP losses generated by LPCs, benefitedthis segment's operations in those periods.


Investment Portfolio Segment
This segment consists of organic investments sourced through our residential and business purpose mortgage banking operations, including primarily securities retained from tightening credit spreadsour residential and business purpose securitization activities (some of which we consolidate for bothGAAP purposes) and BPL bridge loans, as well as third-party investments including RMBS issued by third parties, investments in Freddie Mac K-Series multifamily loan securitizations and wholereperforming loan securitizations (both of which we consolidate for GAAP purposes), servicer advance investments, home equity investments ("HEI"), and other housing-related investments and associated hedges. This segment’s main sources of income are net interest income and other income from investments, changes in fair value of investments and associated hedges, and realized gains and losses upon the sale of securities. Direct operating expenses and tax provisions associated with these activities are also included in this segment.
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The following table presents details of our Investment Portfolio at September 30, 2023 and December 31, 2022 organized by investments organically created through our mortgage banking segments and those acquired from third-parties. Amounts presented in the table represent our retained economic investments in consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted.
Table 9 – Investment Portfolio - Detail of Economic Interests
(In Thousands)September 30, 2023December 31, 2022
Organic Residential Investments
Residential loans at Redwood (1)
$— $152,621 
Residential securities at Redwood105,275 103,089 
Residential securities at consolidated Sequoia entities (2)
201,004 219,299 
Other investments (3)
48,285 48,972 
Organic Business Purpose Investments
BPL bridge loans2,177,336 2,023,529 
BPL term loan securities at consolidated CAFL Term entities (4)
315,932 303,897 
Other investments— 705 
Third-Party Investments
Residential securities at Redwood5,429 124,567 
Residential securities at consolidated Freddie Mac SLST entities (5)
256,023 322,803 
Multifamily securities at Redwood9,687 12,674 
Multifamily securities at consolidated Freddie Mac K-Series entities (6)
32,904 31,767 
Servicing investments (7)
91,478 90,120 
HEI (8)
316,824 283,897 
Other investments5,824 7,081 
Total Segment Investments$3,566,001 $3,725,021 
(1)Balance comprised of loans called from Sequoia securitizations.
(2)Represents our retained economic investment in securities issued by consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $3.77 billion of loans and $3.57 billion of ABS issued associated with these investments at September 30, 2023. We consolidated $3.19 billion of loans and $2.97 billion of ABS issued associated with these investments at December 31, 2022.
(3)Organic residential other investments at September 30, 2023 includes net risk share investments of $22 million, representing $28 million of restricted cash and other assets, net of other liabilities of $6 million.
(4)Represents our retained economic investment in securities issued by consolidated CAFL Term securitization VIEs. For GAAP purposes, we consolidated $2.97 billion of loans and $2.65 billion of ABS issued associated with these investments at September 30, 2023. We consolidated $3.49 billion of loans and $3.21 billion of ABS issued associated with these investments at December 31, 2022.
(5)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $1.31 billion of loans and $1.06 billion of ABS issued associated with these investments at September 30, 2023. We consolidated $1.46 billion of loans and $1.14 billion of ABS issued associated with these investments at December 31, 2022.
(6)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $421 million of loans and $388 million of ABS issued associated with these investments at September 30, 2023. We consolidated $425 million of loans and $393 million of ABS issued associated with these investments at December 31, 2022.
(7)Represents our economic investment in consolidated Servicing Investment variable interest entities. At September 30, 2023, for GAAP purposes, we consolidated $253 million of servicing investments and $154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2022, for GAAP purposes, we consolidated $301 million of servicing investments and $207 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.
(8)At September 30, 2023 and December 31, 2022, represents HEI owned at Redwood of $302 million and $271 million, respectively, as well as our retained economic investment in securities issued by the consolidated HEI securitization entity of $15 million. At September 30, 2023, for GAAP purposes, we consolidated $129 million of HEI and $93 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity. At December 31, 2022, for GAAP purposes, we consolidated $133 million of HEI and $101 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity.
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The size of our Investment Portfolio decreased slightly during the first nine months of 20172023, as sales of non-strategic third-party securities and remained above our long-term expectations.
At both September 30, 2017 and December 31, 2016, we had repurchase reserves of $4 million outstanding related to residential loans sold through this segment. Forwas partially offset by incremental investments in BPL bridge loans and HEI. See the nine months ended September 30, 2017Investments Detail and 2016, we recorded $0.2 million of reversal of provisionActivity section that follows for repurchasesadditional detail on our portfolio investments 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.their associated borrowings.
The following table details outstanding principal balancespresents an earnings summary for residential loans held-for-sale by product type at September 30, 2017.
Table 28 – Characteristics of Residential Loans Held-for-Sale
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 Taxes
Operating expenses for thisour Investment Portfolio segment primarily include costs associated with the underwriting, purchase and sale of jumbo residential loans. Operating expenses were relatively consistent for both the three- and nine-month periods.
All residential mortgage banking activities are performed at 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 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 allowance 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, 2017,2023 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.2022.
Table 2910 – Consolidated Legacy Sequoia Entities Statements of IncomeInvestment Portfolio Earnings Summary
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20232022Change20232022Change
Net interest income$30,948$45,006$(14,058)$107,904 $140,885 $(32,981)
Investment fair value changes, net(31,315)(61,780)30,465 (34,166)(165,297)131,131 
Other income, net2,622 3,906 (1,284)8,803 15,423 (6,620)
Realized gains, net26 — 26 858 2,581 (1,723)
Operating expenses(6,501)(3,872)(2,629)(18,192)(10,833)(7,359)
(Provision for) Benefit from income taxes(1,457)(5,664)4,207 (3,135)(6,808)3,673 
Segment Contribution$(5,677)$(22,404)$16,727 $62,072 $(24,049)$86,121 
  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 at Consolidated Legacy Sequoia Entities     
The decreasesincrease in net interest income forcontribution from the three-Investment Portfolio during the three and nine-month periods werewas primarily attributable to the continued pay down 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 value of our retained investments in the consolidated Legacy Sequoia entities. Thesmaller negative investment fair value changes in both three-the 2023 periods, as discussed in the Consolidated Results of Operations section of this MD&A. These improvements were partially offset by lower net interest income and lower other income, as discussed in the preceding Consolidated Results of Operations section of this MD&A.
Investment fair value changes, net is primarily comprised of the change in fair value (both realized and unrealized) of our portfolio investments accounted for under the fair value option and hedges associated with these investments. See Table 5.6 in Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of investment fair value changes (the difference in amounts in the table above and in Table 5.6 in the notes to our consolidated financial statements relates to fair value changes for investments held at corporate/other).
Despite challenging market technicals, fundamental performance across most of our Investment Portfolio continues to be driven by strong employment data, embedded equity protection via loan seasoning and borrowers motivated to stay current on their low-coupon mortgages. However, the BPL sector overall continues to manage through macro crosswinds that have impacted sponsor sentiment and reduced transaction volumes across the industry. We remain focused on the impact that higher short-term interest rates have on sponsors, notwithstanding overall strength in leasing trends. In anticipation of this impact, our team has continued to work with borrowers well in advance of their loan maturities to assess project plans and ensure they manage towards successful completions. While 90 days+ delinquencies across our bridge and term books declined slightly in the third quarter to 4%, REO balances in the BPL bridge portfolio increased, and we continue to manage through pockets of stress, largely with a handful of sponsor relationships where a combination of rate modifications and fresh equity has been utilized.
Other income, net within this segment is primarily comprised of income from our MSR investments, bridge loan extension fees, and risk share investment income. Details on the composition of Other income, net are included in Note 21 in Part I, Item 1 of this Quarterly Report on Form 10-Q. Realized gains, net generally result from sales or calls of available-for-sale securities we own. Refer to the analysis of this line item in the Consolidated Results of Operations section of this MD&A for an explanation of activity during 2023.
Operating expenses at this segment are primarily attributable to portfolio management costs, which increased $2 million and $5 million during the three and nine-month periods, wereattributable to both an increase in portfolio investments under management year-over-year and higher asset management costs for our bridge loan portfolio. We hold certain of our investments, primarily related toour MSRs, at our taxable REIT subsidiary. Our provision for income taxes at this segment is primarily driven by the reduction in basisamount of retained IO securitiesincome earned from portfolio assets as well as from gains or losses from hedges held at the loans underlying these securities continued to pay down.TRS and, for the three and nine-month periods, reflects positive net income earned from investment portfolio activities at our taxable REIT subsidiary.
Residential Loans
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Investments Detail and Activity
This section presents additional details on our investments (both within our Investment Portfolio segment and held at Consolidated Legacy Sequoia Entitiesa corporate level) and their activity during the three and nine months ended September 30, 2023.
Real Estate Securities Portfolio
The following table provides details of residential loansets forth our real estate securities activity at consolidated Legacy Sequoia entitiesby collateral type for the three and nine months ended September 30, 20172023.
Table 11 – Real Estate Securities Activity by Collateral Type (1)
Three Months Ended September 30, 2023ResidentialMultifamilyTotal
(In Thousands)SeniorSubordinateSubordinate
Beginning fair value$38,064 $116,013 $12,742 $166,819 
Acquisitions— — — — 
Sales(1,026)(35,223)(3,524)(39,773)
Gains on sales and calls, net— 103 (77)26 
Effect of principal payments (2)
— (163)— (163)
Change in fair value, net4,131 (2,141)546 2,536 
Ending Fair Value (3)
$41,169 $78,589 $9,687 $129,445 
Nine Months Ended September 30, 2023ResidentialMultifamilyTotal
(In Thousands)SeniorSubordinateSubordinate
Beginning fair value$28,867 $198,934 $12,674 $240,475 
Acquisitions7,883 1,979 — 9,862 
Sales(1,026)(133,561)(3,524)(138,111)
Gains on sales and calls, net— 1,579 (77)1,502 
Effect of principal payments (2)
(6)(603)— (609)
Change in fair value, net5,451 10,261 614 16,326 
Ending Fair Value (3)
$41,169 $78,589 $9,687 $129,445 
(1)Amounts presented in this table include securities reported on our balance sheet and 2016.do not include securities we own in consolidated entities. See the following table for a presentation of all securities we own, including those in consolidated entities.
Table 31 –(2)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.
(3)At September 30, 2023, $9 million of Senior Securities were used as hedges for our Residential LoansMortgage Banking operations. These Real estate securities are included in our Residential Mortgage Banking segment.
At September 30, 2023, our securities at Consolidated Legacy Sequoia Entities — ActivityRedwood (exclusive of securities owned in consolidated entities) consisted of fixed-rate assets (89%), adjustable-rate assets (10%), and hybrid assets that reset within the next year (1%).

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  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 unpaidsets forth activity in our real estate securities portfolio for the three and nine months ended September 30, 2023, organized by investments organically created through our mortgage banking segments and acquired from third-parties. This table includes both our securities held on balance sheet and our economic interests in securities we own in securitizations we consolidate in accordance with GAAP. Additionally, this table includes securities held both in our Investment Portfolio segment and our Residential Mortgage Banking segment.
Table 12 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities
Three Months Ended September 30, 2023Residential OrganicBusiness Purpose OrganicThird-Party InvestmentsTotal
Sequoia Securities on Balance SheetConsolidated Sequoia SecuritiesConsolidated CAFL SecuritiesConsolidated SLST SecuritiesConsolidated Multifamily SecuritiesOther
Third-Party Securities
(In Thousands)
Beginning fair value$106,915 $218,357 $305,794 $297,587 $32,515 $59,904 $1,021,072 
Acquisitions— 3,911 13,938 — — — 17,849 
Sales(926)(8,962)— — — (38,847)(48,735)
Gains on sales and calls, net— — — — — 26 26 
Effect of principal payments (1)
(116)(2,460)— (8,738)— (47)(11,361)
Change in fair value, net58 (5,265)(3,800)(32,826)389 2,478 (38,966)
Ending Fair Value (2)
$105,931 $205,581 $315,932 $256,023 $32,904 $23,514 $939,885 
Nine Months Ended September 30, 2023Residential OrganicBusiness Purpose OrganicThird-Party InvestmentsTotal
Sequoia Securities on Balance SheetConsolidated Sequoia SecuritiesConsolidated CAFL SecuritiesConsolidated SLST SecuritiesConsolidated Multifamily SecuritiesOther
Third-Party Securities
(In Thousands)
Beginning fair value$103,089 $219,299 $303,897 $322,803 $31,767 $137,386 $1,118,241 
Acquisitions1,700 44,605 13,938 — — 8,162 68,405 
Sales(926)(49,715)— — — (137,185)(187,826)
Gains on sales and calls, net— — — — — 1,502 1,502 
Effect of principal payments (1)
(313)(6,357)— (25,692)— (296)(32,658)
Change in fair value, net2,381 (2,251)(1,903)(41,088)1,137 13,945 (27,779)
Ending Fair Value (2)
$105,931 $205,581 $315,932 $256,023 $32,904 $23,514 $939,885 
(1)Effect of principal balancespayments 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 loans atthat security.
(2)At September 30, 2023, $5 million of Sequoia Securities and $8 million of Other Third-Party Securities were used as hedges for our Residential Mortgage Banking operations, and were included in our Residential Mortgage Banking segment.
At September 30, 2023, our securities (both those held on our balance sheet and our economic interests in consolidated LegacyVIEs) consisted of fixed-rate assets (98%), adjustable-rate assets (2%) and hybrid assets that reset within the next year (<1%).
We directly finance our holdings of real estate securities with a combination of non-recourse debt, non-marginable recourse term debt and marginable debt in the form of repurchase (or “repo”) financing. At September 30, 2023, real estate securities with a fair value of $401 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with $127 million of short-term, non-marginable recourse debt and $162 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities, and real estate securities with a fair value of $336 million (including securities owned in consolidated securitization entities) were financed with $238 million of short-term debt incurred through repurchase facilities with five different counterparties, and $54 million of securities were financed with a short-term financing facility. The remaining $149 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.
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The following table summarizes the credit characteristics of our entire real estate securities portfolio by productcollateral type at September 30, 2017.2023. This table includes both our securities held on balance sheet and our economic interests in securities we own in securitizations we consolidate in accordance with GAAP.
Table 3213 – CharacteristicsCredit Statistics of LoansReal Estate Securities Owned at Redwood and in Consolidated Legacy Sequoia Entities
September 30, 2023Weighted Average Values
Market Value -
IO
Securities		Market Value - Non-IO
 Securities		Principal Balance - Non-IO
Securities		Gross Weighted Average Coupon90 Day+ Delinquency3-Month Prepayment Rate
Investment Thickness(1)
(Dollars in Thousands)
Sequoia securities on balance sheet$32,771 $73,160 $139,694 3.8 %0.2 %6 %7 %
Consolidated Sequoia securities33,462 172,119 232,896 4.7 %1.2 %8 %39 %
Total Sequoia Securities66,233 245,279 372,590 4.4 %0.9 %7 %28 %
Consolidated Freddie Mac SLST securities16,849 239,174 461,596 4.5 %8.6 %5 %28 %
RPL securities on balance sheet— — — — %— %— %— %
Total RPL Securities16,849 239,174 461,596 4.5 %8.6 %5 %28 %
Consolidated Freddie Mac K-Series securities— 32,904 36,468 4.3 %— %— %8 %
Multifamily securities on balance sheet12 9,675 10,178 5.2 %— %46 %14 %
Total Multifamily Securities12 42,579 46,646 4.5 %— %10 %9 %
Consolidated CAFL securities24,244 291,688 437,838 5.4 %3.7 %7 %19 %
Other third-party securities8,409 5,418 19,473 5.9 %0.3 %13 %5 %
Total Securities (2)
$115,747 $824,138 $1,338,143 
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(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 subordinate securities) in multifamily and other third-party securities.
(2)At September 30, 2023, $5 million of Sequoia Securities and $8 million of Other Third-Party Securities were used as hedges for our Residential Mortgage Banking operations, and were included in our Residential Mortgage Banking segment.
We primarily target investments that have a sensitivity to housing credit risk, typically sourced through our operating businesses where we control the underwriting and review of underlying collateral. During the third quarter of 2023, our overall securities portfolio continued to demonstrate stable fundamentals, driven by underlying loan seasoning, low 90+ day delinquencies and embedded growth in home prices and rents. Given the seasoned nature of our investments (particularly within our RPL securities and Sequoia securities), many of our residential investments are supported by substantial home price appreciation and borrower equity in the underlying homes. While the level of 90 day+ delinquencies for the BPL term loans underlying our consolidated Legacy Sequoia entitiesCAFL securities remained stable from the second to third quarter of 2023, 60 days+ delinquencies since June 30, 2023 increased modestly, which if not resolved, could negatively impact the value of these securities. With a weighted average quarter-end carrying value of 62 cents to face value, we estimate our Investment Portfolio had approximately $3.26 per share of net discount to par at quarter end. We believe continued credit performance in our underlying securities portfolio could contribute to our ability to realize potential upside in book value over time.
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BPL Bridge Loans Held-for-Investment
The following table provides the activity of BPL bridge loans held-for-investment during the three and were primarily originated in 2006 or prior. For outstandingnine months ended September 30, 2023.
Table 14 – BPL Bridge Loans Held-for-Investment - Activity
Three Months EndedNine Months Ended
(In Thousands)September 30, 2023September 30, 2023
Fair value at beginning of period$2,160,156 $2,023,529 
Sales(2,310)(2,310)
Transfers between portfolios (1)
256,654 760,235 
Transfers to REO(38,128)(48,639)
Principal repayments(182,687)(533,052)
Changes in fair value, net(16,349)(22,427)
Fair Value at End of Period$2,177,336 $2,177,336 
(1)We originate BPL bridge loans at our TRS and transfer a portion of them to our REIT that we intend to hold for investment. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated Legacy Sequoia entitiesstatements of income. 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. For BPL bridge loans held at our REIT that are transferred into our CAFL bridge securitizations, 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. 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.
Our $2.18 billion of BPL bridge loans held-for-investment at September 30, 2017,2023 were comprised of first-lien, interest-only loans with a weighted average coupon of 10.54% and original maturities of six to 36 months. At origination, the weighted average FICO score of borrowers backing these loans was 728 (at origination)745 and the weighted average original LTV ratio of these loans was 66% (at origination)64%. At September 30, 20172023, of the 3,197 loans in this portfolio, 91 of these loans with an aggregate fair value of $54 million and December 31, 2016, thean aggregate unpaid principal balance of $61 million were in foreclosure and 101 loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $14with an aggregate fair value of $79 million and $19 million, respectively, and thean unpaid principal balance of $89 million were 90-or-more days delinquent (certain loans in foreclosure were also at least 90 days delinquent). Additionally, REO associated with bridge loans increased to $49 million at September 30, 2023, from $13 million at June 30, 2023 and $3 million at December 31, 2022.
Changes in the fair value of bridge loans held-for-investment during the nine months ended September 30, 2023, primarily reflect reductions in values for non-accrual bridge loans and bridge loans that were modified during the third quarter of 2023. During the third quarter of 2023, BPL bridge loans with a cumulative unpaid principal balance of $307 million were subject to modifications of certain terms, including reductions in interest rates (including, in certain cases, deferrals of interest) combined with infusions of fresh capital from either the existing sponsor or third-party sources. The modifications resulted in a weighted average reduction in contractual interest rate on these loans of approximately 2.5%. In addition to loans for which we completed these types of modifications, during the third quarter of 2023, we extended the maturities of loans with approximately $187 million of unpaid principal balance. While we continue to work proactively with certain borrowers to address the impacts of rising interest rates, elongated project timelines, or other issues, further increases in delinquencies or modifications within our BPL bridge loan portfolio could ultimately result in further decreases in the fair value of our bridge loans held for investment, and further instances of borrower/sponsor stress could lead to realized credit losses. Additionally, an increase in maturity extensions in the BPL bridge portfolio would increase the expected time to repayment with a potential impact on fair values and credit losses. However, given the short duration nature of our bridge loans, maturity extensions have been an expected part of the business, even before market conditions became more challenging. Over the past six months, maturity extensions of BPL bridge loans averaged less than six months.
We generally value delinquent BPL loans at a dollar price that is informed by various market data, including the estimated fair value of the collateral securing a loan, for which we typically receive third-party appraisals, as well as estimated holding costs and sales costs. The amounts we may ultimately recover through the foreclosure of loans and the sale of the underlying collateral or through alternative strategies, such as through loans sales or discounted payoffs, could vary materially from our estimates and could have a material impact on our earnings in future periods.
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We finance our BPL bridge loans with a combination of recourse, non-marginable warehouse facilities, non-recourse, non-marginable warehouse facilities, and non-recourse securitization debt. At September 30, 2023, we had: $70 million of debt incurred through short-term warehouse facilities with two counterparties, which was $12secured by $92 million of business purpose bridge loans; $1.12 billion of debt incurred through long-term facilities with three different counterparties, which was secured by $1.50 billion of business purpose bridge loans; and $11$485 million respectively.

of securitization debt secured by $525 million of business purpose bridge loans and $24 million of restricted cash.
Taxable IncomeThe following table provides the composition of BPL bridge loans held-for-investment by product type as of September 30, 2023 and Tax ProvisionDecember 31, 2022.
Taxable IncomeTable 15 – BPL Bridge Loans Held-for-Investment - By Product Type
(In Thousands)September 30, 2023December 31, 2022
Multifamily$993,983 $1,055,533 
Renovate / Build to rent942,869 736,368 
Fix and Flip91,861 105,157 
Other148,623 126,471 
Fair Value at End of Period$2,177,336 $2,023,529 
Residential Loans
The following table summarizesprovides the activity of residential loans held at our taxable incomeinvestment portfolio during the three and distributionsnine months ended September 30, 2023.
Table 16 – Investment Portfolio Residential Loans - Activity
Three Months EndedNine Months Ended
(In Thousands)September 30, 2023September 30, 2023
Fair value at beginning of period$— $152,621 
Acquisitions— — 
Sales— (134,848)
Transfers between portfolios— (17,330)
Principal repayments— (992)
Changes in fair value, net— 549 
Fair Value at End of Period$— $— 
During the first quarter of 2023, we sold the majority of our remaining residential loans in our Investment Portfolio (which were from Sequoia securitizations), and the remaining $17 million were transferred to shareholdersour Residential Mortgage Banking segment.

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Home Equity Investments
The following table provides the activity of HEI held at our investment portfolio during the three and nine months ended September 30, 2023.
Table 17 – HEI at Investment Portfolio Segment - Activity
Home Equity Investments(1)
Three Months EndedNine Months Ended
(In Thousands)September 30, 2023September 30, 2023
Balance at beginning of period$427,307 $403,462 
New/additional investments113 113 25,626 
Sales/distribution— — 
Repayments(9,122)(26,153)
Changes in fair value, net12,974 28,337 
Balance at End of Period$431,272 $431,272 
(1)Our home equity investments presented in this table as of September 30, 2023, include $129 million of HEI owned in our consolidated HEI securitization entity and $302 millionof HEI owned directly at Redwood.
Additional details on our HEI are included in Note 10 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. During the three and nine months ended September 30, 2023, positive investment fair value changes primarily reflected improvements in actual and forecasted home price appreciation, relative to previously modeled amounts.

Other Investments
The following table sets forth our other investments activity at our Investment Portfolio segment by significant asset type for the three and nine months ended September 30, 20172023.
Table 18 – Other Investments – Activity(1)
Three Months Ended September 30, 2023
Servicing
Investments(2)
Strategic InvestmentsMSRs and
Excess
Servicing		OtherTotal
(In Thousands)
Balance at beginning of period$234,304 $54,867 $66,119 $247 $355,537 
New/additional investments— 2,441 — — 2,441 
Sales/distribution/repayments— — — (13)(13)
Servicer advances (repayments), net(18,560)— — — (18,560)
Changes in fair value, net4,069 (1,454)(1,659)— 956 
Other— — — — — 
Balance at End of Period$219,813 $55,854 $64,460 $234 $340,361 

Nine Months Ended September 30, 2023
Servicing
Investments(2)
Strategic InvestmentsMSRs and
Excess
Servicing		OtherTotal
(In Thousands)
Balance at beginning of period$269,259 $56,518 $64,456 $705 $390,938 
New/additional investments— 4,491 — — 4,491 
Sales/distribution/repayments— — — (385)(385)
Servicer advances (repayments), net(55,828)— — — (55,828)
Changes in fair value, net6,382 (5,155)4 (86)1,145 
Other— — — — — 
Balance at End of Period$219,813 $55,854 $64,460 $234 $340,361 
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Footnotes to Table 18 on prior page
(1)Tables include all "Other investments" as presented on our consolidated balance sheets. Strategic Investments presented above are held at Corporate/Other, and 2016. For eachthe remaining other investments are held in our Investment Portfolio segment.
(2)Our servicing investments are owned through our consolidated Servicing Investment entities. At September 30, 2023, our economic investment in these entities was $91 million (for GAAP purposes, we consolidated $253 million of servicing investments, $154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these periods, we had no undistributedentities).
Additional details on our Other Investments is included in Note 11 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.


Income Taxes
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.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.
Table 33 – Taxable IncomeIn September 2023, our Board of Directors declared regular dividends of $0.16 per common share and $0.625 per Series A preferred share for the third quarter of 2023, which were paid on September 29, 2023 and October 16, 2023, respectively. As of September 30, 2023, we expect our full-year dividend distributions to exceed our annual minimum distribution requirements and we believe that we will meet 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 requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and we would not be able to elect to be taxed as a REIT for four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.
While our minimum REIT dividend requirement is generally 90% of our annual REIT taxable income, we carried a $37 million federal net operating loss carry forward (NOL) into 2023 at our REIT that affords us the ability to retain REIT taxable income up to the 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 NOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our NOL and any remaining NOL amount will carry forward into future years.
  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 untilWhile the exact amount is uncertain at this time, we file our tax return for 2017.

We currently expect all or nearly alla significant portion of the dividends we distribute in 2017 willour 2023 common stock dividend distributions to be taxable to shareholders as ordinary income and a smaller portion, if any, willfor 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 onnontaxable (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. We currently expect all of our 2023 preferred stock dividend distributions to be taxable as ordinary income for federal income tax purposes. Under the federal income tax rules relatedapplicable to capital loss carryforwards,REITs, none of our 2017Redwood’s 2023 dividend distributions are currently expected to be characterized as long-term capital gains for federalgain dividends. The income or loss generated at our TRS will not directly affect the tax purposes.characterization of our 2023 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, 2017,2023, we recorded tax provisions of $5$2 million and $17 million, respectively, compared to a tax provision of $1 million, for bothrespectively. For the three and nine months ended September 30, 2016.2022, we recorded a tax provision of $1 million and a benefit from income taxes of $10 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 inswitch to a tax provision from a benefit from income taxes year-over-year was primarily the result of us benefiting from the reversalGAAP income earned at our TRS in 2023 compared to a GAAP loss in 2022.
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Realization of the valuation allowance recorded against our federal net deferred tax assets ("DTAs") in 2016. As the federal valuation allowance was fully released in 2016, our TRS effective tax rate in 2017 is expected to be approximately equal to the federal statutory rate. The income or loss generated at our TRS will not affect the tax characterization of our 2017 dividends.

Realization of our DTAs is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards (where applicable) 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“more likely than not” and establish a valuation allowance accordingly. At December 31, 2016,2022, we reported net federal ordinary and capital deferred tax liabilities ("DTLs"),DTAs with no material valuation allowance recorded against them. As we experienced GAAP losses in 2022 and as such, had no associated valuation allowance. As a result ofearned minimal GAAP income during the nine months ended September 30, 2023 at our TRS, we forecastclosely analyzed the realizability of our net deferred tax assets in whole and in part. We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering, among other things, all available positive and negative evidence, historical operating results and cumulative earnings analysis, forecasts of future profitability, and the duration of statutory carryforward periods. Based on this analysis, we continue to believe it is more likely than not that we will reportrealize our federal deferred tax assets in future periods as income is earned at our TRS; therefore, there continues to be no material valuation allowance recorded against our net federal ordinary and capital DTLs at December 31, 2017 and consequently noDTAs. This evaluation requires significant judgment in assessing the possible need for a valuation allowance and changes to our assumptions could result in a material change in the valuation allowance with a corresponding impact on the provision for income taxes in the period including such change.
If in a future period, based on available evidence, we conclude that it is expectednot more likely than not that our DTAs will be realized, then a valuation allowance would be established with a corresponding charge to be recorded against any federal DTA. GAAP earnings, which would reduce our book value. Such charges could cause a material reduction, up to the full value of our net DTAs for which a valuation allowance has not previously been established, to our GAAP earnings and book value per share for the quarterly and annual periods in which they are established and could have a material and adverse effect on our business, financial results, or liquidity.
Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs. Our estimateDTAs as realization of net deferred tax assets could change in future periods to the extent that actual or revised estimates of futureour 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 ofsame 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.



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LIQUIDITY AND CAPITAL RESOURCES
Summary
OurIn addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash and liquidity consist of borrowings under mortgage loan warehouse facilities, secured term financing facilities, securities repurchase agreements, payments of principal and interest we receive from our investment portfolios,portfolio assets, proceeds from the sale of investment portfolio assets, and cash generated from our mortgage banking operating activities.activities, such as securitization. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations to fund investments in residential loans,and manage hedges associated with those activities, 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.
OurAt September 30, 2023, our total capital was $1.78$1.79 billion, at September 30, 2017, and included $1.21consisting of (i) $1.11 billion of equity capital, and $0.57 billion(ii) $665 million of the total $2.57 billion ofconvertible notes and long-term debt on our consolidated balance sheet. This portionsheet ($148 million of convertible debt included $201due in 2024, $162 million of exchangeable debt due in 2019, $2452025, $215 million of convertible debt due in 2023,2027 and $140 million of trust-preferred securities due in 2037.2037), and (iii) $17 million of promissory notes included in short-term debt.
As of September 30, 2017, we estimate that2023, our available capital was approximately $330unrestricted cash and cash equivalents were $204 million. Although we continue to evaluate our options with regard to our upcoming $250 million convertible debt maturity, at current 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 optimization of our investment portfolio.
In February 2016, our Board of Directors approved an authorization for the repurchase of up to $100 million of our common stock and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced all previous share repurchase plans 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. At September 30, 2017, approximately $86 million of this current authorization remained available for the repurchases of shares of our common stock. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital described above.
While we believe our available capitalcash is sufficient to fund our currently contemplated investment activities,operations, we may raise equity or debt capital from time-to-timetime 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, 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.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 margin calls based solely on the lender's determination, in its discretion, of the market value of the 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 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 mortgage 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 or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of loans, or a change in the interest rate of a specified reference security relative to a base interest rate amount. 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 estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or following the occurrence of a triggering credit event impacting the financed mortgage loan based on a decline in the market value of the financed mortgage loan (as determined by the lender).
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 (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.
At September 30, 2023, in aggregate, we had $2.45 billion of recourse debt outstanding, of which $520 million was marginable and $1.93 billion was non-marginable.
We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential and commercial 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."
Repurchase Authorization
In July 2022, our Board of Directors approved an authorization for the repurchase of up to $125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization has no expiration date and does not obligate us to acquire any specific number of shares or securities. During the nine months ended September 30, 2023, we did not repurchase any shares of our common stock under this program, and repurchased $66 million of Redwood's convertible debt. At September 30, 2023, $101 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.
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Cash Flows and Liquidity for the Nine Months Ended September 30, 20172023
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, 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 $629 million duringDuring the nine months ended September 30, 2017.2023, our net cash used in operating activities was $867 million. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination, purchase 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. ExcludingDuring the first nine months of 2023, excluding cash flows from the purchase, origination, sale and principal payments of loans classified as held-for-sale, and the settlement of associated derivatives (which cumulatively totaled $896 million of net cash outflows), 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.$28 million.
Cash Flows from Investing Activities
During the nine months ended September 30, 2017,2023, our net cash provided by investing activities was $205$639 million and primarily resulted from proceeds 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 impactexcess of future sales of investment securities, if any.
cash deployed into these investments. Because many of our investment securities, loans and HEI are financed through repurchasevarious borrowing agreements, a significant portion of the proceeds from any sales or principal payments of our investment securities wouldthese assets are generally be used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans and HEI at consolidated Sequoiasecuritization 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,Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these assets in order to manage our liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market conditions.
As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the nine months ended September 30, 2017,2023, we had transfers of residentialtransferred loans with a carrying value of $644 million frombetween held-for-sale toand held-for-investment and we retained MSRs with a carrying value of $7 million from the sale of residential loans. Theseclassification, 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, 2017,2023, our net cash provided by financing activities was $468$159 million. This primarily resulted from $582 million of net borrowings under ABS issued (resulting from the issuance of asset-backed securitiesthree Sequoia securitizations and one CAFL term securitization), partially offset by $437 million of net repayments of short-term debt borrowings, and $11 million of net repayments under long-term debt facilities. Additionally, in the first quarter of 2023 we raised $67 million of net proceeds from our Sequoia Choice securitizationthe issuance of preferred stock, and in the third quarter of 2017, the issuance2023 we raised $33 million through sales 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.Redwood common stock under our ATM program.
 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, 2017,2023, we declared and paid $66 million of cash dividends on our common stock representing cumulativeof $0.55 per common share (totaling $66 million) and declared dividends of $0.84$1.85417 per share. Additionally, in November 2017,share and paid dividends of $1.22917 per share (totaling $3 million) on our preferred stock. On September 12, 2023, the Board of Directors declared a regular dividend of $0.28$0.16 per share for the fourththird quarter of 2017,2023, which is payablewas paid on December 28, 2017September 29, 2023 to shareholders of record on December 15, 2017.September 22, 2023. Additionally, on September 12, 2023, the Board of Directors declared a regular quarterly dividend of $0.625 per share of preferred stock, payable on October 16, 2023 to stockholders of record on September 29, 2023.
In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, and restricted stock units, which are stock-basedgenerally 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.

Short-Term Debt
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Material Cash Requirements
In the ordinarynormal course of our business, we use recourse debt through severalenter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, while others are off-balance sheet or recorded on the balance sheet in amounts different typesfrom the full contract or notional amount of borrowing facilities and usethe transaction.
Our material 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 securitiesrequirements from known contractual and other investments,obligations during the twelve months following September 30, 2023, include maturing short-term debt, interest payments on debt and otherwise fundABS issued, payments on operating leases, funding commitments for BPL bridge loans and other current payables. Our material cash requirements from known contractual and other obligations beyond the twelve months following September 30, 2023, include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for BPL bridge loans, and payments under ABS issued (as described further below under Liquidity Needs for our business and operations.Investment Portfolio).
At September 30, 2017,2023, we had four short-term residentialcommitments to fund up to $623 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 (for example, funding is dependent on actual progress on a project and we retain the right to conduct due diligence with respect to each draw request to confirm conditions have been met). A majority of the commitments are for longer-term renovate/build-for-rent loans (which generally have funding caps below their full commitment amount) and are expected to fund over the next several quarters. Additionally, at September 30, 2023, we had $1.71 billion of available warehouse capacity for business purpose loans and scheduled bridge loan maturities are expected to provide an additional source of cash that can be used to fund our commitments.
For additional information regarding our material cash requirements, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 under the caption Contractual Obligations. For additional information on commitments and contingencies as of September 30, 2023 that could impact our liquidity and capital resources, see Note 17 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 17 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Most of our loan warehouse facilities and our servicer advance financing were established with a total outstanding debt balanceinitial one-year terms and are regularly amended on an annual basis to extend the terms for an additional year ahead of $438 million (secured bytheir maturity. We renewed several of these facilities during the first nine months of 2023, extinguished others we deemed under-utilized, and have other such facilities with scheduled maturities during the next twelve months. In October of 2023, we successfully extended our residential loans withMSR warehouse facility and servicer advance financing, each for an aggregate fair valueadditional year. While there is no assurance of $493 million) and a total uncommittedour ability to renew our other facilities maturing in the next year, given current market conditions we expect to extend these in the normal course of business.
One of our subordinate securities financing facilities matures in September of 2024. This recourse term 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 wereis secured by certain securities we retained from Sequoia securitizations we sponsored. While we will continue to evaluate our alternatives with a fairrespect to this maturity, we expect we will be able to finance these securities utilizing securities repo financing. However, if market valueinterest rates remain elevated, the cost of $663 million. We also had a secured line of credit with no outstanding debt balance and a totalthis financing would increase our borrowing limit of $10 million (secured by securities with a fair market value of $6 million) at September 30, 2017.costs for these assets.


During the three months ended June 30, 2017, $288 million principal amountAdditionally, one series of our convertible notes is maturing during the 12-month period following September 30, 2023. To the extent we cannot issue new corporate capital (for example, convertible notes, preferred equity or common equity) on favorable terms, or at all, due to adverse market conditions, we will need to utilize capital from other sources, including cash on hand, to repay our convertible debt that is maturing, which will reduce the amount of cash that can be deployed into our business and could reduce the earnings potential of our business. Further, if market rates for corporate capital remain elevated and we choose to issue new corporate capital, it could negatively impact our profitability.
We expect to meet our obligations coming 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. Atfrom September 30, 2017,2023, through a combination of cash on hand, payments of principal and interest we receive from our investment portfolio assets, proceeds from the outstanding principal amountsale of these notes was $250 million.
Atinvestment portfolio assets, cash generated from our operating activities, incremental borrowings under existing, new or amended financing arrangements, or through the issuance of equity or debt capital. As of September 30, 2017,2023, we had $1.24 billionapproximately $340 million of short-term debt outstanding. unencumbered assets. Our unencumbered assets consist primarily of bridge loans, HEI, and retained securities from our securitization activities. We are actively engaged in seeking new financing lines or expanded financing capacity for bridge loans and HEI and expect to have demonstrated further progress on these initiatives in the fourth quarter of 2023.
During the first nine months of 2017,2023, the highest balance of our short-term debt outstanding was $1.60$2.03 billion. See Note 14 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our short-term debt. See Note 16 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our long-term debt.
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Long-Term DebtLiquidity Needs for our Mortgage Banking Activities
FHLBC Borrowings
In July 2014,We generally use loan warehouse facilities to finance the residential loans we acquire and the business purpose loans we originate or acquire in our FHLB-member subsidiary entered into a borrowing agreement withmortgage banking operations while we aggregate the Federal Home Loan Bankloans for sale or securitization. These facilities may be designated as short-term or long-term for financial reporting purposes, depending on the remaining maturity of Chicago. At September 30, 2017, under this agreement, our subsidiary could incurthe facility or the amount of time individual 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 tomay 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.on a facility.
At September 30, 2017, $2.002023, we had residential warehouse facilities outstanding with four different counterparties, with $1.05 billion of advances were outstanding under this agreement, which were classified as long-term debt,total capacity and $502 million of available capacity. These included non-marginable facilities with a weighted average interest rate$500 million of 1.26% per annumtotal capacity and a weighted average maturitymarginable facilities with $550 million of eight years.total capacity. At September 30, 2017, accrued2023, we had business purpose warehouse facilities outstanding with five different counterparties, with $2.94 billion of total capacity and $1.71 billion of available capacity. All of these BPL financing facilities are non-marginable. We note that several of these facilities used to finance our business purpose mortgage banking loan inventory are also used to finance bridge loans held in our investment portfolio.
All of these facilities have variable interest payable on these borrowings was $4 million. Advances under this agreement are charged interestrates based on a specified margin overSOFR or other commonly used benchmarks and recent policy statements from the FHLBC’s 13-week discount noteFederal Reserve indicate the potential for further increases in the federal funds rate, which resets every 13 weeks. Our total advanceswould result in higher benchmark rates and interest costs for us 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, 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.
Convertible Notes
In August 2017, 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, onecertain 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.facilities.
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 reclassified from long-term debt to short-term debt, as the maturityAs discussed above, several of the notes was less than one year asfacilities we use to finance our mortgage banking loan inventory are short-term in nature and will require renewals. Additionally, because several of April 2017. Additionally, duringour warehouse 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. Additional information regarding risks related to the three months ended June 30, 2017,debt 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 onuse to finance our consolidated statements of income. At September 30, 2017,mortgage banking operations can be found under 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 Notes
At September 30, 2017, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively, issued by us 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 titledheading "Residential Loans at Sequoia Choice" and "Results of Consolidated Legacy Sequoia Entities"in the Results of Operations section of this MD&A for additional details on these entities.
Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities" that follows within this section.
Liquidity Needs for our Investment Portfolio
We use various forms of secured recourse and non-recourse debt to finance assets in our investment portfolio. We distinguish our debt between recourse and non-recourse, as our non-recourse debt has unique characteristics that differentiate it in important ways from our 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.
Our ABS issued is non-recourse and represents debt of securitization entities that we consolidate for GAAP reporting purposes. Our exposure to these entities is primarily through the financial interests we have purchased or retained from these entities (typically subordinate securities and interest only securities). 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. As the debt issued by these entities is not a direct obligation of Redwood, and since the debt generally can remain outstanding for the full term of the loans it is financing within each securitization, this debt effectively provides permanent financing for these assets. See Notes 4 and 15, respectively, in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our principles of consolidation and our asset-backed securities issued.
Additionally, we have non-recourse debt in the form of non-marginable warehouse facilities to finance a portion of our business purpose bridge loan portfolio. While this debt is non-recourse to Redwood, it does have fixed terms with prepayment options that allows us to refinance this debt or ultimately repay it upon maturity. In addition, in connection with our BPL bridge loan joint venture, we established a new, dedicated warehouse facility for the joint venture. This warehouse facility is an obligation of the joint venture, not of Redwood, and it is non-recourse to Redwood (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"). See Notes 11 and 17 in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information regarding our BPL bridge loan joint venture.
The remainder of the debt we use to finance our investments is recourse debt, including our long-term subordinate securities financing facilities, BPL financing facilities and MSR financing facility, as well as our short-term securities repo borrowings and HEI warehouse facility. For securities we have financed, our subordinate securities financing facilities are non-marginable and our repo debt facilities and MSR facility (which also finances certificated MSRs we classify as securities) are marginable. Our BPL financing facilities and HEI warehouse facility are non-marginable.
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Delinquencies on BPL bridge loans that are financed through warehouse facilities increased in the first nine months of 2023, and have and are expected to continue to be a required use of our liquidity to the extent the terms of the applicable warehouse facility apply reduced financing advance rates to these loans (“advance rate step-downs”) or these loans become ineligible for financing under the terms of the warehouse facility. At September 30, 2023, we had approximately $35 million of borrowings on warehouse facilities collateralized by BPL bridge loans that were between 30 and 89 days delinquent, certain of which have already, or may, during or subsequent to the third quarter of 2023, become subject to advance rate step downs or repurchase requirements. Additionally, our liquidity may be impacted to the extent delinquencies on loans financed through CAFL bridge securitizations were elevated above established thresholds for an extended period, which could trigger adverse changes to certain structural terms of these transactions (such as terms relating to the amortization of the issued securities and the revolving availability of financing under these transactions).
We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. Recent policy statements from the Federal Reserve indicate the potential of further increases in the federal funds rate, which if enacted could result in lower net interest income to the extent our variable rate assets and liabilities are not aligned. Additionally, to the extent interest rates remain elevated or increase further, certain fixed-rate term borrowings that mature in the coming quarters could have to be refinanced at higher interest rates, which could cause a reduction in net interest income. Further, each of our three recourse subordinate securities financing facilities have interest rate step-up provisions, under which if we do not repay the facilities by certain specified dates, the interest rates on those facilities will increase (see Note 14 and Note 16 in in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on these provisions).
Corporate Debt
In addition to secured recourse and non-recourse debt we use specifically in association with our mortgage banking operations and within our investment portfolio, we also use unsecured recourse debt to finance our overall operations. This is generally in the form of convertible debt securities we issue in the public markets and also includes trust preferred securities and promissory notes. See Notes 14 and 16 in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 8 of our Annual Report on Form 10-K, for additional information on our short-term and long-term debt.

Risks Relating to Debt Incurred 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/or origination of residential and business purpose mortgage loans (including those we acquire or 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 commoncapital stock. DebtRecourse 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 21A of our Annual Report on Form 10-K for the year ended December 31, 2016,2022, under the captioncaption(s) “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities.Facilities,”

and “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.”
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 ofHEI warehouse facility, short-term servicer advance financing, a secured, credit from a bank,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 eachmany of the facilities (with the exception of the $10 million committed line of short-term secured credit) isare uncommitted, which means that any request we make to borrow funds under these uncommitted facilities may be declined by the lender 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 and our short-term securities repurchase facilities, 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
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assets or cash in an amount at least equal to the decline in value. We refer to borrowing facilities with margin call provisions based solely on the lender's determination, in its discretion, of changes in the market value of transferred or pledged assets, as marginable debt. Borrowing facilities that we refer to as non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, or a change in the interest rate of a specified reference security relative to a base interest rate amount. 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 estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender), in which case 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 mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at September 30, 2023, only our short-term securities repurchase facilities (with $238 million of borrowings outstanding at September 30, 2023), two of our residential mortgage loan warehouse facilities (with a combined $234 million of borrowings outstanding at September 30, 2023) and a certificated MSR facility (with $48 million of borrowings outstanding at September 30, 2023) retain market-value based margin call provisions based solely on the lender's determination of market value and, as such, are considered marginable.

Margin call provisions under these facilities are further described in Part I, Item 21A of our Annual Report on Form 10-K for the year ended December 31, 20162022 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 21A of our Annual Report on Form 10-K for the year ended December 31, 20162022 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

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 warehouseborrowing 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, 20162022 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, 20162022 under the heading “Market Risks.” In addition, with respect to residentialmortgage 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, 20162022 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, 20162022 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, 2017,2023, 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, 20172023 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, 20172023 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 more than $4 billion in additional recourse indebtedness.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off Balance Sheet Arrangements
We do not have any material off balance sheet arrangements.
Contractual Obligations
The following table presents our contractual obligations and commitments at September 30, 2017, as well as the obligations of the securitization entities that we consolidate for financial reporting purposes.
Table 35 – Contractual Obligations and Commitments

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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 2 — Basis of Presentation and Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q10-Q.
We have elected the fair value option of accounting for a significant portion of the assets and some of the liabilities on our balance sheet, and the majority of these assets and liabilities utilize Level 3 valuation inputs, which require a significant level of estimation uncertainty. See Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our assets and liabilities accounted for at fair value at September 30, 2023, including the significant inputs used to estimate their fair values and the impact the changes in their fair values had to our financial condition and results of operations. See Note 5 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016. Management discusses2022, incorporated herein by reference, for the ongoing development and selection ofsame information on 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 decreasesas of December 31, 2022. Periodic fluctuations in the values of these assets and liabilities are inherently volatile and thus can lead to significant period-to-period GAAP earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing ofvolatility.
Additional detail on 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 areis 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, 2016.2022, under the heading "Critical Accounting Estimates."

Market Risks
MARKET AND OTHER 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, 2016.2022.
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.2022.
111
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.

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, 2016,2022, 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, 2016.2022.

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 20172023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

112

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about December 23, 2009,For information on our legal proceedings, see Note 17 to the Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a complaintFinancial 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 17 to the Superior CourtFinancial 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, 2022 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.

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 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. 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.
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 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.2022.

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, 2017,2023, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
In February 2016,July 2022, our Board of Directors approved an authorization for the repurchase of up to $100$125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced all previous share repurchase plans and has no expiration date. This repurchase authorizationdate and 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 no2023, we did not repurchase any shares acquiredof our common stock under this authorization.program. At September 30, 2017, approximately $862023, $101 million of thisthe 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, 2017.2023.
  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 toTotal Number of Shares Purchased or AcquiredAverage
Price per
Share Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum 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, 2023 - July 31, 2023— $— — $— 
August 1, 2023 - August 31, 2023— $— — $— 
September 1, 2023 - September 30, 2023— $— — $— 
Total— $— — $101,265 
Item 3. Defaults Upon Senior Securities
None.
Item 4. Not ApplicableMine Safety Disclosures (Not Applicable)

Item 5. Other Information
None.During the three months ended September 30, 2023, no director or "officer" (as defined in 17 CFR § 240.16a-1(f)) of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.

113

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)
3.2.13.1.11
Amended and Restated BylawsArticles of Amendment of the Registrant, as adoptedeffective May 16, 2019 (incorporated by reference to the Registrant's Current Report on March 5, 2008Form 8-K, Exhibit 3.1, filed on May 17, 2019)
3.1.12
3.2.23.1.13
3.2
Amended and Restated Bylaws of the Registrant, as adopted on May 17, 2012November 2, 2022 (incorporated by reference to the Registrant’s CurrentRegistrant's Annual Report on Form 8-K,10-K, Exhibit 3.2, filed on May 21, 2012)March 1, 2023)
4.110.1*
Indenture, dated March 6, 2013, betweenFourth Amendment to Redwood Trust, Inc. Amended 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).Restated Executive Deferred Compensation Plan (filed herewith)
4.210.2*
Second Supplemental Indenture,Eighth Amended and Restated Employment Agreement, dated August 18, 2017,as of November 3, 2023, by and between Redwood Trust, Inc.Christopher J. Abate 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).Registrant (filed herewith)
10.1*10.3*
Sixth Amended and Restated Employment Agreement, dated as of November 3, 2023, by and between Dashiell I. Robinson and the Registrant (filed herewith)
10.4*
Third Amended and Restated Employment Agreement, dated as of August 8, 2017.
10.2*
Side Letter Agreement,November 3, 2023, by and between Dashiell I. RobinsonBrooke E. Carillo and the Registrant (filed herewith)
10.5*
Eighth Amended and Restated Employment Agreement, dated as of August 8, 2017.November 3, 2023, by and between Andrew P. Stone and the Registrant (filed herewith)
10.310.6*
Amendment to Advances, Collateral Pledge,Third Amended and SecurityRestated Employment Agreement, between the Federal Home Loan Bank of Chicago and RWT Financial, LLC, dated as of October 31, 2017.November 3, 2023, by and between Sasha G. Macomber and the Registrant (filed herewith)
31.110.7*
Second Amended and Restated Employment Agreement, dated as of November 3, 2023, by and between Fred J. Matera and the Registrant (filed herewith)
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
114

101Exhibit
Number
Exhibit
101Pursuant 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, 2017,2023, is filed in inline XBRL-formatted interactive data files:


 
(i) Consolidated Balance Sheets at September 30, 20172023 and December 31, 2016;
2022;
(ii) Consolidated Statements of Income for the three and nine months ended September 30, 20172023 and 2016;
2022;
(iii) Statements of Consolidated Comprehensive Income for the three and nine months ended September 30, 20172023 and 2016;
2022;
(iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 20172023 and 2016;
2022;
(v) Consolidated Statements of Cash Flows for the nine months ended September 30, 20172023 and 2016;2022; and

(vi) Notes to Consolidated Financial Statements.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
______________________
* Indicates exhibits that include management contracts or compensatory plan or arrangements.

115

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 6, 2023REDWOOD TRUST, INC.
By:
Date:November 7, 2017By:/s/ Martin S. Hughes
Martin S. Hughes
Chief Executive Officer
(Principal Executive Officer)
Date:November 7, 2017By:/s/ Collin L. Cochrane
Collin L. Cochrane
Chief Financial Officer
(Principal Financial and Accounting Officer)

EXHIBIT INDEX
Christopher J. Abate
Exhibit
Number		ExhibitChristopher 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 6, 2023By:/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
101Date:November 6, 2023
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)
116
* Indicates exhibits that include management contracts or compensatory plan or arrangements.

105