false2022Q3000093023612/31P6M0.0956823http://fasb.org/us-gaap/2022#AccountsPayableAndAccruedLiabilitiesCurrentAndNoncurrenthttp://fasb.org/us-gaap/2022#OtherAssets

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, 20172022


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
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 share77,114,790 113,349,651 shares outstanding as of November 3, 20172, 2022




REDWOOD TRUST, INC.
20172022 FORM 10-Q REPORT
TABLE OF CONTENTS
 
Page
PART I —
FINANCIAL INFORMATION
Item 1.
5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172022 and 20162021 (Unaudited)
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. Operating22. General and Administrative Expenses, Loan Acquisition Costs, and Other 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, 2022December 31, 2021
ASSETS (1)
Residential loans, held-for-sale, at fair value$834,262 $1,845,282 
Residential loans, held-for-investment, at fair value4,918,294 5,747,150 
Business purpose loans, held-for-sale, at fair value337,238 358,309 
Business purpose loans, held-for-investment, at fair value4,919,980 4,432,680 
Consolidated Agency multifamily loans, at fair value427,458 473,514 
Real estate securities, at fair value259,212 377,411 
Home equity investments340,437 192,740 
Other investments412,762 449,229 
Cash and cash equivalents297,092 450,485 
Restricted cash71,996 80,999 
Goodwill23,373 — 
Intangible assets44,130 41,561 
Derivative assets65,213 26,467 
Other assets194,500 231,117 
Total Assets$13,145,947 $14,706,944 
LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net$2,110,279 $2,177,362 
Derivative liabilities6,782 3,317 
Accrued expenses and other liabilities201,125 245,788 
Asset-backed securities issued (includes $7,564,312 and $8,843,147 at fair value), net8,139,293 9,253,557 
Long-term debt, net1,534,226 1,640,833 
Total liabilities11,991,705 13,320,857 
Commitments and Contingencies (see Note 17)
Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 113,343,014 and 114,892,309 issued and outstanding1,133 1,149 
Additional paid-in capital2,345,152 2,316,799 
Accumulated other comprehensive loss(64,935)(8,927)
Cumulative earnings1,197,428 1,316,890 
Cumulative distributions to stockholders(2,324,536)(2,239,824)
Total equity1,154,242 1,386,087 
Total Liabilities and Equity$13,145,947 $14,706,944 
(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, 2022 and December 31, 2021, assets of consolidated VIEs totaled $9,449,163 and $10,661,081, respectively. At September 30, 2022 and December 31, 2021, liabilities of consolidated VIEs totaled $8,448,479 and $9,619,347, 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)2022202120222021
Interest Income
Residential loans$61,002 $53,993 $191,252 $146,081 
Business purpose loans95,197 67,129 270,430 201,640 
Consolidated Agency multifamily loans4,762 4,846 14,247 14,492 
Real estate securities6,989 14,242 30,772 33,184 
Other interest income9,712 5,512 27,816 17,325 
Total interest income177,662 145,722 534,517 412,722 
Interest Expense
Short-term debt(23,944)(11,826)(49,093)(30,794)
Asset-backed securities issued(90,910)(73,732)(285,464)(222,712)
Long-term debt(27,873)(18,196)(71,435)(60,865)
Total interest expense(142,727)(103,754)(405,992)(314,371)
Net Interest Income34,935 41,968 128,525 98,351 
Non-interest (Loss) Income
Mortgage banking activities, net16,535 63,163 2,833 200,189 
Investment fair value changes, net(57,697)26,077 (151,789)120,644 
Other income, net4,027 2,388 17,016 8,357 
Realized gains, net— 6,703 2,581 17,803 
Total non-interest (loss) income, net(37,135)98,331 (129,359)346,993 
General and administrative expenses(40,107)(47,692)(106,927)(131,837)
Loan acquisition costs(2,426)(4,621)(10,371)(11,928)
Other expenses(4,261)(4,023)(11,814)(12,104)
Net (Loss) Income before Benefit from (Provision for) Income Taxes(48,994)83,963 (129,946)289,475 
(Provision for) benefit from income taxes(1,417)4,323 10,484 (13,907)
Net (Loss) Income$(50,411)$88,286 $(119,462)$275,568 
Basic (loss) earnings per common share$(0.44)$0.75 $(1.04)$2.36 
Diluted (loss) earnings per common share$(0.44)$0.65 $(1.04)$2.03 
Basic weighted average shares outstanding116,087,890 112,995,847 118,530,172 112,754,691 
Diluted weighted average shares outstanding116,087,890 141,855,471 118,530,172 141,575,385 
(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 INCOME (LOSS)


For the Nine Months Ended September 30, 2017
(In Thousands)Three Months Ended September 30,Nine Months Ended September 30,
(Unaudited)2022202120222021
Net (Loss) Income$(50,411)$88,286 $(119,462)$275,568 
Other comprehensive (loss) income:
Net unrealized (loss) gain on available-for-sale securities(8,731)(2,658)(60,013)19,552 
Reclassification of unrealized loss (gain) on available-for-sale securities to net (loss) income544 (6,200)918 (16,495)
Reclassification of unrealized loss on interest rate agreements to net (loss) income1,040 1,041 3,087 3,087 
Total other comprehensive (loss) income(7,147)(7,817)(56,008)6,144 
Total Comprehensive (Loss) Income$(57,558)$80,469 $(175,470)$281,712 

(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 FLOWS
CHANGES IN STOCKHOLDERS' EQUITY
(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)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
(Loss)		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
June 30, 2022116,753,174 $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 plans38,698 — 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)— — — — — (27,699)(27,699)
September 30, 2022113,343,014 $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)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
(Loss)		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
December 31, 2021114,892,309 $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 stock5,232,869 52 67,424 — — — 67,476 
Employee stock purchase and incentive plans346,727 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)— — — — — (84,712)(84,712)
September 30, 2022113,343,014 $1,133 $2,345,152 $(64,935)$1,197,428 $(2,324,536)$1,154,242 

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

5

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)

For the Three Months Ended September 30, 2021
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
June 30, 2021113,052,780 $1,131 $2,287,412 $9,740 $1,184,559 $(2,187,700)$1,295,142 
Net income— — — — 88,286 — 88,286 
Other comprehensive income— — — (7,817)— — (7,817)
Issuance of common stock1,585,709 16 19,810 — — — 19,826 
Direct stock purchase and dividend reinvestment plan— — 153 — — — 153 
Employee stock purchase and incentive plans23,273 — — — — — — 
Non-cash equity award compensation— — 4,897 — — — 4,897 
Common dividends declared ($0.21 per share)— — — — — (24,664)(24,664)
September 30, 2021114,661,762 $1,147 $2,312,272 $1,923 $1,272,845 $(2,212,364)$1,375,823 

For the Nine Months Ended September 30, 2021
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
December 31, 2020112,090,006 $1,121 $2,264,874 $(4,221)$997,277 $(2,148,152)$1,110,899 
Net income— — — — 275,568 — 275,568 
Other comprehensive income— — — 6,144 — — 6,144 
Issuance of common stock2,391,777 24 33,176 — — — 33,200 
Employee stock purchase and incentive plans179,979 2 (536)— — — (534)
Non-cash equity award compensation— — 14,758 — — — 14,758 
Common dividends declared ($0.55 per share)— — — — — (64,212)(64,212)
September 30, 2021114,661,762 $1,147 $2,312,272 $1,923 $1,272,845 $(2,212,364)$1,375,823 


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,
20222021
Cash Flows From Operating Activities:
Net (loss) income$(119,462)$275,568 
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net2,041 300 
Depreciation and amortization of non-financial assets12,115 12,674 
Originations of held-for-sale loans(913,477)(960,419)
Purchases of held-for-sale loans(3,734,972)(9,902,028)
Proceeds from sales of held-for-sale loans4,110,949 6,948,264 
Principal payments on held-for-sale loans160,985 49,619 
Net settlements of derivatives158,868 27,412 
Non-cash equity award compensation expense18,505 14,758 
Market valuation adjustments183,487 (292,056)
Realized gains, net(2,581)(17,803)
Net change in:
Accrued interest receivable and other assets56,156 (9,680)
Accrued interest payable and accrued expenses and other liabilities(62,046)73,120 
Net cash used in operating activities(129,432)(3,780,271)
Cash Flows From Investing Activities:
Originations of loan investments(1,377,714)(557,327)
Purchases of loan investments(22,006)(35,713)
Proceeds from sales of loan investments— 9,484 
Principal payments on loan investments1,666,514 1,950,151 
Purchases of real estate securities(15,006)(29,342)
Sales of securities held in consolidated securitization trusts— 8,197 
Proceeds from sales of real estate securities27,471 37,500 
Principal payments on real estate securities26,584 46,904 
Principal repayments from servicer advance investments, net65,772 58,248 
Acquisition of Riverbend, net of cash acquired(40,636)— 
Purchases of HEIs(176,439)(109,174)
Principal payments on HEIs35,187 — 
Other investing activities, net(20,768)(15,915)
Net cash provided by investing activities168,959 1,363,013 
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt4,149,726 9,847,178 
Repayments on short-term debt(5,192,165)(8,443,664)
Proceeds from issuance of asset-backed securities1,420,289 2,822,785 
Repayments on asset-backed securities issued(1,288,294)(1,549,766)
Proceeds from borrowings on long-term debt1,678,805 948,674 
Deferred long-term debt issuance costs paid(17,925)— 
Repayments on long-term debt(873,820)(1,055,475)
Payments on repurchase of common stock(56,496)— 
Taxes paid on equity award distributions(1,571)(957)
Net proceeds from issuance of common stock67,899 20,248 
Dividends paid(84,712)(64,212)
Other financing activities, net(3,659)(6,297)
Net cash (used in) provided by financing activities(201,923)2,518,514 
Net (decrease) increase in cash, cash equivalents and restricted cash(162,396)101,256 
Cash, cash equivalents and restricted cash at beginning of period (1)
531,484 544,450 
Cash, cash equivalents and restricted cash at end of period (1)
$369,088 $645,706 
7


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

(In Thousands)
(Unaudited)		Nine Months Ended September 30,
20222021
Supplemental Cash Flow Information:
Cash paid during the period for:
 Interest$378,691 $298,507 
 Taxes paid3,894 28,092 
Supplemental Noncash Information:
Real estate securities retained from loan securitizations$— $9,375 
Retention of mortgage servicing rights from loan securitizations and sales4,543 7,065 
Transfers from loans held-for-sale to loans held-for-investment2,643,027 3,005,041 
Transfers from loans held-for-investment to loans held-for-sale— 44,922 
Transfers from residential loans to real estate owned4,033 21,655 
Transfers from long-term debt to short-term debt908,627 93,150 
Right-of-use asset obtained in exchange for operating lease liability— 1,135 
Issuance of common stock for 5 Arches acquisition— 13,375 
(1)    Cash, cash equivalents, and restricted cash includes cash and cash equivalents of $297 million and restricted cash of $72 million at September 30, 2022, and includes cash and cash equivalents of $450 million and restricted cash of $81 million at December 31, 2021.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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, business purpose and multifamily assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in 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 portfolios.
Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are generally not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our operating subsidiaries” or “our taxable REIT subsidiaries” or “TRS.”
We sponsor our Sequoia securitization program, which we use forRedwood Trust, Inc. was incorporated in the securitizationState of residential mortgage loans.Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to Sequoia with respect to any time or period generally refer collectively to all“Redwood,” the then“company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated Sequoia securitization entities forsubsidiaries, unless the periods presented. We have also engaged in securitization transactions in order to obtain financing for certain of our securities and commercial loans.context otherwise requires.

9

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 2. Basis of Presentation
The consolidated financial statements presented herein are at September 30, 20172022 and December 31, 2016,2021, and for the three and nine months ended September 30, 20172022 and 2016.2021. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2016.2021. 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, 20172022 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, 20172022 should not be construed as indicative of the results to be expected for the full year.
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 single-family rental and bridge loans ("CAFL") and an entity formed in connection with the securitization of Redwood Choice expanded-prime loans duringhome equity investment contracts ("HEIs"). 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 single-family rental and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, and the underlying HEIs at the consolidated HEI securitization entity are shown under 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, 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, 2022
(Unaudited)
Note 2. Basis of Presentation - (continued)
Acquisitions
Riverbend Funding, LLC
On July 1, 2022, we acquired Riverbend Funding LLC ("Riverbend"), a private mortgage lender for residential transitional and commercial real estate investors. Aggregate consideration for this acquisition included an initial cash payment of approximately $44 million (with a remaining estimated provisional purchase consideration payable subject to reconciliation and final settlement), and a potential earnout component to be paid contingent on Riverbend 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. Based on the terms of the merger agreement, we determined that the earnout component should be accounted for as contingent purchase consideration, which was valued at zero at the acquisition.
We accounted for the acquisition of Riverbend under the acquisition method of accounting pursuant to ASC 805. We performed the purchase price allocation and recorded underlying assets acquired and liabilities assumed based on their estimated fair values using the information available as of each acquisition date, with the excess of the purchase price allocated to intangible assets and goodwill. Through September 30, 2022, there were no significant changes to our purchase price allocations, which are summarized in the following table.
Table 2.1 - Purchase Price Allocation
(In Thousands)Riverbend
Acquisition DateJuly 1, 2022
Purchase price:
Cash$44,126 
Provisional consideration payable477 
Contingent consideration, at fair value— 
Total consideration$44,603 
Allocated to:
Business purpose loans, at fair value$59,748 
Other investments2,443 
Cash and cash equivalents3,490 
Other assets13,306 
Goodwill23,373 
Intangible assets13,300 
Total assets acquired115,660 
Short-term debt, net67,423 
Accrued expenses and other liabilities3,634 
Total liabilities assumed71,057 
Total net assets acquired$44,603 
We recognized $1 million of acquisition costs related to our acquisition of Riverbend during the nine months ended September 30, 2022. These costs primarily related to accounting, consulting, and legal expenses and are included in our General and administrative expenses on our consolidated statements of income (loss).
5 Arches and CoreVest
Refer to Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for information regarding the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations.
11

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 2. Basis of Presentation - (continued)
Intangible Assets and Goodwill
In connection with the acquisition of Riverbend on July 1, 2022, and 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $13 million, $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at September 30, 2022.
Table 2.2 – Intangible Assets – Activity
Intangible Assets at AcquisitionAccumulated Amortization at September 30, 2022Carrying Value at September 30, 2022Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network$56,300 $(19,537)$36,763 7
Broker network18,100 (12,972)5,128 5
Non-compete agreements11,400 (9,567)1,833 3
Tradenames4,400 (3,994)406 3
Developed technology1,800 (1,800)— 2
Loan administration fees on existing loan assets2,600 (2,600)— 1
Total$94,600 $(50,470)$44,130 6
All of our intangible assets are amortized on a straight-line basis. For the three and nine months ended September 30, 2022, we recorded intangible asset amortization expense of $4 million and $11 million, respectively. For the three and nine months ended September 30, 2021, we recorded intangible asset amortization expense of $4 million and $12 million, respectively. Estimated future amortization expense is summarized in the table below.
Table 2.3 – Intangible Asset Amortization Expense by Year
(In Thousands)September 30, 2022
2022 (3 months)$3,238 
202312,430 
20249,413 
20258,426 
20266,695 
2027 and thereafter3,928 
Total Future Intangible Asset Amortization$44,130 

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, 2022.

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. The goodwill was attributed to the expected business synergies and expansion into new business purpose loan markets, as well as access to the knowledgeable and experienced workforce continuing to provide complementary sourcing of assets for the business. We expect $23 million of this goodwill to be deductible for tax purposes. For reporting purposes, we included the intangible assets and goodwill from these acquisitions within our Business Purpose Mortgage Banking segment.





12

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 2. Basis of Presentation - (continued)

Table 2.4 – Goodwill - Activity

(In Thousands)Riverbend
Beginning Balance$— 
Goodwill recognized from acquisition23,373 
Impairment— 
Ending Balance$23,373 

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, 2022, 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 (loss). During the period ended September 30, 2022, 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, 2021. 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, 2021 and should not be taken as indicative of our future consolidated results of operations.

During the period from July 1, 2022 to September 30, 2022, Riverbend had net interest income of $1 million, non-interest income of $0.5 million, and a net loss of $1 million, which included intangible asset amortization expense of 0.6 million.

Table 2.5 – Unaudited Pro Forma Financial Information

Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Supplementary pro forma information:
Net interest income$34,935 $43,174 $132,475 $100,570 
Non-interest (loss) income(37,135)102,436 (121,614)355,456 
Net (loss) income(50,411)89,923 (117,090)278,134 
13

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)


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, 2021 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 Standards Updates ("ASUs")
In January 2017,August 2020, the FASB issued ASU 2017-03, "Accounting Changes2020-06, "Debt - Debt with Conversion and Error Corrections (Topic 250)Other Options (Subtopic 470-20) and InvestmentsDerivatives and Hedging - Contracts in Entity's Own Equity Method and Joint Ventures (Topic 323)(Subtopic 815-40)." This new guidance requires that companies evaluate ASUs that have not been adoptedsimplifies the accounting for convertible debt by reducing the number of accounting models to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted.separately present certain conversion features in equity. This new guidance was effective immediately. We adopted this guidance, as required, in the first quarter of 2017, which did not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This new guidance provides simplifications of the accounting for share-based payment transactions, including related income tax accounting, classification of awards, and classification on the statement of cash flows. In addition, this guidance permits the withholding of employee taxes related to the distribution of equity awards up to the maximum individual employee statutory tax rates. This new guidance is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. In31, 2021. We adopted this guidance in the secondfirst 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 guidance2022, which did not have a material impact on our consolidated financial statements.
Other Recent Accounting Pronouncements
In August 2017,June 2022, the FASB issued ASU 2017-12, "Derivatives2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued to (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and Hedging (Topic 815): Targeted Improvements(3) to Accountingintroduce new disclosure requirements for Hedging Activities." This new guidance amends previous guidanceequity securities subject 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 iscontractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2018.2023, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the accounting and disclosure requirements of ASU 2022-03 and we plan to adopt this new guidance by the required date 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 2017,2022, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Other Costs (Subtopic 310-20).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 shortensfor troubled debt restructurings by creditors that have adopted the amortization periodCECL model and enhance the disclosure requirements for certain callable debt securities purchased atloan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a premiumpublic business entity to disclose current-period gross writeoffs for financing receivables and net investment in leases by requiringyear of origination in the premium to be amortized to the earliest call date.vintage disclosures. This new guidance is effective for fiscal years beginning after December 15, 2018.2022, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In November 2016,March 2022, the FASB issued ASU 2016-18, "Statement2022-01, "Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method," which will expand companies' abilities to hedge the benchmark interest rate risk of Cash Flows (Topic 230): Restricted Cash." This new guidance amends previous guidance on howportfolios of financial assets (or beneficial interests) in a fair value hedge. The ASU expands the use of the portfolio layer method (previously referred to classifyas the last-of-layer method) to allow multiple hedges of a single closed portfolio of assets using spot starting, forward starting, and present changesamortizing-notional swaps. The ASU also permits both prepayable and non-prepayable financial assets to be included in restricted cashthe 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 statementclosed portfolio of cash flows.assets as a whole. This new guidance is effective for public business entities 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 for2022, including interim periods within those fiscal years beginning after December 15, 2017.years. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In 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.

14

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)


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

In May 2014,March 2020, 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 deferral2020-04, "Reference Rate Reform (Topic 848): Facilitation of the effective date. Accordingly, the update is effective for us in the first quarterEffects 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).Reference Rate Reform on Financial Reporting." This new guidance provides additional implementation guidance on how an entity should identify the unit of accountingoptional expedients and exceptions for the principal versus agent evaluations.applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In May 2016,January 2021, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers2021-01, "Reference Rate Reform (Topic 606)848): Narrow-Scope Improvements and Practical Expedients,Scope." 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 allowsguidance clarifies that certain public businessoptional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This new guidance is effective for all entities to useas of March 12, 2020 through December 31, 2022. We are currently evaluating the nonpublic business entity effective dates forimpact the adoption of the new revenue standard. Based on our initial evaluation of these new accounting standards, we do not expect that their adoption willthis standard would have a material impact on our consolidated financial statements, as financial instruments are explicitly scoped out ofstatements. Through September 30, 2022, we have not elected to apply the standardsoptional expedients and nearly allexceptions to any of our income is generated from financial instruments. existing contracts, hedging relationships, or other transactions.
We will continue evaluating these new standardshave an established cross-functional group that has evaluated our exposure to LIBOR, reviewed relevant contracts and caution that any changes inhas monitored regulatory updates to assess the potential impact to our business, processes and technology from the ultimate full cessation of LIBOR in 2023, and has established a LIBOR transition plan to facilitate an orderly transition to alternative reference rates. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or additionalliability with LIBOR exposure. At September 30, 2022, our primary LIBOR exposure included the following: $689 million of repo or warehouse debt, $37 million of interest rate swaps, $757 million of bridge loans, and $140 million of trust preferred securities and subordinated notes debt. Since December 31, 2021, certain of our contracts, such as interest rate swaps, have experienced an orderly market transition and we have transitioned a substantial portion of our derivative positions off of LIBOR-benchmarks. Other contracts, such as warehouse debt agreements, require bilateral amendments, many of which we have amended or are currently in the process of amending.
We anticipate most of these facilities will be amended in 2022, with sufficient time remaining to these standards could changeresolve the remainder, which also have fallback provisions for benchmark replacement. In early 2022, we began benchmarking all newly originated bridge loans to the Secured Overnight Financing Rate (“SOFR”), and our initial assessment.existing portfolio of bridge loans are short-dated and we expect the vast majority to mature before the LIBOR cessation date in 2023. Additionally, as a result of legislation that was passed in the state of New York, our trust preferred securities and subordinated notes are expected to convert to SOFR upon the cessation of LIBOR.
Balance Sheet Netting
Certain of our derivatives and short-term debt are subject to master netting arrangements or similar agreements. Under GAAP, in certain circumstances we may elect to present certain financial assets, liabilities and related collateral subject to master netting arrangements in a net position on our consolidated balance sheets. However, we do not report any of these financial assets or liabilities on a net basis, and instead present them on a gross basis on our consolidated balance sheets.
The 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, 20172022 and December 31, 2016.2021.
Table 3.1 – Offsetting of Financial Assets, Liabilities, and Collateral
15
  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, 20172022
(Unaudited)


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

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, 2022 (In Thousands)Financial InstrumentsCash Collateral (Received) Pledged
Assets (2)
Interest rate agreements$24,626 $— $24,626 $(23)$(7,638)$16,965 
TBAs13,568 — 13,568 (529)(12,077)962 
Futures26,275 — 26,275 (2)(10,675)15,598 
Total Assets$64,469 $— $64,469 $(554)$(30,390)$33,525 
Liabilities (2)
Interest rate agreements$(23)$— $(23)$23 $— $— 
TBAs(6,545)— (6,545)529 1,280 (4,736)
Futures(2)— (2)2 — — 
Loan warehouse debt(224,370)— (224,370)224,370 — — 
Total Liabilities$(230,940)$— $(230,940)$224,924 $1,280 $(4,736)
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, 2021 (In Thousands)Financial InstrumentsCash Collateral (Received) Pledged
Assets (2)
Interest rate agreements$18,929 $— $18,929 $(1,251)$(16,046)$1,632 
TBAs2,880 — 2,880 (633)(704)1,543 
Futures25 — 25 (25)— — 
Total Assets$21,834 $— $21,834 $(1,909)$(16,750)$3,175 
Liabilities (2)
Interest rate agreements$(1,251)$— $(1,251)$1,251 $— $— 
TBAs$(658)$— $(658)$633 $15 $(10)
Futures(905)— (905)25 880 — 
Loan warehouse debt(572,720)— (572,720)572,720 — — 
Total Liabilities$(575,534)$— $(575,534)$574,629 $895 $(10)
(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, 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 and TBAs 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.
16
  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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)
For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be aggregated and treated as a single transaction. For certain categories of these instruments, 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, 2017,2022, 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, 2017,2022, we held an 80% ownership interest in, and were responsible for the estimated fair valuemanagement of, our investments in the consolidated Legacy Sequoiaeach 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 a summaryHEI securitization entity formed to invest in HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At September 30, 2022 and December 31, 2021, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 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
17


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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.
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, 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$198,161 $3,237,170 $— $1,482,964 $— $— $— $4,918,295 
Business purpose loans, held-for-investment— — 3,531,229 — — — — 3,531,229 
Consolidated Agency multifamily loans— — — — 427,458 — — 427,458 
Home equity investments139,728 139,728 
Other investments— — — — — 307,723 — 307,723 
Cash and cash equivalents— — — — — 15,923 — 15,923 
Restricted cash92 78 15,889 — — 18,569 3,540 38,168 
Accrued interest receivable226 11,295 17,497 5,247 1,299 720 — 36,284 
Other assets407 — 24,084 2,544 — 7,270 50 34,355 
Total Assets$198,886 $3,248,543 $3,588,699 $1,490,755 $428,757 $350,205 $143,318 $9,449,163 
Short-term debt$— $— $— $— $— $233,104 $— $233,104 
Accrued interest payable224 9,003 11,202 3,630 1,173 348 — 25,580 
Accrued expenses and other liabilities(58)80 1,903 — — 24,223 24,354 50,502 
Asset-backed securities issued197,354 3,013,249 3,179,487 1,249,041 395,411 — 104,751 8,139,293 
Total Liabilities$197,520 $3,022,332 $3,192,592 $1,252,671 $396,584 $257,675 $129,105 $8,448,479 
Value of our investments in VIEs(1)
$1,214 $223,920 $393,015 $236,467 $32,047 $92,530 $14,213 $993,406 
Number of VIEs20 17 19 3 1 3 1 64 

18

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 4. Principles of Consolidation - (continued)

December 31, 2021Legacy
Sequoia		Sequoia
CAFL(1)
Freddie Mac SLST(1)
Freddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Residential loans, held-for-investment$230,455 $3,628,465 $— $1,888,230 $— $— $— $5,747,150 
Business purpose loans, held-for-investment— — 3,766,316 — — — — 3,766,316 
Consolidated Agency multifamily loans— — — — 473,514 — — 473,514 
Other investments— — — — — 384,754 159,553 544,307 
Cash and cash equivalents— — — — — 6,481 — 6,481 
Restricted cash148 5 15,221 — — 25,420 5,292 46,086 
Accrued interest receivable210 10,885 15,737 5,792 1,315 1,462 — 35,401 
Other assets61 — 32,510 2,028 — 7,177 50 41,826 
Total Assets$230,874 $3,639,355 $3,829,784 $1,896,050 $474,829 $425,294 $164,895 $10,661,081 
Short-term debt$— $— $— $— $— $294,447 $— $294,447 
Accrued interest payable99 8,452 11,030 4,055 1,190 192 — 25,018 
Accrued expenses and other liabilities— 5 1,171 — — 28,115 17,034 46,325 
Asset-backed securities issued227,881 3,383,048 3,474,898 1,588,463 441,857 — 137,410 9,253,557 
Total Liabilities$227,980 $3,391,505 $3,487,099 $1,592,518 $443,047 $322,754 $154,444 $9,619,347 
Value of our investments in VIEs(1)
$2,634 $245,417 $339,419 $301,795 $31,657 $102,540 $10,451 $1,033,913 
Number of VIEs20 16 16 3 1 3 1 60 
(1)Value of our investments in VIEs, as presented in this table, represent the fair value of our economic interests in the VIEs only for consolidated VIEs we account for under the CFE election. CAFL includes SFR loan securitizations we account for under the CFE election and two bridge loan securitizations for which we did not make the CFE election. As of September 30, 2022 and December 31, 2021, the fair value of our interests in the CAFL SFR securitizations were $314 million and $302 million, respectively, and the remaining values were associated with our interests in the CAFL Bridge securitizations, for which the ABS issued is carried at amortized historical cost. Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a resecuritization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. As of September 30, 2022 and December 31, 2021, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election were $335 million and $445 million, respectively, with the difference from the tables above representing ABS issued and carried at amortized historical cost.




















19

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents income (loss) from these VIEs for the three and nine months ended September 30, 2022 and 2021.
Table 4.2 – Income (Loss) from Consolidated VIEs
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)

20

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 4. Principles of Consolidation - (continued)
Three Months Ended September 30, 2021
Legacy
Sequoia		SequoiaCAFLFreddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$1,042 $18,867 $48,937 $18,707 $4,846 $3,905 $— $96,304 
Interest expense(641)(15,368)(37,489)(15,774)(4,460)(1,018)— (74,750)
Net interest income401 3,499 11,448 2,933 386 2,887 — 21,554 
Non-interest income
Investment fair value changes, net(247)3,314 2,943 13,849 554 (2,080)47 18,380 
Other income— — 10 — — — — 10 
Total non-interest income, net(247)3,314 2,953 13,849 554 (2,080)47 18,390 
General and administrative expenses— — — — — (60)— (60)
Other expenses— — — — — (149)— (149)
Income (loss) from Consolidated VIEs$154 $6,813 $14,401 $16,782 $940 $598 $47 $39,735 
Nine Months Ended September 30, 2021
Legacy
Sequoia		SequoiaCAFLFreddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentHEITotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$3,559 $48,842 $152,659 $58,372 $14,492 $12,168 $— $290,092 
Interest expense(2,271)(38,848)(118,543)(49,756)(13,294)(3,414)— (226,126)
Net interest income1,288 9,994 34,116 8,616 1,198 8,754 — 63,966 
Non-interest income
Investment fair value changes, net(1,162)13,118 6,354 54,282 11,330 (5,646)47 78,323 
Other income— — 10 — — — — 10 
Total non-interest income, net(1,162)13,118 6,364 54,282 11,330 (5,646)47 78,333 
General and administrative expenses— — — — — (150)— (150)
Other expenses— — — — — (591)— (591)
Income (loss) from Consolidated VIEs$126 $23,112 $40,480 $62,898 $12,528 $2,367 $47 $141,558 
We consolidate the assets and liabilities of certain Sequoia, CAFL and HEI securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia, CAFL and HEI securitization entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity, including rights to direct loss mitigation activities; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia, CAFL and HEI securitization entities in accordance with GAAP.

We consolidate the assets and liabilities of certain Freddie Mac K-Series and SLST securitization trusts resulting from our investment in subordinate securities issued by these trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.
21

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 4. Principles of Consolidation - (continued)
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, 2022, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and 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.
During the three months ended September 30, 2022, we did not call any of our unconsolidated Sequoia entities. During the nine months ended September 30, 2022, we called three of our unconsolidated Sequoia entities, and purchased $102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $0.3 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At September 30, 2022, we held $158 million of loans for sale at fair value that were acquired following the calls.
The following table presents information related to securitization transactions that occurred during the three and nine months ended September 30, 20172022 and 2016.2021.
Table 4.24.3 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
 Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016(In Thousands)2022202120222021
Principal balance of loans transferred $839,264
 $348,537
 $2,223,387
 $693,427
Principal balance of loans transferred$— $— $— $1,231,803 
Trading securities retained, at fair value 24,617
 —
 55,607
 —
Trading securities retained, at fair value— — — 7,774 
AFS securities retained, at fair value 4,416
 1,839
 11,476
 3,673
AFS securities retained, at fair value— — — 1,600 
MSRs recognized —
 1,971
 7,123
 4,102
The following table summarizes the cash flows during the three and nine months ended September 30, 20172022 and 20162021 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.
Table 4.34.4 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Proceeds from new transfers$— $— $— $1,266,063 
MSR fees received737 1,095 2,365 4,038 
Funding of compensating interest, net(11)54 (41)(116)
Cash flows received on retained securities3,096 16,724 20,380 42,117 

22
  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

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 4. Principles of Consolidation - (continued)
The following table presents the key weighted-average assumptions used to measure MSRs andvalue securities retained at the date of securitization for securitizations completed during the three and nine months ended September 30, 20172022 and 2016.2021.
Table 4.44.5 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood

Three Months Ended September 30, 2022Three Months Ended September 30, 2021
At Date of SecuritizationSenior IO SecuritiesSubordinate SecuritiesSenior IO SecuritiesSubordinate Securities
Prepayment ratesN/AN/AN/AN/A
Discount ratesN/AN/AN/AN/A
Credit loss assumptionsN/AN/AN/AN/A
Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
At Date of SecuritizationSenior IO SecuritiesSubordinate SecuritiesSenior IO SecuritiesSubordinate Securities
Prepayment ratesN/AN/A11 11 %
Discount ratesN/AN/A15 %6 %
Credit loss assumptionsN/AN/A0.23 %0.23 %
  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%

The following table presents additional information at September 30, 20172022 and December 31, 2016,2021, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.
Table 4.54.6 – Unconsolidated VIEs Sponsored by Redwood
(In Thousands)September 30, 2022December 31, 2021
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading$28,511 $18,214 
Subordinate securities, classified as AFS78,065 127,542 
Mortgage servicing rights11,915 6,450 
Maximum loss exposure (1)
$118,491 $152,206 
Assets transferred:
Principal balance of loans outstanding$4,146,817 $4,959,234 
Principal balance of loans 30+ days delinquent21,803 30,594 
(1)Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.

23
(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, 2022
(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, 20172022 and December 31, 2016.2021.
Table 4.64.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
September 30, 2022MSRs
Senior
Securities (1)
Subordinate Securities
(Dollars in Thousands)
Fair value at September 30, 2022$11,915 $28,511 $78,065 
Expected life (in years) (2)
7716
Prepayment speed assumption (annual CPR) (2)
8 %11 %8 %
Decrease in fair value from:
10% adverse change$334 $942 $570 
25% adverse change810 2,291 1,132 
Discount rate assumption (2)
11 %12 %8 %
Decrease in fair value from:
100 basis point increase$441 $1,001 $7,714 
200 basis point increase852 1,889 14,345 
Credit loss assumption (2)
N/A0.04 %0.04 %
Decrease in fair value from:
10% higher lossesN/AN/A$190 
25% higher lossesN/AN/A254 
September 30, 2017 MSRs 
Senior
Securities (1)
 Subordinate Securities
December 31, 2021December 31, 2021MSRs
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, 2021Fair value at December 31, 2021$6,450 $18,214 $127,542 
Expected life (in years) (2)
 7
 5
 13
Expected life (in years) (2)
345
Prepayment speed assumption (annual CPR) (2)
 9% 10% 11%
Prepayment speed assumption (annual CPR) (2)
29 %23 %32 %
Decrease in fair value from:      Decrease in fair value from:
10% adverse change $1,694
 $1,575
 $667
10% adverse change$447 $1,130 $531 
25% adverse change 4,278
 3,734
 1,683
25% adverse change1,020 2,596 1,440 
Discount rate assumption (2)
 11% 9% 5%
Discount rate assumption (2)
12 %16 %5 %
Decrease in fair value from:      Decrease in fair value from:
100 basis point increase $2,311
 $1,281
 $25,377
100 basis point increase$152 $426 $4,801 
200 basis point increase 4,453
 2,472
 47,107
200 basis point increase297 829 9,139 
Credit loss assumption (2)
 N/A
 0.25% 0.25%
Credit loss assumption (2)
N/A0.35 %0.35 %
Decrease in fair value from:      Decrease in fair value from:
10% higher losses N/A
 $4
 $1,505
10% higher lossesN/AN/A$1,528 
25% higher losses N/A
 9
 3,764
25% higher lossesN/AN/A3,819 

(1)Senior securities included $29 million and $18 million of interest-only securities at September 30, 2022 and December 31, 2021, respectively.
(2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.


24

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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, 2017,2022 and December 31, 2021, grouped by securityasset type.
Table 4.74.8 – Third-Party Sponsored VIE Summary
(Dollars in Thousands) September 30, 2017
(In Thousands)(In Thousands)September 30, 2022December 31, 2021
Mortgage-Backed Securities  Mortgage-Backed Securities
Senior $181,723
Senior$348 $3,572 
Re-REMIC 39,033
Subordinate 812,260
Subordinate152,288 228,083 
Total Mortgage-Backed SecuritiesTotal Mortgage-Backed Securities152,636 231,655 
Excess MSRExcess MSR7,662 10,400 
Total Investments in Third-Party Sponsored VIEs $1,033,016
Total Investments in Third-Party Sponsored VIEs$160,298 $242,055 
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.




25

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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, 20172022 and December 31, 2016.2021.


Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
September 30, 2022December 31, 2021
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value$834,262 $834,262 $1,845,248 $1,845,248 
Residential loans, held-for-investment, at fair value4,918,294 4,918,294 5,747,150 5,747,150 
Business purpose loans, held-for-sale, at fair value337,238 337,238 358,309 358,309 
Business purpose loans, held-for-investment, at fair value4,919,980 4,919,980 4,432,680 4,432,680 
Consolidated Agency multifamily loans, at fair value427,458 427,458 473,514 473,514 
Real estate securities, at fair value259,212 259,212 377,411 377,411 
Servicer advance investments (1)
274,934 274,934 350,923 350,923 
MSRs (1)
24,796 24,796 12,438 12,438 
Excess MSRs (1)
40,452 40,452 44,231 44,231 
HEIs (1)
340,437 340,437 192,740 192,740 
Other investments (1)
11,174 11,174 12,663 12,663 
Cash and cash equivalents297,092 297,092 450,485 450,485 
Restricted cash71,996 71,996 80,999 80,999 
Derivative assets65,213 65,213 26,467 26,467 
REO (2)
3,683 4,105 36,126 39,272 
Margin receivable (2)
6,683 6,683 7,269 7,269 
Liabilities
Short-term debt (3)
$1,912,694 $1,912,694 $2,177,362 $2,177,362 
Margin payable (4)
30,389 30,389 24,368 24,368 
Guarantee obligations (4)
6,532 5,237 7,459 7,133 
HEI securitization non-controlling interest24,355 24,355 17,035 17,035 
Derivative liabilities6,782 6,782 3,317 3,317 
ABS issued, net
At fair value7,564,312 7,564,312 8,843,147 8,843,147 
At amortized cost574,981 541,773 410,410 410,471 
Other long-term debt, net (5)
868,851 858,810 988,483 989,570 
Convertible notes, net (5)
724,205 651,888 513,629 537,300 
Trust preferred securities and subordinated notes, net (5)
138,755 76,725 138,721 97,650 
(1)These investments are included in Other investments on our consolidated balance sheets.
(2)These assets are included in Other assets on our consolidated balance sheets.
(3)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, 2022, we elected the fair value option for zero and $5 million of securities, respectively, $0.34 billion and $3.60 billion of residential loans (principal balance), respectively, and $630 million and $2.47 billion of business purpose loans (principal balance), respectively. Additionally, during the three and nine months ended September 30, 2022, we elected the fair value option for $80 million and $176 million of HEIs, respectively, and zero and $8 million of Other Investments, respectively. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities, fixed-rate securities rated investment grade or higher and HEIs.
26
  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, 20172022
(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, 20172022 and December 31, 2016,2021, as well as the fair value hierarchy of the valuation inputs used to measure fair value.
Table 5.2 – Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2022Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$5,752,524 $— $— $5,752,524 
Business purpose loans5,257,218 — — 5,257,218 
Consolidated Agency multifamily loans427,458 — — 427,458 
Real estate securities259,212 — — 259,212 
Servicer advance investments274,934 — — 274,934 
MSRs24,796 — — 24,796 
Excess MSRs40,452 — — 40,452 
HEIs340,437 — — 340,437 
Other investments11,174 — — 11,174 
Derivative assets65,213 39,843 24,626 744 
Liabilities
HEI securitization non-controlling interest$24,355 $— $— $24,355 
Derivative liabilities6,782 6,547 23 212 
ABS issued7,564,312 — — 7,564,312 
September 30, 2017 
Carrying
Value
 Fair Value Measurements Using
December 31, 2021December 31, 2021Carrying
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$7,592,398 $— $— $7,592,398 
Trading securities 820,134
 —
 —
 820,134
Available-for-sale securities 536,138
 —
 —
 536,138
Business purpose loansBusiness purpose loans4,790,989 — — 4,790,989 
Consolidated Agency multifamily loansConsolidated Agency multifamily loans473,514 — — 473,514 
Real estate securitiesReal estate securities377,411 — — 377,411 
Servicer advance investmentsServicer advance investments350,923 — — 350,923 
MSRsMSRs12,438 — — 12,438 
Excess MSRsExcess MSRs44,231 — — 44,231 
HEIsHEIs192,740 — — 192,740 
Other investmentsOther investments17,574 — — 17,574 
Derivative assets 11,948
 3,010
 3,942
 4,996
Derivative assets26,467 2,906 18,928 4,633 
MSRs 62,928
 —
 —
 62,928
Pledged collateral 42,933
 42,933
 —
 —
FHLBC stock 43,393
 —
 43,393
 —
FHLBC stock10 — 10 — 
Guarantee asset 3,049
 —
 —
 3,049
        
Liabilities 

      Liabilities
HEI securitization non-controlling interestHEI securitization non-controlling interest$17,035 $— $— $17,035 
Derivative liabilities $65,238
 $4,369
 $57,994
 $2,875
Derivative liabilities3,317 1,563 1,251 503 
ABS issued 944,288
 —
 —
 944,288
ABS issued8,843,147 — — 8,843,147 
27
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, 20172022
(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, 2017.2022.
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		Servicer Advance InvestmentsExcess MSRsHEIsMSRs 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, 2021		Beginning balance -
December 31, 2021		$7,592,398 $4,790,989 $473,514 $170,619 $206,792 $350,923 $44,231 $192,740 $25,101 
Acquisitions 3,791,471
 444,073
 31,654
 7,957
 —
 —
 286,898
Acquisitions3,585,882 181,814 — 5,006 10,000 — — 176,439 8,293 
OriginationsOriginations— 2,291,192 — — — — — — — 
Sales (3,147,707) (87,092) (60,801) (52,966) —
 —
 —
Sales(3,702,359)(414,998)— (27,471)— — — — (3,044)
Principal paydowns (405,888) (13,219) (42,325) —
 —
 —
 (146,358)Principal paydowns(734,577)(1,086,983)(5,936)(1,202)(25,381)(65,772)— (35,187)(137)
Gains (losses) in net income, net 62,290
 30,685
 24,011
 (10,589) (1,043) 33,686
 30,286
Gains (losses) in net income (loss), netGains (losses) in net income (loss), net(985,958)(503,832)(40,120)(30,019)12,560 (10,217)(3,779)6,445 9,336 
Unrealized losses in OCI, net —
 —
 10,847
 —
 —
 —
 —
Unrealized losses in OCI, net— — — — (61,692)— — — — 
Other settlements, net (2)
 (3,178) —
 —
 —
 —
 (31,079) —
Ending Balance -
September 30, 2017
 $4,183,833
 $820,134
 $536,138
 $62,928
 $3,049
 $2,121
 $944,288
Other settlements, net (1)
Other settlements, net (1)
(2,862)(964)— — — — — — (3,579)
Ending balance -
September 30, 2022		Ending balance -
September 30, 2022		$5,752,524 $5,257,218 $427,458 $116,933 $142,279 $274,934 $40,452 $340,437 $35,970 
(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, 2021$4,130 $17,035 $8,843,147 
Acquisitions— — 1,205,289 
Principal paydowns— — (1,242,859)
Gains (losses) in net income (loss), net(53,962)7,320 (1,241,265)
Other settlements, net (1)
50,364 — — 
Ending balance - September 30, 2022$532 $24,355 $7,564,312 
(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 single-family rental business purpose loans, and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.
(2)     For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments and interest rate lock commitments, are presented on a net basis.


28

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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, 20172022 and 2016.2021. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 20172022 and 20162021 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, 20172022 and 20162021 Included in Net Income (Loss)
Included in Net Income (Loss)
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Assets
Residential loans at Redwood$(28,762)$6,553 $(42,952)$9,371 
Business purpose loans(10,967)18,810 (39,019)19,829 
Net investments in consolidated Sequoia entities (1)
(11,264)2,885 (22,467)11,779 
Net investments in consolidated Freddie Mac SLST entities (1)
(41,969)13,781 (75,043)54,006 
Net investments in consolidated Freddie Mac K-Series entities (1)
316 555 390 11,330 
Net investments in consolidated CAFL SFR entities (1)
(6,585)2,943 (24,365)5,500 
Net investment in consolidated HEI securitization entity (1)
(1,652)47 11,348 129 
Trading securities(12,668)1,547 (34,104)3,824 
Servicer advance investments(3,905)(2,079)(10,218)(3,179)
MSRs1,653 (235)9,118 (49)
Excess MSRs(351)(803)(3,779)(5,233)
HEIs at Redwood(4,903)(41)(2,272)21 
Loan purchase and interest rate lock commitments723 9,021 744 9,261 
Liabilities
HEI securitization non-controlling interest$1,068 $(83)$(7,320)$(83)
Loan purchase commitments(212)(2,570)(212)(2,550)
  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 (loss) related to securitized loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at September 30, 2022 and 2021, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under CFE election, excluding REO.
The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2017.2022. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance sheetsheets at September 30, 2017.2022.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 20172022
Gain (Loss) for
September 30, 2022Carrying
Value		Fair Value Measurements UsingThree Months EndedNine Months Ended
(In Thousands)Level 1Level 2Level 3September 30, 2022September 30, 2022
Assets
Strategic investments17,350 — — 17,350 (25)10,000 
29
          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, 20172022
(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, 20172022 and 2016.2021.
Table 5.6 – Market Valuation Gains and Losses, Net
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value$(20,060)$9,045 $(71,776)$57,145 
Residential loan purchase commitments(2,716)18,817 (53,236)18,351 
Single-family rental loans held-for-sale, at fair value(19,325)19,205 (83,827)54,675 
Single-family rental loan interest rate lock commitments19 (744)(666)— 
Bridge loans(9)3,433 2,242 6,702 
Trading securities (1)
148 32 4,249 (342)
Risk management derivatives, net48,363 3,539 164,137 38,117 
Total mortgage banking activities, net (2)
$6,420 $53,327 $(38,877)$174,648 
Investment Fair Value Changes, Net
Residential loans held-for-sale, at fair value (called Sequoia loans)$(6,614)$816 $(18,876)$2,423 
Bridge loans held-for-investment2,482 900 (9,220)4,142 
Trading securities(12,668)1,546 (34,268)25,067 
Servicer advance investments(3,905)(2,079)(10,217)(3,179)
Excess MSRs(351)(803)(3,779)(5,233)
Net investments in Legacy Sequoia entities (3)
(328)(247)(1,378)(1,162)
Net investments in Sequoia entities (3)
(10,936)3,314 (20,644)13,118 
Net investments in Freddie Mac SLST entities (3)
(41,892)13,849 (74,796)54,282 
Net investment in Freddie Mac K-Series entity (3)
316 554 390 11,330 
Net investments in CAFL SFR entities (3)
(6,585)2,943 (24,365)6,354 
Net investment in HEI securitization entity (3)
(584)47 4,028 47 
HEIs at Redwood(4,774)5,622 (1,986)13,017 
Other investments1,445 (385)12,028 50 
Risk management derivatives, net27,241 — 33,609 — 
Credit (losses) recoveries on AFS securities(544)— (2,315)388 
Total investment fair value changes, net$(57,697)$26,077 $(151,789)$120,644 
Other Income
MSRs$1,236 $(989)$8,031 $(3,236)
Other(852)— (852)— 
Total other income (4)
$384 $(989)$7,179 $(3,236)
Total Market Valuation Gains (Losses), Net$(50,893)$78,415 $(183,487)$292,056 
(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the market risks associated with our residential mortgage banking operations.
(2)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases, and other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes.
(3)Includes changes in fair value of the residential loans held-for-investment, securitized HEIs, REO and the ABS issued at the entities, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election.
(4)Other income presented above does not include net MSR fee income or provisions for repurchases of MSRs, as these amounts do not represent market valuation adjustments.
30
  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, 20172022
(Unaudited)


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


At September 30, 2017,2022, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2016. 2021.
The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments
September 30, 2022Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average(1)
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans$718,347 Whole loan spread to swap rate201 -400 bps202 bps
Called loan dollar price$92 -$92 $92 
Jumbo loans committed to sell115,883 Whole loan committed sales price$96 -$102 $98 
Loans held by Legacy Sequoia (2)
198,160 Liability priceN/AN/A
Loans held by Sequoia (2)
3,237,170 Liability priceN/AN/A
Loans held by Freddie Mac SLST (2)
1,482,964 Liability priceN/AN/A
Business purpose loans:
Single-family rental loans281,105 Senior credit spread210 -210 bps210 bps
Subordinate credit spread275 -1,025 bps458 bps
Senior credit support36 -36 %36 %
IO discount rate8 -9 %8 %
Prepayment rate (annual CPR)3 -3 %3 %
Whole loan dollar price$84 -$99 $86 
Single-family rental loans held by CAFL (2)
3,018,994 Liability priceN/AN/A
Bridge loans1,957,119 Whole loan discount rate5 -15 %9 %
Senior credit spread285 -285 bps285 bps
Subordinate credit spread345 -1,200 %680 %
Senior credit support43 -43 %43 %
Prepayment rate (annual CPR)— -— %— %
Multifamily loans held by Freddie Mac K-Series (2)
427,458 Liability priceN/AN/A
Trading and AFS securities259,212 Discount rate5 -18 %10 %
Prepayment rate (annual CPR)6 -65 %12 %
Default rate— -12 %0.4 %
Loss severity— -50 %25 %
CRT dollar price$73 -$93 $85 
Servicer advance investments274,934 Discount rate2 -5 %4 %
Prepayment rate (annual CPR)14 -30 %14 %
Expected remaining life (3)
5-5yrs5yrs
Mortgage servicing income— -18 bps7 bps
MSRs24,796 Discount rate11 -69 %11 %
Prepayment rate (annual CPR)4 -28 %8 %
Per loan annual cost to service$93 -$93 $93 
31
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, 20172022
(Unaudited)


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

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
September 30, 2022Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average (1)
Assets (continued)
Excess MSRs40,452 Discount rate13 -19 %18 %
Prepayment rate (annual CPR)10 -100 %18 %
Excess mortgage servicing income8 -19 bps11 bps
HEIs200,709 Discount rate10 -10 %10 %
Prepayment rate (annual CPR)1 -23 %16 %
Home price appreciation(7)-4 %3 %
HEIs held by HEI securitization entity139,728 Liability priceN/AN/AN/A
Residential loan purchase commitments, net531 Whole loan spread to swap rate201 -201 bps201 bps
Pull-through rate26 -100 %78 %
Committed sales price$99 -$102 $100 
Liabilities
ABS issued (2):
At consolidated Sequoia entities3,210,603 Discount rate4 -18 %6 %
Prepayment rate (annual CPR)5 -24 %13 %
Default rate— -33 %1 %
Loss severity25 -50 %32 %
At consolidated CAFL SFR entities (4)
2,703,223 Discount rate0.3 -16 %6 %
Prepayment rate (annual CPR)— -3 %0.2 %
Default rate4 -21 %6 %
Loss severity30 -40 %30 %
At consolidated Freddie Mac SLST entities1,150,323 Discount rate5 -8 %6 %
Prepayment rate (annual CPR)6 -8 %6 %
Default rate13 -14 %14 %
Loss severity35 -35 %35 %
At consolidated Freddie Mac K-Series entities (4)
395,411 Discount rate3 -9 %5 %
At consolidated HEI securitization entity (4)
104,751 Discount rate9 -15 %10 %
Prepayment rate (annual CPR)20 -20 %20 %
Home price appreciation(7)-4 %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)The fair value of the loans and HEIs 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, 2022, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was $224 million, $314 million, $335 million, $32 million, and $14 million, respectively.
(3)Represents the estimated average duration of outstanding servicer advances at a given point in time (not taking into account new advances made with respect to the pool).
(4)As a market convention, certain securities are priced to a no-loss yield and therefore do not include default and loss severity assumptions.
32


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(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, 2021 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 start-up 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, 2022, 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 $10 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, 20172022 and December 31, 2016.2021.
Table 6.1 – Classifications and Carrying Values of Residential Loans
September 30, 2022LegacyFreddie Mac
(In Thousands)RedwoodSequoiaSequoiaSLSTTotal
Held-for-sale at fair value$834,262 $— $— $— $834,262 
Held-for-investment at fair value— 198,160 3,237,170 1,482,964 4,918,294 
Total Residential Loans$834,262 $198,160 $3,237,170 $1,482,964 $5,752,556 
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, 2021LegacyFreddie Mac
(In Thousands)RedwoodSequoiaSequoiaSLSTTotal
Held-for-sale at fair value$1,845,282 $— $— $— $1,845,282 
Held-for-investment at fair value— 230,455 3,628,465 1,888,230 5,747,150 
Total Residential Loans$1,845,282 $230,455 $3,628,465 $1,888,230 $7,592,432 
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, 2017,2022, we owned mortgage servicing rights associated with $2.41 billion$853 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.

33

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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, 2022 and December 31, 2021.
Table 6.2 – Characteristics of Residential Loans Held-for-Sale
(Dollars in Thousands)September 30, 2022December 31, 2021
Number of loans1,054 2,196 
Unpaid principal balance$874,412 $1,813,865 
Fair value of loans$834,262 $1,845,282 
Market value of loans pledged as collateral under short-term borrowing agreements$828,192 $1,838,797 
Weighted average coupon4.99 %3.27 %
Delinquency information
Number of loans with 90+ day delinquencies1 3 
Unpaid principal balance of loans with 90+ day delinquencies$209 $2,923 
Fair value of loans with 90+ day delinquencies$170 $2,304 
Number of loans in foreclosure— — 
The following table provides the activity of residential loans held-for-sale during the three and nine months ended September 30, 2017, we purchased $1.43 billion2022 and $3.72 billion (principal balance)2021.
Table 6.3 – Activity of Residential Loans Held-for-Sale
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Principal balance of loans acquired (1)
$336,698 $3,167,186 $3,597,339 $9,747,867 
Principal balance of loans sold662,302 2,360,862 3,727,993 6,787,490 
Principal balance of loans transferred to HFI— 448,878 687,192 1,623,000 
Net market valuation gains (losses) recorded (2)
(26,674)9,861 (90,652)59,568 
(1)For the three and nine months ended September 30, 2022, includes zero and $102 million of loans respectively, for which we elected the fair value option,acquired through calls of zero and we sold $1.05 billion and $3.08 billion (principal balance) of loans, respectively, for which we recorded netthree seasoned Sequoia securitizations, respectively.
(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.income (loss).
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.

34

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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, 20172022 and December 31, 2016, the unpaid principal balance2021.
Table 6.4 – Characteristics of Residential Loans Held-for-Investment
September 30, 2022LegacyFreddie Mac
(Dollars in Thousands)SequoiaSequoiaSLST
Number of loans1,372 4,666 11,054 
Unpaid principal balance$218,298 $3,902,938 $1,753,301 
Fair value of loans$198,160 $3,237,170 $1,482,964 
Weighted average coupon3.23 %3.25 %4.50 %
Delinquency information
Number of loans with 90+ day delinquencies (1)
33 13 1,295 
Unpaid principal balance of loans with 90+ day delinquencies$5,532 $11,404 $223,260 
Fair value of loans with 90+ day delinquencies (2)
N/AN/AN/A
Number of loans in foreclosure16 6 332 
Unpaid principal balance of loans in foreclosure$1,852 $5,928 $56,755 
December 31, 2021LegacyFreddie Mac
(Dollars in Thousands)SequoiaSequoiaSLST
Number of loans1,583 4,300 11,986 
Unpaid principal balance$264,057 $3,605,469 $1,932,241 
Fair value of loans$230,455 $3,628,465 $1,888,230 
Weighted average coupon1.87 %3.39 %4.51 %
Delinquency information
Number of loans with 90+ day delinquencies (1)
32 18 1,208 
Unpaid principal balance of loans with 90+ day delinquencies$7,482 $15,124 $212,961 
Fair value of loans with 90+ day delinquencies (2)
N/AN/AN/A
Number of loans in foreclosure10 2 241 
Unpaid principal balance of loans in foreclosure$2,188 $1,624 $43,637 
(1)For loans held at consolidated Legacy Sequoia entities, delinquentthe number of loans greater than 90 days delinquent includes loans in foreclosure.
(2)The fair value of the loans held by consolidated entities was $14 millionbased 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.


35

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 6. Residential Loans - (continued)
For loans held at our consolidated Legacy Sequoia, Sequoia, and $19 million, respectively,Freddie Mac SLST entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines, and are recorded in Investment fair value changes, net on our consolidated statements of income (loss). The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.
Table 6.5 – Activity of Residential Loans Held-for-Investment at Consolidated Entities
Three Months Ended September 30, 2022Three Months Ended September 30, 2021
LegacyFreddie MacLegacyFreddie Mac
(In Thousands)SequoiaSequoiaSLSTSequoiaSequoiaSLST
Fair value of loans transferred from HFS to HFI (1)
N/A$— N/AN/A$464,189 N/A
Net market valuation gains (losses) recorded5,182 (202,825)(104,040)(2,580)(11,663)(13,836)
Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
LegacyFreddie MacLegacyFreddie Mac
(In Thousands)SequoiaSequoiaSLSTSequoiaSequoiaSLST
Fair value of loans transferred from HFS to HFI (1)
N/A$684,491 N/AN/A$1,669,683 N/A
Net market valuation gains (losses) recorded12,286 (685,042)(224,543)9,896 (27,076)5,177 
(1)Represents the unpaid principal balancetransfer of loans from held-for-sale to held-for-investment associated with Sequoia securitizations.
REO
See Note 13 for detail on residential loans transferred to REO during 2022.

Note 7. Business Purpose Loans
We originate and invest in foreclosure was $12 millionbusiness purpose loans, including single-family rental ("SFR") loans and $11 million, respectively. Duringbridge 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, 2022 and December 31, 2021.
Table 7.1 – Classifications and Carrying Values of Business Purpose Loans
September 30, 2022Single-Family RentalBridge
(In Thousands)RedwoodCAFLRedwoodCAFLTotal
Held-for-sale at fair value$281,105 — $56,133 $— $337,238 
Held-for-investment at fair value— 3,018,994 1,388,750 512,236 4,919,980 
Total Business Purpose Loans$281,105 $3,018,994 $1,444,883 $512,236 $5,257,218 
December 31, 2021Single-Family RentalBridge
(In Thousands)RedwoodCAFLRedwoodCAFLTotal
Held-for-sale at fair value$358,309 $— $— $— $358,309 
Held-for-investment at fair value— 3,488,074 666,364 278,242 4,432,680 
Total Business Purpose Loans$358,309 $3,488,074 $666,364 $278,242 $4,790,989 

36

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 7. Business Purpose Loans - (continued)
Nearly all of the outstanding SFR loans at September 30, 2022 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with 2% having original maturities of 30 years. The outstanding bridge loans held-for-investment at September 30, 2022 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of 39% one-month LIBOR-indexed adjustable-rate loans, 48% one-month SOFR-indexed adjustable-rate loans, and 13% fixed-rate loans.
At September 30, 2022, we had commitments to fund bridge loans of $990 million. 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, 2017, we recorded2022 and 2021.
Table 7.2 – Activity of Business Purpose Loans at Redwood
Three Months Ended 
 September 30, 2022		Three Months Ended 
 September 30, 2021
(In Thousands)SFR at RedwoodBridge at RedwoodSFR at RedwoodBridge at Redwood
Principal balance of loans originated$99,281 $470,425 $392,620 $208,938 
Principal balance of loans acquired (1)
— 59,977 2,463 35,713 
Principal balance of loans sold to third parties37,202 48,279 — 253 
Fair value of loans transferred (2)
266,181 77,362 332,670 276,354 
Mortgage banking activities income (loss) recorded (4)
(19,325)(110)19,205 3,691 
Investment fair value changes recorded (5)
— (679)— 900 
Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
(In Thousands)SFR at RedwoodBridge at RedwoodSFR at RedwoodBridge at Redwood
Principal balance of loans originated$865,253 $1,424,604 $957,935 $557,327 
Principal balance of loans acquired (1)
100,349 81,983 2,463 35,713 
Principal balance of loans sold to third parties368,704 48,279 — 9,484 
Fair value of loans transferred (2)
561,218 465,966 799,375 276,354 
Fair value of loans transferred from HFI to HFS (3)
— — 44,922 N/A
Mortgage banking activities income (loss) recorded (4)
(83,827)1,129 54,675 5,212 
Investment fair value changes recorded (5)
— (6,747)— 4,142 
(1)Bridge at Redwood for the three and nine months ended September 30, 2022, includes $60 million of loans acquired as part of the Riverbend acquisition.
(2)For SFR at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL SFR securitizations. For Bridge at Redwood, represents the transfer of bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their securitization.
(3)Represents the transfer of single-family rental loans from held-for-investment to held-for-sale associated with the call of a consolidated CAFL securitization during the second quarter of 2021.
(4)Represents net market valuation gainschanges from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three and nine months ended September 30, 2022, we recorded loan origination fee income of $4$10 million and $24$36 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).
(5)Represents net market valuation changes for loans classified as held-for-investment and associated interest-only strip liabilities.


37

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 7. Business Purpose Loans - (continued)
Business Purpose Loans Held-for-Investment at CAFL
    We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. For loans held at our consolidated CAFL entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines, and are recorded through Investment fair value changes, net on our consolidated statements of income. Duringincome (loss). The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2. The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2016,2022 and 2021.
Table 7.3 – Activity of Business Purpose Loans Held-for-Investment at CAFL
Three Months Ended 
 September 30, 2022		Three Months Ended 
 September 30, 2021
(In Thousands)SFR at
CAFL		Bridge at CAFLSFR at
CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded$(108,980)$1,906 $(34,803)$— 
Nine Months Ended 
 September 30, 2022		Nine Months Ended 
 September 30, 2021
(In Thousands)SFR at
CAFL		Bridge at CAFLSFR at
CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded$(419,182)$50 $(96,934)$— 
REO
See Note 13 for detail on business purpose loans transferred to REO during 2022.
38

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 7. Business Purpose Loans - (continued)
Business Purpose Loan Characteristics
The following tables summarize the characteristics of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2022 and December 31, 2021.
Table 7.4 – Characteristics of Business Purpose Loans
September 30, 2022SFR at Redwood
SFR at
CAFL(1)
 Bridge at RedwoodBridge at CAFL
(Dollars in Thousands)
Number of loans202 1,142 1,585 1,994 
Unpaid principal balance$317,556 $3,316,706 $1,452,180 $510,839 
Fair value of loans$281,105 $3,018,994 $1,444,883 $512,236 
Weighted average coupon5.14 %5.22 %8.06 %8.04 %
Weighted average remaining loan term (years)15621
Market value of loans pledged as collateral under short-term debt facilities$279,846 N/A$702,899 N/A
Market value of loans pledged as collateral under long-term debt facilities$— N/A$699,704 N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)
1 15 51 47 
Unpaid principal balance of loans with 90+ day delinquencies$536 $31,296 $33,822 $7,063 
Fair value of loans with 90+ day delinquencies (2)
$528 N/A$31,140 $7,144 
Number of loans in foreclosure (3)
1 7 49 — 
Unpaid principal balance of loans in foreclosure$536 $10,335 $33,471 $— 
Fair value of loans in foreclosure (3)
$528 N/A$30,789 $— 
December 31, 2021SFR at Redwood
SFR at
CAFL(1)
Bridge at RedwoodBridge at CAFL
(Dollars in Thousands)
Number of loans245 1,173 1,134 1,640 
Unpaid principal balance$348,232 $3,340,949 $670,392 $274,617 
Fair value of loans$358,309 $3,488,074 $666,364 $278,242 
Weighted average coupon4.73 %5.17 %6.91 %7.05 %
Weighted average remaining loan term (years)12611
Market value of loans pledged as collateral under short-term debt facilities$75,873 N/A$91,814 N/A
Market value of loans pledged as collateral under long-term debt facilities$244,703 N/A$554,597 N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)
6 18 31 — 
Unpaid principal balance of loans with 90+ day delinquencies$5,384 $41,998 $18,032 $— 
Fair value of loans with 90+ day delinquencies (2)
$4,238 N/A$14,218 $— 
Number of loans in foreclosure (3)
7 9 28 — 
Unpaid principal balance of loans in foreclosure$5,473 $12,648 $18,043 $— 
Fair value of loans in foreclosure (3)
$4,305 N/A$14,257 $— 



39

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(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 recordedown, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.
(2)The number of loans 90-or-more days delinquent includes loans in foreclosure.
(3)May include loans that are less than 90 days delinquent.


Note 8. Consolidated Agency Multifamily Loans
We invest in multifamily subordinate securities issued by a netFreddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of our consolidated Agency multifamily loans at September 30, 2022 and December 31, 2021.
Table 8.1 – Characteristics of Consolidated Agency Multifamily Loans
(Dollars in Thousands)September 30, 2022December 31, 2021
Number of loans28 28 
Unpaid principal balance$449,232 $455,168 
Fair value of loans$427,458 $473,514 
Weighted average coupon4.25 %4.25 %
Weighted average remaining loan term (years)34
Delinquency information
Number of loans with 90+ day delinquencies— — 
Number of loans in foreclosure— — 
The outstanding consolidated Agency multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at September 30, 2022 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of multifamily loans held-for-investment during the three and nine months ended September 30, 2022 and 2021.
Table 8.2 – Activity of Consolidated Agency Multifamily Loans Held-for-Investment
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Net market valuation gains (losses) recorded (1)
$(13,691)$(487)$(40,120)$(3,745)
(1)Net market valuation gain of $9 million and a net market valuation loss of $19 million, respectively,gains (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 financingincome (loss). For 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.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 Note 5.Table 4.2.
At Consolidated Sequoia Choice Entity
40
At

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017, we owned 409 held-for-investment loans at the consolidated Sequoia Choice entity, with an aggregate unpaid balance of $308 million and a fair value of $317 million. There were no loans held at the Sequoia Choice entity 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. At September 30, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.2022
During both the three and nine months ended September 30, 2017, we transferred loans with a fair value of $318 million from held-for-sale to held-for-investment, associated with this transaction. During both the three and nine months ended September 30, 2017, we recorded a net market valuation loss of $1 million on these loans through Investment fair value changes, net on our consolidated statements of income. Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans is based on the estimated fair value of the ABS issued associated with this transaction. The net impact to our income statement associated with our retained economic investment in the Sequoia Choice securitization entity is presented in Note 5.(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, 20172022 and December 31, 2016.2021.
Table 7.19.1 – Fair Values of Real Estate Securities by Type
(In Thousands) September 30, 2017 December 31, 2016(In Thousands)September 30, 2022December 31, 2021
Trading $820,134
 $445,687
Trading$116,933 $170,619 
Available-for-sale 536,138
 572,752
Available-for-sale142,279 206,792 
Total Real Estate Securities $1,356,272
 $1,018,439
Total Real Estate Securities$259,212 $377,411 
Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. 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, 20172022 and December 31, 2016, our2021.
Table 9.2 – Fair Value of Trading Securities by Position
(In Thousands)September 30, 2022December 31, 2021
Senior
Interest-only securities (1)
$28,860 $21,787 
Total Senior28,860 21,787 
Subordinate
RPL securities31,963 65,140 
Multifamily securities8,021 10,549 
Other third-party residential securities48,089 73,143 
Total Subordinate88,073 148,832 
Total Trading Securities$116,933 $170,619 
(1)Includes $25 million and $15 million of Sequoia certificated mortgage servicing rights at September 30, 2022 and December 31, 2021, respectively.
The following table presents the unpaid principal balance of trading securities by position and collateral type at September 30, 2022 and December 31, 2021.
Table 9.3 – Unpaid Principal Balance of Trading Securities by Position
(In Thousands)September 30, 2022December 31, 2021
Senior (1)
$— $— 
Subordinate220,888 235,306 
Total Trading Securities$220,888 $235,306 
(1)Our senior trading securities were comprised ofinclude interest-only securities, for which there is no principal balance, and our subordinatebalance.
41

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(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 million2022 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. During2021.
Table 9.4 – Trading Securities Activity
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Principal balance of securities acquired (1)
$— $10,750 $— $28,380 
Principal balance of securities sold (1)
— 750 12,716 53,561 
Net market valuation gains (losses) recorded (2)
(12,521)1,578 (30,019)24,725 
(1)For the three and nine months ended September 30, 2016, we acquired $652021, excludes $1 million and $198$3 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading,bought and sold $2 million and $238 million, respectively, of such securities.during the same quarter, respectively.
During the three and nine months ended September 30, 2017, we recorded net(2)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)


income (loss).
AFS Securities
The following table presents the fair value of our available-for-sale ("AFS") securities by position and collateral type at September 30, 20172022 and December 31, 2016.2021.
Table 7.39.5 – Fair Value of Available-for-Sale Securities by Position and Collateral Type
(In Thousands)September 30, 2022December 31, 2021
Subordinate
Sequoia securities$78,065 $127,542 
Multifamily securities13,211 22,166 
Other third-party residential securities51,003 57,084 
Total Subordinate142,279 206,792 
Total AFS Securities$142,279 $206,792 
(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 million2022 and $32 million of2021.
Table 9.6 – Available-for-Sale Securities Activity
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Fair value of securities acquired$— $— $10,000 $1,600 
Fair value of securities sold— — — 4,785 
Principal balance of securities called— 11,565 14,486 25,970 
Net unrealized (losses) gains on AFS securities (1)
(8,731)(2,658)(60,013)19,552 
(1)Net unrealized (losses) gains 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.

42

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)

Note 7.9. Real Estate Securities - (continued)



At September 30, 2022, we had $10 million of AFS securities with contractual maturities less than five years, $1 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.
The following table presents the components of carrying value (which equals fair value) of AFS securities at September 30, 20172022 and December 31, 2016.2021.
Table 7.49.7 – Carrying Value of AFS Securities
September 30, 2022
(In Thousands)Total
Principal balance$227,715 
Credit reserve(30,247)
Unamortized discount, net(61,015)
Amortized cost136,453 
Gross unrealized gains19,017 
Gross unrealized losses(10,876)
CECL allowance(2,315)
Carrying Value$142,279 
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
December 31, 2021
(In Thousands)Total
Principal balance$242,852 
Credit reserve(27,555)
Unamortized discount, net(76,023)
Amortized cost139,274 
Gross unrealized gains67,815 
Gross unrealized losses(297)
CECL allowance— 
Carrying Value$206,792 
The following table presents the changes for the three and nine months ended September 30, 2017,2022, 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, 2022		Nine Months Ended 
 September 30, 2022
Credit
Reserve		Unamortized
Discount, Net		Credit
Reserve		Unamortized
Discount, Net
(In Thousands)
Beginning balance$30,619 $61,303 $27,555 $76,023 
Amortization of net discount— (830)— (10,647)
Realized credit recoveries (losses), net170 — 244 — 
Acquisitions— — — — 
Sales, calls, other— — (343)(1,570)
Transfers to (release of) credit reserves, net(542)542 2,791 (2,791)
Ending Balance$30,247 $61,015 $30,247 $61,015 
  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



43

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)

Note 7.9. 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, 20172022 and December 31, 2016.2021.
Table 7.69.9 – Components of Fair Value of Residential AFS Securities in Gross Unrealized Loss Position by Holding Periods
  Less Than 12 Consecutive Months 12 Consecutive Months or Longer
  
Amortized
Cost
 
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Unrealized
Losses
 Fair
Value
(In Thousands)      
September 30, 2017 $10,164
 $(694) $9,470
 $31,001
 $(1,651) $29,350
December 31, 2016 15,772
 (330) 15,442
 60,035
 (2,839) 57,196
Less Than 12 Consecutive Months12 Consecutive Months or Longer
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
(In Thousands)
September 30, 2022$65,585 $(10,685)$1,409 $(191)
December 31, 20216,827 (251)1,554 (46)
At September 30, 2017,2022, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 17381 AFS securities, of which 1435 were in an unrealized loss position and six wereone was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2016,2021, our consolidated balance sheet included 18685 AFS securities, of which 19four 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$11 million at September 30, 2017.2022. 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, 2022, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in expected cashcash 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 impairments2022, 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 $2.3 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, 2017.2022.
Table 7.79.10 – Significant Valuation AssumptionsCredit Quality Indicators
September 30, 2022Subordinate Securities
Default rate0.8%
Loss severity20%

44
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, 20172022
(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.2022.
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, 2022Nine Months Ended September 30, 2022
(In Thousands)
Beginning balance allowance for credit losses$1,771 $— 
Additions to allowance for credit losses on securities for which credit losses were not previously recorded30 1,520 
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period514 795 
Allowance on purchased financial assets with credit deterioration— — 
Reduction to allowance for securities sold during the period— — 
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell— — 
Write-offs charged against allowance— — 
Recoveries of amounts previously written off— — 
Ending balance of allowance for credit losses$2,315 $2,315 
Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 7.99.12 – Gross Realized Gains and Losses on AFS Securities
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Gross realized gains - sales$— $— $— $1,507 
Gross realized gains - calls— 6,389 1,914 15,484 
Gross realized losses - sales— — — — 
Total Realized Gains on Sales and Calls of AFS Securities, net$— $6,389 $1,914 $16,991 
During the nine months ended September 30, 2022, we called three of our unconsolidated Sequoia entities and purchased $102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $0.3 million gain on the securities we owned from these securitizations. The remaining realized gains were from third-party securities we owned that were called during the nine months ended September 30, 2022.

45
  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, 20172022
(Unaudited)






Note 8. 10. Home Equity Investments (HEI)
Home equity investments at September 30, 2022 and December 31, 2021 are summarized in the following table.
Table 10.1 – Home Equity Investments
(In Thousands)September 30, 2022December 31, 2021
HEIs at Redwood$200,709 $33,187 
HEIs held at consolidated HEI securitization entity139,728 159,553 
Total Home Equity Investments$340,437 $192,740 
We purchase home equity investment contracts from third party originators under flow purchase agreements. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property.
At September 30, 2022, we had flow purchase agreements with HEI originators with $149 million of cumulative purchase commitments outstanding. See Note 17 for additional information on these commitments.
As of September 30, 2022, we owned $201 million of HEIs at Redwood and consolidated $140 million of HEIs through the HEI securitization entity. We account for these investments under the fair value option and during the three and nine months ended September 30, 2022, we recorded net market valuation losses of $5 million and losses of $2 million, respectively, related to HEIs owned at Redwood through Investment fair value changes, net on our consolidated statements of income (loss).
We consolidate the HEI securitization in accordance with GAAP and have elected to account for it under the CFE election. During the three and nine months ended September 30, 2022, we recorded net market valuation losses of $1 million and gains of $4 million (including $1 million and $3 million of interest expense), respectively, related to our net investment in the HEI securitization entity through Investment fair value changes, net on our consolidated statements of income (loss).

Note 11. Other Investments
Other investments at September 30, 2022 and December 31, 2021 are summarized in the following table.
Table 11.1 – Components of Other Investments
(In Thousands)September 30, 2022December 31, 2021
Servicer advance investments$274,934 $350,923 
Strategic investments71,607 35,702 
Excess MSRs40,452 44,231 
Mortgage servicing rights24,796 12,438 
Other973 5,935 
Total Other Investments$412,762 $449,229 
Servicer advance investments
We and a third-party co-investor, through two partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor. Refer to Note 10 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding the transactions. At both September 30, 2022 and December 31, 2021, we had cumulatively funded $148 million of total capital to the SA Buyers. See Note 17 for additional detail on these commitments.
46

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 11. Other Investments - (continued)
At September 30, 2022, our servicer advance investments had a carrying value of $275 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $11.68 billion. The outstanding servicer advance receivables associated with this investment were $245 million at September 30, 2022, 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, 2022 and December 31, 2021.
Table 11.2 – Components of Servicer Advance Receivables
(In Thousands)September 30, 2022December 31, 2021
Principal and interest advances$89,816 $94,148 
Escrow advances (taxes and insurance advances)117,971 172,847 
Corporate advances37,394 43,958 
Total Servicer Advance Receivables$245,181 $310,953 
We account for our servicer advance investments at fair value and during the three and nine months ended September 30, 2022, we recorded $5 million and $15 million of interest income, respectively, through Other interest income, and recorded a net market valuation loss of $4 million and loss of $10 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).
Strategic Investments
Strategic investments represent investments we made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At September 30, 2022, we had made a total of 27 investments in companies through RWT Horizons with a total carrying value of $24 million, as well as six corporate-level investments. During the three and 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, which was recorded in Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2022, we recorded losses of $0.3 million and $0.4 million, respectively, in Other income, net from our strategic investments.
Excess MSRs
In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and nine months ended September 30, 2022, we recognized $4 million and $12 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $0.4 million and $4 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss).
Mortgage Servicing Rights
We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The following table 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. During the three and nine months ended September 30, 20172022, we retained zero and 2016.$5 million, respectively, of MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.
Table 8.2 – Activity forAt September 30, 2022 and December 31, 2021, 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 $25 million and $12 million, respectively, and were associated with loans with an aggregate principal balance of $2.22 billion and $2.12 billion, respectively. During the three months ended September 30, 2017, we did not sell any MSRs. During theand nine months ended September 30, 2017,2022, including net market valuation gains and losses on our MSRs, we sold conforming MSRs with a fair valuerecorded net income of $53 million.$3 million and $13 million, respectively, through Other income on our consolidated statements of income (loss) related to our MSRs.

47

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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, 20172022 and December 31, 2016.2021.
Table 9.112.1 – Fair Value and Notional Amount of Derivative Financial Instruments
 September 30, 2017 December 31, 2016September 30, 2022December 31, 2021
 
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$24,626 $459,000 $611 $161,500 
TBAs 2,875
 985,000
 8,300
 850,000
TBAs13,568 565,000 2,880 2,440,000 
Futures 135
 7,500
 —
 —
Interest rate futuresInterest rate futures26,275 681,500 25 9,000 
Swaptions 297
 300,000
 5,121
 345,000
Swaptions— — 18,318 1,660,000 
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 commitments744 87,157 4,633 971,631 
Total Assets $11,948
 $2,604,050
 $36,595
 $2,556,981
Total Assets$65,213 $1,792,657 $26,467 $5,242,131 
        
Liabilities - Cash Flow Hedges        
Interest rate swaps $(45,093) $139,500
 $(44,822) $139,500
Liabilities - Risk Management Derivatives        Liabilities - Risk Management Derivatives
Interest rate swaps (12,901) 1,838,500
 (12,097) 1,101,500
Interest rate swaps$(23)$10,000 $(1,251)$283,100 
TBAs (3,946) 950,000
 (4,681) 510,000
TBAs(6,545)255,000 (658)870,000 
Futures (423) 29,000
 (928) 87,500
Interest rate futuresInterest rate futures(2)300 (905)62,500 
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(212)58,544 (503)404,190 
Total Liabilities $(65,238) $3,640,709
 $(66,329) $2,423,362
Total Liabilities$(6,782)$323,844 $(3,317)$1,619,790 
Total Derivative Financial Instruments, Net $(53,290) $6,244,759
 $(29,734) $4,980,343
Total Derivative Financial Instruments, Net$58,431 $2,116,501 $23,150 $6,861,921 
Risk Management Derivatives
To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At September 30, 2017,2022, we were party to swaps and swaptions with an aggregate notional amount of $2.65 billion,$469 million, TBA agreements sold with an aggregate notional amount of $1.94 billion,$820 million, and financialinterest rate futures contracts with an aggregate notional amount of $37$682 million. At December 31, 2016,2021, we were party to swaps and swaptions with an aggregate notional amount of $2.46$2.10 billion, TBA agreements soldfutures with an aggregate notional amount of $1.36 billion,$72 million and financial futures contractsTBA agreements with an aggregate notional amount of $88 million.$3.31 billion.
DuringFor the three and nine months ended September 30, 2017,2022, risk management derivatives had net market valuation lossesgains of $9$76 million and $36gains of $198 million, respectively. DuringFor the three and nine months ended September 30, 2016,2021, risk management derivatives had net market valuation lossesgains of $5$4 million and $11gains of $38 million, respectively. These marketMarket valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net and MSROther income net on our consolidated statements of income.income (loss).

48

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)

Note 9.12. Derivative Financial Instruments - (continued)


Loan Purchase and Interest Rate Lock Commitments
LPCsLoan purchase commitments ("LPCs") and interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. Net market valuation gains on LPCs were $13 million and $34 million forFor the three and nine months ended September 30, 2017, respectively,2022, LPCs and were $12IRLCs had net market valuation losses of $3 million and $36losses of $54 million, for the three and nine months ended September 30, 2016, respectively. The market valuation gains and lossesrespectively, that 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.
income (loss). For both the three and nine months ended September 30, 2017, changes in the values2021, LPCs and IRLCs had net market valuation gains of designated cash flow hedges were positive $0.3$18 million, and negative $0.4 million, respectively, andthat were recorded in Accumulated other comprehensiveMortgage banking activities, net on our consolidated statements of 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. (loss).
Derivatives Designated as Cash Flow Hedges
For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $44$73 million and $76 million at both September 30, 20172022 and December 31, 2016.2021, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of September 30, 2022, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.
The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 9.212.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges
 Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016(In Thousands)2022202120222021
Net interest expense on cash flows hedges $(1,119) $(1,314) $(3,516) $(4,049)Net interest expense on cash flows hedges$— $— $— $— 
Realized net losses reclassified from other comprehensive income (14) (18) (42) (55)Realized net losses reclassified from other comprehensive income(1,040)(1,041)(3,086)(3,086)
Total Interest Expense $(1,133) $(1,332) $(3,558) $(4,104)Total Interest Expense$(1,040)$(1,041)$(3,086)$(3,086)
Derivative Counterparty Credit Risk
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2016,2021, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, 2017,2022, we assessed this risk as remote and did not record aan associated specific valuation adjustment.
At September 30, 2017,2022, 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.

49

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)

Note 10.13. Other Assets and Liabilities
Other assets at September 30, 20172022 and December 31, 2016,2021 are summarized in the following table.
Table 10.113.1 – Components of Other Assets
(In Thousands)September 30, 2022December 31, 2021
Accrued interest receivable$54,944 $47,515 
Investment receivable50,149 82,781 
Deferred tax asset20,867 20,867 
Operating lease right-of-use assets17,126 18,772 
Income tax receivables13,959 22 
Fixed assets and leasehold improvements (1)
12,411 9,019 
Margin receivable6,683 7,269 
REO3,683 36,126 
Other14,678 8,746 
Total Other Assets$194,500 $231,117 
(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 $22 million and accumulated depreciation of $9 million at September 30, 2022.
(1)Fixed assets and leasehold improvements had a basis of $6 million and accumulated depreciation of $3 million at September 30, 2017.
Accrued expenses and other liabilities at September 30, 20172022 and December 31, 20162021 are summarized in the following table.
Table 10.213.2 – Components of Accrued Expenses and Other Liabilities
(In Thousands)September 30, 2022December 31, 2021
Payable to non-controlling interests$47,487 $42,670 
Accrued interest payable46,938 39,297 
Margin payable30,389 24,368 
Accrued compensation23,488 74,636 
Operating lease liabilities19,533 20,960 
Guarantee obligations6,532 7,459 
Residential loan and MSR repurchase reserve5,754 9,306 
Accrued operating expenses4,956 4,377 
Current accounts payable4,722 8,273 
Bridge loan holdbacks3,930 3,109 
Other7,396 11,333 
Total Accrued Expenses and Other Liabilities$201,125 $245,788 
(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
Refer to Note 12 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional descriptions of our other assets and liabilities.
Margin Receivable and Payable
Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral.
FHLB Stock
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 13 for additional detail. Through September 30, 2022, we had met all margin calls due.

50

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 10.13. Other Assets and Liabilities - (continued)


Guarantee Asset, Pledged Collateral, and Guarantee Obligations
The pledged collateral, guarantee asset, and guarantee obligations presented in the tables above are related to our risk sharing arrangements with Fannie Mae and Freddie Mac. In accordance with these arrangements, we are required to pledge collateral to secure our guarantee obligations. See Note 14 for additional information on our risk sharing arrangements.
Investment Receivable and Unsettled Trades
In accordance with our policy to record purchases and sales of securities on the trade date, if the trade and settlement of a purchase or sale crosses over a quarterly reporting period, we will record an investment receivable for sales and an unsettled trades liability for purchases. 
MSR Holdback Receivable
MSR holdback receivable represents amounts owed to us from third parties related to the sale of MSRs.
REO
The following table summarizes the activity and carrying valuevalues of REO assets held at September 30, 2017 was $3 million, which includes the net effect of $3 million related to transfers into REORedwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities during the nine months ended September 30, 2017, offset by $92022.
Table 13.3 – REO Activity
Nine Months Ended September 30, 2022
(In Thousands) BridgeLegacy SequoiaFreddie Mac SLSTSFR at CAFLTotal
Balance at beginning of period $13,067 $61 $2,028 $20,970 $36,126 
Transfers to REO963 407 2,664 — 4,034 
Liquidations (1)
(14,271)(505)(2,395)(20,970)(38,141)
Changes in fair value, net974 443 247 — 1,664 
Balance at End of Period$733 $406 $2,544 $— $3,683 
(1)For the nine months ended September 30, 2022, REO liquidations resulted in $2 million of REO liquidations, and $3 million of unrealizedrealized gains, resulting from market valuation adjustments. At September 30, 2017 and December 31, 2016, therewhich were 12 and 23 REO properties, respectively, recorded in Investment fair value changes, net on our consolidated balance sheets, allstatements of which were owned at consolidated Legacy Sequoia entities.income (loss).
Accrued Taxes Payable
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, 2017
(Unaudited)



Note 11.14. Short-Term Debt
We enter into repurchase agreements bank("repo"), loan warehouse agreements, and other forms of collateralized (and generallypartially uncommitted) short-term borrowings with several banks and major investment banking firms. At September 30, 2017,2022, 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, 20172022 and December 31, 2016.2021.
Table 11.114.1 – Short-Term Debt
  September 30, 2017
(Dollars in Thousands) Number of Facilities Outstanding Balance Limit Weighted Average Interest Rate Maturity Weighted Average Days Until Maturity
Facilities            
Residential loan warehouse 4
 $438,243
 $1,325,000
 2.80% 12/2017-8/2018 150
Real estate securities repo 8
 549,811
 —
 2.46% 10/2017-12/2017 28
Total Short-Term Debt Facilities 12
 988,054
        
Convertible notes, net N/A
 250,142
 —
 4.63% 4/2018 197
Total Short-Term Debt 
 $1,238,196
        
September 30, 2022
(Dollars in Thousands)Number of FacilitiesOutstanding BalanceLimit
Weighted Average Interest Rate (1)
Maturity (2)
Weighted Average Days Until Maturity
Facilities
Residential loan warehouse9 $748,962 $2,850,000 4.83 %12/2022 - 9/2023150
Business purpose loan warehouse4 775,491 1,750,000 5.67 %3/2023 - 9/2023289
Real estate securities repo
7 124,435 — 3.50 %10/2022 - 12/202232
Total Short-Term Debt Facilities20 1,648,888 
Servicer advance financing1 233,104 290,000 4.94 %11/2023397
Promissory notesN/A30,702 N/A6.58 %N/AN/A
Convertible notes, netN/A197,585 N/A4.75 %8/2023319
Total Short-Term Debt$2,110,279 
51
  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
        
Borrowings under our facilities are generally 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.
During the three months ended June 30, 2017, $288 million principal amount of 4.625% convertible senior notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the accrued interest payable balance on this debt was $5 million. See Note 13 for additional information on our convertible notes.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 11.14. Short-Term Debt - (continued)


December 31, 2021
(Dollars in Thousands)Number of FacilitiesOutstanding BalanceLimit
Weighted Average Interest Rate (1)
MaturityWeighted Average Days Until Maturity
Facilities
Residential loan warehouse7 $1,669,344 $2,900,000 1.87 %1/2022-12/2022153
Business purpose loan warehouse2 138,746 350,000 3.34 %3/2022-7/2022105
Real estate securities repo
4 74,825 — 1.13 %1/2022-3/202233
Total Short-Term Debt Facilities13 1,882,915 
Servicer advance financing1 294,447 350,000 1.90 %11/2022306
Convertible notes, netN/A— 
Total Short-Term Debt$2,177,362 
(1)Borrowings under our facilities generally are uncommitted and charged interest based on a specified margin over 1-month SOFR or 1- or 3-month LIBOR.
(2)Promissory notes payable on demand to lender with 90-day notice. Assumed maturity date at September 30, 2022 is December 30, 2022 for this presentation.
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, 20172022 and $534 million and $363 million, respectively, at December 31, 2016. 2021.
Table 14.2 – Collateral for Short-Term Debt
(In Thousands)September 30, 2022December 31, 2021
Collateral Type
Held-for-sale residential loans$828,192 $1,838,797 
Business purpose loans982,745 167,687 
Real estate securities
On balance sheet60,457 5,823 
Sequoia securitizations (1)
77,470 61,525 
Freddie Mac K-Series securitization (1)
32,047 31,657 
Total real estate securities owned
169,974 99,005 
Restricted cash and other assets4,116 1,962 
Total Collateral for Short-Term Debt Facilities1,985,027 2,107,451 
Cash15,891 6,480 
Restricted cash18,569 25,420 
Servicer advances274,934 310,953 
Total Collateral for Servicer Advance Financing309,394 342,853 
Total Collateral for Short-Term Debt$2,294,421 $2,450,304 
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.
For the three and nine months ended September 30, 2017,2022, the average balancesbalance of our short-term debt facilities were $1.07was $1.64 billion and $0.97$1.65 billion, respectively. At September 30, 20172022 and December 31, 2016,2021, accrued interest payable on our short-term debt facilities was $5 million and $3$2 million, respectively.
52

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 14. Short-Term Debt - (continued)
Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. At September 30, 2022, the accrued interest payable balance on this financing was $0.3 million and the unamortized capitalized commitment costs were $0.1 million.
In connection with our acquisition of Riverbend, we assumed $43 million of promissory notes which 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%. During the three months ended September 30, 2022, we repaid $12 million of principal of these notes.
We also maintain a $10 million committed line of credit with a financial institution that is secured by certain mortgage-backed securities with a fair market value of $6$1 million at September 30, 2017.2022. At both September 30, 20172022 and December 31, 2016,2021, we had no outstanding borrowings on this facility.
During the three and nine months ended September 30, 2022, business purpose loan warehouse facilities with a borrowing limits of $450 million and $900 million, respectively, were reclassified to short-term debt from long-term debt as the maturity of these facilities became less than one year.
During the three months ended September 30, 2022, $199 million principal amount of 4.75% convertible debt and $1 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt as the maturity of the notes was less than one year as of August 2022.
Remaining Maturities of Short-Term Debt
The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt as well as our convertible notes at September 30, 2017.2022.
Table 11.214.3 – Short-Term Debt by Collateral Type and Remaining Maturities
September 30, 2022
(In Thousands)Within 30 days31 to 90 daysOver 90 daysTotal
Collateral Type
Held-for-sale residential loans$— $262,804 $486,158 $748,962 
Business purpose loans— — 775,491 775,491 
Real estate securities72,233 52,202 — 124,435 
Total Secured Short-Term Debt72,233 315,006 1,261,649 1,648,888 
Servicer advance financing— — 233,104 233,104 
Promissory notes— 30,702 — 30,702 
Convertible notes, net— — 197,585 197,585 
Total Short-Term Debt$72,233 $345,708 $1,692,338 $2,110,279 
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, 2022
(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, 2022 and December 31, 2021, along with other selected information, are summarized in the following table.
Table 15.1 – Asset-Backed Securities Issued
September 30, 2022Legacy
Sequoia		Sequoia
CAFL (1)
Freddie Mac SLST (2)
Freddie Mac
K-Series		HEITotal
(Dollars in Thousands)
Certificates with principal balance$213,786 $3,650,411 $3,375,688 $1,344,521 $412,764 $112,380 $9,109,550 
Interest-only certificates170 62,311 134,348 13,930 8,075 — 218,834 
Market valuation adjustments(16,602)(699,473)(330,549)(109,410)(25,428)(7,629)(1,189,091)
ABS Issued, Net$197,354 $3,013,249 $3,179,487 $1,249,041 $395,411 $104,751 $8,139,293 
Range of weighted average interest rates, by series(3)
2.52% to 3.90%2.56% to 4.99%2.34% to 5.93%3.50% to 4.75%3.41 %3.76 %
Stated maturities(3)
2024 - 20362047-20522027-20322028-205920252052
Number of series20 17 19 3 1 1 

December 31, 2021Legacy
Sequoia		Sequoia
CAFL(1)
Freddie Mac SLST (2)
Freddie Mac K-SeriesHEITotal
(Dollars in Thousands)
Certificates with principal balance$259,505 $3,353,073 $3,264,766 $1,535,638 $418,700 $138,792 $8,970,474 
Interest-only certificates619 32,749 193,725 11,714 10,184 — 248,991 
Market valuation adjustments(32,243)(2,774)16,407 41,111 12,973 (1,382)34,092 
ABS Issued, Net$227,881 $3,383,048 $3,474,898 $1,588,463 $441,857 $137,410 $9,253,557 
Range of weighted average interest rates, by series(3)
0.23% to 1.44%2.40% to 5.03%2.64% to 5.24%3.50% to 4.75%3.41 %3.31 %
Stated maturities(3)
2024 - 20362047-20522027-20312028-205920252052 
Number of series20 16 16 3 1 1 
(1)Includes $485 million and $270 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 September 30, 2022 and December 31, 2021, respectively.
(2)Includes $100 million and $145 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 September 30, 2022 and December 31, 2021, respectively.
(3)Certain ABS issued by the Legacy SequoiaCAFL, Freddie Mac SLST, 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, 20172022
(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 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, 2022, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $7 million in total, for a net carrying value of $208 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 $229 million of bridge loans and $19 million of restricted cash and other assets at September 30, 20172022. 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 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, 2022, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $2 million, for a net carrying value of $268 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were collateralized by $283 million of bridge loans and $24 million of restricted cash and other assets at September 30, 2022. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024), unless an amortization event occurs prior to the expiration of the 30-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of the HEI securitization entity formed in connection with the securitization of HEIs, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income. The ABS issued by the HEI securitization entity are subject to an optional redemption in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.
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. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2022, the principal balance of the ABS issued was $100 million, and the debt discount and deferred issuance costs totaled $1 million, for a net carrying value of $99 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued are subject to an optional redemption in July 2022 and in July 2023 the ABS interest rate steps up to 7.75%.

55

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(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, all2022, 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.2022 and December 31, 2021. Interest due on consolidated ABS issued is payable monthly.
Table 15.2 – Accrued Interest Payable on Asset-Backed Securities Issued
(In Thousands)September 30, 2022December 31, 2021
Legacy Sequoia$223 $99 
Sequoia9,003 8,452 
CAFL11,202 11,030 
Freddie Mac SLST (1)
4,026 4,630 
Freddie Mac K-Series1,173 1,190 
Total Accrued Interest Payable on ABS Issued$25,627 $25,401 
(1)Includes accrued interest payable on ABS issued by a re-securitization trust sponsored by Redwood.


56

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 12. Asset-Backed Securities Issued - (continued)


The following table summarizes the carrying value components of the collateral for ABS issued and outstanding at September 30, 2017 and December 31, 2016.
Table 12.2 – Collateral for Asset-Backed Securities Issued
September 30, 2017 
Legacy
Sequoia
 
Sequoia
Choice
 Total
(In Thousands)   
Residential loans $673,134
 $317,303
 $990,437
Restricted cash 147
 —
 147
Accrued interest receivable 898
 1,266
 2,164
REO 3,020
 —
 3,020
Total Collateral for ABS Issued $677,199
 $318,569
 $995,768
December 31, 2016 
Legacy
Sequoia
 Sequoia
Choice		 Total
(In Thousands)   
Residential loans $791,636
 $—
 $791,636
Restricted cash 148
 —
 148
Accrued interest receivable 1,000
 —
 1,000
REO 5,533
 —
 5,533
Total Collateral for ABS Issued $798,317
 $—
 $798,317
Note 13.16. Long-Term Debt

FHLBC Borrowings

In July 2014,The tables below summarize 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 aincluding the facilities that are available to us, the outstanding balances, the weighted average interest rate, of 1.3% and a weighted averagethe 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 billioninformation at September 30, 2017. In addition, cash of $24 million served as collateral for these borrowings at September 30, 2017,2022 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.December 31, 2021.
Table 16.1 – Long-Term Debt
September 30, 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$131,316 $— $131,316 N/A4.21 %9/2024
CAFL
Facility B102,006 (126)101,880 N/A4.21 %2/2025
Facility C71,792 (189)71,603 N/A4.75 %6/2026
Non-Recourse BPL Financing
Facility D565,028 (976)564,052 $750,000 L + 2.51%N/A
Recourse BPL Financing
Facility G— — — 500,000 SOFR + 2.25% - 2.50%9/2024
Total Long-Term Debt Facilities870,142 (1,291)868,851 
Convertible notes
5.625% convertible senior notes150,200 (1,484)148,716 N/A5.625 %7/2024
5.75% exchangeable senior notes172,092 (2,769)169,323 N/A5.75 %10/2025
7.75% convertible senior notes215,000 (6,419)208,581 N/A7.75 %6/2027
Trust preferred securities and subordinated notes139,500 (745)138,755 N/AL + 2.25%7/2037
Total Long-Term Debt$1,546,934 $(12,708)$1,534,226 

57

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 13.16. Long-Term Debt - (continued)



December 31, 2021
(Dollars in Thousands)BorrowingsUnamortized Deferred Issuance Costs / DiscountNet Carrying ValueLimit
Weighted Average Interest Rate (1)
Final Maturity
Facilities
Recourse Subordinate Securities Financing
Facility A$144,385 $(313)$144,072 N/A4.21 %9/2024
CAFL
Facility B102,351 (353)101,998 N/A4.21 %2/2025
Facility C91,707 (376)91,331 N/A4.75 %6/2026
Non-Recourse BPL Financing
Facility D307,215 (507)306,708 $400,000 L + 2.75%N/A
Recourse BPL Financing
Facility E234,349 (123)234,226 450,000 L + 2.21%9/2023
Facility F110,148 — 110,148 450,000 L + 3.35%6/2023
Total Long-Term Debt Facilities990,155 (1,672)988,483 
Convertible notes
4.75% convertible senior notes198,629 (1,836)196,793 N/A4.75 %8/2023
5.625% convertible senior notes150,200 (2,072)148,128 N/A5.625 %7/2024
5.75% exchangeable senior notes172,092 (3,384)168,708 N/A5.75 %10/2025
Trust preferred securities and subordinated notes139,500 (779)138,721 N/AL + 2.25%7/2037
Total Long-Term Debt$1,650,576 $(9,743)$1,640,833 
The following(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table presents maturities ofabove) or 1-month SOFR plus an applicable spread.

Refer to Note 15 to the Consolidated Financial Statements included in our FHLBC borrowings by year at September 30, 2017.
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 QuarterlyAnnual Report on Form 10-Q10-K for the year ended December 31, 2021, for a full description of our long-term debt.
Non-Recourse BPL Financing Facility
During the three months ended March 31, 2022, we amended facility D (see Table 16.1 above) to increase the borrowing limit from $400 million to $600 million. During the three months ended September 30, 2022, we amended facility D to increase the borrowing limit from $600 million to $750 million.
Recourse BPL Financing Facilities
During the three months ended September 30, 2022, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable financing for business purpose bridge loan and single-family rental loans (Facility G in Table 16.1 above). At September 30, 2022, there were no borrowings under this facility. During the heading “Risks Relatingthree months ended September 30, 2022, Facility E was reclassified to short-term debt as the maturity of this facility was less than one year.
During the three months ended June 30, 2022, Facility F was reclassified to short-term debt as the maturity of this facility was less than one year. During the three months ended March 31, 2022, we amended the interest rate for Facilities E and F (see Table 16.1 above) to be indexed to a spread over one-month SOFR compared to a LIBOR-indexed spread.

58

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 16. Long-Term Debt Incurred under Short- and Long-Term Borrowing Facilities.”- (continued)

Convertible Notes
In August 2017,June 2022, we issued $245$215 million principal amount of 4.75%7.75% convertible senior notes due 2023.2027. These convertible notes require semi-annual interest payments at a fixed annual coupon rate of 4.75%7.75% until maturity or conversion, which will be no later than AugustJune 15, 2023.2027. 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$208 million of net proceeds. Including amortization of deferred securitiesdebt issuance costs, the weighted averageeffective interest expense yield on these exchangeablenotes was approximately 8.50% per annum. We may elect to settle conversions either entirely in cash or in a combination of cash and shares of common stock. Upon conversion, the conversion value will be paid in cash up to at least the principal amount of the notes being converted. The initial conversion rate of the notes is approximately 6.3% per annum. At September 30, 2017, these notes were exchangeable at the option of the holder at an exchange rate of 46.179895.6823 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$10.45 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, $2882022, $199 million principal amount of these4.75% convertible notesdebt and $2$1 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt as the maturity of the notes was less than one year as of April 2017. Additionally, duringAugust 2022.
The following table below presents the three months ended June 30, 2017, we repurchased $37 million par value of these notesloans, securities, and other assets pledged as collateral under our long-term debt 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, 2017,2022 and December 31, 2021.
Table 16.2 – Collateral for Long-Term Debt
(In Thousands)September 30, 2022December 31, 2021
Collateral Type
Bridge loans$699,704 $554,597 
Single-family rental loans— 244,703 
Real estate securities
Sequoia securitizations (1)
184,363 247,227 
CAFL securitizations (1)
240,683 260,405 
Total Collateral for Long-Term Debt$1,124,750 $1,306,932 
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the outstanding principal amount ofloans and non-recourse ABS debt issued from these notes was $250 million. At September 30, 2017,securitizations.
The following table summarizes the accrued interest payable balance on thislong-term debt was $5 millionat September 30, 2022 and the unamortized deferred issuance costs were $0.3 million.December 31, 2021.
Table 16.3 – Accrued Interest Payable on Long-Term Debt
(In Thousands)September 30, 2022December 31, 2021
Long-term debt facilities$2,685 $815 
Convertible notes
4.75% convertible senior notes— 3,564 
5.625% convertible senior notes1,784 3,896 
5.75% exchangeable senior notes4,947 2,474 
7.75% convertible senior notes5,184 — 
Trust preferred securities and subordinated notes1,228 581 
Total Accrued Interest Payable on Long-Term Debt$15,828 $11,330 


59

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 13. Long-Term Debt - (continued)


Trust Preferred Securities and Subordinated Notes
At September 30, 2017, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively. This debt requires quarterly interest payments at a floating rate equal to three-month LIBOR plus 2.25% until the notes are redeemed. The $100 million trust preferred securities will be redeemed no later than January 30, 2037, and the $40 million subordinated notes will be redeemed no later than July 30, 2037. Prior to 2014, we entered into interest rate swaps with aggregate notional values totaling $140 million to hedge the variability in this long-term debt interest expense. Including hedging costs and amortization of deferred securities issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.8% per annum. At both September 30, 2017 and December 31, 2016, the accrued interest payable balance on our trust preferred securities and subordinated notes was $1 million.
Under the terms of this debt, we covenant, among other things, to use our best efforts to continue to qualify as a REIT. If an event of default were to occur in respect of this debt, we would generally be restricted under its terms (subject to certain exceptions) from making dividend distributions to stockholders, from repurchasing common stock or repurchasing or redeeming any other then-outstanding equity securities, and from making any other payments in respect of any equity interests in us or in respect of any then-outstanding debt that is pari passu or subordinate to this debt.
Note 14.17. Commitments and Contingencies
Lease Commitments
At September 30, 2017,2022, we were obligated under fourten non-cancelable operating leases with expiration dates through 20282031 for $18$22 million of cumulative lease payments. Our operating lease expense was $2 million for bothFor the nine-month periods ended September 30, 20172022 and 2016.2021 our operating lease expense was $4 million and $3 million, respectively.
The following table presents our future lease commitments at September 30, 2017.2022.
Table 14.117.1 – Future Lease Commitments by Year
(In Thousands)September 30, 2022
2022 (3 months)$1,216 
20234,956 
20244,601 
20253,580 
20263,420 
2027 and thereafter4,553 
Total Lease Commitments22,326 
Less: Imputed interest(2,793)
Operating Lease Liabilities$19,533 
(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, 2022, we did not enter into any new office leases. During the three months ended September 30, 2022, we assumed three operating office leases as a result of our acquisition of Riverbend on July 1, 2022. At September 30, 2022, our operating lease liabilities were $20 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $17 million, which were a component of Other assets.
We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At September 30, 2022, the weighted-average remaining lease term and weighted-average discount rate for our leases was 5 years and 5.2%, respectively.
Commitment to Fund Bridge Loans
As of September 30, 2022, we had commitments to fund up to $990 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At September 30, 2022, we carried a $3 million contingent liability related to these commitments to fund construction advances. During the three and nine months ended September 30, 2022, we recorded a net market valuation gain of $1 million and a net market valuation loss of $2 million, respectively, related to this liability through Mortgage banking activities, net and Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2021, we recorded a net market valuation loss of $0.3 million and a net market valuation gain of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).
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 this investment, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.

60

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)

Note 14.17. Commitments and Contingencies - (continued)

Commitment to Acquire HEIs
At September 30, 2022, we had outstanding flow purchase agreements with multiple third parties, with an aggregate commitment to purchase $350 million of HEIs, $149 million of which commitments remained outstanding. These purchase agreements specify monthly minimum and maximum amounts of HEIs subject to such purchase commitments. We may terminate the purchase agreement and associated purchase commitment relating to $85 million of remaining commitments upon 90 days prior notice. We account for these investments under the fair value option. See Note 10 for additional detail on these investments.
Commitments to Fund Strategic Investments
In the first quarter of 2022, we entered into a $25 million commitment to an investment fund with the mission of providing quality workforce housing opportunities in several California urban communities, including the San Francisco Bay Area. At September 30, 2022, 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, 2022, we had funded $1 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.
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, 2022, 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, 2017,2022, 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, 2017,2022, we had not incurred anyless than $100 thousand of cumulative losses under these arrangements. For the three and nine months ended September 30, 2017,2022, other income related to these arrangements was $1 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 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, 2017,2022, the loans had an unpaid principal balance of $2.19 billion and$454 million, a weighted average FICO score of 758756 (at origination), and LTV ratio of 77%74% (at origination). At September 30, 2017, $32022, $10 million of the loans were 90 days or more days delinquent, andof which four of these loans with an unpaid principal balance of $1 million were in foreclosure. At September 30, 2017,2022, the carrying value of our guarantee obligation was $20$7 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 both September 30, 20172022 and December 31, 2016,2021, assets of such SPEs totaled $47$30 million, and $49 million, respectively, and liabilities of such SPEs totaled $20 million$7 million.

61

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 17. Commitments and $22 million, respectively.Contingencies - (continued)
Loss Contingencies — Residential Repurchase Reserve
We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential loans we have sold to securitization trusts or third parties and for conforming residential loans associated with MSRs that we have purchased from third parties. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation.
At both September��September 30, 20172022 and December 31, 2016,2021, our repurchase reserve associated with our residential loans and MSRs was $5$6 million and $9 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, 20172022 and 2016,2021, we received seven and eight repurchase requests, respectively, and repurchased one and one loan(s), respectively. During the three and nine months ended September 30, 2022, we recorded $0.5a repurchase provision expense of $0.1 million ofand a reversal of repurchase provision for repurchasesexpense of $4 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2021, we recorded repurchase provision expense of $0.3 million of provision for repurchases,and $0.6 million, respectively, thatwhich were recorded in Mortgage banking activities, net, and MSROther income net on our consolidated statements of income.

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

Note 14. Commitments and Contingencies - (continued)

income (loss).
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 16 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, 2021 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, 2017,2022, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described abovein our Annual Report on Form 10-K for the year ended December 31, 2021 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.
62
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.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)

Note 15.18. Equity
The following table provides a summary of changes to accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 15.118.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component
Three Months Ended September 30, 2022Three Months Ended September 30, 2021
(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$16,595 $(74,383)$88,251 $(78,511)
Other comprehensive (loss) income
before reclassifications		(8,731)— (2,658)— 
Amounts reclassified from other
accumulated comprehensive (income) loss		544 1,040 (6,200)1,041 
Net current-period other comprehensive (loss) income(8,187)1,040 (8,858)1,041 
Balance at End of Period$8,408 $(73,343)$79,393 $(77,470)
 Three Months Ended September 30, 2017 Three Months Ended September 30, 2016Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
(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$67,503 $(76,430)$76,336 $(80,557)
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
Net current-period other comprehensive income (loss) 12,305
 335
 7,719
 665
Other comprehensive (loss) income
before reclassifications		Other comprehensive (loss) income
before reclassifications		(60,013)— 19,552 — 
Amounts reclassified from other
accumulated comprehensive (income) loss		Amounts reclassified from other
accumulated comprehensive (income) loss		918 3,087 (16,495)3,087 
Net current-period other comprehensive (loss) incomeNet current-period other comprehensive (loss) income(59,095)3,087 3,057 3,087 
Balance at End of Period $126,669
 $(44,353) $124,568
 $(69,853)Balance at End of Period$8,408 $(73,343)$79,393 $(77,470)

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, 20172022
(Unaudited)
Note 15.18. Equity - (continued)


The following table provides a summary of reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 15.218.2 – Reclassifications Out of Accumulated Other Comprehensive Income
(Loss)
    
 Amount Reclassified From Accumulated Other Comprehensive IncomeAmount Reclassified From
Accumulated Other Comprehensive (Loss)
 Affected Line Item in the Three Months Ended September 30,Affected Line Item in theThree Months Ended September 30,
(In Thousands) Income Statement 2017 2016(In Thousands)Income Statement20222021
Net Realized (Gain) Loss on AFS Securities    Net Realized (Gain) Loss on AFS Securities
Other than temporary impairment (1)
 Investment fair value changes, net $3
 $—
Increase (decrease) in allowance for credit losses on AFS securitiesIncrease (decrease) in allowance for credit losses on AFS securitiesInvestment fair value changes, net$544 $— 
Gain on sale of AFS securities Realized gains, net (856) (1,319)Gain on sale of AFS securitiesRealized gains, net— (6,200)
 $(853) $(1,319)$544 $(6,200)
Net Realized Loss on Interest Rate
Agreements Designated as Cash Flow Hedges		    Net Realized Loss on Interest Rate
Agreements Designated as Cash Flow Hedges
Amortization of deferred loss Interest expense $14
 $18
Amortization of deferred lossInterest expense$1,040 $1,041 
 $14
 $18
$1,040 $1,041 
Amount Reclassified From
Accumulated Other Comprehensive (Loss)
Affected Line Item in theNine Months Ended September 30,
(In Thousands)Income Statement20222021
Net Realized (Gain) Loss on AFS Securities
Increase (decrease) in allowance for credit losses on AFS securitiesInvestment fair value changes, net$2,315 $(388)
Gain on sale of AFS securitiesRealized gains, net(1,397)(16,107)
$918 $(16,495)
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 nine months ended September 30, 2022, we issued 5.2 million common shares for net proceeds of $67 million under this program. During the three months ended March 31, 2022, we increased the capacity of this program to $175 million, all of which remained outstanding for future offerings under this program as of September 30, 2022.
Direct Stock Purchase and Dividend Reinvestment Plan
During the nine months ended September 30, 2022, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At September 30, 2022, approximately 6 million shares remained outstanding for future offerings under this plan.

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, 20172022
(Unaudited)
Note 15.18. Equity - (continued)


Earnings per Common Share
The following table provides the basic and diluted (loss) earnings per common share computations for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 15.318.3 – Basic and Diluted Earnings 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)2022202120222021
Basic Earnings per Common Share:        Basic Earnings per Common Share:
Net income attributable to Redwood $36,180
 $52,553
 $109,473
 $105,897
Net (loss) income attributable to RedwoodNet (loss) income attributable to Redwood$(50,411)$88,286 $(119,462)$275,568 
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(1,158)(2,984)(3,445)(8,979)
Net income allocated to common shareholders $35,232
 $51,068
 $106,673
 $102,857
Net (loss) income allocated to common shareholdersNet (loss) income allocated to common shareholders$(51,569)$85,302 $(122,907)$266,589 
Basic weighted average common shares outstanding 76,850,830
 76,680,183
 76,803,324
 76,827,026
Basic weighted average common shares outstanding116,087,890 112,995,847 118,530,172 112,754,691 
Basic Earnings per Common Share $0.46
 $0.67
 $1.39
 $1.34
Basic (Loss) Earnings per Common ShareBasic (Loss) Earnings per Common Share$(0.44)$0.75 $(1.04)$2.36 
Diluted Earnings per Common Share:        Diluted Earnings per Common Share:
Net income attributable to Redwood $36,180
 $52,553
 $109,473
 $105,897
Net (loss) income attributable to RedwoodNet (loss) income attributable to Redwood$(50,411)$88,286 $(119,462)$275,568 
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(1,158)(2,747)(3,445)(8,151)
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— 6,870 — 20,585 
Net income allocated to common shareholders $41,758
 $57,229
 $125,186
 $120,934
Net (loss) income allocated to common shareholdersNet (loss) income allocated to common shareholders$(51,569)$92,409 $(122,907)$288,002 
Weighted average common shares outstanding 76,850,830
 76,680,183
 76,803,324
 76,827,026
Weighted average common shares outstanding116,087,890 112,995,847 118,530,172 112,754,691 
Net effect of dilutive equity awards 298,955
 54,696
 215,141
 18,665
Net effect of dilutive equity awards— 292,749 — 253,819 
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— 28,566,875 — 28,566,875 
Diluted weighted average common shares outstanding 102,703,108
 97,831,617
 99,397,866
 97,991,678
Diluted weighted average common shares outstanding116,087,890 141,855,471 118,530,172 141,575,385 
Diluted Earnings per Common Share $0.41
 $0.58
 $1.26
 $1.23
Diluted (Loss) Earnings per Common ShareDiluted (Loss) Earnings per Common Share$(0.44)$0.65 $(1.04)$2.03 
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, 2017 and 2016,2021, certain of our convertible notes were determined to be dilutive and were included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money) are included in the denominator.
For the three and nine months ended September 30, 2017,2022, 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, 2022, the number of outstanding equity awards that were antidilutive totaled 6,149249,178 and 5,843,268,737, respectively. For the three and nine months ended September 30, 2016,2021, the number of outstanding equity awards that were antidilutive totaled 6,62322,102 and 6,565,18,736, respectively.


65

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 15.18. Equity - (continued)


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 allour previous share$100 million stock repurchase plans andauthorization. This authorization 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 no2022, we repurchased 3.4 million shares of our common stock acquired under this authorization.for a total cost of $24 million. At September 30, 2017, approximately $862022, $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. During the nine months ended September 30, 2022, we repurchased 7.1 million shares of our common stock for a total cost of $56 million under our current and previously-approved Board of Director authorizations.

Note 16.19. Equity Compensation Plans
At September 30, 20172022 and December 31, 2016, 1,469,9912021, 5,258,817 and 1,787,9745,958,390 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock and purchases under the Employee Stock Purchase Plan, totaled $18$35 million at September 30, 2017,2022, 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, 2022
(In Thousands) Restricted Stock Deferred Stock Units Performance Stock Units Employee Stock Purchase Plan Total(In Thousands)Restricted Stock AwardsRestricted 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$84 $3,589 $26,473 $12,237 $— $42,383 
Equity grants 2,237
 5,747
 —
 129
 8,113
Equity grants— 2,513 7,960 — 323 10,796 
Performance-based valuation adjustmentPerformance-based valuation adjustment— — — (3,205)— (3,205)
Equity grant forfeitures (174) (472) —
 —
 (646)Equity grant forfeitures(5)(448)(101)— — (554)
Equity compensation expense (934) (4,866) (1,738) (96) (7,634)Equity compensation expense(79)(1,567)(10,412)(2,524)(242)(14,824)
Unrecognized Compensation Cost at End of Period $3,220
 $11,915
 $2,811
 $33
 $17,979
Unrecognized Compensation Cost at End of Period$— $4,087 $23,920 $6,508 $81 $34,596 
At September 30, 2017,2022, the weighted average amortization period remaining for all of our equity awards was less than two years.
Restricted Stock Awards ("RSAs")
At September 30, 20172022 and December 31, 2016,2021, there were 265,8421,551 and 204,51528,141 shares respectively, of restricted stock outstanding.RSAs outstanding, respectively. Restrictions on these shares lapse through 2021.during 2022. During the nine months ended September 30, 2017,2022, there were 134,364 shares of restricted stockno RSAs granted, restrictions on 61,285 shares of restricted stock26 RSAs lapsed and those shares were distributed, and 11,752 shares of restricted stock awards341 RSAs were forfeited.
Restricted Stock Units ("RSUs")
At September 30, 2022 and December 31, 2021, there were 476,893 and 431,072 RSUs outstanding, respectively. During the nine months ended September 30, 2022, there were 208,717 RSUs granted, 123,869 RSUs distributed, and 39,027 RSUs forfeited. Unvested RSUs at September 30, 2022 vest through 2026.
Deferred Stock Units (“DSUs”)
At September 30, 20172022 and December 31, 2016,2021, there were 1,869,5774,911,777 and 1,848,8614,022,088 DSUs outstanding, respectively, outstanding of which 1,006,3942,217,327 and 939,899,1,469,903, respectively, had vested. During the nine months ended September 30, 2017,2022, there were 359,5011,214,533 DSUs granted, 306,911316,546 DSUs distributed, and 31,8758,298 DSUs forfeited. Unvested DSUs at September 30, 20172022 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.2026.

66

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 16.19. Equity Compensation Plans - (continued)


Performance Stock Units (“PSUs”)
At both September 30, 20172022 and December 31, 2016,2021, the target number of PSUs that were unvested was 642,879.1,267,849 and 1,473,883, 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 18 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.2021. During the nine months ended September 30, 2022, for PSUs granted in 2020 and 2021, we decreased the book value total shareholder return estimate for the 2022 performance period, reducing the future equity compensation expense related to these awards by $3 million.
For 206,034 target PSU awards that were granted in December 2018, the performance vesting period ended on January 1, 2022. These 2018 PSU awards failed to reach a threshold level under their performance-based vesting criteria and resulted in the vesting of no shares of our common stock underlying these PSUs.
Employee Stock Purchase Plan ("ESPP")
The ESPP allows a maximum of 450,000850,000 shares of common stock to be purchased in aggregate for all employees. As of September 30, 20172022 and December 31, 2016, 354,8012021, 505,496 and 337,271569,728 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at September 30, 2017.2022.
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, 20172022 and 2016.2021.
Table 17.120.1 – Mortgage Banking Activities
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)
$(22,776)$27,862 $(125,012)$75,496 
Trading securities (2)
148 32 4,249 (342)
Risk management derivatives (3)
24,319 3,963 107,573 37,187 
Other income (expense), net (4)
467 1,089 5,496 3,305 
Total residential mortgage banking activities, net2,158 32,946 (7,694)115,646 
Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
Single-family rental loans, at fair value (1)
(19,306)18,461 (84,493)54,675 
Risk management derivatives (3)
24,044 (424)56,564 930 
Bridge loans, at fair value(9)3,433 2,242 6,702 
Other income, net (5)
9,648 8,747 36,214 22,236 
Total business purpose mortgage banking activities, net14,377 30,217 10,527 84,543 
Mortgage Banking Activities, Net$16,535 $63,163 $2,833 $200,189 
(1)For residential loans, includes changes in fair value for associated loan purchase commitments. For single-family rental loans, includes changes in fair value for associated interest rate lock commitments.
(2)Represents fair value changes on trading securities that are being used as hedges to manage the mark-to-market risks associated with our residential mortgage banking operations.
(3)Represents market valuation changes of derivatives that were used to manage risks associated with our mortgage banking operations.
(4)Amounts in this line item include other fee income from loan acquisitions and provisions for repurchases, presented net.
(5)Amounts in this line item include other fee income from loan originations.
67
  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, 20172022
(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, 20172022 and 2016.2021.
Table 18.121.1 – Investment Fair Value ChangesOther Income, Net
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
MSR income, net (1)
$2,890 $295 $12,569 $949 
Bridge loan fees1,489 1,131 3,952 2,735 
Risk share income279 575 1,062 2,318 
Other(631)387 (567)2,355 
Other Income, Net$4,027 $2,388 $17,016 $8,357 
(1)Includes servicing fees and fair value changes for MSRs, net.
68
  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, 20172022
(Unaudited)


Note 19. Operating22. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
Components of our operatinggeneral and administrative expenses, loan acquisition costs, and other expenses for the three and nine months ended September 30, 20172022 and 20162021 are presented in the following table.
Table 19.122.1 – Components of OperatingGeneral and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
General and Administrative Expenses
Fixed compensation expense (1)
$18,626 $11,285 $45,364 $34,359 
Annual variable compensation expense3,521 19,844 8,689 51,021 
Long-term incentive award expense (2)
4,998 4,915 16,190 14,766 
Acquisition-related equity compensation expense (3)
— 1,189 — 3,613 
Systems and consulting3,909 2,975 10,796 9,224 
Office costs2,381 2,197 6,489 6,029 
Accounting and legal1,775 1,197 5,026 3,132 
Corporate costs928 964 2,792 2,528 
Other3,969 3,126 11,581 7,165 
Total General and Administrative Expenses40,107 47,692 106,927 131,837 
Loan Acquisition Costs
Commissions1,549 1,906 6,279 4,830 
Underwriting costs545 2,351 3,013 5,872 
Transfer and holding costs332 364 1,079 1,226 
Total Loan Acquisition Costs2,426 4,621 10,371 11,928 
Other Expenses
Amortization of purchase-related intangible assets3,891 3,873 10,731 11,619 
Other370 150 1,083 485 
Total Other Expenses4,261 4,023 11,814 12,104 
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses$46,794 $56,336 $129,112 $155,869 
(1)Includes $3 million of severance and transition-related expenses for the three and nine months ended September 30, 2022.
(2)For the three months ended September 30, 2022 and 2021, long-term incentive award expense included $5 million and $3 million of expense for awards settleable in shares of our common stock, and $0.1 million and $1 million of expense for awards settleable in cash, respectively. For the nine months ended September 30, 2022 and 2021, long-term incentive award expense included $15 million and $10 million of expense for awards settleable in shares of our common stock, and $1 million and $4 million of expense for awards settleable in cash, respectively.
(3)Acquisition-related equity compensation expense relates to 588,260 shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in CoreVest in 2019. The grant date fair value of these restricted stock awards was $10 million, which was recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.

69
  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, 20172022
(Unaudited)

Note 22. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses - (continued)

Long-Term Cash-Based Awards and Cash Settled Deferred Stock Units
During the nine months ended September 30, 2022, $2 million of long-term cash-based retention awards were granted to employees that will vest and be paid over a three-year period, subject to continued employment through the vesting periods from 2022 through 2025. At both September 30, 2022 and December 31, 2021, the unamortized compensation cost of long-term cash-based awards was $4 million.
During the nine months ended September 30, 2022, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020 and 2021 vest over four years through 2025. At September 30, 2022 and December 31, 2021, the unamortized compensation cost of cash-settled deferred stock units was $2 million and $7 million, respectively. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period.
Refer to Note 21 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

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.
For the nine months ended September 30, 20172022 and 2016,2021, we recognized a benefit from income taxes of $10 million and a provision for income taxes of $17 million and $1$14 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at September 30, 20172022 and 2016.2021.
Table 20.123.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate
 September 30, 2017 September 30, 2016September 30, 2022September 30, 2021
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 statutory rate, net of Federal tax effect8.6 %8.6 %
Differences in taxable (loss) income from GAAP income (6.8)% (21.7)%Differences in taxable (loss) income from GAAP income(29.6)%(13.1)%
Change in valuation allowance (2.8)% 6.6 %Change in valuation allowance(2.4)%(6.8)%
Dividends paid deduction (18.3)% (24.9)%Dividends paid deduction10.5 %(4.9)%
Effective Tax Rate 13.3 % 1.2 %Effective Tax Rate8.1 %4.8 %
We assessed our tax positions for all open tax years (i.e., Federal, 20142018 to 2017,2022, and State, 20132017 to 2017)2022) at September 30, 20172022 and December 31, 2016,2021, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

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, 2021.
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.
70

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)

Note 24. Segment Information - (continued)
The following tables present financial information by segment for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 21.124.1 – Business Segment Financial Information
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 $177,662 
Interest expense(8,083)(5,971)(111,876)(16,797)(142,727)
Net interest income1,799 3,111 45,006 (14,981)34,935 
Non-interest (loss) income
Mortgage banking activities, net2,158 14,377 — — 16,535 
Investment fair value changes, net— — (61,780)4,083 (57,697)
Other income, net— 399 3,906 (278)4,027 
Realized gains, net— — — — — 
Total non-interest income (loss), net2,158 14,776 (57,874)3,805 (37,135)
General and administrative expenses(5,735)(18,535)(3,502)(12,335)(40,107)
Loan acquisition costs(550)(1,876)— — (2,426)
Other expenses— (3,891)(370)— (4,261)
Benefit from (provision for) income taxes1,688 2,559 (5,664)— (1,417)
Segment Contribution$(640)$(3,856)$(22,404)$(23,511)
Net (Loss)$(50,411)
Non-cash amortization (expense) income, net$(185)$(3,609)$(3,658)$(2,843)$(10,295)
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 $534,517 
Interest expense(23,316)(12,797)(331,047)(38,832)(405,992)
Net interest income12,732 9,712 140,885 (34,804)128,525 
Non-interest (loss) income
Mortgage banking activities, net(7,694)10,527 — — 2,833 
Investment fair value changes, net— — (165,297)13,508 (151,789)
Other income, net— 2,028 15,423 (435)17,016 
Realized gains, net— — 2,581 — 2,581 
Total non-interest (loss) income, net(7,694)12,555 (147,293)13,073 (129,359)
General and administrative expenses(17,918)(40,076)(9,676)(39,257)(106,927)
Loan acquisition costs(2,848)(7,523)— — (10,371)
Other expenses74 (10,731)(1,157)— (11,814)
Benefit from (provision for) income taxes8,283 9,009 (6,808)— 10,484 
Segment Contribution$(7,371)$(27,054)$(24,049)$(60,988)
Net (Loss)$(119,462)
Non-cash amortization (expense) income, net$(699)$(11,563)$4,385 $(6,428)$(14,305)
71
  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, 20172022
(Unaudited)


Note 21.24. Segment Information - (continued)


Three Months Ended September 30, 2021
(In Thousands)Residential Mortgage BankingBusiness Purpose Mortgage BankingInvestment PortfolioCorporate/
Other		Total
Interest income$14,712 $3,967 $125,994 $1,049 $145,722 
Interest expense(7,537)(2,013)(84,049)(10,155)(103,754)
Net interest income7,175 1,954 41,945 (9,106)41,968 
Non-interest income
Mortgage banking activities, net32,946 30,217 — — 63,163 
Investment fair value changes, net— — 26,324 (247)26,077 
Other income, net— 216 1,842 330 2,388 
Realized gains, net— — 6,703 — 6,703 
Total non-interest income, net32,946 30,433 34,869 83 98,331 
General and administrative expenses(7,891)(12,017)(4,483)(23,301)(47,692)
Loan acquisition costs(2,395)(2,175)(51)— (4,621)
Other expenses— (3,873)(150)— (4,023)
(Provision for) benefit from income taxes(10,429)(3,485)(1,045)19,282 4,323 
Segment Contribution$19,406 $10,837 $71,085 $(13,042)
Net Income$88,286 
Non-cash amortization (expense) income, net$(33)$(4,224)$5,682 $(1,995)$(570)


Nine Months Ended September 30, 2021
(In Thousands)Residential Mortgage BankingBusiness Purpose Mortgage BankingInvestment PortfolioCorporate/
Other		Total
Interest income$35,536 $9,849 $363,751 $3,586 $412,722 
Interest expense(19,903)(5,134)(258,685)(30,649)(314,371)
Net interest income15,633 4,715 105,066 (27,063)98,351 
Non-interest income
Mortgage banking activities, net115,646 84,543 — — 200,189 
Investment fair value changes, net— — 121,812 (1,168)120,644 
Other income, net— 494 7,121��742 8,357 
Realized gains, net— — 17,803 — 17,803 
Total non-interest income (loss), net115,646 85,037 146,736 (426)346,993 
General and administrative expenses(27,478)(34,567)(10,804)(58,988)(131,837)
Loan acquisition costs(5,686)(5,528)(710)(4)(11,928)
Other expenses(6)(11,523)(592)17 (12,104)
Provision for income taxes(23,640)(6,988)(2,561)19,282 (13,907)
Segment Contribution$74,469 $31,146 $237,135 $(67,182)
Net Income$275,568 
Non-cash amortization income (expense), net$8,867 $(16,154)$317 $(5,845)$(12,815)
72
  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, 20172022
(Unaudited)


Note 21.24. Segment Information - (continued)



  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

(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.
The following tables presenttable presents the components of Corporate/Other for the three and nine months ended September 30, 20172022 and 2016.2021.

Table 21.224.2 – Components of Corporate/Other
 Three Months Ended September 30,Three Months Ended September 30,
 2017 201620222021
(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$1,473 $343 $1,816 $1,042 $7 $1,049 
Interest expense (3,838) (10,025) (13,863) (3,274) (9,484) (12,758)Interest expense(1,486)(15,311)(16,797)(641)(9,514)(10,155)
Net interest income (loss) 1,037
 (9,812) (8,775) 1,563
 (9,422) (7,859)
Net interest incomeNet interest income(13)(14,968)(14,981)401 (9,507)(9,106)
Non-interest income            Non-interest income
Investment fair value changes, net (1,045) (3) (1,048) (255) (3) (258)Investment fair value changes, net(329)4,412 4,083 (247)— (247)
Other incomeOther income— (278)(278)— 330 330 
Total non-interest income, net (1,045) (3) (1,048) (255) (3) (258)Total non-interest income, net(329)4,134 3,805 (247)330 83 
Direct operating expenses —
 (12,491) (12,491) —
 (11,797) (11,797)
General and administrative expensesGeneral and administrative expenses— (12,335)(12,335)— (23,301)(23,301)
Loan acquisition costsLoan acquisition costs— — — — — — 
Other expensesOther expenses— — — — — — 
Provision for income taxesProvision for income taxes— — — — 19,282 19,282 
Total $(8) $(22,306) $(22,314) $1,308
 $(21,222) $(19,914)Total$(342)$(23,169)$(23,511)$154 $(13,196)$(13,042)
Nine Months Ended September 30,
20222021
(In Thousands)
Legacy Consolidated VIEs(1)
OtherTotal
Legacy Consolidated VIEs(1)
Other Total
Interest income$3,593 $435 $4,028 $3,559 $27 $3,586 
Interest expense(3,154)(35,678)(38,832)(2,271)(28,378)(30,649)
Net interest income439 (35,243)(34,804)1,288 (28,351)(27,063)
Non-interest income
Investment fair value changes, net(1,379)14,887 13,508 (1,162)(6)(1,168)
Other income— (435)(435)— 742 742 
Total non-interest income, net(1,379)14,452 13,073 (1,162)736 (426)
General and administrative expenses— (39,257)(39,257)— (58,988)(58,988)
Loan acquisition costs— — — — (4)(4)
Other expenses— — — — 17 17 
Provision for income taxes— — — — 19,282 19,282 
Total$(940)$(60,048)$(60,988)$126 $(67,308)$(67,182)

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


73

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(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, 20172022 and December 31, 2016.2021.
Table 21.324.3 – Supplemental Segment Information
(In Thousands)Residential Mortgage BankingBusiness Purpose Mortgage BankingInvestment Portfolio Corporate/
Other		Total
September 30, 2022
Residential loans$676,458 $— $4,877,938 $198,160 $5,752,556 
Business purpose loans— 337,238 4,919,980 — 5,257,218 
Consolidated Agency multifamily loans— — 427,458 — 427,458 
Real estate securities— — 259,212 — 259,212 
Home equity investments— — 340,437 — 340,437 
Other investments— — 341,155 71,607 412,762 
Goodwill— 23,373 — — 23,373 
Intangible assets— 44,130 — — 44,130 
Total assets738,301 473,748 11,301,836 632,062 13,145,947 
December 31, 2021
Residential loans$1,673,235 $— $5,688,742 $230,455 $7,592,432 
Business purpose loans— 347,860 4,443,129 — 4,790,989 
Consolidated Agency multifamily loans— — 473,514 — 473,514 
Real estate securities4,927 — 372,484 — 377,411 
Home equity investments— — 192,740 — 192,740 
Other investments— — 413,527 35,702 449,229 
Intangible assets— 41,561 — — 41,561 
Total assets1,716,285 464,967 11,770,486 755,206 14,706,944 
74
(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.



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Our Business
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, business purpose and multifamily assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in 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 investments segments, 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, 2021.
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, 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 case2021, 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 2022 and future years, including statements regarding our long-term debtthe economic impact of inflation, supply chain disruptions, and upcoming maturity of convertible noteswar in 2018;Europe; (iii) statements regarding our expectations with respect to Riverbend’s integration into, and effect upon, the Redwood and CoreVest businesses; (iv) statements related to our opportunities for growth, including opportunities to grow and increase our market share for our residential and business purpose mortgage banking platforms; (v) statements related to our investment portfolio, including that there remains potential upside in our portfolio through market discount, and that at September 30, 2022, our securities portfolio had approximately $458 million of net discount to par (approximately $4.05 per share), which we have the potential impact of changes to the capital requirement underrecover over time; (vi) statements related to RWT Horizons and our FHLB borrowing facility; (iv)strategic investment initiatives; (vii) statements regarding our mortgage banking activities, including expectations relating to residential mortgage banking margins, securitization execution, and our expanded-prime Redwood Choice loan program; (v)estimate of our available capital (including that we estimate our available capital at September 30, 2022 was approximately $160 million); (viii) 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 20172022 and at September 30, 2017, and2022, expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase; (vi) statements relatingpurchase, and residential mortgage loans subject to our estimate of our available capital (including that we estimate our available capital as of September 30, 2017 was approximately $330 million, expectations relating 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); (vii)forward sale commitments; (ix) 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;2022; and (viii)(x) 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.

Many of the factors that could affect our actual results are summarized below. One of the most significant factors, however, is the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Moreover, each of the factors summarized below is likely to also be impacted directly or indirectly by the ongoing impact of the pandemic and investors are cautioned to interpret substantially all of the risks identified in the Company’s previously published “Risk Factors” as being heightened as a result of the ongoing impact of the pandemic.



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Important factors, among others, that may affect our actual results include:
•the pace at which we redeploy our available capital into new investments;impact of the COVID-19 pandemic;
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 assets and the credit status of borrowers;markets;
•federal and state legislative and regulatory developments and the actions of governmental authorities includingand entities;
•changing benchmark interest rates, and the new U.S. presidential administration,Federal Reserve’s actions and in particular those affecting the mortgage industry orstatements regarding monetary policy;
•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 termination of our captive insurance subsidiary’s membership in the Federal Home Loan Bank and the implications for our income generating abilities;
•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 quarter of 2017 operationally and financially, and are well positionedOur GAAP book value declined to achieve the operating metrics we set out 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$10.18 per share at an attractive level. We deployed $119 million of capital in new investments, much of it after asset pricing declines in 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, up from $1.4 billion and $1.1 billion in the second and first quarters of 2017, respectively. We had strong growth during the third quarter with our Choice program, which accounted for approximately 30% of our total third quarter loan purchase commitments, adjusted for fallout, versus approximately 20% in the second quarter of 2017. Overall margins remained at or above our long-term expectations of 75-100 basis points during the third quarter of 2017.
Capital and Investing
We aggressively pursued new investments in September when volatility due to hurricane activity drove asset prices down. The bulk of the quarter’s $119 million of capital deployment occurred during this period, and included $63 million in GSE residential credit risk transfer (CRT) securities, $39 million in Sequoia and third-party RMBS, and $17 million in multifamily securities. Year-to-date through September 30, 2017, we have deployed $393 million of capital towards new investments (including $37 million of debt repurchases).
We also sold $49 million of mostly lower yielding securities in the third quarter of 2017, freeing up $20 million of capital for reinvestment, after the repayment of associated debt. Additionally, we issued $245 million of six-year, 4.75% convertible debt in August.
As of September 30, 2017, we estimate that our available capital was approximately $330 million, versus $180 million2022, a 5.6% decline from $10.78 per share at June 30, 2017. Although we continue to evaluate our options with regard to the April 2018 maturity2022, driving a GAAP loss 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.
We continue 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 from overall credit spread tightening exceeded any negative impact from the hurricanes. 


Outlook
As we progress through the fourth quarter of 2017, our current operating metrics are in line with our expectations. While investment portfolio returns have been bolstered by persistent market value increases, 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 margins continue to be robust 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 milestone as we continue to think critically about our business assumptions and look ahead to next year and beyond.
Financial and Operational Overview - Third Quarter of 2017
Highlights
Our GAAP earnings were $0.41$(0.44) per share for the third quarter of 2017, as compared with $0.43 per share forquarter. As was the case in the second quarter, mark-to-market adjustments were the primary driver of 2017. Higherour GAAP loss for the quarter and contributed $(0.50) per share of unrealized fair value changes in the third quarter.
During the third quarter, we focused on maintaining liquidity and maximizing our balance sheet flexibility. We ended the quarter with $297 million of unrestricted cash on hand, unencumbered assets of $491 million, and approximately $3.8 billion of excess capacity on our warehouse lines. We were successful during the quarter in adding $900 million of new financing capacity across multiple borrowing facilities (with both new and existing domestic depository institutions) to further support our operating platforms. Our overall recourse leverage ratio(1) was 2.6x, which included only 0.8x secured recourse leverage within our Investment Portfolio(2). This allowed us to remain opportunistic across our operating segments, a posture we expect to carry through year-end.
For the third quarter, we deployed $235 million of capital, which included repurchases of our common stock, the acquisition of Riverbend Funding, LLC (“Riverbend”), and further investments in organically created business-purpose loans (“BPL”) and third-party investments. We closed the Riverbend acquisition on July 1, 2022, and have progressed with key integration workstreams that we expect to be largely completed by year-end. At current levels, we believe there is an attractive opportunity to invest in our own common shares and, as such, we expect opportunistic share repurchases to be an on-going option for capital deployment in the near term.
Within our Investment Portfolio, at September 30, 2022, we had $3.6 billion of economic investments; 77% of which were organically created and 23% of which were purchased from third-parties. We estimate there was $458 million (or $4.05 per share) of net discount to par value at September 30, 2022 that we believe represents potential upside in Redwood’s book value.
Our investment portfolio sits in a strong fundamental credit position given consistent cash flows, underlying seasoning and robust home price appreciation. Delinquencies in our portfolio remain low, at approximately 2% across our organically-created Residential and BPL investments combined at September 30, 2022. We believe the seasoning of our portfolio assets is a positive factor in light of near-term downward pressure on home prices expected as a result of the Federal Reserve's monetary policy actions. Our portfolio overall has benefited from significant appreciation in home prices and rents the last several years, providing a tailwind to fundamental performance even in a more stressed housing market. This inherent downside protection may support the potential recoverability of the unrealized losses we have taken over the last few quarters.
While markets need to stabilize for our operating businesses to return to their optimal levels of operations, both of our mortgage banking income and interest income were offset by higher interest costs and less benefit from market value increases on our trading securities portfolio relativeplatforms delivered substantially better quarter-on-quarter results as compared to the second quarter of 2017.2022, notwithstanding continued market dislocation. Across our Residential and Business Purpose Mortgage Banking businesses, we distributed almost $1 billion of loans during the quarter. Despite capital markets in the consumer residential sector remaining largely distressed, we sold $612 million of residential loans to various whole loans buyers at accretive levels and within our historical target range for gain on sale margins. Our BPL team also completed an innovative $274 million private SFR securitization at the end of the third quarter, in addition to selling $85 million of loans. Our ability to distribute loans through both securitization and whole loan sales in challenging markets is a testament to the strength of our platforms, the quality of our products and the depth of our whole loan networks.
Our GAAP book value was $15.67 per share at September 30, 2017,We expect conditions in the consumer residential sector to remain challenging for a number of quarters as comparedindustry volumes continue to be affected by rapidly increasing mortgage rates, which, along with $15.29 per share at June 30, 2017.record home price appreciation in recent years, has pushed housing affordability to new lows. The spread between mortgage rates and the 10-year Treasury recently reached an all-time high, even as the 10-year Treasury yield itself has risen over 250 basis points since the beginning of the year. The institution that has been the largest buyer of mortgage-backed securities, the Federal Reserve, has exited the market, and money center banks and overseas investors have also pulled back significantly. This increase was primarily driven bydynamic, in the near term, has resulted in significant market risk for those aggregating loans for future securitizations, including us.
As a result of these market conditions, we have remained conservatively positioned in Residential Mortgage Banking, reducing our quarterly earnings exceeding our dividend, and higher fair values on our available-for-sale securities.
We deployed $119 million of capitaljumbo loan locks(3) in the third quarter to $461 million and focusing on moving risk expediently, operating efficiently and preserving flexibility. This includes ongoing rationalization of 2017 toward new investments,our cost structure and disciplined pipeline management, including $63 millionthrough maintaining lower overall loan inventory balances and nimble distribution strategies with whole loan buyers. In light of these conditions, we intentionally reduced our capital allocation to our Residential Mortgage Banking business by almost 60% since the beginning of 2022. We see attractive uses for this freed-up capital, including investment opportunities in Agency residential CRT securities, $39 millioncredit made possible by the market downturn.
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Turning to Business Purpose Mortgage Banking, while we have seen some resiliency in Sequoiademand for shorter duration bridge loan products that we originate, we expect volumes to moderate from record levels earlier this year as higher interest rates 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 duringmacroeconomic uncertainty cause housing investors to be more cautious. In the third quarter, we saw this trend play out as 83% of 2017, freeing up $20our origination volume was in our bridge product and 17% was in our SFR product. As affordability remains challenged, we believe that strong occupancy rates, low vacancies, and high consumer mortgage rates should continue to support strong and consistent cash flows for our rental loan products. We have long promoted our BPL franchise as a life-cycle lender and our ability to provide both short- and long-term financing options makes us an attractive lender for borrowers.

































Footnotes to Business Update


(1)    Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $8.9 billion of consolidated securitization debt (ABS issued and servicer advance financing) and other debt that is non-recourse to Redwood, and tangible stockholders' equity excludes $68 million of goodwill and intangible assets.
(2)    Secured recourse leverage for our investment portfolio is defined as secured recourse debt financing our investment portfolio assets divided by capital allocated to our investment portfolio.
(3)    Lock volume does not account for reinvestment afterpotential fallout from pipeline that typically occurs through 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.lending process.
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.
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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 MetricsThird Quarter Overview
The following table presents key earningsfinancial metrics for the three and nine months ended September 30, 2017.2022.
Table 1 – Key EarningsFinancial Results and Metrics
Three Months EndedNine Months Ended
(In Thousands, except per Share Data)September 30, 2022September 30, 2022
Net (loss) income per diluted common share$(0.44)$(1.04)
Annualized GAAP return on equity(16.4)%(11.8)%
Dividends per share$0.23 $0.69 
Book value per share$10.18$10.18
Economic return on book value (1)
(3.4)%(9.9)%
  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.
Business Highlights
Investment Portfolio
•Deployed $167 million of capital into new organic and third-party investments
•Credit performance remained strong with stable delinquencies and continued declining LTVs
•Investment Portfolio secured recourse leverage of 0.8x as of September 30, 2022
Business Purpose Mortgage Banking
•Funded $570 million in business purpose loans, 83% Bridge and 17% Single-Family Rental ("SFR")
•Securitized $274 million of loans in a private securitization backed by SFR loans
•Closed the previously announced acquisition of Riverbend Funding, LLC and its subsidiaries ("Riverbend"), a best-in-class private mortgage lender to investors in transitional residential and multifamily real estate, for an initial cash purchase price of approximately $44 million paid at closing (and subject to certain adjustments including potential earnout consideration)
Residential Mortgage Banking
•Distributed $612 million of jumbo loans through whole loan sales; at September 30, 2022, total net jumbo loan exposure was $712 million
•Intentionally maintained light volume, locking $461 million of jumbo loans, down from $1.0 billion in second quarter 2022; loan purchase commitments were $256 million, down from $538 million in second quarter 2022
Financing Highlights
•Maintained robust balance sheet with unrestricted cash of 2017. This increase was primarily driven by positive mark-to-market adjustments on our available-for-sale securities$297 million and our quarterly earnings exceeding our dividend.unencumbered assets of $491 million at September 30, 2022
Unrealized gains on our available-for-sale securities increased $0.19 per share during•Added $900 million of new financing capacity across multiple borrowing facilities (with both new and existing domestic depository institutions) in the third quarter to further support operating platforms
◦Successfully renewed warehouse lines with maturities in the third quarter at unchanged advance rates
◦Ended third quarter with $3.8 billion of 2017, primarily asunused financing capacity across Residential and Business Purpose Mortgage Banking segments
•Total margin call activity in the third quarter resulted in a resultnet return of cash to Redwood from financing and hedging counterparties
•Repurchased 3.4 million shares of Redwood’s common stock at a positive $0.27 per share mark-to-market adjustment on our available-for-sale securities due to credit spread tightening during the quarter. This increase was partially offset by $0.05cost of $24 million, resulting in $0.12 per share of discount amortization income recognized in earnings from the appreciationbook value accretion 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.third quarter

RWT Horizons Highlights
Capital Allocation Summary
This section provides an overview of our capital position and how it was allocated at the end of•Completed three new investments in the third quarter
•Since inception, RWT Horizons has completed 27 technology venture investments in 24 companies with an aggregate of 2017. A detailed discussion of our liquidity and capital resources is provided in the Liquidity and Capital Resources section of this MD&A that follows.
We use a combination 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 at September 30, 2017.
Table 3 – Capital Allocation Summary
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 billion at September 30, 2017, and included $1.21 billion of equity capital and $0.57 billion of the total $2.57 billion of long-term debt on our consolidated balance sheet. This portion of debt included $201over $26 million of exchangeable debt due in 2019, $245 million of convertible debt due in 2023, and $140 million of trust-preferred securities due in 2037.investment commitments
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.
80
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 20172022 and 2016.2021. Most tables include a "change" column that shows the amount by which the results from 20172022 are greater or less than the results from the respective period in 2016.2021. 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 2017,2022, compared to the third quarter of 2016,2021, and increases or decreases induring the "nine-month periods" refer to the change in results for the first nine months of 2017,ended September 30, 2022 compared to the first nine months ended September 30, 2021.
Consolidated Results of 2016.Operations
The following table presents the components of our net (loss) income for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 42 – Net (Loss) Income
  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)20222021Change20222021Change
Net Interest Income$34,935 $41,968 $(7,033)$128,525 $98,351 $30,174 
Non-interest Income
Mortgage banking activities, net16,535 63,163 (46,628)2,833 200,189 (197,356)
Investment fair value changes, net(57,697)26,077 (83,774)(151,789)120,644 (272,433)
Other income, net4,027 2,388 1,639 17,016 8,357 8,659 
Realized gains, net— 6,703 (6,703)2,581 17,803 (15,222)
Total non-interest (loss) income, net(37,135)98,331 (135,466)(129,359)346,993 (476,352)
General and administrative expenses(40,107)(47,692)7,585 (106,927)(131,837)24,910 
Loan acquisition costs(2,426)(4,621)2,195 (10,371)(11,928)1,557 
Other expenses(4,261)(4,023)(238)(11,814)(12,104)290 
Net (loss) income before income taxes(48,994)83,963 (132,957)(129,946)289,475 (419,421)
(Provision for) benefit from income taxes(1,417)4,323 (5,740)10,484 (13,907)24,391 
Net (Loss) Income$(50,411)$88,286 $(138,697)$(119,462)$275,568 $(395,030)
Diluted (loss) earnings per common share$(0.44)$0.65 $(1.09)$(1.04)$2.03 $(3.07)
Net Interest Income
The decreaseNet interest income from our investment portfolio increased by $3 million and $36 million during the three and nine-month periods, respectively, and generally resulted from higher average asset balances in 2022, as we increased our investments in bridge loans and in securities we retained from CoreVest securitizations during the prior twelve months. We recognized elevated levels of discount accretion on our available-for-sale securities and yield maintenance income on our SFR securities during the first quarter of 2022. In association with a continued rise in interest rates throughout 2022, prepayment speeds on many of our assets slowed, and resulted in a reduction in discount accretion and yield maintenance income on our SFR securities in the second and third quarters. Additionally, net interest income from Business Purpose Mortgage Banking operations increased by $1 million and $5 million, during the three and nine-month periods, respectively, as a result of higher average balances of SFR loan inventory during the respective periods.
These increases were offset by $6 million and $8 million decreases in net interest income during the three-three and nine-month periods, primarily resultedrespectively, from higher corporate interest expense resulting from the saleissuance of new convertible debt in June 2022 and from our commercial mezzanine loans during 2016. This decline was partially offsettrust preferred securities, which are variable rate and were impacted by higher benchmark interest rates in 2022. Additionally, Residential Mortgage Banking operations experienced $5 million and $3 million decreases in net interest income from our residential investmentsduring the three and nine-month periods, respectively, as a result of a lower average balance of loan inventory in the respective periods.
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Continued increases in benchmark interest rates and borrowing spreads could negatively impact our future net interest income in relation to the portion of our fixed-rate assets that are financed with floating-rate debt, as well as in relation to fixed-rate debt that matures in the near-term that is refinanced with new debt at current market rates. Additionally, to the extent we add incremental leverage to our investment portfolio, net interest income could decrease while proceeds from those financings are redeployed into other assets or if additional capital redeploymentis deployed into HEIs which do not earn interest income.
Additional detail on net interest income is provided in the “Net Interest Income” section that follows.
Mortgage Banking Activities, Net
The decrease in income from mortgage banking activities during 2016the three and nine-month periods was attributable to $31 million and $123 million decreases, respectively, from our Residential Mortgage Banking operations and $16 million and $74 million decreases, respectively, from our Business Purpose Mortgage Banking operations.
The decreases from Residential Mortgage Banking operations were attributable to lower acquisition volumes as well as decreased margins during 2022, as a sharp increase in mortgage rates during 2022 contributed to an industry-wide decrease in residential mortgage origination activity. Additionally, given market volatility, we focused on risk management and were deliberate in moderating volume and transferring financial risk quickly during 2022. Margins and profitability for Residential Mortgage Banking during the first nine months of 2017.2022 were impacted by wider credit spreads for securitizations and whole loans, as well as increased rate volatility, which resulted in higher hedging costs. In the third quarter of 2022, margins recovered on improved distribution execution.
Provision for Loan Losses
The reversalDespite increased volumes during the first nine months 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.
2022, Business Purpose Mortgage Banking Activities, Net
Income fromincome declined year-over-year, as continued market volatility and extreme credit spread widening in 2022 negatively impacted profitability. Spreads stabilized in the third quarter and volume remained fairly healthy, which contributed to $14 million of BPL mortgage banking activities, net includes results from our residential jumbo mortgage banking operations and, prior toactivity income in the secondthird quarter of 2016, results from our residential conforming and commercial mortgage banking operations. The increase in mortgage banking activities during the three- and nine-month periods was predominantly due to higher gross margins from our jumbo residential mortgage banking activities on higher volume.2022.
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 residential loans held-for-investmentportfolio investments accounted for under the fair value option and financed with FHLB borrowings,their associated interest rate hedges. During the three and nine months ended September 30, 2022, negative investment fair value changes reflected extreme levels of credit spread widening across many of our investmentlonger-duration, fixed-rate investments, partially offset by fair value increases in our IO securities, classified as trading,MSRs, and interest rate hedges, associated with eachwhich benefited from rising interest rates. While our home equity investments ("HEIs") experienced price increases in the first half of these investments.2022 due to home price appreciation, in the third quarter of 2022, they saw declines in prices as the outlook for home price appreciation deteriorated. Negative fair value changes primarily reflected unrealized mark-to-market losses, while fundamental credit performance, including delinquencies and LTVs, remained stable across our portfolio.
During the three and nine months ended September 30, 2017, the2021, positive investment fair value changes primarily resulted from net increasesreflected improvements in the fair value ofcredit performance and spread tightening across our trading securitiesinvestment portfolio, particularly in our third-party re-performing loan ("RPL") 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.retained CAFL SFR securities.
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 resulting from the write-off of premium from loan repayments.
Additional detail on our investment fair value changes during 2022 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 increase in other income for the three and nine month periods primarily resulted from higher income on our MSR investments, which increased by $3 million and $12 million, respectively. The increase in both the three- and nine-month periodsincome from MSRs was primarily compriseddue to positive valuation changes resulting from a slowdown in prepayment speeds during 2022 as interest rates rose.
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.
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Realized Gains, Net
During the third quarter of 2017,three and nine months ended September 30, 2022, we realized gains of $2zero and $3 million, respectively, primarily resulting from calls associated with third-party available-for-sale ("AFS") securities during the salefirst quarter of $23 million of AFS securities.2022. During the third quarter of 2016,three and nine months ended September 30, 2021, we realized gains of $7 million whichand $18 million, respectively, primarily resulting from the call of two and six seasoned Sequoia securitizations, respectively.
General and Administrative Expenses
General and administration expenses decreased for the three and nine month periods, primarily due to $16 million and $42 million decreases in variable compensation expense, respectively, associated with the decreases in earnings during the respective periods. Additionally, fixed compensation expense in the second quarter of 2022 included a $2 million primarilybenefit from a payroll tax refund related to a prior year that was realized during 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, we realized gains of $9 million, which included $10 million of realized gains primarily from the sale of $61 million of AFS securities, partiallyquarter. These decreases were offset by a $1 million increase in costs associated with the acquisition of Riverbend, including $1 million of realized lossdirect transaction costs incurred over the second and third quarters of 2022, and $2 million of fixed compensation costs in the third quarter of 2022 from the repurchaseaddition of $37Riverbend employees. Additionally, in the third quarter of 2022, we incurred $4 million of convertible debt. During the nine months ended September 30, 2016, we realized gains of $26 million, which included $21 million of realized gains primarily from the sale of $241 million of AFS securitiesemployee severance and $5 million of realized gains from the sale of $208 million of commercial mezzanine loans.transition-related expenses.
Operating Expenses
The decreaseAdditional detail on our General and administrative expenses is presented in operating expenses during the three- and nine-month periods was primarily due to the restructuringTable 22.1 of our residential conforming and commercialNotes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Loan Acquisition Costs
Loan acquisition costs for our mortgage banking operations duringdecreased $2 million for both the first quarterthree and nine month periods, as a result of 2016, which resultedlower loan origination volumes 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, 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 in provision for income taxes resulted primarily from higher incomehedging activities. Losses from our mortgage banking activities. operations during the first nine months of 2022 contributed to a tax benefit during that period. For the third quarter of 2022, a small loss from our mortgage banking operations was more than offset by gains on hedges associated with certain of our investments, resulting in a tax provision for the quarter.
During the third quarter of 2021, we realized a $19 million benefit from the release of valuation allowance on a portion of our deferred tax assets contributing to a net tax benefit during that quarter. The tax provision for the nine months ended September 30, 2021 reflects positive income earned from our mortgage banking operations during that period, partially offset by the benefit from the release of valuation allowance.
For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.

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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, 20172022 and 2016.2021.
Table 53 – Net Interest Income
Three Months Ended September 30,
20222021
(Dollars in Thousands)Interest Income/ (Expense)
 Average
   Balance (1)
YieldInterest Income/ (Expense)
 Average
   Balance (1)
Yield
Interest Income
Residential loans, held-for-sale$11,844 $984,365 4.8 %$15,377 $1,936,882 3.2 %
Residential loans - HFI at Legacy Sequoia (2)
1,473 199,264 3.0 %1,042 248,791 1.7 %
Residential loans - HFI at Sequoia (2)
31,587 3,468,730 3.6 %18,867 2,104,357 3.6 %
Residential loans - HFI at Freddie Mac SLST (2)
16,098 1,600,215 4.0 %18,707 2,043,813 3.7 %
Business purpose loans - HFS9,070 535,017 6.8 %4,090 314,641 5.2 %
Business purpose loans - HFI24,688 1,257,222 7.9 %14,102 704,752 8.0 %
Single-family rental loans - HFI at CAFL (2)
50,959 2,960,614 6.9 %48,723 3,455,645 5.6 %
Bridge loans - HFI at CAFL (2)
10,480 529,993 7.9 %214 12,015 7.1 %
Multifamily loans at Freddie Mac K-Series (2)
4,762 439,966 4.3 %4,846 483,930 4.0 %
Trading securities3,924 131,626 11.9 %5,710 147,925 15.4 %
Available-for-sale securities3,065 136,203 9.0 %8,532 120,183 28.4 %
Other interest income9,712 898,111 4.3 %5,512 769,308 2.9 %
Total interest income177,662 13,141,326 5.4 %145,722 12,342,242 4.7 %
Interest Expense
Short-term debt facilities(19,436)1,561,146 (5.0)%(10,808)1,982,726 (2.2)%
Short-term debt - servicer advance financing(2,606)225,002 (4.6)%(1,018)149,450 (2.7)%
Promissory notes(572)33,302 (6.9)%— — — %
Short-term debt - convertible notes, net(1,330)100,895 (5.3)%— — — %
ABS issued - Legacy Sequoia (2)
(1,486)198,166 (3.0)%(641)245,910 (1.0)%
ABS issued - Sequoia (2)
(27,541)3,233,716 (3.4)%(15,368)1,872,636 (3.3)%
ABS issued - Freddie Mac SLST (2)
(12,829)1,325,930 (3.9)%(15,774)1,765,465 (3.6)%
ABS issued - Freddie Mac K-Series (2)
(4,377)408,164 (4.3)%(4,460)453,031 (3.9)%
ABS issued - CAFL (2)
(44,677)3,075,551 (5.8)%(37,489)3,118,792 (4.8)%
Long-term debt facilities(14,464)1,148,700 (5.0)%(8,715)881,669 (4.0)%
Long-term debt - corporate(13,409)761,712 (7.0)%(9,481)651,468 (5.8)%
Total interest expense(142,727)12,072,284 (4.7)%(103,754)11,121,147 (3.7)%
Net Interest Income$34,935 $41,968 

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  Three 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 $10,396
 $980,067
 4.2 % $8,835
 $995,136
 3.6 %
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 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 %
Available-for-sale securities 10,734
 420,896
 10.2 % 12,769
 488,842
 10.4 %
Other interest income 771
 202,019
 1.5 % 258
 226,730
 0.5 %
Total interest income 62,737
 5,377,732
 4.7 % 60,906
 5,383,141
 4.5 %
Interest Expense            
Short-term debt facilities (7,158) 1,066,695
 (2.7)% (5,405) 1,071,757
 (2.0)%
Short-term debt - convertible notes, net (3,024) 250,098
 (4.8)% —
 —
 — %
ABS issued - Legacy Sequoia (2)
 (3,852) 667,070
 (2.3)% (3,193) 828,411
 (1.5)%
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)%
Total interest expense (27,443) 4,437,651
 (2.5)% (21,597) 4,574,298
 (1.9)%
Net Interest Income $35,294
     $39,309
    


 Nine Months Ended September 30,Nine Months Ended September 30,
 2017 201620222021
(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 $26,246
 $846,335
 4.1 % $24,062
 $886,777
 3.6 %Residential loans, held-for-sale$42,201 $1,406,219 4.0 %$35,308 $1,568,966 3.0 %
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 Legacy Sequoia (2)
3,592 211,707 2.3 %3,559 262,007 1.8 %
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 %
Residential loans - HFI at Sequoia (2)
Residential loans - HFI at Sequoia (2)
95,608 3,732,108 3.4 %48,842 1,644,256 4.0 %
Residential loans - HFI at Freddie Mac SLST (2)
Residential loans - HFI at Freddie Mac SLST (2)
49,851 1,717,544 3.9 %58,372 2,110,555 3.7 %
Business purpose loans - HFSBusiness purpose loans - HFS22,823 536,366 5.7 %10,105 277,486 4.9 %
Business purpose loans - HFIBusiness purpose loans - HFI52,226 1,003,673 6.9 %38,877 668,413 7.8 %
Single-family rental loans - HFI at CAFL (2)
Single-family rental loans - HFI at CAFL (2)
173,630 3,070,972 7.5 %152,444 3,349,828 6.1 %
Bridge loans - HFI at CAFL(2)
Bridge loans - HFI at CAFL(2)
21,751 412,766 7.0 %214 4,049 7.0 %
Multifamily loans at Freddie Mac K-Series (2)
Multifamily loans at Freddie Mac K-Series (2)
14,247 451,757 4.2 %14,492 488,804 4.0 %
Trading securities 31,622
 643,736
 6.5 % 15,639
 271,758
 7.7 %Trading securities13,520 151,898 11.9 %17,133 140,241 16.3 %
Available-for-sale securities 33,446
 441,038
 10.1 % 42,473
 553,278
 10.2 %Available-for-sale securities17,252 137,134 16.8 %16,051 128,564 16.6 %
Other interest income 1,638
 210,765
 1.0 % 926
 318,138
 0.4 %Other interest income27,816 917,975 4.0 %17,325 790,499 2.9 %
Total interest income 176,589
 5,183,546
 4.5 % 190,021
 5,454,955
 4.6 %Total interest income534,517 13,750,119 5.2 %412,722 11,433,668 4.8 %
Interest Expense     

     

Interest Expense
Short-term debt facilities (18,174) 967,834
 (2.5)% (17,439) 1,150,206
 (2.0)%Short-term debt facilities(41,081)1,628,316 (3.4)%(27,380)1,609,295 (2.3)%
Short-term debt - servicer advance financingShort-term debt - servicer advance financing(6,110)241,582 (3.4)%(3,414)166,605 (2.7)%
Promissory notesPromissory notes(572)11,223 (6.8)%— — — %
Short-term debt - convertible notes, net (5,811) 159,744
 (4.9)% —
 —
 — %Short-term debt - convertible notes, net(1,330)34,001 (5.2)%— — — %
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 - Legacy Sequoia (2)
(3,154)209,931 (2.0)%(2,271)258,915 (1.2)%
ABS issued - Sequoia Choice (2)
 (104) 3,151
 (4.4)% —
 —
 — %
ABS issued - Sequoia (2)
ABS issued - Sequoia (2)
(84,041)3,491,194 (3.2)%(38,848)1,419,153 (3.6)%
ABS issued - Freddie Mac SLST (2)
ABS issued - Freddie Mac SLST (2)
(40,287)1,424,032 (3.8)%(49,756)1,859,559 (3.6)%
ABS issued - Freddie Mac K-Series (2)
ABS issued - Freddie Mac K-Series (2)
(13,099)419,954 (4.2)%(13,294)459,648 (3.9)%
ABS issued - CAFL (2)
ABS issued - CAFL (2)
(144,883)3,105,387 (6.2)%(118,543)3,041,714 (5.2)%
Long-term debt facilitiesLong-term debt facilities(37,664)1,231,057 (4.1)%(32,518)776,846 (5.6)%
Long-term debt - FHLBC (15,125) 1,999,999
 (1.0)% (8,634) 1,974,582
 (0.6)%Long-term debt - FHLBC— — — %(2)374 (0.7)%
Long-term debt - other (22,407) 481,232
 (6.2)% (30,461) 680,576
 (6.0)%
Long-term debt - corporateLong-term debt - corporate(33,771)706,504 (6.4)%(28,345)650,828 (5.8)%
Total interest expense (72,708) 4,314,044
 (2.2)% (67,991) 4,719,380
 (1.9)%Total interest expense(405,992)12,503,181 (4.3)%(314,371)10,242,937 (4.1)%
Net Interest Income $103,881
     $122,030
    Net Interest Income$128,525 $98,351 
(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)
(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business purpose loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for certain ABS issued, which is based upon fair value.
(2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia entities. Interest income from residential loans - HFI at Legacy Sequoia and 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 at each segment are included in the “Results of Operations by Segment” section that follows.
The Corporate/Other line item in the table above primarily includes interest expense related to long-term debt not directly allocated to our segments and net interest income from consolidated Legacy Sequoia entities. Details regarding consolidated LegacyInterest income from residential loans - HFI at 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 and securities and the debt yield ofinterest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia entities. Interest income from residential loans - HFI at Freddie Mac SLST and the short-term debt used in part to finance each investment typeinterest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities. Interest income from multifamily loans at September 30, 2017.
Table 7 –Freddie Mac K-Series and the interest expense from ABS issued - Freddie Mac K-Series represent activity from our consolidated Freddie Mac K-Series entities. Interest Expense — Specific Borrowing Costsincome from single-family rental loans - HFI at CAFL, bridge loans - HFI at CAFL and the interest expense from ABS issued - CAFL represent activity from our consolidated CAFL entities.
85
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 (loss) income for the three and nine months ended September 30, 20172022 and 2016.2021.
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)20222021Change20222021Change
Segment Contribution from:             Segment Contribution from:
Residential Mortgage BankingResidential Mortgage Banking$(640)$19,406 $(20,046)$(7,371)$74,469 $(81,840)
Business Purpose Mortgage BankingBusiness Purpose Mortgage Banking(3,856)10,837 (14,693)(27,054)31,146 (58,200)
Investment Portfolio $41,739
 $63,743
 $(22,004)  $137,185
 $155,863
 $(18,678)Investment Portfolio(22,404)71,085 (93,489)(24,049)237,135 (261,184)
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(23,511)(13,042)(10,469)(60,988)(67,182)6,194 
Net Income $36,180
 $52,553
 $(16,373)  $109,473
 $105,897
 $3,576
Net (Loss) IncomeNet (Loss) Income$(50,411)$88,286 $(138,697)$(119,462)$275,568 $(395,030)
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 2016.2022.
Corporate/Other
The $2 million decreaseincrease in net incomeexpense from Corporate/Other for the three-month periods was primarily due to a $1$19 million increase in interest expensebenefit from convertible debt issuedtaxes in the third quarter of 2017,2021 resulting from the reversal of 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 $2deferred tax asset valuation allowance, as well as $6 million of upfront costs associated with the hiring of a new executivehigher interest expense in the third quarter of 2017. 2022 resulting from the issuance of new convertible debt in June 2022 and from our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates. These increases in expenses were offset by $11 million and $20 million decreases in the three- and nine-month periods, respectively, in compensation expense for corporate employees, primarily related to variable compensation, which decreased in association with lower earnings year-over-year.
The $10 million improvementdecrease in net expense from Corporate/Other for the nine-month periods was primarily due to the $11a $20 million of costs incurreddecrease in compensation expense for corporate employees, primarily related to variable compensation, which decreased in association with lower earnings year-over-year, offset both by $8 million of higher interest expense in 2022 and the restructuring$19 million benefit from income taxes in 2021 described previously.
86

Residential Mortgage Banking Segment
Our Residential Mortgage Banking 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 Sequoia private-label securitization program, or transfer into our investment portfolio. 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 conforming and commercialloans held-for-sale within this segment. This segment’s main source of mortgage banking operations during the first quarterincome is net interest income from its inventory of 2016. In addition, $3 million of net losses related to our commercialloans held-for-sale, as well as income from mortgage banking operations wereactivities, which includes valuation increases (or gains) on loans we acquire and subsequently sell, securitize, or transfer into our investment portfolio, and the hedges used to manage risks associated with these activities. Direct operating expenses and tax expenses associated with these activities are also included in Corporate/Other for the first quarter of 2016, prior to those operations being wound down.

this segment.
Investment Portfolio Segment

Our Investment PortfolioNet income from this segment is primarily comprised of our portfolio of residentialnet interest income earned on loans while they are held in inventory, mortgage banking activities income (including mark-to-market adjustments on loans held-for-investmentfrom the time they are purchased to when they are sold or securitized, mark-to-market adjustments on new and financed through the FHLBCoutstanding loan purchase commitments and our real estategains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate 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 ofthat we retain from our Sequoia senior trading securities were included in our Residential Mortgage Banking segment. As such, theysecuritizations (many of which we consolidate for GAAP purposes) are excluded from any amountstransferred to and tables in this section and may not agree with similarly titled amounts and tables in our consolidated financial statements and footnotes.
The following table presents the components of segment contribution for the Investment Portfolio segment for the three and nine months ended September 30, 2017 and 2016.
Table 9 – Investment Portfolio Segment Contribution
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2017 2016 Change  2017 2016 Change
Interest income $47,023
 $47,176
 $(153)  $135,106
 $149,985
 $(14,879)
Interest expense (9,445) (5,013) (4,432)  (21,940) (18,679) (3,261)
Net interest income 37,578
 42,163
 (4,585)  113,166
 131,306
 (18,140)
Reversal of provision for loan losses —
 859
 (859)  —
 7,102
 (7,102)
Net Interest Income after Provision 37,578
 43,022
 (5,444)  113,166
 138,408
 (25,242)
Non-interest income             
MSR income, net 1,615
 3,770
 (2,155)  6,106
 12,834
 (6,728)
Investment fair value changes, net 1,372
 12,176
 (10,804)  13,846
 (16,505) 30,351
Other income 1,197
 1,643
 (446)  3,367
 4,157
 (790)
Realized gains, net 1,734
 6,615
 (4,881)  9,561
 25,745
 (16,184)
Total non-interest income, net 5,918
 24,204
 (18,286)  32,880
 26,231
 6,649
Direct operating expenses (1,324) (2,751) 1,427
  (4,371) (7,689) 3,318
Segment contribution before income taxes 42,172
 64,475
 (22,303)  141,675
 156,950
 (15,275)
Provision for income taxes (433) (732) 299
  (4,490) (1,087) (3,403)
Total Segment Contribution $41,739
 $63,743
 $(22,004)  $137,185
 $155,863
 $(18,678)
The following table presents our primary portfolios of investment assetsheld 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 sale of our commercial mezzanine loans during 2016, as well as from higher interest costs on our FHLB borrowings during 2017 and higher interest expense associated with securities that were financed during the second and third quarters of 2017. These decreases were partially offset by higher net interest income from real estate securities, primarily resulting from higher average balances of these investments 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 resulting from the write-off of premium from loan repayments.
The increase in fair values from commercial/multifamily trading securities and their associated derivatives during the three- and nine-month periods primarily resulted from credit spread tightening during each period.


MSR Income, net
The following table presents the components of MSR income, net for the three and nine months ended September 30, 2017 and 2016.
Table 13 – MSR Income, net
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Net servicing fee income $3,396
 $8,726
 $14,775
 $27,241
Changes in fair value of MSR from the receipt of expected cash flows (1,914) (5,705) (7,392) (17,766)
MSR reversal of provision for repurchases (8) —
 304
 208
MSR income before the effect of changes in interest rates and other assumptions 1,474
 3,021
 7,687
 9,683
Changes in fair value of MSRs from interest rates and other assumptions (1)
 563
 7,085
 (3,450) (52,723)
Changes in fair value of associated derivatives (422) (6,336) 1,869
 55,874
Total net effect of changes in assumptions and rates 141
 749
 (1,581) 3,151
MSR Income, Net $1,615
 $3,770
 $6,106
 $12,834
(1)Primarily reflects 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.
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 costs associated with the management of our servicing portfolio. For the three and nine months ended September 30, 2017, the provision for income taxes at our Investment Portfolio segment resulted from GAAP income earned at our TRS during those periods, primarily from MSR income and income on certain securities we hold at our TRS.


Residential Loans Held-for-Investment at Redwood Portfoliosegment.
The following table provides the activity of residential loans held-for-investmentheld in inventory for sale at Redwoodour mortgage banking business during the three and nine months ended September 30, 2017 and 2016.2022.
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, 2022September 30, 2022
Balance at beginning of period $990,924 $1,673,236 
Acquisitions337,922 3,483,833 
Sales(602,842)(3,653,601)
Transfers between segments (1)
— (684,491)
Principal repayments(29,486)(72,771)
Changes in fair value, net(20,060)(69,748)
Balance at End of Period$676,458 $676,458 
  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 $202022, our residential mortgage loan conduit locked $461 million and $227 million, respectively, of residential loans from our Residential Mortgage Banking segment to our Investment Portfolio segment. At September 30, 2017, $2.26$4.10 billion of loans, were held by our FHLB-member subsidiaryrespectively ($256 million and were financed with $2.00$2.75 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), including $379 million and $3.59 billion of borrowings from the FHLBC. In connection with these borrowings, our FHLB-member subsidiary is required to hold $43Select loans and $82 million and $512 million of FHLB stock.
At September 30, 2017, the weighted average maturity of these FHLB borrowings was approximately eight yearsChoice loans, respectively, and they had a weighted average cost of 1.3% per annum. This interest cost resets every 13 weekspurchased $338 million 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$3.48 billion 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 onrespectively. During 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 consisted2022, approximately 80% of fixed-rate assets (78%), adjustable-rate assets (5%), hybrid assets that reset within the next year (9%),locked loans were purchase-money loans 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 that20% 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.refinancings. During the three and nine months ended September 30, 2017, realized credit losses on our residential securities totaled $12022, we distributed $612 million and $3 million,$3.68 billion of loans (unpaid principal balance) through whole loan sales, respectively. During the three and nine months ended September 30, 2016, realized credit losses on our residential securities totaled $0.3 million and $3 million, respectively.
Residential Loans Held-for-Investment at Sequoia Choice Portfolio

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

The following table presents the balance sheets of the consolidated Sequoia Choice entity at September 30, 2017 and December 31, 2016.
Table 21 – Consolidated Sequoia Choice Entity Balance Sheets
(In Thousands) September 30, 2017 December 31, 2016
Residential loans, held-for-investment, at fair value $317,303
 $—
Other assets 1,266
 —
Total Assets $318,569

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

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

$—

The following table provides details of residential loan activity at the consolidated Sequoia Choice entity for the three and nine months ended September 30, 2017 and 2016.
Table 22 – Residential Loans Held-for-Investment at Sequoia Choice - Activity
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Balance at beginning of period  $—
 $—
 $—
 $—
New securitization issuance 318,129
   318,129
  
Changes in fair value, net (826) —
 (826) —
Balance at End of Period $317,303

$—

$317,303

$—
The outstanding loans held-for-investment at our Sequoia Choice entity at September 30, 2017 were prime-quality, first lien, 30-year, fixed-rate loans and were originated in 2014 or later. The gross 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
During the nine months ended September 30, 2017,2022, we sold conforming MSRs with a fair value of $53 million. The remaining $63completed one securitization backed by $687 million of MSRs are primarily associated with loans transferred to Sequoia securitizations we completed over the past several years.(unpaid principal balance).

The following table presents characteristics of our MSR investments and their associated loans at September 30, 2017.
Table 24 – Characteristics of MSR Investments Portfolio
(Dollars In Thousands) September 30, 2017
Unpaid principal balance $5,747,006
Fair value of MSRs $62,928
MSR values as percent of unpaid principal balance 1.09%
Gross cash yield (1)
 0.26%
Number of loans 8,900
Average loan size $646
Average coupon 3.96%
Average loan age (months) 38
Average original loan-to-value 67%
Average original FICO score 770
60+ day delinquencies 0.08%
(1)Gross cash yield is calculated by dividing the annualized quarterly gross servicing fees we received for the three months ended September 30, 2017, by the weighted average notional balance of loans associated with MSRs we owned during that period.
At September 30, 2017, nearly all of our MSRs were comprised of base MSRs and we did not own any portion of a servicing right related to any loan where we did not own the entire servicing right. At September 30, 2017 and December 31, 2016,2022, we had $0.5total net jumbo loan exposure of $712 million and $1(down 5% from June 30, 2022), with an average gross mortgage rate of 5%. This balance included $703 million (principal value) 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 three 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 $318sheet, $146 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), and $137 million of forward sale agreements for loans. Given current market conditions, we reduced our capital allocation to Residential Mortgage Banking to $150 million at September 30, 2017 included $1.49 billionthe end of jumbo loans.the third quarter of 2022, down from $200 million at the end of the second quarter of 2022. As we look ahead, we expect conditions in the consumer residential sector to remain challenging for a number of quarters as industry volumes continue to be affected by rapidly increasing mortgage rates, which, along with record home price appreciation in recent years, has pushed housing affordability to new lows.
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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, 2017,2022, we had $438 millionresidential warehouse facilities outstanding with nine different counterparties, with $2.85 billion of warehouse debt outstandingtotal capacity and $2.10 billion of available 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 $1.38 billion of total capacity and marginable facilities with $1.48 billion of total capacity.
The following table presents key earnings and operating metrics for our Residential Mortgage Banking segment during the three and nine months ended September 30, 2022.
Table 6 – Residential Mortgage Banking Earnings Summary and Operating Metrics
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20222021Change20222021Change
Mortgage banking (loss) income$3,957 $40,121 $(36,164)$5,038 $131,279 $(126,241)
Operating expenses(6,285)(10,286)4,001 (20,692)(33,170)12,478 
Benefit from (provision for) income taxes1,688 (10,429)12,117 8,283 (23,640)31,923 
Segment Contribution$(640)$19,406 $(20,046)$(7,371)$74,469 $(81,840)
Loan purchase commitments (loan locks, adjusted for expected fallout)$256,044 $3,288,102 $(3,032,058)$2,749,910 $9,541,499 $(6,791,589)
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 mortgage banking activities, 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 funddecrease in contribution from our residential mortgage banking operations during the three- and nine-month periods was primarily attributable to lower mortgage banking activities income, as discussed in the near-term.
Our residentialpreceding Consolidated Results of Operations section of this MD&A. While margins improved in the third quarter of 2022, a re-widening of credit spreads or further rate volatility could continue to negatively impact our margins and profitability. The decreases in mortgage banking operations created investments that allowed us to deploy $57 million of capital into our investment portfolio during the first nine months of 2017. At September 30, 2017, we had 446 loan sellers, up from 406 at the end of 2016. This included 187 jumbo sellers and 259 sellers from various FHLB districts participating in the FHLB's MPF Direct program.
Net Interest Income
Net interest income from residential mortgage banking is primarily comprised of interest income earned on residential loans from the time we purchase the loans to when we sell or securitize them,were partially offset by interest expense incurred on short-term warehouse debt used in part to finance the loans while we hold them on our consolidated balance sheet.
Net interest income from residential mortgage banking increased for bothlower general and administrative expenses, which declined during the three- and nine-month periods, primarily due to lower variable compensation expenses.
Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit from income taxes for the third quarter of 2022 was due to an overall GAAP loss incurred at our TRS during that period.

Business Purpose Mortgage Banking Segment
Our Business Purpose Mortgage Banking segment consists of a platform that originates and acquires business purpose loans (consisting of SFR loans and bridge loans) for subsequent securitization, sale to whole loan warehouse borrowings usedbuyers, or transfer into our investment portfolio. SFR loans are business purpose mortgage loans to financeinvestors in single-family (primarily 1-4 unit) rental properties. Bridge loans are business purpose mortgage loans to investors rehabilitating and subsequently reselling or renting residential and multifamily properties. We typically originate SFR loans and distribute most of our residentialSFR loans held-for-salethrough our CAFL private-label securitization program and, on occasion, will sell them as whole loans. We originate and acquire bridge loans and typically transfer these loans into our Investment Portfolio where they will be retained for each period in 2017,investment; on occasion, we may sell them as comparedwhole loans. This segment also includes various derivative financial instruments that we utilize to 2016.manage certain risks associated with our inventory of SFR loans held-for-sale.
The amountNet income from this segment is primarily comprised of net interest income we earnearned on loans held-for-sale is dependentwhile they are held in inventory, mortgage banking activities income (including mark-to-market adjustments on many variables, including the amount of loans andfrom the time they are outstandingpurchased to when they are sold, securitized or transferred into our investment portfolio, fee income earned on originations, and gains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate securities that we retain from our consolidated balance sheetCAFL securitizations (which we consolidate for GAAP purposes) and their interest rates, as well asbridge loans we originate in this segment are transferred to and held in our Investment Portfolio segment.
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On July 1, 2022, we closed the amountpreviously announced acquisition of leverage we employ throughRiverbend, a private mortgage lender to investors in transitional residential and multifamily real estate. This acquisition adds capacity, product breadth and geographic footprint to our existing bridge loan origination platform.
The following table provides business purpose loan origination activity at Redwood during the use of short-term debtthree and nine months ended September 30, 2022.
Table 7 – Business Purpose Loans — Funding Activity
Three Months Ended September 30, 2022Nine Months Ended September 30, 2022
(In Thousands)Single-Family Rental
Bridge (1)
TotalSingle-Family Rental
Bridge (1)
Total
Fair value at beginning of period$505,171 $— $505,171 $358,309 $— $358,309 
Fundings99,736 470,425 570,161 966,648 1,446,610 2,413,258 
Sales(34,970)(48,279)(83,249)(366,720)(48,279)(414,999)
Transfers between segments (2)
(266,181)(423,425)(689,606)(561,218)(1,400,849)(1,962,067)
Principal repayments(5,582)(2,220)(7,802)(37,166)(2,220)(39,386)
Riverbend loans acquired at acquisition— 59,748 59,748 — 59,748 59,748 
Changes in fair value, net(17,069)(116)(17,185)(78,748)1,123 (77,625)
Fair Value at End of Period$281,105 $56,133 $337,238 $281,105 $56,133 $337,238 
(1)We originate bridge loans at our TRS and then transfer them to finance theour REIT. Origination fees and any fair value changes on these loans and the interest rates on that debt. These factors will impact net interest income in future periods.

Mortgage Banking Activities, Net
prior to transfer are recognized within Mortgage banking activities, net includeson our consolidated statements of income (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitizations, we record any changes in marketfair value from the date of bothorigination or purchase to the loans we hold for sale and commitments for loans we intend to purchase (collectively, our loan pipeline),time of securitization as well as the effect of hedges we utilize to manage risks associated with our loan pipeline. Our loan sale profit margins are measured over the period from when we commit to purchase a loan and subsequently sell or securitize the loan. Accordingly, these profit margins may encompass positive or negative market valuation adjustments on loans, hedging gains or losses associated with our loan pipeline, and any other related transaction expenses, and may be realized over the course of one or more quarters for financial reporting purposes.
The following table presents the components of residential mortgage banking activities, net. Amounts presented include both the changes in market values for loans that were sold and associated derivative positions that were settled during the periods presented, as well as changes in market values of loans, derivatives and hedges outstanding at the end of each period.
Table 27 – Components of Residential Mortgage Banking Activities, Net
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2017 2016 Change  2017 2016 Change
Changes in fair value of:             
Residential loans, at fair value (1)
 $28,135
 $12,671
 $15,464
  $63,122
 $47,456
 $15,666
Sequoia securities —
 —
 —
  —
 1,455
 (1,455)
Risk management derivatives (2)
 (7,077) (3,287) (3,790)  (13,787) (22,743) 8,956
Other income, net (3)
 142
 382
 (240)  1,515
 606
 909
Total Residential Mortgage Banking Activities, Net $21,200
 $9,766
 $11,434
  $50,850
 $26,774
 $24,076
(1)Includes changes in fair value for loan purchase commitments.
(2)Represents market valuation changes of derivatives that are used to manage risks associated with our accumulation of residential loans.
(3)Amounts in this line include other fee income from loan acquisitions and the provision for repurchase expense, presented net.
The increases in mortgage banking activities, net for bothon 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 (loss). For the three-carrying value and nine-month periods were primarily dueactivity of our bridge loans held-for-investment, see the Investment Portfolio section that follows.
(2)For single-family rental loans, amounts represent transfers of loans from held-for-sale at our Business Purpose Mortgage Banking segment to higherheld-for-investment at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP. Bridge loan purchase volumeamounts represent the transfer of loans originated or acquired by our Business Purpose Mortgage Banking segment at our TRS and higher gross margins primarily duetransferred to improved securitization executionour Investment Portfolio segment at our REIT as described in 2017 as compared to 2016.the preceding footnote.
Loan purchase commitments ("LPCs"), adjusted for fallout expectations, were $1.57 billion and $4.07 billionSFR loan fundings for the three and nine months ended September 30, 2017, respectively. Our gross margins for our jumbo loans, which we define as net interest income plus income from mortgage banking activities, divided by LPCs, benefited from tightening credit spreads for both securitizations2022 included zero and whole loans during the first nine months of 2017 and remained above our long-term expectations.
At both September 30, 2017 and December 31, 2016, we had repurchase reserves of $4 million outstanding related to residential loans sold through this segment. For the nine months ended September 30, 2017 and 2016, we recorded $0.2$100 million of reversal of provision for repurchases and $0.5 million of provision for repurchases, respectively, that was included in incomeloans acquired from mortgage banking activities, net, in this segment. We review ourthird parties, respectively. Bridge loan repurchase reserves each quarter and adjust them as necessary based on current information available at each reporting date.
The following table details outstanding principal balances for residential loans held-for-sale by product type at September 30, 2017.
Table 28 – Characteristics of Residential Loans Held-for-Sale
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 this 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 incomefundings for the three and nine months ended September 30, 2017,2022 included zero and $22 million of loans acquired from third parties, respectively. During the three and nine months ended September 30, 2022, we acquired $60 million of bridge loans with our acquisition of Riverbend on July 1, 2022. During the nine months ended September 30, 2022, we completed two business purpose loan securitizations backed by $588 million of SFR loans, including a private securitization of $274 million of loans in the third quarter with a large global institutional investor. During the nine months ended September 30, 2022, we completed one business purpose loan securitization backed by approximately $250 million of bridge loans that includes a 24-month revolving feature. At September 30, 2022, we had $281 million of SFR loans and $56 million of bridge loans in inventory on our balance sheetssheet.
During the third quarter of 2022, the decline in overall volume was predominantly in our SFR product, as borrowers continue in this higher rate environment to prefer short-term fully prepayable bridge loans, for which demand remains elevated (driven by multifamily product). Given current market conditions, we reduced our capital allocation to Business Purpose Mortgage Banking to $100 million at the end of the consolidated Legacy Sequoia entitiesthird quarter of 2022, down from $150 million at the end of the second quarter of 2022 (excluding capital associated with goodwill and intangibles). While the fourth quarter has historically been a very busy one for BPL originations – with sponsors often seeking to complete transactions by year-end – we would expect the recent slowdown in lending activity to continue in some capacity, as transaction flow ebbs and borrowers not facing near-term maturities wait for more favorable conditions.
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, 20172022, we had business purpose warehouse facilities outstanding with six different counterparties, with $3.00 billion of total capacity (used for both SFR and December 31, 2016.bridge loans) and $1.66 billion of available capacity (inclusive of capacity on non-recourse facilities). All amountsof these facilities are non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the statements of income and balance sheets presented below are included in our consolidated financial statements.
Table 29 – Consolidated Legacy Sequoia Entities Statements of Income
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2017 2016 Change
 2017 2016 Change
Interest income $4,875
 $4,837
 $38
  $14,576
 $14,525
 $51
Interest expense (3,838) (3,274) (564)  (11,046) (9,842) (1,204)
Net interest income 1,037
 1,563
 (526)  3,530
 4,683
 (1,153)
Investment fair value changes, net (1,045) (255) (790)  (3,842) (2,086) (1,756)
Net Income from Consolidated Legacy Sequoia Entities $(8) $1,308
 $(1,316)  $(312) $2,597
 $(2,909)
Table 30 – Consolidated Legacy Sequoia Entities Balance Sheets
(In Thousands) September 30, 2017 December 31, 2016
Residential loans, held-for-investment, at fair value $673,134
 $791,636
Other assets 4,065
 6,681
Total Assets $677,199
 $798,317
Other liabilities $540
 $518
Asset-backed securities issued, at fair value 657,960
 773,462
Total liabilities 658,500
 773,980
Equity (fair value of Redwood's retained investments in entities) 18,699
 24,337
Total Liabilities and Equity $677,199
 $798,317


Net Interest Income at Consolidated Legacy Sequoia Entities     
The decreases in net interest income for the three- and nine-month periods were 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 fairmarket 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. The negative investment fair value changes in both three- and nine-month periods were primarily related to the reduction in basis of retained IO securities as the loans underlying these securities continued to pay down.collateral that is non-delinquent).
Residential Loans at Consolidated Legacy Sequoia Entities
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The following table provides details of residential loan activity at consolidated Legacy Sequoia entitiespresents an earnings summary for our Business Purpose Mortgage Banking segment for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 318 – Residential LoansBusiness Purpose Mortgage Banking Earnings Summary

Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20222021Change20222021Change
Mortgage banking income$17,887 $32,387 $(14,500)$22,267 $89,752 $(67,485)
Operating expenses(24,302)(18,065)(6,237)(58,330)(51,618)(6,712)
Benefit from income taxes2,559 (3,485)6,044 9,009 (6,988)15,997 
Segment Contribution$(3,856)$10,837 $(14,693)$(27,054)$31,146 $(58,200)
Business Purpose Mortgage Banking income presented in the table above is comprised of net interest income from SFR loans held-for-sale in inventory, mortgage banking activities, net (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 for this segment.
The decrease in contribution from our business purpose mortgage banking operations during the three and nine month periods was attributable to lower mortgage banking income and higher operating expenses. While margins stabilized during the third quarter of 2022, mortgage banking income year-to-date was negatively impacted by severe credit spread widening in the first half 2022 and remains challenged given current market conditions. Continued rate volatility or a further widening of spreads would continue to impact our margins and profitability at Consolidated Legacy Sequoia Entities — Activitythis business.
General and administrative expenses increased during the three- and nine-month periods, as lower variable compensation expenses were offset by higher fixed compensation and other costs associated with an increased headcount during 2022, in particular from the addition of employees from the Riverbend acquisition. Additionally, in the third quarter, we incurred $4 million of employee severance and transition-related expenses at this segment.
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 the three- and nine-month periods in 2022 was due to an overall GAAP loss incurred at our TRS during those periods.

  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
Investment Portfolio Segment
CharacteristicsOur Investment Portfolio segment consists of Loans at Consolidated Legacy Sequoia Entitiesinvestments sourced through our residential and business purpose mortgage banking operations, including primarily securities retained from our residential and business purpose loan securitization activities (some of which we consolidate for GAAP purposes), business purpose residential and multifamily bridge loans, as well as third-party investments including RMBS issued by third parties (including Agency CRT securities), investments in Freddie Mac K-Series multifamily loan securitizations and re-performing loan securitizations (both of which we consolidate for GAAP purposes), servicer advance investments, HEIs, and other housing-related investments. 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.
The following table highlights unpaidpresents details of our Investment Portfolio at September 30, 2022 and December 31, 2021 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.
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Table 9 – Investment Portfolio - Detail of Economic Interests
(In Thousands)September 30, 2022December 31, 2021
Organic Residential Investments
Residential loans at Redwood (1)
$157,804 $172,047 
Residential securities at Redwood106,576 143,838 
Residential securities at consolidated Sequoia entities (2)
223,920 245,417 
Other investments (3)
48,100 12,438 
Organic Business Purpose Investments
Bridge loans1,900,986 944,606 
Single-family rental securities at consolidated CAFL SFR entities (4)
314,431 301,506 
Other investments972 5,935 
Third-Party Investments
Residential securities at Redwood131,055 195,930 
Residential securities at consolidated Freddie Mac SLST entities (5)
335,185 444,751 
Multifamily securities at Redwood21,232 32,715 
Multifamily securities at consolidated Freddie Mac K-Series entities (6)
32,047 31,657 
Servicing investments (7)
92,530 102,540 
HEIs (8)
214,922 43,638 
Other investments7,664 10,400 
Total Segment Investments$3,587,424 $2,687,418 
(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 $3.24 billion of loans and $3.01 billion of ABS issued associated with these investments at September 30, 2022. We consolidated $3.63 billion of loans and $3.38 billion of ABS issued associated with these investments at December 31, 2021.
(3)Organic residential other investments at September 30, 2022 includes net risk share investments of $23 million, representing $30 million of restricted cash and other assets, net of other liabilities of $7 million.
(4)Represents our retained economic investment in securities issued by consolidated CAFL SFR securitization VIEs. For GAAP purposes, we consolidated $3.02 billion of loans and $2.70 billion of ABS issued associated with these investments at September 30, 2022. We consolidated $3.49 billion of loans and $3.21 billion of ABS issued associated with these investments at December 31, 2021.
(5)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $1.48 billion of loans and $1.15 billion of ABS issued associated with these investments at September 30, 2022. We consolidated $1.89 billion of loans and $1.45 billion of ABS issued associated with these investments at December 31, 2021.
(6)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $427 million of loans and $395 million of ABS issued associated with these investments at September 30, 2022. We consolidated $474 million of loans and $442 million of ABS issued associated with these investments at December 31, 2021.
(7)Represents our economic investment in consolidated Servicing Investment variable interest entities. At September 30, 2022, for GAAP purposes, we consolidated $308 million of servicing investments and $233 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2021, for GAAP purposes, we consolidated $385 million of servicing investments and $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.
(8)At September 30, 2022 and December 31, 2021, represents HEIs owned at Redwood of $201 million and $33 million, respectively, as well as our retained economic investment in securities issued by the consolidated HEI securitization entity of $14 million and $10 million, respectively. At September 30, 2022, for GAAP purposes, we consolidated $140 million of HEIs and $105 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity. At December 31, 2021, for GAAP purposes, we consolidated $160 million of HEIs and $137 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity.
The growth in our Investment Portfolio during the first nine months of 2022 was primarily attributable to a net increase in business purpose bridge loans and incremental investments in HEIs through third-party flow purchase agreements. See the Investments Detail and Activity section that follows for additional detail on our portfolio investments and their associated borrowings.
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The following table presents an earnings summary for our Investment Portfolio segment for the three and nine months ended September 30, 2022 and 2021.
Table 10 – Investment Portfolio Earnings Summary
Three Months Ended September 30,  Nine Months Ended September 30,
(In Thousands)20222021Change20222021Change
Net interest income$45,006$41,945$3,061 $140,885 $105,066 $35,819 
Investment fair value changes, net(61,780)26,324 (88,104)(165,297)121,812 (287,109)
Other income, net3,906 1,842 2,064 15,423 7,121 8,302 
Realized gains, net— 6,703 (6,703)2,581 17,803 (15,222)
Operating expenses(3,872)(4,684)812 (10,833)(12,106)1,273 
Benefit from (provision for) income taxes(5,664)(1,045)(4,619)(6,808)(2,561)(4,247)
Segment Contribution$(22,404)$71,085 $(93,489)$(24,049)$237,135 $(261,184)
The decrease in contribution from the Investment Portfolio during the three- and nine-month periods was primarily attributable to negative investment fair value changes, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These decreases were partially offset by higher net interest income and other income during the three- and nine-month periods, each as discussed in the Consolidated Results of Operations section of this MD&A.
The increase in net interest income from our Investment Portfolio during the nine-month periods primarily resulted from an increase in the average balance of investments in that period in 2022 as we deployed capital into new investments, including primarily into business purpose bridge loans. Net interest income for the nine months ended September 30, 2022, included yield maintenance income (triggered by prepayments) received on retained SFR securities of $8 million in the first quarter of 2022, $4 million in the second quarter of 2022, and $3 million in the third quarter of 2022. Additionally, during the first quarter of 2022, we recorded $8 million of discount accretion for AFS securities, much of which was associated with securities we expected to be called given high prepayment speeds experienced during 2021. As a result of interest rate increases, early in 2022 we changed our assumptions for expected call dates for certain available-for-sale securities and discount accretion income from these securities declined, resulting in $1 million of discount accretion in both the second and third quarters of 2022. Net interest income from the investment portfolio was also impacted by higher borrowing costs in 2022, driven primarily by rising benchmark interest rates. While the majority of the floating-rate debt utilized within our investment portfolio finances floating-rate assets, we do have some exposure to rising interest rates and further increases in benchmark interest rates or borrowing spreads could negatively impact our net interest income. Additionally, to the extent market interest rates remain elevated and we refinance fixed-rate debt that matures in the near-term, our interest costs could increase and negatively impact our net interest income.
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). The negative investment fair value changes in the first nine months of 2022 were predominantly unrealized and resulted primarily from credit spread widening across many of our investments. Rising interest rates and slower actual and expected prepayment speeds resulted in positive fair value changes for our interest-only securities and hedges allocated to our investment portfolio, which partially offset the negative fair value changes. Additionally, credit improvements in several of our investments including, in particular, our retained CAFL SFR securities and bridge loans positively impacted fair values for those assets. While our investments generally continue to experience stable credit performance, further spread widening, a deterioration in credit, or declines in home price appreciation could result in additional negative investment fair value changes for our investments.

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Other income, net within this segment is primarily comprised of income (loss) from our MSR investments, bridge loan extension fees, and risk share investment income. Details on the composition of Other income, net are included inNote 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 2022. Operating expenses at this segment are primarily attributable to compensation expenses and decreased overall during the three and nine month periods, as decreases in variable compensation were partially offset by higher fixed compensation costs resulting from higher headcount in 2022. We hold certain of our investments, primarily our MSRs, at our taxable REIT subsidiary. Our Provision for income taxes at this segment is primarily driven by the amount of income earned from portfolio assets as well as from gains or losses from hedges held at the TRS and, for 2022, reflects positive net income earned from investment portfolio activities at our taxable REIT subsidiary.
Investments Detail and Activity
This section presents additional details on our investments and their activity during the three and nine months ended September 30, 2022.
Real Estate Securities Portfolio
The following table sets forth our real estate securities activity by collateral type for the three and nine months ended September 30, 2022.
Table 11 – Real Estate Securities Activity by Collateral Type (1)
Three Months Ended September 30, 2022ResidentialMultifamilyTotal
(In Thousands)SeniorSubordinateMezzanine
Beginning fair value$31,496 $231,652 $21,130 $284,278 
Acquisitions— — — — 
Sales(4,142)— — (4,142)
Gains on sales and calls, net— — — — 
Effect of principal payments (2)
— (359)— (359)
Change in fair value, net1,506 (22,173)102 (20,565)
Ending Fair Value$28,860 $209,120 $21,232 $259,212 
Nine Months Ended September 30, 2022ResidentialMultifamilyTotal
(In Thousands)SeniorSubordinateMezzanine
Beginning fair value$21,787 $322,909 $32,715 $377,411 
Acquisitions5,006 10,000 — 15,006 
Sales(14,334)(13,137)— (27,471)
Gains on sales and calls, net— 1,914 — 1,914 
Effect of principal payments (2)
— (16,036)(8,688)(24,724)
Change in fair value, net16,401 (96,530)(2,795)(82,924)
Ending Fair Value$28,860 $209,120 $21,232 $259,212 
(1)Amounts presented in this table include securities reported on our balance sheet and 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.
(2)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 loansthat security.
At September 30, 2022, our securities at Redwood (exclusive of securities owned in consolidated Legacyentities) consisted of fixed-rate assets (90%), adjustable-rate assets (7%), and hybrid assets that reset within the next year (3%).

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The following table sets forth activity in our real estate securities portfolio for the three and nine months ended September 30, 2022, 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 interest in securities we own in securitizations we consolidate in accordance with GAAP.
Table 12 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities
Three Months Ended September 30, 2022Residential 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$112,562 $236,777 $307,413 $390,416 $31,732 $171,716 $1,250,616 
Acquisitions (1)
— — 13,603 — — — 13,603 
Sales— — — — — (4,142)(4,142)
Gains on sales and calls, net— — — — — — — 
Effect of principal payments (2)
(123)(1,856)— (13,144)— (236)(15,359)
Change in fair value, net(5,863)(11,001)(6,585)(42,088)315 (14,702)(79,924)
Ending Fair Value$106,576 $223,920 $314,431 $335,184 $32,047 $152,636 $1,164,794 
Nine Months Ended September 30, 2022Residential 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$145,757 $245,417 $301,506 $444,751 $31,657 $231,654 $1,400,742 
Acquisitions (1)
— 3,742 37,290 — — 15,006 56,038 
Sales(3,854)(612)— — — (23,617)(28,083)
Gains on sales and calls, net284 — — — — 1,630 1,914 
Effect of principal payments (2)
(10,755)(3,889)— (34,716)— (13,969)(63,329)
Change in fair value, net(24,856)(20,738)(24,365)(74,851)390 (58,068)(202,488)
Ending Fair Value$106,576 $223,920 $314,431 $335,184 $32,047 $152,636 $1,164,794 
(1)During the nine months ended September 30, 2022, we retained $4 million of securities from one Sequoia securitization.
(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.
At September 30, 2022, our securities (both those held on our balance sheet and our economic interests in consolidated VIEs) consisted of fixed-rate assets (98%), adjustable-rate assets (1%) 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 term debt and marginable debt in the form of repurchase (or “repo”) financing. At September 30, 2022, real estate securities with a fair value of $425 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with $305 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities, re-performing loan securities with a fair value of $335 million were financed with $99 million of non-recourse securitization debt, and real estate securities with a fair value of $170 million (including securities owned in consolidated securitization entities) were financed with $124 million of short-term debt incurred through repurchase facilities with seven different counterparties. The remaining $235 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, 2017.2022. 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, 2022Weighted Average Values
Market Value -
IO
Securities		Market Value - Non-IO
 Securities		Principal Balance - Non-IO
Securities		Gross Weighted Average Coupon90+ Delinquency3-Month Prepayment Rate
Investment Thickness(1)
(Dollars in Thousands)
Sequoia securities on balance sheet$28,511 $78,065 $140,149 3.8 %0.4 %10 %7 %
Consolidated Sequoia securities23,955 199,965 246,570 4.7 %2.0 %16 %42 %
Total Sequoia Securities52,466 278,030 386,719 4.4 %1.5 %14 %30 %
Consolidated Freddie Mac SLST securities18,089 317,095 498,023 4.5 %12.9 %8 %29 %
RPL securities on balance sheet347 31,963 142,734 4.3 %3.7 %8 %2 %
Total RPL Securities18,436 349,058 640,757 4.5 %12.0 %8 %26 %
Consolidated Freddie Mac K-Series securities— 32,047 36,468 4.3 %— %— %10 %
Multifamily securities on balance sheet166 21,066 22,809 4.1 %— %24 %11 %
Total Multifamily Securities166 53,113 59,277 4.2 %— %10 %11 %
Consolidated CAFL securities34,268 280,163 424,677 5.3 %2.2 %16 %17 %
Other third-party securities12 99,082 142,912 3.4 %0.6 %10 %2 %
Total Securities$105,348 $1,059,446 $1,654,342 
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.
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 first nine months of 2022, our investment portfolio continued to demonstrate strong performance across a range of credit metrics, including loan delinquencies which generally remained stable, and loan-to-value ratios (LTVs), which continued to decline or remain stable. Given the seasoned nature of our investments (particularly within our RPL securities and Sequoia securities), many of these investments are supported by substantial home price appreciation and borrower equity in the consolidated Legacy Sequoia entitiesunderlying homes.
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Bridge Loans Held-for-Investment
The following table provides the activity of bridge loans held-for-investment during the three and were primarily originated in 2006 or prior. For outstandingnine months ended September 30, 2022.
Table 14 – Bridge Loans Held-for-Investment - Activity
Three Months EndedNine Months Ended
(In Thousands)September 30, 2022September 30, 2022
Fair value at beginning of period$1,651,489 $944,606 
Transfers between portfolios (1)
423,425 1,400,849 
Transfers to REO— (963)
Principal repayments(175,007)(436,545)
Changes in fair value, net1,079 (6,961)
Fair Value at End of Period$1,900,986 $1,900,986 
(1)We originate bridge loans at our TRS and then transfer them to our REIT. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated Legacy Sequoia entitiesstatements of income (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge 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 (loss). Once loans are transferred into this securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss).
Our $1.90 billion of bridge loans held-for-investment and $56 million of bridge loans held-for-sale at September 30, 2017,2022 were comprised of first-lien, interest-only loans with a weighted average coupon of 8.05% and original maturities of six to 36 months. At origination, the weighted average FICO score of borrowers backing these loans was 728 (at origination)743 and the weighted average original LTV ratio of these loans was 66% (at origination). At September 30, 20172022, of the 3,579 loans in this portfolio, 49 of these loans with an aggregate fair value of $31 million and December 31, 2016, thean aggregate unpaid principal balance of $33 million were in foreclosure and 98 loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $14with an aggregate fair value of $38 million and $19 million, respectively, and thean unpaid principal balance of $41 million were 90-or-more days delinquent (certain loans in foreclosure were also at least 90 days delinquent).
We finance our bridge loans with a combination of recourse, non-marginable warehouse facilities, non-recourse, non-marginable warehouse facilities, and non-recourse securitization debt. During the second quarter of 2022, we completed our second bridge loan securitization. This bridge loan securitization included a 24-month revolving feature that allows us to add additional loans as loans within the structure pay down. The two bridge securitization structures have $550 million of total capacity. At September 30, 2022, we had: $524 million of debt incurred through short-term warehouse facilities with four counterparties, which was $12secured by $703 million of business purpose bridge loans; $565 million of debt incurred through long-term facilities with two different counterparties, which was secured by $700 million of business purpose bridge loans; and $11$485 million respectively.

of securitization debt secured by $512 million of business purpose bridge loans and $16 million of restricted cash.
Taxable IncomeThe following table provides the composition of bridge loans held-for-investment by product type as of September 30, 2022 and Tax ProvisionDecember 31, 2021.
Taxable IncomeTable 15 – Bridge Loans Held-for-Investment - By Product Type
(In Thousands)September 30, 2022December 31, 2021
Multifamily$1,049,538 $326,004 
Renovate / Build to rent660,870 375,729 
Fix and Flip107,333 150,928 
Other83,245 91,945 
Fair Value at End of Period$1,900,986 $944,606 
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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, 2022.
Table 16 – Investment Portfolio Residential Loans - Activity
Three Months EndedNine Months Ended
(In Thousands)September 30, 2022September 30, 2022
Fair value at beginning of period$222,144 $172,048 
Acquisitions— 102,258 
Sales(48,759)(48,759)
Principal repayments(8,967)(48,831)
Changes in fair value, net(6,614)(18,912)
Fair Value at End of Period$157,804 $157,804 

During the nine months ended September 30, 2022, we called three of our unconsolidated Sequoia securitizations and purchased $102 million (unpaid principal balance) of loans from the securitization trusts.

Home Equity Investments
Table 17 – HEI at Investment Portfolio Segment - Activity
Home Equity Investments(1)
Three Months EndedNine Months Ended
(In Thousands)September 30, 2022September 30, 2022
Balance at beginning of period$276,366 $192,740 
New/additional investments79,050 176,439 
Sales/distribution— — 
Repayments(9,361)(35,187)
Changes in fair value, net(5,618)6,445 
Other— — 
Balance at End of Period$340,437 $340,437 
(1)Our home equity investments presented in this table as of September 30, 2022, include $140 million of HEIs owned in our consolidated HEI securitization entity and $201 millionof HEIs owned directly at Redwood. At September 30, 2022, our economic investment in the consolidated HEI securitization entity was $14 million (for GAAP purposes, we consolidated $140 million of HEIs and $105 million of ABS issued, as well as other assets and liabilities for this entity).
Changes in fair value, net for HEIs primarily reflects changes in actual and expected home price appreciation (HPA). While home prices generally increased during the first half of 2022, in the third quarter of 2022, some regions began experiencing home price declines leading to shareholdersa downward adjustment of our HPA assumptions, which negatively affected HEI valuations. Additional details on our HEIs is 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.
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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, 20172022.
Table 18 – Other Investments at Investment Portfolio Segment - Activity(1)
Three Months Ended September 30, 2022
Servicing
Investments(2)
MSRs and
Excess
Servicing		OtherTotal
(In Thousands)
Balance at beginning of period$273,210 $64,363 $1,868 $339,441 
New/additional investments— — — — 
Sales/distribution— — (813)(813)
Servicer advances (repayments), net5,629 — — 5,629 
Changes in fair value, net(3,905)885 25 (2,995)
Other— — (107)(107)
Balance at End of Period$274,934 $65,248 $973 $341,155 
Nine Months Ended September 30, 2022
Servicing
Investments(2)
MSRs and
Excess
Servicing		OtherTotal
(In Thousands)
Balance at beginning of period$350,923 $56,669 $5,935 $413,527 
New/additional investments— 4,543 — 4,543 
Sales/distribution— — (5,582)(5,582)
Servicer (repayments) advances, net(65,772)— — (65,772)
Changes in fair value, net(10,217)4,245 757 (5,215)
Other— (209)(137)(346)
Balance at End of Period$274,934 $65,248 $973 $341,155 
(1)Excludes $72 million of Strategic investments which are included in Corporate/Other.
(2)Our servicing investments are owned through our consolidated Servicing Investment entities. At September 30, 2022, our economic investment in these entities was $93 million (for GAAP purposes, we consolidated $308 million of servicing investments, $233 million of non-recourse short-term securitization debt, as well as other assets and 2016. For eachliabilities for these entities). At December 31, 2021, our economic investment in these entities was $103 million (for GAAP purposes, we consolidated $385 million of servicing investments, $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these periods, we had no undistributedentities).
Reductions in investments for our servicing investments primarily represents recoveries of servicing advances within our consolidated servicing VIEs. Changes in fair value, net for MSRs and Excess Servicing for the three and nine months ended September 30, 2022 includes a reduction in basis from the regular receipt of scheduled cash flows, which was more than offset by a positive impact to fair value from a decrease in forecasted prepayment speeds. 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.
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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 2022, our Board of Directors declared a regular dividend of $0.23 per share for the third quarter of 2022, which was paid on September 30, 2022 to shareholders of record on September 23, 2022. As of September 30, 2022, our year-to-date dividend distributions of $0.69 per share exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the 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 2022 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 2022 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. Under the federal income tax rules relatedapplicable to capital loss carryforwards,REITs, none of our 2017Redwood’s 2022 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 2022 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, 2017,2022, we recorded tax provisions of $5 million and $17 million, respectively, compared to a tax provision of $1 million for bothand a tax benefit of $10 million, respectively. For the three and nine months ended September 30, 2016.2021, we recorded tax benefit of $4 million and a tax provision of $14 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 inFor the nine-month periods, the switch to a tax benefit from a tax provision year-over-year was primarily the result of us benefitingGAAP income being recorded at our TRS during this period in 2021 versus GAAP losses being recorded at our TRS during this period in 2022. For the three-month periods, while GAAP income was earned at the TRS during both periods, the switch to a tax provision from a tax benefit year-over-year was due to the reversalrelease of the valuation allowance recorded againston a portion of our federal netdeferred tax assets in 2021.
Realization of our 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 and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determineTo the extent we determine it is more likely than not that we will not be able to which realization of our DTAs is not assured andrealize a deferred tax asset, we establish a valuation allowance accordingly. At December 31, 2016,2021, we reported net federal ordinary and capital DTAs with no valuation allowance recorded against them. We continue to believe it is more likely than not that we will realize all of our federal deferred tax liabilities ("DTLs"), and, as such, hadassets; therefore, there continues to be no associated valuation allowance.allowance recorded against our net federal DTAs. As a result ofwe have experienced year-to-date GAAP incomelosses at our TRS, we forecast that weare continuing to monitor our estimate of the realizability of our net deferred tax assets and will report net federal ordinary and capital DTLs at December 31, 2017 and consequently noreassess the need for a valuation allowance, is expected to be recorded against any federal DTA. in whole or in part, in future periods.
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 operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations to fund investments in residential loans,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, 2022, our total capital was $1.78$2.02 billion at September 30, 2017, and included $1.21$1.15 billion of equity capital and $0.57 billion$863 million of the total $2.57 billion ofconvertible notes and long-term debt on our consolidated balance sheet. This portionsheet, including $199 million of convertible debt included $201due in 2023, $150 million of convertible debt due in 2024, $172 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.
As of September 30, 2017,2022, our unrestricted cash was $297 million, and we estimate that our available capital waswe had approximately $330 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$160 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.
capital. 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 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).
We also distinguish between recourse and non-recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.
At September 30, 2022, in aggregate, we had $2.86 billion of secured recourse debt outstanding, financing our mortgage banking and investment portfolio, of which $480 million was marginable and $2.38 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."

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Repurchase Authorization
During the third quarter of 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. 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. This common stock repurchase authorization replaced the $100 million common stock repurchase authorization approved by the Board of Directors in 2018, has no time limit, may be modified, suspended or discontinued at any time, and does not obligate us to acquire any specific number of shares or securities. The Board of Directors also continued its previous authorization for the repurchase of outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above.
During the three and nine months ended September 30, 2022, we repurchased 3.4 million and 7.1 million shares of our common stock for $24 million and $56 million, respectively. At September 30, 2022, $101 million of the authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities. Subsequent to September 30, 2022, and through November 4, 2022, we repurchased $3 million of our convertible notes due in August 2023.
Cash Flows and Liquidity for the Nine Months Ended September 30, 20172022
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$129 million during the nine months ended September 30, 2017.2022. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. ExcludingDuring the first nine months of 2022, 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 $218 million), 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.$88 million.
Cash Flows from Investing Activities
During the nine months ended September 30, 2017,2022, our net cash provided by investing activities was $205$169 million and primarily resulted from proceeds from principal payments on loans held-for-investment, at Redwoodsecurities and at our consolidated Sequoia entities, proceeds from salesother investment in excess of MSRs, and principal payments from, and proceeds from net sales of, real estate securities. Although we generally intendcash deployed to hold our investment securities as long-term investments, we may sell certain of these securities in order to manage our interest rate risk and liquidity needs, to meet other operating objectives, and to adapt to market conditions. We cannot predict the timing and impact of future sales of investment securities, if any.
investments. Because many of our investment securities and loans 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 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, 2017,2022, we had transfers of residentialtransferred loans with a carrying value of $644 million frombetween held-for-sale and held-for-investment classification and long-term debt to held-for-investment, and we retained MSRs with a carrying value of $7 million from the sale of residential loans. Theseshort-term debt, which represent significant non-cash transactions that were not included in cash flows from investing activities.

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Cash Flows from Financing Activities

During the nine months ended September 30, 2017,2022, our net cash provided by financing activities was $468$202 million. This primarily resulted from net long-term debt borrowings of $787 million, which included the issuance of asset-backed securities from our Sequoia Choice securitization in the third quarter of 2017, the issuance$215 million of convertible debt in August 2017, and $159June 2022, as well as $132 million of net borrowings under ABS issued, including from the issuance of short-term debt, whichCAFL SFR, CAFL bridge and Sequoia ABS securitizations during the nine months ended September 30, 2022. These amounts were partially offset by $146$1.04 billion of net paydowns on short-term borrowings, resulting primarily from a reduction in financed loan inventory at our mortgage banking operations through September 30, 2022, as well as the payment of our three quarterly dividends totaling $85 million. Cash raised through stock issuances under our ATM program of $68 million during the first quarter of repayments2022 were partially offset by stock repurchases of ABS issued.$56 million during the second and third quarters of 2022.
 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, 2017,2022, we paid $66 million of cash dividends on our common stock, representing cumulativedeclared dividends of $0.84$0.69 per common share. Additionally, in November 2017,On September 13, 2022, the Board of Directors declared a regular dividend of $0.28$0.23 per share for the fourththird quarter of 2017,2022, which is payablewas paid on December 28, 2017September 30, 2022 to shareholders of record on December 15, 2017.September 23, 2022.
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 DebtMaterial 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, 2022 include maturing short-term debt, interest payments on short-term and otherwise fund our businesslong-term debt, payments on operating leases, and operations.funding commitments for bridge loans and under HEI flow purchase agreements. Our material cash requirements from known contractual and other obligations beyond the twelve months following September 30, 2022 include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for bridge loans and under HEI flow purchase agreements.
At September 30, 2017,2022, we had four short-term residentialcommitments to fund up to $990 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 (e.g. funding is dependent on actual progress on a project and we retain the option to conduct due diligence with respect to each draw request to confirm conditions have been met). Approximately $650 million of the commitments are for longer-term build-for-rent loans (which generally have funding caps below their full commitment amount) and are expected to fund over the next eight quarters. Additionally, at September 30, 2022, we had $1.66 billion of available warehouse capacity for business purpose loans and the majority of our $1.96 billion balance of bridge loans outstanding matures over the next 12 to 24 months, which will provide an additional source of cash that can be used to fund our commitments.
At September 30, 2022, we had outstanding flow purchase agreements with multiple third parties, with an aggregate commitment to purchase $350 million of HEIs, $149 million of which commitments remained outstanding. These purchase agreements specify monthly minimum and maximum amounts of HEIs subject to such purchase commitments. We may terminate the purchase agreement and associated purchase commitment relating to $85 million of remaining commitments upon 90 days prior notice. Subsequent to September 30, 2022, we entered into a repurchase agreement providing financing for HEIs. The committed amount and maximum borrowing limit under the facility is $150 million and the facility has a one-year term. As of the date of this report, there were no borrowings outstanding under this facility.
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, 2021 under the caption Contractual Obligations. For additional information on commitments and contingencies as of September 30, 2022 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 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
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Several of our loan warehouse facilities 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 by residential loanstheir maturity. We renewed several of these facilities in the first nine months of 2022 and have other such facilities with an aggregate fair value of $493 million) and a total uncommitted borrowing limit of $1.33 billion. In addition, at September 30, 2017, we had an aggregate outstanding short-term debt balance of $550 million under eight securities repurchase facilities, which were secured by securities with a fair market value of $663 million. We also had a secured line of credit withscheduled maturities during the next twelve months. While there is no outstanding debt balance and a total borrowing limit of $10 million (secured by securities with a fair market value of $6 million) at September 30, 2017.


During the three months ended June 30, 2017, $288 million principal amountassurance of our convertible notesability to renew these facilities, given current market conditions we would expect to extend these in the normal course of business.
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. At from September 30, 2017,2022, 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.
At investment portfolio assets, cash generated from our operating activities, or incremental borrowings under existing, new or amended financing arrangements. As of September 30, 2017,2022, we had $1.24 billionapproximately $500 million of short-term debt outstanding. pledgeable and unencumbered assets.
During the first nine months of 2017,2022, the highest balance of our short-term debt outstanding was $1.60$2.39 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 15 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our long-term debt.
Liquidity Needs for our Mortgage Banking Activities
Long-Term Debt
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, $2.002022, we had residential warehouse facilities outstanding with nine different counterparties, with $2.85 billion of advances were outstanding under this agreement, which were classified as long-term debt,total capacity and $2.10 billion of available capacity. These included non-marginable facilities with a weighted average interest rate$1.38 billion of 1.26% per annumtotal capacity and a weighted average maturitymarginable facilities with $1.48 billion of eight years. At September 30, 2017, accrued interest payable on these borrowings was $4 million. Advances under this agreement are charged interest based on a specified margin over the FHLBC’s 13-week discount note rate, which resets every 13 weeks. Our total advances under this agreement were secured by residential mortgage loans with a fair value of $2.26 billion at September 30, 2017. In addition, cash of $24 million served as collateral for these borrowings at September 30, 2017, 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, one of our taxable subsidiaries issued $205 million principal amount of 5.625% exchangeable senior notes due 2019. After deducting the underwriting discount and issuance costs, we received approximately $198 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. During the nine months ended September 30, 2016, we repurchased $4 million par value of these notes at a discount and recorded a gain on extinguishment of debt of $0.3 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $201 million. At September 30, 2017, the accrued interest payable balance on this debt was $4 million.
In March 2013, we issued $288 million principal amount of 4.625% convertible senior notes due 2018. After deducting the underwriting discount and issuance costs, we received approximately $279 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 4.8% per annum. During the three months ended June 30, 2017, $288 million principal amount of these convertible notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $250 million. At September 30, 2017, the accrued interest payable balance on this debt was $5 million.

Trust Preferred Securities and Subordinated Notescapacity.
At September 30, 2017,2022, we had trust preferred securitiesbusiness purpose warehouse facilities outstanding with six different counterparties, with $3 billion of total capacity and subordinated notes outstanding$1.66 billion of $100 millionavailable capacity. All of these facilities are non-marginable.
Several of these facilities have variable interest rates based on LIBOR or SOFR benchmarks 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 hedgerecent policy statements from the variability in this long-term debt interest expense. Including hedging costs and amortizationFederal Reserve indicate the likelihood of deferred securities issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.8% per annum. These swaps are accounted for as cash flow hedges with all interest recorded as a component of net interest income and other valuation changes recorded as a component of equity.
Asset-Backed Securities
At September 30, 2017, there were $738 million (principal balance) of loans owned at consolidated Legacy Sequoia securitization entities, which were funded with $730 million (principal balance) of ABS issued at these entities. In addition, at September 30, 2017, there were $308 million (principal balance) of loans owned at the consolidated Sequoia Choice securitization entity, which was funded with $277 million (principal balance) of ABS issued at this entity. The loans and ABS issued from these entities are reported at estimated fair value. See the subsections titled "Residential Loans at Sequoia Choice" and "Results of Consolidated Legacy Sequoia Entities"further increases in the Resultsfederal funds rate, which would result in higher benchmark rates and interest costs for us under certain of Operations sectionour debt facilities.
As discussed above, several of this MD&A forthe facilities we use to finance our mortgage banking loan inventory are short-term in nature and will require renewals. Additionally, because several of our warehouse facilities are uncommitted, at any given time we may not be able to obtain additional details on these entities.
financing under them when we need it, exposing us to, among other things, liquidity risks. Additional information regarding risks related to the debt we use to finance our mortgage banking operations can be found under the heading "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 is mostly comprised of ABS issued, which 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.
ABS issued 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. SeeNotes 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.
Separately, we use non-recourse debt in the form of non-marginable term 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. The remainder of the debt we use to finance our investments is recourse debt. For securities we have financed, the majority of our financing is in the form of recourse non-marginable secured term debt, with the smaller remaining amount being marginable securities repurchase debt. Additionally, a portion of our business purpose bridge loan portfolio is financed with recourse non-marginable secured term debt.
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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 likelihood 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.
Corporate Capital
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. SeeNote 15 in Part II, Item 8 of our Annual Report on Form 10-K, for additional information on our 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 common 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, 2016,2021, 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 of short-term secured credit from a bank, short-term servicer advance financing, a secured, revolving debt facility collateralized by mortgage servicing rights, and secured borrowings by our wholly-owned subsidiary, RWT Financial, LLC, under its borrowing facility with the FHLBC.subordinate securities financing facilities.


Aggregate borrowing limits are stated under certain of these facilities, and certain other facilities have no stated borrowing limit, but 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 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, 2022, only our short-term securities repurchase facilities (with $124 million of borrowings outstanding at September 30, 2022), and six of our residential mortgage loan warehouse facilities (with $356 million of borrowings outstanding at September 30, 2022) retain market-value based margin call provisions based solely on the lender's determination of market value and, as such, are considered marginable.

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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, 20162021 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, 20162021 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, 20162021 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, 20162021 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, 20162021 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, 20162021 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, 2017,2022, 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, 20172022 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, 20172022 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 millionmore than $5 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


105
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, 2022, 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 discusses2021, 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, 2021. 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, 2016.2021, 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, 2016.2021.
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.2021.
106
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, 2016,2021, 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, 2016.2021.

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 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

107

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 16 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, 2021 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.2021.

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, 2017,2022, 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 authorized the repurchase of up to $125 million of common stock. This common stock repurchase authorization replaces the $100 million common stock repurchase authorization approved anby the Board of Directors in 2018, has no time limit and may be modified, suspended or discontinued at any time. The Board of Directors also continued its previous 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.securities. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three and nine months ended September 30, 2017, there were no2022, we repurchased 3.4 million shares acquired under this authorization.of our common stock for a total cost of $24 million. At September 30, 2017, approximately $862022, $101 million of this current authorization remained available for the repurchase of shares of our common stock.stock and outstanding debt securities. During the nine months ended September 30, 2022, we repurchased 7.1 million shares of our common stock for a total cost of $56 million under our current and previously-approved Board of Director authorizations.
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, 2017.2022.
Total 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 Plans or Programs
(In Thousands, except per Share Data)
July 1, 2022 - July 31, 2022— $— — $— 
August 1, 2022 - August 31, 20221,126 $8.07 1,126 $115,907 
September 1, 2022 - September 30, 20222,322 $6.30 2,322 $101,265 
Total3,448 $6.88 3,448 $101,265 
  Total Number of Shares Purchased or Acquired 
Average
Price per
Share Paid
 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)    
July 1, 2017 - July 31, 2017 —
(1 
) 
$17.04
 —
     $—
August 1, 2017 - August 31, 2017 —
 $—
 —
 $—
September 1, 2017 - September 30, 2017 —
 $—
 —
 $86,109
Total —
 $17.04
 —
 $86,109
(1)Represents fewer than 1,000 shares reacquired to satisfy tax withholding requirements related to the vesting of restricted shares.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Not Applicable
108

Item 5. Other Information
None.Effective November 2, 2022, our Board of Directors adopted Amended and Restated Bylaws of the Company in order to incorporate changes to the provisions in Article II of the Bylaws relating to annual meetings of stockholders. These changes include, among other things, updated provisions related to stockholder meetings held by phone, video, and remote communications, updated requirements related to the form of proxy cards and proxy solicitation by stockholders, updated information required to be included in a stockholder's notice of nomination of individuals for election as a director, and accompanying certifications to be made by the stockholder submitting such nomination, and clarify provisions relating to compliance with federal proxy rules, including Exchange Act Rule 14a-9, by stockholders submitting nominations.

The preceding summary of the amendment and restatement of the Bylaws of the Company is qualified in its entirety by reference to, and should be read in connection with, the complete copy of the Amended and Restated Bylaws attached as Exhibit 3.2.1 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
On November 3, 2022, Redwood amended and restated its employment agreements with each of Christopher J. Abate (Redwood’s CEO), Dashiell I. Robinson (Redwood’s President), Brooke E. Carillo (Redwood’s CFO), Andrew P. Stone (Redwood’s Executive Vice President, Chief Legal Officer, and Secretary), and Sasha G. Macomber (Redwood’s Chief Human Resource Officer). These agreements were amended and restated to, among other things, update or clarify certain defined terms, update and clarify certain notice and cure terms, and update provisions related to arbitration and costs related to dispute resolution, as well as to reflect previously disclosed compensation terms applicable to these officers.
The preceding summary of the five amended and restated employment agreements is qualified in its entirety by reference to, and should be read in connection with, the complete copies of the amended and restated employment agreements attached as Exhibits 10.2, 10.3, 10.4, 10.5 and 10.6 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
109

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
3.2.23.2.1
First Amendment to Amended and Restated Bylaws of the Registrant, as adopted on May 17, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.2, November 2, 2022 (filed on May 21, 2012)herewith)
4.110.1*
Indenture, dated March 6, 2013, between Redwood Trust, Inc.Third Amendment to Amended and Wilmington Trust, National Association,Restated Executive Deferred Compensation Plan, effected as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A, filed March 6, 2013).of August 25, 2022 (filed herewith)
4.210.2*
Second Supplemental Indenture,Seventh Amended and Restated Employment Agreement, dated August 18, 2017,as of November 3, 2022, 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*
Fifth Amended and Restated Employment Agreement, dated as of November 3, 2022, by and between Dashiell I. Robinson and the Registrant (filed herewith)
10.4*
Second Amended and Restated Employment Agreement, dated as of August 8, 2017.
10.2*
Side Letter Agreement,November 3, 2022, by and between Dashiell I. RobinsonBrooke E. Carillo and the Registrant (filed herewith)
10.5*
Seventh Amended and Restated Employment Agreement, dated as of August 8, 2017.November 3, 2022, by and between Andrew P. Stone and the Registrant (filed herewith)
10.310.6*
Amendment to Advances, Collateral Pledge,Second 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, 2022, by and between Sasha G. Macomber 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
110

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, 2017,2022, is filed in inline XBRL-formatted interactive data files:


 
(i) Consolidated Balance Sheets at September 30, 20172022 and December 31, 2016;
2021;
(ii) Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 20172022 and 2016;
2021;
(iii) Statements of Consolidated Comprehensive Income (Loss) for the three and nine months ended September 30, 20172022 and 2016;
2021;
(iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 20172022 and 2016;
2021;
(v) Consolidated Statements of Cash Flows for the nine months ended September 30, 20172022 and 2016;2021; 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.

111

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
REDWOOD TRUST, INC.
Date:November 4, 2022REDWOOD 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 4, 2022By:/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 4, 2022
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)
112
* Indicates exhibits that include management contracts or compensatory plan or arrangements.

105