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

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SeptemberJune 30, 20192020

OR
☐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,California94941
(Address of Principal Executive Offices)(Zip Code)
(415) (415) 389-7373
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each 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 share112,689,511114,944,552 
shares outstanding as of November 5, 2019August 4, 2020





REDWOOD TRUST, INC.
20192020 FORM 10-Q REPORT
TABLE OF CONTENTS
 
Page
PART I —
FINANCIAL INFORMATION
Item 1.
Note 1. Organization
Note 2. Basis of Presentation
Note 3. Summary of Significant Accounting Policies
Note 4. Principles of Consolidation
Note 5. Fair Value of Financial Instruments
Note 6. Residential Loans
Note 7. Business Purpose Residential Loans
Note 8. Multifamily Loans
Note 9. Real Estate Securities
Note 10. Other Investments
Note 11. Derivative Financial Instruments
Note 12. Other Assets and Liabilities
Note 13. Short-Term Debt
Note 14. Asset-Backed Securities Issued
Note 15. Long-Term Debt
Note 16. Commitments and Contingencies
Note 17. Equity
Note 18. Equity Compensation Plans
Note 19. Mortgage Banking Activities, Net
Note 20. Investment Fair Value Changes, NetOther Income
Note 21. General and Administrative Expenses and Other Income, NetExpenses
Note 22. Operating ExpensesTaxes
Note 23. TaxesSegment Information
Item 2.
72
Note 25. Subsequent Events
76
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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)		June 30, 2020December 31, 2019
ASSETS (1)
Residential loans, held-for-sale, at fair value$20,199  $536,385  
Residential loans, held-for-investment, at fair value4,514,131  7,178,465  
Business purpose residential loans, held-for-sale, at fair value379,795  331,565  
Business purpose residential loans, held-for-investment, at fair value3,402,405  3,175,178  
Multifamily loans, held-for-investment, at fair value489,075  4,408,524  
Real estate securities, at fair value316,436  1,099,874  
Other investments429,840  358,130  
Cash and cash equivalents528,612  196,966  
Restricted cash44,496  93,867  
Goodwill and intangible assets64,610  161,464  
Derivative assets357  35,701  
Other assets171,586  419,321  
Total Assets$10,361,542  $17,995,440  
LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net$662,807  $2,329,145  
Derivative liabilities1,932  163,424  
Accrued expenses and other liabilities166,013  206,893  
Asset-backed securities issued, at fair value6,856,086  10,515,475  
Long-term debt, net1,738,128  2,953,272  
Total liabilities9,424,966  16,168,209  
Commitments and Contingencies (see Note 16)
Equity
Common stock, par value $0.01 per share, 395,000,000 and 270,000,000 shares authorized; 114,940,197 and 114,353,036 issued and outstanding1,149  1,144  
Additional paid-in capital2,279,625  2,269,617  
Accumulated other comprehensive (loss) income(29,391) 41,513  
Cumulative earnings801,170  1,579,124  
Cumulative distributions to stockholders(2,115,977) (2,064,167) 
Total equity936,576  1,827,231  
Total Liabilities and Equity$10,361,542  $17,995,440  
(In Thousands, except Share Data)
(Unaudited)
 September 30, 2019 December 31, 2018
ASSETS (1)
    
Residential loans, held-for-sale, at fair value $925,887
 $1,048,801
Residential loans, held-for-investment, at fair value 7,755,916
 6,205,941
Business purpose residential loans, at fair value 336,035
 141,258
Multifamily loans, held-for-investment, at fair value 3,791,622
 2,144,598
Real estate securities, at fair value 1,285,426
 1,452,494
Other investments 347,707
 438,518
Cash and cash equivalents 394,628
 175,764
Restricted cash 111,518
 29,313
Goodwill and intangible assets 49,121
 —
Accrued interest receivable 57,464
 47,105
Derivative assets 43,649
 35,789
Other assets 377,310
 217,825
Total Assets $15,476,283
 $11,937,406
     
LIABILITIES AND EQUITY (1)
    
Liabilities    
Short-term debt, net (2)
 $1,980,817
 $2,400,279
Accrued interest payable 46,881
 42,528
Derivative liabilities 234,011
 84,855
Accrued expenses and other liabilities 129,742
 78,719
Asset-backed securities issued, at fair value 8,346,051
 5,410,073
Long-term debt, net 2,953,722
 2,572,158
Total liabilities 13,691,224
 10,588,612
Commitments and Contingencies (see Note 16)
 


 


Equity    
Common stock, par value $0.01 per share, 270,000,000 and 180,000,000 shares authorized; 112,101,731 and 84,884,344 issued and outstanding 1,121
 849
Additional paid-in capital 2,244,834
 1,811,422
Accumulated other comprehensive income 38,124
 61,297
Cumulative earnings 1,529,981
 1,409,941
Cumulative distributions to stockholders (2,029,001) (1,934,715)
Total equity 1,785,059
 1,348,794
Total Liabilities and Equity $15,476,283
 $11,937,406
——————
(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At June 30, 2020 and December 31, 2019, assets of consolidated VIEs totaled $7,984,618 and $11,931,869, respectively. At June 30, 2020 and December 31, 2019, liabilities of consolidated VIEs totaled $7,140,221 and $10,717,072, respectively. See Note 4 for further discussion.
(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, 2019 and December 31, 2018, assets of consolidated VIEs totaled $9,596,537 and $6,331,191, respectively. At September 30, 2019 and December 31, 2018, liabilities of consolidated VIEs totaled $8,582,595 and $5,709,807, respectively. See

Note 4 for further discussion.
(2)
Includes $201 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 November 15, 2018. See Note 13 for further discussion.


The accompanying notes are an integral part of these consolidated financial statements.
2

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In Thousands, except Share Data)Three Months Ended June 30,Six Months Ended June 30,
(Unaudited)2020201920202019
Interest Income
Residential loans$54,974  $77,288  $134,410  $153,238  
Business purpose residential loans53,419  3,996  106,073  6,785  
Multifamily loans4,870  35,917  45,042  57,305  
Real estate securities10,027  25,017  28,336  49,467  
Other interest income6,656  6,324  14,166  12,788  
Total interest income129,946  148,542  328,027  279,583  
Interest Expense
Short-term debt(16,907) (24,275) (39,974) (46,493) 
Asset-backed securities issued(65,304) (70,113) (165,802) (125,408) 
Long-term debt(20,455) (21,832) (43,561) (43,595) 
Total interest expense(102,666) (116,220) (249,337) (215,496) 
Net Interest Income27,280  32,322  78,690  64,087  
Non-interest Income (Loss)
Mortgage banking activities, net(5,772) 19,160  (34,183) 31,469  
Investment fair value changes, net152,228  3,138  (718,604) 23,297  
Other income, net955  4,859  3,392  9,484  
Realized gains, net25,965  2,827  29,817  13,513  
Total non-interest income (loss), net173,376  29,984  (719,578) 77,763  
General and administrative expenses(30,092) (26,255) (62,760) (49,414) 
Other expenses(5,083) (2,452) (96,498) (3,490) 
Net Income (Loss) before (Provision for) Benefit from Income Taxes165,481  33,599  (800,146) 88,946  
(Provision for) benefit from income taxes(37) (2,333) 22,192  (3,216) 
Net Income (Loss)$165,444  $31,266  $(777,954) $85,730  
Basic earnings (loss) per common share$1.41  $0.31  $(6.82) $0.88  
Diluted earnings (loss) per common share$1.00  $0.30  $(6.82) $0.78  
Basic weighted average shares outstanding114,383,289  96,983,764  114,229,928  94,846,431  
Diluted weighted average shares outstanding147,099,079  130,696,954  114,229,928  128,499,431  
(In Thousands, except Share Data) Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) 2019 2018 2019 2018
Interest Income        
Residential loans $77,070
 $63,265
 $230,308
 $169,010
Business purpose residential loans 5,446
 1,445
 12,231
 1,445
Multifamily loans 36,829
 5,578
 94,134
 5,578
Real estate securities 23,047
 27,063
 72,514
 79,054
Other interest income 7,725
 2,046
 20,513
 3,905
Total interest income 150,117
 99,397
 429,700
 258,992
Interest Expense        
Short-term debt (24,239) (14,146) (70,732) (40,756)
Asset-backed securities issued (71,065) (27,421) (196,473) (55,171)
Long-term debt (21,300) (22,784) (64,895) (58,151)
Total interest expense (116,604) (64,351) (332,100) (154,078)
Net Interest Income 33,513
 35,046
 97,600
 104,914
Non-interest Income        
Mortgage banking activities, net 9,515
 11,224
 40,984
 48,396
Investment fair value changes, net 11,444
 10,332
 34,741
 12,830
Other income, net 1,825
 3,453
 7,819
 8,893
Realized gains, net 4,714
 7,275
 18,227
 21,352
Total non-interest income, net 27,498
 32,284
 101,771
 91,471
Operating expenses (26,815) (21,490) (76,229) (63,529)
Net Income before Provision for Income Taxes 34,196
 45,840
 123,142
 132,856
Benefit from (provision for) income taxes 114
 (4,919) (3,102) (12,343)
Net Income $34,310
 $40,921
 $120,040
 $120,513
         
Basic earnings per common share $0.33
 $0.49
 $1.20
 $1.51
Diluted earnings per common share $0.31
 $0.42
 $1.09
 $1.30
Basic weighted average shares outstanding 101,872,126
 80,796,856
 97,214,064
 77,211,188
Diluted weighted average shares outstanding 136,522,709
 114,682,688
 131,202,689
 107,792,029


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


3

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

(In Thousands) Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) 2019 2018 2019 2018
Net Income $34,310
 $40,921
 $120,040
 $120,513
Other comprehensive loss:        
Net unrealized gain (loss) on available-for-sale securities 4,484
 (2,408) 19,764
 (9,749)
Reclassification of unrealized gain on available-for-sale securities to net income (3,492) (5,686) (15,807) (19,821)
Net unrealized (loss) gain on interest rate agreements (11,791) 4,801
 (27,130) 16,649
Total other comprehensive loss (10,799) (3,293) (23,173) (12,921)
Total Comprehensive Income $23,511
 $37,628
 $96,867
 $107,592


(In Thousands)Three Months Ended June 30,Six Months Ended June 30,
(Unaudited)2020201920202019
Net Income (Loss)$165,444  $31,266  $(777,954) $85,730  
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities52,393  8,562  (28,126) 15,280  
Reclassification of unrealized loss (gain) on available-for-sale securities to net income2,718  (2,822) (11,080) (12,315) 
Net unrealized loss on interest rate agreements—  (9,501) (32,806) (15,339) 
Reclassification of unrealized loss on interest rate agreements to net income1,029  —  1,108  —  
Total other comprehensive income (loss)56,140  (3,761) (70,904) (12,374) 
Total Comprehensive Income (Loss)$221,584  $27,505  $(848,858) $73,356  


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



4



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

For the Three Months Ended SeptemberJune 30, 20192020
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Cumulative
Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
March 31, 2020114,837,533  $1,148  $2,275,808  $(85,531) $635,726  $(2,101,949) $725,202  
Net income—  —  —  —  165,444  —  165,444  
Other comprehensive income—  —  —  56,140  —  —  56,140  
Employee stock purchase and incentive plans102,664  1  (235) —  —  —  (234) 
Non-cash equity award compensation—  —  4,052  —  —  —  4,052  
Common dividends declared ($0.125 per share)—  —  —  —  —  (14,028) (14,028) 
June 30, 2020114,940,197  $1,149  $2,279,625  $(29,391) $801,170  $(2,115,977) $936,576  
(In Thousands, except Share Data) Common Stock 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Cumulative
 Earnings
 
Cumulative
Distributions
to Stockholders
 Total
(Unaudited) Shares Amount     
June 30, 2019 97,715,021
 $977
 $2,013,044
 $48,923
 $1,495,671
 $(1,994,583) $1,564,032
Net income —
 —
 —
 —
 34,310
 —
 34,310
Other comprehensive loss —
 —
 —
 (10,799) —
 —
 (10,799)
Issuance of common stock 14,375,000
 144
 228,339
 —
 —
 —
 228,483
Employee stock purchase and incentive plans 11,710
 —
 154
 —
 —
 —
 154
Non-cash equity award compensation —
 —
 3,297
 —
 —
 —
 3,297
Common dividends declared ($0.30 per share) —
 —
 —
 —
 —
 (34,418) (34,418)
September 30, 2019 112,101,731
 $1,121
 $2,244,834
 $38,124
 $1,529,981
 $(2,029,001) $1,785,059

For the NineSix Months Ended SeptemberJune 30, 20192020
(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, 2019114,353,036  $1,144  $2,269,617  $41,513  $1,579,124  $(2,064,167) $1,827,231  
Net loss—  —  —  —  (777,954) —  (777,954) 
Other comprehensive loss—  —  —  (70,904) —  —  (70,904) 
Issuance of common stock350,088  3  5,544  —  —  —  5,547  
Employee stock purchase and incentive plans237,073  2  (2,776) —  —  —  (2,774) 
Non-cash equity award compensation—  —  7,240  —  —  —  7,240  
Common dividends declared ($0.445 per share)—  —  —  —  —  (51,810) (51,810) 
June 30, 2020114,940,197  $1,149  $2,279,625  $(29,391) $801,170  $(2,115,977) $936,576  
(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, 2018 84,884,344
 $849
 $1,811,422
 $61,297
 $1,409,941
 $(1,934,715) $1,348,794
Net income —
 —
 —
 —
 120,040
 —
 120,040
Other comprehensive loss —
 —
 —
 (23,173) —
 —
 (23,173)
Issuance of common stock 26,666,191
 267
 418,324
 —
 —
 —
 418,591
Direct stock purchase and dividend reinvestment plan 399,838
 4
 6,303
 —
 —
 —
 6,307
Employee stock purchase and incentive plans 151,358
 1
 (1,767) —
 —
 —
 (1,766)
Non-cash equity award compensation —
 —
 10,552
 —
 —
 —
 10,552
Common dividends declared ($0.90 per share) —
 —
 —
 —
 —
 (94,286) (94,286)
September 30, 2019 112,101,731
 $1,121
 $2,244,834
 $38,124
 $1,529,981
 $(2,029,001) $1,785,059

For the Three Months Ended SeptemberJune 30, 20182019
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income		Cumulative
Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
March 31, 201996,866,464  $969  $1,996,358  $52,684  $1,464,405  $(1,964,489) $1,549,927  
Net income—  —  —  —  31,266  —  31,266  
Other comprehensive loss—  —  —  (3,761) —  —  (3,761) 
Issuance of common stock791,191  8  12,503  —  —  —  12,511  
Employee stock purchase and incentive plans57,366  —  18  —  —  —  18  
Non-cash equity award compensation—  —  4,165  —  —  —  4,165  
Common dividends declared ($0.30 per share)—  —  —  —  —  (30,094) (30,094) 
June 30, 201997,715,021  $977  $2,013,044  $48,923  $1,495,671  $(1,994,583) $1,564,032  


5
(In Thousands, except Share Data) Common Stock Additional
Paid-In
Capital		 Accumulated
Other
Comprehensive
Income		 Cumulative
Earnings		 Cumulative
Distributions
to Stockholders		 Total
(Unaudited) Shares Amount     
June 30, 2018 75,742,719
 $757
 $1,665,749
 $75,620
 $1,369,933
 $(1,883,104) $1,228,955
Net income —
 —
 —
 —
 40,921
 —
 40,921
Other comprehensive loss —
 —
 —
 (3,293) —
 —
 (3,293)
Issuance of common stock 7,187,500
 72
 116,964
 —
 —
 —
 117,036
Employee stock purchase and incentive plans 62
 —
 94
 —
 —
 —
 94
Non-cash equity award compensation —
 —
 3,150
 —
 —
 —
 3,150
Common dividends declared ($0.30 per share) —
 —
 —
 —
 —
 (25,536) (25,536)
September 30, 2018 82,930,281
 $829
 $1,785,957
 $72,327
 $1,410,854
 $(1,908,640) $1,361,327


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

For the Nine Months Ended September 30, 2018
(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, 2017 76,599,972
 $766
 $1,673,845
 $85,248
 $1,290,341
 $(1,837,913) $1,212,287
Net income —
 —
 —
 —
 120,513
 —
 120,513
Other comprehensive loss —
 —
 —
 (12,921) —
 —
 (12,921)
Issuance of common stock 7,187,500
 72
 116,964
 —
 —
 —
 117,036
Employee stock purchase and incentive plans 183,638
 1
 (101) —
 —
 —
 (100)
Non-cash equity award compensation —
 —
 10,783
 —
 —
 —
 10,783
Share repurchases (1,040,829) (10) (15,534) —
 —
 —
 (15,544)
Common dividends declared ($0.88 per share) —
 —
 —
 —
 —
 (70,727) (70,727)
September 30, 2018 82,930,281
 $829
 $1,785,957
 $72,327
 $1,410,854
 $(1,908,640) $1,361,327


For the Six Months Ended June 30, 2019
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income		Cumulative
Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
December 31, 201884,884,344  $849  $1,811,422  $61,297  $1,409,941  $(1,934,715) $1,348,794  
Net income—  —  —  —  85,730  —  85,730  
Other comprehensive loss—  —  —  (12,374) —  —  (12,374) 
Issuance of common stock12,291,191  123  189,985  —  —  —  190,108  
Direct stock purchase and dividend reinvestment plan399,838  4  6,303  —  —  —  6,307  
Employee stock purchase and incentive plans139,648  1  (1,921) —  —  —  (1,920) 
Non-cash equity award compensation—  —  7,255  —  —  —  7,255  
Common dividends declared ($0.60 per share)—  —  —  —  —  (59,868) (59,868) 
June 30, 201997,715,021  $977  $2,013,044  $48,923  $1,495,671  $(1,994,583) $1,564,032  

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,
 2019 2018
Cash Flows From Operating Activities:    
Net income $120,040
 $120,513
Adjustments to reconcile net income to net cash used in operating activities:    
Amortization of premiums, discounts, and securities issuance costs, net (3,486) (11,091)
Depreciation and amortization of non-financial assets 5,673
 922
Originations of held-for-sale loans (124,392) —
Purchases of held-for-sale loans (4,002,509) (5,596,326)
Proceeds from sales of held-for-sale loans 2,971,811
 4,097,211
Principal payments on held-for-sale loans 77,100
 51,853
Net settlements of derivatives (32,902) 36,721
Non-cash equity award compensation expense 10,552
 10,783
Market valuation adjustments (62,720) (53,666)
Realized gains, net (18,227) (21,352)
Net change in:    
Accrued interest receivable and other assets (141,197) (32,722)
Accrued interest payable and accrued expenses and other liabilities (1,049) 34,137
Net cash used in operating activities (1,201,306) (1,363,017)
Cash Flows From Investing Activities:    
Originations of loans held-for-investment (171,915) —
Purchases of loans held-for-investment (49,489) (111,231)
Proceeds from sales of loans held-for-investment 9,422
 —
Principal payments on loans held-for-investment 1,091,652
 550,973
Purchases of real estate securities (309,839) (482,150)
Purchases of residential securities held in consolidated securitization trust (193,212) —
Purchases of multifamily securities held in consolidated securitization trusts (68,601) (54,957)
Proceeds from sales of real estate securities 487,469
 432,199
Principal payments on real estate securities 62,711
 61,278
Purchases of servicer advance investments (69,610) —
Principal repayments from servicer advance investments 150,512
 —
Acquisition of 5 Arches, net of cash acquired (3,714) —
Net investment in participation in loan warehouse facility 38,209
 (37,814)
Net investment in multifamily loan fund (33,090) —
Other investing activities, net (24,989) (3,731)
Net cash provided by investing activities 915,516
 354,567
Cash Flows From Financing Activities:    
Proceeds from borrowings on short-term debt 4,009,083
 4,760,083
Repayments on short-term debt (4,435,823) (5,274,664)
Proceeds from issuance of asset-backed securities 1,020,136
 1,658,848
Repayments on asset-backed securities issued (720,651) (305,528)
Proceeds from issuance of long-term debt 387,053
 199,000
Deferred long-term debt issuance costs paid (7,023) (4,977)
Net proceeds from issuance of common stock 426,970
 117,311
Net payments on repurchase of common stock —
 (16,315)
Dividends paid (94,286) (70,727)
Other financing activities, net 1,400
 (619)
Net cash provided by financing activities 586,859
 1,062,412
Net increase in cash, cash equivalents and restricted cash 301,069
 53,962
Cash, cash equivalents and restricted cash at beginning of period (1)
 205,077
 146,807
Cash, cash equivalents and restricted cash at end of period (1)
 $506,146
 $200,769


REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)		Six Months Ended June 30,
20202019
Cash Flows From Operating Activities:
Net (loss) income$(777,954) $85,730  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net4,083  144  
Depreciation and amortization of non-financial assets8,962  696  
Originations of held-for-sale loans(457,510) (84,924) 
Purchases of held-for-sale loans(2,720,245) (2,534,886) 
Proceeds from sales of held-for-sale loans3,126,860  2,123,794  
Principal payments on held-for-sale loans48,901  49,894  
Net settlements of derivatives(183,373) (25,751) 
Non-cash equity award compensation expense7,240  7,255  
Goodwill impairment expense88,675  —  
Market valuation adjustments765,647  (48,172) 
Realized gains, net(29,817) (13,513) 
Net change in:
Accrued interest receivable and other assets254,368  (108,985) 
Accrued interest payable and accrued expenses and other liabilities(80,219) (9,744) 
Net cash provided by (used in) operating activities55,618  (558,462) 
Cash Flows From Investing Activities:
Originations of loan investments(263,544) (84,638) 
Purchases of loan investment—  (49,489) 
Proceeds from sales of loan investments1,574,160  2,780  
Principal payments on loan investments1,136,000  619,085  
Purchases of real estate securities(52,260) (242,970) 
Purchases of multifamily securities held in consolidated securitization trusts—  (68,601) 
Sales of multifamily securities held in consolidated securitization trusts142,990  —  
Proceeds from sales of real estate securities621,730  241,217  
Principal payments on real estate securities16,405  39,041  
Purchases of servicer advance investments(179,419) (68,976) 
Principal repayments from servicer advance investments75,478  111,662  
Acquisition of 5 Arches, net of cash acquired—  (3,714) 
Net investment in participation in loan warehouse facility—  38,209  
Net investment in multifamily loan fund10,203  (28,673) 
Other investing activities, net(21,342) (7,616) 
Net cash provided by investing activities3,060,401  497,317  
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt3,655,530  2,731,731  
Repayments on short-term debt(5,322,519) (2,675,308) 
Proceeds from issuance of asset-backed securities827,644  330,534  
Repayments on asset-backed securities issued(673,323) (416,789) 
Proceeds from issuance of long-term debt944,282  —  
Deferred long-term debt issuance costs paid(7,830) —  
Repayments on long-term debt(2,128,805) —  
Net settlements of derivatives(84,336) —  
Net proceeds from issuance of common stock5,707  198,333  
Taxes paid on equity award distributions(2,934) —  
Dividends paid(51,810) (59,868) 
Other financing activities, net4,650  (467) 
Net cash (used in) provided by financing activities(2,833,744) 108,166  
Net increase in cash, cash equivalents and restricted cash282,275  47,021  
Cash, cash equivalents and restricted cash at beginning of period (1)
290,833  205,077  
Cash, cash equivalents and restricted cash at end of period (1)
$573,108  $252,098  
7


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

(In Thousands)
(Unaudited)		Six Months Ended June 30,
20202019
Supplemental Cash Flow Information:
Cash paid during the period for:
 Interest$267,787  $203,086  
 Taxes209  4,158  
Supplemental Noncash Information:
Real estate securities retained from loan securitizations$46,560  $5,462  
Retention of mortgage servicing rights from loan securitizations and sales—  868  
(Deconsolidation) consolidation of multifamily loans held in securitization trusts(3,849,779) 1,481,554  
(Deconsolidation) consolidation of multifamily ABS(3,706,789) 1,408,002  
Transfers from loans held-for-sale to loans held-for-investment706,775  518,521  
Transfers from residential loans to real estate owned9,645  5,098  
Right-of-use asset obtained in exchange for operating lease liability5,362  13,016  
(1) Cash, cash equivalents, and restricted cash at June 30, 2020 includes cash and cash equivalents of $529 million and restricted cash of $44 million, and at December 31, 2019 includes cash and cash equivalents of $197 million and restricted cash of $94 million.
(In Thousands)
(Unaudited)		 Nine Months Ended September 30,
 2019 2018
Supplemental Cash Flow Information:    
Cash paid during the period for:    
 Interest $319,036
 $139,003
 Taxes 6,977
 6,372
Supplemental Noncash Information:    
Real estate securities retained from loan securitizations $7,759
 $46,872
Retention of mortgage servicing rights from loan securitizations and sales 868
 —
Consolidation of residential loans held in securitization trusts 1,190,995
 —
Consolidation of residential ABS 997,783
 —
Consolidation of multifamily loans held in securitization trusts 1,481,554
 946,650
Consolidation of multifamily ABS 1,408,002
 880,602
Transfers from loans held-for-sale to loans held-for-investment 1,361,015
 1,981,170
Transfers from loans held-for-investment to loans held-for-sale 22,808
 15,717
Transfers from residential loans to real estate owned 5,280
 2,139
Right-of-use asset obtained in exchange for operating lease liability 13,016
 —
(1)Cash, cash equivalents, and restricted cash at September 30, 2019 includes cash and cash equivalents of $395 million and restricted cash of $112 million, and at December 31, 2018 includes cash and cash equivalents of $176 million and restricted cash of $29 million.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)




Note 1. Organization
Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on making credit-sensitive investments in single-family residential and multifamily mortgages and related assets and engaging in mortgage banking activities. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, as well as through capital appreciation. We operate our business in 23 segments: Investment PortfolioResidential Lending, Business Purpose Lending, and Mortgage Banking.Third-Party Investments.
Our primary sources of income are net interest income from our investment portfolioinvestments 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 is generated through the origination and acquisition of residential loans, and their subsequent sale, securitization, or securitization, as well as through the origination of business purpose residential loans.transfer to our investment portfolios.
Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”“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.”
Redwood was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. On March 1, 2019, Redwood completed the acquisition of 5 Arches, LLC ("5 Arches"), at which time 5 Arches became a wholly-owned subsidiary of Redwood. On October 15, 2019, Redwood acquired CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), at which time CoreVest became wholly owned by Redwood. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.
Note 2. Basis of Presentation
The consolidated financial statements presented herein are at SeptemberJune 30, 20192020 and December 31, 2018,2019, and for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. 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, 2018.2019. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the company at SeptemberJune 30, 20192020 and results of operations for all periods presented have been made. The results of operations for the three and ninesix months ended SeptemberJune 30, 20192020 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 as entities formed in connection with the securitization of Redwood Choice expanded-prime loans beginning in the third quarter of 2017 ("Sequoia Choice"). In addition, we consolidatedWe also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations we invested in beginning in the third quarter of 2018, andin. Finally, we consolidated the assets and liabilities of certain Freddie Mac SLSTCoreVest American Finance Lender ("CAFL") securitizations we invested in beginning in the fourth quarter of 2018.2019, in connection with our acquisition of CoreVest. 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 the consolidated Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.
9

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)
Note 2. Basis of Presentation - (continued)

For financial reporting purposes, the underlying loans owned at the consolidated Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment at fair value, and the underlying loans at the consolidated Freddie Mac K-Series are shown under Multifamily loans held-for-investment at fair value, and the underlying single-family rental loans at the consolidated CAFL entities are shown under Business purpose residential loans held-for-investment at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income (loss), we recorded interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as other income and expenses associated with these entities' activities. See Note 14 for further discussion on ABS issued.
Beginning inDuring the fourthfirst quarter of 2018,2020, we sold subordinate securities issued by four of these Freddie Mac K-Series securitization trusts and determined that we should derecognize the associated assets and liabilities of each of these entities for financial reporting purposes. We deconsolidated $3.86 billion of multifamily loans and other assets and $3.72 billion of multifamily ABS issued and other liabilities, for which we realized market valuation losses of $72 million, which were recorded through Investment fair value changes, net on our consolidated statements of income (loss) for the three months ended March 31, 2020.
We also consolidate 2 partnerships ("Servicing Investment" entities) through which we have invested in servicing-related assets. We maintain an 80% ownership interest in each entity and have determined that we are the primary beneficiary of these partnerships.
Beginning in the first quarter of 2019, we consolidated 5 Arches, LLC ("5 Arches"), an originator of business purpose residential loans, pursuant to the exercise of our purchase option and the acquisition of the remaining equity in the company. In the fourth quarter of 2019, we acquired and consolidated CoreVest, an originator and portfolio manager of business purpose residential loans.
See Note 4 for further discussion on principles of consolidation.
Use of Estimates
The preparation of financial statements requires us to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.
Acquisition ofAcquisitions
In May 2018, Redwood acquired a 20% minority interest in 5 Arches, LLC
an originator of business purpose residential loans. On March 1, 2019, we completed the acquisition of the remaining 80% interest in 5 Arches,Arches. On October 15, 2019, we acquired CoreVest, an originator and portfolio manager of business purpose residential loans. In May 2018, Redwood acquired a 20% minority interest in 5 ArchesRefer to our Annual Report on Form 10-K for $10 million in cash, with a one-year option tothe year ended December 31, 2019 for additional information regarding these acquisitions, including purchase all remaining equity in the company. At closing, we paid approximately $13 million of cash, and the remainder of the consideration, which could total up to an additional $27 million, will be paid in a mix of cash and Redwood common stock and is contingent on the achievement of certain specified loan origination thresholds over the next two years.price allocations.


10

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)
Note 2. Basis of Presentation - (continued)

We accounted forIn connection with the acquisitionacquisitions of 5 Arches under the acquisition method of accounting pursuant to ASC 805. We performed the preliminary purchase price allocation and recorded underlying assets acquired and liabilities assumed based on their estimated fair values using the information available as of the acquisition date, with the excess of the purchase price allocated to goodwill. Through September 30, 2019, there have been no significant changes to our preliminary purchase price allocation, which is summarized in the following table.
Table 2.1 – 5 Arches Purchase Price Allocation
(In Thousands) March 1, 2019
Purchase price:  
Cash $12,575
Contingent consideration, at fair value 24,621
Purchase option, at fair value 5,082
Equity method investment, at fair value 8,052
Total consideration $50,330
   
Allocated to:  
Tangible net assets acquired (1)
 $985
Goodwill 28,747
Intangible assets 24,800
Deferred tax liability (4,202)
Total net assets acquired $50,330
(1)5 Arches net assets acquired consisted of assets of $19 million and liabilities of $18 million as of March 1, 2019.
Because we owned a 20% noncontrolling interest in 5 Arches immediately before obtaining full control, we remeasured our initial minority investment and purchase option at their acquisition-date fair values using the income approach, which resulted in a gain of $2 million that was recorded in Other income, net on our consolidated statements of income during the three months ended March 31, 2019.
As part of this acquisition,CoreVest, we identified and recorded finite-lived intangible assets totaling $25 million.million and $57 million, respectively. The amortization period for each of these assets and the activity for the period from March 1, 2019 to Septembersix months ended June 30, 20192020 is summarized in the table below.
Table 2.22.1 – Intangible Assets – Activity
(Dollars in Thousands) Carrying Value at December 31, 2018 Additions Amortization Expense Carrying Value at September 30, 2019 Weighted Average Amortization Period (in years)
Finite-lived intangible assets:          
Broker network $—
 $18,100
 $(2,112) $15,988
 5
Non-compete agreements —
 2,900
 (564) 2,336
 3
Loan administration fees on existing loan assets —
 2,600
 (1,517) 1,083
 1
Tradename —
 1,200
 (233) 967
 3
Total $—
 $24,800
 $(4,426) $20,374
 4


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Note 2. Basis of Presentation - (continued)

Carrying Value at December 31, 2019AdditionsAmortization ExpenseCarrying Value at June 30, 2020Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network$43,952  $—  $(3,236) $40,716  7
Broker network15,083  —  (1,810) 13,273  4
Non-compete agreements8,236  —  (1,583) 6,653  3
Tradenames3,472  —  (667) 2,805  3
Developed technology1,613  —  (450) 1,163  2
Loan administration fees on existing loan assets433  —  (433) —  —
Total$72,789  $—  $(8,179) $64,610  6
All of our intangible assets are amortized on a straight-line basis. Estimated future amortization expense for the remainder of 2019 and the following years is summarized in the table below.
Table 2.32.2 – Intangible Asset Amortization Expense by Year
(In Thousands) September 30, 2019
2019 (3 months) $1,897
2020 5,420
2021 4,987
2022 3,848
2023 and thereafter 4,222
Total Future Intangible Asset Amortization $20,374

(In Thousands)June 30, 2020
2020 (6 months)$7,746  
202115,304  
202212,800  
202310,091  
20247,073  
2025 and thereafter11,596  
Total Future Intangible Asset Amortization$64,610  
We recorded total goodwill of $29$89 million in 2019 as a result of the total consideration exceeding the fair value of the net assets acquired.acquired from 5 Arches and CoreVest. The goodwill was attributed to the expected business synergies and expansion into business purpose loan markets, as well as access to the knowledgeable and experienced workforceworkforces continuing to provide services to the business. We expect $3$75 million of ourthis goodwill balance to be deductible for tax purposes. The following table presentsFor reporting purposes, we included the intangible assets and goodwill activityfrom these acquisitions within the Business Purpose Lending segment.

11

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 2. Basis of Presentation - (continued)
During the first quarter of 2020, as a result of the deterioration in economic conditions caused by the spread of the COVID-19 pandemic (the "pandemic"), and its impact on our business, including a significant decline in the market price of our common stock, we determined that it was more likely than not that the fair value of our Business Purpose Lending reporting unit was lower than its carrying amount, including goodwill. Based on this analysis, we determined that an interim goodwill impairment test should be performed as of March 31, 2020 and prepared updated cash flow projections for the ninereporting unit, resulting in a reduction in the long-term forecasts of profitability for our Business Purpose Lending reporting unit as compared to the prior year forecasts. Using these projections, we concluded that the fair value of our Business Purpose Lending reporting unit was less than its carrying value, including goodwill. As a result of this evaluation, we recorded a non-cash $89 million goodwill impairment expense through Other expenses on our consolidated statements of income (loss) during the three months ended September 30, 2019.
Table 2.4 – Goodwill – Activity
(In Thousands) 
Nine Months Ended
September 30, 2019
Beginning balance $—
Goodwill recognized from 5 Arches acquisition 28,728
Measurement period adjustment 19
Impairment —
Ending Balance $28,747

March 31, 2020. In conjunction with our assessment of goodwill, we also assessed our intangible assets for impairment at March 31, 2020 and determined they were 0t impaired. 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.
The liability resulting from the contingent consideration arrangement with 5 Arches was recorded at its acquisition-date fair value of $25 million as part of total consideration for the acquisition of 5 Arches. These contingent earn-out payments were classified as a contingent consideration liability and carried at fair value prior to March 31, 2020. During the three months ended March 31, 2020, we made a cash payment of $11 million and granted $3 million of Redwood common stock in connection with the first anniversary of the purchase date. Additionally, as a result of an amendment to the agreement, we reclassified the contingent liability to a deferred liability, as the remaining payments became payable on a set timetable without any remaining contingencies. At SeptemberJune 30, 2019, our estimated fair2020, the carrying value of this contingentdeferred liability was $25$15 million and was recorded as a component of Accrued expenses and other liabilities on our consolidated balance sheets. During the three and six months ended June 30, 2020, we recorded $0.1 million and $0.4 million of contingent consideration expense, respectively, through Other expenses on our consolidated statements of income (loss). See Note 16 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, and 5 Arches, and CoreVest combined, for the three and six months ended June 30, 2019, as if the acquisitionacquisitions occurred as of January 1, 2018. These pro forma amounts have been adjusted to include the amortization of intangible assets and acquisition-related compensation expense for both periods, and to exclude the income statement impacts related to our equity method investment in 5 Arches. 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 acquisitionacquisitions had been completed as of January 1, 2018 and should not be taken as indicative of our future consolidated results of operations. During the period from March 1, 2019 to September 30, 2019, 5 Arches had mortgage banking income of $12 million and a net loss of $3 million. Included in the net loss for this period was intangible asset amortization expense of $4 million.
Table 2.52.3 – Unaudited Pro Forma Financial Information
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Supplementary pro forma information:        
Net interest income $33,513
 $35,231
 $98,101
 $105,660
Non-interest income 27,498
 22,280
 98,780
 84,684
Net income 34,310
 32,636
 115,809
 111,072

Three Months Ended June 30, 2019Six Months Ended June 30, 2019
(In Thousands)
Supplementary pro forma information:
Net interest income$44,353  $87,743  
Non-interest income35,495  78,471  
Net income44,218  100,246  

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)



Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies
Included in Note 3 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 20182019 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 position and results of operations for the three and ninesix months ended SeptemberJune 30, 2019.2020.
Business Combinations
12

We useREDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)
Available-for-Sale Securities
Upon adoption of ASU 2016-13, "Financial Instruments - Credit Losses" in the acquisition methodfirst quarter of accounting2020, we modified our policy for business combinations, underrecording impairments on available-for-sale securities. This new guidance requires that credit impairments on our available-for-sale securities be recorded in earnings using an allowance for credit losses, with the allowance limited to the amount by which the purchase pricesecurity's fair value is allocatedless than its amortized cost basis. The allowance for credit losses is calculated using a discounted cash flow approach and is measured as the difference between the beneficial interest’s amortized cost and the estimate of cash flows expected to the fair values of the assets acquired and liabilities assumedbe collected, discounted at the acquisition date. Theeffective interest rate used to accrete the beneficial interest. Any allowance for credit losses in excess of the purchase price overunrealized losses on the amount allocatedbeneficial interests are accounted for as a prospective reduction of the effective interest rate. No allowance is recorded for beneficial interests in an unrealized gain position. Favorable changes in the discounted cash flows will result in a reduction in the allowance for credit losses, if any. Any reduction in allowance for credit losses is recorded in earnings. If the allowance for credit losses has been reduced to zero, the remaining favorable changes are reflected as a prospective increase to the assets acquired and liabilities assumedeffective interest rate. If we intend to sell or it is recorded as goodwill. Adjustmentsmore likely than not that we will be required to sell the values ofsecurity before it recovers in value, the assets acquired and liabilities assumed that couldentire impairment amount will be made during the measurement period, which could be up to one year after the acquisition date, are recordedrecognized in the period in which the adjustment is identified,earnings with a corresponding offsetadjustment to goodwill. Any adjustments made after the measurement period are recordedsecurity's amortized cost basis.
Goodwill
Pursuant to our adoption of ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" in the consolidated statementsfirst quarter of income. Acquisition-related costs are expensed as incurred.
Goodwill and Intangible Assets
Significant judgment is required to estimate the fair value of intangible assets and in assigning their estimated useful lives. Accordingly,2020, we typically seek the assistance of independent third-party valuation specialists for significant intangible assets. The fair value estimates are based on available historical information and on future expectations and assumptions we deem reasonable. We generally use an income-based valuation method to estimate the fair value of intangible assets, which discounts expected future cash flows to present value using estimates and assumptions we deem reasonable.
Determining the estimated useful lives of intangible assets also requires judgment. Our assessment as to which intangible assets are deemed to have finite or indefinite lives is based on several factors including economic barriers of entry for the acquired business, retention trends, andmodified our operating plans, among other factors.
Finite-lived intangible assets are amortized over their estimated useful lives on a straight-line basis and reviewed forgoodwill impairment if indicators are present. Additionally, useful lives are evaluated each reporting period to determine if revisions to the remaining periods of amortization are warranted. Goodwill is tested for impairment annually or more frequently if indicators of impairment exist. We have elected to make the first day of our fiscal fourth quarter the annual impairment assessment date for goodwill.testing policy. We first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than theits carrying value. If, based on that assessment, we believe it is more likely than not that the fair value of the reporting unit is less than its carrying value, we measure the fair value of reporting unit and record a goodwill impairment charge for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value, then a two-step quantitative goodwillamount of the goodwill. Any such impairment test is performed.
Loan Originations
Our wholly-owned subsidiary, 5 Arches, originates business purpose residential loans, including single-family rental and residential bridge loans. Single-family rental loans are mortgage loans secured by 1-4 unit residential real estate with a mortgage loan borrower that owns the real estate as an investment property and rents the property to residential tenants. Residential bridge loans are mortgage loans generally secured by unoccupied residential real estate that the borrower owns as an investment and that is being renovated, rehabilitated or constructed. Generally, single-family rental loans are classified as held-for-sale at fair value, as we have originated these loans with the intent to sell to third parties or transfer to securitization entities. Certain single-family rental loans maycharges would be subsequently reclassified to held-for-investment when the loans are transferred to our Federal Home Loan Bank of Chicago ("FHLBC") member subsidiary and pledged as collateral for borrowings made from the FHLBC. Residential bridge loans are classified as held-for-investment at fair value, if we intend to hold these loans to maturity, or held-for-sale at fair value, if we intend to sell the loans to a third party.
Contingent Consideration
In relation to our acquisition of 5 Arches, we recorded contingent consideration liabilities that represent the estimated fair value (at the date of acquisition) of our obligation to make certain earn-out payments that are contingent on 5 Arches loan origination volumes exceeding certain specified thresholds. These liabilities are carried at fair value and periodic changes in their estimated fair value are recorded through Other income, netexpenses on our consolidated statements of income. The estimate of the fair value of contingent consideration requires significant judgment regarding assumptions about future operating results, discount rates, and probabilities of projected operating result scenarios.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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

Leases
Upon adoption of ASU 2016-02, "Leases," in the first quarter of 2019, we recorded a lease liability and right-of-use asset on our consolidated balance sheets. The lease liability is equal to the present value of our remaining lease payments discounted at our incremental borrowing rate and the right-of-use asset is equal to the lease liability adjusted for our deferred rent liability at the adoption of this accounting standard. As lease payments are made, the lease liability is reduced to the present value of the remaining lease payments and the right-of-use asset is reduced by the difference between the lease expense (straight-lined over the lease term) and the theoretical interest expense amount (calculated using the incremental borrowing rate)income (loss). See Note 16 for further discussion on leases.
Recent Accounting Pronouncements
Newly Adopted Accounting Standards Updates ("ASUs")
In July 2019, the FASB issued ASU 2019-07, "Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update)." This new guidance amends certain SEC paragraphs in the FASB Accounting Standards Codification pursuant to the issuance of various SEC Final Rule Releases, and is effective immediately. We adopted this guidance, as required, in the third quarter of 2019, which did not have a material impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This new guidance allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). This new guidance is effective for fiscal years beginning after December 15, 2018. However, we did not elect to reclassify any income tax effects of the Tax Act from AOCI to retained earnings as we did not have any tax effects related to the Tax Act remaining in AOCI at December 31, 2018. Our policy is to release any stranded income tax effects from AOCI to income tax expense on an investment-by-investment basis.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." This new guidance amends previous guidance to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This new guidance is effective for fiscal years beginning after December 15, 2018. Additionally, in October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes," which permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The amendments in this update are required to be adopted concurrently with the amendments in ASU 2017-12. We adopted this guidance, as required, in the first quarter of 2019, which did not have a material impact 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. We adopted this guidance, as required, in the first quarter of 2019, which did not have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20)." This new guidance shortens the amortization period for certain callable debt securities purchased at a premium by requiring the premium to be amortized to the earliest call date. This new guidance is effective for fiscal years beginning after December 15, 2018. We adopted this guidance, as required, in the first quarter of 2019, which did not have a material impact on our consolidated financial statements.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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

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. In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases," which provides more specific guidance on certain aspects of Topic 842. Additionally, in July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements." This new ASU introduces an additional transition method which allows entities to apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements," which is intended to clarify Codification guidance. We adopted this guidance, as required, in the first quarter of 2019, which did not have a material impact on our consolidated financial statements. We elected the package of practical expedients under the transition guidance within this standard, which allowed us to carry forward the classifications of each of our existing leases as operating leases. In connection with the adoption of this guidance, at September 30, 2019, our lease liability was $13 million, which represented the present value of our remaining lease payments discounted at our incremental borrowing rate and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. At September 30, 2019, our right-of-use asset was $11 million, which was equal to the lease liability adjusted for our deferred rent liability at adoption and was recorded in Other assets on our consolidated balance sheets. We will continue to record lease expense on a straight-line basis and have included required lease disclosures within Note 16.
Other Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This new guidance amends previous guidance by removing and modifying certain existing fair value disclosure requirements, while adding other new disclosure requirements. This new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted and entities may elect to early adopt the removal or modification of disclosures immediately and delay adoption of the new disclosure requirements until their effective date. We plan to adoptadopted this new guidance, byas required, in the required date and dofirst quarter of 2020, which did not anticipate that this update will have a material impact on our consolidated financial statements.
In July 2018, the FASB issued ASU 2018-09, "Codification Improvements." This new guidance is intended to clarify, correct, and make minor improvements to the FASB Accounting Standards Codification. The transition and effective dates are based on the facts and circumstancesstatements but impacted certain of each amendment, with some amendments becoming effective upon issuance of this ASU and others becoming effective for annual periods beginning after December 15, 2018. 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.fair value footnote disclosures.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This new guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. We plan to adoptadopted this new guidance, byas required, in the required date and dofirst quarter of 2020, which did not anticipate that this update will have a material impact on our consolidated financial statements.
13

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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

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 after December 15, 2018. In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which clarifies the scope of the amendments in ASU 2016-13. In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which is intended to clarify this guidance. Additionally, inIn May 2019, the FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost. In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which is intended to clarify Codification guidance. In February 2020, the FASB issued ASU 2020-02, "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)," and in March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments." These updates amend certain sections of the guidance. We currently have only a small balance of loans receivable that are not carried at fair value and would be subject to this new guidance for allowance for credit losses. Separately, we accountaccounted for our available-for-sale securities under the other-than-temporary impairment ("OTTI") model for debt securities.securities prior to the issuance of this new guidance. This new guidance requires that credit impairments on our available-for-sale securities be recorded in earnings using an allowance for credit losses, with the allowance limited to the amount by which the security's fair value is less than its amortized cost basis. Subsequent reversals in credit loss estimates are recognized in income. We adopted this guidance, as required, in the first quarter of 2020, which did not have a material impact on our consolidated financial statements.
Other Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This new guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact the adoption of this standard would have on our consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." This new guidance clarifies the interaction of the accounting for equity securities, equity method investments, and certain forward contracts and purchased options. This new guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that these updatesthis update will have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance. This new guidance is effective for fiscal years beginning after December 15, 2020. 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 as nearly all of our financial instruments are carried at fair value and changes in fair values of these instruments are recorded on our consolidated statements of income in the period in which the valuation change occurs. We will continue evaluating these new standards and caution that any changes in our business or additional amendments to these standards could change our initial assessment.statements.
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.
14

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)
The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at SeptemberJune 30, 20192020 and December 31, 2018.2019.
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
June 30, 2020 (In Thousands)Financial InstrumentsCash Collateral (Received) Pledged
Liabilities (2)
Loan warehouse debt$(449,560)$— $(449,560)$449,560 $— $— 
Security repurchase agreements(311,888)— (311,888)311,888 — — 
Total Liabilities$(761,448)$— $(761,448)$761,448 $— $— 
  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, 2019
(In Thousands)		    Financial Instruments Cash Collateral (Received) Pledged 
Assets (2)
            
Interest rate agreements $33,642
 $—
 $33,642
 $(25,802) $(4,379) $3,461
TBAs 5,250
 —
 5,250
 (3,448) (1,040) 762
Total Assets $38,892
 $—
 $38,892
 $(29,250) $(5,419) $4,223
             
Liabilities (2)
            
Interest rate agreements $(228,150) $—
 $(228,150) $25,802
 $202,348
 $—
TBAs (4,192) —
 (4,192) 3,448
 483
 (261)
Loan warehouse debt (233,224) —
 (233,224) 233,224
 —
 —
Security repurchase agreements (1,157,646) —
 (1,157,646) 1,157,646
 —
 —
Total Liabilities $(1,623,212) $—
 $(1,623,212) $1,420,120
 $202,831
 $(261)
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, 2019 (In Thousands)Financial InstrumentsCash Collateral (Received) Pledged
Assets (2)
Interest rate agreements$19,020 $— $19,020 $(14,178)$(915)$3,927 
TBAs5,755 — 5,755 (5,755)— — 
Futures137 — 137 — — 137 
Total Assets$24,912 $— $24,912 $(19,933)$(915)$4,064 
Liabilities (2)
Interest rate agreements$(148,765)$— $(148,765)$14,178 $134,587 $— 
TBAs(13,359)— (13,359)5,755 6,673 (931)
Loan warehouse debt(432,126)— (432,126)432,126 — — 
Security repurchase agreements(1,096,578)— (1,096,578)1,096,578 — — 
Total Liabilities$(1,690,828)$— $(1,690,828)$1,548,637 $141,260 $(931)
(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.
(2)Interest rate agreements and TBAs are components of derivatives instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by certain residential and business purpose residential loans, and security repurchase agreements are components of Short-term debt and Long-term debt on our consolidated balance sheets.

15

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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

  Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in Consolidated Balance Sheet Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet 
Gross Amounts Not Offset in Consolidated
Balance Sheet (1)
 Net Amount
December 31, 2018
(In Thousands)		    Financial Instruments Cash Collateral (Received) Pledged 
Assets (2)
            
Interest rate agreements $28,211
 $—
 $28,211
 $(28,211) $—
 $—
TBAs 4,665
 —
 4,665
 (3,391) (835) 439
Total Assets $32,876
 $—
 $32,876
 $(31,602) $(835) $439
             
Liabilities (2)
            
Interest rate agreements $(70,908) $—
 $(70,908) $28,211
 $42,697
 $—
TBAs (13,215) —
 (13,215) 3,391
 5,620
 (4,204)
Loan warehouse debt (860,650) —
 (860,650) 860,650
 —
 —
Security repurchase agreements (988,890) —
 (988,890) 988,890
 —
 —
Total Liabilities $(1,933,663) $—
 $(1,933,663) $1,881,142
 $48,317
 $(4,204)
(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.
(2)Interest rate agreements and TBAs are components of derivatives instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by residential mortgage loans, and security repurchase agreements are components of Short-term debt on our consolidated balance sheets.
For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be aggregated and treated as a single transaction. For certain categories of these instruments, some of our transactions 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.
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.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

Note 4. Principles of Consolidation - (continued)


Analysis of Consolidated VIEs
At SeptemberJune 30, 2019,2020, we consolidated our Legacy Sequoia, and Sequoia Choice securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Additionally, beginning in the second half of 2018, we consolidated certainFreddie Mac SLST, Freddie Mac K-Series and SLSTCAFL securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for the consolidated Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. At SeptemberJune 30, 2019,2020, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series and CAFL entities was $10$6 million, $259$204 million, $456$336 million, $25 million, and $215$206 million, respectively.
During the first quarter of 2020, we sold subordinate securities issued by four of these Freddie Mac K-Series securitization trusts and determined that we should derecognize the associated assets and liabilities of each of these entities for financial reporting purposes. We deconsolidated $3.86 billion of multifamily loans and other assets and $3.72 billion of multifamily ABS issued and other liabilities, for which we realized market valuation losses of $72 million, which were recorded through Investment fair value changes, net on our consolidated statements of income (loss) for the three months ended March 31, 2020.
Beginning in the fourth quarter of 2018, we consolidated 2 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 SeptemberJune 30, 2019,2020, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s interest. Additionally, beginning in the fourth quarter of 2018, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing. At SeptemberJune 30, 2019,2020, the estimated fair value of our investment in the Servicing Investment entities was $75$68 million.
16

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 4. Principles of Consolidation - (continued)
The following table presents a summary of the assets and liabilities of these VIEs.
Table 4.1 – Assets and Liabilities of Consolidated VIEs
June 30, 2020Legacy
Sequoia		Sequoia
Choice		Freddie Mac SLSTFreddie Mac
K-Series		CAFLServicing InvestmentTotal
Consolidated
VIEs
(Dollars in Thousands)
Residential loans, held-for-investment$304,632  $2,064,388  $2,145,111  $—  $—  $—  $4,514,131  
Business purpose residential loans, held-for-investment—  —  —  —  2,615,038  —  2,615,038  
Multifamily loans, held-for-investment—  —  —  489,075  —  —  489,075  
Other investments—  —  —  —  —  290,805  290,805  
Cash and cash equivalents—  —  —  —  —  2,773  2,773  
Restricted cash145  9  —  —  —  30,416  30,570  
Accrued interest receivable529  8,236  6,627  1,342  11,087  6,725  34,546  
Other assets916  —  940  —  5,824  —  7,680  
Total Assets$306,222  $2,072,633  $2,152,678  $490,417  $2,631,949  $330,719  $7,984,618  
Short-term debt$—  $—  $—  $—  $—  $244,437  $244,437  
Accrued interest payable230  6,474  5,149  1,182  8,458  134  21,627  
Accrued expenses and other liabilities—  9  —  —  —  18,062  18,071  
Asset-backed securities issued300,357  1,861,777  1,812,008  464,691  2,417,253  —  6,856,086  
Total Liabilities$300,587  $1,868,260  $1,817,157  $465,873  $2,425,711  $262,633  $7,140,221  
Number of VIEs20  10  2  1  12  3  48  
September 30, 2019 
Legacy
Sequoia
 
Sequoia
Choice
 Freddie Mac SLST 
Freddie Mac
K-Series
 Servicing Investment 
Total
Consolidated
VIEs
December 31, 2019December 31, 2019Legacy
Sequoia		Sequoia
Choice		Freddie Mac SLSTFreddie Mac
K-Series		CAFLServicing InvestmentTotal
Consolidated
VIEs
(Dollars in Thousands) 
Legacy
Sequoia
 
Sequoia
Choice
 Freddie Mac SLST 
Freddie Mac
K-Series
 Servicing Investment 
Total
Consolidated
VIEs
(Dollars in Thousands)
Residential loans, held-for-investment Residential loans, held-for-investment$407,890  $2,291,463  $2,367,215  $—  $—  $—  $5,066,568  
Business purpose residential loans, held-for-investmentBusiness purpose residential loans, held-for-investment—  —  —  —  2,192,552  —  2,192,552  
Multifamily loans, held-for-investment —
 —
 —
 3,791,622
 —
 3,791,622
Multifamily loans, held-for-investment—  —  —  4,408,524  —  —  4,408,524  
Other investments —
 —
 —
 —
 238,316
 238,316
Other investments—  —  —  —  —  184,802  184,802  
Cash and cash equivalents —
 —
 —
 —
 21,240
 21,240
Cash and cash equivalents—  —  —  —  —  9,015  9,015  
Restricted cash 143
 15
 —
 —
 21,450
 21,608
Restricted cash143  27  —  —  —  21,766  21,936  
Accrued interest receivable 716
 10,806
 7,215
 11,300
 4,472
 34,509
Accrued interest receivable655  9,824  7,313  13,539  9,572  4,869  45,772  
REO 460
 —
 84
 —
 —
 544
Other assetsOther assets460  —  445  —  1,795  —  2,700  
Total Assets $430,478
 $2,629,137
 $2,448,522
 $3,802,922
 $285,478
 $9,596,537
Total Assets$409,148  $2,301,314  $2,374,973  $4,422,063  $2,203,919  $220,452  $11,931,869  
Short-term debt $—
 $—
 $—
 $—
 $191,203
 $191,203
Short-term debt$—  $—  $—  $—  $—  $152,554  $152,554  
Accrued interest payable 456
 8,949
 5,498
 10,805
 247
 25,955
Accrued interest payable395  7,732  5,374  12,887  7,485  187  34,060  
Accrued expenses and other liabilities —
 15
 —
 —
 19,371
 19,386
Accrued expenses and other liabilities—  27  —  —  —  14,956  14,983  
Asset-backed securities issued 419,890
 2,361,111
 1,987,473
 3,577,577
 —
 8,346,051
Asset-backed securities issued402,465  2,037,198  1,918,322  4,156,239  2,001,251  —  10,515,475  
Total Liabilities $420,346
 $2,370,075
 $1,992,971
 $3,588,382
 $210,821
 $8,582,595
Total Liabilities$402,860  $2,044,957  $1,923,696  $4,169,126  $2,008,736  $167,697  $10,717,072  
            
Number of VIEs 20
 9
 2
 4
 3
 38
Number of VIEs20  9  2  5  10  3  49  
17

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

Note 4. Principles of Consolidation - (continued)
The following table presents income (loss) from these VIEs for the three and six months ended June 30, 2020 and 2019.
Table 4.2 – Income (Loss) from Consolidated VIEs
Three Months Ended June 30, 2020
Legacy
Sequoia		Sequoia
Choice		Freddie Mac SLSTFreddie Mac
K-Series		CAFLServicing InvestmentTotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$2,686  $22,565  $21,187  $4,870  $32,978  $4,540  $88,826  
Interest expense(1,518) (19,117) (15,845) (4,378) (24,446) (1,797) (67,101) 
Net interest income1,168  3,448  5,342  492  8,532  2,743  21,725  
Non-interest income
Investment fair value changes, net(230) 39,753  26,867  1,599  16,313  3,292  87,594  
Total non-interest income, net(230) 39,753  26,867  1,599  16,313  3,292  87,594  
General and administrative expenses—  —  —  —  —  (712) (712) 
Other expenses—  —  —  —  —  (1,065) (1,065) 
Income from Consolidated VIEs$938  $43,201  $32,209  $2,091  $24,845  $4,258  $107,542  
Six Months Ended June 30, 2020
Legacy
Sequoia		Sequoia
Choice		Freddie Mac SLSTFreddie Mac
K-Series		CAFLServicing InvestmentTotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$5,880  $47,647  $43,173  $45,042  $62,988  $8,623  $213,353  
Interest expense(4,040) (40,627) (32,022) (42,728) (48,101) (3,374) (170,892) 
Net interest income1,840  7,020�� 11,151  2,314  14,887  5,249  42,461  
Non-interest income
Investment fair value changes, net(621) (29,916) (115,295) (84,910) (51,533) (8,593) (290,868) 
Total non-interest income, net(621) (29,916) (115,295) (84,910) (51,533) (8,593) (290,868) 
General and administrative expenses—  —  —  —  —  (743) (743) 
Other expenses—  —  —  —  —  817  817  
Income (Loss) from Consolidated VIEs$1,219  $(22,896) $(104,144) $(82,596) $(36,646) $(3,270) $(248,333) 
Three Months Ended June 30, 2019
Legacy
Sequoia		Sequoia
Choice		Freddie Mac SLSTFreddie Mac
K-Series		CAFLServicing InvestmentTotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$4,776  $26,828  $11,597  $35,917  $—  $3,579  $82,697  
Interest expense(3,981) (23,134) (8,557) (34,441) —  (3,401) (73,514) 
Net interest income795  3,694  3,040  1,476  —  178  9,183  
Non-interest income
Investment fair value changes, net(123) 2,879  8,037  3,246  —  1,069  15,108  
Total non-interest income, net(123) 2,879  8,037  3,246  —  1,069  15,108  
General and administrative expenses—  —  —  —  —  (41) (41) 
Other expenses—  —  —  —  —  (242) (242) 
Income from Consolidated VIEs$672  $6,573  $11,077  $4,722  $—  $964  $24,008  
18

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 4. Principles of Consolidation - (continued)

December 31, 2018 
Legacy
Sequoia
 Sequoia
Choice		 Freddie Mac SLST 
Freddie Mac
K-Series
 Servicing Investment 
Total
Consolidated
VIEs
(Dollars in Thousands)      
Residential loans, held-for-investment $519,958
 $2,079,382
 $1,222,669
 $—
 $—
 $3,822,009
Multifamily loans, held-for-investment —
 —
 —
 2,144,598
 —
 2,144,598
Other investments —
 —
 —
 —
 312,688
 312,688
Restricted cash 146
 1,022
 —
 —
 25,363
 26,531
Accrued interest receivable 822
 8,988
 3,926
 6,595
 1,091
 21,422
REO 3,943
 —
 —
 —
 —
 3,943
Total Assets $524,869
 $2,089,392
 $1,226,595
 $2,151,193
 $339,142
 $6,331,191
Short-term debt $—
 $—
 $—
 $—
 $262,740
 $262,740
Accrued interest payable 571
 7,180
 2,907
 6,239
 483
 17,380
Accrued expenses and other liabilities —
 1,022
 —
 —
 18,592
 19,614
Asset-backed securities issued 512,240
 1,885,010
 993,748
 2,019,075
 —
 5,410,073
Total Liabilities $512,811
 $1,893,212
 $996,655
 $2,025,314
 $281,815
 $5,709,807
             
Number of VIEs 20
 6
 1
 3
 3
 33
Six Months Ended June 30, 2019
Legacy
Sequoia		Sequoia
Choice		Freddie Mac SLSTFreddie Mac
K-Series		CAFLServicing InvestmentTotal
Consolidated
VIEs
(Dollars in Thousands)
Interest income$9,629  $52,490  $23,391  $57,305  $—  $6,926  $149,741  
Interest expense(8,096) (45,247) (17,304) (54,760) —  (7,014) (132,421) 
Net interest income1,533  7,243  6,087  2,545  —  (88) 17,320  
Non-interest income
Investment fair value changes, net(497) 6,144  14,402  6,365  —  2,499  28,913  
Total non-interest income, net(497) 6,144  14,402  6,365  —  2,499  28,913  
General and administrative expenses—  —  —  —  —  (70) (70) 
Other expenses—  —  —  —  —  (468) (468) 
Income from Consolidated VIEs$1,036  $13,387  $20,489  $8,910  $—  $1,873  $45,695  
We consolidate the assets and liabilities of certain Sequoia and CAFL 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 and CAFL 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; 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 and CAFL 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.trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.

Analysis of Unconsolidated VIEs with Continuing Involvement
Since 2012, we have transferred residential loans to 4651 Sequoia securitization entities sponsored by us that are still outstanding as of SeptemberJune 30, 2019,2020, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.
During the first quarter of 2019, the master servicer for one of our unconsolidated Sequoia entities exercised their right to call the securitization and paid off the underlying securities. We realized a $4 million gain related to the called securities, which was recognized through Realized gains, net on our consolidated statements of income. In connection with this called securitization, Redwood acquired $39 million of residential real estate loans that were subsequently sold or were held in our held-for-investment portfolio at Redwood at September 30, 2019.
19

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

Note 4. Principles of Consolidation - (continued)


The following table presents information related to securitization transactions that occurred during the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 4.24.3 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Principal balance of loans transferred $366,999
 $327,511
 $1,116,092
 $2,735,644
Trading securities retained, at fair value 1,228
 2,583
 4,736
 48,831
AFS securities retained, at fair value 1,069
 776
 3,023
 6,728

Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
Principal balance of loans transferred$—  $400,836  $1,573,703  $749,093  
Trading securities retained, at fair value—  1,792  43,362  3,508  
AFS securities retained, at fair value—  1,069  3,198  1,954  
The following table summarizes the cash flows during the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 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) 2019 2018 2019 2018
Proceeds from new transfers $376,126
 $329,231
 $1,138,778
 $2,723,012
MSR fees received 2,919
 3,405
 9,084
 10,216
Funding of compensating interest, net (76) (46) (213) (102)
Cash flows received on retained securities 6,603
 7,267
 20,892
 21,720


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

Note 4. Principles of Consolidation - (continued)


Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
Proceeds from new transfers$—  $410,281  $1,610,761  $762,652  
MSR fees received2,475  3,105  5,165  6,165  
Funding of compensating interest, net(205) (47) (297) (137) 
Cash flows received on retained securities6,788  6,743  13,369  14,289  
The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization for securitizations completed during the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 4.44.5 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood

Three Months Ended June 30, 2020Three Months Ended June 30, 2019
At Date of SecuritizationSenior IO SecuritiesSubordinate SecuritiesSenior IO SecuritiesSubordinate Securities
Prepayment ratesN/AN/A16 %15 %
Discount ratesN/AN/A14 %7 %
Credit loss assumptionsN/AN/A0.20 %0.20 %
Six Months Ended June 30, 2020Six Months Ended June 30, 2019
At Date of SecuritizationSenior IO SecuritiesSubordinate SecuritiesSenior IO SecuritiesSubordinate Securities
Prepayment rates41 %13 %16 %15 %
Discount rates16 %6 %14 %7 %
Credit loss assumptions0.21 %0.22 %0.20 %0.20 %
  Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
At Date of Securitization Senior IO Securities Subordinate Securities Senior IO Securities Subordinate Securities
Prepayment rates 37% 15% 9% 9%
Discount rates 14% 7% 14% 7%
Credit loss assumptions 0.20% 0.20% 0.20% 0.20%

  Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
At Date of Securitization Senior IO Securities Subordinate Securities Senior IO Securities Subordinate Securities
Prepayment rates 25% 15% 9% 10%
Discount rates 14% 7% 14% 5%
Credit loss assumptions 0.20% 0.20% 0.20% 0.20%
20

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 4. Principles of Consolidation - (continued)
The following table presents additional information at SeptemberJune 30, 20192020 and December 31, 2018,2019, 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)June 30, 2020December 31, 2019
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading$25,038  $88,425  
Subordinate securities, classified as AFS117,675  140,649  
Mortgage servicing rights18,727  40,254  
Maximum loss exposure (1)
$161,440  $269,328  
Assets transferred:
Principal balance of loans outstanding$9,918,493  $10,299,442  
Principal balance of loans 30+ days delinquent291,191  41,809  
(In Thousands) September 30, 2019 December 31, 2018
On-balance sheet assets, at fair value:    
Interest-only, senior and subordinate securities, classified as trading $106,691
 $129,111
Subordinate securities, classified as AFS 141,568
 162,314
Mortgage servicing rights 37,904
 58,572
Maximum loss exposure (1)
 $286,163
 $349,997
Assets transferred:    
Principal balance of loans outstanding $10,360,700
 $10,580,216
Principal balance of loans 30+ days delinquent 28,782
 21,805
(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.

(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, 2019
(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 SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 4.64.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
September 30, 2019 MSRs 
Senior
Securities (1)
 Subordinate Securities
June 30, 2020June 30, 2020MSRs
Senior
Securities (1)
Subordinate Securities
(Dollars in Thousands) MSRs 
Senior
Securities (1)
 Subordinate Securities(Dollars in Thousands)
Fair value at September 30, 2019 
Fair value at June 30, 2020Fair value at June 30, 2020$18,727  $21,524  $121,189  
Expected life (in years) (2)
 6
 5
 13
Expected life (in years) (2)
4312
Prepayment speed assumption (annual CPR) (2)
 14% 16% 16%
Prepayment speed assumption (annual CPR) (2)
21 %28 %24 %
Decrease in fair value from:      Decrease in fair value from:
10% adverse change $1,893
 $1,977
 $454
10% adverse change$1,477  $1,855  $1,361  
25% adverse change 4,486
 5,189
 1,802
25% adverse change3,435  4,489  4,246  
Discount rate assumption (2)
 11% 13% 5%
Discount rate assumption (2)
12 %14 %6 %
Decrease in fair value from:      Decrease in fair value from:
100 basis point increase $1,259
 $848
 $19,313
100 basis point increase$548  $196  $10,543  
200 basis point increase 2,436
 1,977
 35,950
200 basis point increase1,061  652  19,824  
Credit loss assumption (2)
 N/A
 0.21% 0.21%
Credit loss assumption (2)
N/A0.22 %0.22 %
Decrease in fair value from:      Decrease in fair value from:
10% higher losses N/A
 $—
 $1,666
10% higher lossesN/A$—  $1,888  
25% higher losses N/A
 —
 4,153
25% higher lossesN/A—  4,706  
21
December 31, 2018 MSRs 
Senior
Securities (1)
 Subordinate Securities
(Dollars in Thousands)   
Fair value at December 31, 2018 $58,572
 $61,178
 $230,247
Expected life (in years) (2)
 8
 7
 15
Prepayment speed assumption (annual CPR) (2)
 7% 10% 9%
Decrease in fair value from:      
10% adverse change $1,668
 $2,151
 $201
25% adverse change 4,027
 5,127
 1,372
Discount rate assumption (2)
 11% 12% 6%
Decrease in fair value from:      
100 basis point increase $2,323
 $2,190
 $21,982
200 basis point increase 4,493
 4,226
 40,641
Credit loss assumption (2)
 N/A
 0.20% 0.20%
Decrease in fair value from:      
10% higher losses N/A
 $—
 $1,387
25% higher losses N/A
 —
 3,471

(1)Senior securities included $42 million and $61 million of interest-only securities at September 30, 2019 and December 31, 2018, respectively.
(2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

Note 4. Principles of Consolidation - (continued)

December 31, 2019MSRs
Senior
Securities (1)
Subordinate Securities
(Dollars in Thousands)
Fair value at December 31, 2019$40,254  $48,765  $180,309  
Expected life (in years) (2)
6614
Prepayment speed assumption (annual CPR) (2)
11 %14 %16 %
Decrease in fair value from:
10% adverse change$1,643  $1,908  $205  
25% adverse change3,913  5,086  1,434  
Discount rate assumption (2)
11 %12 %5 %
Decrease in fair value from:
100 basis point increase$1,447  $1,079  $18,127  
200 basis point increase2,795  2,482  33,630  
Credit loss assumption (2)
N/A0.21 %0.21 %
Decrease in fair value from:
10% higher lossesN/A$—  $1,804  
25% higher lossesN/A—  4,520  

(1)Senior securities included $22 million and $49 million of interest-only securities at June 30, 2020 and December 31, 2019, 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, grouped by asset type.
Table 4.74.8 – Third-Party Sponsored VIE Summary
(In Thousands) September 30, 2019 December 31, 2018
Mortgage-Backed Securities    
Senior $141,264
 $185,107
Mezzanine 589,189
 547,249
Subordinate 306,713
 428,713
Total Mortgage-Backed Securities 1,037,166
 1,161,069
Excess MSR 17,212
 15,092
Total Investments in Third-Party Sponsored VIEs $1,054,378
 $1,176,161

(In Thousands)June 30, 2020December 31, 2019
Mortgage-Backed Securities
Senior$11,336  $127,094  
Mezzanine—  508,195  
Subordinate162,387  235,510  
Total Mortgage-Backed Securities173,723  870,799  
Excess MSR15,883  16,216  
Total Investments in Third-Party Sponsored VIEs$189,606  $887,015  
We determined that we are not the primary beneficiary of these third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.
Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.
22

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(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.

23

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(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 SeptemberJune 30, 20192020 and December 31, 2018.2019.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
June 30, 2020December 31, 2019
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value$20,098  $20,098  $536,385  $536,509  
Residential loans, held-for-investment4,514,131  4,514,131  7,178,465  7,178,465  
Business purpose residential loans, held-for-sale379,795  379,795  331,565  331,565  
Business purpose residential loans, held-for-investment3,402,405  3,402,405  3,175,178  3,175,178  
Multifamily loans489,075  489,075  4,408,524  4,408,524  
Trading securities142,699  142,699  860,540  860,540  
Available-for-sale securities173,737  173,737  239,334  239,334  
Servicer advance investments (1)
266,948  266,948  169,204  169,204  
MSRs (1)
19,661  19,661  42,224  42,224  
Excess MSRs (1)
36,197  36,197  31,814  31,814  
Shared home appreciation options (1)
40,851  40,851  45,085  45,085  
Cash and cash equivalents528,612  528,612  196,966  196,966  
Restricted cash44,496  44,496  93,867  93,867  
Accrued interest receivable44,134  44,134  71,058  71,058  
Derivative assets357  357  35,701  35,701  
REO (2)
9,780  10,014  9,462  10,389  
Margin receivable (2)
2,746  2,746  209,776  209,776  
FHLBC stock (2)
5,000  5,000  43,393  43,393  
Guarantee asset (2)
770  770  1,686  1,686  
Pledged collateral (2)
33,105  33,105  32,945  32,945  
Liabilities
Short-term debt facilities$418,370  $418,370  $2,176,591  $2,176,591  
Short-term debt - servicer advance financing244,437  244,437  152,554  152,554  
Accrued interest payable37,024  37,024  60,655  60,655  
Margin payable (3)
—  —  1,700  1,700  
Guarantee obligation (3)
12,350  10,995  14,009  13,754  
Contingent consideration (3)
14,953  14,953  28,484  28,484  
Derivative liabilities1,932  1,932  163,424  163,424  
ABS issued at fair value6,856,086  6,856,086  10,515,475  10,515,475  
FHLBC long-term borrowings1,000  1,000  1,999,999  1,999,999  
Other long-term debt, net1,088,609  1,082,327  183,520  184,666  
Convertible notes, net509,868  469,360  631,125  661,985  
Trust preferred securities and subordinated notes, net138,651  55,800  138,628  99,045  
(1)These investments are included in Other investments on our consolidated balance sheets.
(2)These assets are included in Other assets on our consolidated balance sheets.
(3)These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.
24
  September 30, 2019 December 31, 2018
  
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
(In Thousands)    
Assets        
Residential loans, held-for-sale        
At fair value $925,780
 $925,780
 $1,048,690
 $1,048,690
At lower of cost or fair value 107
 126
 111
 131
Residential loans, held-for-investment 7,755,916
 7,755,916
 6,205,941
 6,205,941
Business purpose residential loans 336,035
 336,035
 141,258
 141,258
Multifamily loans 3,791,622
 3,791,622
 2,144,598
 2,144,598
Trading securities 1,013,785
 1,013,785
 1,118,612
 1,118,612
Available-for-sale securities 271,641
 271,641
 333,882
 333,882
Servicer advance investments (1)
 222,591
 222,591
 300,468
 300,468
MSRs (1)
 39,837
 39,837
 60,281
 60,281
Participation in loan warehouse facility (1)
 —
 —
 39,703
 39,703
Excess MSRs (1)
 32,937
 32,937
 27,312
 27,312
Shared home appreciation options (1)
 11,372
 11,372
 —
 —
Cash and cash equivalents 394,628
 394,628
 175,764
 175,764
Restricted cash 111,518
 111,518
 29,313
 29,313
Accrued interest receivable 57,464
 57,464
 47,105
 47,105
Derivative assets 43,649
 43,649
 35,789
 35,789
REO (2)
 5,069
 5,124
 3,943
 4,396
Margin receivable (2)
 226,727
 226,727
 100,773
 100,773
FHLBC stock (2)
 43,393
 43,393
 43,393
 43,393
Guarantee asset (2)
 1,784
 1,784
 2,618
 2,618
Pledged collateral (2)
 57,832
 57,832
 42,433
 42,433
Liabilities        
Short-term debt facilities $1,589,062
 $1,589,062
 $1,937,920
 $1,937,920
Short-term debt - servicer advance financing 191,203
 191,203
 262,740
 262,740
Accrued interest payable 46,881
 46,881
 42,528
 42,528
Margin payable (3)
 6,658
 6,658
 835
 835
Guarantee obligation (3)
 15,016
 14,661
 16,711
 16,774
Contingent consideration (3)
 25,167
 25,167
 —
 —
Derivative liabilities 234,011
 234,011
 84,855
 84,855
ABS issued at fair value 8,346,051
 8,346,051
 5,410,073
 5,410,073
FHLBC long-term borrowings 1,999,999
 1,999,999
 1,999,999
 1,999,999
Subordinate securities financing facility 184,664
 185,803
 —
 —
Convertible notes, net 830,995
 853,471
 633,196
 618,271
Trust preferred securities and subordinated notes, net 138,616
 92,070
 138,582
 102,533
(1)These investments are included in Other investments on our consolidated balance sheets.
(2)These assets are included in Other assets on our consolidated balance sheets.
(3)These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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


During the three and ninesix months ended SeptemberJune 30, 2019,2020, we elected the fair value option for $16$10 million and $50$78 million of residential senior securities, respectively, $40$58 million and $247 million of subordinate securities, respectively, $2.67 billion and $5.20$2.69 billion of residential loans (principal balance), respectively, $124$230 million and $301$696 million of business purpose residential loans (principal balance), respectively, 0 and $1.43 billion of multifamily loans (principal balance), respectively, $1$21 million and $70$179 million of servicer advance investments, respectively, and $1$2 million and $8$11 million of excess MSRs, respectively. Additionally, during the three months ended September 30, 2019, we elected the fair value option for $11respectively, and 0 and $4 million of shared home appreciation options.options, respectively. We anticipate electing the fair value option for all future purchases of residential and business purpose residential loans that we intend to sell to third parties or transfer to securitizations, as well as 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, as well as the fair value hierarchy of the valuation inputs used to measure fair value.
Table 5.2 – Assets and Liabilities Measured at Fair Value on a Recurring Basis
June 30, 2020Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$4,534,229  $—  $—  $4,534,229  
Business purpose residential loans3,782,200  —  —  3,782,200  
Multifamily loans489,075  —  —  489,075  
Trading securities142,699  —  —  142,699  
Available-for-sale securities173,737  —  —  173,737  
Servicer advance investments266,948  —  —  266,948  
MSRs19,661  —  —  19,661  
Excess MSRs36,197  —  —  36,197  
Shared home appreciation options40,851  —  —  40,851  
Derivative assets357  —  —  357  
Pledged collateral33,105  33,105  —  —  
FHLBC stock5,000  —  5,000  —  
Guarantee asset770  —  —  770  
Liabilities
Derivative liabilities$1,932  $—  $—  $1,932  
ABS issued6,856,086  —  —  6,856,086  
September 30, 2019 
Carrying
Value
 Fair Value Measurements Using
(In Thousands)  Level 1 Level 2 Level 3
Assets        
Residential loans $8,681,696
 $—
 $—
 $8,681,696
Business purpose residential loans 336,035
 —
 —
 336,035
Multifamily loans 3,791,622
 —
 —
 3,791,622
Trading securities 1,013,785
 —
 —
 1,013,785
Available-for-sale securities 271,641
 —
 —
 271,641
Servicer advance investments 222,591
 —
 —
 222,591
MSRs 39,837
 —
 —
 39,837
Excess MSRs 32,937
 —
 —
 32,937
Shared home appreciation options 11,372
 —
 —
 11,372
Derivative assets 43,649
 5,250
 33,642
 4,757
Pledged collateral 57,832
 57,832
 —
 —
FHLBC stock 43,393
 —
 43,393
 —
Guarantee asset 1,784
 —
 —
 1,784
         
Liabilities 

      
Contingent consideration $25,167
 $—
 $—
 $25,167
Derivative liabilities 234,011
 4,192
 228,150
 1,669
ABS issued 8,346,051
 —
 —
 8,346,051
25



REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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


December 31, 2018 
Carrying
Value
 Fair Value Measurements Using
(In Thousands)  Level 1 Level 2 Level 3
Assets        
Residential loans $7,254,631
 $—
 $—
 $7,254,631
Business purpose residential loans 141,258
 —
 —
 141,258
Multifamily loans 2,144,598
 —
 —
 2,144,598
Trading securities 1,118,612
 —
 —
 1,118,612
Available-for-sale securities 333,882
 —
 —
 333,882
Servicer advance investments 300,468
 —
 —
 300,468
MSRs 60,281
 —
 —
 60,281
Excess MSRs 27,312
 —
 —
 27,312
Derivative assets 35,789
 4,665
 28,211
 2,913
Pledged collateral 42,433
 42,433
 —
 —
FHLBC stock 43,393
 —
 43,393
 —
Guarantee asset 2,618
 —
 —
 2,618
         
Liabilities        
Derivative liabilities $84,855
 $13,215
 $70,908
 $732
ABS issued 5,410,073
 —
 —
 5,410,073

December 31, 2019Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$7,714,745  $—  $—  $7,714,745  
Business purpose residential loans3,506,743  —  —  3,506,743  
Multifamily loans4,408,524  —  —  4,408,524  
Trading securities860,540  —  —  860,540  
Available-for-sale securities239,334  —  —  239,334  
Servicer advance investments169,204  —  —  169,204  
MSRs42,224  —  —  42,224  
Excess MSRs31,814  —  —  31,814  
Shared home appreciation options45,085  —  —  45,085  
Derivative assets35,701  6,531  19,020  10,150  
Pledged collateral32,945  32,945  —  —  
FHLBC stock43,393  —  43,393  —  
Guarantee asset1,686  —  —  1,686  
Liabilities
Contingent consideration$28,484  $—  $—  $28,484  
Derivative liabilities163,424  13,368  148,766  1,290  
ABS issued10,515,475  —  —  10,515,475  
The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the ninesix months ended SeptemberJune 30, 2019.2020.
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
 AssetsAssets
 Residential Loans 
Business Purpose
Residential Loans
 Multifamily Loans Trading Securities 
AFS
Securities
 Servicer Advance Investments MSRs Excess MSRs Shared Home Appreciation OptionsResidential LoansBusiness Purpose
Residential Loans		Multifamily LoansTrading SecuritiesAFS
Securities		Servicer Advance InvestmentsMSRsExcess MSRsShared Home Appreciation Options
(In Thousands) (In Thousands)
Beginning balance -
December 31, 2018
 $7,254,631
 $141,258
 $2,144,598
 $1,118,612
 $333,882
 $300,468
 $60,281
 $27,312
 $—
Beginning balance -
December 31, 2019		Beginning balance -
December 31, 2019		$7,714,745  $3,506,743  $4,408,524  $860,540  $239,334  $169,204  $42,224  $31,814  $45,085  
Acquisitions 5,257,800
 29,093
 1,481,554
 296,484
 21,115
 69,610
 868
 7,762
 11,343
Acquisitions2,751,590  —  —  77,889  31,181  179,419  —  10,906  3,517  
Originations —
 296,955
 —
 —
 —
 —
 —
 —
 —
Originations—  721,054  —  —  —  —  —  —  —  
Sales (2,941,592) (46,855) —
 (418,168) (82,384) —
 —
 —
 —
Sales(4,695,048) (44,172) —  (566,537) (55,193) —  —  —  —  
Principal paydowns (1,068,878) (84,410) (12,904) (33,730) (28,981) (150,512) —
 —
 —
Principal paydowns(907,360) (272,052) (5,830) (8,114) (8,293) (75,477) —  —  (1,080) 
Gains (losses) in net income, net 179,964
 4,990
 178,374
 55,538
 24,052
 3,025
 (21,312) (2,137) 29
Unrealized losses in OCI, net —
 —
 —
 —
 3,957
 —
 —
 —
 —
DeconsolidationsDeconsolidations—  —  (3,849,779) —  —  —  —  —  —  
Gains (losses) in net income (loss), netGains (losses) in net income (loss), net(328,313) (121,961) (63,840) (221,079) (33,292) (6,198) (22,563) (6,523) (6,671) 
Other settlements, net (1)
 (229) (4,996) —
 (4,951) —
 —
 —
 —
 —
Other settlements, net (1)
(1,385) (7,412) —  —  —  —  —  —  —  
Ending Balance -
September 30, 2019
 $8,681,696
 $336,035
 $3,791,622
 $1,013,785
 $271,641
 $222,591
 $39,837
 $32,937
 $11,372
Ending balance -
June 30, 2020		Ending balance -
June 30, 2020		$4,534,229  $3,782,200  $489,075  $142,699  $173,737  $266,948  $19,661  $36,197  $40,851  
26

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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


Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis (continued)
 Assets   LiabilitiesAssetsLiabilities
 Guarantee Asset 
Derivatives (2)
 Contingent Consideration 
ABS
Issued
Guarantee Asset
Derivatives (2)
Contingent ConsiderationABS
Issued
(In Thousands) (In Thousands)
Beginning balance - December 31, 2018 $2,618
 $2,181
 $—
 $5,410,073
Beginning balance - December 31, 2019Beginning balance - December 31, 2019$1,686  $8,860  $28,484  $10,515,475  
Acquisitions —
 —
 24,621
 3,423,561
Acquisitions—  —  —  827,645  
Principal paydowns —
 —
 —
 (718,293)Principal paydowns—  —  (13,353) (673,324) 
Gains (losses) in net income, net (834) 42,415
 546
 230,710
DeconsolidationsDeconsolidations—  —  —  (3,706,789) 
Gains (losses) in net income (loss), netGains (losses) in net income (loss), net(916) 20,643  (446) (106,921) 
Other settlements, net (1)
 —
 (41,508) —
 —
Other settlements, net (1)
—  (31,078) (14,685) —  
Ending Balance - September 30, 2019 $1,784
 $3,088
 $25,167
 $8,346,051
Ending balance - June 30, 2020Ending balance - June 30, 2020$770  $(1,575) $—  $6,856,086  
(1)Other settlements, net for residential and business purpose residential loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase commitments at the time loans are acquired to the basis of residential loans. Other settlements, net for trading securities relates to the consolidation of a Freddie Mac K-Series entity during the second quarter of 2019.
(2)For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase and forward sale commitments, are presented on a net basis.
(1) Other settlements, net for residential and business purpose residential loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans. Other settlements, net for contingent consideration reflects the reclassification from a contingent liability to a deferred liability during the period due to an amendment in the underlying agreement. See Note 16 for further discussion.
(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.

27

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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


The following table presents the portion of gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at SeptemberJune 30, 20192020 and 2018.2019. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 are not included in this presentation.
Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at SeptemberJune 30, 20192020 and 20182019 Included in Net Income
Included in Net Income
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
Assets
Residential loans at Redwood$(359) $48,575  $(746) $80,615  
Business purpose residential loans31,187  3,038  (21,026) 4,032  
Net investments in consolidated Sequoia entities (1)
39,558  2,487  (30,502) 5,191  
Net investments in consolidated Freddie Mac SLST entities (1)
26,867  8,037  (115,295) 14,402  
Net investments in consolidated Freddie Mac K-Series entities (1)
1,599  3,246  (13,180) 6,365  
Net investments in consolidated CAFL entities (1)
17,125  —  (50,721) —  
Trading securities30,647  17,771  (79,633) 38,658  
Servicer advance investments(136) 432  (6,198) 1,440  
MSRs(1,591) (7,334) (16,507) (11,518) 
Excess MSRs2,971  (66) (6,523) (502) 
Shared home appreciation options884  —  (6,670) —  
Loan purchase and interest rate lock commitments357  5,534  357  5,567  
Other assets - Guarantee asset(135) (277) (916) (196) 
Liabilities
Loan purchase commitments$2,137  $(756) $(1,634) $(772) 
  Included in Net Income
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Assets        
Residential loans at Redwood $17,771
 $(18,100) $82,408
 $(70,316)
Residential loans at consolidated Sequoia entities (11,132) (8,978) 10,111
 11,936
Residential loans at consolidated Freddie Mac SLST entities 39,783
 —
 94,788
 —
Business purpose residential loans 584
 (20) 4,069
 (20)
Multifamily loans at consolidated Freddie Mac K-Series entities 47,353
 (4,199) 178,374
 (4,199)
Trading securities 11,206
 3,821
 33,196
 (1,956)
Available-for-sale securities —
 (33) —
 (90)
Servicer advance investments 1,585
 —
 3,025
 —
MSRs (5,892) 337
 (16,971) 4,861
Excess MSRs (1,634) —
 (2,137) —
Shared home appreciation options 29
 —
 29
 —
Loan purchase commitments 4,678
 2,168
 4,757
 2,157
Other assets - Guarantee asset (216) (51) (834) 15
         
Liabilities        
Loan purchase commitments $(1,668) $(2,314) $(1,669) $(2,388)
Contingent consideration (235) —
 (546) —
ABS issued (49,399) 12,536
 (230,709) (8,478)

(1) Represents the portion of net gains or losses included in our consolidated statements of income (loss) related to loans and the associated ABS issued at our consolidated securitization entities held at June 30, 2020 and 2019, which netted together represent the change in value of our investments at the consolidated VIEs.
The following table presents information on assets recorded at fair value on a non-recurring basis at SeptemberJune 30, 2019.2020. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance sheets at SeptemberJune 30, 2019.2020.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at SeptemberJune 30, 20192020
Gain (Loss) for
June 30, 2020Carrying
Value		Fair Value Measurements UsingThree Months EndedSix Months Ended
(In Thousands)Level 1Level 2Level 3June 30, 2020June 30, 2020
Assets
REO$1,712  $—  $—  $1,712  $(36) $(31) 
          Gain (Loss) for
September 30, 2019 
Carrying
Value
 Fair Value Measurements Using Three Months Ended Nine Months Ended
(In Thousands)  Level 1 Level 2 Level 3 September 30, 2019 September 30, 2019
Assets            
REO $4,525
 $—
 $—
 $4,525
 $(332) $(470)
28


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(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 ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 5.6 – Market Valuation Gains and Losses, Net
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value$(2,014) $3,379  $(15,494) $6,912  
Residential loan purchase and forward sale commitments621  16,888  22,056  28,199  
Single-family rental loans held-for-sale, at fair value1,210  1,313  12,677  2,917  
Single-family rental loan purchase and interest rate lock commitments—  569  341  709  
Residential bridge loans(1,260) 1,012  (5,194) 1,098  
Risk management derivatives, net—  (7,431) (52,832) (12,415) 
Total mortgage banking activities, net (1)
$(1,443) $15,730  $(38,446) $27,420  
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood$104  $35,548  $(93,532) $63,656  
Single-family rental loans held-for-investment2,222  —  (20,806) —  
Residential bridge loans held-for-investment21,774  (318) (16,828) (621) 
Trading securities42,246  18,442  (221,079) 40,302  
Servicer advance investments(136) 432  (6,198) 1,440  
Excess MSRs2,971  (65) (6,523) (502) 
Net investments in Legacy Sequoia entities (2)
(230) (123) (621) (497) 
Net investments in Sequoia Choice entities (2)
39,753  2,879  (29,916) 6,144  
Net investments in Freddie Mac SLST entities (2)
26,867  8,037  (115,295) 14,402  
Net investments in Freddie Mac K-Series entities (2)
1,599  3,246  (84,910) 6,365  
Net investments in CAFL entities (2)
17,125  —  (50,721) —  
Other investments(2,121) (200) (11,562) (277) 
Risk management derivatives, net—  (64,740) (59,142) (107,115) 
Credit recoveries (losses) on AFS securities54  —  (1,471) —  
Total investment fair value changes, net$152,228  $3,138  $(718,604) $23,297  
Other Income
MSRs$(3,955) $(8,653) $(22,563) $(13,753) 
Risk management derivatives, net—  6,517  13,966  8,768  
Gain on re-measurement of 5 Arches investment—  —  —  2,440  
Total other income (3)
$(3,955) $(2,136) $(8,597) $(2,545) 
Total Market Valuation Gains (Losses), Net$146,830  $16,732  $(765,647) $48,172  
(1)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases expense, and other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income (loss), as these amounts do not represent market valuation changes.
(2)Includes changes in fair value of the residential loans held-for-investment, REO and the ABS issued at the entities, which netted together represent the change in value of our investments at the consolidated VIEs.
(3)Other income presented above does not include net MSR fee income or provisions for repurchases for MSRs, as these amounts do not represent market valuation adjustments.

29
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Mortgage Banking Activities, Net        
Residential loans held-for-sale, at fair value $(6,623) $5,626
 $289
 $16,522
Residential loan purchase and forward sale commitments 12,943
 1,610
 41,142
 (8,116)
Single-family rental loans held-for-sale, at fair value 1,283
 (99) 4,200
 (99)
Single-family rental loan purchase commitments 564
 (22) 1,273
 (22)
Residential bridge loans 1,010
 —
 2,108
 —
Risk management derivatives, net (2,972) 3,796
 (15,387) 38,378
Total mortgage banking activities, net (1)
 $6,205
 $10,911
 $33,625
 $46,663
Investment Fair Value Changes, Net        
Residential loans held-for-investment, at Redwood $7,667
 $(17,063) $71,323
 $(71,058)
Single-family rental loans held-for-investment 22
 —
 22
 —
Residential bridge loans held-for-investment (742) 53
 (1,363) 53
Trading securities 15,275
 6,314
 55,577
 2,429
Servicer advance investments 1,585
 —
 3,025
 —
Excess MSRs (1,635) —
 (2,137) —
Shared home appreciation options 29
 —
 29
 —
REO (331) —
 (470) —
Net investments in Legacy Sequoia entities (2)
 (407) (248) (904) (976)
Net investments in Sequoia Choice entities (2)
 2,722
 (943) 8,866
 43
Net investments in Freddie Mac SLST entities (2)
 17,300
 —
 31,702
 —
Net investments in Freddie Mac K-Series entities (2)
 7,445
 511
 13,810
 511
Risk-sharing investments (53) (126) (191) (474)
Risk management derivatives, net (37,433) 21,867
 (144,548) 82,391
Impairments on AFS securities —
 (33) —
 (89)
Total investment fair value changes, net $11,444
 $10,332
 $34,741
 $12,830
Other Income (Expense), Net        
MSRs $(7,489) $(823) $(21,243) $1,324
Risk management derivatives, net 4,389
 (890) 13,157
 (7,151)
Gain on re-measurement of 5 Arches investment —
 —
 2,440
 —
Total other expense, net (3)
 $(3,100) $(1,713) $(5,646) $(5,827)
Total Market Valuation Gains, Net $14,549
 $19,530
 $62,720
 $53,666
(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-investment, REO and the ABS issued at the entities, which netted together represent the change in value of our investments at the consolidated VIEs.
(3)Other income (expense), net presented above does not include net MSR fee income or provisions for repurchases for MSRs, as these amounts do not represent market valuation adjustments.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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


At SeptemberJune 30, 2019,2020, 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, 2018.2019. 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, 2019 
Fair
Value
 Input Values
June 30, 2020June 30, 2020Fair
Value		Input Values
(Dollars in Thousands, except Input Values) 
Fair
Value
 Unobservable Input Range  
Weighted
Average
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average(5)
Assets       Assets
Residential loans, at fair value:         Residential loans, at fair value:
Jumbo fixed-rate loans $2,452,300
 Prepayment rate (annual CPR) 20
-20
% 20
%
   Whole loan spread to TBA price $0.56
-$1.56
 $1.55
 
   Whole loan spread to swap rate 94
-375
bps 184
bps
         
Jumbo hybrid loans 321,793
 Prepayment rate (annual CPR) 15
-15
% 15
%
   Whole loan spread to swap rate 90
-345
bps 146
bps
         
Jumbo loans committed to sell 418,905
 Whole loan committed sales price $101.88
-$102.91
 $102.27
 Jumbo loans committed to sell$20,199  Whole loan committed sales price$101.00  -$101.00  $101.00  
         
Loans held by Legacy Sequoia (1)
 429,159
 Liability price   N/A
 N/A
 
Loans held by Legacy Sequoia (1)
304,632  Liability priceN/AN/A
         
Loans held by Sequoia Choice (1)
 2,618,316
 Liability price   N/A
 N/A
 
Loans held by Sequoia Choice (1)
2,064,388  Liability priceN/AN/A
         
Loans held by Freddie Mac SLST (1)
 2,441,223
 Liability price   N/A
 N/A
 
Loans held by Freddie Mac SLST (1)
2,145,111  Liability priceN/AN/A
         
Business purpose residential loans:         Business purpose residential loans:
Single-family rental loans 129,145
 Senior credit spread 110
-110
bps 110
bpsSingle-family rental loans379,795  Senior credit spread230  -230  bps230  bps
   Subordinate credit spread 143
-1,250
bps 308
bpsSubordinate credit spread300  -2,450  bps772  bps
   Senior credit support 35
-36
% 36
%Senior credit support31  -36  %34  %
   IO discount rate 5
-8
% 8
%IO discount rate10  -10  %10  %
   Prepayment rate (annual CPR) 1
-10
% 5
%Prepayment rate (annual CPR)3  -3  %3  %
         
Single-family rental loans held by CAFLSingle-family rental loans held by CAFL2,615,038  Liability priceN/AN/A
Residential bridge loans 206,890
 Discount rate 6
-10
% 7
%Residential bridge loans787,367  Discount rate8  -17  %11  %
         
Multifamily loans held by Freddie Mac K-Series (1)
 3,791,622
 Liability price   N/A
 N/A
 
Multifamily loans held by Freddie Mac K-Series (1)
489,075  Liability priceN/AN/A
         
Trading and AFS securities 1,285,426
 Discount rate 2
-15
% 5
 %Trading and AFS securities316,436  Discount rate4  -21  %10   %
   Prepayment rate (annual CPR) —
-60
% 13
 %Prepayment rate (annual CPR)6  -65  %17   %
   Default rate —
-20
% 1
 %Default rate—  -15  %1   %
   Loss severity —
-40
% 21
 %Loss severity—  -50  %16   %
         
Servicer advance investments 222,591
 Discount rate 5
-5
% 5
%Servicer advance investments266,948  Discount rate5  -5  %5  %
   Prepayment rate (annual CPR) 8
-15
% 14
%Prepayment rate (annual CPR)8  -14  %14  %
   
Expected remaining life (2)
 2
-2
years 2
years
Expected remaining life (2)
2-2years2years
   Mortgage servicing income 8
-14
bps 10
bpsMortgage servicing income8  -13  bps10  bps
         
MSRs 39,837
 Discount rate 11
-13
% 11
 %MSRs19,661  Discount rate12  -12  %12   %
   Prepayment rate (annual CPR) 6
-53
% 14
 %Prepayment rate (annual CPR)8  -62  %21   %
   Per loan annual cost to service $82
-$82
 $82
 Per loan annual cost to service$95  -$95  $95  
         
Excess MSRs 32,937
 Discount rate 11
-16
% 14
%Excess MSRs36,197  Discount rate15  -20  %18  %
   Prepayment rate (annual CPR) 9
-14
% 11
%Prepayment rate (annual CPR)10  -14  %12  %
   Excess mortgage servicing income 8
-17
bps 13
bpsExcess mortgage servicing income9  -17  bps12  bps
         
Shared home appreciation options 11,372
 Discount rate 11
-11
% 11
%
   Prepayment rate (annual CPR) 10
-30
% 23
%
   Home price appreciation 3
-3
% 3
%
         
Guarantee asset 1,784
 Discount rate 11
-11
% 11
%
   Prepayment rate (annual CPR) 16
-16
% 16
%
         
30

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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


Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
June 30, 2020Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average (4)
Assets (continued)
Shared home appreciation options$40,851  Discount rate17  -17  %17  %
Prepayment rate (annual CPR)8  -28  %21  %
Home price appreciation1  -3  %3  %
Guarantee asset781  Discount rate13  -13  %13  %
Prepayment rate (annual CPR)37  -37  %37  %
REO1,712  Loss severity3  -86  %19  %
Liabilities
Residential loan purchase commitments, net177  Committed sales price$96.10  -$101.28  $100.11  
Pull-through rate100  -100  %100  %
ABS issued (1):
At consolidated Sequoia entities2,162,134  Discount rate2  -25  %4   %
Prepayment rate (annual CPR)10  -50  %24   %
Default rate—  -40  %1   %
Loss severity—  -50  %32   %
At consolidated Freddie Mac SLST entities1,812,008  Discount rate2  -14  %4  %
Prepayment rate (annual CPR)6  -6  %6  %
Default rate17  -18  %17  %
Loss severity30  -30  %30  %
At consolidated Freddie Mac K-Series entities (3)
464,691  Discount rate1  -19  %2   %
Non-IO prepayment rate (annual CPR)—  -—  %—   %
IO prepayment rate (annual CPY/CPP)100  -100  %100   %
At consolidated CAFL entities (3)
2,417,253  Discount rate1  -74  %4  %
Prepayment rate (annual CPR)—  -3  %—  %
September 30, 2019 
Fair
Value
   Input Values
(Dollars in Thousands, except Input Values)  Unobservable Input Range  
Weighted
Average
Assets (continued)            
REO $4,525
 Loss severity 16
-16
% 16
%
             
Residential loan purchase commitments, net 3,042
 MSR multiple 0.6
-4.6
x 2.5
x
    Pull-through rate 9
-100
% 71
%
    Whole loan spread to TBA price $0.56
-$1.56
  $1.55
 
    Whole loan spread to swap rate - fixed rate 115
-375
bps 257
bps
    Prepayment rate (annual CPR) 15
-20
% 20
%
    Whole loan spread to swap rate - hybrid 90
-330
bps 128
bps
             
Liabilities            
ABS issued (1):
            
At consolidated Sequoia entities 2,781,001
 Discount rate 3
-15
% 4
 %
    Prepayment rate (annual CPR) 8
-40
% 20
 %
    Default rate —
-7
% 2
 %
    Loss severity 20
-29
% 21
 %
             
At consolidated Freddie Mac SLST entities 1,987,473
 Discount rate 2
-13
% 3
%
    Prepayment rate (annual CPR) 6
-6
% 6
%
    Default rate 22
-22
% 22
%
    Loss severity 30
-30
% 30
%
             
At consolidated Freddie Mac K-Series entities 3,577,577
 Discount rate 2
-9
% 2
 %
    Prepayment rate (annual CPR) —
-—
% —
 %
    Default rate 1
-1
% 1
 %
    Loss severity 20
-20
% 20
 %
             
Contingent consideration 25,167
 Discount rate 23
-23
% 23
%
    
Probability of outcomes (3)
 —
-100
% 90
%
(1)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. At June 30, 2020, the fair value of securities we owned at the consolidated Sequoia, Freddie Mac SLST, Freddie Mac K-Series, and CAFL entities was $208 million, $334 million, $24 million, and $203 million, respectively.
(1)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. At September 30, 2019, the fair value of securities we owned at the consolidated Sequoia, Freddie Mac SLST and Freddie Mac K-Series entities was $266 million, $454 million, and $214 million, respectively.
(2)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).
(3)Represents the probability of a full payout of contingent purchase consideration.
(2)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).
(3)As a market convention, certain securities are priced to a no-loss yield and therefore do not include default and loss severity assumptions.
(4)The weighted average input values for all loan types are based on the unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.
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 inputsinput and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs –- such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions –- in isolation would likely result in a significantly lower or higher fair value measurement.
31

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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


Residential loansIncluded in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2019 is a more detailed description of our financial instruments measured at Redwood
Estimated fair values for residential loans are determined using models that incorporate various observable inputs, including pricing information from whole loan salesvalue and securitizations. Certaintheir significant inputs, 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 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. These assets would generally decrease in value based upon an increase in the credit spread, prepayment speed, or credit support assumptions.
Residential and multifamily loans at consolidated entities
We have elected to account for our consolidated securitization entities as CFEs in accordance with GAAP. A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allow 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. Pursuant to this guidance, we use the fair value of the ABS issued by the 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 CFEs. 
Business purpose residential loans
Business purpose residential loans include single-family rental loans and residential bridge loans that are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3 in nature, due to the lack of readily available market quotes and related inputs.
Prices for our single-family rental loans are determined using market comparable information. Significant inputs obtained from market activity include indicative spreads to indexed swap rates for senior and subordinate mortgage-backed securities ("MBS"), IO MBS discount rates, senior credit support levels, and assumed future prepayment rates (Level 3). These assets would generally decrease in value based upon an increase in the credit spread or prepayment speed assumptions.
Prices for our residential bridge loans are determined using discounted cash flow modeling, which incorporates a primary significant unobservable input of discount rate. These assets would generally decrease in value based upon an increase in the discount rate.
Real estate securities
Real estate securities include residential, multifamily, and other mortgage-backed securities that are generally illiquid in nature and trade infrequently. 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 and loss severity. The estimated fair value of our securities would generally decrease based upon an increase in discount rate, default rates, loss severities, or a decrease in prepayment rates.
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, 2019, we received dealer price indications on 83% of our securities, representing 95% 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, 2019
(Unaudited)

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


Derivative assets and liabilities
Our derivative instruments include swaps, swaptions, TBAs, loan purchase commitments ("LPCs"), and forward sale commitments ("FSCs"). 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 and FSC fair values for residential jumbo and single-family rental loans are estimated based on the estimated fair values of the underlying loans (as described in "Residential loans at Redwood" and "Business purpose residential loans" above). In addition, fair values for LPCs are estimated based on the probability that the mortgage loan will be purchased (the "Pull-through rate") (Level 3).
For other derivatives, valuations are based on various factors such as liquidity, bid/ask spreads, and credit considerations for which we rely on available market inputs. In the absence of such inputs, management’s best estimate is used (Level 3).
Servicer advance investments
Estimated fair values for servicer advance investments are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs that are considered unobservable and are therefore Level 3 in nature. Our estimations of cash flows include the combined cash flows of all of the components that comprise the servicer advance investments: existing advances, the requirement to purchase future advances, the recovery of advances, and the right to a portion of the associated mortgage servicing fee ("mortgage servicing income"). The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included prepayment rate (of the loans underlying the investments), mortgage servicing income, servicer advance WAL (the weighted-average expected remaining life of servicer advances), and discount rate. These assets would generally decrease in value based upon an increase in prepayment rates, an increase in servicer advance WAL, or an increase in discount rate, or a decrease in mortgage servicing income.
MSRs
MSRs include the rights to service jumbo residential mortgage loans. 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. Changes in the fair value of MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputsthe general classification of such instruments pursuant to the Level 1, Level 2, and assumptions. Estimated fair values are based on applying the inputs to generate the net present value of estimated future MSR income (Level 3). These discounted cash flow models utilize certain significant unobservable inputs including market discount rates, assumed future prepayment rates of serviced loans, and the market cost of servicing. An increase in these unobservable inputs would generally reduce the estimated fair 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 5% of the third-party valuation.
Excess MSRs
Estimated fair values for excess MSRs are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs that are considered unobservable and are therefore Level 3 in nature. The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included prepayment rate (of the loans underlying the investments), the amount of excess servicing income expected to be received ("excess mortgage servicing income"), and discount rate. These assets would generally decrease in value based upon an increase in prepayment rates or discount rate, or a decrease in excess mortgage servicing income.hierarchy.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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


Shared Home Appreciation Options
Estimated fair values for shared home appreciation options are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs such as forecasted home price appreciation, prepayment rates, and discount rate. The valuation technique is based on discounted cash flows. An increase in discount rate, or a decrease in expected future home values combined with a decrease in prepayment rates, would generally reduce the estimated fair value of the shared home appreciation options (Level 3).
FHLBC stock
Our Federal Home Loan Bank ("FHLB") member subsidiary is required to purchase FHLBC stock under a borrowing agreement between our FHLB-member subsidiary and the FHLBC. Under this agreement, the stock is redeemable at face value, which represents the carrying value and fair value of the stock (Level 2).
Guarantee asset
The guarantee asset represents the estimated fair value of cash flows we are contractually entitled to receive related to a risk-sharing arrangement with Fannie Mae. Significant inputs in the valuation analysis are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.
Pledged collateral
Pledged collateral consists of cash and U.S. Treasury securities held by a custodian in association with certain agreements we have entered into. Treasury securities are carried at their fair value, which is determined using quoted prices in active markets (Level 1).
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. Fair values equal carrying values (Level 1).
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, cash held at Servicing Investment entities, 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).
Real estate owned
Real estate owned ("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).

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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


Contingent consideration
Contingent consideration is related to our acquisition of 5 Arches and is estimated and recorded at fair value as part of purchase consideration. Each reporting period we estimate the change in fair value of the contingent consideration, and such change is recognized in our consolidated statements of income, unless it is determined to be a measurement period adjustment. The estimate of the fair value of contingent consideration requires significant judgment and assumptions to be made about future operating results, discount rates, and probabilities of projected operating result scenarios (Level 3).
Short-term debt
Short-term debt includes our credit facilities for residential and business purpose residential loans and real estate securities as well as non-recourse short-term borrowings used to finance servicer advance investments. 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).
ABS issued
ABS issued includes asset-backed securities issued through the Legacy Sequoia and Sequoia Choice securitization entities, as well as securities issued by certain third-party Freddie Mac SLST and K-series securitization entities which we consolidate. 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). These cash flow models use significant unobservable inputs such as a discount rates, prepayment rate, default rate, loss severity and credit support. 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 (i.e., become a larger liability).
FHLBC borrowings
FHLBC borrowings include amounts borrowed from the FHLBC that are secured, generally by residential mortgage loans. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2).
Financial Instruments Carried at Amortized Cost
Participation in loan warehouse facility
Our participation in a loan warehouse facility was carried at amortized cost (Level 2).
Guarantee obligations
In association with our risk-sharing transactions with the Agencies, we have made certain guarantees which are carried on our balance sheet at amortized cost (Level 3).
Subordinate securities financing facility
Borrowings under our subordinate securities financing facility are secured by real estate securities and carried at unpaid principal balance net of any unamortized deferred issuance costs (Level 3).
Convertible notes
Convertible notes include unsecured convertible and exchangeable senior notes that are carried at their unpaid principal balance net of any unamortized deferred issuance costs. The fair value of the convertible notes is determined using quoted prices in generally active markets (Level 2).

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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


Trust preferred securities and subordinated notes
Trust preferred securities and subordinated notes are carried at their unpaid principal balance net of any unamortized deferred issuance costs (Level 3).
Note 6. Residential Loans
We acquire residential loans from third-party originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 6.1 – Classifications and Carrying Values of Residential Loans
June 30, 2020LegacySequoiaFreddie Mac
(In Thousands)RedwoodSequoiaChoiceSLSTTotal
Held-for-sale at fair value$20,200  $—  $—  $—  $20,200  
Held-for-investment at fair value—  304,632  2,064,388  2,145,111  4,514,131  
Total Residential Loans$20,200  $304,632  $2,064,388  $2,145,111  $4,534,331  
September 30, 2019   Legacy Sequoia Freddie Mac  
(In Thousands) Redwood Sequoia Choice SLST Total
Held-for-sale          
At fair value $925,780
 $—
 $—
 $—
 $925,780
At lower of cost or fair value 107
 —
 —
 —
 107
Total held-for-sale 925,887
 —

—
 —
 925,887
Held-for-investment at fair value 2,267,218
 429,159
 2,618,316
 2,441,223
 7,755,916
Total Residential Loans $3,193,105
 $429,159

$2,618,316
 $2,441,223
 $8,681,803
December 31, 2018   Legacy Sequoia Freddie Mac  
(In Thousands) Redwood Sequoia Choice SLST Total
Held-for-sale          
At fair value $1,048,690
 $—
 $—
 $—
 $1,048,690
At lower of cost or fair value 111
 —
 —
 —
 111
Total held-for-sale 1,048,801
 —
 —
 —
 1,048,801
Held-for-investment at fair value 2,383,932
 519,958
 2,079,382
 1,222,669
 6,205,941
Total Residential Loans $3,432,733
 $519,958
 $2,079,382
 $1,222,669
 $7,254,742
December 31, 2019LegacySequoiaFreddie Mac
(In Thousands)RedwoodSequoiaChoiceSLSTTotal
Held-for-sale at fair value$536,385  $—  $—  $—  $536,385  
Held-for-investment at fair value2,111,897  407,890  2,291,463  2,367,215  7,178,465  
Total Residential Loans$2,648,282  $407,890  $2,291,463  $2,367,215  $7,714,850  
At SeptemberJune 30, 2019,2020, we owned mortgage servicing rights associated with $2.51 billion$20 million (principal balance) of consolidated residential loans 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 SeptemberJune 30, 2019,2020, we owned 1,20629 loans held-for-sale at fair value with an aggregate unpaid principal balance of $904$21 million and a fair value of $926$20 million, compared to 1,484669 loans with an aggregate unpaid principal balance of $1.03 billion$525 million and a fair value of $1.05 billion$536 million at December 31, 2018.2019. At both SeptemberJune 30, 20192020, 3 of these loans with an aggregate fair value of $2 million and December 31, 2018,unpaid principal balance of $3 million were greater than 90 days delinquent and 1 of these loans with a fair value of $0.6$0.4 million and an unpaid principal balance of $0.7$1 million was in foreclosure. At December 31, 2019, 1 of these loans with a fair value and unpaid principal balance of $1 million was greater than 90 days delinquent and NaN0ne of these loans were in foreclosure.
During the three and ninesix months ended SeptemberJune 30, 2019,2020, we purchased $1.45 billion$58 million and $3.94$2.69 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $1.53$2.28 billion and $3.92$4.94 billion (principal balance) of loans, respectively, for which we recorded a net market valuation losslosses of $7$2 million and a net market valuation gain of $0.3$15 million, respectively, through Mortgage banking activities, net on our consolidated statements of income.income (loss). At SeptemberJune 30, 2019,2020, loans held-for-sale with a market value of $253$15 million were pledged as collateral under short-term borrowing agreements.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

Note 6. Residential Loans - (continued)

During the three and ninesix months ended SeptemberJune 30, 2018,2019, we purchased $1.79$1.53 billion and $5.52$2.49 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $1.90$1.23 billion and $5.83$2.39 billion (principal balance) of loans, respectively, for which we recorded net market valuation gains of $6$3 million and $16$7 million, respectively, through Mortgage banking activities, net on our consolidated statements of income.income (loss).
At Lower of Cost or Fair Value
At both September
32

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 and December 31, 2018, we held 2 residential loans at the lower of cost or fair value with $0.1 million in outstanding principal balance and carrying values of $0.1 million. At both September 30, 2019 and December 31, 2018, NaN of these loans were greater than 90 days delinquent or in foreclosure.2020
(Unaudited)

Note 6. Residential Loans - (continued)
Residential Loans Held-for-Investment at Fair Value
At Redwood
At SeptemberJune 30, 2020, we did 0t own any held-for-investment loans at Redwood. At December 31, 2019, we owned 3,1182,940 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.20$2.05 billion and a fair value of $2.27 billion, compared to 3,296 loans with an aggregate unpaid principal balance of $2.39 billion and a fair value of $2.38 billion at$2.11 billion. At December 31, 2018. At September 30, 2019, 12 of these loans with an aggregate fair value of $0.5$1 million and an unpaid principal balance of $0.6 million was greater than 90 days delinquent and in foreclosure. At December 31, 2018, 2 of these loans with an aggregate fair value and unpaid principal balance of $1$2 million were greater than 90 days delinquent and NaN0ne of these loans were in foreclosure.
During the three and ninesix months ended SeptemberJune 30, 2020, we transferred loans with a fair value of 0 and $13 million, respectively, from held-for-sale to held-for-investment. During the three and six months ended June 30, 2020, we transferred loans with a fair value of 0 and $1.87 billion, respectively, from held-for-investment to held-for-sale. During the three and six months ended June 30, 2020, we recorded net market valuation losses of 0 and $94 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss).
During the three and six months ended June 30, 2019, we purchased 0 and $39 million (principal balance) of loans, respectively, for which we elected the fair value option, and did not0t sell any loans. During the three and ninesix months ended SeptemberJune 30, 2019, we transferred loans with a fair value of 0$30 million and $69 million, respectively, from held-for-sale to held-for-investment. During the three and ninesix months ended SeptemberJune 30, 2019, we transferred loans with a fair value of 0 and $23 million, respectively, from held-for-investment to held-for-sale. During the three and ninesix months ended SeptemberJune 30, 2019, we recorded net market valuation gains of $8$36 million and $71$64 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, 2019, loans with a fair value of $2.27 billion were pledged as collateral under a borrowing agreement with the FHLBC.
During the three and nine months ended September 30, 2018, we transferred loans with a fair value of $116 million and $204 million, respectively, from held-for-sale to held-for-investment. During both the three and nine months ended September 30, 2018, we transferred loans with a fair value of $16 million from held-for-investment to held-for-sale. During the three and nine months ended September 30, 2018, we recorded net market valuation losses of $17 million and $71 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income.
The outstanding loans held-for-investment at Redwood at September 30, 2019 were prime-quality, first lien loans, of which 96% were originated between 2013 and 2019, and 4% were originated in 2012 and prior years. The weighted average Fair Isaac Corporation ("FICO") score of borrowers backing these loans was 768 (at origination) and the weighted average loan-to-value ("LTV") ratio of these loans was 66% (at origination)income (loss). At September 30, 2019, these loans were comprised of 88% fixed-rate loans with a weighted average coupon of 4.15%, and the remainder were hybrid or ARM loans with a weighted average coupon of 4.19%.
At Consolidated Legacy Sequoia Entities
At SeptemberJune 30, 2019,2020, we consolidated 2,2772,063 held-for-investment loans at consolidated Legacy Sequoia entities, with an aggregate unpaid principal balance of $446$382 million and a fair value of $429$305 million, as compared to 2,6412,198 loans at December 31, 2018,2019, with an aggregate unpaid principal balance of $545$425 million and a fair value of $520$408 million. At origination, the weighted average FICO score of borrowers backing these loans was 727, the weighted average LTV ratio of these loans was 66%65%, and the loans were nearly all first lien and prime-quality.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberAt June 30, 2019
(Unaudited)

Note 6. Residential Loans - (continued)

At September 30, 20192020 and December 31, 2018,2019, the aggregate unpaid principal balance of loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $13$12 million and $14$10 million, respectively, of which the aggregate unpaid principal balance of loans in foreclosure was $3 million and $5$4 million, respectively. During the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded a net market valuation lossgain of $0.1$8 million and a net market valuation gainloss of $61 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2019, we recorded net market valuation gains of $1 million and $5 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income. During the three and nine months ended September 30, 2018, we recorded net market valuation gains of $4 million and $37 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income.income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the associated ABS issued. The net impact to our income statement associated with our retained economic investment in the Legacy Sequoia securitization entities is presented in Note 5.
At Consolidated Sequoia Choice Entities
At SeptemberJune 30, 2019,2020, we consolidated 3,5432,861 held-for-investment loans at the consolidated Sequoia Choice entities, with an aggregate unpaid principal balance of $2.55$2.03 billion and a fair value of $2.62$2.06 billion, as compared to 2,8003,156 loans at December 31, 20182019 with an aggregate unpaid principal balance of $2.04$2.24 billion and a fair value of $2.08$2.29 billion. At origination, the weighted average FICO score of borrowers backing these loans was 745,743, the weighted average LTV ratio of these loans was 75%74%, and the loans were all first lien and prime-quality. At SeptemberJune 30, 2019, 62020, 22 of these loans with an aggregate unpaid principal balance of $4$16 million were greater than 90 days delinquent and 15 of these loans with an aggregate unpaid principal balance of $1$3 million was in foreclosure. At December 31, 2018,2019, 9 of these loans with an aggregate unpaid principal balance of $7 million were greater than 90 days delinquent and 3 of these loans with an aggregate unpaid principal balance of $2 million were greater than 90 days delinquent and NaN of these loans were in foreclosure.

33

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 6. Residential Loans - (continued)
During both the three and six months ended June 30, 2020, we transferred $271 million of loans from held-for-sale to held-for-investment associated with Choice securitizations. During the three and ninesix months ended SeptemberJune 30, 2019, we transferred loans with a fair value of $7270 and $350 million, and $1.08 billion, respectively, from held-for-sale to held-for-investment associated with Choice securitizations. During the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded a net market valuation lossgain of $11$94 million and a net market valuation gainloss of $5$17 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income. During the three and nine months ended September 30, 2018, we recorded net market valuation losses of $13 million and $25 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income.income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with Choice securitizations. The net impact to our income statement associated with our retained economic investment in the Sequoia Choice securitization entities is presented in Note 5.
At Consolidated Freddie Mac SLST Entities
Beginning in the fourth quarter of 2018, we invested in subordinate securities issued by certain Freddie Mac SLST securitization trusts and were required to consolidate the underlying seasoned re-performing and non-performing residential loans owned at these entities for financial reporting purposes in accordance with GAAP. At securitization, each of these mortgage loans was a fully amortizing, fixed- or step-rate, first-lien loan that had been modified. At SeptemberJune 30, 2019,2020, we consolidated 14,70614,143 held-for-investment loans at the consolidated Freddie Mac SLST entities, with an aggregate unpaid principal balance of $2.47$2.35 billion and a fair value of $2.44$2.15 billion, as compared to 7,90014,502 loans at December 31, 20182019 with an aggregate unpaid principal balance of $1.31$2.43 billion and a fair value of $1.22$2.37 billion. At securitization, the weighted average FICO score of borrowers backing these loans was 599600 and the weighted average LTV ratio of these loans was 68%73%. At SeptemberJune 30, 2019, 2882020, 1,409 of these loans with an aggregate unpaid principal balance of $75$258 million were greater than 90 days delinquent, and 150of which 236 of these loans with an aggregate unpaid principal balance of $24$38 million were in foreclosure. At December 31, 2018, 3062019, 587 of these loans with an aggregate unpaid principal balance of $51$135 million were greater than 90 days delinquent and NaN208 of these loans with an aggregate unpaid principal balance of $33 million were in foreclosure.
During the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded a net market valuation gainsgain of $40$49 million and $95a net market valuation loss of $144 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income.income (loss). During the three and six months ended June 30, 2019, we recorded net market valuation gains of $31 million and $55 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with the Freddie Mac SLST securitizations. The net impact to our income statement associated with our economic investment in the Freddie Mac SLST securitization entities is presented in Note 5.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)


Note 7. Business Purpose Residential Loans
We originate business purpose residential loans, including single-family rental loans and residential bridge loans. This origination activity commenced in connection with our acquisitionacquisitions of 5 Arches and CoreVest in March 2019.
Business Purpose Residential Loan Originations
During the three months ended SeptemberJune 30, 2019,2020, we funded $127$234 million of business purpose residential loans, of which $3$2 million of residential bridge loans were sold to a third party. During the period from March 1, 2019 to September 30, 2019, we funded $297 million of business purpose residential loans, of which $47 million of residential bridgeand 0 single-family rental loans were sold to a third party.parties. The remaining business purpose residential loans were transferred to our investment portfolio (residential bridge loans), or retained in our mortgage banking business (single-family rental loans). for future securitizations. Prior to the transfer of residential bridge loans to our investment portfolio, we recorded a net market valuation gainsloss of $1 million and $2$3 million on these loans through Mortgage banking activities, net on our consolidated statements of income (loss) for the three months ended SeptemberJune 30, 2019 and for the period from March 1, 2019 to September 30, 2019, respectively.2020. Market valuation adjustments on our single-family rental loans are also recorded in Mortgage banking activities, net on our consolidated statements of income.income (loss) prior to their sale or transfer to our investment portfolio. Additionally, during the three and six months ended SeptemberJune 30, 2019 and during the period from March 1, 2019 to September 30, 2019,2020, we recorded loan origination fee income associated with business purpose residential loans of $3$2 million and $6$11 million, respectively, through Mortgage banking activities, net on our consolidated statements of income.income (loss).

34

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 7. Business Purpose Residential Loans - (continued)
The following table summarizes the classifications and carrying values of the business purpose residential loans owned at Redwood at SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 7.1 – Classifications and Carrying Values of Business Purpose Residential Loans
September 30, 2019 Single-Family Residential  
(In Thousands) Rental Bridge Total
Held-for-sale at fair value $110,434
 $—
 $110,434
Held-for-investment at fair value 18,711
 206,890
 225,601
Total Business Purpose Residential Loans $129,145
 $206,890
 $336,035

June 30, 2020Single-Family RentalResidential
(In Thousands)RedwoodCAFLBridgeTotal
Held-for-sale at fair value$379,795  —  $—  $379,795  
Held-for-investment at fair value—  2,615,038  787,367  3,402,405  
Total Business Purpose Residential Loans$379,795  $2,615,038  $787,367  $3,782,200  
December 31, 2018 Single-Family Residential  
(In Thousands) Rental Bridge Total
Held-for-sale at fair value $28,460
 $—
 $28,460
Held-for-investment at fair value —
 112,798
 112,798
Total Business Purpose Residential Loans $28,460
 $112,798
 $141,258

December 31, 2019Single-Family RentalResidential
(In Thousands)RedwoodCAFLBridgeTotal
Held-for-sale at fair value$331,565  $—  $—  $331,565  
Held-for-investment at fair value237,620  2,192,552  745,006  3,175,178  
Total Business Purpose Residential Loans$569,185  $2,192,552  $745,006  $3,506,743  
Single-Family Rental Loans Held-for-Sale at Fair Value
At SeptemberJune 30, 2019,2020, we owned 77199 single-family rental loans held-for-salewith an aggregate unpaid principal balance and fair value of $380 million, as compared to 308 loans at December 31, 2019 with an aggregate unpaid principal balance of $106$553 million and a fair value of $110 million, compared to 11$569 million. At June 30, 2020, 3 of these loans at December 31, 2018 with an aggregate unpaid principal balance of $28 million and a fair value of $28 million.$3 million were in foreclosure, of which 2 of these loans with an aggregate unpaid principal balance and fair value of $2 million were greater than 90 days delinquent. At both September 30, 2019 and December 31, 2018, NaN2019, 2 of these loans with an aggregate unpaid principal balance and fair value of $2 million were greater than 90 days delinquent, orof which 1 of these loans with an unpaid principal balance of $0.1 million was in foreclosure.
During the three and six months ended SeptemberJune 30, 2019 and for the period from March 1, 2019 to September 30, 2019,2020, we originated $36$176 million and $78$436 million of single-family rental loans, respectively. During both the threesix months ended SeptemberJune 30, 2019 and for the period from March 1, 2019 to September 30, 2019, $19 million of single-family rental loans were2020, we transferred to our investment portfolio and financed with FHLB borrowings, and the remaining loans were retained in our mortgage banking business. We did 0t sell any loans during either of these periods. During the first two months of 2019, prior to our acquisition of 5 Arches on March 1, 2019, we purchased $19$599 million of single-family rental loans from 5 Arches.held-for-sale to held-for-investment associated with 2 CAFL securitizations and sold $26 million to third parties. Additionally, at March 31, 2020, we transferred all held-for-investment single-family rental loans to held-for-sale. During the three and ninesix months ended SeptemberJune 30, 2020, we recorded a net market valuation gain of $3 million and a net market valuation loss of $9 million, respectively, on single-family rental loans. Of the $3 million of net market valuation gains recorded during the three months ended June 30, 2020, $1 million of net market valuation gains were recorded through Mortgage banking activities, net and $2 million of net market valuation gains were recorded through Investment fair value changes, net on our consolidated statements of income (loss). Of the $9 million of net market valuation losses recorded during the six months ended June 30, 2020, $12 million of net market valuation gains were recorded through Mortgage banking activities, net and $21 million of net market valuation losses were recorded through Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2019, we recorded net market valuation gains of $1 million and $3$2 million, respectively, on single-family rental loans held-for-sale at fair value through Mortgage banking activities, net on our consolidated statements of income. At September 30, 2019, loans held-for-sale with a market value of $78 million were pledged as collateral under short-term borrowing agreements.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)


income (loss).
The outstanding single-family rental loans held-for-sale at SeptemberJune 30, 20192020 were first lien, fixed-rate loans with original maturities of five, seven, or ten years. At SeptemberJune 30, 2019,2020, the weighted average coupon of our single-family rental loans was 5.35%4.82% and the weighted average remaining loan term was eight years. At origination, the weighted average LTV ratio of these loans was 67% and the weighted average debt service coverage ratio ("DSCR") was 1.35 times.
35

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 7. Business Purpose Residential Loans - (continued)
Single-Family Rental Loans Held-for-Investment at CAFL
        In conjunction with our acquisition of CoreVest in the fourth quarter of 2019, we consolidated the single-family rental loans owned at certain CAFL securitization entities. At June 30, 2020, we consolidated 967 held-for-investment single-family rental loans at the consolidated CAFL entities, with an aggregate unpaid principal balance of $2.58 billion and a fair value of $2.62 billion, as compared to 783 loans at December 31, 2019 with an aggregate unpaid principal balance of $2.08 billion and a fair value of $2.19 billion. The outstanding single-family rental loans held-for-investment at CAFL at June 30, 2020 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years. At June 30, 2020, the weighted average coupon of our single-family rental loans was 5.52% and the weighted average remaining loan term was six years. At origination, the weighted average LTV ratio of these loans was 68%69% and the weighted average debt service coverage ratio ("DSCR")DSCR was 1.361.37 times.
Single-Family Rental Loans Held-for-Investment at Fair Value
At SeptemberJune 30, 2019, we owned 1 single-family rental loan held-for-investment2020, 19 of these loans with an aggregate unpaid principal balance of $17$29 million and a fair value of $19 million. At September 30, 2019, this loan was notwere greater than 90 days delinquent orand 8 of these loans with an aggregate unpaid principal balance of $14 million were in foreclosure. At December 31, 2019, 18 of these loans with an aggregate unpaid principal balance of $29 million were greater than 90 days delinquent and 5 of these loans with an aggregate unpaid principal balance of $9 million were in foreclosure.
During the three and six months ended SeptemberJune 30, 2019,2020, we transferred one loan withrecorded a fair value of $19 million from held-for-sale to held-for-investment. During both the three and nine months ended September 30, 2019, we recorded net market valuation gainsgain of less than $0.1$169 million and a net market valuation loss of $103 million, respectively, on single-family rentalthese loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income.income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with CAFL securitizations. The net impact to our income statement associated with our retained economic investment in the CAFL securitization entities is presented in Note 5.
Residential Bridge Loans Held-for-Investment at Fair Value
At SeptemberJune 30, 2019,2020, we owned 3922,847 residential bridge loans held-for-investment with an aggregate unpaid principal balance of $205$803 million and a fair value of $207$787 million, as compared to 1572,653 loans at December 31, 20182019 with an aggregate unpaid principal balance of $112$743 million and a fair value of $113$745 million.
As part of our credit risk management practices, our residential bridge loans are subject to individual risk assessment using an internal borrower and collateral quality evaluation framework. At SeptemberJune 30, 2019, 92020, 13 loans with an aggregate fair value of $30 million and an unpaid principal balance of $6$35 million were greater than 90 days delinquent, and 8of which 9 of these loans with an aggregate fair value of $28 million and an unpaid principal balance of $5$32 million were in foreclosure. At December 31, 2018, 72019, 31 loans with an aggregate fair value of $12 million and an unpaid principal balance of $14 million were greater than 90 days delinquent and 4in foreclosure, of which 15 of these loans with an aggregate fair value of $11$7 million and an unpaid principal balance of $9 million were in foreclosure.greater than 90 days delinquent. During the ninesix months ended SeptemberJune 30, 2019,2020, we transferred 1 loan3 loans with a fair value of $5$2 million to REO, which is included in Other assets on our consolidated balance sheets.
During the three and six months ended SeptemberJune 30, 2019 and for the period from March 1, 2019 to September 30, 2019, $882020, $54 million and $174$260 million of newly originated residential bridge loans, respectively, were transferred to our investment portfolio. During the first two months of 2019, prior to our acquisition of 5 Arches on March 1, 2019, we purchased $10 million of residential bridge loans from 5 Arches. During both the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded a net market valuation lossesgain of $1$22 million and a net market valuation loss of $17 million, respectively, on residential bridge loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income. At Septemberincome (loss). During the three and six months ended June 30, 2019, we recorded net market valuation losses of $0.3 million and $0.6 million, respectively, on residential bridge loans with a marketheld-for-investment at fair value through Investment fair value changes, net on our consolidated statements of $176 million were pledged as collateral under short-term borrowing agreements.income (loss).
The outstanding residential bridge loans held-for-investment at SeptemberJune 30, 20192020 were first lien, fixed-rate, interest-only loans with a weighted average coupon of 8.90%7.96% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was 693720 and the weighted average LTV ratio of these loans was 70%69%.
At SeptemberJune 30, 2019,2020, we had a $67$167 million commitment to fund residential bridge loans. See Note 16 for additional information on this commitment.

36

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)



Note 8. Multifamily Loans
Beginning in the second half ofSince 2018, we invested in multifamily subordinate securities issued by certain Freddie Mac K-Series securitization trusts and were required to consolidate the underlying multifamily loans owned at these entities for financial reporting purposes in accordance with GAAP. During the first quarter of 2020, we sold subordinate securities issued by four such Freddie Mac K-Series securitization trusts and deconsolidated $3.85 billion of multifamily loans. See Note 2 for further discussion.
At SeptemberJune 30, 2019,2020, we consolidated 25028 held-for-investment multifamily loans, with an aggregate unpaid principal balance of $3.54 billion$465 million and a fair value of $3.79 billion,$489 million, as compared to 162279 loans at December 31, 20182019 with an aggregate unpaid principal balance of $2.13$4.20 billion and a fair value of $2.14$4.41 billion. The outstanding multifamily loans held-for-investment at the Freddie Mac K-Series entities at SeptemberJune 30, 20192020 were first lien,first-lien, fixed-rate loans that were originated betweenin 2015 and 2017 and had original loan terms of seven to ten years and an original weighted average LTV ratio of 69%67%. At SeptemberJune 30, 2019,2020, the weighted average coupon of these multifamily loans was 4.19%4.25% and the weighted average remaining loan term was sixfive years. At both SeptemberJune 30, 20192020 and December 31, 2018,2019, NaN of these loans were greater than 90 days delinquent or in foreclosure.
During the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded a net market valuation gainsgain of $47$19 million and $178a net market valuation loss of $64 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income.income (loss). During the three and six months ended June 30, 2019, we recorded net market valuation gains of $97 million and $131 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with the securitizations. The net impact to our income statement associated with our economic investment in the securities of the Freddie Mac K-Series securitization entities is presented in Note 5.
Note 9. Real Estate Securities
We invest in real estate securities that we acquire from third parties or create and retain from our Sequoia securitizations. The following table presents the fair values of our real estate securities by type at SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 9.1 – Fair Values of Real Estate Securities by Type
(In Thousands) September 30, 2019 December 31, 2018
Trading $1,013,785
 $1,118,612
Available-for-sale 271,641
 333,882
Total Real Estate Securities $1,285,426
 $1,452,494

(In Thousands)June 30, 2020December 31, 2019
Trading$142,699  $860,540  
Available-for-sale173,737  239,334  
Total Real Estate Securities$316,436  $1,099,874  
Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Mezzanine securities are interests that are generally subordinate to senior securities in their rights to receive cash flows, and have subordinate securities below them that are first to absorb losses. MostMany of our mezzanine classified securities were initially rated AA through BBB- and issued in 2012 or later. Subordinate securities are all interests below mezzanine. NearlyExcluding our re-performing loan securities, nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.

37

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 9. Real Estate Securities - (continued)

Trading Securities
The following table presents the fair value of trading securities by position and collateral type at SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 9.2 – Trading Securities by Position
(In Thousands)June 30, 2020December 31, 2019
Senior$32,860  $150,067  
Mezzanine3,514  538,489  
Subordinate106,325  171,984  
Total Trading Securities$142,699  $860,540  
(In Thousands) September 30, 2019 December 31, 2018
Senior $149,634
 $158,670
Mezzanine 644,571
 610,819
Subordinate 219,580
 349,123
Total Trading Securities $1,013,785
 $1,118,612

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

Note 9. Real Estate Securities - (continued)


We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities.securities, and our residential securities also include securities backed by re-performing loans ("RPL"). At SeptemberJune 30, 2019, trading securities with a carrying value of $677 million as well as $113 million, $385 million, and $209 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series securitizations, respectively, were pledged as collateral under short-term borrowing agreements. See Note 13 for additional information on short-term debt. At September 30, 2019, trading securities with a carrying value of $4 million, as well as $126 million of securities we owned that were issued by consolidated Sequoia Choice securitizations, were pledged as collateral under our subordinate securities financing facility. In addition, at September 30, 2019, trading securities with a fair value of $41 million were pledged as collateral under a borrowing agreement with the FHLBC. See Note 15 for additional information on long-term debt.
At September 30, 20192020 and December 31, 2018,2019, our senior trading securities included $58$33 million and $82$64 million of interest-only securities, respectively, for which there is no principal balance, and the remaining unpaid principal balance of our remaining senior trading securities was $88 million0 and $78$84 million, respectively. Our interest-only securities included $29$14 million and $43$36 million of A-IO-S securitiescertificated mortgage servicing rights at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively, which are securities we retained from certain of our Sequoia securitizations that represent certificated servicing strips.
At SeptemberJune 30, 20192020 and December 31, 2018,2019, our senior trading securities included $11 million and $55 million of RPL securities, respectively.
At June 30, 2020 and December 31, 2019, our mezzanine trading securities had an unpaid principal balance of $4 million and $537 million, respectively. At June 30, 2020 and December 31, 2019, the fair value of our mezzanine securities was $4 million and $538 million, respectively, and included $4 million and $39 million of Sequoia securities, respectively, 0 and $395 million of multifamily securities, respectively, and 0 and $104 million of other third-party residential securities, respectively, including 0 and $30 million of RPL securities, respectively.
At June 30, 2020 and December 31, 2019, our subordinate trading securities had an unpaid principal balance of $1.01 billion$272 million and $1.12 billion,$302 million, respectively. At SeptemberJune 30, 20192020 and December 31, 2018,2019, the fair value of our mezzanine and subordinate securities was $864$106 million and $960$172 million, respectively, and included $128$50 million and $277$90 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, $65$52 million and $68 million, respectively, of Sequoia securities, $207 million and $186$82 million, respectively, of other third-party residential securities, and $464including $49 million and $429$76 million respectively, of third-party commercial/multifamily securities.RPL securities, respectively.
During the three and ninesix months ended SeptemberJune 30, 2019,2020, we acquired $66$10 million and $335$67 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $236$86 million and $397$705 million, respectively, of such securities. During the three and ninesix months ended SeptemberJune 30, 2018,2019, we acquired $189$115 million and $567$269 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $79$132 million and $323$161 million, respectively, of such securities.
During the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded a net market valuation gainsgain of $15$42 million and $56a net market valuation loss of $221 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income.income (loss). During the three and ninesix months ended SeptemberJune 30, 2018,2019, we recorded net market valuation gains of $6$18 million and $2$40 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income.income (loss).

38

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities
The following table presents the fair value of our available-for-sale securities by position and collateral type at SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 9.3 – Available-for-Sale Securities by Position
(In Thousands) September 30, 2019 December 31, 2018
Senior $33,457
 $87,615
Mezzanine 13,967
 36,407
Subordinate 224,217
 209,860
Total AFS Securities $271,641
 $333,882

(In Thousands)June 30, 2020December 31, 2019
Senior$—  $25,792  
Mezzanine—  13,687  
Subordinate173,737  199,855  
Total AFS Securities$173,737  $239,334  
At SeptemberJune 30, 20192020 and December 31, 2018, all of2019, our available-for-sale securities were primarily comprised of $150 million and $230 million of residential mortgage-backed securities.securities, respectively, and $23 million and $9 million of multifamily mortgage-backed securities, respectively. At SeptemberJune 30, 2020 and December 31, 2019, AFSour residential available-for-sale securities with a carrying valuewere comprised of $59$118 million were pledged as collateral under short-term borrowing agreements. See Note 13 for additional information on short-term debt. At September 30, 2019, AFSand $141 million of residential mortgage-backed securities with a carrying valuewe retained from our Sequoia securitizations, respectively, and $33 million and $90 million of $123 million were pledged as collateral under our subordinateother third-party residential securities, financing facility. See Note 15 for additional information on long-term debt.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

Note 9. Real Estate Securities - (continued)


respectively.
During the three and ninesix months ended SeptemberJune 30, 2019,2020, we purchased $12 million0 and $21$31 million of AFS securities, respectively, and sold $15$9 million and $82$55 million of AFS securities, respectively, which resulted in net realized gains of $4$1 million and $13$5 million, respectively. During the three and ninesix months ended SeptemberJune 30, 2018,2019, we purchased $1$4 million and $7$9 million of AFS securities, respectively, and sold $26$25 million and $118$67 million of AFS securities, respectively, which resulted in net realized gains of $7$3 million and $21$9 million, respectively.
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 SeptemberJune 30, 2019, there were no2020, we had $21 million of AFS securities with contractual maturities less than five years, $8$2 million with contractual maturities greater than five years but less than 10ten years, and the remainder of our AFS securities had contractual maturities greater than 10ten years.
The following table presents the components of carrying value (which equals fair value) of AFS securities at SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 9.4 – Carrying Value of AFS Securities
September 30, 2019      
June 30, 2020June 30, 2020
(In Thousands) Senior Mezzanine Subordinate Total(In Thousands)SeniorMezzanineSubordinateTotal
Principal balance $34,272
 $13,729
 $291,207
 $339,208
Principal balance$—  $—  $264,100  $264,100  
Credit reserve (588) —
 (33,623) (34,211)Credit reserve—  —  (37,785) (37,785) 
Unamortized discount, net (12,346) (552) (119,756) (132,654)Unamortized discount, net—  —  (104,260) (104,260) 
Amortized cost 21,338

13,177
 137,828
 172,343
Amortized cost—  —  122,055  122,055  
Gross unrealized gains 12,131
 790
 86,389
 99,310
Gross unrealized gains—  —  56,999  56,999  
Gross unrealized losses (12) —
 —
 (12)Gross unrealized losses—  —  (3,846) (3,846) 
Allowance for credit lossesAllowance for credit losses—  —  (1,471) (1,471) 
Carrying Value $33,457

$13,967
 $224,217
 $271,641
Carrying Value$—  $—  $173,737  $173,737  
December 31, 2018      
(In Thousands) Senior Mezzanine Subordinate Total
Principal balance $91,736
 $36,852
 $302,524
 $431,112
Credit reserve (7,790) —
 (33,580) (41,370)
Unamortized discount, net (18,460) (3,697) (129,043) (151,200)
Amortized cost 65,486

33,155
 139,901
 238,542
Gross unrealized gains 22,178
 3,252
 70,458
 95,888
Gross unrealized losses (49) —
 (499) (548)
Carrying Value $87,615

$36,407
 $209,860
 $333,882
39


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

Note 9. Real Estate Securities - (continued)


December 31, 2019
(In Thousands)SeniorMezzanineSubordinateTotal
Principal balance$26,331  $13,512  $264,234  $304,077  
Credit reserve(533) —  (32,407) (32,940) 
Unamortized discount, net(10,427) (527) (113,301) (124,255) 
Amortized cost15,371  12,985  118,526  146,882  
Gross unrealized gains10,450  702  81,329  92,481  
Gross unrealized losses(29) —  —  (29) 
Carrying Value$25,792  $13,687  $199,855  $239,334  
The following table presents the changes for the three and ninesix months ended SeptemberJune 30, 2019,2020, in unamortized discount and designated credit reserves on AFS securities.
Table 9.5 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities
  Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
  
Credit
Reserve
 
Unamortized
Discount, Net
 Credit
Reserve		 Unamortized
Discount, Net
(In Thousands)    
Beginning balance $34,849
 $137,282
 $41,370
 $151,200
Amortization of net discount —
 (1,834) —
 (5,823)
Realized credit losses (694) —
 (1,874) —
Acquisitions 734
 399
 2,198
 1,103
Sales, calls, other (800) (3,071) (7,197) (14,112)
(Release of) transfers to credit reserves, net 122
 (122) (286) 286
Ending Balance $34,211
 $132,654
 $34,211
 $132,654

Three Months Ended June 30, 2020Six Months Ended June 30, 2020
Credit
Reserve		Unamortized
Discount, Net		Credit
Reserve		Unamortized
Discount, Net
(In Thousands)
Beginning balance$37,717  $109,538  $32,940  $124,255  
Amortization of net discount—  (1,087) —  (2,841) 
Realized credit losses(184) —  (703) —  
Acquisitions—  —  5,184  777  
Sales, calls, other(520) (3,419) (726) (16,841) 
(Release of) transfers to credit reserves, net772  (772) 1,090  (1,090) 
Ending Balance$37,785  $104,260  $37,785  $104,260  
AFS Securities with Unrealized Losses
The following table presents the components comprising the total carrying value of AFS securities that were in a gross unrealized loss position at SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 9.6 – Components of Fair Value of AFS Securities by Holding Periods
  Less Than 12 Consecutive Months 12 Consecutive Months or Longer
  
Amortized
Cost
 
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Unrealized
Losses
 Fair
Value
(In Thousands)      
September 30, 2019 $—
 $—
 $—
 $6,254
 $(12) $6,242
December 31, 2018 12,923
 (499) 12,424
 7,464
 (49) 7,415

Less Than 12 Consecutive Months12 Consecutive Months or Longer
Amortized
Cost		Unrealized
Losses		Fair
Value		Amortized
Cost		Unrealized
Losses		Fair
Value
(In Thousands)
June 30, 2020$37,751  $(3,846) $32,433  $—  $—  $—  
December 31, 2019—  —  —  5,830  (29) 5,801  
At SeptemberJune 30, 2019,2020, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 11394 AFS securities, of which 13 were in an unrealized loss position and 0 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2019, our consolidated balance sheet included 107 AFS securities, of which 1 was in an unrealized loss position and 1 was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2018, our consolidated balance sheet included 128 AFS securities, of which 7 were in an unrealized loss position and 3 were in a continuous unrealized loss position for 12 consecutive months or longer.

40

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 9. Real Estate Securities - (continued)

Evaluating AFS Securities for Other-than-Temporary ImpairmentsCredit Losses
Gross unrealized losses on our AFS securities were less than $0.1$4 million at SeptemberJune 30, 2019. We2020. Pursuant to our adoption of ASU 2016-13, "Financial Instruments - Credit Losses" in the first quarter of 2020, 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 SeptemberJune 30, 2019,2020, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberAt June 30, 2019
(Unaudited)

Note 9. Real Estate Securities - (continued)


For both the three and nine months ended September 30, 2019, there were no other-than-temporary impairments2020, our allowance for credit losses related to our AFS securities.securities was $1 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 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 SeptemberJune 30, 2019.2020.
Table 9.7 – Significant Valuation AssumptionsCredit Quality Indicators
September 30, 2019 Range for Securities
Prepayment rates 15%-15%
Projected losses 1%-1%

June 30, 2020Subordinate Securities
Default rate0.5%
Loss severity20%
The following table details the activity related to the allowance for credit loss component of OTTI (i.e., OTTI recognized through earnings)losses for AFS securities held at SeptemberJune 30, 2019 and 2018, for which a portion of an OTTI was recognized in other comprehensive income.2020.
Table 9.8 – ActivityRollforward of theAllowance for Credit Component of Other-than-Temporary ImpairmentsLosses
Three Months EndedSix Months Ended
(In Thousands)June 30, 2020June 30, 2020
Beginning balance allowance for credit losses$1,525  $—  
Transition impact from adoption of new standard—  —  
Additions to allowance for credit losses on securities for which credit losses were not previously recorded—  1,525  
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(54) (54) 
Ending balance of allowance for credit losses$1,471  $1,471  

  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Balance at beginning of period $18,580
 $20,967
 $18,652
 $21,037
Additions        
Initial credit impairments —
 33
 —
 76
Reductions        
Securities sold, or expected to sell (6) (927) (20) (1,026)
Securities with no outstanding principal at period end —
 (1,229) (58) (1,243)
Balance at End of Period $18,574
 $18,844
 $18,574
 $18,844
41

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 9. Real Estate Securities - (continued)

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income.income (loss). The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 9.9 – Gross Realized Gains and Losses on AFS Securities
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Gross realized gains - sales $3,656
 $7,275
 $13,143
 $21,312
Gross realized gains - calls 1,058
 —
 5,084
 43
Gross realized losses - sales —
 —
 —
 (3)
Total Realized Gains on Sales and Calls of AFS Securities, net $4,714
 $7,275
 $18,227
 $21,352

Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
Gross realized gains - sales$1,074  $2,827  $8,779  $9,487  
Gross realized gains - calls—  —  —  4,026  
Gross realized losses - sales(291) —  (4,144) —  
Total Realized Gains on Sales and Calls of AFS Securities, net$783  $2,827  $4,635  $13,513  

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)


Note 10. Other Investments
Other investments at SeptemberJune 30, 20192020 and December 31, 20182019 are summarized in the following table.
Table 10.1 – Components of Other Investments
(In Thousands) September 30, 2019 December 31, 2018
Servicer advance investments $222,591
 $300,468
Mortgage servicing rights 39,837
 60,281
Excess MSRs 32,937
 27,312
Investment in multifamily loan fund 32,158
 —
Shared home appreciation options 11,372
 —
Other 8,812
 —
Participation in loan warehouse facility —
 39,703
Investment in 5 Arches —
 10,754
Total Other Investments $347,707
 $438,518

(In Thousands)June 30, 2020December 31, 2019
Servicer advance investments$266,948  $169,204  
Shared home appreciation options40,851  45,085  
Excess MSRs36,197  31,814  
Mortgage servicing rights19,661  42,224  
Investment in multifamily loan fund30,370  39,802  
Other35,813  30,001  
Total Other Investments$429,840  $358,130  
Servicer advance investments
In 2018, 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 (See Note 4(Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding the transaction). During the six months ended June 30, 2020, we funded additional purchases of outstanding servicer advances and excess MSRs under the same partnership structure. At SeptemberJune 30, 2019,2020, we had funded $71$94 million of total capital to the SA Buyers (see Note 16 for additional detail).
Our servicer advance investments (owned by the consolidated SA Buyers) are comprised of outstanding servicer advance receivables, the requirement to purchase all future servicer advances made with respect to a specified pool of residential mortgage loans, and a portion of the mortgage servicing fees from the underlying loan pool. A portion of the remaining mortgage servicing fees from the underlying loan pool are paid directly to the third-party servicer for the performance of servicing duties and a portion is paid to excess MSRs that we own as a separate investment. We hold our servicer advance investments at our taxable REIT subsidiary.
Servicer advances are non-interest bearing and are a customary feature of residential mortgage securitization transactions. Servicer advances are generally reimbursable cash payments made by a servicer when the borrower fails to make scheduled payments due on a residential mortgage loan or to support the value of the collateral property. Servicer advances typically fall into three categories:
Principal and Interest Advances: cash payments made by the servicer to cover scheduled principal and interest payments on a residential mortgage loan that have not been paid on a timely basis by the borrower.
Escrow Advances (Taxes and Insurance Advances): Cash payments made by the servicer to third parties on behalf of the borrower for real estate taxes and insurance premiums on the property that have not been paid on a timely basis by the borrower.
Corporate Advances: Cash payments made by the servicer to third parties for the reimbursable costs and expenses incurred in connection with the foreclosure, preservation and sale of the mortgaged property, including attorneys’ and other professional fees.
Servicer advances are generally permitted to be repaid from amounts received with respect to the related residential mortgage loan, including payments from the borrower or amounts received from the liquidation of the property securing the loan. Residential mortgage servicing agreements generally require a servicer to make advances in respect of serviced residential mortgage loans unless the servicer determines in good faith that the advance would not be ultimately recoverable from the proceeds of the related residential mortgage loan or the mortgaged property.
42

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)


Note 10. Other Investments - (continued)
At SeptemberJune 30, 2019,2020, our servicer advance investments had a carrying value of $223$267 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $8.38$10.26 billion. The outstanding servicer advance receivables associated with this investment were $205$250 million at SeptemberJune 30, 2019,2020, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at SeptemberJune 30, 20192020 and December 31, 2018:2019.
Table 10.2 – Components of Servicer Advance Receivables
(In Thousands) September 30, 2019 December 31, 2018
Principal and interest advances $54,670
 $144,336
Escrow advances (taxes and insurance advances) 99,227
 94,828
Corporate advances 51,049
 47,614
Total Servicer Advance Receivables $204,946
 $286,778

(In Thousands)June 30, 2020December 31, 2019
Principal and interest advances$82,719  $15,081  
Escrow advances (taxes and insurance advances)118,260  96,732  
Corporate advances48,726  39,769  
Total Servicer Advance Receivables$249,705  $151,582  
We account for our servicer advance investments at fair value and during the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded $3$3 million and $9$6 million, respectively, of interest income associated with these investments, respectively, and recorded net market valuation gainslosses of $2$0.1 million and $3$6 million, respectively, through Investment fair value changes, net in our consolidated statements of income.income (loss). During the three and six months ended June 30, 2019, we recorded $3 million and $5 million, respectively, of interest income associated with these investments for each of these periods, and recorded net market valuation gains of $0.4 million and $1 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).
Mortgage Servicing Rights
We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The majority of our investments in MSRs were made through the retention of servicing rights associated with the residential jumbo mortgage loans that we acquired and subsequently transferred to third parties. We hold our MSR investments at our taxable REIT subsidiary.subsidiaries.
At SeptemberJune 30, 20192020 and December 31, 2018,2019, our MSRs had a fair value of $40$20 million and $60$42 million, respectively, and were associated with loans with an aggregate principal balance of $4.61$3.63 billion and $4.93$4.35 billion, respectively.
The following table presents activity for MSRs for During the three and ninesix months ended SeptemberJune 30, 20192020, including net market valuation gains and 2018.
Table 10.3 – Activity forlosses on our MSRs
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Balance at beginning of period $47,396
 $64,674
 $60,281
 $63,598
Additions —
 —
 868
 —
Sales —
 —
 —
 (1,077)
Changes in fair value due to:        
Changes in assumptions (1)
 (5,150) 1,099
 (15,291) 6,388
Other changes (2)
 (2,409) (1,988) (6,021) (5,124)
Balance at End of Period $39,837
 $63,785
 $39,837
 $63,785
(1)Primarily reflects changes in prepayment assumptions due to changes in market interest rates.
(2)Represents changes due to the realization of expected cash flows.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)


The following table presents the components and related risk management derivatives, we recorded net losses of $1 million and $3 million, respectively, through Other income on our MSRconsolidated statements of income for(loss). During the three and ninesix months ended SeptemberJune 30, 2019, and 2018.
Table 10.4 – Componentswe recognized $2 million of MSR Income,income, net for both periods through Other income on our consolidated statements of income (loss).
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Servicing income $3,850
 $4,004
 $11,310
 $11,601
Cost of sub-servicer (319) (324) (1,090) (1,254)
Net servicing fee income 3,531
 3,680
 10,220
 10,347
Market valuation changes of MSRs (7,489) (823) (21,243) 1,324
Market valuation changes of associated derivatives 4,389
 (890) 13,157
 (7,151)
MSR reversal of provision for repurchases —
 —
 208
 277
MSR Income, Net (1)
 $431
 $1,967
 $2,342
 $4,797
(1)MSR income, net is included in Other income, net on our consolidated statements of income.
Excess MSRs
In association with our servicer advance investments described above, in the fourth quarter of 2018, we (through our consolidated SA Buyers) also invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, beginning in 2018, we invested inown excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and ninesix months ended SeptemberJune 30, 2020, we recognized $3 million and $6 million of interest income, respectively, through Other interest income, and recorded a net market valuation gain of $3 million and a net market valuation loss of $7 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2019, we recognized $2 million and $6$4 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2$0.1 million and $2$0.5 million, respectively, through Investment fair value changes, net on our consolidated statements of income.income (loss).

43

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 10. Other Investments - (continued)
Investment in Multifamily Loan Fund
In January 2019, we invested in a limited partnership created to acquire floating rate, light-renovation multifamily loans from Freddie Mac. We committed to fund an aggregate of $78 million to the partnership, and have funded approximately $33$70 million at SeptemberJune 30, 2019. Freddie Mac is providing a debt facility to finance loans purchased by2020. During the partnership. Afterthree months ended March 31, 2020, we acquired $28 million of securities from the partnership's acquisitions have reached a specific threshold, the partnership and Freddie Mac may agree to include the related loans in a Freddie Mac-sponsoredfirst securitization and the limited partners may acquire the subordinate securities issued in any such securitization.
We account for our ownership interest in this partnership using the equity method of accounting as we are able to exert significant influence over but do not control the activities of the investee.transaction. At SeptemberJune 30, 2019,2020, the carrying amount of our investment in the partnership was $32$30 million. We have elected to record our share of earnings or losses from this investment on a one-quarter lag. During the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded losses of $1 million and $0.5income of $0.3 million, of income, respectively, associated with this investment in Other income net on our consolidated statements of income.income (loss). During both the three and six months ended June 30, 2019, we recorded $0.1 million of losses associated with this investment in Other income on our consolidated statements of income (loss).
Shared Home Appreciation Options
In the third quarter of 2019, we entered into a flow purchase agreement to acquire shared home appreciation options. The counterparty purchases an option to buy a fractional interest in a homeowner's ownership interest in his or her real property, and subsequently the counterparty sells the option contract to us. Pursuant to the terms of the option contract, we are able to share in both home price appreciation and depreciation. At SeptemberJune 30, 2019,2020, we had acquired $11$47 million of shared home appreciation options under this flow purchase agreement and had an outstanding commitment to fund up to an additional $39$3 million under this agreement.
Participation in Loan Warehouse Facility
In We account for these investments under the second quarter of 2018, we invested in a subordinated participation in a revolving mortgage loan warehouse credit facility of one of our loan sellers. We accounted for this subordinated participation interest as a loan receivable at amortized cost,fair value option and all associated interest income was recorded as a component of Other interest income in our consolidated statements of income. Duringduring the first quarter of 2019, our agreement associated with this investment was terminatedthree and the balance outstanding under this agreement was repaid.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Septembersix months ended June 30, 2019
(Unaudited)


Investment in 5 Arches
In May 2018, we acquired a 20% minority interest in 5 Arches for $10 million, which included a one-year option to purchase all remaining equity in the company for a combination of cash and stock totaling $40 million. In March 2019, we closed on our option to acquire the remaining 80% interest in 5 Arches. See Note 2 for discussion of this acquisition.
During 2018 and through February 28, 2019, we accounted for our minority ownership interest in 5 Arches using the equity method of accounting as we were able to exert significant influence over but did not control the activities of the investee. During the period from January 1, 2019 to February 28, 2019,2020, we recorded $0.3a net market valuation gain of $1 million and a net market valuation loss of gross income associated with this investment and, including amortization of certain intangible$7 million, respectively, related to these assets recorded $0.1 million of net earnings in Other income,through Investment fair value changes, net on our consolidated statements of income.income (loss).
Note 11. Derivative Financial Instruments
The following table presents the fair value and notional amount of our derivative financial instruments at SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 11.1 – Fair Value and Notional Amount of Derivative Financial Instruments
June 30, 2020December 31, 2019
Fair
Value		Notional
Amount		Fair
Value		Notional
Amount
(In Thousands)
Assets - Risk Management Derivatives
Interest rate swaps$—  $—  $17,095  $1,399,000  
TBAs—  —  5,755  2,445,000  
Interest rate futures—  —  777  213,700  
Swaptions—  —  1,925  1,065,000  
Assets - Other Derivatives
Loan purchase and interest rate lock commitments357  24,871  10,149  1,537,162  
Total Assets$357  $24,871  $35,701  $6,659,862  
Liabilities - Cash Flow Hedges
Interest rate swaps$—  $—  $(51,530) $139,500  
Liabilities - Risk Management Derivatives
Interest rate swaps—  —  (97,235) 2,314,300  
TBAs—  —  (13,359) 4,160,000  
Interest rate futures—  —  (10) 12,300  
Liabilities - Other Derivatives
Loan purchase commitments(1,932) 199,932  (1,290) 303,394  
Total Liabilities$(1,932) $199,932  $(163,424) $6,929,494  
Total Derivative Financial Instruments, Net$(1,575) $224,803  $(127,723) $13,589,356  
  September 30, 2019 December 31, 2018
  
Fair
Value
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
(In Thousands)    
Assets - Risk Management Derivatives        
Interest rate swaps $28,987
 $1,190,500
 $28,211
 $2,106,500
TBAs 5,250
 1,960,000
 4,665
 520,000
Swaptions 4,655
 625,000
 —
 —
Assets - Other Derivatives        
Loan purchase commitments 4,757
 875,707
 2,913
 331,161
Total Assets $43,649
 $4,651,207
 $35,789
 $2,957,661
         
Liabilities - Cash Flow Hedges        
Interest rate swaps $(61,685) $139,500
 $(34,492) $139,500
Liabilities - Risk Management Derivatives        
Interest rate swaps (166,465) 3,896,300
 (36,416) 1,742,000
TBAs (4,192) 1,655,000
 (13,215) 935,000
Liabilities - Other Derivatives        
Loan purchase commitments (1,669) 457,272
 (732) 137,224
Total Liabilities $(234,011) $6,148,072
 $(84,855) $2,953,724
Total Derivative Financial Instruments, Net $(190,362) $10,799,279
 $(49,066) $5,911,385
44

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 11. Derivative Financial Instruments - (continued)
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 SeptemberJune 30, 2020, we were 0t party to any derivative contracts. At December 31, 2019, we were party to swaps and swaptions with an aggregate notional amount of $5.71$4.78 billion, and TBA agreements sold with an aggregate notional amount of $3.62 billion. At December 31, 2018, we were party to swaps$6.61 billion, and interest rate futures contracts with an aggregate notional amount of $3.85 billion and TBA agreements sold with an aggregate notional amount of $1.46 billion.$226 million.
During the three and ninesix months ended SeptemberJune 30, 2020, risk management derivatives had net market valuation losses of 0 and $98 million, respectively. During the three and six months ended June 30, 2019, risk management derivatives had net market valuation losses of $36$66 million and $147 million, respectively. During the three and nine months ended September 30, 2018, risk management derivatives had net market valuation gains of $25 million and $114$111 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Note 11. Derivative Financial Instruments - (continued)


income (loss). During the three months ended March 31, 2020, we settled substantially all of our outstanding derivative contracts as we determined that they were no longer effectively managing the risks associated with certain assets and liabilities.
Loan Purchase and Forward SaleInterest Rate Lock Commitments
LPCs and FSCsIRLCs that qualify as derivatives are recorded at their estimated fair values. For the three and ninesix months ended SeptemberJune 30, 2019,2020, LPCs and FSCsIRLCs had net market valuation gains of $14$3 million and $42$21 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income.income (loss). For the three and ninesix months ended SeptemberJune 30, 2018,2019, LPCs and FSCsIRLCs had a net market valuation gaingains of $2$17 million and a net market valuation loss of $8$29 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income.income (loss).
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.
During the first quarter of 2020, we terminated and settled all of our outstanding derivatives that had been designated as cash flow hedges for our long-term debt, with an aggregate notional balancea payment of $140$84 million. For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $83 million and $51 million at June 30, 2020 and December 31, 2019, respectively. We will amortize this loss into interest expense over the remaining term of the trust preferred securities and subordinated notes. As of June 30, 2020, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.
For the three and ninesix months ended SeptemberJune 30, 2019,2020, changes in the values of designated cash flow hedges were negative $12 million0 and negative $27$33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. For the three and ninesix months ended SeptemberJune 30, 2018,2019, changes in the values of designated cash flow hedges were positive $5negative $10 million and positive $17negative $15 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $61 million and $34 million at September 30, 2019 and December 31, 2018, respectively.
The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 11.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
Net interest expense on cash flows hedges$—  $(640) $(860) $(1,277) 
Realized net losses reclassified from other comprehensive income(1,029) —  (1,108) —  
Total Interest Expense$(1,029) $(640) $(1,968) $(1,277) 
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Net interest expense on cash flows hedges $(727) $(734) $(2,004) $(2,536)
Total Interest Expense $(727) $(734) $(2,004) $(2,536)
45

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 11. Derivative Financial Instruments - (continued)
Derivative Counterparty Credit Risk
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At SeptemberJune 30, 2019,2020, we assessed this risk as remote and did not record a specific valuation adjustment.
At SeptemberJune 30, 2019,2020, we had outstanding derivative agreements with 6 counterparties (other than clearinghouses) and were in compliance with our derivative counterparty ISDA agreements governing our open derivative positions.agreements.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

Note 12. Other Assets and Liabilities
Other assets at SeptemberJune 30, 20192020 and December 31, 20182019 are summarized in the following table.
Table 12.1 – Components of Other Assets
(In Thousands)June 30, 2020December 31, 2019
Accrued interest receivable$44,134  $71,058  
Pledged collateral33,105  32,945  
Investment receivable29,916  23,330  
Income tax receivables17,255  36  
Right-of-use asset15,561  11,866  
REO9,780  9,462  
FHLBC stock5,000  43,393  
Fixed assets and leasehold improvements (1)
4,590  4,901  
Margin receivable2,746  209,776  
Other9,499  12,554  
Total Other Assets$171,586  $419,321  
(In Thousands) September 30, 2019 December 31, 2018
Margin receivable $226,727
 $100,773
Pledged collateral 57,832
 42,433
FHLBC stock 43,393
 43,393
Investment receivable 14,375
 6,959
Right-of-use asset 11,076
 —
REO 5,069
 3,943
Fixed assets and leasehold improvements (1)
 4,794
 5,106
Other 14,044
 15,218
Total Other Assets $377,310
 $217,825
(1)Fixed assets and leasehold improvements had a basis of $12 million and accumulated depreciation of $7 million at June 30, 2020.
(1)Fixed assets and leasehold improvements had a basis of $11 million and accumulated depreciation of $6 million at September 30, 2019.
Accrued expenses and other liabilities at SeptemberJune 30, 20192020 and December 31, 20182019 are summarized in the following table.
Table 12.2 – Components of Accrued Expenses and Other Liabilities
(In Thousands)June 30, 2020December 31, 2019
Accrued interest payable$37,024  $60,655  
Lease liability17,348  13,443  
Payable to minority partner17,021  13,189  
Contingent consideration14,953  28,484  
Guarantee obligations12,350  14,009  
Accrued compensation10,677  33,888  
Residential loan and MSR repurchase reserve8,295  4,268  
Residential bridge loan holdbacks7,348  10,682  
Deferred tax liabilities5,152  5,152  
Other35,845  23,123  
Total Accrued Expenses and Other Liabilities$166,013  $206,893  
(In Thousands) September 30, 2019 December 31, 2018
Contingent consideration $25,167
 $—
Payable to minority partner 18,664
 14,331
Accrued compensation 17,219
 19,769
Guarantee obligations 15,016
 16,711
Lease liability 12,570
 —
Deferred tax liabilities 11,986
 9,022
Margin payable 6,658
 835
Accrued operating expenses 6,036
 3,122
Residential bridge loan holdbacks 4,465
 —
Residential loan and MSR repurchase reserve 3,947
 4,189
Legal reserve 2,000
 2,000
Other 6,014
 8,740
Total Accrued Expenses and Other Liabilities $129,742
 $78,719
Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for additional descriptions of our other assets and liabilities.
46

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 12. Other Assets and Liabilities - (continued)
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.
FHLBC 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 3 and Note 15 for additional information on this borrowing agreement.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September Through June 30, 2019
(Unaudited)
Note 12. Other Assets and Liabilities - (continued)


Pledged Collateral and Guarantee Obligations
The pledged collateral and guarantee obligations presented in the tables above are related to our risk-sharing arrangements with Fannie Mae and Freddie Mac, as well as collateral pledged to a clearinghouse related to our interest rate agreements. In accordance with these arrangements,2020, we are required to pledge collateral to secure our guarantee obligations and to meethad met all margin requirements for our interest rate agreements. See Note 3 and Note 16 for additional information on our risk-sharing arrangements.
Contingent Consideration
The contingent consideration presented in the table above is related to our acquisition of 5 Arches in the first quarter of 2019. See Note 16 for additional information on our contingent consideration liabilities.
Lease Liability and Right-of-Use Asset
The lease liability and right-of-use asset presented in the tables above resulted from our adoption of ASU 2016-02, "Leases," in the first quarter of 2019. The lease liability is equal to the present value of our remaining lease payments discounted at our incremental borrowing rate and the right-of-use asset is equal to the lease liability adjusted for our deferred rent liability. These balances are reduced as lease payments are made. See Note 16 for additional information on leases.
Residential Bridge Loan Holdbacks
Residential bridge loan holdbacks represent loan amounts payable to residential bridge loan borrowers subject to the completion of various phases of property rehabilitation.
Investment Receivable
At September 30, 2019, investment receivable primarily consisted of unsettled trade receivables related to real estate securities sales. 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.calls due.
REO
The carrying value of REO at SeptemberJune 30, 20192020 was $5$10 million, which included $0.5 million of REO from our Legacy Sequoia entities, $5$2 million from our residential bridge loan portfolio, and $0.1$1 million of REO from our consolidated Legacy Sequoia entities, $1 million from our consolidated Freddie Mac SLST entities, and $5 million from consolidated CAFL entities. At June 30, 2020, there were 3 residential bridge loan REO assets, 5 REO assets at our Legacy Sequoia entities, 10 REO assets at our Freddie Mac SLST entities, and 4 REO assets at our CAFL entities recorded on our consolidated balance sheets. During the ninesix months ended SeptemberJune 30, 2019,2020, transfers into REO included $0.2a $2 million residential bridge loan, $1 million from Legacy Sequoia entities, a $5 million residential bridge loan, and $0.1$1 million from Freddie Mac SLST entities, and $6 million from CAFL entities. During the ninesix months ended SeptemberJune 30, 2019,2020, there were Legacy Sequoia REO liquidations of $5$8 million, resulting in $1 million of unrealized gainslosses which were recorded in Investment fair value changes, net, on our consolidated statements of income.income (loss). At September 30,December 31, 2019, there were 34 residential bridge loan REO propertiesassets, 4 REO assets at our Legacy Sequoia entities, 1 residential bridge loan3 REO property, and one REO propertyassets at our Freddie Mac SLST entities, and 2 REO assets at our CAFL entities recorded on our consolidated balance sheets. At December 31, 2018, there were 13 REO properties recorded, all of which were owned at consolidated Legacy Sequoia entities.
Legal and Repurchase Reserves
See Note 16 for additional information on the legal and residential repurchase reserves.
Payable to Minority Partner
In 2018, Redwood and a third-party co-investor, through 2 partnership entities consolidated by Redwood, purchased servicer advances and excess MSRs related to a portfolio of residential mortgage loans serviced by the co-investor (see Note 4 and Note 10 for additional information on the partnership entities and associated investments). We account for the co-investor’s interests in the entities as liabilities and at September 30, 2019, the carrying value of their interests was $19 million, representing their current economic interest in the entities. Earnings from the partnership entities are allocated to the co-investors on a proportional basis and during the three and nine months ended September 30, 2019, we allocated $0.4 million and $0.9 million of gains to the co-investors, respectively, which were recorded in Other income, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)


Note 13. Short-Term Debt
We enter into repurchase agreements, bank warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At SeptemberJune 30, 2019,2020, 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, 2018.
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 SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 13.1 – Short-Term Debt
 September 30, 2019June 30, 2020
(Dollars in Thousands) Number of Facilities Outstanding Balance Limit Weighted Average Interest Rate Maturity Weighted Average Days Until Maturity(Dollars in Thousands)Number of FacilitiesOutstanding BalanceLimitWeighted Average Interest RateMaturityWeighted Average Days Until Maturity
Facilities         Facilities
Residential loan warehouse (1)
 4
 $233,224
 $1,425,000
 3.51% 10/2019-3/2020 96
Residential loan warehouse (1)
3  $13,581  $700,000  3.14 %2/2021241
Business purpose residential loan warehouse (2)
Business purpose residential loan warehouse (2)
2  92,901  500,000  3.41 %6/2021-5/2022536
Real estate securities repo (1)
 9
 1,157,646
 —
 3.11% 10/2019-1/2020 28
Real estate securities repo (1)
4  311,888  —  4.21 %7/2020-11/202039
Single-family rental loan warehouse (2)
 2
 59,204
 400,000
 4.30% 6/2020-6/2021 358
Residential bridge loan warehouse (2)
 4
 138,988
 330,000
 4.54% 10/2019-5/2022 707
Business purpose loan working capital (2)
 1
 —
 15,000
 5.00% 12/2020 N/A
Total Short-Term Debt Facilities 20
 1,589,062
     Total Short-Term Debt Facilities9  418,370  
Servicer advance financing 1
 191,203
 350,000
 3.89% 11/2019 46Servicer advance financing1  244,437  400,000  1.99 %11/2020153
Convertible notes, net N/A
 200,552
 —
 5.63% 11/2019 60
Total Short-Term Debt 
 $1,980,817
     Total Short-Term Debt$662,807  
47

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)
Note 13. Short-Term Debt - (continued)


December 31, 2019
(Dollars in Thousands)Number of FacilitiesOutstanding BalanceLimitWeighted Average Interest RateMaturityWeighted Average Days Until Maturity
Facilities
Residential loan warehouse (1)
4  $185,894  $1,425,000  3.23 %1/2020-10/202069
Business purpose residential loan warehouse (2)
8  814,118  1,475,000  4.11 %12/2020-5/2022489
Real estate securities repo (1)
10  1,176,579  —  2.94 %1/2020-3/202023
Total Short-Term Debt Facilities22  2,176,591  
Servicer advance financing1  152,554  400,000  3.56 %11/2020335
Total Short-Term Debt$2,329,145  
  December 31, 2018
(Dollars in Thousands) Number of Facilities Outstanding Balance Limit Weighted Average Interest Rate Maturity Weighted Average Days Until Maturity
Facilities            
Residential loan warehouse (1)
 4
 $860,650
 $1,425,000
 4.10% 2/2019-12/2019 178
Real estate securities repo (1)
 9
 988,890
 —
 3.47% 1/2019-3/2019 26
Single-family rental loan warehouse (2)
 2
 22,053
 400,000
 4.77% 6/2020-6/2021 560
Residential bridge loan warehouse (2)
 2
 66,327
 80,000
 5.20% 11/2019-4/2021 629
Total Short-Term Debt Facilities 17
 1,937,920
        
Servicer advance financing 1
 262,740
 350,000
 4.32% 11/2019 333
Convertible notes, net N/A
 199,619
 
 5.63% 11/2019 319
Total Short-Term Debt   $2,400,279
        

(1)
(1)Borrowings under our facilities are generally charged interest based on a specified margin over the one-month LIBOR interest rate. At September 30, 2019, all of these borrowings were under uncommitted facilities and were due within 364 days (or less) of the borrowing date.
(2)Due to the revolving nature of the borrowings under these facilities, we have classified these facilities as short-term debt at September 30, 2019. Borrowings under these facilities will be repaid as the underlying loans mature or are sold to third parties or transferred to securitizations.
At SeptemberJune 30, 20192020 and December 31, 2018,2019, all of these borrowings were under uncommitted facilities and were due within 364 days (or less) of the fairborrowing date.
(2)Due to the revolving nature of the borrowings under these facilities, we have classified these facilities as short-term debt at June 30, 2020. Borrowings under these facilities will be repaid as the underlying loans mature or are sold to third parties or transferred to securitizations.
The following table below presents the value of held-for-sale residential loans, securities, and other assets pledged as collateral under our short-term debt facilities was $253 millionat June 30, 2020 and $935 million, respectively. At September 30, 2019,December 31, 2019.
Table 13.2 – Collateral for Short-Term Debt Facilities
(In Thousands)June 30, 2020December 31, 2019
Collateral Type
Held-for-sale residential loans$15,241  $201,949  
Business purpose residential loans116,701  988,179  
Real estate securities
On balance sheet24,442  618,881  
Sequoia Choice securitizations (1)
59,543  111,341  
Freddie Mac SLST securitizations (1)
334,043  381,640  
Freddie Mac K-Series securitizations (1)
24,384  252,284  
CAFL securitizations (1)
—  127,840  
Total real estate securities owned
442,412  1,491,986  
Other assets (2)
2,696  16,252  
Total Collateral for Short-Term Debt Facilities$577,050  $2,698,366  
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the fair value of real estateloans and non-recourse ABS debt issued from these securitizations.
(2)In addition to securities pledgedthat serve as collateral underfor our short-term debt facilities was $736 million, and also included $113securities repo borrowings, we had posted $3 million of securities retained fromcash collateral as margin with our consolidated Sequoia Choice securitizations as well as $385 million and $209 million of securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-series securitizations, respectively. At December 31, 2018, the fair value of real estate securities pledged as collateral under our short-term debt facilities was $844 million, and also included $130 million of securities retained from our consolidated Sequoia Choice securitizations as well as $229 million and $18 million of securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-series securitizations, respectively. The fair value of single-family rental and residential bridge loans pledged as collateral under our warehouse facilities was $78 million and $176 million, respectively, at September 30, 2019 and $28 million and $98 million, respectively, at December 31, 2018.borrowing counterparties.
For the three and ninesix months ended SeptemberJune 30, 2019,2020, the average balances of our short-term debt facilities were $1.97$1.30 billion and $1.81$1.97 billion, respectively. At SeptemberJune 30, 20192020 and December 31, 2018,2019, accrued interest payable on our short-term debt facilities was $3 million and $4$6 million, respectively.
48

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 13. 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 SeptemberJune 30, 2019,2020, the fair value of servicer advances, cash and restricted cash collateralizing the securitization financing was $243$283 million. At SeptemberJune 30, 2019,2020, the accrued interest payable balance on this financing was $0.2$0.1 million and the unamortized capitalized commitment costs were $0.4$1 million.
During the fourth quarter of 2018, $201 million principal amount of 5.625% exchangeable senior notes 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 November 2018. At September 30, 2019, the accrued interest payable balance on this debt was $4 million. See Note 15 for additional information on our convertible 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 $3 million at SeptemberJune 30, 2019.2020. At both SeptemberJune 30, 20192020 and December 31, 2018,2019, we had 0 outstanding borrowings on this facility.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Note 13. Short-Term Debt - (continued)


Remaining Maturities of Short-Term Debt
The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt as well as our convertible notes at SeptemberJune 30, 2019.2020.
Table 13.213.3 – Short-Term Debt by Collateral Type and Remaining Maturities
  September 30, 2019
(In Thousands) Within 30 days 31 to 90 days Over 90 days Total
Collateral Type        
Held-for-sale residential loans $31,031
 $108,316
 $93,877
 $233,224
Real estate securities 834,748
 293,108
 29,790
 1,157,646
Single-family rental loans —
 —
 59,204
 59,204
Residential bridge loans —
 —
 138,988
 138,988
Total Secured Short-Term Debt 865,779
 401,424
 321,859
 1,589,062
Servicer advance financing —
 191,203
 —
 191,203
Convertible notes, net —
 200,552
 —
 200,552
Total Short-Term Debt $865,779
 $793,179
 $321,859
 $1,980,817

June 30, 2020
(In Thousands)Within 30 days31 to 90 daysOver 90 daysTotal
Collateral Type
Held-for-sale residential loans$—  $—  $13,581  $13,581  
Business purpose residential loans—  —  92,901  92,901  
Real estate securities150,774  140,682  20,432  311,888  
Total Secured Short-Term Debt150,774  140,682  126,914  418,370  
Servicer advance financing—  —  244,437  244,437  
Total Short-Term Debt$150,774  $140,682  $371,351  $662,807  
Note 14. Asset-Backed Securities Issued
Through our Sequoia securitization program, we sponsor securitization transactions in which securities backed by residential mortgage loans (ABS) are issued by Sequoia entities. We consolidated the Legacy Sequoia and Sequoia Choice securitization entities, and beginning in 2018, certain third-party Freddie Mac K-Series and SLST securitization entities, that we determined were VIEs and for which we determined we were the primary beneficiary. Each consolidated securitization entity is independentThe carrying values 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 result of our having sold assets directly or indirectly to these entities.
We account for the ABS issued under our consolidated entities at fair value, with periodic changes in fair value recorded in Investment fair value changes, net on our consolidated statements of income. Pursuant to the CFE guidelines, the market valuation changes on our loans are based on the estimated fair value of the associated ABS issued. The net impact to our income statement associated with our retained economic investment in each of these securitization entities is presented in Note 5.
The ABS issued by theseour consolidated securitization entities consist of various classes of securities that pay interest on a monthly basis. All ABS issued byat June 30, 2020 and December 31, 2019, along with other selected information, are summarized in the Sequoia Choice and Freddie Mac K-Series, and Freddie Mac SLST entities pay fixed rates 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. ABS issued also includes some interest-only classes with coupons set at a fixed spread to a benchmark 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.following table.
Table 14.1 – Asset-Backed Securities Issued
June 30, 2020Legacy
Sequoia		Sequoia
Choice		Freddie Mac SLSTFreddie Mac
K-Series		CAFLTotal
(Dollars in Thousands)
Certificates with principal balance$378,087  $1,793,901  $1,765,505  $418,212  $2,323,475  $6,679,180  
Interest-only certificates1,410  9,005  24,434  13,874  95,324  144,047  
Market valuation adjustments(79,140) 58,871  22,069  32,605  (1,546) 32,859  
ABS Issued, Net$300,357  $1,861,777  $1,812,008  $464,691  $2,417,253  $6,856,086  
Range of weighted average interest rates, by series0.39% to 2.60%2.22% to 5.04%3.50 %3.39 %3.19% to 5.18%
Stated maturities2024 - 20362047 - 20502028 - 202920252022 - 2048
Number of series20  10  2  1  12  
49

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

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

The carrying values of ABS issued by Sequoia securitization entities we sponsored at September 30, 2019 and December 31, 2018, along with other selected information, are summarized in the following table.

December 31, 2019Legacy
Sequoia		Sequoia
Choice		Freddie Mac SLSTFreddie Mac K-SeriesCAFLTotal
(Dollars in Thousands)
Certificates with principal balance$420,056  $1,979,719  $1,842,682  $3,844,789  $1,875,007  $9,962,253  
Interest-only certificates1,282  16,514  30,291  217,891  90,134  356,112  
Market valuation adjustments(18,873) 40,965  45,349  93,559  36,110  197,110  
ABS Issued, Net$402,465  $2,037,198  $1,918,322  $4,156,239  $2,001,251  $10,515,475  
Range of weighted average interest rates, by series1.94% to 3.26%4.40% to 5.05%3.50 %3.35% to 4.35%3.25% to 5.36%
Stated maturities2024 - 20362047 - 20492028 - 20292025 - 20492022 - 2048
Number of series20  9  2  5  10  
Table 14.1 – Asset-Backed Securities Issued
September 30, 2019 
Legacy
Sequoia
 Sequoia
Choice		 Freddie Mac SLST 
Freddie Mac
K-Series
 Total
(Dollars in Thousands)     
Certificates with principal balance $437,793
 $2,285,479
 $1,885,106
 $3,239,009
 $7,847,387
Interest-only certificates 1,486
 16,619
 28,758
 202,730
 249,593
Market valuation adjustments (19,389) 59,013
 73,609
 135,838
 249,071
ABS Issued, Net $419,890
 $2,361,111
 $1,987,473
 $3,577,577
 $8,346,051
Range of weighted average interest rates, by series 2.22% to 3.49%
 4.41% to 5.06%
 3.50% 3.39% to 4.20%
  
Stated maturities 2024 - 2036
 2047 - 2049
 2028 - 2029
 2025 - 2049
  
Number of series 20
 9
 2
 4
  

December 31, 2018 
Legacy
Sequoia
 Sequoia
Choice		 Freddie Mac SLST 
Freddie Mac
K-Series
 Total
(Dollars in Thousands)     
Certificates with principal balance $540,456
 $1,838,758
 $993,659
 $1,936,691
 $5,309,564
Interest-only certificates 1,537
 25,662
 —
 131,600
 158,799
Market valuation adjustments (29,753) 20,590
 89
 (49,216) (58,290)
ABS Issued, Net $512,240
 $1,885,010
 $993,748
 $2,019,075
 $5,410,073
Range of weighted average interest rates, by series 1.36% to 3.60%
 4.46% to 4.97%
 3.51% 3.39% to 4.08%
  
Stated maturities 2024 - 2036
 2047 - 2048
 2028
 2025 - 2049
  
Number of series 20
 6
 1
 3
  

The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than its stated maturity. At SeptemberJune 30, 2019, all2020, the majority of the ABS issued and outstanding had contractual maturities beyond five years. See Note 4 for detail on the carrying value components of the collateral for ABS issued and outstanding. The following table summarizes the accrued interest payable on ABS issued at SeptemberJune 30, 20192020 and December 31, 2018.2019. Interest due on consolidated ABS issued is payable monthly.
Table 14.2 – Accrued Interest Payable on Asset-Backed Securities Issued
(In Thousands) September 30, 2019 December 31, 2018
Legacy Sequoia $456
 $571
Sequoia Choice 8,949
 7,180
Freddie Mac SLST 5,498
 2,907
Freddie Mac K-Series 10,805
 6,239
Total Accrued Interest Payable on ABS Issued $25,708
 $16,897

(In Thousands)June 30, 2020December 31, 2019
Legacy Sequoia$230  $395  
Sequoia Choice6,474  7,732  
Freddie Mac SLST5,149  5,374  
Freddie Mac K-Series1,182  12,887  
CAFL8,300  7,298  
Total Accrued Interest Payable on ABS Issued$21,335  $33,686  

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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

The following table summarizes the carrying value components of the collateral for ABS issued and outstanding at September 30, 2019 and December 31, 2018.
Table 14.3 – Collateral for Asset-Backed Securities Issued
September 30, 2019 
Legacy
Sequoia
 
Sequoia
Choice
 Freddie Mac SLST 
Freddie Mac
K-Series
 Total
(In Thousands)     
Residential loans $429,159
 $2,618,316
 $2,441,223
 $—
 $5,488,698
Multifamily loans —
 —
 —
 3,791,622
 3,791,622
Restricted cash 143
 15
 —
 —
 158
Accrued interest receivable 716
 10,806
 7,215
 11,300
 30,037
REO 460
 —
 84
 —
 544
Total Collateral for ABS Issued $430,478
 $2,629,137
 $2,448,522
 $3,802,922
 $9,311,059
December 31, 2018 
Legacy
Sequoia
 Sequoia
Choice		 Freddie Mac SLST 
Freddie Mac
K-Series
 Total
(In Thousands)     
Residential loans $519,958
 $2,079,382
 $1,222,669
 $—
 $3,822,009
Multifamily loans —
 —
 —
 2,144,598
 2,144,598
Restricted cash 146
 1,022
 —
 —
 1,168
Accrued interest receivable 822
 8,988
 3,926
 6,595
 20,331
REO 3,943
 —
 —
 —
 3,943
Total Collateral for ABS Issued $524,869
 $2,089,392
 $1,226,595
 $2,151,193
 $5,992,049

Note 15. Long-Term Debt

Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for a full description of our long-term debt.
FHLBC Borrowings

In July 2014,At June 30, 2020, $1 million of advances were outstanding under our FHLB-member subsidiary entered into aFHLBC borrowing agreement, with the Federal Home Loan Banka weighted average interest rate of Chicago.0.38%. These borrowings mature in 2026. At September 30, 2019, 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, 2019, our FHLB-member subsidiary made 0 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,December 31, 2019, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 2.31%1.88% and a weighted average maturity of approximately six years. At December 31, 2018,During the three and six months ended June 30, 2020, we repaid $1.37 billion and $2.00 billion, respectively, of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 2.52% and a weighted average maturity of seven 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.our FHLBC borrowings. At SeptemberJune 30, 2019,2020, total advances under this agreement were secured by residential mortgage loans with a fair value of $2.27 billion, securities with a fair value of $41 million, and $77$1 million of restricted cash. We do not expect to increase borrowings under our FHLBC borrowing agreement above the existing $1 million of advances outstanding. 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 SeptemberJune 30, 2019,2020, our subsidiary held $43$5 million of FHLBC stock that is included in Other assets in our consolidated balance sheets.
50

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)
Note 15. Long-Term Debt - (continued)


The following table presents maturities of our FHLBC borrowings by year at September 30, 2019.
Table 15.1 – Maturities of FHLBC Borrowings by Year
(In Thousands) September 30, 2019
2024 $470,171
2025 887,639
2026 642,189
Total FHLBC Borrowings $1,999,999

For additional information about our FHLBC borrowings, see Part I, Item 2 of Quarterly Report on Form 10-Q under the heading “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities.”
Recourse Subordinate Securities Financing FacilityFacilities
In September 2019, a subsidiary of Redwood entered into a repurchase agreement providing non-mark-to-marketnon-marginable (e.g., not subject to margin calls due to collateral value changes) recourse debt financing.financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia Choice securitizations. The financing is fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through September 2022. The financing facility may be terminated, at our option, in September 2022, and has a final maturity in September 2024, provided that the interest rate on amounts outstanding under the facility increases between October 2022 and September 2024. At SeptemberJune 30, 2019,2020, we had borrowings under this facility totaling $186$182 million net ofand $1 million of unamortized deferred issuance costs, for a net carrying value of $185$181 million. At SeptemberJune 30, 2019,2020, the fair value of real estate securities pledged as collateral under this long-term debt facility was $253$223 million whichand included $126 millionSequoia securities and securities retained from our Sequoia Choice securitizations.
In the first quarter of 2020, a subsidiary of Redwood entered into a second repurchase agreement with similar terms to provide non-marginable recourse debt financing of certain securities retained from our consolidated Sequoia ChoiceCAFL securitizations. This facilityThe financing is included in Long-term debt, net on our consolidated balance sheets at September 30, 2019.
Convertible Notes
In September 2019, RWT Holdings, Inc., a wholly-owned subsidiary offully and unconditionally guaranteed by Redwood, Trust, Inc., issued $201 million principal amount of 5.75% exchangeable senior notes due 2025. These exchangeable notes require semi-annualwith an interest payments at a fixed coupon rate of 5.75% untilapproximately 4.21% through February 2023. The financing facility may be terminated, at our option, in February 2023, and has a final maturity or exchange, which will be no later than October 1,in February 2025, provided that the interest rate on amounts outstanding under the facility increases between March 2023 and February 2025. After deducting the underwriting discount and offering costs,At June 30, 2020, we received $195 million of net proceeds. Including amortization of deferred debt issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. At September 30, 2019, these notes were exchangeable at the option of the holder at an exchange rate of 55.1967 common shares per $1,000 principal amount of exchangeable senior notes (equivalent to an exchange price of $18.12 per common share). Upon exchange of these notes by a holder, the holder will receive shares of our common stock. At September 30, 2019, the outstanding principal amount of these notes was $201 million. At September 30, 2019, the accrued interest payable balance onhad borrowings under this debt was $0.2facility totaling $103 million and the$1 million of unamortized deferred issuance costs, were $6for a net carrying value of $103 million. At June 30, 2020, the fair value of real estate securities pledged as collateral under this long-term debt facility was $110 million and included securities retained from our consolidated CAFL securitizations.
Non-Recourse Business Purpose Loan Financing Facility
In June 2018, we issued $200 million principal amountthe second quarter of 5.625% convertible senior notes due 2024 at an issuance price2020, a subsidiary of 99.5%. These convertible notes require semi-annualRedwood entered into a repurchase agreement providing non-marginable, non-recourse financing primarily for business purpose bridge loans. Borrowings under this facility accrue interest payments at a fixed couponper annum rate equal to one-month LIBOR plus 7.50% (with a 1.50% LIBOR floor), through June 2022 (facility is fully callable in June 2021). This facility has an aggregate maximum borrowing capacity of 5.625% until maturity or conversion,$530 million, which will be no later than July 15, 2024. After deducting the issuance discount, the underwriting discount and offering costs, we received $194 millionconsists of net proceeds. Including amortizationa term facility of deferred debt issuance costs and the debt discount, the weighted average interest expense yield on these convertible notes is approximately 6.2% per annum. These notes are convertible at the option of the holder at a conversion rate of 54.7645 common shares per $1,000 principal amount of convertible senior notes (equivalent to a conversion price of $18.26 per common share). Upon conversion of these notes by a holder, the holder will receive shares of our common stock. At September 30, 2019, the outstanding principal amount of these notes was $200$355 million and a revolving facility of $175 million. The revolving period ends in June 2021, and amounts borrowed under the accrued interest payable onterm and revolving facilities are due in full in June 2022. At June 30, 2020, we had borrowings under this debt was $2 million. At September 30, 2019, thefacility totaling $355 million and $6 million of unamortized deferred issuance costs, for a net carrying value of $350 million. At June 30, 2020, $442 million of bridge loans and debt discount$8 million of other BPL investments were $4pledged as collateral under this facility.
Recourse Business Purpose Loan Financing Facility
In the second quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable financing for business purpose bridge loans and single-family rental loans. Borrowings under this facility accrue interest at a per annum rate equal to three-month LIBOR plus 3.50% to 4.50% (with a 1.00% LIBOR floor) through May 2022 and are recourse to Redwood. This facility has an aggregate maximum borrowing capacity of $500 million. At June 30, 2020, we had borrowings under this facility totaling $436 million and $1 million respectively.of unamortized deferred issuance costs, for a net carrying value of $435 million. At June 30, 2020, $280 million of bridge loans and $302 million of single-family rental loans were pledged as collateral under this facility.
Recourse Revolving Debt Facility
In the first quarter of 2020, a subsidiary of Redwood entered into a secured revolving debt facility agreement collateralized by MSRs and certificated mortgage servicing rights. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 2.75% through January 2021, with an increase in rate between February 2021 and the maturity of the facility in January 2022. This facility has an aggregate maximum borrowing capacity of $50 million. Borrowings under this facility totaled $20 million at June 30, 2020. At June 30, 2020, $40 million of MSRs and certificated servicing rights were pledged as collateral under this facility.

51

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)
Note 15. Long-Term Debt - (continued)


Convertible Notes
In August 2017,At June 30, 2020, we issued $245had $172 million principal amount outstanding of 4.75% convertible senior notes due 2023. These convertible notes require semi-annual interest payments at a fixed coupon rate of 4.75% until maturity or conversion, which will be no later than August 15, 2023. After deducting the underwriting discount and offering costs, we received $238 million of net proceeds. Including amortization of deferred debt issuance costs, the weighted average interest expense yield on these convertible notes is approximately 5.3% per annum. At September 30, 2019, these notes were convertible at the option of the holder at a conversion rate of 53.9060 common shares per $1,000 principal amount of convertible senior notes (equivalent to a conversion price of $18.55 per common share). Upon conversion of these notes by a holder, the holder will receive shares of our common stock. At September 30, 2019, the outstanding principal amount of these notes was $245 million. At September 30, 2019, the accrued interest payable balance on this debt was $1 million and the unamortized deferred issuance costs were $5 million.
In November 2014, RWT Holdings, Inc., a wholly-owned subsidiary of Redwood Trust, Inc., issued $205 million principal amount of 5.625%5.75% exchangeable senior notes due 2019. These exchangeable notes require semi-annual interest payments at a fixed coupon rate2025. During the second quarter of 5.625% until maturity or exchange, which will be no later than November 15, 2019. After deducting the underwriting discount and offering costs, we received $198 million of net proceeds. Including amortization of deferred debt issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. At September 30, 2019, these notes were exchangeable at the option of the holder at an exchange rate of 46.2370 common shares per $1,000 principal amount of exchangeable senior notes (equivalent to an exchange price of $21.63 per common share). Upon exchange of these notes by a holder, the holder will receive shares of our common stock. During 2016,2020, we repurchased $4$29 million par value of these notes at a discount and recorded a gain on extinguishment of debt of $0.3$6 million in Realized gains, net on our consolidated statements of income. Additionally, duringincome (loss). At June 30, 2020, the fourth quarter of 2018, $201accrued interest payable balance on this debt was $2 million principal amount of these notes and $1 million ofthe unamortized deferred issuance costs were reclassified from long-term debt to short-term debt as$5 million.
At June 30, 2020, we had $150 million principal amount outstanding of 5.625% convertible senior notes due 2024. During the maturitysecond quarter of the notes was less than one year as of November 2018. At September 30, 2019, the outstanding principal amount2020, we repurchased $50 million par value of these notes at a discount and recorded a gain on extinguishment of $9 million in Realized gains, net on our consolidated statements of income (loss). At June 30, 2020, the accrued interest payable on this debt was $201$4 million, the unamortized deferred issuance costs were $3 million, and the debt discount was $1 million.
At SeptemberJune 30, 2019,2020, we had $199 million principal amount outstanding of 4.75% convertible senior notes due 2023. During the second quarter of 2020, we repurchased $46 million par value of these notes at a discount and recorded a gain on extinguishment of $10 million in Realized gains, net on our consolidated statements of income (loss). At June 30, 2020, the accrued interest payable balance on this debt was $4 million and the unamortized deferred issuance costs were $0.2$3 million.
Trust Preferred Securities and Subordinated Notes
At SeptemberJune 30, 2019,2020, 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 debt issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.9% per annum. At both SeptemberJune 30, 20192020 and December 31, 2018,2019, 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 16. Commitments and Contingencies
Lease Commitments
At SeptemberJune 30, 2019,2020, we were obligated under 57 non-cancelable operating leases with expiration dates through 20282031 for $15$21 million of cumulative lease payments. Our principal executive and administrative office is located in Mill Valley, California and we have several additional offices, as disclosed in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2018. Additionally, with our acquisition of 5 Arches in the first quarter of 2019, we added an office located in Irvine, California. Our operating lease expense was $2 million and $1 million for both nine-month periodsthe six months ended SeptemberJune 30, 2020 and 2019, and 2018.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Note 16. Commitments and Contingencies - (continued)


respectively.
The following table presents our future lease commitments and a reconciliation to our lease liability at SeptemberJune 30, 2019.2020.
Table 16.1 – Future Lease Commitments by Year
(In Thousands) September 30, 2019
2019 (3 months) $688
2020 2,721
2021 1,864
2022 1,468
2023 and thereafter 8,749
Total Lease Commitments 15,490
Less: Imputed interest (2,920)
Lease Liability $12,570

(In Thousands)June 30, 2020
2020 (6 months)$1,860  
20213,104  
20222,597  
20232,087  
20242,095  
20259,214  
Total Lease Commitments20,957  
Less: Imputed interest(3,609) 
Lease Liability$17,348  
During the first quarter of 2019,six months ended June 30, 2020, we adopted ASU 2016-02, "Leases," which required us to recognize a lease liabilityentered into 3 new office leases and determined that was equal to the present value of our remaining lease payments of $15 million discounted at various incremental borrowing rates, and a right-of-use asset, which was equal to our lease liability adjusted for our deferred rent liability. We elected to apply the new guidance using the optional transition method, which permits lessees to measure the lease liability and right-of-use asset at January 1, 2019, without adjusting the comparative periods presented. We elected the package of practical expedients under the transition guidance within this standard, which allowed us to carry forward the classifications of each of our 4 existingthese leases qualified as operating leases and to continue to expense lease payments on a straight-line basis. As 1 of our operating leases qualifies for the short-term lease exception under this guidance, we will continue to account for this lease under legacy GAAP and did not include this lease in our calculation of the lease liability and right-of-use asset.leases. At SeptemberJune 30, 2019,2020, our lease liability was $13$17 million, which was a component of Accrued expenses and other liabilities, and our right-of-use asset was $11$16 million, which was a component of Other assets.assets.
52

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 16. Commitments and Contingencies - (continued)
We determined that the 4 remainingnone of our leases did not containcontained 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 SeptemberJune 30, 2019,2020, the weighted-average remaining lease term and weighted-average discount rate for our leases was 8 years and 5.3%5.0%, respectively.
Commitment to Fund Residential Bridge Loans
As of SeptemberJune 30, 2019,2020, we had commitments to fund $67up to $167 million of additional advances on existing residential bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the customer and other terms regarding advances that must be met before we fund the commitment. At June 30, 2020, we recorded a $2 million derivative liability related to these commitments to fund construction advances (see Note 7 for additional detail). We may also advance funds related to loans sold under a separate loan sale agreement that are generally repaid immediately by the loan purchaser and do not generally expose us to loss (outstandingloss. The outstanding commitments related to these loans that we may temporarily fund totaled approximately $65$20 million at SeptemberJune 30, 2019).2020.
Commitment to Fund Partnerships
In the fourth quarter of 2018, we invested in 2 partnerships created to acquire and manage certain mortgage servicing related assets (see Note 10 for additional detail). In connection with this investment, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Note 16. Commitments and Contingencies - (continued)


In the first quarter of 2019, we invested in a partnership created to acquire floating rate, light-renovation multifamily loans from Freddie Mac (see Note 10 for additional detail). At SeptemberJune 30, 2019,2020, we had an outstanding commitment to fund an additional $49$8 million to the partnership. Additionally, in connection with this transaction, we have made a guarantee to Freddie Mac in the event of losses incurred on the loans that exceed the equity available in the partnership to absorb such losses. At SeptemberJune 30, 2019,2020, the carrying value of this guarantee was $0.1 million. We believe the likelihood of performance under the guarantee is remote. Our maximum loss exposure from this guarantee arrangement is $135 million.million less the value of securities collateralizing our partner's portion of the partnership's guarantee obligations.
5 Arches Contingent Consideration
As part of the consideration for our acquisition of 5 Arches, we arewere committed to make earn-out payments up to $27$29 million, payable in a mix of cash and Redwood common stock, which will be calculated following each of the first two anniversaries of the option closing date based on loan origination volumes exceeding certain specified thresholds.stock. These contingent earn-out payments arewere classified as a contingent consideration liability and carried at fair value. At September 30, 2019, our estimated fair value prior to March 31, 2020. During the first quarter of this2020, we made a cash payment of $11 million and granted $3 million of Redwood common stock in connection with the first anniversary of the purchase date. Additionally, as a result of an amendment to the agreement, we reclassified the contingent liability was $25 million. Forto a deferred liability, as the three and nine months ended Septemberremaining payments became payable on a set timetable without any remaining contingencies. At June 30, 2019, we recorded contingent consideration expense of $0.2 million and $0.5 million, respectively, related to our valuation2020, the balance of this liability through Other income, net, on our consolidated statementswas $15 million, which will be paid in a mix of income.cash and common stock in March 2021.
Commitment to Fund Shared Home Appreciation Options
In the third quarter of 2019, we entered into a flow purchase agreement to acquire shared home appreciation options. The counterparty purchases an option to buy a fractional interest in a homeowner's ownership interest in his or her realresidential property, and subsequently the counterparty sells the option contract to us. Pursuant to the terms of the option contract, we are able to share in both home price appreciation and depreciation. At SeptemberJune 30, 2019,2020, we had acquired $11$47 million of shared home appreciation options under this agreement, which are included in Other Investmentsinvestments on our consolidated balance sheets. At SeptemberJune 30, 2019,2020, we had an outstanding commitment to fund up to an additional $39$3 million under this agreement.
Commitment to Participate in Loan Warehouse Facility
53
In the second quarter of 2018, we invested in a participation in the mortgage loan warehouse credit facility of one of our loan sellers. This investment included a commitment to participate in (and an obligation to fund) a designated amount of the loan seller's borrowings under this warehouse credit facility. Our commitment to participate in this facility was terminated in the first quarter of 2019. See
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 10 for additional detail on our participation in a loan warehouse facility.16. Commitments and Contingencies - (continued)
Loss Contingencies — Risk-Sharing
During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At SeptemberJune 30, 2019,2020, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was fully 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 SeptemberJune 30, 2019,2020, we had not incurred any losses under these arrangements. For the three and ninesix months ended SeptemberJune 30, 2019,2020, other income related to these arrangements was $1 million and $2 million, respectively, and net market valuation losses related to these investments were $0.1$0.2 million and $0.2$0.7 million, respectively. For the three and ninesix months ended SeptemberJune 30, 2018,2019, other income related to these arrangements was $1 million and $3 million, respectively,for both periods, and net market valuation losses related to these investments were $0.1 million and $0.5 million, respectively.for both periods.
All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at SeptemberJune 30, 2019,2020, the loans had an unpaid principal balance of $1.66$1.30 billion and a weighted average FICO score of 759758 (at origination) and LTV ratio of 76% (at origination). At SeptemberJune 30, 2019, $72020, $17 million of the loans were 90 days or more delinquent, and 0ne of which $2 millionthese loans were in foreclosure. At SeptemberJune 30, 2019,2020, the carrying value of our guarantee obligation was $15$12 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Note 16. Commitments and Contingencies - (continued)


Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to Redwood Trust, Inc. or its affiliates. At SeptemberJune 30, 20192020 and December 31, 2018,2019, assets of such SPEs totaled $48$47 million and $47$48 million, respectively, and liabilities of such SPEs totaled $15$12 million and $17$14 million, respectively.
Loss Contingencies — Residential Repurchase Reserve
We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential loans we have sold to securitization trusts or third parties and for conforming residential loans associated with MSRs that we have purchased from third parties. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation. Additionally, for certain loans we sold during the second quarter of 2020 that were previously held for investment, we have a direct obligation to repurchase these loans in the event of any early payment defaults (or EPDs) by the underlying mortgage borrowers within certain specified periods following the sales.
At both SeptemberJune 30, 20192020 and December 31, 2018,2019, our repurchase reserve associated with our residential loans and MSRs was $8 million and $4 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. The increase in the repurchase reserve during the second quarter of 2020 was related to potential repurchase obligations related to EPDs arising from loans we sold during the last several months.
We received 105 and 7 repurchase requests during the ninesix months ended SeptemberJune 30, 2020 and 2019, respectively, and did 0t repurchase any loans during this period.either of these periods. During both the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, we recorded repurchase provisions of $4 million and reversals of repurchase provisions of $0.2$0.4 million, respectively, that were recorded in Mortgage banking activities, net and Other income net on our consolidated statements of income.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,year ended December 31, 2019 under the “FHLB-Seattle Defendants”), which alleged thatheading “Loss Contingencies - Litigation.” At June 30, 2020, 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. The Seattle Certificate was issued with an original principalaggregate amount of approximately $133 million, and, at September 30, 2019, approximately $128 million of principal and $12 million of interest payments had been madeloss contingency reserves established in respect of the Seattle Certificate. The matter was subsequently resolvedFHLB-Seattle 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 defendantsSchwab litigation matters described 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 Courtour Annual Report on Form 10-K for the State of California in San Francisco (case number CGC-10-501610) against SRF and 26 other defendants (collectively, the “Schwab Defendants”), which alleged 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. The Schwab Certificateyear ended December 31, 2019 was issued with an original principal amount of approximately $15 million, and, at September 30, 2019, approximately $14 million of principal and $1 million of interest payments had 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.$2 million.
54

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)
Note 16. Commitments and Contingencies - (continued)


ThroughIn addition to those matters, as previously disclosed, in connection with the impact of the effects of the pandemic on the non-Agency mortgage finance market and on our business and operations, a small number of the counterparties that have regularly sold residential mortgage loans to us believe that we breached perceived obligations to them, and requested or demanded that we purchase loans from them and/or compensate them for perceived damages resulting from our decisions earlier in 2020 not to purchase certain loans from them (“Residential Loan Seller Demands”). As previously disclosed, one such counterparty filed a breach of contract lawsuit against us alleging that it has suffered in excess of $2 million of losses as a result of our wholly-owned subsidiaries,alleged failure to purchase residential mortgage loans from it.
We believe that these Residential Loan Seller Demands are without merit or subject to defenses and we intend to defend vigorously any such allegations and any related demand or claim to which we are or become a party. Despite our beliefs about the legal merits of these allegations, because our ordinary course of business is to seek to continue to regularly engage in mutually beneficial transactions with these counterparties, in some cases we have been willing to engage in discussions with these counterparties with the past engaged in,intention of reaching resolution and expectstructuring arrangements that incentivize both the counterparty and us to continue to engage in activities relatingresidential loan purchase and sale transactions in the future.
With respect to certain of the Residential Loan Seller Demands, these resolution discussions have been successful in resolving, or establishing a framework that we believe will be the basis for successfully resolving, the demands of these counterparties, including through forward-looking joint business undertakings and structured arrangements that incentivize both the counterparty and us to continue to engage in residential loan purchase and sale transactions in the future. With respect to these counterparties, we have incurred or expect to incur certain costs in connection with finalizing these arrangements (including costs that are contingent on the successful completion of future residential loan purchase and sale transactions with these counterparties that we expect to generate future revenue for the Company) and have recorded any such actual costs incurred through June 30, 2020, as well as an accrual for the estimated costs associated with counterparties where a go-forward framework has been discussed but not finalized, through Mortgage Banking Activities, net in our Residential Lending segment. In accordance with GAAP, the accrual for estimated costs is based on the opinion of management, that it is probable that these forward-looking joint business undertakings and structured arrangements will result in an expense and the amount of expense can be reasonably estimated. At June 30, 2020, the aggregate amount of these actual costs, together with the accrual for estimated costs, was $5 million, a significant portion of which would be contingent on the successful completion of future residential loan purchase and sale transactions with these counterparties, with the expectation of generating future revenue for the Company.
With respect to the acquisitionremaining Residential Loan Seller Demands, our beliefs about the legal merits of these allegations and securitizationour discussions with these counterparties have resulted in us determining that a significant loss from these matters is not probable. With respect to these remaining Residential Loan Seller Demands, based on the foregoing, we have concluded that we can estimate an aggregate range of residential mortgage loans. In addition, certainreasonably possible losses with respect to these Residential Loan Seller Demands of our wholly-owned subsidiaries have in the past engaged in activities relating to the acquisitionbetween 0 and securitization$1.5 million.
Future developments (including receipt of debt obligationsadditional information 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 litigationdocuments relating to these businesses, includingmatters, new or additional litigation of the type described above, and we could also become the subject of governmental investigations, enforcement actions,resolution 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 were the subject of the complaint, two were Sequoia mortgage pass-through certificates issued in 2004 and two were 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. The plaintiffs subsequently withdrew from the litigation their claims based on eight of the 28 mortgage pass-through certificates, including one of the Sequoia mortgage pass-through certificates issued in 2004. We believe this matter was subsequently resolved and the plaintiffs withdrew their remaining claims. At the time these 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 themsettlement communications relating to these certificates,matters, resolutions of similar claims against other industry participants in similar circumstances, or receipt of additional Residential Loan Seller Demands) could result in our concluding in the future to establish additional accruals or reserves or modify our aggregate range of reasonably possible losses with respect to these Residential Loan Seller Demand matters. Our actual losses, and any accruals or reserves we may establish in the future relating to these matters, may be materially higher than the accruals, reserves and the aggregate range of reasonably possible losses we have estimated above, respectively, including without limitation,in the event that any of these matters proceed to trial and result in a judgment against us. We cannot be certain legal expenses. Regardlessthat any of these matters that are not already formally resolved will be resolved through a resolution or settlement prior to trial and we cannot be certain that the resolution of this litigation, we could incurthese matters, whether through trial, settlement, or otherwise, will not have a loss as a resultmaterial adverse effect on our financial condition or results of these indemnities.operations in any future period.
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, 2019, 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.
55

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 16. Commitments and Contingencies - (continued)
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-referencedabove 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, 2019
(Unaudited)


Note 17. Equity
The following table provides a summary of changes to accumulated other comprehensive income by component for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. During the three and six months ended June 30, 2020, we recognized net unrealized gains (losses) on our Level 3 AFS securities which we owned as of June 30, 2020 of $52 million and negative $24 million, respectively.
Table 17.1 – Changes in Accumulated Other Comprehensive Income by Component
 Three Months Ended September 30, 2019 Three Months Ended September 30, 2018Three Months Ended June 30, 2020Three Months Ended June 30, 2019
(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)Net Unrealized Gains (Losses) on Available-for-Sale SecuritiesNet Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow HedgesNet Unrealized Gains on Available-for-Sale SecuritiesNet Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period $98,307
 $(49,384) $106,725
 $(31,105)Balance at beginning of period$(1,865) $(83,666) $92,567  $(39,883) 
Other comprehensive income (loss)
before reclassifications (1)
 4,484
 (11,791) (2,408) 4,801
Other comprehensive income (loss)
before reclassifications		Other comprehensive income (loss)
before reclassifications		52,393  —  8,562  (9,501) 
Amounts reclassified from other
accumulated comprehensive income
 (3,492) —
 (5,686) —
Amounts reclassified from other
accumulated comprehensive income		2,718  1,029  (2,822) —  
Net current-period other comprehensive income (loss) 992
 (11,791) (8,094) 4,801
Net current-period other comprehensive income (loss)55,111  1,029  5,740  (9,501) 
Balance at End of Period $99,299
 $(61,175) $98,631
 $(26,304)Balance at End of Period$53,246  $(82,637) $98,307  $(49,384) 
56
  Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
(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 $95,342
 $(34,045) $128,201
 $(42,953)
Other comprehensive income (loss)
before reclassifications (1)
 19,764
 (27,130) (9,749) 16,649
Amounts reclassified from other
accumulated comprehensive income		 (15,807) —
 (19,821) —
Net current-period other comprehensive income (loss) 3,957
 (27,130) (29,570) 16,649
Balance at End of Period $99,299
 $(61,175) $98,631
 $(26,304)
(1)Amounts presented for net unrealized gains on available-for-sale securities are net of tax benefit (provision) of 0 and $0.1 million for the three and nine months ended September 30, 2018, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)
Note 17. Equity - (continued)


Six Months Ended June 30, 2020Six Months Ended June 30, 2019
(In Thousands)Net Unrealized Gains on Available-for-Sale SecuritiesNet Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow HedgesNet Unrealized Gains on Available-for-Sale SecuritiesNet Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period$92,452  $(50,939) $95,342  $(34,045) 
Other comprehensive income (loss)
before reclassifications		(28,126) (32,806) 15,280  (15,339) 
Amounts reclassified from other
accumulated comprehensive income		(11,080) 1,108  (12,315) —  
Net current-period other comprehensive income (loss)(39,206) (31,698) 2,965  (15,339) 
Balance at End of Period$53,246  $(82,637) $98,307  $(49,384) 
The following table provides a summary of reclassifications out of accumulated other comprehensive income for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 17.2 – Reclassifications Out of Accumulated Other Comprehensive Income
    
 Amount Reclassified From Accumulated Other Comprehensive IncomeAmount Reclassified From
Accumulated Other Comprehensive Income
 Affected Line Item in the Three Months Ended September 30,Affected Line Item in theThree Months Ended June 30,
(In Thousands) Income Statement 2019 2018(In Thousands)Income Statement20202019
Net Realized (Gain) Loss on AFS Securities    Net Realized (Gain) Loss on AFS Securities
Other than temporary impairment (1)
 Investment fair value changes, net $—
 $33
Gain on sale of AFS securities Realized gains, net (3,492) (7,247)
Credit loss recovery on AFS securitiesCredit loss recovery on AFS securitiesInvestment fair value changes, net$(54) $—  
Gain on sale of AFS securities Provision for income taxes —
 1,528
Gain on sale of AFS securitiesRealized gains, net2,772  (2,822) 
 $(3,492) $(5,686)
$2,718  $(2,822) 
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 lossAmortization of deferred lossInterest expense$1,029  $—  
$1,029  $—  
Amount Reclassified From
Accumulated Other Comprehensive Income
Affected Line Item in theSix Months Ended June 30,
(In Thousands)Income Statement20202019
Net Realized (Gain) Loss on AFS Securities
Credit loss expense on AFS securitiesInvestment fair value changes, net$1,471  $—  
Gain on sale of AFS securitiesRealized gains, net(12,551) (12,315) 
$(11,080) $(12,315) 
Net Realized Loss on Interest Rate
Agreements Designated as Cash Flow Hedges
Amortization of deferred lossInterest expense$1,108  $—  
$1,108  $—  
57

    Amount Reclassified From Accumulated Other Comprehensive Income
  Affected Line Item in the Nine Months Ended September 30,
(In Thousands) Income Statement 2019 2018
Net Realized (Gain) Loss on AFS Securities      
Other than temporary impairment (1)
 Investment fair value changes, net $—
 $89
Gain on sale of AFS securities Realized gains, net (15,807) (21,438)
Gain on sale of AFS securities Provision for income taxes —
 1,528
    $(15,807) $(19,821)
(1)For both the three and nine months ended September 30, 2019, there were 0 other-than-temporary impairments. For the three months ended September 30, 2018, other-than-temporary impairments were $0.4 million, of which less than $0.1 million were recognized through our consolidated statements of income and $0.3 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet. For the nine months ended September 30, 2018, other-than-temporary impairments were $0.6 million, of which $0.1 million were recognized through our consolidated statements of income and $0.5 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
SeptemberJune 30, 20192020
(Unaudited)
Note 17. Equity - (continued)


Issuance of Common Stock
In 2018, we established a program to sell up to an aggregate of $150 million of common stock from time to time in at-the-market ("ATM") offerings. During the ninesix months ended SeptemberJune 30, 2019,2020, we issued 791,191129,500 common shares for net proceeds of approximately $13$2 million through ATM offerings. At SeptemberJune 30, 2019,2020, approximately $112$85 million remained outstanding for future offerings under this program.
On January 29, 2019, we sold 11,500,000 shares of common stock in an underwritten public offering, resulting in net proceeds of approximately $177 million. On September 3, 2019, we sold 14,375,000 shares of common stock in an underwritten public offering, resulting in net proceeds of approximately $228 million.
Direct Stock Purchase and Dividend Reinvestment Plan
During the ninethree months ended SeptemberJune 30, 2020, we did 0t issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. During the six months ended June 30, 2019, we issued 399,838 shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan, resulting in net proceeds of approximately $6 million.
Earnings (Loss) per Common Share
The following table provides the basic and diluted earnings (loss) per common share computations for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 17.3 – Basic and Diluted Earnings (Loss) per Common Share
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands, except Share Data) 2019 2018 2019 2018
Basic Earnings per Common Share:        
Net income attributable to Redwood $34,310
 $40,921
 $120,040
 $120,513
Less: Dividends and undistributed earnings allocated to participating securities (856) (1,231) (3,260) (3,766)
Net income allocated to common shareholders $33,454
 $39,690
 $116,780
 $116,747
Basic weighted average common shares outstanding 101,872,126
 80,796,856
 97,214,064
 77,211,188
Basic Earnings per Common Share $0.33
 $0.49
 $1.20
 $1.51
Diluted Earnings per Common Share:        
Net income attributable to Redwood $34,310
 $40,921
 $120,040
 $120,513
Less: Dividends and undistributed earnings allocated to participating securities (1,036) (1,284) (3,625) (3,867)
Add back: Interest expense on convertible notes for the period, net of tax 8,887
 8,666
 26,271
 23,642
Net income allocated to common shareholders $42,161
 $48,303
 $142,686
 $140,288
Weighted average common shares outstanding 101,872,126
 80,796,856
 97,214,064
 77,211,188
Net effect of dilutive equity awards 362,743
 443,191
 261,155
 251,935
Net effect of assumed convertible notes conversion to common shares 34,287,840
 33,442,641
 33,727,470
 30,328,906
Diluted weighted average common shares outstanding 136,522,709
 114,682,688
 131,202,689
 107,792,029
Diluted Earnings per Common Share $0.31
 $0.42
 $1.09
 $1.30


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Note 17. Equity - (continued)


Three Months Ended June 30,Six Months Ended June 30,
(In Thousands, except Share Data)2020201920202019
Basic Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood$165,444  $31,266  $(777,954) $85,730  
Less: Dividends and undistributed earnings allocated to participating securities(4,528) (877) (1,011) (2,417) 
Net income (loss) allocated to common shareholders$160,916  $30,389  $(778,965) $83,313  
Basic weighted average common shares outstanding114,383,289  96,983,764  114,229,928  94,846,431  
Basic Earnings (Loss) per Common Share$1.41  $0.31  $(6.82) $0.88  
Diluted Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood$165,444  $31,266  $(777,954) $85,730  
Less: Dividends and undistributed earnings allocated to participating securities(3,116) (1,053) (1,011) (2,595) 
Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax(15,835) 8,698  —  17,385  
Net income (loss) allocated to common shareholders$146,493  $38,911  $(778,965) $100,520  
Weighted average common shares outstanding114,383,289  96,983,764  114,229,928  94,846,431  
Net effect of dilutive equity awards—  270,550  —  210,360  
Net effect of assumed convertible notes conversion to common shares32,715,790  33,442,640  —  33,442,640  
Diluted weighted average common shares outstanding147,099,079  130,696,954  114,229,928  128,499,431  
Diluted Earnings (Loss) per Common Share$1.00  $0.30  $(6.82) $0.78  
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.

58

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Note 17. Equity - (continued)
During the three and nine months ended SeptemberJune 30, 20192020 and 2018,the three and six months ended June 30, 2019, 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 and any realized gains or losses on extinguishment of debt (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 six months ended June 30, 2020, 34,075,404 of common shares related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and ninesix months ended SeptemberJune 30, 2020, the number of outstanding equity awards that were antidilutive totaled 11,561 and 16,405, respectively. For the three and six months ended June 30, 2019, the number of outstanding equity awards that were antidilutive totaled 11,7108,996 and 9,361, respectively. For the three and nine months ended September 30, 2018, the number of outstanding equity awards that were antidilutive totaled 7,761 and 7,230,8,186, respectively.
Stock Repurchases
In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. At SeptemberJune 30, 2019,2020, $100 million of the current authorization remained available for the repurchase of shares of our common stock.stock and we also continued to be authorized to repurchase outstanding debt securities.
Note 18. Equity Compensation Plans
At SeptemberJune 30, 20192020 and December 31, 2018, 4,187,9242019, 8,615,077 and 4,616,7763,637,480 shares of common stock, respectively, were available for grant under our Incentive Plan. During the three months ended June 30, 2020, Redwood shareholders approved for grant an additional 5 million shares of common stock under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan and purchases under the Employee Stock Purchase Plan totaled $23 million at SeptemberJune 30, 2019,2020, as shown in the following table.
Table 18.1 – Activities of Equity Compensation Costs by Award Type
  Nine Months Ended September 30, 2019
(In Thousands) Restricted Stock Awards Restricted Stock Units Deferred Stock Units Performance Stock Units Employee Stock Purchase Plan Total
Unrecognized compensation cost at beginning of period $3,498
 $74
 $14,489
 $7,061
 $—
 $25,122
Equity grants —
 3,483
 4,831
 —
 160
 8,474
Equity grant forfeitures —
 —
 —
 —
 —
 —
Equity compensation expense (1,137) (499) (5,871) (2,505) (120) (10,132)
Unrecognized Compensation Cost at End of Period $2,361
 $3,058
 $13,449
 $4,556
 $40
 $23,464

Six Months Ended June 30, 2020
(In Thousands)Restricted Stock AwardsRestricted Stock UnitsDeferred Stock UnitsPerformance Stock UnitsEmployee Stock Purchase PlanTotal
Unrecognized compensation cost at beginning of period$1,990  $3,534  $17,858  $8,946  $—  $32,328  
Equity grants70  3,431  6,593  —  160  10,254  
Performance-based valuation adjustment—  —  —  (7,352) —  (7,352) 
Equity grant forfeitures(349) (1,266) (4,733) (648) —  (6,996) 
Equity compensation expense(614) (772) (4,511) 720  (80) (5,257) 
Unrecognized Compensation Cost at End of Period$1,097  $4,927  $15,207  $1,666  $80  $22,977  
At SeptemberJune 30, 2019,2020, the weighted average amortization period remaining for all of our equity awards was two years.one year.
Restricted Stock Awards ("RSAs")
At SeptemberJune 30, 20192020 and December 31, 2018,2019, there were 218,02292,440 and 334,606216,470 shares, respectively, of RSAs outstanding. Restrictions on these shares lapse through 2022. During the ninesix months ended SeptemberJune 30, 2019,2020, there were 0 RSAs granted, restrictions on 116,584101,063 RSAs lapsed and those shares were distributed, and 022,967 RSAs were forfeited.

59

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)
Note 18. Equity Compensation Plans - (continued)


Restricted Stock Units ("RSUs")
At SeptemberJune 30, 20192020 and December 31, 2018,2019, there were 229,943333,869 and 4,876275,173 shares, respectively, of RSUs outstanding. Restrictions on these shares lapse through 2023.2024. During the ninesix months ended SeptemberJune 30, 2019,2020, there were 225,067190,624 RSUs granted, 055,514 RSUs distributed, and 076,414 RSUs forfeited.
Deferred Stock Units (“DSUs”)
At SeptemberJune 30, 20192020 and December 31, 2018,2019, there were 2,414,0562,395,786 and 2,336,7202,630,805 DSUs, respectively, outstanding of which 1,345,0051,318,200 and 1,181,622,1,286,063, respectively, had vested. During the ninesix months ended SeptemberJune 30, 2019,2020, there were 337,787449,092 DSUs granted, 260,451392,858 DSUs distributed, and 0291,253 DSUs forfeited. Unvested DSUs at SeptemberJune 30, 20192020 vest through 2023.2024.

Performance Stock Units (“PSUs”)
At both SeptemberJune 30, 20192020 and December 31, 2018,2019, the target number of PSUs that were unvested was 725,616.739,895 and 839,070, respectively. During the six months ended June 30, 2020, 99,175 PSUs were forfeited. Vesting for all PSUs will generally occur at the end of three years from their grant date based on various TSR performance calculations, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. During the first quarter of 2020, for PSUs granted in 2018 and 2019, we adjusted our vesting estimate to assume that none of these awards will meet the minimum performance thresholds for vesting. This adjustment resulted in a reversal of $1 million of stock-based compensation expense recorded in the first quarter of 2020.
Employee Stock Purchase Plan ("ESPP")
The ESPP allows a maximum of 600,000 shares of common stock to be purchased in aggregate for all employees. As of SeptemberJune 30, 20192020 and December 31, 2018, 418,6512019, 463,582 and 390,569430,772 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at SeptemberJune 30, 2019.2020.

















60

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)


Note 19. Mortgage Banking Activities, Net
The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income (loss) for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 19.1 – Mortgage Banking Activities
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)
$(1,393) $20,267  $6,562  $35,111  
Risk management derivatives (2)
—  (5,760) (31,294) (9,898) 
Other income (expense), net (3)
(6,612) 852  (6,354) 973  
Total residential mortgage banking activities, net(8,005) 15,359  (31,086) 26,186  
Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
Single-family rental loans, at fair value (1)
1,210  1,882  13,018  3,626  
Risk management derivatives (2)
—  (1,671) (21,538) (2,517) 
Residential bridge loans, at fair value(1,260) 1,012  (5,194) 1,098  
Other income, net (4)
2,283  2,578  10,617  3,076  
Total business purpose mortgage banking activities, net2,233  3,801  (3,097) 5,283  
Mortgage Banking Activities, Net$(5,772) $19,160  $(34,183) $31,469  
(1)For residential loans, includes changes in fair value for associated loan purchase and forward sale commitments. For single-family rental loans, includes changes in fair value for associated interest rate lock commitments.
(2)Represents market valuation changes of derivatives that were used to manage risks associated with our accumulation of loans.
(3)Amounts in this line item include other fee income from loan acquisitions, provisions for repurchases expense, and expense related to resolving residential loan seller demands, presented net.
(4)Amounts in this line item include other fee income from loan originations.
61
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Residential Mortgage Banking Activities, Net        
Changes in fair value of:        
Residential loans, at fair value (1)
 $6,320
 $7,236
 $41,431
 $8,406
Risk management derivatives (2)
 (1,710) 3,796
 (11,608) 38,378
Other income, net (3)
 407
 313
 1,380
 1,733
Total residential mortgage banking activities, net 5,017
 11,345
 31,203
 48,517
         
Business Purpose Mortgage Banking Activities, Net:        
Changes in fair value of:        
Single-family rental loans, at fair value (1)
 1,847
 (121) 5,473
 (121)
Risk management derivatives (2)
 (1,262) —
 (3,779) —
Residential bridge loans, at fair value 1,010
 —
 2,108
 —
Other income, net (4)
 2,903
 —
 5,979
 —
Total business purpose mortgage banking activities, net 4,498
 (121) 9,781
 (121)
Mortgage Banking Activities, Net $9,515
 $11,224
 $40,984
 $48,396
(1)Includes changes in fair value for associated loan purchase and forward sale commitments.
(2)Represents market valuation changes of derivatives that were used to manage risks associated with our accumulation of loans.
(3)Amounts in this line item include other fee income from loan acquisitions and the provision for repurchases expense, presented net.
(4)Amounts in this line item include other fee income from loan originations.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)


Note 20. Investment Fair Value Changes, NetOther Income
The following table presents the components of Investment fair value changes, net,Other income recorded in our consolidated statements of income (loss) for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 20.1 – Investment Fair Value ChangesOther Income
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Investment Fair Value Changes, Net        
Changes in fair value of:        
Residential loans held-for-investment at Redwood $7,667
 $(17,063) $71,323
 $(71,058)
Single-family rental loans held-for-investment 22
 —
 22
 —
Residential bridge loans held-for-investment (742) 53
 (1,363) 53
Trading securities 15,275
 6,314
 55,577
 2,429
Servicer advance investments 1,585
 —
 3,025
 —
Excess MSRs (1,635) —
 (2,137) —
Shared home appreciation options 29
 —
 29
 —
REO (331) —
 (470) —
Net investments in Legacy Sequoia entities (1)
 (407) (248) (904) (976)
Net investments in Sequoia Choice entities (1)
 2,722
 (943) 8,866
 43
Net investments in Freddie Mac SLST entities (1)
 17,300
 —
 31,702
 —
Net investments in Freddie Mac K-Series entities (1)
 7,445
 511
 13,810
 511
Risk-sharing investments (53) (126) (191) (474)
Risk management derivatives, net (37,433) 21,867
 (144,548) 82,391
Impairments on AFS securities —
 (33) —
 (89)
Investment Fair Value Changes, Net $11,444
 $10,332
 $34,741
 $12,830
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
MSR (loss) income, net$(1,424) $1,654  $(3,233) $1,911  
Risk share income1,181  800  1,946  1,446  
FHLBC capital stock dividend538  535  1,085  1,082  
Equity investment (loss) income(574) (96) 274  172  
5 Arches loan administration fee income648  1,488  1,518  1,954  
Gain on re-measurement of investment in 5 Arches—  —  —  2,441  
Other586  478  1,802  478  
Other Income$955  $4,859  $3,392  $9,484  
62

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

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)


Note 21. Other Income, Net
The following table presents the components of Other income, net, recorded in our consolidated statements of income for the threeGeneral and nine months ended September 30, 2019Administrative Expenses and 2018.
Table 21.1 – Other Income, Net
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
MSR income, net $431
 $1,967
 $2,342
 $4,797
Risk share income 905
 907
 2,351
 2,706
FHLBC capital stock dividend 541
 460
 1,623
 1,271
Equity investment income 557
 119
 552
 119
5 Arches loan administration fee income 1,344
 —
 3,298
 —
Amortization of intangible assets (1,897) —
 (4,429) —
Gain on re-measurement of investment in 5 Arches —
 —
 2,441
 —
Other (56) —
 (359) —
Other Income, Net $1,825
 $3,453
 $7,819
 $8,893

Note 22. Operating Expenses
Components of our operatinggeneral and administrative, and other expenses for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 are presented in the following table.
Table 22.121.1 – Components of OperatingGeneral and Administrative Expenses and Other Expenses
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2020201920202019
General and Administrative Expenses
Fixed compensation expense$11,818  $9,252  $26,502  $17,349  
Variable compensation expense3,278  4,021  3,289  8,423  
Equity compensation expense3,262  4,024  5,257  6,977  
Acquisition-related equity compensation expense (1)
1,212  —  2,424  —  
Systems and consulting2,395  2,536  5,607  4,364  
Loan acquisition costs (2)
2,152  1,516  6,878  3,101  
Office costs1,887  1,585  3,995  2,889  
Accounting and legal2,788  960  5,004  2,085  
Corporate costs626  545  1,297  1,219  
Other operating expenses674  1,816  2,507  3,007  
Total General and Administrative Expenses30,092  26,255  62,760  49,414  
Other Expenses
Goodwill impairment expense—  —  88,675  —  
Amortization of purchase-related intangible assets3,873  1,900  8,179  2,711  
Contingent consideration expense (3)
134  311  446  311  
Other1,076  241  (802) 468  
Total Other Expenses5,083  2,452  96,498  3,490  
Total General and Administrative Expenses and Other Expenses$35,175  $28,707  $159,258  $52,904  
(1)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. The grant date fair value of these restricted stock awards was $10 million, which will be recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.
(2)Loan acquisition costs primarily includes underwriting and due diligence costs related to the acquisition of residential loans held-for-sale at fair value as well as employee commissions related to our business purpose loan originations.
(3) Contingent consideration expense relates to the acquisition of 5 Arches during 2019. Refer to Note 2 for additional detail.
63
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Fixed compensation expense $9,391
 $5,922
 $26,848
 $18,136
Variable compensation expense 4,090
 4,923
 12,513
 13,655
Equity compensation expense 3,155
 3,033
 10,132
 9,565
Total compensation expense 16,636
 13,878
 49,493
 41,356
Systems and consulting 3,230
 1,794
 7,594
 5,434
Loan acquisition costs (1)
 1,392
 1,887
 4,385
 5,860
Office costs 1,517
 1,173
 4,406
 3,397
Accounting and legal 1,767
 1,170
 3,852
 3,078
Corporate costs 482
 462
 1,701
 1,462
Other operating expenses 1,791
 1,126
 4,798
 2,942
Total Operating Expenses $26,815
 $21,490
 $76,229
 $63,529
(1)Loan acquisition costs primarily includes underwriting and due diligence costs related to the acquisition of residential loans held-for-sale at fair value.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)


Note 23.22. Taxes
For the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, we recognized a provisionbenefit for income taxes of $3$22 million and $12a provision from income taxes of $3 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at SeptemberJune 30, 20192020 and 2018.2019.
Table 23.122.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate
June 30, 2020June 30, 2019
Federal statutory rate21.0 %21.0 %
State statutory rate, net of Federal tax effect8.6 %8.6 %
Differences in taxable (loss) income from GAAP income(23.6)%(4.7)%
Change in valuation allowance(3.2)%(3.6)%
Dividends paid deduction (1)
— %(17.7)%
Effective Tax Rate2.8 %3.6 %
  September 30, 2019 September 30, 2018
Federal statutory rate 21.0 % 21.0 %
State statutory rate, net of Federal tax effect 8.6 % 8.6 %
Differences in taxable (loss) income from GAAP income (2.5)% (1.8)%
Change in valuation allowance (2.5)% (3.2)%
Dividends paid deduction (22.1)% (15.3)%
Effective Tax Rate 2.5 % 9.3 %

(1)The dividends paid deduction in the effective tax rate reconciliation is generally representative of the amount of distributions to shareholders that reduce REIT taxable income. For the six months ended June 30, 2020, the dividends paid deduction is 0% due to our REIT incurring a taxable loss during the period; therefore, there was no REIT taxable income available to apply against the dividends paid.
We assessed our tax positions for all open tax years (i.e., Federal, 2016 to 2019,2020, and State, 20142015 to 2019)2020) at SeptemberJune 30, 20192020 and December 31, 2018,2019, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.
Note 24.23. Segment Information
Redwood operates in 23 segments: Investment PortfolioResidential Lending, Business Purpose Lending, and Mortgage Banking. Our segments are based onThird-Party Investments. Beginning in the second quarter of 2020, we combined what was previously our organizationalMultifamily Investments segment and management structure, which aligns with how our results are monitored and performanceThird-Party Residential Investments segment into a new segment called Third-Party Investments. Prior periods have been conformed to the current presentation. Following is assessed. For a full description of our segments, see current segments.
Part I, Item 1—BusinessResidential Lending – consists of a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer into our investment portfolio, as well as the investments we retain from these activities. 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. Our investments in this segment primarily consist of residential mortgage-backed securities ("RMBS") retained from our Annual ReportSequoia securitizations (some of which we consolidate for GAAP purposes) and MSRs retained from jumbo whole loans we sold or securitized. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of residential loans held-for-sale and long-term investments we hold within this segment. This segment’s main source of revenue is net interest income from its long-term investments and its inventory of loans held-for-sale, as well as income from mortgage banking activities, which includes valuation increases (or gains) on Form 10-K forloans we acquire and subsequently sell, securitize, or transfer into our investment portfolio, and the year ended December 31, 2018.hedges used to manage risks associated with these activities. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.
Our Mortgage Banking segment includes activity from both our residential
64

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 23. Segment Information - (continued)
Business Purpose Lending – consists of a platform that originates and acquires business purpose mortgage banking operations. Our business purpose mortgage banking operations includes activityresidential loans for subsequent securitization or transfer into our investment portfolio, as well as the investments we retain from our wholly-owned subsidiary 5 Archesthese activities. We typically originate single-family rental and ourresidential bridge loans and distribute certain single-family rental loans through our CoreVest American Finance Lender ("CAFL") private-label securitization program and retain others for investment along with our residential bridge loans. Single-family rental loans are business purpose residential mortgage loans to investors in single-family (1-4 unit) rental properties. Residential bridge loans are business purpose residential mortgage loans to investors rehabilitating and subsequently reselling or renting residential properties. Our investments in this segment primarily consist of securities retained from our CAFL securitizations (which we consolidate for GAAP purposes), and residential bridge loans. This segment also includes various derivative financial instruments that we are aggregating for subsequent sale or securitization. In connectionutilize to manage certain risks associated with our acquisitioninventory of 5 Archessingle-family rental loans held-for-sale and our investments. This segment’s main source of revenue is net interest income from its investments and loans held-for-sale, as well as income from mortgage banking activities, which includes valuation increases (or gains) on March 1, 2019,loans we originate or acquire and subsequently sell, securitize or transfer into our investment portfolio, and the goodwill, intangible assets,hedges used to manage risks associated with these activities. Additionally, this segment may realize gains and contingent consideration we recorded on our consolidated balance sheets werelosses upon the sale of securities. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.
Third-Party Investments – consists of investments in RMBS issued by third parties, investments in Freddie Mac K-Series multifamily loan securitizations and SLST reperforming loan securitizations (which we consolidate for GAAP purposes), our Mortgage Banking segment. The gain on re-measurementservicer advance investments, and other residential and multifamily credit investments not generated through our Residential or Business Purpose Lending segments. This segment’s main sources of our initial minority investmentrevenue are interest income from securities and purchase option in 5 Arches duringloans held-for-investment. Additionally, this segment may realize gains and losses upon the three months ended March 31, 2019 wassale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in Corporate/Other.this segment.
Segment contribution represents the measure of profit that management uses to assess the performance of our business segments and make resource allocation and operating decisions. Certain corporate expenses not directly assigned or allocated to one of our 23 segments, as well as activity from certain consolidated Sequoia entities, are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include interest expense associated with certain long-term debt, indirect operatinggeneral and administrative expenses and other expense.

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

Note 24. Segment Information - (continued)


The following tables present financial information by segment for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 24.123.1 – Business Segment Financial Information
Three Months Ended June 30, 2020
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other		 Total
Interest income$36,653  $53,742  $36,811  $2,740  $129,946  
Interest expense(30,169) (38,837) (27,869) (5,791) (102,666) 
Net interest income6,484  14,905  8,942  (3,051) 27,280  
Non-interest income
Mortgage banking activities, net(8,005) 2,233  —  —  (5,772) 
Investment fair value changes, net35,085  40,401  76,972  (230) 152,228  
Other income, net230  476  (509) 758  955  
Realized gains, net205  —  578  25,182  25,965  
Total non-interest income, net27,515  43,110  77,041  25,710  173,376  
General and administrative expenses(3,875) (10,293) (2,106) (13,818) (30,092) 
Other expenses—  (3,884) (1,065) (134) (5,083) 
Benefit from (provision for) income taxes3,323  2,439  (5,799) —  (37) 
Segment Contribution$33,447  $46,277  $77,013  $8,707  
Net Income$165,444  
Non-cash amortization (expense) income, net$(1,265) $(6,391) $312  $(1,619) $(8,963) 
  Three Months Ended September 30, 2019
(In Thousands) Investment Portfolio Mortgage Banking 
 Corporate/
Other
  Total
Interest income $132,894
 $12,491
 $4,732
 $150,117
Interest expense (94,519) (6,657) (15,428) (116,604)
Net interest income (loss) 38,375

5,834

(10,696) 33,513
Non-interest income        
Mortgage banking activities, net —
 9,515
 —
 9,515
Investment fair value changes, net 11,896
 —
 (452) 11,444
Other income (expense), net 2,313
 (252) (236) 1,825
Realized gains, net 4,714
 —
 —
 4,714
Total non-interest income, net 18,923

9,263

(688) 27,498
Direct operating expenses (2,191) (11,907) (12,717) (26,815)
(Provision for) benefit from income taxes (89) 203
 —
 114
Segment Contribution $55,018

$3,393

$(24,101)  
Net Income       $34,310
Non-cash amortization income (expense), net $2,456
 $(2,028) $(1,148) $(720)

65
  Three Months Ended September 30, 2018
(In Thousands) Investment Portfolio Mortgage Banking  Corporate/
Other		  Total
Interest income $79,556
 $14,427
 $5,414
 $99,397
Interest expense (40,852) (7,537) (15,962) (64,351)
Net interest income (loss) 38,704
 6,890
 (10,548) 35,046
Non-interest income        
Mortgage banking activities, net —
 11,224
 —
 11,224
Investment fair value changes, net 10,566
 —
 (234) 10,332
Other income, net 3,334
 —
 119
 3,453
Realized gains, net 7,275
 —
 —
 7,275
Total non-interest income, net 21,175
 11,224
 (115) 32,284
Direct operating expenses (2,659) (6,570) (12,261) (21,490)
Provision for income taxes (2,840) (2,079) —
 (4,919)
Segment Contribution $54,380
 $9,465
 $(22,924)  
Net Income       $40,921
Non-cash amortization income (expense), net $4,019
 $(54) $(1,176) $2,789

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

Note 24.23. Segment Information - (continued)


Six Months Ended June 30, 2020
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other		 Total
Interest income$97,284  $106,802  $118,007  $5,934  $328,027  
Interest expense(71,571) (73,827) (95,626) (8,313) (249,337) 
Net interest income25,713  32,975  22,381  (2,379) 78,690  
Non-interest income
Mortgage banking activities, net(31,086) (3,097) —  —  (34,183) 
Investment fair value changes, net(161,550) (101,729) (454,586) (739) (718,604) 
Other income, net(267) 2,169  732  758  3,392  
Realized gains, net2,001  —  2,634  25,182  29,817  
Total non-interest income, net(190,902) (102,657) (451,220) 25,201  (719,578) 
General and administrative expenses(9,507) (24,626) (3,894) (24,733) (62,760) 
Other expenses—  (96,869) 817  (446) (96,498) 
Benefit from income taxes8,653  9,021  4,518  —  22,192  
Segment Contribution$(166,043) $(182,156) $(427,398) $(2,357) 
Net Loss$(777,954) 
Non-cash amortization (expense) income, net$(1,053) $(11,316) $1,053  $(1,728) $(13,044) 
Other significant non-cash expense: goodwill impairment$—  $(88,675) $—  $—  $(88,675) 
  Nine Months Ended September 30, 2019
(In Thousands) Investment Portfolio Mortgage Banking  Corporate/
Other		  Total
Interest income $380,394
 $34,220
 $15,086
 $429,700
Interest expense (266,318) (18,816) (46,966) (332,100)
Net interest income (loss) 114,076
 15,404
 (31,880) 97,600
Non-interest income        
Mortgage banking activities, net —
 40,984
 —
 40,984
Investment fair value changes, net 35,749
 —
 (1,008) 34,741
Other income, net 6,408
 (575) 1,986
 7,819
Realized gains, net 18,227
 —
 —
 18,227
Total non-interest income, net 60,384
 40,409
 978
 101,771
Direct operating expenses (7,110) (31,582) (37,537) (76,229)
Provision for income taxes (1,327) (1,775) —
 (3,102)
Segment Contribution $166,023
 $22,456
 $(68,439)  
Net Income       $120,040
Non-cash amortization income (expense), net $7,446
 $(4,765) $(3,573) $(892)

  Nine Months Ended September 30, 2018
(In Thousands) Investment Portfolio Mortgage Banking  Corporate/
Other		  Total
Interest income $202,882
 $40,408
 $15,702
 $258,992
Interest expense (87,719) (21,303) (45,056) (154,078)
Net interest income (loss) 115,163
 19,105
 (29,354) 104,914
Non-interest income        
Mortgage banking activities, net —
 48,396
 —
 48,396
Investment fair value changes, net 13,756
 —
 (926) 12,830
Other income, net 8,774
 —
 119
 8,893
Realized gains, net 21,352
 —
 —
 21,352
Total non-interest income, net 43,882
 48,396
 (807) 91,471
Direct operating expenses (6,524) (20,941) (36,064) (63,529)
Provision for income taxes (4,858) (7,485) —
 (12,343)
Segment Contribution $147,663
 $39,075
 $(66,225)  
Net Income       $120,513
Non-cash amortization income (expense), net $13,290
 $(99) $(3,021) $10,170

Three Months Ended June 30, 2019
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other		 Total
Interest income$67,611  $4,131  $72,024  $4,776  $148,542  
Interest expense(49,321) (2,238) (60,680) (3,981) (116,220) 
Net interest income18,290  1,893  11,344  795  32,322  
Non-interest income
Mortgage banking activities, net15,359  3,801  —  —  19,160  
Investment fair value changes, net(8,102) (457) 11,856  (159) 3,138  
Other income, net2,990  1,829  40  —  4,859  
Realized gains, net2,791  —  36  —  2,827  
Total non-interest income, net13,038  5,173  11,932  (159) 29,984  
General and administrative expenses(6,799) (6,120) (900) (12,436) (26,255) 
Other expenses—  (1,899) (242) (311) (2,452) 
(Provision for) benefit from income taxes(1,484) 38  (887) —  (2,333) 
Segment Contribution$23,045  $(915) $21,247  $(12,111) 
Net Income$31,266  
Non-cash amortization income (expense), net$2,268  $(2,068) $(417) $(300) $(517) 

66

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

Note 24.23. Segment Information - (continued)

Six Months Ended June 30, 2019
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other		 Total
Interest income$134,450  $7,068  $128,436  $9,629  $279,583  
Interest expense(96,997) (3,777) (106,626) (8,096) (215,496) 
Net interest income37,453  3,291  21,810  1,533  64,087  
Non-interest income
Mortgage banking activities, net26,186  5,283  —  —  31,469  
Investment fair value changes, net(9,822) (760) 34,435  (556) 23,297  
Other income, net4,439  2,295  40  2,710  9,484  
Realized gains, net7,728  —  5,785  —  13,513  
Total non-interest income, net28,531  6,818  40,260  2,154  77,763  
General and administrative expenses(14,002) (8,685) (1,886) (24,841) (49,414) 
Other expenses—  (2,532) (469) (489) (3,490) 
(Provision for) benefit from income taxes(1,985) 33  (1,264) —  (3,216) 
Segment Contribution$49,997  $(1,075) $58,451  $(21,643) 
Net Income$85,730  
Non-cash amortization income (expense), net$4,243  $(2,800) $(688) $(791) $(36) 

The following table presents the components of Corporate/Other for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.

Table 24.223.2 – Components of Corporate/Other
 Three Months Ended September 30,Three Months Ended June 30,
 2019 201820202019
(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 $4,295
 $437
 $4,732
 $5,174
 $240
 $5,414
Interest income$2,686  $54  $2,740  $4,776  $—  $4,776  
Interest expense (3,452) (11,976) (15,428) (4,257) (11,705) (15,962)Interest expense(1,518) (4,273) (5,791) (3,981) —  (3,981) 
Net interest income (loss) 843
 (11,539) (10,696) 917
 (11,465) (10,548)
Net interest incomeNet interest income1,168  (4,219) (3,051) 795  —  795  
Non-interest income            Non-interest income
Investment fair value changes, net (407) (45) (452) (248) 14
 (234)Investment fair value changes, net(230) —  (230) (123) (36) (159) 
Other income —
 (236) (236) —
 119
 119
Other income—  758  758  —  —  —  
Realized gains, netRealized gains, net—  25,182  25,182  —  —  —  
Total non-interest income, net (407) (281) (688) (248) 133
 (115)Total non-interest income, net(230) 25,940  25,710  (123) (36) (159) 
Direct operating expenses —
 (12,717) (12,717) —
 (12,261) (12,261)
General and administrative expensesGeneral and administrative expenses—  (13,818) (13,818) —  (12,436) (12,436) 
Other expensesOther expenses—  (134) (134) —  (311) (311) 
Total $436
 $(24,537) $(24,101) $669
 $(23,593) $(22,924)Total$938  $7,769  $8,707  $672  $(12,783) $(12,111) 

67
  Nine Months Ended September 30,
  2019 2018
(In Thousands) 
Legacy Consolidated
VIEs (1)
 Other Total 
Legacy Consolidated
VIEs (1)
 Other  Total
Interest income $13,924
 $1,162
 $15,086
 $15,003
 $699
 $15,702
Interest expense (11,548) (35,418) (46,966) (12,324) (32,732) (45,056)
Net interest income (loss) 2,376
 (34,256) (31,880) 2,679
 (32,033) (29,354)
Non-interest income            
Investment fair value changes, net (904) (104) (1,008) (976) 50
 (926)
Other income —
 1,986
 1,986
 —
 119
 119
Total non-interest income, net (904) 1,882
 978
 (976) 169
 (807)
Direct operating expenses —
 (37,537) (37,537) —
 (36,064) (36,064)
Total $1,472
 $(69,911) $(68,439) $1,703
 $(67,928) $(66,225)
(1)
Legacy consolidated VIEs represent Legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.


REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20192020
(Unaudited)

Note 24.23. Segment Information - (continued)

Six Months Ended June 30,
20202019
(In Thousands)
Legacy Consolidated VIEs (1)
OtherTotal
Legacy Consolidated VIEs (1)
Other Total
Interest income$5,880  $54  $5,934  $9,629  $—  $9,629  
Interest expense(4,040) (4,273) (8,313) (8,096) —  (8,096) 
Net interest income1,840  (4,219) (2,379) 1,533  —  1,533  
Non-interest income
Investment fair value changes, net(621) (118) (739) (497) (59) (556) 
Other income—  758  758  —  2,710  2,710  
Realized gains, net—  25,182  25,182  —  —  —  
Total non-interest income, net(621) 25,822  25,201  (497) 2,651  2,154  
General and administrative expenses—  (24,733) (24,733) —  (24,841) (24,841) 
Other expenses—  (446) (446) —  (489) (489) 
Total$1,219  $(3,576) $(2,357) $1,036  $(22,679) $(21,643) 
(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 SeptemberJune 30, 20192020 and December 31, 2018.2019.
Table 24.323.3 – Supplemental Segment Information
(In Thousands) Investment Portfolio Mortgage Banking 
Corporate/
Other
 Total(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other		Total
September 30, 2019        
June 30, 2020June 30, 2020
Residential loans $7,326,757
 $925,887
 $429,159
 $8,681,803
Residential loans$2,084,587  $—  $2,145,111  $304,632  $4,534,330  
Business purpose residential loans 225,601
 110,434
 —
 336,035
Business purpose residential loans—  3,782,200  —  —  3,782,200  
Multifamily loans 3,791,622
 —
 —
 3,791,622
Multifamily loans—  —  489,075  —  489,075  
Real estate securities 1,285,426
 —
 —
 1,285,426
Real estate securities142,713  —  173,723  —  316,436  
Other investments 346,136
 1,571
 —
 347,707
Other investments19,661  26,933  383,246  —  429,840  
Goodwill and intangible assets —
 49,121
 —
 49,121
Goodwill and intangible assets—  64,610  —  —  64,610  
Total assets 13,347,460
 1,166,639
 962,184
 15,476,283
Total assets2,303,320  4,009,371  3,211,030  837,821  10,361,542  
        
December 31, 2018        
December 31, 2019December 31, 2019
Residential loans $5,685,983
 $1,048,801
 $519,958
 $7,254,742
Residential loans$4,939,745  $—  $2,367,215  $407,890  $7,714,850  
Business purpose residential loans 112,798
 28,460
 —
 141,258
Business purpose residential loans—  3,506,743  —  —  3,506,743  
Multifamily loans 2,144,598
 —
 —
 2,144,598
Multifamily loans—  —  4,408,524  —  4,408,524  
Real estate securities 1,452,494
 —
 —
 1,452,494
Real estate securities229,074  —  870,800  —  1,099,874  
Other investments 427,764
 —
 10,754
 438,518
Other investments42,224  21,002  294,904  —  358,130  
Goodwill and intangible assetsGoodwill and intangible assets—  161,464  —  —  161,464  
Total assets 10,093,993
 1,103,090
 740,323
 11,937,406
Total assets5,410,540  3,786,641  8,028,946  769,313  17,995,440  
68

Note 25. Subsequent Events
On October 14, 2019, Redwood and RWT Holdings, Inc., our wholly-owned subsidiary, entered into an equity interests purchase agreement with CF CoreVest Parent I LLC, CF CoreVest Parent II LLC and CoreVest Management Partners LLC (collectively, the “Sellers”), and members of the CoreVest management team, pursuant to which we acquired a 100% equity interest in CoreVest American Finance Lender LLC and several of its affiliates (“CoreVest”), an originator of business purpose residential loans. The acquisition included CoreVest’s operating platform and approximately $900 million of business purpose loans and securities, a significant portion of which we will hold for investment in our investment portfolio. The estimated aggregate purchase consideration for CoreVest is approximately $492 million, subject to a customary post-closing reconciliation, including a net book value adjustment. Substantially all of the purchase consideration was payable in cash upon the close of the transaction. The transaction was closed on October 15, 2019.





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 six main sections:
•Overview
•Results of Operations
•Liquidity and Capital Resources
•Off-Balance Sheet Arrangements and Contractual Obligations
•Critical Accounting Policies and Estimates
•New Accounting Standards
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, 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-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,” 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 information 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 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.

69

Our Business
Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on making credit-sensitive investments in single-family residential and multifamily mortgages and related assets and engaging in mortgage banking activities. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, as well as through capital appreciation. We operate our business in twothree segments: Investment PortfolioResidential Lending, Business Purpose Lending, and Mortgage Banking. Our segments are based on our organizational and management structure, which aligns with how our results are monitored and performance is assessed.Third-Party Investments. For a full description of our segments, see Note 23 of our Notes to Consolidated Financial Statements in Part I, Item 1—Business in our Annual1 of this Quarterly Report on Form 10-K for the year ended December 31, 2018.10-Q.
Our primary sources of income are net interest income from our investment portfolio 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 is generated 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.
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, 2017 and thisour Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, in each case 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 (including trends driving the flow of capital in the housing finance market,markets, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, our ability to pay higher sustainable dividends in the future, and the prospects for federal housing finance reform); (ii) statements related to our financial outlook and expectations for 2019,2020 and future years, including our positioning to take advantage of a significant recovery in our business lines, expectations with respect to activity in our Residential Lending segment and strategic priorities for this segment, expectations with respect to activity in our Business Purpose Lending segment, including with respect to investment demand for our SFR and bridge loans, and our belief that asset valuations in our investment portfolio and mortgage banking activities;possess significant upside to recover value from unrealized losses incurred during the first quarter 2020; (iii) statements related to our investment portfolio, including target returns on our RPL securities, our RPL investment strategy, and the view that a significant percentagerepurchases of the underlying borrowers will cure their persistent delinquency history and continue paying steadily under the modifiedlong-term debt or recast terms of the loan;common equity; (iv) statements relatedregarding our expectations with respect to our residentialforbearance rates, loan performance for borrowers exiting forbearance periods, and business purpose mortgage banking platforms,Redwood's servicing advance obligations, including our positioningestimate that for every 5 percentage point increase in the market, the estimated sizeprincipal balance of the BPL market opportunity, and our commitment to growing our acquisition volume of expanded credit and non-QM loans; (v) statements relating to the potential for regulatory reform, including the expiration of the “QM Patch,” the ability of the private sector to effectively compete for a significant volume of non-QM loans currently purchased by the GSEs, and positioning Redwood to capitalize on resulting opportunities; (vi) statements relating to acquiring residentialSequoia securitized mortgage loans in the future thata delinquent status (whether or not subject to forbearance), our average monthly principal and interest servicing advance funding obligation would increase by approximately $3 million; (v) statements 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 2019 and at September 30, 2019, and expected falloutmake regarding estimated costs and the corresponding volumerange of reasonably possible losses with respect to residential mortgage loans expected to be available for purchase; (vii) statements regarding business purpose loan originations, loans funded, and associated funding commitments; (viii) statements relating to our estimate of our available capital (including that we estimate our available capital at September 30, 2019 was approximately $590 million, and that we believe this capital, along with additional capital from continued portfolio optimization, should be sufficient to meet our near-term capital needs); (ix)seller demands; (vi) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2019;2020; and (x)(vii) 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.
Important factors, among others, that may affect our actual results include:
•the impact of the current outbreak of COVID-19 or the future outbreak of any other highly infectious or contagious diseases on the U.S. and global economy, financial markets, and our business and operations;
•the ability and willingness of residential mortgage loan borrowers that have been negatively impacted by the pandemic to make payments of principal and interest relating to their mortgage loans;
•liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities;
70

•changes to our interest rate hedging strategy and our revised approach to addressing interest rate risk;
•the pace at which we redeploy our available capital into new investments and initiatives;
•our ability to scale our platform and systems, particularly with respect to our new initiatives;
•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, the performance of the housing, real estate, mortgage, credit, and broader financial markets, and their effects on the prices of earning assets and the credit status of borrowers;
•federal and state legislative and regulatory developments, and the actions of governmental authorities, including the new U.S. presidential administration, and in particular those affecting the mortgage industry or our business (including, but not limited 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);business;
•state and/or local regulations related to rent control or rent stabilization impacting single-family rental and multifamily properties;
•strategic business and capital deployment decisions we make;
•our recent acquisitions of business purpose lending origination platforms;
•developments related to the fixed income and mortgage finance markets and the Federal Reserve’s statements regarding its future open market activity and monetary policy;
•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;
•our exposure to adjustable-rate mortgage loans;
•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 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;
•the ability of counterparties to satisfy their obligations to us;
•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 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;
•changes in accounting principles and tax rules;
•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;
•decisions about raising, managing, and distributing capital; 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.
71

OVERVIEW
Business Update
Two yearsThe COVID-19 pandemic continued to impact financial markets and the economy in the second quarter, and our country experienced a significant increase in coronavirus cases during July. While the long-term impact of this crisis on Redwood’s business remains unclear, we made significant progress in response to the collapse of liquidity that the non-government mortgage sector experienced in March. We believe we are now positioned to take advantage of a significant recovery in our business lines – which is currently underway. There is still much to do, but we expect to look back on the second quarter of 2020 as one of meaningful strengthening for the Company.
During the second quarter, we recast most of our secured recourse debt. In aggregate, recourse debt declined from $4.6 billion at March 31, 2020 to $1.8 billion at June 30, 2020, reducing our recourse leverage ratio from 6.9x to 2.1x. Marginable debt, or that portion of recourse debt subject to daily, market-value-based margin calls, represents only about 21% of our recourse debt, or $375 million at June 30th. When comparing our $529 million of unrestricted cash to our marginable debt at the end of the second quarter, our coverage ratio was approximately 1.4:1, leaving us with ample room above a prudent risk capital level to allocate significant capital to our operating businesses, new investments and capital deployment opportunities.
Importantly, the evolution of our capital structure has been managed organically, without raising dilutive equity capital. Not only did we not require outside capital in the second quarter, we repurchased $125 million of our convertible debt at discounted levels, generating $25 million of realized gains. These repurchases also provide the benefit of reduced debt service costs and leverage as we manage through the pandemic. We may continue to opportunistically repurchase our long-term debt or common stock to the extent we believe valuations remain significantly detached from fundamentals.
With our capital structure enhancements largely complete, we paid a second quarter dividend of $0.125 per share on June 29, 2020. The second quarter dividend aligned with the current size of our balance sheet and reflected a sustainable level that we would hope to build upon as the economy and our business cash flows stabilize. We remain committed to delivering an attractive dividend to shareholders while remaining well positioned to opportunistically deploy capital going forward.
When taking stock of the extreme market shocks brought about by COVID-19 and our future forward earnings potential, we believe it is still premature to look too far ahead, as the true impact to the U.S. economy and the mortgage industry is yet to be seen. From a macroeconomic perspective, the recovery in financial markets remains meaningfully detached from the continued, and in many areas accelerating, health pandemic. Record job losses and the associated economic contraction have significantly outpaced the Great Financial Crisis in both speed and severity. The spectacular resiliency of the financial markets appears to be buoyed by extreme monetary and fiscal stimulus, with the prospect that financial asset values can be supported, either directly or implicitly, by the Federal Reserve until a COVID-19 vaccine or effective treatments can be found.
Discomforted by the prospect of trying to predict and time the outcome of the pandemic, and with an election looming in November, we have put ourselves in a position to be patient and focused on the long-term through what may be a volatile next several months. The virtue of patience has had meaningful ancillary benefits, as we have been able to focus on the strategic evolution of our business model, and how our platforms will function in a post-pandemic world.
For now, our residential and business purpose lending segments continue to operate in a significantly altered landscape. Myriad aspects of the mortgage process that historically took place in person, such as appraisals and closings, are now often done remotely. Residential credit performance has fundamentally deteriorated from the record low delinquencies the industry enjoyed before the crisis, though continues to run better than many observers expected. As of June 30, 2020, we received approximately 96% of payments due in June for residential loans underlying our Sequoia securitizations and we received approximately 96% of payments due for the single-family rental loans underlying our CoreVest securitizations. Forbearance rates for our Sequoia portfolio had stabilized in the 6.5% - 7.0% range of outstanding balances as of July 24, 2020. Importantly, we are now observing how the first group of borrowers exiting forbearance periods will perform, and the early signs are encouraging. Along these lines, it is important to emphasize that Redwood’s servicer advancing obligations to date have been immaterial to our operations, largely thanks to the fact that a significant percentage of underlying borrowers who have been granted forbearance periods have nonetheless continued to make their monthly mortgage payments. Over the longer-term, for borrowers who reach deeper stages of delinquency, “stop-advance” features incorporated into many of our Sequoia securitization transactions will also mitigate our advancing obligations.

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The rise in past-due mortgages, thus far, does not appear to be weakening the single-family housing sector. Thanks to record low mortgage rates, in some cases below 3% for agency mortgages and trending lower, refinance activity has remained elevated and home purchases have seen a resurgence in demand. By way of shelter-in-place orders and broader (perhaps secular) trends in working remotely, the concept of “home” has taken on greater significance for most Americans. Many children are now learning “virtually” right down the hall from their working parents. Particularly strong demand for suburban housing has been observed in many states where families look to exit dense metropolitan areas, seeking some outdoor space to call their own and that critical extra room. This is a remarkable shift in consumer preference from even a few short months ago, and one that, on balance, is positive for both our residential consumer and rental products, which are predominantly focused on single-family dwellings.
Our Residential Lending team entered the second half of the year primed for a relaunch with an idle period in the jumbo mortgage space slowly coming to an end. Since March, most lenders had significantly tightened their underwriting guidelines for newly originated loans due to the prospect of a severe recession and lack of Fed support to the non-agency sector. Additionally, constraints on the bandwidth of loan officers, who have remained largely focused on high margin refinance loans to agency-eligible borrowers, has weighed on jumbo origination activity. Based on our recent engagement with loan sellers and the gradual narrowing of the spread between agency and jumbo mortgage rates, we’ve begun to see a pickup in lock activity and expect this to grow meaningfully as we announcedhead into the fall. Even with this narrowing, we continue to see substantial relative value in non-agency whole loans, a comprehensivesentiment shared by our loan-buying counterparties, both current and prospective. Our near-term focus continues to be on recasting our programs and guidelines with loan sellers to reflect the economic environment in preparation for increased activity. Though our team’s efforts may not yet be reflected in our results, tremendous progress has been made and we’re excited about the resurgence underway.
To reach this point, we completed the difficult work of managing through our “pre-COVID” loan inventory, culminating with the sale of substantially all of those loans and the repayment of our associated secured debt facilities. As part of this process, our residential team completed our Sequoia “MC1” securitization in late June, a transaction that brought the sale of these loans to a close. The deal priced better than we expected and allowed us to safely begin locking new business strategyloans in July.
As we move forward, our Residential team is focused on a few key strategic priorities. First, is to leveragereaffirm our housing credit competencies acrosscommitment to technology by upgrading our loan systems and transition toward the more automated underwriting and approval processes our sellers experience for conventional loans. Second, is to broaden our methods of loan distribution to complement traditional whole-loan sales and securitization – a broaderkey initiative as we closely manage our loan inventory levels going forward. Third, is to enhance our value-add to our loan sellers by continuing to refine how - and how quickly - we can purchase loans in a safe and sound manner. Thanks to our deep and valuable banking relationships, we have substantial warehouse capacity to fund new loans and now have access to non-marginable facilities that will help us manage our inventory going forward.
Transitioning to our Business Purpose Lending segment, the recovery was very much underway at the end of the second quarter, and we have much to be excited about going forward. Our BPL team originated $234 million of loans in the second quarter, the majority in late May and June when we re-entered the market in earnest after securitizing a significant portion of the residential housing finance sector. This entailed not only the expansion of our traditional jumbo residential mortgage business, but also a commitment to financing housing investors who purchase residential real estate for business income (i.e., rent or refurbishment). Over the course of the past 18 months, we've developed the skills and operations necessary to grow in this market, and have taken tangible steps towards building a specialty finance platform that serves the financing needs of all homebuyers - owner-occupants and investors alike.
Our expansion into business purpose lending ("BPL") began organically, but quickly evolved into a partnership with our 5 Arches platform in Irvine. We completed our acquisition of 5 Arches in March 2019, and this business has fit squarely within Redwood's strategic initiatives. The investment opportunities generated by 5 Arches have validated the thesis underpinning our new strategy; that is, a significant imbalance exists between the rate of new household formation in the United States and the rate of new homebuilding. Most recently, we had the opportunity to further solidify business purpose lending as a core strategy at Redwood, and in October 2019 we announced our acquisition of the CoreVest BPL platform.
CoreVest is a leading BPL originator and brings a talented team to Redwood that shares our values of working with integrity and fostering deep relationships with customers and business partners. Since their inception in 2014, CoreVest has funded over $4 billion of loans while developing technology that offers a seamless borrower experience. The CoreVest platform has a highly scalable mortgage banking business and, at the time of acquisition, had recently completed its ninth securitization ofpre-COVID single-family rental loans since 2015,on our balance sheet. Our origination footprint has remained largely consistent for SFR loans, and our bridge origination strategy has sharpened its focus on sponsors whose strategy is to ultimately hold and stabilize all or most of their portfolios. In addition to their institutional caliber, these sponsors often become accretive repeat customers for both SFR loans and fresh bridge financing to support new investments. Across our BPL products, we are commanding improved lending terms in both structure and coupon. As funding markets improve, we expect more such transactions than any other issuer. This acquisition strengthenscompetition to re-enter the space; however, we believe our position as a leading lenderoperational advantage remains durable.
Our BPL business continued to make great progress in diversifying its outlets to distribute risk in the largesecond quarter and growingthrough July. We completed two non-recourse financing arrangements for over 85% of our pre-COVID bridge portfolio, essentially match-funding a portfolio that has thus far displayed solid performance through the pandemic (as noted above, these arrangements did not come with equity-linked options for the lenders). Investment demand remains very robust for our SFR and bridge loans, including significant inquiry for both loan purchases and opportunities to co-invest or provide private financing. We expect these options to become a reliable complement to traditional securitization. The attractive risk-adjusted returns in the space have kept BPL marketassets in strong demand and added approximately $900 million of business purpose mortgage loans and securities to our portfolio.
While our BPL expansion has been a key area of focus, we continue to focus on expandingreceive strong indications from investors in our core jumbo residential business.SFR securitizations.
As we take stock of the year so far and look towards the fall, we are reminded that we are living in truly historic times. We face a pandemic that has created global economic disruption, trade and technology wars are committed to growing our acquisition volume of expanded creditlooming, the fight against racism and non-qualified residential mortgage (non-QM) loans by leveraging our approach to credit, speed to close,social injustice is hitting an inflection point at a global scale, and reliable execution we deliver to loan sellers. We seethe U.S. presidential election is a mere three months away. This presents an opportunity for growing this business in responseall of us to announcements made by federal regulatory agencies made overexamine our values, reset priorities and pause while we rethink how we want our world to function. As the course of this year regarding proposed changes to housing finance rules. Most recently, the CFPB announced in July 2019 that it intends to let the so called "QM Patch" expire. The QM Patch is an exemption from the CFPB's "Ability to Pay" regulations that has the effect of affording a competitive advantage to the public mortgage sector, resulting in an unlevel playing field for non-QM mortgage lending. We estimate the QM Patch expiration will allow the private sector to effectively compete for a significant volume of non-QM loans currently purchased by Fannie Mae and Freddie Mac, providing additional opportunities for growing our business.
The success of our mortgage banking businesses has been directly complemented by the work we have done within our investment portfolio. Our portfolio team continues to effectively deploy capital, leveraging unique and durable relationships forged over several years. A key differentiator for Redwood has always been our ability to source and structure investments our competitors cannot easily replicate, and we have over $670 million of capital deployed year-to-date, through October, including our acquisition of the CoreVest investment portfolio. As we grow our mortgage banking platforms, our portfolio activities and efficiency oftimes evolve, our corporate functions will be keymission remains the same - to profitably scaling our business and increasing earnings per share.help make quality housing accessible to all Americans, whether rented or owned.
As we reflect on the current state of our industry, we believe this is an exciting time for Redwood. Credit-oriented strategies are in demand as the yield curve flattens and investors seek alternative means to source real estate-related assets. However, the investment sourcing capabilities and operating know-how required to succeed in this environment remain in scarce supply. At Redwood, we have built a solutions-based business that possesses a unique ability to bridge the gap between the customized needs of non-agency borrowers - whether BPL, non-QM, or traditional jumbo - and the liquidity options available to them in the marketplace. We are already making necessary investments in technology and infrastructure to further automate our loan purchase process in anticipation of these opportunities. Our 25-year track record speaks to our ability to operate efficiently, while developing nascent, emerging products into scalable funding solutions that are transformative in nature. As we integrate our jumbo residential mortgage and BPL businesses over time, we continue to work towards our vision of becoming the preeminent specialty finance operator in the mortgage industry.

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Financial and OperationalSecond Quarter Overview - Third Quarter Highlights
The following table presents key earningsfinancial metrics for the three and ninesix months ended SeptemberJune 30, 2019.2020.
Table 1 – Key EarningsFinancial Metrics
Three Months EndedSix Months Ended
(In Thousands, except per Share Data)June 30, 2020June 30, 2020
Net income (loss) per diluted common share$1.00  $(6.82) 
Book value per share$8.15  $8.15  
REIT taxable loss per share$(0.50) $(0.17) 
Dividends per share$0.125  $0.445  
•Our second quarter 2020 results benefited from a rebound in asset prices, as the COVID-19 induced spread widening we experienced in the first quarter partially reversed, benefiting our investment portfolio. As a result of the substantial work we completed repositioning our secured debt, we were able to maintain strategic assets in our portfolio and Return Metricsrecover a meaningful portion of the unrealized losses recorded in the first quarter of 2020.
  Three Months Ended Nine Months Ended
(In Thousands, except per Share Data) September 30, 2019 September 30, 2019
Net income $34,310
 $120,040
Net income per diluted common share $0.31
 $1.09
Annualized GAAP return on equity 9% 10%
Book value per share $15.92
 $15.92
Economic return on book value (1)
 1.3% 5.9%
REIT taxable income per share $0.34
 $0.89
Dividends per share $0.30
 $0.90
(1)Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period.
•Our book value per share increased $1.83 per share to $8.15 per share during the second quarter of 2020, resulting primarily from positive investment fair value changes as well as from gains on extinguishment of our convertible debt. During the thirdsecond quarter, we recognized positive fair value changes of $1.78 per share on our investment assets, primarily driven by spread-tightening across our portfolios. While not uniform in magnitude, asset valuations were materially higher and still possess significant upside to the extent the economy continues to recover. Additionally, during the second quarter of 2019,2020, we accelerated our pace of portfolio optimization and raised equity capital in early September, which together generated $476repurchased $125 million of available capital. These activities resultedconvertible debt, resulting in increased levelsnet gains of realized gains, but dampened growth in$25 million and a $0.22 per share benefit to book value.
•During the second quarter of 2020, we made significant progress repositioning our secured recourse debt structure including reducing our recourse debt from $4.6 billion at March 31, 2020 to $1.8 billion at June 30, 2020, and reducing our marginable debt from $3.5 billion at March 31, 2020 to $375 million at June 30, 2020. While our new non-marginable and non-recourse financing facilities have reduced our contingent liquidity risks, they generally have higher interest costs, which will marginally impact our net interest income asin coming quarters. Additional details on these new financing agreements are provided in the "Liquidity and Capital Resources" section that follows in this MD&A.
•During the second quarter of 2020, we completed the sale of nearly all of our average undeployed capital increased. While lower benchmarkresidential loans previously held for investment and financed at our Federal Home Loan Bank of Chicago facility (our "FHLBC Facility") and repaid all but $1 million of borrowings under this facility. Additionally, during the second quarter, we completed the sale of nearly all of our loan inventory held at the end of the first quarter of 2020. These sales benefited our cash position, recourse leverage and marginable debt ratios, but reduced net interest rates generally persisted throughoutincome in the quarter, helping maintain residential loan purchase volume levelssecond quarter.
•We reset operations in our mortgage banking business, we experienced higher prepayments in our investment portfolio, which negatively impacted investment fair value changes. Additionally, mortgage banking margins were negatively impacted by lower benchmark interest rates, which impacted execution on securitizations we completedbusinesses during the quarter. Execution improved for our most recent Sequoia securitization, completed in October. Despitesecond quarter of 2020, increasing the rate volatility, overall we continued to see strong demand for yield, resulting in positive overall investment fair value changes for the quarter.
We issued $228 millionpace of common stockresidential loan locks and $201 million of 5.75% 6-year exchangeable debtbusiness purpose loan originations in the thirdsecond half of the second quarter.
We deployed $152 million of capital in the third quarter, including $55 million into proprietary investments and $98 million into third-party investments.
Our 5 Archesbusiness purpose lending platform originated $162$234 million of business purpose mortgage loans in the thirdsecond quarter, including $125$176 million in fundedof single-family rental loans and $37 million in associated funding commitments.
Residential jumbo loan purchase commitments were $1.70 billion, and we purchased $1.48 billion of residential jumbo loans during the third quarter of 2019.
During the third quarter, we completed one Sequoia securitization of Select residential jumbo loans totaling $376 million and two Sequoia securitizations of Choice residential jumbo loans totaling $727 million. Additionally, we sold $470$58 million of residential jumbo loans to third parties.bridge loans.
Our book value per share declined $0.09 per share to $15.92 per share during•During the thirdsecond quarter of 2019. While our earnings covered our dividend during the third quarter, this decrease was primarily driven by a $0.11 per share decline in the value of derivatives hedging our long-term debt, which were impacted by the decline in benchmark rates during the third quarter.
In October 2019,2020, we completed the acquisition of CoreVest, an originator of business purpose residential loans. The acquisition included CoreVest's operating platform and approximately $900sold $29 million of business purpose loans and securities a significant portion of which we will hold forfrom our residential lending investment in our investment portfolio. Total transaction consideration was $492portfolio, $53 million of cash and Redwood common stock, net of in-place financing on certain of the financial assets.



Capital Allocation Summary
This section provides an overview of our capital position and how it was allocated at September 30, 2019. 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 capitalize our business with a combination of equity and long-term unsecured corporate debt (which we collectively refer to as corporate “capital”). Our total capital was $2.55 billion at September 30, 2019, and included $1.79 billion of equity capital and $0.77 billion of unsecured corporate debt, including $245third-party residential investments (including $35 million of convertible debt due in 2023, $200recently issued subordinate securities), and $19 million of convertible debt due in 2024, $201 million of exchangeable debt due in 2025, and $140 million of trust-preferred securities due in 2037.
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, 2019.
Table 2 – Capital Allocation Summary
At September 30, 2019          
(Dollars in Thousands) Fair Value Collateralized Short-Term Debt Collateralized Long-Term Debt Allocated Capital % of Total Capital
Investment portfolio          
Residential loans (1)
 $2,419,937
 $—
 $(1,944,640) $475,297
 19 %
Business purpose residential loans 225,601
 (139,476) (14,265) 71,860
 3 %
           
Securities portfolio          
Sequoia residential securities (2)
 505,464
 (155,185) (184,664) 165,615
 6 %
Agency CRT securities 140,881
 (8,082) —
 132,799
 5 %
Multifamily securities (3)
 683,414
 (516,552) —
 166,862
 7 %
Re-performing residential loan securities (4)
 626,594
 (315,030) (41,094) 270,470
 11 %
Third-party residential securities 254,158
 (162,797) —
 91,361
 4 %
Total securities portfolio 2,210,511
 (1,157,646) (225,758) 827,107
 32 %
           
Other investments 200,872
 —
 —
 200,872
 8 %
Other assets/(other liabilities)       (73,548) (3)%
Cash and liquidity capital       868,013
 N/A
Total investment portfolio $5,056,921
 $(1,297,122) $(2,184,663) 2,369,602
 93 %
Residential       130,000
 5 %
Business purpose       54,516
 2 %
Total mortgage banking       184,516
 7 %
Total       $2,554,118
 100 %
(1)Includes $43 million of FHLB stock, $34 million of cash and cash equivalents, and $77 million of restricted cash.
(2)Sequoia residential securities presented above includes $257 million of securities retained from our consolidated Sequoia Choice securitizations. For GAAP purposes we consolidated $2.62 billion of residential loans and $2.36 billion of non-recourse ABS debt associated with these retained securities.
(3)Multifamily securities presented above includes $214 million of subordinate investments in the Freddie Mac K-Series securitizations. For GAAP purposes we consolidated $3.79 billion of multifamily loans and $3.58 billion of non-recourse ABS debt associated with these securities.
(4)Re-performing residential loan securities presented above represent third-party securities collateralized by seasoned re-performing, and to a lesser extent, non-performing residential loans and includes $454 million of subordinate and mezzanine investments in the Freddie Mac SLST securitizations. For GAAP purposes we consolidated $2.44 billion of residential loans and $1.99 billion of non-recourse ABS debt associated with these securities.

During the third quarter, capital raising combined with the completion of a new secured financing facility and portfolio optimization raised over $476 million of capital. This combined activity included $228 million of common equity raised in early September, a $185 million long-term, non-mark-to-market, secured debt facility collateralized by retained Sequoia residential securities (that generated $130 million of capital, after repayment of existing financing), and $118 million from security sales.
In late September, we issued $201 million of 5.75% 6-year exchangeable debt. This issuance will replace our exchangeable notes maturing in November 2019, and we therefore do not consider it incremental capital.
During the third quarter, we deployed capital into re-performing residential loan securities and business purpose residential loans, and reduced our capital allocations to Agency CRT securities, other third-party residential securities, and multifamily mezzanine securities.
As of September 30, 2019, our•Our unrestricted cash and liquidity capital included $590position increased to $529 million of capital available for investment and an additional $201 million of capital reserved for the repayment of our exchangeable notes maturing in November 2019.
In October 2019, we completed the acquisition of CoreVest for $492 million, net of in-place financing on financial assets acquired, with a mix of cash on hand and shares of Redwood stock. This acquisition will increase our allocations of capital to business purpose residential loan investments and business purpose mortgage banking. In the near-term, we expect to further increase capital allocated to business purpose residential loans, multifamily securities, and re-performing loan securities.
Atat the end of October, adjusting for the acquisitionsecond quarter of CoreVest and other activity, we estimate we had approximately $1002020, after repurchasing $125 million of capital available for investment.our convertible debt at a discount, and without issuing any equity or equity-linked securities.

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RESULTS OF OPERATIONS
Within this Results of Operations section, we provide commentary that compares results year-over-year for 20192020 and 2018.2019. Most tables include a "change" column that shows the amount by which the results from 20192020 are greater or less than the results from the respective period in 2018.2019. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the thirdsecond quarter of 2019,2020, compared to the thirdsecond quarter of 2018,2019, and increases or decreases in the "nine-month"six-month periods" refer to the change in results for the first ninesix months of 2019,2020, compared to the first ninesix months of 2018.2019.
Consolidated Results of Operations
The following table presents the components of our net income for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 32 – Net Income (Loss)
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands, except per Share Data) 2019 2018 Change  2019 2018 Change
Net Interest Income $33,513
 $35,046
 $(1,533)  $97,600
 $104,914
 $(7,314)
Non-interest Income     

      

Mortgage banking activities, net 9,515
 11,224
 (1,709)  40,984
 48,396
 (7,412)
Investment fair value changes, net 11,444
 10,332
 1,112
  34,741
 12,830
 21,911
Other income, net 1,825
 3,453
 (1,628)  7,819
 8,893
 (1,074)
Realized gains, net 4,714
 7,275
 (2,561)  18,227
 21,352
 (3,125)
Total non-interest income, net 27,498
 32,284
 (4,786)  101,771
 91,471
 10,300
Operating expenses (26,815) (21,490) (5,325)  (76,229) (63,529) (12,700)
Net income before income taxes 34,196
 45,840
 (11,644)  123,142
 132,856
 (9,714)
Benefit from (provision for) income taxes 114
 (4,919) 5,033
  (3,102) (12,343) 9,241
Net Income $34,310
 $40,921
 $(6,611)  $120,040
 $120,513
 $(473)
Diluted earnings per common share $0.31
 $0.42
 $(0.11)  $1.09
 $1.30
 $(0.21)
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands, except per Share Data)20202019Change20202019Change
Net Interest Income$27,280  $32,322  $(5,042) $78,690  $64,087  $14,603  
Non-interest Income
Mortgage banking activities, net(5,772) 19,160  (24,932) (34,183) 31,469  (65,652) 
Investment fair value changes, net152,228  3,138  149,090  (718,604) 23,297  (741,901) 
Other income955  4,859  (3,904) 3,392  9,484  (6,092) 
Realized gains, net25,965  2,827  23,138  29,817  13,513  16,304  
Total non-interest income (loss), net173,376  29,984  143,392  (719,578) 77,763  (797,341) 
General and administrative expenses(30,092) (26,255) (3,837) (62,760) (49,414) (13,346) 
Other expenses(5,083) (2,452) (2,631) (96,498) (3,490) (93,008) 
Net income (loss) before income taxes165,481  33,599  131,882  (800,146) 88,946  (889,092) 
(Provision for) benefit from income taxes(37) (2,333) 2,296  22,192  (3,216) 25,408  
Net Income (Loss)$165,444  $31,266  $134,178  $(777,954) $85,730  $(863,684) 
Diluted earnings (loss) per common share$1.00  $0.30  $0.70  $(6.82) $0.78  $(7.60) 
Net Interest Income
The decrease in net interest income during the three- and nine-monththree-month periods was primarily due to lower net interest income from our mortgage banking segment, driven by lower average balances of residential loans, held-for-saleas we completed the sale of nearly all of our loans previously held-for-investment at the FHLBC, and higherour loan inventory held at the end of the first quarter of 2020.As a result of these sales, we expect our net interest rates on our variable rate financing. Additionally, duringincome to decrease further in the third quarter of 2019,2020 and remain lower until we acceleratedbegin to re-deploy our paceavailable capital into interest earning investments and increase our inventory of portfolio optimization, increasingloans held for sale in our average balancemortgage banking businesses. Additionally, during the second quarter of undeployed capital,2020 we entered into several new financing agreements, which also contributed to lowerin general carry higher interest costs associated with non-marginable and non-recourse features.
The increase in net interest income during the quarter. The decreasesix-month periods was primarily due to a higher average balance of invested capital during the nine-month periods was also driven by higher convertible debt expense in 2019, relative to 2018, duefirst six months of 2020, as compared to the timingfirst six months of the issuance and maturity of different series of convertible and exchangeable notes in 2018 and 2019.
We utilize hedges to manage interest rate risk in our investment portfolio and the net interest paid or received from these instruments is a component of our Investment fair value changes line item, which is discussed below. For the three-month periods, net hedge interest expense associated with portfolio hedges increased and on a combined basis, net interest income plus net interest income (expense) on hedges decreased by $2 million. For the nine-month periods, net hedge interest expense associated with portfolio hedges decreased and on a combined basis, net interest income plus net interest income (expense) on hedges increased by $4 million. During the third quarter of 2019, we experienced increased hedging costs due to interest rate volatility.
Additional detail on changes in 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 the three- and nine-monthsix-month periods was predominantly due to lower marginsa decrease in 2019, relative to 2018,loan acquisition and origination volumes at our mortgage banking businesses during the second quarter of 2020, as well as lower loan purchase volumes. margins, in both cases due to pandemic-related market disruptions. While we began to see volumes grow later in the second quarter, in the near-term we expect volumes and margins to continue to be below levels we experienced pre-pandemic.
A more detailed analysis of the changes in this line item is included in the “Results of Operations by Segment” section that follows.

75

Investment Fair Value Changes, Net
Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and, prior to the second quarter of 2020, interest rate hedges associated with these investments. During the three and nine months ended SeptemberJune 30, 2019, the positive2020, investment fair value changes were primarily driven by tightening credit spreads in several partsincreased significantly, as the fair value of our portfolio.investment assets recovered nearly one-third of the unrealized losses recognized in the first quarter of 2020. During the six months ended June 30, 2020, the negative investment fair value changes reflected significant declines in the value of our investments in the first quarter of 2020 resulting from market dislocations caused by the pandemic. Additional detail on our investment fair value changes is included in the Investment Portfolio portion of the “Results of Operations by Segment” section that follows.
Other Income Net
The decrease in other income for the three- and nine-monthsix-month periods was primarily due to amortization expense from intangible assets we recorded in connection with the acquisitionresult of 5 Arches in the first quarter of 2019, as well as a decrease in income fromlosses on our MSR investments. The decreaseinvestments, which were driven primarily by increased prepayment speeds, resulting from recent declines in other income for the nine-month periods was partially offset byinterest rates. Additionally, we recorded a $2 million gain associated with the re-measurement of our initial minority investment and purchase option in 5 Arches and loan administration fee income earned by 5 Arches.during the six months ended June 30, 2019.
Realized Gains, Net
During the three and ninesix months ended SeptemberJune 30, 2020, we realized gains of $26 million and $30 million, respectively, primarily resulting from a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020. During the three and six months ended June 30, 2019, we realized gains of $5$3 million and $18$14 million, respectively, primarily from the sale of $15$25 million and $82$67 million of AFS securities, respectively, and the call of a seasoned Sequoia securitization insecuritization. Of note, all of the first quarter. Duringgains from extinguishment of debt were excluded from our diluted earnings per share for the three and nine months ended SeptemberJune 30, 2018, we realized gains2020, in accordance with GAAP. See Note 17 of $7 millionour Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on this calculation.
General and $21 million, respectively, primarily from the sale of $26 million and $118 million of AFS securities, respectively.
OperatingAdministrative Expenses
The increase in operatinggeneral and administrative expenses for the three- and nine-monthsix-month periods primarily resulted from $4 million and $16 million of additional expenses, respectively, from the consolidatedconsolidation of 5 Arches operations. Operatingand CoreVest operations during 2019 after their respective acquisitions. The increase for the six-month periods was partially offset by a $5 million decrease in our variable compensation expense, which was impacted by our year-to-date performance in 2020. Additionally, in April 2020, we implemented a workforce reduction that reduced headcount by approximately 35% and fixed compensation costs by approximately 25%.
Other Expenses
The increase in other expenses for the threethree-month periods was primarily due to higher amortization expense from intangible assets and nine months ended September 30, 2019 also included $2contingent consideration we recorded in association with the acquisitions of 5 Arches and CoreVest in 2019. The increase in other expenses for the six-month periods was primarily due to $89 million of transaction costs related togoodwill impairment expense at our Business Purpose Lending segment recorded in the acquisitionfirst quarter of CoreVest in October 2019.2020.
Provision for Income Taxes
Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. For the three- and nine-monthsix-month periods, the decrease in provision for income taxes was drivenand the change to a benefit from income taxes from a provision for income taxes in the prior year, respectively, were primarily by lowerthe result of GAAP income earnedlosses at our TRS. Additionally, the nine-month period includedTRS in 2020. The benefit from income taxes in 2020 was partially offset by a valuation allowance being recorded against our federal net ordinary deferred tax benefit resulting from the purchase of 5 Arches.assets. For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.


76

Net Interest Income
The following table presents the components of net interest income for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 43 – Net Interest Income
Three Months Ended June 30,
20202019
(Dollars in Thousands)Interest Income/ (Expense)
 Average
   Balance (1)
YieldInterest Income/ (Expense)
 Average
   Balance (1)
Yield
Interest Income
Residential loans, held-for-sale$8,537  $771,003  4.4 %$10,015  $898,054  4.5 %
Residential loans - HFI at Redwood (2)
—  —  — %24,090  2,399,670  4.0 %
Residential loans - HFI at Legacy Sequoia (2)
2,685  305,160  3.5 %4,773  468,062  4.1 %
Residential loans - HFI at Sequoia Choice (2)
22,565  1,826,727  4.9 %26,814  2,218,425  4.8 %
Residential loans - HFI at Freddie Mac SLST (2)
21,187  2,115,716  4.0 %11,596  1,221,346  3.8 %
Business purpose residential loans20,441  1,181,644  6.9 %3,996  207,280  7.7 %
Single-family rental loans - HFI at CAFL32,978  2,379,689  5.5 %—  —  — %
Multifamily loans - HFI at Freddie Mac K-Series4,870  470,896  4.1 %35,917  3,644,683  3.9 %
Trading securities6,587  127,506  20.7 %19,548  1,235,965  6.3 %
Available-for-sale securities3,440  128,486  10.7 %5,469  181,253  12.1 %
Other interest income6,656  848,105  3.1 %6,324  555,514  4.6 %
Total interest income129,946  10,154,932  5.1 %148,542  13,030,252  4.6 %
Interest Expense
Short-term debt facilities(15,110) 1,295,973  (4.7)%(17,740) 1,856,466  (3.8)%
Short-term debt - servicer advance financing(1,797) 231,312  (3.1)%(3,401) 238,669  (5.7)%
Short-term debt - convertible notes, net—  —  — %(3,134) 200,132  (6.3)%
ABS issued - Legacy Sequoia (2)
(1,518) 300,773  (2.0)%(3,981) 459,305  (3.5)%
ABS issued - Sequoia Choice (2)
(19,117) 1,673,361  (4.6)%(23,134) 2,002,552  (4.6)%
ABS issued - Freddie Mac SLST (2)
(15,845) 1,801,798  (3.5)%(8,557) 984,150  (3.5)%
ABS issued - Freddie Mac K-Series(4,378) 447,886  (3.9)%(34,441) 3,442,411  (4.0)%
ABS issued - CAFL(24,446) 2,213,900  (4.4)%—  —  — %
Long-term debt - FHLBC(1,635) 381,465  (1.7)%(13,235) 1,999,999  (2.6)%
Long-term debt - other(18,820) 1,297,504  (5.8)%(8,597) 573,003  (6.0)%
Total interest expense(102,666) 9,643,972  (4.3)%(116,220) 11,756,687  (4.0)%
Net Interest Income$27,280  $32,322  
77

 Three Months Ended September 30,Six Months Ended June 30,
 2019 201820202019
(Dollars in Thousands) Interest Income/ (Expense) 
 Average
   Balance (1)
 Yield Interest Income/ (Expense) 
 Average
   Balance (1)
 Yield(Dollars in Thousands)Interest Income/ (Expense)
 Average
   Balance (1)
YieldInterest Income/ (Expense)
 Average
   Balance (1)
Yield
Interest Income            Interest Income
Residential loans, held-for-sale $10,583
 $973,917
 4.3 % $13,867
 $1,193,919
 4.6 %Residential loans, held-for-sale$16,787  $875,767  3.8 %$19,473  $842,673  4.6 %
Residential loans - HFI at Redwood (2)
 22,809
 2,325,304
 3.9 % 23,326
 2,311,347
 4.0 %
Residential loans - HFI at Redwood (2)
20,925  993,623  4.2 %48,281  2,390,215  4.0 %
Residential loans - HFI at Legacy Sequoia (2)
 4,293
 436,963
 3.9 % 5,172
 565,008
 3.7 %
Residential loans - HFI at Legacy Sequoia (2)
5,878  348,885  3.4 %9,623  481,633  4.0 %
Residential loans - HFI at Sequoia Choice (2)
 27,555
 2,320,989
 4.7 % 20,900
 1,753,014
 4.8 %
Residential loans - HFI at Sequoia Choice (2)
47,647  1,981,097  4.8 %52,470  2,180,091  4.8 %
Residential loans - HFI at Freddie Mac SLST (2)
 11,830
 1,278,036
 3.7 % —
 —
 — %
Residential loans - HFI at Freddie Mac SLST (2)
43,173  2,229,068  3.9 %23,391  1,218,153  3.8 %
Business purpose residential loans 5,446
 296,037
 7.4 % 1,445
 65,186
 8.9 %Business purpose residential loans43,085  1,325,798  6.5 %6,785  180,042  7.5 %
Single-family rental loans - HFI at CAFLSingle-family rental loans - HFI at CAFL62,988  2,283,812  5.5 %—  —  — %
Multifamily loans - HFI at Freddie Mac K-Series 36,829
 3,767,847
 3.9 % 5,578
 565,793
 3.9 %Multifamily loans - HFI at Freddie Mac K-Series45,042  2,328,527  3.9 %57,305  2,897,936  4.0 %
Trading securities 17,877
 1,168,952
 6.1 % 18,960
 1,091,045
 7.0 %Trading securities20,249  434,852  9.3 %38,261  1,198,531  6.4 %
Available-for-sale securities 5,170
 174,530
 11.8 % 8,103
 281,819
 11.5 %Available-for-sale securities8,087  141,279  11.4 %11,206  197,684  11.3 %
Other interest income 7,725
 612,554
 5.0 % 2,046
 202,029
 4.1 %Other interest income14,166  715,416  4.0 %12,788  567,669  4.5 %
Total interest income 150,117
 13,355,129
 4.5 % 99,397
 8,029,160
 5.0 %Total interest income328,027  13,658,124  4.8 %279,583  12,154,627  4.6 %
Interest Expense            Interest Expense
Short-term debt facilities (18,209) 1,974,174
 (3.7)% (14,146) 1,567,364
 (3.6)%Short-term debt facilities(36,600) 1,973,427  (3.7)%(33,214) 1,732,720  (3.8)%
Short-term debt - servicer advance financing (2,891) 212,988
 (5.4)% —
 —
 — %Short-term debt - servicer advance financing(3,374) 189,726  (3.6)%(7,014) 252,550  (5.6)%
Short-term debt - convertible notes, net (3,139) 200,445
 (6.3)% —
 —
 — %Short-term debt - convertible notes, net—  —  — %(6,265) 199,978  (6.3)%
ABS issued - Legacy Sequoia (2)
 (3,452) 428,101
 (3.2)% (4,257) 555,511
 (3.1)%
ABS issued - Legacy Sequoia (2)
(4,040) 343,997  (2.3)%(8,097) 473,458  (3.4)%
ABS issued - Sequoia Choice (2)
 (23,576) 2,085,622
 (4.5)% (18,019) 1,589,553
 (4.5)%
ABS issued - Sequoia Choice (2)
(40,627) 1,782,702  (4.6)%(45,247) 1,984,241  (4.6)%
ABS issued - Freddie Mac SLST (2)
 (8,709) 1,023,046
 (3.4)% —
 —
 — %
ABS issued - Freddie Mac SLST (2)
(32,022) 1,845,307  (3.5)%(17,304) 984,455  (3.5)%
ABS issued - Freddie Mac K-Series (35,328) 3,559,970
 (4.0)% (5,145) 526,303
 (3.9)%ABS issued - Freddie Mac K-Series(42,728) 2,195,469  (3.9)%(54,760) 2,733,499  (4.0)%
ABS issued - CAFLABS issued - CAFL(46,385) 2,115,019  (4.4)%—  —  — %
Long-term debt - FHLBC (12,311) 1,999,999
 (2.5)% (11,080) 1,999,999
 (2.2)%Long-term debt - FHLBC(10,410) 1,184,002  (1.8)%(26,418) 1,999,999  (2.6)%
Long-term debt - other (8,989) 602,434
 (6.0)% (11,704) 770,730
 (6.1)%Long-term debt - other(33,151) 1,150,774  (5.8)%(17,177) 572,750  (6.0)%
Total interest expense (116,604) 12,086,779
 (3.9)% (64,351) 7,009,460
 (3.7)%Total interest expense(249,337) 12,780,423  (3.9)%(215,496) 10,933,650  (3.9)%
Net Interest Income $33,513
     $35,046
    Net Interest Income$78,690  $64,087  

(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business purpose residential loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value.
(2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our 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 entities. Interest income from residential loans - HFI at Freddie Mac SLST and the interest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities.

78
  Nine Months Ended September 30,
  2019 2018
(Dollars in Thousands) Interest Income/ (Expense) 
 Average
   Balance (1)
 Yield Interest Income/ (Expense) 
 Average
   Balance (1)
 Yield
Interest Income            
Residential loans, held-for-sale $30,056
 $886,902
 4.5 % $39,399
 $1,174,174
 4.5 %
Residential loans - HFI at Redwood (2)
 71,089
 2,368,340
 4.0 % 70,643
 2,350,322
 4.0 %
Residential loans - HFI at Legacy Sequoia (2)
 13,916
 466,580
 4.0 % 14,998
 593,382
 3.4 %
Residential loans - HFI at Sequoia Choice (2)
 80,026
 2,227,573
 4.8 % 43,970
 1,234,897
 4.7 %
Residential loans - HFI at Freddie Mac SLST (2)
 35,221
 1,238,334
 3.8 % —
 —
 — %
Business purpose residential loans 12,231
 219,132
 7.4 % 1,445
 21,967
 8.8 %
Multifamily loans - HFI at Freddie Mac K-Series 94,134
 3,191,093
 3.9 % 5,578
 190,670
 3.9 %
Trading securities 56,138
 1,188,563
 6.3 % 52,494
 989,168
 7.1 %
Available-for-sale securities 16,376
 189,881
 11.5 % 26,560
 319,240
 11.1 %
Other interest income 20,513
 582,795
 4.7 % 3,905
 205,297
 2.5 %
Total interest income 429,700
 12,559,193
 4.6 % 258,992
 7,079,117
 4.9 %
Interest Expense            
Short-term debt facilities (51,424) 1,814,088
 (3.8)% (37,238) 1,472,436
 (3.4)%
Short-term debt - servicer advance financing (9,905) 239,218
 (5.5)% —
 —
 — %
Short-term debt - convertible notes, net (9,403) 200,135
 (6.3)% (3,518) 95,375
 (4.9)%
ABS issued - Legacy Sequoia (2)
 (11,548) 458,173
 (3.4)% (12,324) 583,588
 (2.8)%
ABS issued - Sequoia Choice (2)
 (68,823) 2,018,406
 (4.5)% (37,702) 1,119,373
 (4.5)%
ABS issued - Freddie Mac SLST (2)
 (26,014) 997,460
 (3.5)% —
 —
 — %
ABS issued - Freddie Mac K-Series (90,088) 3,012,017
 (4.0)% (5,145) 177,362
 (3.9)%
Long-term debt - FHLBC (38,728) 1,999,999
 (2.6)% (28,939) 1,999,999
 (1.9)%
Long-term debt - other (26,167) 582,753
 (6.0)% (29,212) 645,681
 (6.0)%
Total interest expense (332,100) 11,322,249
 (3.9)% (154,078) 6,093,814
 (3.4)%
Net Interest Income $97,600
     $104,914
    

(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business purpose residential loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value.
(2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our 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 entities. Interest income from residential loans - HFI at Freddie Mac SLST and the interest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities.

The following table presents net interest income by segment for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 54 – Net Interest Income by Segment
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)20202019Change20202019Change
Net Interest Income by Segment
Residential Lending$6,484  $18,290  $(11,806) $25,713  $37,453  $(11,740) 
Business Purpose Lending14,905  1,893  13,012  32,975  3,291  29,684  
Third-Party Investments8,942  11,344  (2,402) 22,381  21,810  571  
Corporate/Other(3,051) 795  (3,846) (2,379) 1,533  (3,912) 
Net Interest Income$27,280  $32,322  $(5,042) $78,690  $64,087  $14,603  
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Net Interest Income by Segment             
Investment Portfolio $38,375
 $38,704
 $(329)  $114,076
 $115,163
 $(1,087)
Mortgage Banking 5,834
 6,890
 (1,056)  15,404
 19,105
 (3,701)
Corporate/Other (10,696) (10,548) (148)  (31,880) (29,354) (2,526)
Net Interest Income $33,513
 $35,046
 $(1,533)  $97,600
 $104,914
 $(7,314)

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 Legacy Sequoia entities, are included in the "Results of Consolidated Legacy Sequoia Entities" section that follows. Net interest income from Corporate/Otherand for the three-month periods remained consistent while the $3three months ended June 30, 2020, also includes $4 million increase in netof interest expense from Corporate/Other for the nine-month periods was primarily due to higheron our convertible debt. While our convertible debt expense in 2019, relativeis generally allocated to 2018, due toour segments, given the issuancelarge balance of $200 millionundeployed capital (cash) held at a corporate level during the second quarter of convertible notes in June 2018 and the repayment of $250 million of convertible notes in April 2018.
The following table presents the net interest rate spread between the yield on unsecuritized loans and securities and the debt yield2020, a portion of the short-termconvertible debt used in part to finance each investment type at September 30, 2019.expense was allocated against this capital.
Table 6 – Interest Expense — Specific Borrowing Costs
September 30, 2019 Residential Loans Held-for-Sale Single-Family Rental Loans Residential Bridge Loans 
Residential
Securities
Asset yield 4.06% 5.48% 8.97% 4.06%
Short-term debt yield 3.51% 4.30% 4.54% 3.11%
Net Spread 0.55% 1.18% 4.43% 0.95%
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
We report on our business using twothree distinct segments: Investment PortfolioResidential Lending, Business Purpose Lending, and Mortgage Banking. Our segments are based onThird-Party Investments. Beginning in the second quarter of 2020, we combined what was previously our organizationalMultifamily Investments segment and management structure, which aligns with how our results are monitored and performance is assessed.Third-Party Residential Investments segment into a new segment called Third-Party Investments. Prior periods have been conformed to the current presentation. For additional information on our segments, refer to Note 2423 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following table presents the segment contribution from our two segments reconciled to our consolidated net income, for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 75 – Segment Results Summary
 Three Months Ended September 30,   Nine Months Ended September 30,  Three Months Ended June 30,Six Months Ended June 30,
(In Thousands) 2019 2018 Change  2019 2018 Change(In Thousands)20202019Change20202019Change
Segment Contribution from:             Segment Contribution from:
Investment Portfolio $55,018
 $54,380
 $638
  $166,023
 $147,663
 $18,360
Mortgage Banking 3,393
 9,465
 (6,072)  22,456
 39,075
 (16,619)
Residential LendingResidential Lending$33,447  $23,045  $10,402  $(166,043) $49,997  $(216,040) 
Business Purpose LendingBusiness Purpose Lending46,277  (915) 47,192  (182,156) (1,075) (181,081) 
Third-Party InvestmentsThird-Party Investments77,013  21,247  55,766  (427,398) 58,451  (485,849) 
Corporate/Other (24,101) (22,924) (1,177)  (68,439) (66,225) (2,214)Corporate/Other8,707  (12,111) 20,818  (2,357) (21,643) 19,286  
Net Income $34,310
 $40,921
 $(6,611)  $120,040
 $120,513
 $(473)
Net Income (Loss)Net Income (Loss)$165,444  $31,266  $134,178  $(777,954) $85,730  $(863,684) 
The following sections provide a detailed discussion of the results of operations at each of our twothree business segments for the three and ninesix months ended SeptemberJune 30, 2019 and 2018.2020.
The increase in net expenseincome from Corporate/Other for the three- and nine-monthsix-month periods was primarily due to higher convertible debt expense in 2019, relative to 2018, as discussed in the previous section. Operating expenses for the three and nine months ended September 30, 2019 also included $2 million of transaction costs related to the acquisition of CoreVest in October 2019. For the nine-month periods, the increase in net expense from Corporate/Other was partially offset by a $2$25 million gain associated with the re-measurementrepurchase of $125 million of convertible debt in the second quarter of 2020.





79


Residential Lending Segment
Overview
Our Residential Lending segment generated $33 million of net income during the second quarter of 2020, driven primarily by $35 million of positive investment fair value changes. Mortgage banking income was negative for the second quarter of 2020 as we incurred incremental costs associated with the sale of our initial minorityremaining loan inventory from the end of the first quarter and loan lock volumes were substantially reduced. During the second quarter, we resumed locking loans through our conduit operations, and purchased $56 million of loans during the quarter.
Our Residential Lending segment incurred a $199 million net loss during the first quarter of 2020, driven primarily by $197 million of negative investment fair value changes triggered by the pandemic and purchase optiona $19 million net loss from mortgage banking operations, which was driven by decreased profitability on securitizations that settled later in 5 Arches.the first quarter and from lower marks on loan inventory held at quarter-end, resulting from pandemic-related market dislocations.
While our loan acquisition volumes began to ramp back up later in the second quarter, in the near-term we expect volumes and profitability at our residential mortgage banking businesses to continue to be impacted by the pandemic and remain below pre-pandemic levels. We are also exposed to the potential impact of pandemic-related payment delinquencies and forbearances with respect to loans securitized in Sequoia transactions, and loans we have sold where we maintain certain repurchase obligations tied to near-term delinquencies.
Investment Portfolio Segment

Our Investment Portfolio segment is where we hold our housing-focused credit-sensitive investments in residential mortgage loans, mortgage-backed securities, and related assets. Our portfolio is primarily comprised of prime jumbo residential mortgage loans financed through the FHLBC, mortgage-backed securities collateralized by both residential and multifamily mortgages, and business purpose residential loans, which are mortgage loans to investors in residential properties.
The following table presents the componentsdetails of segment contribution for the Investment Portfolio segment for the three and nine months ended Septemberour Residential Lending investment portfolio at June 30, 2019 and 2018.
Table 8 – Investment Portfolio Segment Contribution
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Interest income $132,894
 $79,556
 $53,338
  $380,394
 $202,882
 $177,512
Interest expense (94,519) (40,852) (53,667)  (266,318) (87,719) (178,599)
Net interest income 38,375
 38,704
 (329)  114,076
 115,163
 (1,087)
Non-interest income             
Investment fair value changes, net 11,896
 10,566
 1,330
  35,749
 13,756
 21,993
Other income, net 2,313
 3,334
 (1,021)  6,408
 8,774
 (2,366)
Realized gains, net 4,714
 7,275
 (2,561)  18,227
 21,352
 (3,125)
Total non-interest income, net 18,923
 21,175
 (2,252)  60,384
 43,882
 16,502
Direct operating expenses (2,191) (2,659) 468
  (7,110) (6,524) (586)
Segment contribution before income taxes 55,107
 57,220
 (2,113)  167,350
 152,521
 14,829
Provision for income taxes (89) (2,840) 2,751
  (1,327) (4,858) 3,531
Total Segment Contribution $55,018
 $54,380
 $638
  $166,023
 $147,663
 $18,360

The following table presents our primary portfolios of investment assets in our Investment Portfolio segment at September 30, 20192020 and December 31, 2018.2019.
Table 96 – Investment PortfolioResidential Lending Investments
(In Thousands)June 30, 2020December 31, 2019
Residential loans at Redwood (1)
$—  $2,111,897  
Residential securities at Redwood142,713  229,074  
Residential securities at consolidated Sequoia Choice entities (2)
202,611  254,265  
Other investments19,661  42,224  
Total Segment Investments$364,985  $2,637,460  
(In Thousands) September 30, 2019 December 31, 2018 Change
Residential loans held-for-investment at Redwood $2,267,218
 $2,383,932
 $(116,714)
Residential bridge loans held-for-investment 206,890
 112,798
 94,092
Single-family rental loans held-for-investment 18,711
 —
 18,711
Residential securities 816,057
 1,023,415
 (207,358)
Multifamily securities 469,369
 429,079
 40,290
Securities retained from consolidated Sequoia Choice entities (1)
 257,205
 194,372
 62,833
Securities issued by consolidated Freddie Mac SLST entities (2)
 453,750
 228,921
 224,829
Securities issued by consolidated Freddie Mac K-Series entities (3)
 214,045
 125,523
 88,522
Other investments 346,136
 427,764
 (81,628)
Other assets 371,918
 270,356
 101,562
Economic Assets at Investment Portfolio $5,421,299
 $5,196,160
 $225,139
(1)Our investment in the consolidated Sequoia Choice entities at September 30, 2019 and December 31, 2018 represents $2.62 billion and $2.08 billion of loans, respectively, offset by $2.36 billion and $1.89 billion of ABS issued, respectively.
(2)Our investment in the consolidated Freddie Mac SLST entities at September 30, 2019 and December 31, 2018 represents $2.44 billion and $1.22 billion of loans, respectively, offset by $1.99 billion and $0.99 billion of ABS issued, respectively.
(3)Our investment in the consolidated Freddie Mac K-Series entities at September 30, 2019 and December 31, 2018 represents $3.79 billion and $2.14 billion of loans, respectively, offset by $3.58 billion and $2.02 billion of ABS issued, respectively.
Overview(1)Excludes Sequoia Choice loans held at VIEs that we consolidate for GAAP purposes.
During 2019,(2)Represents our retained economic investment in the consolidated Sequoia Choice securitization VIEs. For GAAP purposes, we have focused on optimizing our investment portfolio by selling assets that had appreciated in valueconsolidated $2.06 billion of loans and $1.86 billion of ABS issued associated with lower current yields, optimizing financing of assets in our portfolio, and redeploying capital into higher-yielding opportunities. During the first nine months of 2019, we deployed $451 million of capital towards new residential and multifamilythese investments including into residential re-performing loan securities, and we generated $230 million of capital from asset sales and $164 million of capital through new and incremental financing. at June 30, 2020.
As a result of capital optimization activities,the economic and financial market impacts of the pandemic, the terms of our FHLBC facility evolved and in March we endedbegan entering into transactions to sell several pools of residential whole loans financed through this facility with the thirdobjective to pay down our FHLBC borrowings. During the second quarter with approximately $590of 2020, we completed the sale of nearly all of our residential loans previously financed at the FHLBC, and repaid all but $1 million of capital available for investment. A higher balanceborrowings under this facility. We do not expect to increase borrowings under our FHLBC facility above the existing $1 million of average undeployed capitalborrowings outstanding.
During the second quarter of 2020, we sold $29 million of securities from our residential lending investment portfolio and retained $20 million of investment securities from a $271 million Sequoia securitization we completed during the thirdquarter. During the first quarter dampened the growth in net interest income, while continued spread tightening during the quarter resulted in positive investment fair value changes.
In October 2019,of 2020, we completed our acquisition of CoreVest, which included an operating platform and approximately $900sold $83 million of business purpose loans and securities a significant portion of which we will hold for investment infrom our residential lending investment portfolio. The deployment of capital into these assets, along with capital we expect to deploy into
See the "Investments" section that follows for additional assets created by our expanded business purpose mortgage banking platform, should meaningfully increase the sustainable earnings potential ofdetails on investments at this segment. Credit fundamentals in our investment portfolio remain strong, benefiting from continued stability in the general economy and in housing.

Net Interest Income
Net interest income from our Investment Portfolio primarily includes interest income from our securities and residential loans held-for-investment, 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 by investment type for the three and nine months ended September 30, 2019 and 2018.
Table 10 - Net Interest Income ("NII") from Investment Portfolio
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Net interest income from:             
Residential securities $12,200
 $19,114
 $(6,914)  $39,657
 $58,030
 $(18,373)
Multifamily securities 732
 1,775
 (1,043)  3,706
 5,526
 (1,820)
HFI residential and single-family rental loans at Redwood 10,558
 12,247
 (1,689)  32,421
 41,704
 (9,283)
HFI residential loans at Sequoia Choice 3,979
 2,881
 1,098
  11,203
 6,268
 4,935
HFI residential bridge loans 2,363
 904
 1,459
  5,558
 904
 4,654
HFI residential loans at Freddie Mac SLST 3,121
 —
 3,121
  9,207
 —
 9,207
HFI multifamily loans at Freddie Mac K-Series 1,501
 433
 1,068
  4,046
 433
 3,613
Other interest income 3,921
 1,350
 2,571
  8,278
 2,298
 5,980
NII from Investment Portfolio $38,375
 $38,704
 $(329)  $114,076
 $115,163
 $(1,087)
              
Supplemental information:             
Hedge interest income (expense), net $(999) $561
 $(1,560)  $3,139
 $(2,297) $5,436

The decrease in net interest income from our Investment Portfolio segment for the three- and nine-month periods was primarily due to higher interest expense on our variable-rate borrowings resulting from rising benchmark interest rates over the first half of 2019. This decrease was partially offset by increased interest income from additional portfolio investments that we made during the past year.

The table above also presents supplemental information about interest income (expense) from hedges that we use to manage interest rate risk in our investment portfolio, which are a component of Investment fair value changes, net on our consolidated statements of income. On a combined basis, net interest income in our investment portfolio segment plus interest income (expense) from hedges used to manage interest rate risk in our investment portfolio decreased by $2 million and increased by $4 million in the three- and nine-month periods, respectively.
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 borrowings.
Note 20 of our Notes to Consolidated Financial Statements in Part I, Item 1 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.

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The following table presents the components of investment fair value changes for our Investment PortfolioResidential Lending segment which is comprised of market valuation gains and losses by investment type inclusive of fair value changes of associated risk management derivatives, for the three and ninesix months ended SeptemberJune 30, 2019 and 2018.2020.
Table 11 -7 – Investment Portfolio Fair Value Changes, Net by Investment Typefrom Residential Lending
Three Months EndedSix Months Ended
(In Thousands)June 30, 2020June 30, 2020
Investment Fair Value Changes, Net
     Changes in fair value of:
Residential loans held-for-investment, at Redwood$104  $(93,532) 
Trading securities(2,229) (45,488) 
Net investments in Sequoia Choice entities (1)
39,753  (29,916) 
Risk-sharing and other investments(2,543) (3,078) 
Risk management derivatives, net—  10,735  
Impairments on AFS securities—  (271) 
Investment Fair Value Changes, Net$35,085  $(161,550) 
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Market valuation changes:             
Residential loans held-for-investment at Redwood $(9,337) $(2,305) $(7,032)  $(19,381) $(4,593) $(14,788)
Single-family rental loans held-for-investment 22
 —
 22
  22
 —
 22
Residential bridge loans held-for-investment (742) 52
 (794)  (1,363) 52
 (1,415)
Net investments in Sequoia Choice entities (1)
 2,722
 (942) 3,664
  8,866
 44
 8,822
Net investments in Freddie Mac SLST entities (1)
 17,300
 —
 17,300
  31,702
 —
 31,702
Net investments in Freddie Mac K-Series entities (1)
 7,445
 511
 6,934
  13,810
 511
 13,299
Residential trading securities (4,763) 8,086
 (12,849)  (8,930) 9,232
 (18,162)
Multifamily trading securities 653
 4,762
 (4,109)  7,628
 11,371
 (3,743)
Servicer advance investments 1,585
 —
 1,585
  3,025
 —
 3,025
Excess MSRs (1,635) —
 (1,635)  (2,137) —
 (2,137)
Shared home appreciation options 29
 —
 29
  29
 —
 29
REO (331) —
 (331)  (470) —
 (470)
Hedge interest income (expense), net (999) 561
 (1,560)  3,139
 (2,298) 5,437
Other valuation changes (53) (159) 106
  (191) (563) 372
Investment Fair Value Changes, Net $11,896
 $10,566
 $1,330
  $35,749
 $13,756
 $21,993
(1)Includes changes in fair value for loan purchase and forward sale commitments.
(1)Includes changes in fair value of the loans held-for-investment and the ABS issued at the entities, which netted together represent the change in value of our investments (senior and subordinate securities) at the consolidated VIEs.
Liquidity began to return to the residential securities markets during the second quarter of 2020, helping spreads to tighten on many of our investments, which resulted in positive fair value changes for the quarter, recovering a portion of the negative fair value changes incurred during the first quarter of 2020 due to the pandemic.
Mortgage Banking
The following table provides the activity of residential loans held in inventory for sale at our mortgage banking business during the three and six months ended June 30, 2020.
Table 8 – Loan Inventory for Residential Mortgage Banking Operations — Activity
Three Months EndedSix Months Ended
(In Thousands)June 30, 2020June 30, 2020
Balance at beginning of period $894,154  $536,385  
Acquisitions55,744  2,751,594  
Sales(710,920) (3,440,081) 
Transfers between portfolios (1)
(158,918) 263,172  
Principal repayments(59,553) (77,990) 
Changes in fair value, net(274) (12,847) 
Balance at End of Period$20,233  $20,233  
(1)Represents the net transfers of loans from held-for-investment to held-for-sale within our Residential Lending investment portfolio.
During the three and nine months ended SeptemberJune 30, 2019,2020, our residential mortgage loan conduit purchased $56 million of predominately prime residential jumbo loans, and sold $711 million of jumbo loans to third parties. During the second quarter of 2020, we transferred $271 million of jumbo loans to a Sequoia Choice securitization, of which $163 million were transferred from our inventory of residential loans held-for-sale. Additionally, at June 30, 2020, we had identified $57 million of loans for purchase, nearly all of which are scheduled to be delivered into forward sale agreements. This activity, along with $2 million of repurchase reserve accrual expense and $5 million of expenses associated with resolving residential loan seller demands, resulted in a loss from mortgage banking activities of $8 million for the second quarter of 2020.
During the first quarter of 2020, our residential mortgage loan conduit purchased $2.70 billion of predominately prime residential jumbo loans, securitized $1.62 billion of jumbo Select loans that were accounted for as sales, and sold $1.11 billion of jumbo loans to third parties. This activity resulted in a loss from mortgage banking activities of $23 million for the first quarter of 2020.
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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. During the second quarter of 2020, we completed a non-marginable warehouse facility that we are utilizing to finance existing loan inventory, under which we had $14 million of borrowings outstanding at June 30, 2020. Going forward, we expect to finance our residential mortgage banking loan inventory substantially with non-marginable debt.
Business Purpose Lending Segment
Overview
Our Business Purpose Lending segment generated $46 million of net income during the second quarter of 2020, driven primarily by $40 million of positive investment fair value changes and $14 million of net interest income from investments. Business purpose mortgage banking activities improved from the first quarter of 2020, as origination volumes began to pick up in late May and securitization pricing in the market improved into quarter end.
During the first quarter of 2020, our Business Purpose Lending segment incurred a $228 million net loss, driven primarily by $142 million of negative investment fair value changes and a $12 million net loss from mortgage banking operations, exclusive of an $89 million charge related to the full impairment of this segment's goodwill. The declines in investment fair values were primarily driventriggered by tightening credit spreadsthe pandemic. Mortgage banking income decreased due to decreased profitability on a securitization that settled later in several partsthe first quarter and from lower marks on loan inventory held at quarter-end, resulting from the pandemic-related market dislocation.
While our loan origination volumes began to ramp back up later in the second quarter, in the near-term we expect loan origination volumes and profitability at our business purpose mortgage banking businesses to continue to be impacted by the pandemic and remain below pre-pandemic levels.
Investment Portfolio
The following table presents details of our portfolio.Business Purpose Lending investment portfolio at June 30, 2020 and December 31, 2019.
Table 9 – Business Purpose Lending Investments
(In Thousands)June 30, 2020December 31, 2019
Single-family rental loans at Redwood (1)
$—  $237,620  
Residential bridge loans at Redwood787,367  745,006  
Single-family rental securities at consolidated CAFL entities (2)
203,230  191,301  
Other investments26,202  21,002  
Total Segment Investments$1,016,799  $1,194,929  
(1)Excludes loans held at VIEs that we consolidate for GAAP purposes.
(2)Represents our economic investment in securities issued by consolidated CAFL securitization VIEs. For our residentialGAAP purposes, we consolidated $2.62 billion of loans held-for-investment at Redwood and certain securities$2.42 billion of ABS issued associated with premiums, including IO securities, our basis in these investments declined dueat June 30, 2020.
During the second quarter of 2020, we funded $54 million of business purpose bridge loans and received principal payments of $86 million of such loans. In addition, we retained $20 million of securities from a $221 million single-family rental loan securitization we completed during the second quarter.
During the first quarter of 2020, we funded $206 million of business purpose bridge loans and received principal payments of $114 million of such loans. In addition, we retained $42 million of securities from a single-family rental loan securitization we completed during the first quarter. During the first quarter of 2020, we reclassified our single-family rental loans financed at the FHLBC to reductions in principal or notional underlying principal balances, which resulted in negative fair value changes.held-for-sale and consider them as part of our mortgage banking loan inventory as we plan to securitize these loans.

See the "Investments" sections that follow for additional details on investments at this segment and their associated borrowings.
Other Income, net
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The following table presents the components of Other income, netinvestment fair value changes for our Business Purpose Lending segment by investment portfoliotype for the three and ninesix months ended SeptemberJune 30, 20192020.
Table 10 – Investment Fair Value Changes, Net from Business Purpose Lending
Three Months EndedSix Months Ended
(In Thousands)June 30, 2020June 30, 2020
Investment Fair Value Changes, Net
     Changes in fair value of:
Single-family rental loans held-for-investment$2,222  $(20,806) 
Residential bridge loans held-for-investment21,774  (16,828) 
REO(265) (763) 
Net investments in CAFL entities (1)
17,125  (50,721) 
Other(455) (1,011) 
Risk management derivatives, net—  (11,600) 
Investment Fair Value Changes, Net$40,401  $(101,729) 
(1)Includes changes in fair value of the loans held-for-investment and 2018.the ABS issued at the entities, which netted together represent the change in value of our investments (subordinate securities) at the consolidated VIEs.
During the second quarter of 2020, we saw liquidity begin to return to the markets for business purpose loans and securities, which caused spreads to tighten on most of our investments, and resulted in positive fair value changes for the quarter, recovering a portion of the negative fair value changes incurred during the first quarter of 2020 due to the pandemic.
Mortgage Banking
The following table provides the business purpose residential loans origination activity at Redwood during the three and six months ended June 30, 2020.
Table 11 – Business Purpose Residential Loans — Origination Activity
Three Months Ended June 30, 2020Six Months Ended June 30, 2020
(In Thousands)Single-Family Rental
Residential Bridge(1)
TotalSingle-Family Rental
Residential Bridge(1)
Total
Fair value at beginning of period$163,290  $—  $163,290  $331,565  $—  $331,565  
Originations176,063  58,468  234,531  436,192  285,836  722,028  
Sales—  (1,558) (1,558) (26,148) (22,293) (48,441) 
Transfers between portfolios (2)
32,835  (53,633) (20,798) (383,614) (260,102) (643,716) 
Principal repayments(915) —  (915) (2,270) —  (2,270) 
Changes in fair value, net8,522  (3,277) 5,245  24,070  (3,441) 20,629  
Fair Value at End of Period$379,795  $—  $379,795  $379,795  $—  $379,795  
(1)Our residential bridge loans are generally originated at our TRS and the majority are transferred to our REIT and a smaller portion sold. Origination fees and any mark-to-market changes on these loans prior to transfer are recognized as mortgage banking income. The loans held at our REIT are classified as held-for-investment, with subsequent fair value changes recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our residential bridge loans held-for-investment, see the Investments section that follows.
(2)For single-family rental loans, amounts represent transfers of loans from held-for-sale to held-for-investment, including when loans are securitized (and consolidated for GAAP purposes) or transferred from our TRS to our REIT with the intent to hold for long-term investment. For residential bridge loans, represents the transfer of loans from our TRS to REIT as described in preceding footnote.
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During the three months ended June 30, 2020, we funded $176 million of single-family rental loans, all of which were retained in our mortgage banking portfolio and classified as held-for-sale. During the three months ended June 30, 2020, we funded $58 million of residential bridge loans, of which $2 million were sold to a third party and the remaining loans were transferred to our BPL investment portfolio. Additionally, we completed a $221 million single-family rental loan securitization, consisting of loans we held at the end of the first quarter of 2020.
During the three months ended March 31, 2020, we funded $260 million of single-family rental loans and $227 million of residential bridge loans, of which $21 million of bridge loans were sold to a third party and the remaining bridge loans were transferred to our BPL investment portfolio. Additionally, during the first quarter, we completed a $378 million single-family rental loan securitization in early March.
We utilize a combination of capital and loan warehouse facilities to manage our inventory of single-family rental loans that we hold for sale. During the second quarter, we completed a non-marginable, recourse facility that will provide financing on new bridge loans and our single-family rental loan production. Going forward, we expect to finance our business purpose mortgage banking loan inventory substantially with non-marginable debt.
Third-Party Investments Segment
Overview
As a result of asset sales driven by the impact of the pandemic, the composition of our portfolio evolved during the last several months and we combined our previously reported Multifamily Investments segment with our Third-Party Residential Investments segment into a new segment called Third-Party Investments.
Our Third-Party Investments segment generated $77 million of net income during the second quarter of 2020, driven primarily by $77 million of positive investment fair value changes and $9 million of net interest income. During the first quarter of 2020, our Third-Party Investments segment incurred a net loss of $504 million, driven primarily by $532 million of negative investment fair value changes. The declines in investment fair values were triggered by the pandemic.
Investment Portfolio
The following table presents details of the investments in our Third-Party Investments segment at June 30, 2020 and December 31, 2019.
Table 12 – Other Income, Net from Investment PortfolioThird-Party Investments
(In Thousands)June 30, 2020December 31, 2019
Residential securities at Redwood$146,562  $466,672  
Residential securities at consolidated Freddie Mac SLST entities (1)
334,043  448,893  
Multifamily securities at Redwood27,161  404,128  
Multifamily securities at consolidated Freddie Mac K-Series entities (2)
24,384  252,285  
Other investments383,246  294,904  
Total Segment Investments$915,396  $1,866,882  
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
MSR income, net $431
 $1,967
 $2,342
 $4,797
Risk share income 905
 907
 2,351
 2,706
FHLBC capital stock dividend 541
 460
 1,623
 1,271
Equity investment income 560
 —
 464
 —
Other (124) —
 (372) —
Other Income, Net from Investment Portfolio $2,313
 $3,334
 $6,408
 $8,774
(1)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $2.15 billion of loans and $1.81 billion of ABS issued associated with these investments at June 30, 2020.
Realized Gains, net(2)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $489 million of loans and $465 million of ABS issued associated with these investments at June 30, 2020.
During the second quarter, we sold $53 million of third-party investments, including $35 million of recently issued subordinate securities and $19 million of CRT securities, and deployed $10 million into CRT securities.
See the "Investments" section that follows for additional details on these investments.

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The following table presents the components of investment fair value changes for our Third-Party Investments segment by investment type for the three and ninesix months ended SeptemberJune 30, 2019, we realized gains2020.
Table 13 – Investment Fair Value Changes, Net from Third-Party Investments
Three Months EndedSix Months Ended
(In Thousands)June 30, 2020June 30, 2020
Investment Fair Value Changes, Net
     Changes in fair value of:
Trading securities$44,475  $(175,591) 
Servicer advance investments(136) (6,198) 
Excess MSRs2,971  (6,523) 
Shared home appreciation options884  (6,670) 
Net investments in Freddie Mac SLST entities (1)
26,867  (115,295) 
Net investments in Freddie Mac K-Series entities (1)
1,599  (84,910) 
Risk management derivatives, net—  (58,158) 
Other258  (41) 
Impairments on AFS securities54  (1,200) 
Investment Fair Value Changes, Net$76,972  $(454,586) 
(1)Includes changes in fair value of $5 million and $18 million, respectively, primarily from the sale of $15 million and $82 million of AFS securities, respectively,loans held-for-investment and the callABS issued at the entities, which netted together represent the change in value of our investments (subordinate securities) at the consolidated VIEs.
During the second quarter of 2020, we saw liquidity begin to return to the markets for residential and multifamily securities, which caused spreads to tighten on most of our investments, and resulted in positive fair value changes for the quarter, recovering a seasoned Sequoia securitizationportion of the negative fair value changes incurred during the first quarter. Duringquarter of 2020 due to the pandemic.
Investments
This section presents additional details on our investment assets and their activity during the three and ninesix months ended SeptemberJune 30, 2018, we realized gains of $7 million and $21 million, respectively, primarily from the sale of $26 million and $118 million of AFS securities, respectively.2020.
Direct Operating Expenses and Provision for Income Taxes
Operating expenses at our Investment Portfolio segment decreased for the three-month periods due to lower variable compensation commensurate with lower earnings quarter-over-quarter, as well as lower loan administration fees resulting from our acquisition of 5 Arches in 2019. The increase in operating expenses at our Investment Portfolio segment for the nine-month periods was primarily related to additional personnel added in 2018 to support our new business initiatives.
The provision for income taxes at our Investment Portfolio segment primarily results from GAAP income earned at our TRS from MSRs and certain securities. For the three- and nine-month periods, the decrease in the tax provision primarily resulted from decreased GAAP income at our TRS in this segment.
Residential Loans Held-for-Investment at RedwoodResidential Lending Investment Portfolio
The following table provides the activity of residential loans held-for-investment at Redwoodour Residential Lending investment portfolio during the three and ninesix months ended SeptemberJune 30, 2019.2020.
Table 1314 – Residential Loans Held-for-Investment at RedwoodResidential Lending Investment Portfolio - Activity
Three Months EndedSix Months Ended
(In Thousands)June 30, 2020June 30, 2020
Fair value at beginning of period$1,436,515  $2,111,897  
Sales(1,254,935) (1,254,935) 
Transfers between portfolios (1)
(111,522) (533,612) 
Principal repayments(70,162) (229,818) 
Changes in fair value, net104  (93,532) 
Fair Value at End of Period$—  $—  
(1)Represents the net transfers of loans into or out of our investment portfolio and their reclassification between held-for-sale and held-for-investment.
During the second quarter of 2020, we completed the sale of nearly all of our residential loans previously held for investment and financed at our FHLBC facility, and repaid all but $1 million of borrowings under this facility. The remaining loans were reclassified as held-for-sale and included as part of our residential mortgage banking loan inventory. We do not expect to increase borrowings under our FHLBC facility above the existing $1 million of borrowings outstanding.
85
  Three Months Ended Nine Months Ended
(In Thousands) September 30, 2019 September 30, 2019
Fair value at beginning of period $2,386,883
 $2,383,932
Acquisitions —
 39,269
Sales (6,641) (9,421)
Transfers between portfolios (1)
 8,431
 68,825
Principal repayments (129,122) (286,710)
Changes in fair value, net 7,667
 71,323
Fair Value at End of Period $2,267,218
 $2,267,218
(1)Represents the net transfers of loans into our

Single-Family Rental Loans at Business Purpose Lending Investment Portfolio segment from our Mortgage Banking segment and their reclassification from held-for-sale to held-for-investment.

The increase in fair valuefollowing table provides the activity of single-family rental loans at our loans during the three- and nine-month periods was primarily due to a decline in benchmark interest rates. As our loans held-for-investment are generally fixed-rate and sensitive to changes in interest rates, we utilize various interest rate derivatives to hedge our interest rate risk for these investments. As a result of declining interest ratesBusiness Purpose Lending investment portfolio during the three and ninesix months ended SeptemberJune 30, 2019, interest rate derivatives associated with these investments decreased in value by $17 million and $86 million, respectively.
At September 30, 2019, $2.27 billion of residential loans were held by our FHLB-member subsidiary and financed with $1.94 billion of borrowings from the FHLBC. In connection with these borrowings, our FHLB-member subsidiary is required to hold $43 million of FHLB stock.
At September 30, 2019, the weighted average maturity of these FHLB borrowings was approximately six years and they had a weighted average cost of 2.31% per annum. While the interest costs on these borrowings is variable and resets every 13 weeks, we utilize various interest rate derivative instruments to hedge our interest rate risk in this portfolio.
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, 2019.2020.
Table 14 – Characteristics15 –Single-Family Rental Loans at Business Purpose Lending Investment Portfolio - Activity
Three Months EndedSix Months Ended
(In Thousands)June 30, 2020June 30, 2020
Fair value at beginning of period$252,043  $237,620  
Transfers between portfolios(253,757) (215,417) 
Principal repayments(508) (1,397) 
Changes in fair value, net2,222  (20,806) 
Fair Value at End of Period$—  $—  
During the second quarter, we transferred all of Residential Real Estate Loans Held-for-Investmentour single-family rental loans previously financed at Redwood
September 30, 2019    
(Dollars in Thousands) Principal Balance Weighted Average Coupon
Fixed - 30 year $1,888,486
 4.16%
Fixed - 15, 20, & 25 year 56,113
 3.70%
Hybrid 251,067
 4.19%
Total Outstanding Principal $2,195,666
  
The outstanding residential loans held-for-investment at Redwood at September 30, 2019 were prime-quality, first lien loans, of which 96% were originated between 2013the FHLBC and 2019held for investment to newly established non-marginable warehouse facilities, repaid our associated FHLBC debt, and 4% were originated in 2012 and prior years. The weighted average FICO score of borrowers backingnow classify these loans was 768 (at origination) and the weighted average loan-to-value ("LTV") ratio was 66% (at origination). At September 30, 2019, oneas held-for-sale as part of these loans with an aggregate fair value of $0.5 million was greater than 90 days delinquent and one of these loans with an aggregate fair value of $0.5 million was in foreclosure.

our business purpose mortgage banking loan inventory.
Residential Bridge Loans Held-for-Investment at Redwood Portfolio
The following table provides the activity of residential bridge loans held-for-investment at Redwood during the three and ninesix months ended SeptemberJune 30, 2019.2020.
Table 1516 – Residential Bridge Loans Held-for-Investment at Redwood - Activity
Three Months EndedSix Months Ended
(In Thousands)June 30, 2020June 30, 2020
Fair value at beginning of period$799,744  $745,006  
Transfers between portfolios (1)
53,633  259,966  
Transfers to REO(1,095) (1,907) 
Principal repayments(85,699) (199,595) 
Changes in fair value, net20,784  (16,103) 
Fair Value at End of Period$787,367  $787,367  
  Three Months Ended Nine Months Ended
(In Thousands) September 30, 2019 September 30, 2019
Fair value at beginning of period $159,353
 $112,798
Originations 90,583
 218,770
Acquisitions —
 10,295
Sales (3,308) (46,857)
Transfers to REO —
 (4,995)
Principal repayments (40,006) (83,866)
Changes in fair value, net 268
 745
Fair Value at End of Period $206,890
 $206,890
(1)All of our residential bridge loans are originated at our TRS then transferred to our REIT. Origination fees and any mark-to-market changes on these loans prior to transfer are recognized as mortgage banking income. Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes recorded through Investment fair value changes, net on our consolidated statements of income (loss).
Our $207$787 million of residential bridgebridge loans held-for-investment at SeptemberJune 30, 20192020 were comprised of first-lien, fixed-rate, interest-only loans with a weighted average couponcoupon of 8.90%7.96% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was 693720 and the weighted average LTV ratio of these loans was 70%69%. At SeptemberJune 30, 2019,2020, of the 3922,847 loans in this portfolio, nine loans with an aggregate fair value of $6 million were greater than 90 days delinquent and eight13 of these loans with an aggregate fair value of $5$30 million and an unpaid principal balance of $35 million were greater than 90 days delinquent, of which nine loans with an aggregate fair value of $28 million and an unpaid principal balance of $32 million were in foreclosure.
At September 30, 2019,During the second quarter, we had $139entered into a non-recourse facility to finance $442 million of warehouse debt outstandingour bridge loan investments, with $355 million of borrowings. Subsequent to fundthe end of the second quarter, in July of 2020, we entered into an additional non-recourse facility for our residentialbridge loan investments, financing $253 million of bridge loans held-for-investment. The weighted average costwith $189 million of non-recourse debt. Upon the borrowings outstanding under these facilitiescompletion of this transaction in July, over 85% of our bridge loan investments were financed with non-recourse debt. Additionally, during the thirdsecond quarter of 2019 was 5.07% per annum. Our residential2020, we entered into a new non-marginable warehouse facility we used to finance a portion of our bridge loan warehouse capacity totaled $330 million across four separate counterparties.loans, and expect to amend our remaining facility to be non-marginable, such that all new bridge loans will be financed under non-marginable facilities in the future. While our new non-marginable and non-recourse financing facilities have reduced our contingent liquidity risks, they generally have higher interest costs, which will marginally impact our net interest income in coming quarters.

86

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 ninesix months ended SeptemberJune 30, 2019.2020.
Table 1617 – Real Estate Securities Activity by Collateral Type
Three Months Ended June 30, 2020ResidentialMultifamilyTotal
(In Thousands)SeniorMezzanineSubordinateMezzanine
Beginning fair value$39,559  $53,781  $173,635  $26,487  $293,462  
Acquisitions
Third-party securities—  —  10,250  —  10,250  
Sales
Sequoia securities—  (27,429) (1,412) —  (28,841) 
Third-party securities—  (27,122) (26,184) —  (53,306) 
Gains on sales and calls, net—  3  780  —  783  
Effect of principal payments (1)
—  (200) (1,829) —  (2,029) 
Change in fair value, net(6,699) 4,481  97,661  674  96,117  
Ending Fair Value (2)
$32,860  $3,514  $252,901  $27,161  $316,436  
Three Months Ended September 30, 2019 Residential Multifamily Total
Six Months Ended June 30, 2020Six Months Ended June 30, 2020ResidentialMultifamilyTotal
(In Thousands) Senior Mezzanine Subordinate Mezzanine Total(In Thousands)SeniorMezzanineSubordinateMezzanineTotal
Beginning fair value $215,198
 $229,336
 $505,030
 $527,922
 Beginning fair value$175,859  $151,797  $368,090  $404,128  $1,099,874  
Transfers —
 —
 —
 —
 —
Acquisitions          Acquisitions
Sequoia securities 1,228
 —
 1,070
 —
 2,298
Sequoia securities43,363  —  3,198  —  46,561  
Third-party securities 14,372
 9,352
 25,772
 16,373
 65,869
Third-party securities16,627  —  14,750  31,132  62,509  
Sales          Sales
Sequoia securities —
 (9,208) —
 —
 (9,208)Sequoia securities(33,375) (31,334) (6,394) —  (71,103) 
Third-party securities (29,881) (44,042) (100,401) (75,803) (250,127)Third-party securities(115,354) (93,728) (54,062) (287,483) (550,627) 
Gains on sales and calls, net 2,570
 —
 2,144
 —
 4,714
Gains on sales and calls, net3,357  400  2,482  (1,604) 4,635  
Effect of principal payments (1)
 (8,579) (1,203) (2,164) (10,340) (22,286)
Effect of principal payments (1)
(4,464) (974) (4,100) (4,015) (13,553) 
Change in fair value, net (11,817) 4,934
 12,346
 11,217
 16,680
Change in fair value, net(53,153) (22,647) (71,063) (114,997) (261,860) 
Ending Fair Value (2)
 $183,091
 $189,169
 $443,797
 $469,369
 $1,285,426
Ending Fair Value (2)
$32,860  $3,514  $252,901  $27,161  $316,436  
(1)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.
Nine Months Ended September 30, 2019 Residential Multifamily Total
(In Thousands) Senior Mezzanine Subordinate Mezzanine 
Beginning fair value $246,285
 $218,147
 $558,983
 $429,079
 $1,452,494
Transfers —
 —
 —
 (4,951) (4,951)
Acquisitions          
Sequoia securities 4,736
 —
 3,024
 —
 7,760
Third-party securities 45,063
 70,169
 70,209
 124,398
 309,839
Sales          
Sequoia securities —
 (31,325) (4,727) —
 (36,052)
Third-party securities (68,661) (77,142) (215,680) (103,017) (464,500)
Gains on sales and calls, net 8,319
 3,059
 6,849
 —
 18,227
Effect of principal payments (1)
 (21,423) (9,596) (13,110) (15,492) (59,621)
Change in fair value, net (31,228) 15,857
 38,249
 39,352
 62,230
Ending Fair Value (2)
 $183,091
 $189,169
 $443,797
 $469,369
 $1,285,426
(1)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.
(2)
At September 30, 2019, excludes $257 million of securities retained from our consolidated Sequoia Choice securitizations as well as $454 million and $214(2)At June 30, 2020, excludes $203 million and $203 million of securities retained from our consolidated Sequoia Choice and CAFL securitizations, respectively, as well as $334 million and $24 million of securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-Series securitizations, respectively. For additional details on our Choice, Freddie Mac SLST, and multifamily loans, see the subsections titled "Residential Loans Held-for-Investment at Sequoia Choice Portfolio," "Residential Loans Held-for-Investment at Freddie Mac SLST Portfolio," and "Multifamily Loans Held-for-Investment at Freddie Mac K-Series Portfolio" that follow.
During the three and nine months ended SeptemberJune 30, 2019,2020, we sold $259$82 million of securities, and $501during the three months ended March 31, 2020, we sold $540 million respectively, of mostly lower-yielding securities as part ofto reposition our ongoing portfolio optimization activities.
and generate liquidity in response to the pandemic. At SeptemberJune 30, 2019,2020, our securities consisted of fixed-rate assets (83%(89%), adjustable-rate assets (12%(8%), and hybrid assets that reset within the next year (4%), and hybrid assets that reset between 12 and 36 months (1%(3%). For the portions of our securities portfolio that are sensitive to changes in interest rates, we seek to minimize this interest rate risk by using various derivative instruments.



87

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 residential securities that were financed with repurchase debt at SeptemberJune 30, 2019.2020.
Table 1718 – Real Estate Securities Financed with Repurchase Debt
September 30, 2019 
Real Estate Securities (1)
 Repurchase Debt Allocated Capital 
Weighted Average
Price(2)
 
Financing Haircut(3)
June 30, 2020June 30, 2020
Real Estate Securities (1)
Margin PostedRepurchase DebtAllocated Capital
Weighted Average
Price(2)
Financing Haircut(3)
(Dollars in Thousands, except Weighted Average Price) 
Real Estate Securities (1)
 Repurchase Debt Allocated Capital 
Weighted Average
Price(2)
 
Financing Haircut(3)
(Dollars in Thousands, except Weighted Average Price)
Residential Securities Residential Securities
Senior $83,954
 $(76,653) $7,301
 $101
 8%
Mezzanine (4)
 289,178
 (249,412) 39,766
 104
 14%
Mezzanine (4)
$59,543  $—  $(42,265) $17,278  $95  29 %
Re-performing 416,111
 (315,029) 101,082
 91
 24%
Re-performing (5)
Re-performing (5)
334,043  2,696  (241,749) 94,990  54  28 %
Total Residential Securities 789,243
 (641,094) 148,149
 97
 19%Total Residential Securities393,586  2,696  (284,014) 112,268  58  29 %
Multifamily Securities (5)
 653,432
 (516,552) 136,880
 88
 21%
Multifamily Securities (6)
Multifamily Securities (6)
48,826  —  (27,874) 20,952  64  43 %
Total $1,442,675
 $(1,157,646) $285,029
   
Total$442,412  $2,696  $(311,888) $133,220  
(1)Amounts represent carrying value of securities, which are held at GAAP fair value.
(2)GAAP fair value per $100 of principal.
(3)Allocated capital divided by GAAP fair value.
(4)Includes $113 million and $385 million of securities retained from our consolidated Sequoia Choice and Freddie Mac SLST securitizations, respectively, which we consolidate in accordance with GAAP.
(5)Includes $209 million of securities we owned that were issued by Freddie Mac K-Series securitizations, which we consolidate in accordance with GAAP.
(1)Amounts represent carrying value of securities, which are held at GAAP fair value.
(2)GAAP fair value per $100 of principal.
(3)Allocated capital divided by GAAP fair value.
(4)Includes $60 million of securities we owned that were issued by consolidated Sequoia Choice securitizations, which we consolidate in accordance with GAAP.
(5)Includes $334 million of securities we owned that were issued by consolidated Freddie Mac SLST securitizations, which we consolidate in accordance with GAAP.
(6)Includes $24 million of securities we owned that were issued by consolidated Freddie Mac K-Series securitizations, which we consolidate in accordance with GAAP.
At SeptemberJune 30, 2019,2020, we had short-term debt incurred through repurchase facilities of $1.16 billion,$312 million, which was secured by $1.44 billion$442 million of real estate securities.securities (including securities owned in consolidated securitization entities). Our repo borrowings were made under facilities with four different counterparties, and the weighted average cost of funds for these facilities during the second quarter of 2020 was approximately 3.80% per annum.
Additionally, at June 30, 2020, real estate securities with a fair value of $333 million (including securities owned in consolidated Sequoia Choice and CAFL securitization entities), were financed with long-term, non-mark-to-market recourse debt through our subordinate securities financing facilities. The remaining $768$305 million of our securities, including certain securities we own that were issued by consolidated Sequoia Choice and Freddie Mac K-Series securitization entities, were financed with capital. Our repo borrowings were made under facilities with nine different counterparties, and the weighted average cost of funds for these facilities during the third quarter of 2019 was approximately 3.37% per annum.
At September 30, 2019, the credit performance on the securities we financed through repurchase facilities generally continued to perform in line with, or better than our expectations. 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 $84 million of senior securities noted in the table above are supported by residential loans originated in 2018 and 2019. The $289 million of mezzanine securities financed through repurchase facilities at September 30, 2019 primarily carry investment grade credit ratings and are supported by residential loans originated between 2013 and 2019. The majority of the loans underlying these securities have experienced minimal delinquencies to date. The $653 million of multifamily securities financed through repurchase facilities at September 30, 2019 primarily carry investment grade credit ratings with 7%-8% of structural credit enhancement.
The following table presents our real estate securities at SeptemberJune 30, 2019 and December 31, 2018,2020, categorized by portfolio vintage (the years the securities were issued), and by priority of cash flows (senior, mezzanine, and subordinate). We have additionally separated securities issued through our Sequoia platform or by third parties, including the Agencies.
Table 1819 – Real Estate Securities by Vintage and Type
June 30, 2020Sequoia 2012-2020Third Party 2013-2019Agency CRT 2018-2020Third Party <=2008Total Residential SecuritiesMultifamily 2019-2020Total Real Estate Securities
(In Thousands)
Senior (1)
$21,524  $11,333  $—  $3  $32,860  $—  $32,860  
Mezzanine (2)
3,514  —  —  —  3,514  —  3,514  
Subordinate (1)
117,676  90,558  38,528  6,139  252,901  27,161  280,062  
Total Securities (3)
$142,714  $101,891  $38,528  $6,142  $289,275  $27,161  $316,436  
September 30, 2019 Sequoia 2012-2019 Third Party 2013-2019 Agency CRT 2016-2019 Third Party <=2008 Total Residential Securities Multifamily 2016-2019 Total Real Estate Securities
(In Thousands)     
Senior (1)
 $41,826
 $107,803
 $—
 $33,462
 $183,091
 $—
 $183,091
Mezzanine (2)
 69,349
 119,820
 —
 —
 189,169
 469,369
 658,538
Subordinate (1)
 137,084
 153,345
 140,881
 12,487
 443,797
 —
 443,797
Total Securities (3)
 $248,259
 $380,968
 $140,881
 $45,949
 $816,057
 $469,369
 $1,285,426
(1)At June 30, 2020, senior Sequoia and third-party securities included $33 million of IO securities. At June 30, 2020, subordinate third-party securities included $10 million of IO securities. Our interest-only securities included $14 million of certificated mortgage servicing investments securities at June 30, 2020 that we retained from certain of our Sequoia securitizations. These securities represent certificated servicing strips and therefore may be negatively impacted by the operating and funding costs related to servicing the associated securitized mortgage loans.

(2)Mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later.
(3)At June 30, 2020, excluded $203 million, $334 million, $24 million, and $203 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series, and CAFL securitizations, respectively. For GAAP purposes we consolidated $7.31 billion of residential loans and $6.56 billion of non-recourse ABS debt associated with these retained securities.
88
December 31, 2018 Sequoia 2012-2018 Third Party 2013-2018 Agency CRT 2013-2018 Third Party <=2008 Total Residential Securities Multifamily 2015-2018 Total Real Estate Securities
(In Thousands)     
Senior (1)
 $61,179
 $96,069
 $—
 $89,037
 $246,285
 $—
 $246,285
Mezzanine (2)
 99,977
 118,170
 —
 —
 218,147
 429,079
 647,226
Subordinate (1)
 130,271
 135,826
 276,894
 15,992
 558,983
 —
 558,983
Total Securities (3)
 $291,427
 $350,065
 $276,894
 $105,029
 $1,023,415

$429,079
 $1,452,494

(1)At September 30, 2019 and December 31, 2018, senior Sequoia and third-party securities included $58 million and $82 million of IO securities, respectively. At September 30, 2019 and December 31, 2018, subordinate third-party securities included $13 million and $12 million of IO securities, respectively. Our interest-only securities included $29 million and $43 million of A-IO-S securities at September 30, 2019 and December 31, 2018, respectively, that we retained from certain of our Sequoia securitizations. These securities represent certificated servicing strips and therefore may be negatively impacted by the operating and funding costs related to servicing the associated securitized mortgage loans.
(2)Mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later.
(3)At September 30, 2019, excluded $257 million, $454 million, and $214 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series securitizations, respectively. At December 31, 2018, excluded $194 million, $229 million, and $126 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series securitizations, respectively. For GAAP purposes we consolidated $8.85 billion of residential loans and $7.93 billion of non-recourse ABS debt associated with these retained securities.
The following tables present the components of the interest income we earned on AFS securities for the three and ninesix months ended SeptemberJune 30, 2019 and 2018.2020.
Table 1920 – Interest Income — AFS Securities
Three Months Ended June 30, 2020Yield as a Result of
Interest IncomeDiscount (Premium) AmortizationTotal Interest IncomeAverage Amortized CostInterest IncomeDiscount (Premium) AmortizationTotal Interest Income
(Dollars in Thousands)
Residential
Subordinate$2,353  $1,087  $3,440  $128,486  7.33 %3.38 %10.71 %
Total AFS Securities$2,353  $1,087  $3,440  $128,486  7.33 %3.38 %10.71 %
Three Months Ended September 30, 2019         Yield as a Result of
Six Months Ended June 30, 2020Six Months Ended June 30, 2020Yield as a Result of
 Interest Income Discount (Premium) Amortization Total Interest Income Average Amortized Cost Interest Income Discount (Premium) Amortization Total Interest IncomeInterest IncomeDiscount (Premium) AmortizationTotal Interest IncomeAverage Amortized CostInterest IncomeDiscount (Premium) AmortizationTotal Interest Income
(Dollars in Thousands) (Dollars in Thousands)
Residential              Residential
Senior $417
 $813
 $1,230
 $23,539
 7.09% 13.83% 20.92%Senior$221  $529  $750  $6,746  6.55 %15.68 %22.23 %
Mezzanine 106
 25
 131
 10,988
 3.86% 0.90% 4.76%Mezzanine97  14  111  4,498  4.31 %0.62 %4.93 %
Subordinate 2,813
 996
 3,809
 140,003
 8.04% 2.85% 10.89%Subordinate4,928  2,298  7,226  130,035  7.58 %3.53 %11.11 %
Total AFS Securities $3,336
 $1,834
 $5,170
 $174,530
 7.65% 4.20% 11.85%Total AFS Securities$5,246  $2,841  $8,087  $141,279  7.43 %4.02 %11.45 %
Three Months Ended September 30, 2018         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 $1,514
 $1,977
 $3,491
 $101,226
 5.98% 7.81% 13.79%
Mezzanine 353
 150
 503
 33,817
 4.18% 1.77% 5.95%
Subordinate 2,913
 1,196
 4,109
 146,776
 7.94% 3.26% 11.20%
Total AFS Securities $4,780
 $3,323
 $8,103
 $281,819
 6.78% 4.72% 11.50%
Nine Months Ended September 30, 2019         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 $1,793
   $2,571
   $4,364
 $33,303
   7.18% 10.29% 17.47%
Mezzanine 556
   224
 780
 18,503
 4.01% 1.61% 5.62%
Subordinate 8,204
   3,028
 11,232
 138,075
 7.92% 2.92% 10.84%
Total AFS Securities $10,553
 $5,823
 $16,376
 $189,881
 7.41% 4.09% 11.50%

Nine Months Ended September 30, 2018         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 $5,081
   $6,648
   $11,729
 $116,274
   5.83% 7.62% 13.45%
Mezzanine 1,651
 692
 2,343
 52,149
 4.22% 1.77% 5.99%
Subordinate 8,597
 3,891
 12,488
 150,817
 7.60% 3.44% 11.04%
Total AFS Securities $15,329
 $11,231
 $26,560
 $319,240
 6.40% 4.69% 11.09%
Residential Loans Held-for-Investment at Sequoia Choice Portfolio

As of September 30, 2019, we had issued nine securitizations primarily comprised of expanded-prime Choice loans that we consolidate for financial reporting purposes in accordance with GAAP. These entities are independent of Redwood 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 Sequoia Choice 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, 2019, our economic investment in the consolidated Sequoia Choice entities had an estimated fair value of $259 million. The securities retained from our consolidated Sequoia Choice entities included senior and subordinate securities of $13 million and $244 million, respectively, at September 30, 2019.
The following tables present the statements of income for the three and nine months ended September 30, 2019 and 2018 and the balance sheets of the consolidated Sequoia Choice entities at September 30, 2019 and December 31, 2018. All amounts in the statements of income and balance sheets presented below are included in our consolidated financial statements and are included in our Investment Portfolio segment.
Table 20 – Consolidated Sequoia Choice Entities Statements of Income
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Interest income $27,555
 $20,900
 $6,655
  $80,046
 $43,970
 $36,076
Interest expense (23,576) (18,019) (5,557)  (68,823) (37,702) (31,121)
Net interest income 3,979
 2,881
 1,098
  11,223
 6,268
 4,955
Investment fair value changes, net 2,722
 (943) 3,665
  8,866
 44
 8,822
Net Income from Consolidated Sequoia Choice Entities $6,701
 $1,938
 $4,763
  $20,089
 $6,312
 $13,777
Table 21 – Consolidated Sequoia Choice Entities Balance Sheets
(In Thousands) September 30, 2019 December 31, 2018
Residential loans, held-for-investment, at fair value $2,618,316
 $2,079,382
Other assets 10,821
 10,010
Total Assets $2,629,137

$2,089,392
Other liabilities $8,964
 $8,202
Asset-backed securities issued, at fair value 2,361,111
 1,885,010
Total liabilities 2,370,075

1,893,212
Equity (fair value of Redwood's retained investments in entities) 259,062
 196,180
Total Liabilities and Equity $2,629,137

$2,089,392

The following table presents residential loan activity at the consolidated Sequoia Choice entities for the three and nine months ended September 30, 2019.
Table 22 – Residential Loans Held-for-Investment at Sequoia Choice - Activity
  Three Months Ended Nine Months Ended
(In Thousands) September 30, 2019 September 30, 2019
Balance at beginning of period  $2,147,356
 $2,079,382
New securitization issuance 727,088
 1,076,671
Principal repayments (245,099) (542,577)
Changes in fair value, net (11,029) 4,840
Balance at End of Period $2,618,316

$2,618,316
The outstanding loans held-for-investment at our Sequoia Choice entities at September 30, 2019 were primarily comprised of prime-quality, first-lien, 30-year, fixed-rate loans originated in 2017 or 2018. The gross weighted average coupon of these loans was 4.74%, the weighted average FICO score of borrowers backing these loans was 745 (at origination) and the weighted average original LTV ratio was 75% (at origination). At September 30, 2019, six of these loans with an aggregate unpaid principal balance of $4 million were greater than 90 days delinquent and one of these loans with an unpaid principal balance of $1 million was in foreclosure. At December 31, 2018, three of these loans with an aggregate unpaid principal balance of $2 million were greater than 90 days delinquent and none of these loans were in foreclosure.
Residential Loans Held-for-Investment at Freddie Mac SLST Portfolio

Beginning in the fourth quarter of 2018, we invested in certain subordinate securities backed by a pool of seasoned re-performing and, to a lesser extent, non-performing residential mortgage loans that were issued by certain Freddie Mac SLST securitization entities and we were required to consolidate these entities for financial reporting purposes in accordance with GAAP. These entities are independent of Redwood 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 Freddie Mac SLST 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, 2019, our economic investment in the consolidated Freddie Mac SLST entities had an estimated fair value of $456 million, and was comprised of subordinate securities.
The following tables present the statements of income for the three and nine months ended September 30, 2019 and 2018 and the balance sheets of the consolidated Freddie Mac SLST entities at September 30, 2019 and December 31, 2018. All amounts in the statements of income and balance sheets presented below are included in our consolidated financial statements and are included in our Investment Portfolio segment.
Table 23 – Consolidated Freddie Mac SLST Entities Statements of Income
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Interest income $11,830
 $—
 $11,830
  $35,221
 $—
 $35,221
Interest expense (8,709) —
 (8,709)  (26,014) —
 (26,014)
Net interest income 3,121
 —
 3,121
  9,207
 —
 9,207
Investment fair value changes, net 17,300
 —
 17,300
  31,702
 —
 31,702
Net Income from Consolidated Freddie Mac SLST Entities $20,421
 $—
 $20,421
  $40,909
 $—
 $40,909

Table 24 – Consolidated Freddie Mac SLST Entities Balance Sheets
(In Thousands) September 30, 2019 December 31, 2018
Residential loans, held-for-investment, at fair value $2,441,223
     $1,222,669
Other assets 7,299
 3,926
Total Assets $2,448,522
 $1,226,595
Other liabilities $5,498
 $2,907
Asset-backed securities issued, at fair value 1,987,473
 993,748
Total liabilities 1,992,971
 996,655
Equity (fair value of Redwood's investments in entities) 455,551
 229,940
Total Liabilities and Equity $2,448,522
 $1,226,595
The following table presents residential loan activity at the consolidated Freddie Mac SLST entities for the three and nine months ended September 30, 2019.
Table 25 – Residential Loans Held-for-Investment at Freddie Mac SLST - Activity
  Three Months Ended Nine Months Ended
(In Thousands) September 30, 2019 September 30, 2019
Balance at beginning of period  $1,235,089
 $1,222,669
Consolidation of residential loans held in securitization trusts 1,190,995
 1,190,995
Principal repayments (24,559) (67,144)
Transfers to REO (84) (84)
Changes in fair value, net 39,782
 94,787
Balance at End of Period $2,441,223
 $2,441,223
The outstanding re-performing and non-performing residential loans held-for-investment at the Freddie Mac SLST entities at September 30, 2019 were first-lien, fixed- or step-rate loans that have been modified. At securitization, the weighted average FICO score of borrowers backing these loans was 599 and the weighted average LTV ratio of these loans was 68%. At September 30, 2019, 288 of these loans with an aggregate unpaid principal balance of $75 million were greater than 90 days delinquent and 150 of these loans with an aggregate unpaid principal balance of $24 million were in foreclosure. At December 31, 2018, 306 of these loans with an aggregate unpaid principal balance of $51 million were greater than 90 days delinquent and none of these loans were in foreclosure. Due to the credit profile of re-performing and non-performing loans, our investment in the subordinate securities issued by the Freddie Mac SLST entities was made based on an expectation of defaults and credit losses that will occur on the underlying pool of residential mortgage loans, which was reflected in our purchase price yield. At September 30, 2019, delinquencies and credit losses in the portfolio remain in line with our expectations.
Multifamily Loans Held-for-Investment at Freddie Mac K-Series Portfolio

Beginning in the second half of 2018, we invested in certain subordinate securities issued by Freddie Mac K-Series securitization entities and were required to consolidate these entities 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 Freddie Mac K-Series 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, 2019, our economic investment in the consolidated Freddie Mac K-Series entities had an estimated fair value of $215 million, and was comprised of subordinate securities.

The following tables present the statements of income for the three and nine months ended September 30, 2019 and 2018 and the balance sheets of the consolidated Freddie Mac K-Series entities at September 30, 2019 and December 31, 2018. All amounts in the statements of income and balance sheets presented below are included in our consolidated financial statements and are included in our Investment Portfolio segment.
Table 26 – Consolidated Freddie Mac K-Series Entities Statements of Income
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Interest income $36,829
 $5,578
 $31,251
  $94,134
 $5,578
 $88,556
Interest expense (35,328) (5,145) (30,183)  (90,088) (5,145) (84,943)
Net interest income 1,501
 433
 1,068
  4,046
 433
 3,613
Investment fair value changes, net 7,445
 511
 6,934
  13,810
 511
 13,299
Net Income from Consolidated Freddie Mac K-Series Entities $8,946
 $944
 $8,002
  $17,856
 $944
 $16,912
Table 27 – Consolidated Freddie Mac K-Series Entities Balance Sheets
(In Thousands) September 30, 2019 December 31, 2018
Multifamily loans, held-for-investment, at fair value $3,791,622
     $2,144,598
Other assets 11,300
 6,595
Total Assets $3,802,922
 $2,151,193
Other liabilities $10,805
 $6,239
Asset-backed securities issued, at fair value 3,577,577
 2,019,075
Total liabilities 3,588,382
 2,025,314
Equity (fair value of Redwood's retained investments in entities) 214,540
 125,879
Total Liabilities and Equity $3,802,922
 $2,151,193
The following table presents multifamily loan activity at the consolidated Freddie Mac K-Series entities for the three and nine months ended September 30, 2019.
Table 28 – Multifamily Loans Held-for-Investment at Freddie Mac K-Series - Activity
  Three Months Ended Nine Months Ended
(In Thousands) September 30, 2019 September 30, 2019
Balance at beginning of period  $3,749,657
 $2,144,598
Consolidation of multifamily loans held in securitization trusts —
 1,481,554
Principal repayments (5,388) (12,904)
Changes in fair value, net 47,353
 178,374
Balance at End of Period $3,791,622
 $3,791,622
The outstanding multifamily loans held-for-investment at the Freddie Mac K-Series entities at September 30, 2019 were first lien, fixed-rate loans that were primarily originated between 2015 and 2017 and had original loan terms of seven to ten years and an original weighted average LTV ratio of 69%. At September 30, 2019, the weighted average coupon of these loans was 4.19% and the weighted average loan term was six years. At both September 30, 2019 and December 31, 2018, 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. 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 for the three and nine months ended September 30, 2019.
Table 29 – MSR Activity
(In Thousands) Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Balance at beginning of period $47,396
 $60,281
Additions    
MSRs retained from third-party loan sales —
 868
Sales (69) (69)
Market valuation adjustments (7,490) (21,243)
Balance at End of Period $39,837
 $39,837
The following table presents characteristics of our MSR investments and their associated loans at September 30, 2019.
Table 30 – Characteristics of MSR Investments Portfolio
(Dollars in Thousands) September 30, 2019
Unpaid principal balance $4,610,339
Fair value of MSRs $39,837
MSR values as percent of unpaid principal balance 0.86%
Gross cash yield (1)
 0.32%
Number of loans 7,199
Average loan size $640
Average coupon 3.98%
Average loan age (months) 61
Average original loan-to-value 67%
Average original FICO score 770
60+ day delinquencies 0.15%
(1)Gross cash yield is calculated by dividing the annualized quarterly gross servicing fees we received for the three months ended September 30, 2019, by the weighted average notional balance of loans associated with MSRs we owned during that period.
At September 30, 2019, nearly all of our MSRs were comprised of base MSRs and within this portfolio we did not own any portion of a servicing right related to any loan where we did not own the entire servicing right. At both September 30, 2019 and December 31, 2018, we had $1 million of servicer advances outstanding related to our MSRs, which are presented in Other assets on our consolidated balance sheets.

Servicing Investments
In 2018, we invested in servicer advances and excess MSRs associated with legacy RMBS (See Note 10 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional detail). At September 30, 2019, our servicer advance investments and excess MSRs associated with this investment had a carrying value of $223 million and $16 million, respectively. The following table presents characteristics of the residential mortgage loans underlying these investments at September 30, 2019.
Table 31 – Characteristics of Servicing Investments
(Dollars in Thousands) September 30, 2019
Unpaid principal balance $8,381,331
Number of loans 42,671
Average loan size $196
Average coupon 5.21%
Average loan age (months) 169
Average original loan-to-value 74%
Average original FICO score 696
60+ day delinquencies (1)
 9.17%
(1)Includes unpaid principal balance of $501 million, or 6% of total portfolio, of loans in foreclosure or transferred to REO.
Mortgage Banking Segment
Our Mortgage Banking segment includes activity from both our residential and business purpose mortgage banking operations. Our business purpose mortgage banking operations includes activity from our wholly-owned subsidiary 5 Arches and our inventory of held-for-sale single-family rental loans. The following table presents the components of segment contribution for the Mortgage Banking segment for the three and nine months ended September 30, 2019 and 2018.
Table 32 – Mortgage Banking Segment Contribution
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Interest income $12,491
 $14,427
 $(1,936)  $34,220
 $40,408
 $(6,188)
Interest expense (6,657) (7,537) 880
  (18,816) (21,303) 2,487
Net interest income 5,834
 6,890
 (1,056)  15,404
 19,105
 (3,701)
Mortgage banking activities, net (1)
 9,515
 11,224
 (1,709)  40,984
 48,396
 (7,412)
Other income (expense), net (2)
 (252) —
 (252)  (575) —
 (575)
Direct operating expenses (3)
 (11,907) (6,570) (5,337)  (31,582) (20,941) (10,641)
Segment contribution before income taxes 3,190
 11,544
 (8,354)  24,231
 46,560
 (22,329)
Provision for income taxes 203
 (2,079) 2,282
  (1,775) (7,485) 5,710
Segment Contribution $3,393
 $9,465
 $(6,072)  $22,456
 $39,075
 $(16,619)
(1)Mortgage banking activities, net includes $5 million and $4 million from our residential mortgage banking and business purpose mortgage banking operations, respectively, for the three months ended September 30, 2019. Mortgage banking activities, net includes $31 million and $10 million from our residential mortgage banking and business purpose mortgage banking operations, respectively, for the nine months ended September 30, 2019.
(2)Other income (expense), net for our business purpose mortgage banking operations includes intangible asset amortization expense of $2 million and $4 million for the three and nine months ended September 30, 2019, respectively, related to our acquisition of 5 Arches.
(3)Direct operating expenses includes $6 million from both our residential mortgage banking and business purpose mortgage banking operations for the three months ended September 30, 2019. Direct operating expenses includes $17 million and $14 million from our residential mortgage banking and business purpose mortgage banking operations, respectively, for the nine months ended September 30, 2019.

The following tables provide the activity of unsecuritized residential loans during the three and nine months ended September 30, 2019 and 2018.
Table 33 – Residential Loans Held-for-Sale — Activity
  Three Months Ended September 30,
  2019 2018
(In Thousands) Select Choice Total Select Choice Total
Balance at beginning of period  $514,785
     $541,502
 $1,056,287
 $680,816
     $423,844
 $1,104,660
Acquisitions 813,970
     668,816
 1,482,786
 1,169,130
     634,995
 1,804,125
Sales (648,829)     (197,848) (846,677) (1,110,994)     (22,084) (1,133,078)
Transfers between portfolios (1)
 (8,361)     (727,088) (735,449) (6,426)     (889,703) (896,129)
Principal repayments (14,000)     (12,737) (26,737) (15,046)     (6,152) (21,198)
Changes in fair value, net (1,758)     (2,565) (4,323) 2,117
     5,947
 8,064
Balance at End of Period $655,807
 $270,080
 $925,887
 $719,597
 $146,847
 $866,444
  Nine Months Ended September 30,
  2019 2018
(In Thousands) Select Choice Total Select Choice Total
Balance at beginning of period  $716,193
     $332,608
 $1,048,801
 $1,101,356
     $326,589
 $1,427,945
Acquisitions 2,437,192
     1,590,275
 4,027,467
 3,780,284
     1,790,701
 5,570,985
Sales (2,459,766)     (472,405) (2,932,171) (4,101,597)     (34,370) (4,135,967)
Transfers between portfolios (1)
 4
     (1,145,375) (1,145,371) (28,968)     (1,936,487) (1,965,455)
Principal repayments (40,828)     (35,735) (76,563) (35,654)     (17,173) (52,827)
Changes in fair value, net 3,012
     712
 3,724
 4,176
     17,587
 21,763
Balance at End of Period $655,807
 $270,080
 $925,887
 $719,597
 $146,847
 $866,444
(1)Represents the net transfers of loans out of our Mortgage Banking segment into our Investment Portfolio segment and their reclassification from held-for-sale to held-for-investment. Includes $727 million and $1.08 billion of Choice loans securitized during the three and nine months ended September 30, 2019, respectively, and $796 million and $1.78 billion of Choice loans securitized during the three and nine months ended September 30, 2018, respectively, which were not treated as sales for GAAP purposes and continue to be reported on our consolidated balance sheets within our Investment Portfolio segment.
Overview
Segment contribution from our mortgage banking business decreased during the three- and nine-month periods, driven primarily by lower margins and lower loan purchase volumes on our residential loans as compared to the prior year. Margins for our residential mortgage banking operations were above our long-term expectations for the first half of 2019 and below our expectations for the third quarter of 2019. For the remainder of 2019, we expect residential loan volumes to remain stable and for margins to normalize in-line with our long-term expectations. For the third quarter of 2019, our business purpose mortgage banking operations generated a segment contribution close to break-even, as our volumes were somewhat impacted by the continued integration of 5 Arches. During the third quarter, we completed one Select securitization and two Choice securitizations.
During the first nine months of 2019, we purchased $4.03 billion of predominately prime residential jumbo loans, securitized $1.14 billion of jumbo Select loans that were accounted for as sales, and sold $1.79 billion of jumbo loans to third parties. Additionally, we transferred $1.08 billion of jumbo Choice loans that did not qualify for sales accounting treatment under GAAP to Sequoia securitization entities and we had net transfers of $69 million of loans to our Investment Portfolio segment that were financed with borrowings from the FHLBC. Our pipeline of residential loans identified for purchase at September 30, 2019 included $1.32 billion of jumbo loans.

During the first two months of 2019, prior to our acquisition of 5 Arches on March 1, 2019, we purchased $19 million of single-family rental loans from 5 Arches. During the period from March 1, 2019 to September 30, 2019, we funded $78 million of single-family rental loans, of which $19 million were transferred to our investment portfolio and financed with FHLB borrowings, and the remaining loans were retained in our mortgage banking segment. Going forward, we anticipate transferring the majority of our remaining 5 Arches-originated single-family rental loans to our investment portfolio and financing them at the FHLB. During the period from March 1, 2019 to September 30, 2019, we have funded $219 million of residential bridge loans, of which $47 million were sold to a third party and the remaining loans were transferred to our investment portfolio. In October 2019, 5 Arches originated an additional $162 million of business purpose loans, all of which we have retained on our balance sheet.
We utilize a combination of capital and our loan warehouse facilities to manage our inventory of loans held-for-sale. At September 30, 2019, we had $233 million of warehouse debt outstanding to fund our residential loans held-for-sale. The weighted average cost of the borrowings outstanding under these facilities during the third quarter of 2019 was 3.87% per annum. Jumbo loan warehouse capacity at September 30, 2019 totaled $1.43 billion across four separate counterparties, which should continue to provide sufficient liquidity to fund our mortgage banking operations in the near-term.
At September 30, 2019, we had $59 million of warehouse debt outstanding to fund our single-family rental loans held-for-sale. The weighted average cost of the borrowings outstanding under these facilities during the third quarter of 2019 was 5.07% per annum. Our single-family rental loan warehouse capacity totaled $400 million across two separate counterparties.
At September 30, 2019, residential mortgage banking had 482 loan sellers, down from 501 at the end of 2018. This included 184 jumbo sellers and 298 sellers from various FHLB districts participating in the FHLB's MPF Direct program.
Net Interest Income
Net interest income from mortgage banking is primarily comprised of interest income earned on loans from the time we purchase the loans to when we sell or securitize them, offset by interest expense incurred on short-term warehouse debt used in part to finance the loans while we hold them on our balance sheet.
The decrease in net interest income during the three- and nine-month periods was primarily due to a decrease in interest income driven by a lower average balance of residential loans held-for-sale and lower loan purchase volumes.
The amount of net interest income we earn on loans held-for-sale is dependent on many variables, including the amount of loans and the time they are outstanding on our consolidated balance sheet and their interest rates, as well as the amount of leverage we employ through the use of short-term debt to finance the loans and the interest rates on that debt. These factors will impact net interest income in future periods.
Mortgage Banking Activities, Net
Mortgage banking activities, net, includes the changes in market value of both the loans we hold for sale and commitments for loans we intend to purchase (collectively, our loan pipeline), as well as the effect of derivative instruments 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 or transfer it into our investment portfolio. 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. In addition, beginning in the first quarter of 2019, mortgage banking activities includes fees from the origination of loans from our business purpose mortgage banking operations.

The following table presents the components of 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 34 – Components of Mortgage Banking Activities, Net
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change  2019 2018 Change
Residential Mortgage Banking Activities, Net             
Changes in fair value of:             
Residential loans, at fair value (1)
 $6,320
 $7,236
 $(916)  $41,431
 $8,406
 $33,025
Risk management derivatives (2)
 (1,710) 3,796
 (5,506)  (11,608) 38,378
 (49,986)
Other income, net (3)
 407
 313
 94
  1,380
 1,733
 (353)
Total residential mortgage banking activities, net 5,017
 11,345
 (6,328)  31,203
 48,517
 (17,314)
              
Business Purpose Mortgage Banking Activities, Net             
Changes in fair value of:             
Single-family rental loans, at fair value (1)
 1,847
 (121) 1,968
  5,473
 (121) 5,594
Risk management derivatives (2)
 (1,262) —
 (1,262)  (3,779) —
 (3,779)
Residential bridge loans, at fair value 1,010
 —
 1,010
  2,108
 —
 2,108
Other income, net (3)
 2,903
 —
 2,903
  5,979
 —
 5,979
Total business purpose mortgage banking activities, net 4,498
 (121) 4,619
  9,781
 (121) 9,902
Mortgage Banking Activities, Net $9,515

$11,224
 $(1,709)  $40,984
 $48,396
 $(7,412)
(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 loans.
(3)Includes other fee income from loan originations and acquisitions as well as the provision for repurchase expense, presented net.
The decrease in mortgage banking activities, net for the three- and nine-month periods was mostly the result of lower gross margins and lower loan purchase volumes. During the third quarter of 2019, gross margins were negatively impacted by deteriorated securitization execution driven by rate volatility that improved toward the end of the quarter.
Residential loan purchase commitments ("LPCs"), adjusted for fallout expectations, were $1.70 billion and $4.59 billion for the three and nine months ended September 30, 2019, respectively. Our gross margins for our residential loans in the third quarter of 2019, which we define as net interest income plus income from mortgage banking activities, divided by LPCs, declined during 2019 but remain within our long-term expectations.
At September 30, 2019 and December 31, 2018, we had repurchase reserves of $3 million and $4 million outstanding, respectively, related to residential loans sold through this segment. For the nine months ended September 30, 2019 and 2018, we recorded less than $0.1 million of reversal of provision for repurchases and $0.1 million of provision for repurchases, respectively, that were included in income from mortgage banking activities, net, in this segment. We review our loan repurchase reserves each quarter and adjust them as necessary based on current information available at each reporting date.

Residential Loans Held-for-Sale
The following table details outstanding principal balances for residential loans held-for-sale by product type at September 30, 2019.
Table 35 – Characteristics of Residential Loans Held-for-Sale
September 30, 2019 Principal Value Weighted Average Coupon
(Dollars in Thousands)  
First Lien Prime    
 Fixed - 30 year $696,677
 4.28%
 Fixed - 10, 15, & 20 year 54,544
 3.73%
 Hybrid 152,761
 4.00%
 ARM 143
 4.45%
Total Outstanding Principal $904,125
 

Single-Family Rental Loans Held-for-Sale
The $110 million of outstanding single-family rental loans held-for-sale at September 30, 2019 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years. At September 30, 2019, the weighted average coupon of our single-family rental loans was 5.35% and the weighted average remaining loan term was six years. At origination, the weighted average LTV ratio of these loans was 68% and the weighted average debt service coverage ratio ("DSCR") was 1.36 times.

Operating Expenses and Taxes
Operating expenses for this segment primarily include costs associated with the origination, purchase and sale of residential and business purpose loans, including expenses from the 5 Arches platform we acquired in March 2019. For the three- and nine-month periods, the increase in operating expenses was primarily due to additional expenses from the consolidated 5 Arches operations.
All 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 decrease in provision for income taxes resulted primarily from the reduction in GAAP income earned in this segment.

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, 2019, the estimated fair value of our investments in the consolidated Legacy Sequoia entities was $10 million.

The following tables present the statements of income for the three and nine months ended September 30, 2019 and 2018 and the balance sheets of the consolidated Legacy Sequoia entities at September 30, 2019 and December 31, 2018. All amounts in the statements of income and balance sheets presented below are included in our consolidated financial statements.
Table 36 – Consolidated Legacy Sequoia Entities Statements of Income
  Three Months Ended September 30,    Nine Months Ended September 30,  
(In Thousands) 2019 2018 Change
 2019 2018 Change
Interest income $4,295
 $5,174
 $(879)  $13,924
 $15,003
 $(1,079)
Interest expense (3,452) (4,257) 805
  (11,548) (12,324) 776
Net interest income 843
 917
 (74)  2,376
 2,679
 (303)
Investment fair value changes, net (407) (248) (159)  (904) (976) 72
Net Income from Consolidated Legacy Sequoia Entities $436
 $669
 $(233)  $1,472
 $1,703
 $(231)
Table 37 – Consolidated Legacy Sequoia Entities Balance Sheets
(In Thousands) September 30, 2019 December 31, 2018
Residential loans, held-for-investment, at fair value $429,159
 $519,958
Other assets 1,319
 4,911
Total Assets $430,478
 $524,869
Other liabilities $456
 $571
Asset-backed securities issued, at fair value 419,890
 512,240
Total liabilities 420,346
 512,811
Equity (fair value of Redwood's retained investments in entities) 10,132
 12,058
Total Liabilities and Equity $430,478
 $524,869

Net Interest Income at Consolidated Legacy Sequoia Entities     
The decrease in net interest income for the three- and six-month periods was primarily attributable to the continued paydown of loans at the consolidated entities.
Investment Fair Value Changes, net at Consolidated Legacy Sequoia Entities

Investment fair value changes, net at consolidated Legacy Sequoia entities includes the change in fair value of the residential loans held-for-investment, REO, and the ABS issued at the entities, which netted together represent the change in value of our retained investments in the consolidated Legacy Sequoia entities. The negative investment fair value changes in each of the periods presented was primarily related to the decline in fair value changes on retained IO securities, as the basis of these assets continue to diminish.

Residential Loans at Consolidated Legacy Sequoia Entities
The following table provides details of residential loan activity at consolidated Legacy Sequoia entities for the three and nine months ended September 30, 2019 and 2018.
Table 38 – Residential Loans at Consolidated Legacy Sequoia Entities — Activity
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Balance at beginning of period  $457,750
 $592,029
 $519,958
 $632,817
Principal repayments (28,390) (41,476) (95,869) (113,567)
Transfers to REO (98) (304) (200) (2,139)
Changes in fair value, net (103) 3,709
 5,270
 36,847
Balance at End of Period $429,159
 $553,958
 $429,159
 $553,958
First lien adjustable rate mortgage ("ARM") and hybrid loans comprise all of the loans in the consolidated Legacy Sequoia entities and were primarily originated in 2006 or prior. For outstanding loans at consolidated Legacy Sequoia entities at September 30, 2019, the weighted average FICO score of borrowers backing these loans was 727 (at origination) and the weighted average original LTV ratio was 66% (at origination). At September 30, 2019 and December 31, 2018, the aggregate unpaid principal balance of loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $13 million and $14 million, respectively, of which the aggregate unpaid principal balance of loans in foreclosure was $3 million and $5 million, respectively.
Taxable Income and Tax Provision
Taxable Income
The following table summarizes our taxable income and distributions to shareholders for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
Table 3921 – Taxable Income
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands, except per Share Data)
2020 est. (1)
2019 est. (1)
2020 est. (1)
2019 est. (1)
REIT taxable (loss) income$(57,905) $24,561  $(20,378) $53,322  
Taxable REIT subsidiary (loss) income(19,496) 16,347  (66,985) 23,044  
Total Taxable (Loss) Income$(77,401) $40,908  $(87,363) $76,366  
REIT taxable (loss) income per share$(0.50) $0.25  $(0.17) $0.55  
Total taxable (loss) income per share$(0.67) $0.42  $(0.75) $0.79  
Distributions to shareholders$14,366  $29,306  $51,107  $58,304  
Distributions to shareholders per share$0.125  $0.30  $0.445  $0.60  
(1)Our tax results for the three and six months ended June 30, 2020 and 2019 are estimates until we file tax returns for these years.

The REIT taxable loss generated for the three months ended June 30, 2020 was due to a deduction for closed hedges related to our FHLB debt.
89
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands, except per Share Data) 
2019 est. (1)
 2018 
2019 est. (1)
 2018
REIT taxable income $38,626
 $22,644
 $91,948
 $82,912
Taxable REIT subsidiary income 2,821
 17,239
 25,865
 53,203
Total Taxable Income $41,447
 $39,883
 $117,813
 $136,115
         
REIT taxable income per share $0.34
 $0.27
 $0.89
 $1.06
Total taxable income per share $0.37
 $0.48
 $1.16
 $1.75
         
Distributions to shareholders $33,627
 $24,877
 $91,931
 $68,792
Distributions to shareholders per share $0.30
 $0.30
 $0.90
 $0.88

(1)Our tax results for the three and nine months ended September 30, 2019 are estimates until we file tax returns for 2019.

Under normal circumstances, our minimum REIT dividend requirement would be 90% of our annual REIT taxable income. However, we currently maintain a $39$28 million federal net operating loss carry forward (NOL) at the REIT that affords us the option of retaining 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. It is possible our estimatedconsidered; therefore, REIT taxable income willmust exceed our dividend distributions in 2019; therefore, we maydistribution for us to utilize a portion of our NOL in 2019 and any remaining amount will carry forward into 2020.future years. If annual REIT taxable income, exclusive of the dividends paid deduction, is a taxable loss, the NOL carryforward will be increased by the taxable loss.


Our dividend characterization for 2020 will be determined based on our full-year taxable income and dividend distributions. We also currently expect all or nearly allonly a small portion of the distributions to shareholders in 20192020 will be taxable as dividend income and a smaller portion, if any,the remainder will be a return of capital, which is generally non-taxable. Additionally, a portionnontaxable. Under the federal income tax rules applicable to REITs, none of our 20192020 dividend distributions are currently expected to be characterized as long-term capital gains for federal income tax purposes.gains.
Tax Provision under GAAP

For the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded a tax benefitprovision of $0.1 million$37 thousand and a tax provisionbenefit of $3$22 million, respectively. For the three and ninesix months ended SeptemberJune 30, 2018,2019, we recorded tax provisions of $5$2 million and $12$3 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 reduction in taxswitch to a benefit from income taxes from provision for income taxes year-over-year was primarily the result of  the lower GAAP income earnedlosses being recorded at our TRS as well as the recognition of discretein 2020 versus TRS GAAP income in 2019. The benefit from income taxes this period was partially offset by a valuation allowance being recorded against our federal net ordinary deferred tax benefits in the first quarter ancillary to the 5 Arches acquisition, which impacted our tax provision by less than $2 million.assets. Our TRS effective tax rate in 20192020 is expected to be approximately equal tosignificantly less than the federal statutory corporate tax rate, excludingdue to the one-time discretevaluation allowance and other permanent GAAP to tax benefits.differences. The income or loss generated at our TRS will not directly affect the tax characterization of our 20192020 dividends.

Realization of our deferred tax assets ("DTAs") is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of our DTAs is not assured and establish a valuation allowance accordingly. At December 31, 2018,2019, we reported net federal ordinary and capital deferred tax liabilities ("DTLs"), and, as such, had no associated valuation allowance.
As a result of GAAP incomelosses at our TRS in 2020, we forecast that we will report net federal ordinary and capital DTLsDTAs at December 31, 20192020 and consequently a valuation allowance was recorded against our net federal ordinary DTAs. However, no valuation allowance is expected to bewas recorded against anyour net federal DTA.capital DTAs as we currently expect to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years. Consistent with prior periods, we continued to maintain a valuation allowance against our net state DTAs. Our estimate of net deferred tax assets could change in future periods to the extent that actual or revised estimates of future 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, 2019.
Table 40 – Differences between Estimated Total Taxable Income and GAAP Net Income
  Nine Months Ended September 30, 2019
(In Thousands, except per Share Data) REIT (Est.) TRS (Est.)  Total Tax (Est.) GAAP Differences
Interest income $184,943
 $41,231
  $226,174
 $429,700
 $(203,526)
Interest expense (95,686) (40,047)  (135,733) (332,100) 196,367
Net interest income 89,257
 1,184
  90,441
 97,600
 (7,159)
Realized credit losses 197
 —
  197
 —
 197
Mortgage banking activities, net —
 39,670
  39,670
 40,984
 (1,314)
Investment fair value changes, net 527
 276
  803
 34,741
 (33,938)
Operating expenses (31,912) (39,185)  (71,097) (76,229) 5,132
Other income, net 6,306
 9,328
  15,634
 7,819
 7,815
Realized gains, net 27,797
 14,769
  42,566
 18,227
 24,339
Provision for income taxes (224) (177)  (401) (3,102) 2,701
Net Income $91,948
 $25,865
  $117,813
 $120,040
 $(2,227)
            
Income per basic common share $0.89
 $0.27
  $1.16
 $1.20
 $(0.04)
Potential Taxable Income Volatility
We expect period-to-period volatility in our estimated taxable income. A description of the factors that can cause this volatility is described in the Taxable Income portion of the Results of Operations section in the MD&A included in Part II, Item 7, of our Annual Report on Form 10-K.
90

LIQUIDITY AND CAPITAL RESOURCES
Summary
In addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash consist of borrowings under mortgage loan warehouse facilities, securities repurchase agreements, payments of principal and interest we receive from our investment portfolios, proceeds from the sale of portfolio assets, and cash generated from our operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations, to fund investments in residential loans, to purchase investment securities and make other investments, to repay principal and interest on our warehouse facilities, repurchase agreements,debt, to meet margin calls associated with our debt and long-term debt,other obligations, to make dividend payments on our capital stock, and to fund our operations.
At SeptemberJune 30, 2019,2020, our total capital was $2.55$1.59 billion and included $1.79$0.94 billion of equity capital and $0.77$0.65 billion of convertible notes and long-term debt on our consolidated balance sheet, including $245$199 million of convertible debt due in 2023, $200$150 million of convertible debt due in 2024, $201$172 million of exchangeable debt due in 2025, and $140 million of trust-preferred securities due in 2037.
As of SeptemberJune 30, 2019,2020, our unrestricted cash and liquidity capital included $590 million of capital available for investment and an additional $201 million of capital reserved for the repayment of our exchangeable debt maturing in November 2019. In October 2019, we completed the acquisition of CoreVest for $492 million, net of in-place financing on financial assets acquired, with a mix of cash on hand and shares of Redwood stock. At the end of October, adjusting for the acquisition of CoreVest and other activity, we estimate we had approximately $100 million of capital available for investment.
was $529 million. While we believe our available capital, together with additional liquidity we believe we can source through continued portfolio optimization (including collateralized borrowings or assets sales),cash is sufficient to fund our operations, and currently contemplated investment activities and to repay existing debt, we may raise equity or debt capital from time to time to acquire assetsincrease our unrestricted cash and liquidity, to repay existing debt, to make long-term investments to expand our investment portfolio, including funding large purchases of portfolios of residential, multifamily, or business purpose residential loans or securities, or other portfolio investments, for acquisitions to expand our mortgage banking operating platforms, or for other purposes. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interestinterests of our shareholders.the company.
We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential loan warehouse facilities, securities repurchase facilities, and other short- and long-term debt facilities and other risks relating to our use of derivatives. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."
Cash Flows and Liquidity for the NineSix Months Ended SeptemberJune 30, 20192020
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/originationsacquisitions and sales and repayments, the profitability of mortgage banking activities, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.
During the first six months of 2020, in response to the pandemic, we sold a significant amount of investments and repaid a significant amount of debt, which allowed us to reposition and de-lever our balance sheet and generate additional liquidity. Additionally, we entered into several new financing agreements that are non-marginable and in one case non-recourse, and have longer dated maturities than agreements they replaced that were marginable and recourse to us. While the asset sales and pay-down of debt, along with these new financing agreements, strengthened our liquidity and capital position by removing sources of contingent liquidity risk (from potential margin calls), they have also reduced our overall amount of earning assets and increased our borrowing costs. In the near-term, while we maintain a higher balance of cash, this will reduce our cash flows from operations. However, given our significant cash position, we believe we are positioned well to meet our near-term liquidity needs.
Cash Flows from Operating Activities
Cash flows from operating activities were negative $1.20 billionpositive $56 million during the ninesix months ended SeptemberJune 30, 2019.2020. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were negative $123positive $58 million and positive $84negative $112 million during the first ninesix months of 2020 and 2019, respectively.
As a result of the pandemic, in late March we determined that our hedges were no longer effectively managing the risks associated with certain of our assets and 2018, respectively. Forliabilities and we settled nearly all of our outstanding derivative positions. As a result of these settlements and other hedging activity during the nine months ended September 30, 2019,quarter, we made $183 million of cash flows from operating activities included netpayments, representing a significant outflow of cash outflows of $159 million relatedfor the period that we would not expect to recur in subsequent periods, particularly while we are not employing the funding of derivative margin obligations and the settlementuse of derivatives. These
Additionally, as discussed previously in this MD&A, in late March and continuing into May, we sold a significant amount of loans and securities, and repaid associated debt. As a result, we expect the cash outflows were the result of declining benchmarkprovided from net interest rates during 2019.  income to decline in future periods.
91

Cash Flows from Investing Activities
During the ninesix months ended SeptemberJune 30, 2019,2020, our net cash provided by investing activities was $916 million$3.06 billion and primarily resulted from proceeds from sales of loans and real estate securities, as well as principal payments on loans held-for-investment and sales of real estate securities.loans. Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these securitiesassets in order to manage our liquidity needs and interest rate risk and liquidity needs,, to meet other operating objectives, and to adapt to market conditions. We cannotWhile it is difficult to predict the timing and impact of future sales of investment securities, if any.

any, given our current liquidity position, we expect the pace of our asset sales to decline from the first six months of 2020.
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 could bethese assets are generally used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated Sequoia and Freddie Mac SLST and K-Seriessecuritization entities would generally be used to repay ABS issued by those entities.
During the three months ended September 30, 2019, we deployed capital into several new investments, including $73 million into Freddie Mac SLST re-performing residential loan securities and $21 million into business purpose loans originated by 5 Arches.
As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the ninesix months ended SeptemberJune 30, 2019,2020, we transferred residential loans between held-for-sale and held-for-investment classification, retained securities from Sequoia and CAFL securitizations we sponsored, and consolidateddeconsolidated certain multifamily and re-performing residential securitization trusts, which represent significant non-cash transactions that were not included in cash flows from investing activities.
Cash Flows from Financing Activities

During the ninesix months ended SeptemberJune 30, 2019,2020, our net cash provided byused in financing activities was $587 million.$2.83 billion. This primarily resulted from proceeds of $1.02$1.67 billion from the issuance of asset-backed securities from our Sequoia Choice securitizations, proceeds of $427 million from the issuance of common stock, and proceeds of $387 million from the issuance of exchangeable notes and borrowings under our subordinate securities financing facility. These cash inflows were partially offset by $721 million of repayments of ABS issued and $427 million of net repayments of short-term debt.debt and $2.13 billion of repayments of long-term debt, including repayments of $2.00 billion of FHLBC borrowings, which were associated with the sales of a significant amount of assets noted in the investing activities section above. Additionally, we paid $97 million to purchase and retire $125 million of our convertible debt in the second quarter of 2020. These outflows of cash were partially offset by $154 million of net proceeds from the issuance and settlements of ABS issued. Additionally, during the six months ended June 30, 2020, we had cash inflows of $944 million related to borrowings under two new non-marginable facilities that were generally used to repay existing borrowings from marginable facilities.
During the ninesix months ended SeptemberJune 30, 2019,2020, we paid $94 million of cash dividends on our common stock, representing cumulativedeclared dividends of $0.90$0.445 per common share. In November 2019,On June 11, 2020, the Board of Directors declared a regular dividend of $0.30$0.125 per share for the fourthsecond quarter of 2019,2020, which is payablewas paid on December 30, 2019June 29, 2020 to shareholders of record on December 16, 2019.June 22, 2020.
In accordance with the terms of our outstanding deferred stock units and restricted stock units, which are stock-based compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent payment in that same per share amount on each outstanding deferred stock unit and restricted stock unit.
Repurchase Authorization
In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. At SeptemberJune 30, 2019,2020, $100 million of the 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. 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.
Short-Term Debt
In the ordinary course of our business, we use recourse debt through several different types of borrowing facilities and use cash borrowings under these facilities to, among other things, fund the acquisition of residential loans (including those we acquire and originate in anticipation of securitization), finance investments in securities and other investments, and otherwise fund our business and operations.
At SeptemberJune 30, 2019,2020, we had four short-term residential loan warehouse facilities with a total outstanding debt balance of $233$663 million (secured by residential loans with an aggregate fair value of $253 million) and a total uncommitted borrowing limit of $1.43 billion. In addition, at September 30, 2019, we had an aggregate outstanding short-term debt balance of $1.16 billion under nine securities repurchase facilities, which were secured by securities with a fair market value of $736 million. In addition, at September 30, 2019, the fair value of our real estate securities pledged as collateral included $113 million of securities retained from our consolidated Sequoia Choice securitizations, as well as $385 million and $209 million of securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-series securitizations, respectively. We also had a secured line of credit with no outstanding debt balance and a total borrowing limit of $10 million (secured by securities with a fair market value of $3 million) at September 30, 2019.


To finance our business purpose residential loan investments, at September 30, 2019, we had two single-family rental loan warehouse facilities with a total outstanding debt balance of $59 million (secured by single-family rental loans with an aggregate fair value of $78 million) and a total uncommitted borrowing limit of $400 million. In addition, at September 30, 2019, we had four residential bridge loan warehouse facilities with a total outstanding debt balance of $139 million (secured by residential bridge loans with an aggregate fair value of $176 million) and a total uncommitted borrowing limit of $330 million. We also had a business purpose loan working capital line with no outstanding balance and a total uncommitted borrowing limit of $15 million.
Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments we made in the fourth quarter of 2018. At September 30, 2019, the fair value of servicer advances, cash and restricted cash pledged as collateral was $243 million. At September 30, 2019, the accrued interest payable balance on this debt was $0.2 million and the unamortized capitalized commitment costs were $0.4 million.
During the fourth quarter of 2018, $201 million principal amount of 5.625% exchangeable senior notes 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 November 2018. At September 30, 2019, the accrued interest payable balance on this debt was $4 million. See Note 15 for additional information on our convertible notes.
At September 30, 2019, we had $1.98 billion of short-term debt outstanding. During the first ninesix months of 2019,2020, the highest balance of our short-term debt outstanding was $2.65$3.23 billion.

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During the second quarter of 2020, we reduced the number of credit facilities related to our business purpose loans to two facilities with borrowing capacity of $500 million at June 30, 2020, from six facilities with borrowing capacity of $1.41 billion at March 31, 2020. These short-term facilities were replaced with a long-term, non-recourse facility with a borrowing capacity of $530 million primarily for the financing of bridge loans, and a second long-term recourse facility with a borrowing capacity of $500 million primarily for the financing of single-family rental and bridge loans. These new long-term facilities are not subject to the collateral margin requirements of our prior short-term facilities.
During the second quarter of 2020, we additionally reduced our residential loan warehouse facilities to three facilities with an aggregate borrowing capacity of $700 million at June 30, 2020, from four facilities with total borrowing capacity of $1.53 billion at March 31, 2020. The reduction in these facilities was related to the decreased residential loan purchase volumes during the second quarter of 2020.
For further detail on our short-term debt, see Note 13 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Long-Term Debt
The following discusses significant activity during the first half of 2020 and other information about our long-term debt. For further detail on our long-term debt, see Note 15 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Convertible Notes
During the second quarter of 2020, we repurchased $29 million par value of our 5.75% exchangeable senior notes due 2025 at a discount and recorded a gain on extinguishment of $6 million in Realized gains, net on our consolidated statements of income (loss).
During the second quarter of 2020, we repurchased $50 million par value of our 5.625% convertible senior notes due 2024 at a discount and recorded a gain on extinguishment of $9 million in Realized gains, net on our consolidated statements of income (loss).
During the second quarter of 2020, we repurchased $46 million par value of our 4.75% convertible senior notes at a discount and recorded a gain on extinguishment of $10 million in Realized gains, net on our consolidated statements of income (loss).
FHLBC Borrowings
In July 2014,As a result of the economic and financial market impacts of the pandemic, the terms of our FHLB-member subsidiary entered into a borrowing agreementfacility with the Federal Home Loan Bank of Chicago. At September 30, 2019, under this agreement, our subsidiary could incur borrowings upChicago (our "FHLBC Facility") evolved and we decided to $2.00 billion, also referred to as “advances,”significantly reduce the financing we obtain from the FHLBC secured by eligible collateral, including, but not limited to residential mortgage loans.FHLBC. During the nine months ended September 30, 2019, our FHLB-member subsidiary made no additionalsecond quarter of 2020, we completed the sale of nearly all residential loans financed through this facility and repaid all but $1 million of borrowings under this agreement. Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through a five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until stated maturity. As residential loans pledged as collateral for this debt pay down, we are permitted to pledge additional loans or other eligible assets to collateralize this debt; however, wefacility. We do not expect to be able to increase borrowings under our subsidiary's FHLB debtFHLBC Facility above the existing $2.00 billion maximum.
At September 30, 2019, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 2.31% per annum and a weighted average maturity of six years. At September 30, 2019, accrued interest payable on these borrowings was $8 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. At September 30, 2019, our total advances under this agreement were secured by residential mortgage loans with a fair value of $2.27 billion, securities with a fair value of $41 million, and $77$1 million of restricted cash. 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, 2019, our subsidiary held $43 million of FHLBC stock that is included in Other assets on our consolidated balance sheets.borrowings outstanding.
Subordinate SecuritiesNon-Recourse Business Purpose Loan Financing Facility
In September 2019,the second quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-mark-to-marketnon-marginable, non-recourse financing primarily for business purpose bridge loans. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 7.50% (with a 1.50% LIBOR floor), through June 2022 (facility is fully callable in June 2021). This facility has an aggregate maximum borrowing capacity of $530 million, which consists of a term facility of $355 million and a revolving facility of $175 million. The revolving period ends in June 2021, and amounts borrowed under the term and revolving facilities are due in full in June 2022. At June 30, 2020, we had borrowings under this facility totaling $355 million and $6 million of unamortized deferred issuance costs, for a net carrying value of $350 million. At June 30, 2020, $442 million of bridge loans and $8 million of other BPL investments were pledged as collateral under this facility.
Recourse Business Purpose Loan Financing Facility
In the second quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable financing for business purpose bridge loans and single-family rental loans. Borrowings under this facility accrue interest at a per annum rate equal to three-month LIBOR plus 3.50% to 4.50% (with a 1.00% LIBOR floor) through May 2022 and are recourse to Redwood. This facility has an aggregate maximum borrowing capacity of $500 million. At June 30, 2020, we had borrowings under this facility totaling $436 million and $1 million of unamortized deferred issuance costs, for a net carrying value of $435 million. At June 30, 2020, $280 million of bridge loans and $302 million of single-family rental loans were pledged as collateral under this facility.

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Recourse Subordinate Securities Financing Facility
In the first quarter of 2020, we entered into a repurchase agreement providing non-marginable recourse debt financing.financing for $110 million of securities retained from our consolidated CAFL securitizations. The financing is fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through September 2022.February 2023. The financing facility may be terminated, at our option, in September 2022,February 2023, and has a final maturity in September 2024,February 2025, provided that the interest rate on amounts outstanding under the facility increases between October 2022March 2023 and September 2024. At September 30, 2019, we had borrowingsFebruary 2025.
Recourse Revolving Debt Facility
In the first quarter of 2020, a subsidiary of Redwood entered into a secured revolving debt facility agreement collateralized by MSRs and certificated mortgage servicing rights. Borrowings under this facility totaling $186accrue interest at a per annum rate equal to one-month LIBOR plus 2.75% through January 2021, with an increase in rate between February 2021 and the maturity of the facility in January 2022. This facility has an aggregate maximum borrowing capacity of $50 million. Borrowings under this facility totaled $20 million net of $1at June 30, 2020. At June 30, 2020, $40 million of deferred issuance costs, for a carrying value of $185 million. At September 30, 2019, the fair value of real estateMSRs and interest-only securities were pledged as collateral under this long-term debt facility was $253 million, which included $126 million of securities retained from our consolidated Sequoia Choice securitizations. This facility is included in Long-term debt, net on our consolidated balance sheets at September 30, 2019.facility.


Convertible NotesAsset-Backed Securities Issued
In September 2019, one of our taxable subsidiaries issued $201 million principal amount of 5.75% exchangeable senior notes due 2025. After deducting the underwriting discount and offering costs, we received approximately $195 million of net proceeds. Including amortization of deferred debt issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. At September 30, 2019, the outstanding principal amount of these notes was $201 million and the accrued interest payable balance on this debt was $0.2 million.
In June 2018, we issued $200 million principal amount of 5.625% convertible senior notes due 2024 at an issuance price of 99.5%. After deducting the issuance discount, the underwriting discount and offering costs, we received approximately $194 million of net proceeds. Including amortization of deferred debt issuance costs and the debt discount, the weighted average interest expense yield on these convertible notes is approximately 6.2% per annum. At September 30, 2019, the outstanding principal amount of these notes was $200 million and the accrued interest payable balance on this debt was $2 million.
In August 2017, we issued $245 million principal amount of 4.75% convertible senior notes due 2023. After deducting the underwriting discount and offering costs, we received approximately $238 million of net proceeds. Including amortization of deferred debt issuance costs, the weighted average interest expense yield on these convertible notes is approximately 5.3% per annum. At September 30, 2019, the outstanding principal amount of these notes was $245 million and 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 offering costs, we received approximately $198 million of net proceeds. Including amortization of deferred debt issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. During the first quarter of 2016,2020, 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. During the fourth quarter of 2018, $201 million principal amount of 5.625% exchangeable senior notes 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 November 2018. At September 30, 2019, the outstanding principal amount of these notes was $201 million and the accrued interest payable balance on this debt was $4 million.
Trust Preferred Securities and Subordinated Notes
At September 30, 2019, we had trust preferredsold subordinate securities and subordinated notes outstanding of $100 million and $40 million, respectively, issued by us in 2006 and 2007. This debt requires quarterly interest payments at a floating rate equal to three-month LIBOR plus 2.25% and must be redeemed no later than 2037. Prior to 2014, we entered into interest rate swaps with aggregate notional values totaling $140 million to hedge the variability in this long-term debt interest expense. Including hedging costs and amortization of deferred debt issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.9% 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, 2019, there were $446 million (principal balance) of loans owned at consolidated Legacy Sequoia securitization entities, which were funded with $438 million (principal balance) of ABS issued at these entities. At September 30, 2019, there were $2.55 billion (principal balance) of loans owned at consolidated Sequoia Choice securitization entities, which were funded with $2.29 billion (principal balance) of ABS issued at these entities. At September 30, 2019, there were $2.47 billion (principal balance) of loans owned at the consolidated Freddie Mac SLST securitization entity, which were funded with $1.89 billion (principal balance) of ABS issued at this entity. At September 30, 2019, there were $3.54 billion (principal balance) of loans owned at the consolidatedfour Freddie Mac K-Series securitization trusts we previously consolidated and determined that we should derecognize the associated assets and liabilities of each of these entities which were funded with $3.24for financial reporting purposes. As a result, during the first quarter of 2020, we deconsolidated $3.86 billion (principal balance)of multifamily loans and other assets and $3.72 billion of multifamily ABS issued. During the three and six months ended June 30, 2020, we issued $450 million and $787 million of ABS issued at these entities. The loansthrough our consolidated securitization entities, respectively. This included $201 million and $537 million of CAFL ABS issued from these entities are reported at estimated fair value. Seeduring the subsections titled "Resultsthree and six months ended June 30, 2020, respectively, and $249 million of Consolidated Legacy Sequoia Entities,""Residential Loans Held-for-Investment at Sequoia Choice Portfolio," "Residential Loans Held-for-Investment at Freddie Mac SLST Portfolio,"ABS issued during the three months ended June 30, 2020. For further detail on our Asset-backed Securities Issued, see and "Multifamily Loans Held-for-Investment at Freddie Mac K-Series Portfolio" in the Results of OperationsNote 14 sectionof our Notes to Consolidated Financial Statements in Part I, Item 1 of this MD&A for additional detailsQuarterly Report on these entities.Form 10-Q.
Other Commitments and Contingencies
For additional information on commitments and contingencies that could impact our liquidity and capital resources, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

COVID-19 Pandemic-Related Mortgage Payment Forbearances
In response to the personal financial impacts of the pandemic, many residential mortgage borrowers are seeking forbearance with respect to monthly mortgage payment obligations. We are exposed to the negative financial impact of COVID-19 related payment forbearances with respect to loans securitized in Sequoia transactions, loans held for investment or sale, and a variety of other investments, including third-party issued mortgage-backed securities, mortgage servicing rights and related cash flows, and re-performing residential mortgage loans. Business purpose mortgage loan borrowers may also seek payment forbearances. In addition, transactions we have entered into, including to finance loans with warehouse financing providers and to sell whole loans to third parties, may be negatively impacted by COVID-19 related payment forbearances, including by reducing our proceeds from these transactions or if we are required to repurchase impacted loans.
Mortgage Servicing Advance Obligations
Redwood's liquidity exposure to advancing obligations associated with residential mortgage servicing rights (MSRs) is primarily related to our Sequoia private-label residential mortgage backed securities (RMBS). The residential mortgage loans backing our Sequoia securities were generally originated as prime quality residential mortgage loans with strong credit characteristics. These loans were sourced from our residential mortgage platform through our network of loan sellers, including banks and independent mortgage companies, and were acquired after undergoing our review and underwriting process.
We outsource our residential mortgage servicing activity to third-party sub-servicers and do not directly service residential mortgage loans. We carry out a servicing oversight function and, in some cases, are obligated to reimburse our sub-servicers when they fund advances of principal and interest (P&I), taxes and insurance (T&I), and certain other amounts related to securitized mortgage loans.

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At June 30, 2020, mortgage loans in a delinquent status (whether or not subject to forbearance) accounted for approximately 4.0% of the aggregate principal (or notional) balance of Sequoia securitized loans for which we had servicing advance funding obligations, with respect to the monthly mortgage payment due at June 30, 2020 (compared to approximately 3.2% of principal balance that were in a delinquent status as of April 30, 2020). As of June 30, 2020, we had no servicing advances outstanding related to principal and interest on Sequoia securitized loans for which we had servicing advance funding obligations. We estimate that for every 5 percentage point increase in the principal balance of Sequoia securitized mortgage loans in a delinquent status (whether or not subject to forbearance), our average monthly principal and interest servicing advance funding obligation would increase by approximately $3 million. Other advance funding obligations, including with respect to T&I, are subject to variability and seasonality and are not included within this estimate.
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 of mortgage loans (including those we acquire 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.stock or outstanding debt securities. Debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities.Facilities,” and under the caption “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the "Q1 2020 10-Q"). Many of the risks described above materialized during the first quarter of 2020 as a result of the pandemic and its impact on the economy and financial markets, as described under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” within the Q1 2020 10-Q.

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 subordinate securities financing facilities. During the second quarter of 2020, we repaid secured borrowings by our wholly-owned subsidiary, RWT Financial, LLC, under its borrowing facility with the FHLBC.

FHLBC and at June 30, 2020, $1 million of advances remained outstanding. We do not expect to be able to increase borrowings under this borrowing facility above the existing $1 million of advances outstanding.

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 and two business purpose residential loan warehouse facilities secured by residential bridge loans) isare uncommitted, which means that any request we make to borrow funds under these uncommitted facilities may be declined for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. In general, financing under these facilities is obtained by transferring or pledging mortgage loans or securities to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred or pledged assets). While


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Under many of our mortgage loan warehouse facilities, our short-term securities repurchase facilities, and our secured, revolving debt facility collateralized by mortgage service rights, while transferred or pledged assets are financed under athe facility, to the extent the market value of the assets, or the collateral underlying those assets, declines, we are generally required to either immediately reacquire the assets or meet a margin requirement to transfer or pledge additional assets or cash in an amount at least equal to the decline in value. During the second quarter of 2020, we amended several of our mortgage loan warehouse facilities to revise these margin call provisions to remove obligations to make margin calls for changes in the market value of transferred or pledged assets. Under these revised agreements, if the estimated value of a property securing a financed mortgage loan declines, based on, for example, an appraisal or broker-price opinion, then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional residential mortgage loans) with a value equal to the amount of the decline. At June 30, 2020, all of our residential mortgage loan warehouse facilities that retained market-value based margin call provisions had been repaid or suspended. Of our active financing arrangements with outstanding balances at June 30, 2020, only our short-term securities repurchase facilities (with $312 million of borrowings outstanding at June 30, 2020), our secured, revolving debt facility collateralized by mortgage service rights (with $20 million of borrowings outstanding at June 30, 2020), and one of our business purpose residential loan warehouse facilities (with $43 million of borrowings outstanding at June 30, 2020) retain market-value based margin call provisions.

Margin call provisions under these facilities are further described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 20182019 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 20182019 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 many of these borrowing facilities are uncommitted, (except two business purpose residential loan warehouse facilities secured by residential bridge loans), 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, 20182019 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, 20182019 under the heading “Market Risks.” In addition, with respect to mortgage loans that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20182019 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, 20182019 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 - 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, 2018.2019.

At SeptemberJune 30, 2019,2020, 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. However, significant and widespread decreases in the fair values of our assets, including decreases of the magnitude that resulted from the impact of the pandemic during the first quarter of 2020, could cause us to breach the financial covenants under our borrowing facilities related to net worth and leverage. In particular, with respect to: (i)during the first and second quarters of 2020, we amended financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth, at September 30, 2019 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 September 30, 2019 our leveland financial covenants that require us to maintain a minimum dollar amount of recourse indebtedness resultedliquidity in certain borrowing agreements on a permanent basis, and we repaid and suspended certain other borrowing facilities; however, we cannot be certain that we will be able to maintain compliance with such amended covenants. Such covenants, if breached, can 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, and other risks described under the caption “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in compliance withour being required to immediately repay all outstanding amounts borrowed under these covenants at a level such that we could incur at least $600 millionfacilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements” in additional recourse indebtedness.Part II, Item 1A of our Q1 2020 10-Q.

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OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
In the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, while others are off-balance sheet or recorded on the balance sheet in amounts different from the full contract or notional amount of the transaction.
For additional information on our contractual obligations, see the Off-Balance Sheet Arrangements and Contractual Obligations section in the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
For additional information on our commitments and contingencies as of SeptemberJune 30, 2019,2020, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part I, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. Management discusses the ongoing development and selection of these critical accounting policies with the audit committee of the board of directors.
We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities, increases or decreases in earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates. Our critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements are included in the "Critical Accounting Policies and Estimates" section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets, has caused additional volatility impacting many of our estimates. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Continued volatility resulting from the pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility.
Market Risks
We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
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, 20182019 and in thisour Quarterly Report on Form 10-Q.10-Q for the quarter ended March 31, 2020.
NEW ACCOUNTING STANDARDS
A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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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, 2018,2019, 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, 2018.2019.

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 thirdsecond quarter of 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 the Superior CourtPart I, Item 3 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,year ended December 31, 2019 under the “FHLB-Seattle Defendants”), which alleged thatheading “Legal Proceedings.” At June 30, 2020, 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. The Seattle Certificate was issued with an original principalaggregate amount of approximately $133 million, and, at September 30, 2019, approximately $128 million of principal and $12 million of interest payments had been madeloss contingency reserves established in respect of the Seattle Certificate. As of September 30,FHLB-Seattle and Schwab litigation matters described in our Annual Report on Form 10-K for the year ended December 31, 2019 was $2 million.
In addition to those matters, as previously disclosed, in connection with the Seattle Certificate had a remaining outstanding principal amount of approximately $6 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 underwritersimpact of the 2005-4 RMBS, which underwriters were named as defendantseffects of the pandemic on the non-Agency mortgage finance market and on our business and operations, a small number of the counterparties that have regularly sold residential mortgage loans to us believe that we breached perceived obligations to them, and requested or demanded that we purchase loans from them and/or compensate them for perceived damages resulting from our decisions earlier in the action, for2020 not to purchase certain loans from them (“Residential Loan Seller Demands”). As previously disclosed, one such counterparty filed a breach of contract lawsuit against us alleging that it has suffered in excess of $2 million of losses and expenses they might incur as a result of claims made against them relatingour alleged failure to this RMBS, including,purchase residential mortgage loans from it.
We believe that these Residential Loan Seller Demands are without limitation, certainmerit or subject to defenses and we intend to defend vigorously any such allegations and any related demand or claim to which we are or become a party. Despite our beliefs about the legal expenses. Regardless of the resolution of this litigation, we could incur a loss as a resultmerits of these indemnities.
On or about July 15, 2010, The Charles Schwab Corporation (“Schwab”) filed a complaintallegations, because our ordinary course of business is to seek to continue to regularly engage in the Superior Court for the State of Californiamutually beneficial transactions with these counterparties, in San Francisco (case number CGC-10-501610) against SRF and 26 other defendants (collectively, the “Schwab Defendants”), which alleged 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. The Schwab Certificate was issued with an original principal amount of approximately $15 million, and, at September 30, 2019, approximately $14 million of principal and $1 million of interest payments had been made in respect of the Schwab Certificate. As of September 30, 2019, 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,some cases we have been willing to engage in discussions with these counterparties with the past engaged in,intention of reaching resolution and expectstructuring arrangements that incentivize both the counterparty and us to continue to engage in activities relatingresidential loan purchase and sale transactions in the future.
With respect to certain of the Residential Loan Seller Demands, these resolution discussions have been successful in resolving, or establishing a framework that we believe will be the basis for successfully resolving, the demands of these counterparties, including through forward-looking joint business undertakings and structured arrangements that incentivize both the counterparty and us to continue to engage in residential loan purchase and sale transactions in the future. With respect to these counterparties, we have incurred or expect to incur certain costs in connection with finalizing these arrangements (including costs that are contingent on the successful completion of future residential loan purchase and sale transactions with these counterparties that we expect to generate future revenue for the Company) and have recorded any such actual costs incurred through June 30, 2020, as well as an accrual for the estimated costs associated with counterparties where a go-forward framework has been discussed but not finalized, through Mortgage Banking Activities, net in our Residential Lending segment. In accordance with GAAP, the accrual for estimated costs is based on the opinion of management, that it is probable that these forward-looking joint business undertakings and structured arrangements will result in an expense and the amount of expense can be reasonably estimated. At June 30, 2020, the aggregate amount of these actual costs, together with the accrual for estimated costs, was $5 million, a significant portion of which would be contingent on the successful completion of future residential loan purchase and sale transactions with these counterparties, with the expectation of generating future revenue for the Company
With respect to the acquisitionremaining Residential Loan Seller Demands, our beliefs about the legal merits of these allegations and securitizationour discussions with these counterparties have resulted in us determining that a significant loss from these matters is not probable. With respect to these remaining Residential Loan Seller Demands, based on the foregoing, we have concluded that we can estimate an aggregate range of residential mortgage loans. In addition, certainreasonably possible losses with respect to these Residential Loan Seller Demands of our wholly-owned subsidiaries have in the past engaged in activities relating to the acquisitionbetween zero and securitization$1.5 million.
Future developments (including receipt of debt obligationsadditional information 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 litigationdocuments relating to these businesses, includingmatters, new or additional litigation of the type described above, and we could also become the subject of governmental investigations, enforcement actions,resolution 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 were the subject of the complaint, two were Sequoia mortgage pass-through certificates issued in 2004 and two were 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. The plaintiffs subsequently withdrew from the litigation their claims based on eight of the 28 mortgage pass-through certificates, including one of the Sequoia mortgage pass-through certificates issued in 2004. We believe this matter was subsequently resolved and the plaintiffs withdrew their remaining claims. At the time these 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 themsettlement communications relating to these certificates,matters, resolutions of similar claims against other industry participants in similar circumstances, or receipt of additional Residential Loan Seller Demands) could result in our concluding in the future to establish additional accruals or reserves or modify our aggregate range of reasonably possible losses with respect to these Residential Loan Seller Demand matters. Our actual losses, and any accruals or reserves we may establish in the future relating to these matters may be materially higher than the accruals, reserves and the aggregate range of reasonably possible losses we have estimated above, respectively, including without limitation,in the event that any of these matters proceed to trial and result in a judgment against us. We cannot be certain legal expenses. Regardlessthat any of these matters that are not already formally resolved will be resolved through a resolution or settlement prior to trial and we cannot be certain that the resolution of this litigation, we could incurthese matters, whether through trial, settlement, or otherwise, will not have a loss as a resultmaterial adverse effect on our financial condition or results of these indemnities.operations in any future period.


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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, 2019, 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-referencedabove 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.
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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, 20182019 and under Part II, Item 1A ofin our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019. In addition, the following risk factors reflect recent developments.2020.

State and/or local regulations may reduce the value of single-family rental or multifamily properties collateralizing mortgage loans we own, or those underlying the securities or other investments we own. As a result, the value of these types of mortgage loans, securities, and other investments may be negatively impacted, which impacts could be material.
Numerous counties and municipalities, including those in which certain of the properties securing single-family rental and multifamily mortgage loans we own, or those underlying the securities or other investments we own, are located, impose rent control or rent stabilization rules on apartment buildings.  These ordinances may limit rent increases to fixed percentages, to percentages of increases in the consumer price index, to increases set or approved by a governmental agency, or to increases determined through mediation or binding arbitration.  In some jurisdictions, including, for example, New York City, many apartment buildings are subject to rent stabilization and some units are subject to rent control.  These regulations, among other things, may limit the ability of single-family rental and multifamily property owners who have borrowed money (including in the form of mortgage debt) to finance their property or properties to raise rents above specified percentages.  Any limitations on a borrower’s ability to raise property rents may impair such borrower’s ability to repair or renovate the mortgaged property or repay its mortgage loan. 


Some states, counties and municipalities have imposed or may impose in the future stricter rent control regulations.  For example, on June 14, 2019, the New York State Senate passed the Housing Stability and Tenant Protection Act of 2019 (the “HSTP Act”), which, among other things, limits the ability of landlords to increase rents in rent stabilized apartments in New York State at the time of lease renewal and after a vacancy.  The HSTP Act also limits potential rent increases for major capital improvements and for individual apartment improvements in such rent stabilized apartments.  In addition, the HSTP Act permits certain qualified localities in the State of New York to implement the rent stabilization system.  In addition, the California State Assembly passed Assembly Bill 1482 (“AB 1482”), which, among other things, will prevent landlords in California from increasing the gross rental rate by more than 5% plus the percentage change in the cost of living in any 12-month period and require landlords to have “just cause” when evicting a tenant that has continuously and lawfully occupied a residential property for 12 months. Such “just cause” may include, among other things, the failure to pay rent, committing waste and assigning or subletting the premises in violation of the tenant’s lease. In addition, the Oregon State House passed Senate Bill 608 (“SB 608”), which, among other things, will limit rent increases to 7% each year, in addition to inflation, and would, in most cases, require landlords to provide notice and give a reason for evicting tenants. The HSTP Act, AB 1482 or SB 608 may reduce the value of the single-family rental and multifamily properties collateralizing mortgage loans we own, or those underlying the securities or other investments we own, that are located in the States of New York, California or Oregon, respectively, that are subject to the applicable rent control regulations. The value of single-family rental and multifamily mortgage loans, securities, and other investments may be negatively impacted by rent control or rent stabilization laws, regulations, or ordinances, which impacts may be material.  

Our acquisition of CoreVest could fail to improve our business or result in diminished returns, could expose us to new or increased risks, and could increase our cost of doing business.

On October 15, 2019, we completed the acquisition of equity interests in CoreVest American Finance Lender LLC and several of its affiliates (CAFL and such affiliates collectively, “CoreVest”), an originator and portfolio manager of business-purpose real estate loans. Prior to the completion of this acquisition, we previously acquired 5 Arches in March 2019. If we experience challenges with the performance or integration of the CoreVest and 5 Arches platforms that we did not anticipate or cannot mitigate, the returns we expected with respect to this investment may not be generated, in the same manner as described in the risk factor titled "Our acquisition of 5 Arches could fail to improve our business or result in diminished returns, could expose us to new or increased risks, and could increase our cost of doing business" under Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.

Additionally, CoreVest engages in and sponsors securitization transactions relating to single-family rental mortgage loans, and in connection with the acquisition of CoreVest, we acquired, and we expect to continue to acquire, mortgage-backed securities issued in CoreVest's securitization transactions. These securitization transactions and investments expose us to potentially material risks, in the same manner as described in the risk factor titled "Through certain of our wholly-owned subsidiaries we have engaged in the past, and expect to continue to engage in, securitization transactions relating to real estate mortgage loans. In addition, we have invested in and continue to invest in mortgage-backed securities and other ABS issued in securitization transactions sponsored by other companies. These types of transactions and investments expose us to potentially material risks" under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended SeptemberJune 30, 2019,2020, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.


In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. At SeptemberJune 30, 2019,2020, $100 million of this current authorization remained available for the repurchase of shares of our common stock.stock and we also continued to be authorized to repurchase outstanding debt securities.
The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended SeptemberJune 30, 2019.2020.
  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, 2019 - July 31, 2019 —
 $—
 —
     $—
August 1, 2019 - August 31, 2019 —
 $—
 —
 $—
September 1, 2019 - September 30, 2019 —
 $—
 —
 $100,000
Total —
 $—
 —
 $100,000
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)
April 1, 2020 - April 30, 2020— $— — $— 
May 1, 2020 - May 31, 2020— $— — $— 
June 1, 2020 - June 30, 2020— $— — $100,000 
Total— $— — $100,000 
Item 3. Defaults Upon Senior Securities
None.
Item 4. Not Applicable
Item 5. Other Information
At the close of business on Friday, November 8, 2019, Lola Bondar will cease to serve as Redwood’s principal accounting officer. Ms. Bondar will remain employed by Redwood during a subsequent transition period prior to her departure from Redwood. Collin Cochrane, Redwood’s Chief Financial Officer, will also be designated as Redwood’s principal accounting officer effective at the close of business on November 8, 2019. In connection with assuming the principal accounting officer role, Mr. Cochrane will not receive any additional compensation or benefits and will not enter into any written contract or arrangement with Redwood. Information responsive to the requirements of Form 8-K, Item 5.02(c)&(e), with respect to Mr. Cochrane has been previously disclosed in Redwood’s 2019 Annual Proxy Statement, filed2020 annual proxy statement (filed with the SEC on April 27, 2020) included a discussion of the process that the Compensation Committee of Redwood’s Board of Directors is undertaking to assess its executive compensation program and consider changes to the program that may be appropriate in light of the impacts of the COVID-19 pandemic on Redwood and the markets and business environment it operates within. On August 5, 2020, the Compensation Committee completed an initial phase of this assessment and approved certain matters relating to 2020 executive compensation, as described below.
Although it has completed this initial phase, the Compensation Committee intends to continue its assessment of Redwood’s executive compensation program and to disclose, over the remainder of 2020, any further updates to the program. In addition, the Compensation Committee Chair is currently planning to engage with shareholders in late 2020 and/or early 2021 to discuss updates to the program designed to support Redwood’s ongoing financial, operational, and strategic objectives.
The Compensation Committee’s August 5, 2020 determinations were made after review and discussion of various considerations with management and with the Committee’s independent compensation consultant, F.W. Cook & Co. Key considerations included that:
•There has been a pronounced impact from the COVID-19 pandemic on Redwood’s financial condition, with significant realized and unrealized losses since December 31, 2020 and a marked decline in the market value of Redwood’s common stock since mid-March 2020;
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•Redwood has historically delivered a significant portion of executive compensation in the form of long-term equity-based awards with three- or four-year performance measurement and/or vesting and holding periods; and, as a result of the impact of the pandemic, the value of multiple years of annual equity-based compensation has significantly declined (or, as a practical matter, become unlikely to be realized) based on the negative total return experience of Redwood’s stockholders since mid-March 2020;

◦While the Committee believes this is appropriate pay-for-performance alignment, the Committee also recognizes that, for the reasons noted above, the performance-based equity awards (PSUs) granted over the past three years no longer provide as meaningful an incentive as was intended when awarded due to the impact of the pandemic;

•Annual bonuses under Redwood’s executive compensation program have historically been driven largely by an annual return-on-equity (ROE) based performance target; and, due to pandemic-related losses recorded under GAAP in the first quarter of 2020, Redwood’s 2020 ROE is expected to be negative, even though a significant portion of these losses were unrealized through the end of the second quarter of 2020;

•Disciplined and extensive actions taken by Redwood’s executive management, together with the full Redwood workforce, to respond to the impacts of the pandemic have enabled the Company to operate through the end of the second quarter of 2020 while avoiding the need for dilutive capital raising and positioning the Company for future growth and opportunities; and

•The impact of the pandemic on Redwood’s labor market has been significant; and competitors that focus on mortgage origination and government-supported sectors of the mortgage market have seen an increase in business activity (e.g., mortgage refinance activity), supported by Federal Reserve and other governmental actions, as well as other macroeconomic factors; and, as a result, competition for talent has increased, which prompted Redwood to take steps to at the end of the second quarter of 2020 to retain key non-executive employees.
After considering these factors, on August 5, 2020, the Compensation Committee made the following determinations and approvals:
•Ensure that pay-for-performance principles continue to govern 2020 annual bonuses for current executive officers by:

◦Eliminating the ability of these executive officers to earn a Company financial performance component of their 2020 target annual bonuses; and

◦Continuing to provide each of these executive officers with an opportunity to earn a portion of 2020 target annual bonuses based on a year-end review of their individual contribution to recovering from the impacts of the pandemic and positioning Redwood for future growth and opportunities.
The following table details the components of the 2020 target annual bonus opportunity for these executive officers as approved in December 2019, and such information is incorporated hereinas adjusted by reference.

the Compensation Committee on August 5, 2020 as part of its initial response to the impact of the pandemic – i.e., illustrating the Committee’s reduction of 2020 target annual bonus opportunity for these executive officers to 33% of the level previously approved in December 2019.
Item 6. Exhibits
Previously approvedAs adjusted
Component of 2020 target annual bonus opportunity:in Dec. 2019on Aug. 5, 2020
Exhibit
NumberCompany financial performance component (ROE-based):		75% of targetExhibit0% of target
3.1
Individual performance component:25% of target33% of target
Total 2020 target bonus opportunity:100% of target33% of target


•Incentivize outperformance on a relative total stockholder return basis over a three-year service period while also providing a basic level of compensation certainty for continued service during that period through the grant of long-term awards with a cash settlement structure intended to limit potential dilution to shareholders.


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A description of the terms of each of these long-term awards is set forth below.
•Long-Term Relative TSR Performance Vesting Cash Award. On August 5, 2020, the Compensation Committee approved the grant of a Long-Term Relative TSR Performance Vesting Cash Award to each of the Named Executive Officers of the Company listed in the table below, pursuant to the Company’s Amended and Restated 2014 Incentive Award Plan (as amended, the “2014 Incentive Plan”). The terms of these Long-Term Relative TSR Performance Vesting Cash Awards are summarized below and are set forth in the form of award agreement included as Exhibit 10.4 hereto and incorporated by reference herein.

The Long-Term Relative TSR Performance Vesting Cash Awards granted on August 5, 2020 are performance-based awards under which the amount of value that vests and that the recipient becomes entitled to receive in cash following vesting will range from 0% to 400% of the granted award value, with vesting of these awards on the third anniversary of the grant date based on relative total stockholder return (“relative TSR”) and continued service through such third anniversary, as further described below.

Vesting of value under these Long-Term Relative TSR Performance Vesting Cash Awards will be determined based on Redwood’s relative TSR against a comparator group of companies measured over the three-year vesting period, as set forth in the table below, with under 60th percentile relative TSR performance correlating with no value vesting.

Relative TSR (X)Percentage of Granted Award Value that Vests
X < 60th percentile
0%
60th percentile ≤ X < 65th percentile
80%
65th percentile ≤ X < 70th percentile
120%
70th percentile ≤ X < 75th percentile
160%
75th percentile ≤ X < 80th percentile
200%
80th percentile ≤ X < 85th percentile
240%
85th percentile ≤ X < 90th percentile
280%
90th percentile ≤ X < 95th percentile
320%
95th percentile ≤ X < 100th percentile
360%
X = 100th percentile
400%


In the event of a termination of the recipient’s service (i) either without “cause” or for “good reason” or (ii) due to the recipient’s death or disability (with terminations of the type described in the foregoing clauses (i) and (ii) being referred to as “Qualifying Terminations”), in each case, during the three year performance vesting period, the Long-Term Relative TSR Performance Vesting Cash Award will remain outstanding and eligible to vest based on relative TSR during the three-year performance vesting period, with the value that ultimately vests (if any) pro-rated in connection with a termination by the Company without “cause” (based on the number of days the recipient was employed during the three-year performance vesting period).

In addition, in the event of a change in control, the vesting of value of these Long-Term Relative TSR Performance Vesting Cash Awards will be determined based on relative TSR through a shortened relative TSR performance measurement period ending with the change in control, but remain subject to forfeiture in the event of a termination of service (other than a Qualifying Termination) prior to the third anniversary of grant.

•Three-Year Vesting Cash Award. On August 5, 2020, the Compensation Committee approved the grant of a Three-Year Vesting Cash Award to each of the Named Executive Officers of the Company listed in the table below, pursuant to the Company’s 2014 Incentive Plan. The terms of these Three-Year Vesting Cash Awards are summarized below and are set forth in the form of award agreement included as Exhibit 10.5 hereto and incorporated by reference herein.

The Three-Year Vesting Cash Awards granted on August 5, 2020 will vest over three years, with 25% of each award’s granted award value vesting based on service through the first anniversary of the grant date and 75% of each award’s granted award value vesting based on service through the third anniversary of the grant date. These Three-Year Vesting Cash Awards will also vest in full upon a termination of the recipient’s service (i) either without “cause” or for “good reason” or (ii) due to the recipient’s death or disability.


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Long-term award values granted on August 5, 2020 to Named Executive Officers are detailed in the table below.

Granted Award Values
Three-Year VestingLong-Term Relative TSR
Named Executive OfficerCash Award (1)Performance Vesting Cash Award (2)
Christopher J. Abate – CEO$1,000,000$750,000
Dashiell I. Robinson – President$825,000$618,800
Andrew P. Stone – Exec. Vice President,$355,000$266,300
General Counsel and Secretary
(1) As described above, one quarter of granted award value vests at first anniversary of grant; and three-quarters
of granted award value vests at third anniversary of grant.
(2) As described above, between 0% and 400% of granted award value vests at third anniversary of grant based on
relative TSR over that three-year period.

Separately, Fred J. Matera, a member of Redwood’s Board of Directors, also began serving on June 29, 2020 as Redwood’s Managing Director–Head of Residential (currently, on an interim basis) following the departure on June 26, 2020 of the employee who previously served in that role. While so serving in this additional role, Mr. Matera will remain as a member of the Board of Directors, but not receive cash compensation for his service as a member of the Board of Directors under Redwood’s cash compensation policy for non-employee directors. For his service as a Managing Director, Mr. Matera will be compensated as an employee and receive for each calendar month of such service (i) a grant of vested deferred stock units with a grant date value of $75,000 (in advance) and (ii) a cash payment of $75,000 (in arrears), and be eligible for standard benefits of the type generally provided to full-time Managing Director employees.


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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)
3.1.11
Articles of Amendment of the Registrant, effective May 16, 2019 (incorporated by reference to the Registrant's Current Report on Form 8-K, Exhibit 3.1, filed on May 17, 2019)
3.2.13.1.12
3.2.1
Amended and Restated Bylaws of the Registrant, as adopted on March 5, 2008 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.1, filed on August 8, 2018)
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 Quarterly Report on Form 10-Q, Exhibit 3.2.2, filed on August 8, 2018)
3.2.3
Second Amendment to Amended and Restated Bylaws of the Registrant, as adopted on May 22, 2018 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.3, filed on August 8, 2018)
10.1
10.2
10.3
Lease, between SRI Nine Main Plaza LLC and CoreVest American Finance Lender LLC (formerly known as Colony American Finance Lender, LLC), dated as of October 7, 2015 (filed herewith)
10.4
First Amendment to Lease, between Broadway Michelson LLC (as successor to SRI Nine Main Plaza LLC) and CoreVest American Finance Lender LLC, dated as of May 21, 2018 (filed herewith)
10.5
Lease, between the Irvine Company LLC and 5 Arches, LLC, dated as of January 27, 2015 (filed herewith)
10.6
First Amendment to Lease, between the Irvine Company LLC and 5 Arches, LLC, dated as of September 9, 2016 (filed herewith)
10.7
Second Amendment to Lease, between the Irvine Company LLC and 5 Arches, LLC, dated as of September 30, 2016 (filed herewith)
10.8
Assignment and Assumption of Lease, between 5 Arches, LLC and 5 Arch Group, LLC, dated as of October 10, 2016 (filed herewith)
10.9
Third Amendment to Lease, between the Irvine Company LLC and 5 Arch Group, LLC, dated as of November 17, 2016 (filed herewith)
10.10
Fourth Amendment to Lease between Newport Gateway Office LLC (as successor in interest to the Irvine Company LLC) and 5 Arch Group, LLC,Agreement, dated as of May 11, 2018April 20, 2020, between ARTIS HRA Inverness Point, LP, as Landlord, and the Registrant, as Tenant (filed herewith)

10.3
Exhibit
Number		Exhibit
10.11
31.110.4
10.5
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
105

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 SeptemberJune 30, 2019,2020, is filed in inline XBRL-formatted interactive data files:


(i) Consolidated Balance Sheets at SeptemberJune 30, 20192020 and December 31, 2018;
2019;
(ii) Consolidated Statements of Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018;
2019;
(iii) Statements of Consolidated Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018;
2019;
(iv) Consolidated Statements of Changes in Stockholders' Equity for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018;
2019;
(v) Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20192020 and 2018;2019; and

(vi) Notes to Consolidated Financial Statements.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
106

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:August 7, 2020REDWOOD TRUST, INC.
By:
Date:November 8, 2019By:/s/ Christopher J. Abate
Christopher J. Abate
Chief Executive Officer
(Principal Executive Officer)
Date:November 8, 2019August 7, 2020By:/s/ Collin L. Cochrane
Collin L. Cochrane
Chief Financial Officer
(Principal Financial Officer)
Date:November 8, 2019By:/s/ Lola Bondar
Lola Bondar
Managing Director, Chiefand Accounting Officer
(Principal Accounting Officer)

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