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


(In Thousands) (Unaudited)	Nine Months Ended September 30,
	2020		2019
Cash Flows From Operating Activities:
Net (loss) income	$	(636,142)	$	120,040
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	6,213		(3,486)
Depreciation and amortization of non-financial assets	13,166		5,673
Originations of held-for-sale loans	(654,820)		(124,392)
Purchases of held-for-sale loans	(2,893,246)		(4,002,509)
Proceeds from sales of held-for-sale loans	3,224,526		2,971,811
Principal payments on held-for-sale loans	53,677		77,100
Net settlements of derivatives	(187,130)		(32,902)

Non-cash equity award compensation expense	11,146		10,552
Goodwill impairment expense	88,675		0
Market valuation adjustments	606,764		(62,720)
Realized gains, net	(30,419)		(18,227)
Net change in:
Accrued interest receivable and other assets	304,147		(141,197)
Accrued interest payable and accrued expenses and other liabilities	(82,489)		(1,049)
Net cash used in operating activities	(175,932)		(1,201,306)
Cash Flows From Investing Activities:
Originations of loan investments	(327,494)		(171,915)
Purchases of loan investment	0		(49,489)
Proceeds from sales of loan investments	1,574,160		9,422
Principal payments on loan investments	1,652,418		1,091,652
Purchases of real estate securities	(106,422)		(309,839)
Purchases of residential securities held in consolidated securitization trust	0		(193,212)
Purchases of multifamily securities held in consolidated securitization trusts	0		(68,601)
Sales of multifamily securities held in consolidated securitization trusts	142,990		0
Proceeds from sales of real estate securities	634,709		487,469
Principal payments on real estate securities	19,446		62,711
Purchases of servicer advance investments	(179,419)		(69,610)
Principal repayments from servicer advance investments	83,124		150,512


Acquisition of 5 Arches, net of cash acquired	0		(3,714)
Net investment in participation in loan warehouse facility	0		38,209
Net investment in multifamily loan fund	40,898		(33,090)
Other investing activities, net	(19,865)		(24,989)
Net cash provided by investing activities	3,514,545		915,516
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	3,981,572		4,009,083
Repayments on short-term debt	(5,828,972)		(4,435,823)
Proceeds from issuance of asset-backed securities	1,343,845		1,020,136
Repayments on asset-backed securities issued	(1,037,546)		(720,651)

Proceeds from issuance of long-term debt	1,251,850		387,053
Deferred long-term debt issuance costs paid	(9,526)		(7,023)
Repayments on long-term debt	(2,640,007)		0
Net settlements of derivatives	(84,336)		0
Net proceeds from issuance of common stock	5,791		426,970
Net payments on repurchase of common stock	(21,659)		0
Taxes paid on equity award distributions	(3,009)		0
Dividends paid	(67,821)		(94,286)
Other financing activities, net	4,650		1,400
Net cash (used in) provided by financing activities	(3,105,168)		586,859
Net increase in cash, cash equivalents and restricted cash	233,445		301,069
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)	$	524,278	$	506,146

(In Thousands)
(Unaudited) Three Months Ended March 31,
2020 2019
Cash Flows From Operating Activities:
Net (loss) income $ (943,398 ) $ 54,464
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net (596 ) (689 )
Depreciation and amortization of non-financial assets 4,677
343
Originations of held-for-sale loans (280,076 ) (28,968 )
Purchases of held-for-sale loans (2,665,447 ) (989,977 )
Proceeds from sales of held-for-sale loans 2,733,285
851,331
Principal payments on held-for-sale loans 19,778
17,450
Net settlements of derivatives (163,442 ) (9,305 )
Non-cash equity award compensation expense 3,188
3,090
Goodwill impairment expense 88,675
—
Market valuation adjustments 912,477
(31,439 )
Realized gains, net (3,852 ) (10,686 )
Net change in:
Accrued interest receivable and other assets 107,740
(50,006 )
Accrued interest payable and accrued expenses and other liabilities (54,414 ) (12,119 )
Net cash used in operating activities (241,405 ) (206,511 )
Cash Flows From Investing Activities:
Originations of loans held-for-investment (206,634 ) (7,000 )
Purchases of loans held-for-investment —
(49,489 )
Principal payments on loans held-for-investment 638,508
246,964
Purchases of real estate securities (52,259 ) (154,871 )
Sales of multifamily securities held in consolidated securitization trusts 121,000
—
Proceeds from sales of real estate securities 529,494
74,018
Principal payments on real estate securities 11,952
24,498
Purchases of servicer advance investments (158,618 ) (68,976 )
Principal repayments from servicer advance investments 22,815
66,532
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 fund 24,842
(22,316 )
Other investing activities, net (20,514 ) (3,295 )
Net cash provided by investing activities 910,586
140,560
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt 2,972,646
1,217,915
Repayments on short-term debt (2,960,444 ) (1,459,648 )
Proceeds from issuance of asset-backed securities 377,164
330,534
Repayments on asset-backed securities issued (363,696 ) (163,146 )
Proceeds from issuance of long-term debt 133,961
—
Deferred long-term debt issuance costs paid (1,003 ) —
Repayments on long-term debt (633,448 ) —
Net settlements of derivatives (84,336 ) (35 )
Net proceeds from issuance of common stock 2,262
182,512
Taxes paid on equity award distributions (2,632 ) (2,033 )
Dividends paid —
(29,774 )
Other financing activities, net 3,497
—
Net cash (used in) provided by financing activities (556,029 ) 76,325
Net increase in cash, cash equivalents and restricted cash 113,152
10,374
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⁾
$ 403,985
$ 215,451

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


(In Thousands) (Unaudited)	Nine Months Ended September 30,
	2020		2019
























































Supplemental Cash Flow Information:
Cash paid during the period for:
Interest	$	364,875	$	319,036
Taxes	218		6,977
Supplemental Noncash Information:
Real estate securities retained from loan securitizations	$	46,560	$	7,759
Retention of mortgage servicing rights from loan securitizations and sales	0		868
Consolidation of residential loans held in securitization trusts	0		1,190,995
Consolidation of residential ABS	0		997,783
(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-investment	770,754		1,361,015

Transfers from residential loans to real estate owned	12,547		5,280

Right-of-use asset obtained in exchange for operating lease liability	5,362		13,016
Reduction in operating lease liability due to lease modification	1,466		0

(1) Cash, cash equivalents, and restricted cash at September 30, 2020 includes cash and cash equivalents of $451 million and restricted cash of $74 million, and at December 31, 2019 includes cash and cash equivalents of $197 million and restricted cash of $94 million.

(In Thousands)
(Unaudited) Three Months Ended March 31,
2020 2019
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 170,884
$ 99,686
Taxes 109
77
Supplemental Noncash Information:
Real estate securities retained from loan securitizations $ 46,560
$ 2,601
Retention of mortgage servicing rights from loan securitizations and sales —
223
Deconsolidation of multifamily loans held in securitization trusts (3,849,779 ) —
Deconsolidation of multifamily ABS (3,706,789 ) —
Transfers from loans held-for-sale to loans held-for-investment 382,635
389,486
Transfers from loans held-for-investment to loans held-for-sale 1,857,781
22,758
Transfers from residential loans to real estate owned 6,363
5,035
Right-of-use asset obtained in exchange for operating lease liability 5,362
12,661
Accrued but unpaid dividends 37,800
—


~~(1)~~	Cash, cash equivalents, and restricted cash at March 31, 2020 includes cash and cash equivalents of $378 million and restricted cash of $26 million, and at December 31, 2019 includes cash and cash equivalents of $197 million and restricted cash of $94 million.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020

(Unaudited)

Note 1. Organization

Our primary sources of income are net interest income from our investments 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 loans, and their subsequent sale, securitization, or transfer to our investment portfolios.

Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “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 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 ~~March 31,~~September 30, 2020 and December 31, 2019, and for the three and nine months ended ~~March 31,~~September 30, 2020 and 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, 2019. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the company at ~~March 31,~~September 30, 2020 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended ~~March 31,~~September 30, 2020 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 ("Sequoia Choice"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations we invested in. Finally, we consolidated the assets and liabilities of certain CoreVest American Finance Lender ("CAFL") securitizations beginning in the fourth quarter of 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020

(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, 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.

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.

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.

Acquisitions

In May 2018, Redwood acquired a 20% minority interest in 5 Arches, an originator of business purpose residential loans. On March 1, 2019, we completed the acquisition of the remaining 80% interest in 5 Arches. On October 15, 2019, we acquired CoreVest, an originator and portfolio manager of business purpose residential loans. Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding these acquisitions, including purchase price allocations.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020

(Unaudited)

Note 2. Basis of Presentation - (continued)

In connection with the acquisitions of 5 Arches and CoreVest, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The amortization period for each of these assets and the activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 is summarized in the table below.

Table 2.1 – Intangible Assets – Activity

Carrying Value at December 31, 2019 Additions Amortization Expense Carrying Value at March 31, 2020 Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network $ 43,952
$ —
$ (1,618 ) $ 42,334
7
Broker network 15,083
—
(905 ) 14,178
4
Non-compete agreements 8,236
—
(792 ) 7,444
3
Tradenames 3,472
—
(333 ) 3,139
3
Developed technology 1,613
—
(225 ) 1,388
2
Loan administration fees on existing loan assets 433
—
(433 ) —
—
Total $ 72,789
$ —
$ (4,306 ) $ 68,483
6


	Carrying Value at December 31, 2019		Additions		Amortization Expense		Carrying Value at September 30, 2020		Weighted Average Amortization Period (in years)
(Dollars in Thousands)

Borrower network	$	43,952	$	0	$	(4,854)	$	39,098	7
Broker network	15,083		0		(2,715)		12,368		5
Non-compete agreements	8,236		0		(2,375)		5,861		3
Tradenames	3,472		0		(1,000)		2,472		3
Developed technology	1,613		0		(675)		938		2
Loan administration fees on existing loan assets	433		0		(433)		0		1
Total	$	72,789	$	0	$	(12,052)	$	60,737	6

All of our intangible assets are amortized on a straight-line basis. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year

(In Thousands) March 31, 2020
2020 (9 months) $ 11,619
2021 15,304
2022 12,800
2023 10,091
2024 7,073
2025 and thereafter 11,596
Total Future Intangible Asset Amortization $ 68,483



(In Thousands)	September 30, 2020
2020 (3 months)	$	3,873
2021	15,304
2022	12,800
2023	10,091
2024	7,073
2025 and thereafter	11,596
Total Future Intangible Asset Amortization	$	60,737

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, 2019
(In Thousands) Financial Instruments Cash Collateral (Received) Pledged
Assets ⁽²⁾

Interest rate agreements $ 19,020
$ —
$ 19,020
$ (14,178 ) $ (915 ) $ 3,927
TBAs 5,755
—
5,755
(5,755 ) —
—
Futures 137
—
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 residential mortgage loans, and security repurchase agreements are components of Short-term debt on our consolidated balance sheets.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020

(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, 2019 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	19,020	$	0	$	19,020	$	(14,178)	$	(915)	$	3,927

TBAs	5,755		0		5,755		(5,755)		0		0
Futures	137		0		137		0		0		137
Total Assets	$	24,912	$	0	$	24,912	$	(19,933)	$	(915)	$	4,064

Liabilities (2)
Interest rate agreements	$	(148,765)	$	0	$	(148,765)	$	14,178	$	134,587	$	0
TBAs	(13,359)		0		(13,359)		5,755		6,673		(931)

Loan warehouse debt	(432,126)		0		(432,126)		432,126		0		0
Security repurchase agreements	(1,096,578)		0		(1,096,578)		1,096,578		0		0
Total Liabilities	$	(1,690,828)	$	0	$	(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.

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, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Analysis of Consolidated VIEs

At ~~March 31,~~September 30, 2020, we consolidated Legacy Sequoia, Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series and CAFL 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 ~~March 31,~~September 30, 2020, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series and CAFL entities was $6$5 million, ~~$144~~$211 million, ~~$309~~$418 million, ~~$23~~$27 million, and ~~$170~~$232 million, respectively.

Beginning in 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 ~~March 31,~~September 30, 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 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 ~~March 31,~~September 30, 2020, the estimated fair value of our investment in the Servicing Investment entities was ~~$59~~$65 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 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 Accounted for as Collateralized Financing Entities


September 30, 2020	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	296,765	$	1,836,361	$	2,256,682	$	0	$	0	$	0	$	4,389,808
Business purpose residential loans, held-for-investment	0		0		0		0		2,969,692		0		2,969,692
Multifamily loans, held-for-investment	0		0		0		491,415		0		0		491,415

Other investments	0		0		0		0		0		278,487		278,487
Cash and cash equivalents	0		0		0		0		0		10,425		10,425
Restricted cash	146		0		0		0		0		20,649		20,795
Accrued interest receivable	402		7,292		6,928		1,342		12,071		2,609		30,644
Other assets	784		0		887		0		4,158		0		5,829
Total Assets	$	298,097	$	1,843,653	$	2,264,497	$	492,757	$	2,985,921	$	312,170	$	8,197,095
Short-term debt	$	0	$	0	$	0	$	0	$	0	$	228,998	$	228,998
Accrued interest payable	180		5,652		5,009		1,182		9,337		137		21,497
Accrued expenses and other liabilities	0		47		0		0		0		18,129		18,176
Asset-backed securities issued	292,484		1,626,564		1,841,313		464,865		2,744,150		0		6,969,376
Total Liabilities	$	292,664	$	1,632,263	$	1,846,322	$	466,047	$	2,753,487	$	247,264	$	7,238,047

Number of VIEs	20		10		2		1		13		3		49


December 31, 2019	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	407,890	$	2,291,463	$	2,367,215	$	0	$	0	$	0	$	5,066,568
Business purpose residential loans, held-for-investment	0		0		0		0		2,192,552		0		2,192,552
Multifamily loans, held-for-investment	0		0		0		4,408,524		0		0		4,408,524

Other investments	0		0		0		0		0		184,802		184,802
Cash and cash equivalents	0		0		0		0		0		9,015		9,015
Restricted cash	143		27		0		0		0		21,766		21,936
Accrued interest receivable	655		9,824		7,313		13,539		9,572		4,869		45,772
Other assets	460		0		445		0		1,795		0		2,700
Total Assets	$	409,148	$	2,301,314	$	2,374,973	$	4,422,063	$	2,203,919	$	220,452	$	11,931,869
Short-term debt	$	0	$	0	$	0	$	0	$	0	$	152,554	$	152,554
Accrued interest payable	395		7,732		5,374		12,887		7,485		187		34,060
Accrued expenses and other liabilities	0		27		0		0		0		14,956		14,983
Asset-backed securities issued	402,465		2,037,198		1,918,322		4,156,239		2,001,251		0		10,515,475
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		5		10		3		49

March 31, 2020
Legacy
Sequoia

Sequoia
Choice
Freddie Mac SLST
Freddie Mac
K-Series
CAFL Servicing Investment
Total
Consolidated
VIEs
(Dollars in Thousands)
Residential loans, held-for-investment $ 316,677
$ 1,932,658
$ 2,131,125
$ —
$ —
$ —
$ 4,380,460
Business purpose residential loans, held-for-investment —
—
—
—
2,248,665
—
2,248,665
Multifamily loans, held-for-investment —
—
—
470,484
—
—
470,484
Other investments —
—
—
—
—
314,394
314,394
Cash and cash equivalents —
—
—
—
—
2,886
2,886
Restricted cash 143
15
—
—
—
11,810
11,968
Accrued interest receivable 580
8,574
7,184
1,390
10,803
5,567
34,098
Other assets 952
—
1,050
—
5,749
—
7,751
Total Assets $ 318,352
$ 1,941,247
$ 2,139,359
$ 471,874
$ 2,265,217
$ 334,657
$ 7,470,706
Short-term debt $ —
$ —
$ —
$ —
$ —
$ 258,931
$ 258,931
Accrued interest payable 351
6,920
5,251
1,230
8,188
205
22,145
Accrued expenses and other liabilities —
15
—
—
—
16,305
16,320
Asset-backed securities issued 312,201
1,790,094
1,825,000
447,699
2,086,870
—
6,461,864
Total Liabilities $ 312,552
$ 1,797,029
$ 1,830,251
$ 448,929
$ 2,095,058
$ 275,441
$ 6,759,260

Number of VIEs 20
9
2
1
11
3
46

December 31, 2019
Legacy
Sequoia
Sequoia
Choice Freddie Mac SLST
Freddie Mac
K-Series
CAFL Servicing Investment
Total
Consolidated
VIEs
(Dollars in Thousands)
Residential loans, held-for-investment $ 407,890
$ 2,291,463
$ 2,367,215
$ —
$ —
$ —
$ 5,066,568
Business purpose residential loans, held-for-investment —
—
—
—
2,192,552
—
2,192,552
Multifamily loans, held-for-investment —
—
—
4,408,524
—
—
4,408,524
Other investments —
—
—
—
—
184,802
184,802
Cash and cash equivalents —
—
—
—
—
9,015
9,015
Restricted cash 143
27
—
—
—
21,766
21,936
Accrued interest receivable 655
9,824
7,313
13,539
9,572
4,869
45,772
Other assets 460
—
445
—
1,795
—
2,700
Total Assets $ 409,148
$ 2,301,314
$ 2,374,973
$ 4,422,063
$ 2,203,919
$ 220,452
$ 11,931,869
Short-term debt $ —
$ —
$ —
$ —
$ —
$ 152,554
$ 152,554
Accrued interest payable 395
7,732
5,374
12,887
7,485
187
34,060
Accrued expenses and other liabilities —
27
—
—
—
14,956
14,983
Asset-backed securities issued 402,465
2,037,198
1,918,322
4,156,239
2,001,251
—
10,515,475
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
5
10
3
49

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents income (loss) from these VIEs for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

Table 4.2 – Income (Loss) from Consolidated VIEs Accounted for as Collateralized Financing Entities


	Three Months Ended September 30, 2020
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,795	$	20,919	$	21,696	$	4,918	$	36,181	$	4,403	$	89,912
Interest expense	(1,058)		(17,828)		(15,473)		(4,426)		(27,499)		(1,587)		(67,871)
Net interest income	737		3,091		6,223		492		8,682		2,816		22,041
Non-interest income

Investment fair value changes, net	(81)		7,851		82,214		2,166		9,692		(422)		101,420


Total non-interest income, net	(81)		7,851		82,214		2,166		9,692		(422)		101,420
General and administrative expenses	0		0		0		0		0		(41)		(41)
Other expenses	0		0		0		0		0		(471)		(471)

Income from Consolidated VIEs	$	656	$	10,942	$	88,437	$	2,658	$	18,374	$	1,882	$	122,949


	Nine Months Ended September 30, 2020
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	7,675	$	68,566	$	64,869	$	49,960	$	99,169	$	13,026	$	303,265
Interest expense	(5,098)		(58,455)		(47,495)		(47,154)		(75,600)		(4,961)		(238,763)
Net interest income	2,577		10,111		17,374		2,806		23,569		8,065		64,502
Non-interest income

Investment fair value changes, net	(702)		(22,065)		(33,081)		(82,744)		(41,841)		(9,015)		(189,448)


Total non-interest income, net	(702)		(22,065)		(33,081)		(82,744)		(41,841)		(9,015)		(189,448)
General and administrative expenses	0		0		0		0		0		(784)		(784)
Other expenses	0		0		0		0		0		346		346

Income (Loss) from Consolidated VIEs	$	1,875	$	(11,954)	$	(15,707)	$	(79,938)	$	(18,272)	$	(1,388)	$	(125,384)


	Three Months Ended September 30, 2019
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	4,295	$	27,555	$	11,830	$	36,829	$	0	$	3,922	$	84,431
Interest expense	(3,452)		(23,576)		(8,709)		(35,328)		0		(2,891)		(73,956)
Net interest income	843		3,979		3,121		1,501		0		1,031		10,475
Non-interest income

Investment fair value changes, net	(407)		2,722		17,300		7,445		0		963		28,023


Total non-interest income, net	(407)		2,722		17,300		7,445		0		963		28,023
General and administrative expenses	0		0		0		0		0		(16)		(16)
Other expenses	0		0		0		0		0		(395)		(395)

Income from Consolidated VIEs	$	436	$	6,701	$	20,421	$	8,946	$	0	$	1,583	$	38,087

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Three Months Ended March 31, 2020

Legacy
Sequoia

Sequoia
Choice
Freddie Mac SLST
Freddie Mac
K-Series
CAFL Servicing Investment
Total
Consolidated
VIEs
(Dollars in Thousands)
Interest income $ 3,194
$ 25,083
$ 21,986
$ 40,172
$ 30,010
$ 4,083
$ 124,528
Interest expense (2,522 ) (21,510 ) (16,176 ) (38,348 ) (21,939 ) (1,577 ) (102,072 )
Net interest income 672
3,573
5,810
1,824
8,071
2,506
22,456
Non-interest income
Investment fair value changes, net (391 ) (69,668 ) (142,161 ) (86,509 ) (67,846 ) (11,884 ) (378,459 )
Total non-interest income, net (391 ) (69,668 ) (142,161 ) (86,509 ) (67,846 ) (11,884 ) (378,459 )
General and administrative expenses —
—
—
—
—
(31 ) (31 )
Other expenses —
—
—
—
—
1,882
1,882
Income (Loss) from Consolidated VIEs $ 281
$ (66,095 ) $ (136,351 ) $ (84,685 ) $ (59,775 ) $ (7,527 ) $ (354,152 )

Three Months Ended March 31, 2019

Legacy
Sequoia

Sequoia
Choice
Freddie Mac SLST
Freddie Mac
K-Series
CAFL Servicing Investment
Total
Consolidated
VIEs
(Dollars in Thousands)
Interest income $ 4,853
$ 25,662
$ 11,794
$ 21,388
$ —
$ 3,346
$ 67,043
Interest expense (4,115 ) (22,113 ) (8,747 ) (20,320 ) —
(3,613 ) (58,908 )
Net interest income 738
3,549
3,047
1,068
—
(267 ) 8,135
Non-interest income
Investment fair value changes, net (374 ) 3,265
6,365
3,119
—
1,430
13,805
Total non-interest income, net (374 ) 3,265
6,365
3,119
—
1,430
13,805
General and administrative expenses —
—
—
—
—
(30 ) (30 )
Other expenses —
—
—
—
—
(227 ) (227 )
Income from Consolidated VIEs $ 364
$ 6,814
$ 9,412
$ 4,187
$ —
$ 906
$ 21,683


	Nine Months Ended September 30, 2019
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	13,924	$	80,045	$	35,221	$	94,134	$	0	$	10,847	$	234,171
Interest expense	(11,548)		(68,823)		(26,013)		(90,089)		0		(9,905)		(206,378)
Net interest income	2,376		11,222		9,208		4,045		0		942		27,793
Non-interest income

Investment fair value changes, net	(904)		8,866		31,702		13,810		0		3,462		56,936


Total non-interest income, net	(904)		8,866		31,702		13,810		0		3,462		56,936
General and administrative expenses	0		0		0		0		0		(87)		(87)
Other expenses	0		0		0		0		0		(864)		(864)

Income from Consolidated VIEs	$	1,472	$	20,088	$	40,910	$	17,855	$	0	$	3,453	$	83,778

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, 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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31,~~During the third quarter of 2020,

~~(Unaudited)~~

~~Note 4. Principles~~ we re-securitized subordinate securities we owned in our consolidated Freddie Mac SLST securitization trusts, through the transfer of ~~Consolidation - (continued)~~

these financial assets to a re-securitization trust that we sponsored. We retain a subordinate investment in the re-securitization trust and maintain certain discretionary rights associated with the ownership of this investment that we determined reflected a controlling financial interest in the entity, as we have both the power to direct the activities that most significantly impact the performance of the VIE and the right to receive benefits of and the obligation to absorb losses from the VIE that could potentially be significant to the VIE. At securitization, we issued $210 million of ABS and have elected to account for the ABS issued at amortized cost.

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 51 Sequoia securitization entities sponsored by us that are still outstanding as of ~~March 31,~~September 30, 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents information related to securitization transactions that occurred during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

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

Three Months Ended March 31,
(In Thousands) 2020 2019
Principal balance of loans transferred $ 1,573,703
$ 348,257
Trading securities retained, at fair value 43,362
1,716
AFS securities retained, at fair value 3,198
885


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Principal balance of loans transferred	$	0	$	366,999	$	1,573,703	$	1,116,092
Trading securities retained, at fair value	0		1,228		43,362		4,736
AFS securities retained, at fair value	0		1,069		3,198		3,023

The following table summarizes the cash flows during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.4 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood

Three Months Ended March 31,
(In Thousands) 2020 2019
Proceeds from new transfers $ 1,610,761
$ 352,371
MSR fees received 2,690
3,060
Funding of compensating interest, net (92 ) (90 )
Cash flows received on retained securities 6,581
7,546


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Proceeds from new transfers	$	0	$	376,126	$	1,610,761	$	1,138,778
MSR fees received	2,280		2,919		7,445		9,084
Funding of compensating interest, net	4		(76)		(293)		(213)
Cash flows received on retained securities	5,873		6,603		19,242		20,892

The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization for securitizations completed during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

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


	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019
At Date of Securitization	Senior IO Securities	Subordinate Securities	Senior IO Securities		Subordinate Securities
Prepayment rates	N/A	N/A	37	%	15	%
Discount rates	N/A	N/A	14	%	7	%
Credit loss assumptions	N/A	N/A	0.20	%	0.20	%


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
At Date of Securitization	Senior IO Securities		Subordinate Securities		Senior IO Securities		Subordinate Securities
Prepayment rates	41	%	13	%	25	%	15	%
Discount rates	16	%	6	%	14	%	7	%
Credit loss assumptions	0.21	%	0.22	%	0.20	%	0.20	%

Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
At Date of Securitization Senior IO Securities Subordinate Securities Senior IO Securities Subordinate Securities
Prepayment rates 41 % 13 % 16 % 14 %
Discount rates 16 % 6 % 14 % 8 %
Credit loss assumptions 0.21 % 0.22 % 0.20 % 0.20 %

September 30, 2020

Subordinate Securities

~~March 31, 2020~~

~~Subordinate Securities~~

~~Prepayment~~Default rate

~~12%~~

0.5%

~~Default rate~~

~~0.5%~~

Loss severity

20%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table details the activity related to the allowance for credit losses for AFS securities held at ~~March 31,~~September 30, 2020.

Table 9.8 – Rollforward of Allowance for Credit Losses

Three Months Ended
(In Thousands) March 31, 2020
Beginning balance allowance for credit losses $ —
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 for securities sold during the period —
Write-offs charged against allowance —
Recoveries of amounts previously written off —
Ending balance of allowance for credit losses $ 1,525

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020~~

~~(Unaudited)~~

~~Note 9. Real Estate Securities - (continued)~~


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2020		September 30, 2020
Beginning balance allowance for credit losses	$	1,471	$	0
Transition impact from adoption of new standard	0		0
Additions to allowance for credit losses on securities for which credit losses were not previously recorded	339		1,864
Additional increases or decreases to the allowance for credit losses on securities that had an allowance recorded in a previous period	(783)		(837)
Allowance on purchased financial assets with credit deterioration	0		0
Reduction to allowance for securities sold during the period	0		0
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell	0		0
Write-offs charged against allowance	0		0
Recoveries of amounts previously written off	0		0
Ending balance of allowance for credit losses	$	1,027	$	1,027

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income (loss). The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

Table 9.9 – Gross Realized Gains and Losses on AFS Securities

Three Months Ended March 31,
(In Thousands) 2020 2019
Gross realized gains - sales $ 7,705
$ 6,660
Gross realized gains - calls —
4,026
Gross realized losses - sales (3,853 ) —
Total Realized Gains on Sales and Calls of AFS Securities, net $ 3,852
$ 10,686


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Gross realized gains - sales	$	0	$	3,656	$	8,779	$	13,143
Gross realized gains - calls	0		1,058		0		5,084
Gross realized losses - sales	0		0		(4,144)		0

Total Realized Gains on Sales and Calls of AFS Securities, net	$	0	$	4,714	$	4,635	$	18,227

Note 10. Other Investments

Other investments at ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized in the following table.

Table 10.1 – Components of Other Investments


(In Thousands)	September 30, 2020		December 31, 2019
Servicer advance investments	$	258,621	$	169,204
Shared home appreciation options	41,758		45,085
Excess MSRs	35,070		31,814
Mortgage servicing rights	14,878		42,224
Investment in multifamily loan fund	(323)		39,802
Other	34,624		30,001


Total Other Investments	$	384,628	$	358,130

(In Thousands) March 31, 2020 December 31, 2019
Servicer advance investments $ 298,946
$ 169,204
Shared home appreciation options 40,642
45,085
Excess MSRs 31,788
31,814
Mortgage servicing rights 23,616
42,224
Investment in multifamily loan fund 15,731
39,802
Other 35,497
30,001
Total Other Investments $ 446,220
$ 358,130

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 10. Other Investments - (continued)

Servicer advance investments

In 2018, we and a third-party co-investor, through ~~two~~2 partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor (Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding the transaction). During the nine months ended September 30, 2020, we funded additional purchases of outstanding servicer advances and excess MSRs under the same partnership structure. At ~~March 31,~~September 30, 2020, we had funded ~~$90~~$94 million of total capital to the SA Buyers (see Note 16 for additional detail).

At ~~March 31,~~September 30, 2020, our servicer advance investments had a carrying value of ~~$299~~$259 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of ~~$10.25~~$9.71 billion. The outstanding servicer advance receivables associated with this investment were ~~$283~~$242 million at ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2020 and December 31, ~~2019:~~2019.

Table 10.2 – Components of Servicer Advance Receivables

(In Thousands) March 31, 2020 December 31, 2019
Principal and interest advances $ 113,612
$ 15,081
Escrow advances (taxes and insurance advances) 117,876
96,732
Corporate advances 51,255
39,769
Total Servicer Advance Receivables $ 282,743
$ 151,582


(In Thousands)	September 30, 2020		December 31, 2019
Principal and interest advances	$	88,370	$	15,081
Escrow advances (taxes and insurance advances)	115,352		96,732
Corporate advances	38,337		39,769
Total Servicer Advance Receivables	$	242,059	$	151,582

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020~~

~~(Unaudited)~~

We account for our servicer advance investments at fair value and during the three and nine months ended ~~March 31,~~September 30, 2020, ~~and 2019,~~ we recorded $3$3 million and $8 million, respectively, of interest income associated with these investments, ~~for each~~and recorded net market valuation gain of ~~these periods,~~less than $0.1 million and ~~recorded~~ a net market valuation loss of $6 ~~million and a net market valuation gain of $1~~ million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss). During the three and nine months ended September 30, 2019, we recorded $3 million and $9 million, respectively, of interest income associated with these investments for each of these periods, and recorded net market valuation gains of $2 million and $3 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 subsidiaries.

At ~~March 31,~~September 30, 2020 and December 31, 2019, our MSRs had a fair value of ~~$24~~$15 million and $42 million, respectively, and were associated with loans with an aggregate principal balance of ~~$4.10~~$3.14 billion and $4.35 billion, respectively.

~~The following table presents activity for MSRs for~~ During the three and nine months ended ~~March 31,~~September 30, 2020, including net market valuation gains and ~~2019.~~

~~Table 10.3 – Activity for~~losses on our MSRs

Three Months Ended March 31,
(In Thousands) 2020 2019
Balance at beginning of period $ 42,224
$ 60,281
Additions —
104
Changes in fair value due to:
Changes in assumptions ⁽¹⁾
(16,746 ) (3,586 )
Other changes ⁽²⁾
(1,862 ) (1,515 )
Balance at End of Period $ 23,616
$ 55,284


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


~~(2)~~	~~Represents changes due to the realization~~ and related risk management derivatives, we recorded net losses of $2 million and $6 million, respectively, through Other income on our consolidated statements of ~~expected cash flows.~~

~~The following table presents the components of our MSR~~ income (loss) ~~for~~. During the three and nine months ended ~~March 31, 2020~~September 30, 2019, we recognized $0.4 million and ~~2019.~~$2 million of income, net, respectively, through Other income on our consolidated statements of income (loss).

~~Table 10.4 – Components of MSR Income (Loss), net~~

Three Months Ended March 31,
(In Thousands) 2020 2019
Servicing income $ 3,311
$ 3,610
Cost of sub-servicer (478 ) (503 )
Net servicing fee income 2,833
3,107
Market valuation changes of MSRs (18,608 ) (5,101 )
Market valuation changes of associated derivatives 13,966
2,251
MSR Income (Loss), Net ⁽¹⁾
$ (1,809 ) $ 257


~~(1)~~	~~MSR income, net is included in Other income on our consolidated statements of income (loss).~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020

(Unaudited)

Note 10. Other Investments - (continued)

Excess MSRs

In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and nine months ended ~~March 31,~~September 30, 2020, ~~and 2019,~~ we recognized $3 million and $2$9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $9$1 million and ~~$0.4~~$8 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2019, we recognized $2 million and $6 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2 million for both periods through Investment fair value changes, net on our consolidated statements of income (loss).

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 $54 million at March 31, 2020. During the three months ended March 31, 2020, we acquired $28 million of securities from the partnership's first securitization transaction. At ~~March 31,~~September 30, 2020, the carrying amount of our investment in the partnership was ~~$16 million.~~0 and we had 0 remaining funding obligations to the partnership. During the three and nine months ended ~~March 31,~~September 30, 2020, we acquired $28 million and $56 million of securities, respectively, from the partnership's securitization transactions. During the three and nine months ended September 30, 2020, we recorded income of $0.3 million and $0.6 million, respectively, associated with this investment in Other income on our consolidated statements of income (loss). During the three and nine months ended September 30, 2019, we recorded $1 million and $0.5 million of income, respectively, 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. At ~~March 31,~~September 30, 2020, we had acquired $47 million of shared home appreciation options under this flow purchase agreement and had an outstanding commitment to fund up to an additional $3 million under this agreement. We account for these investments under the fair value option and during the three and nine months ended ~~March 31,~~September 30, 2020, we recorded a net market valuation gain of $2 million and a net market valuation loss of $8$4 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020

(Unaudited)

Note 11. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at ~~March 31,~~September 30, 2020 and December 31, 2019.

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


	September 30, 2020				December 31, 2019
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)


Assets - Risk Management Derivatives
Interest rate swaps	$	78	$	25,000	$	17,095	$	1,399,000
TBAs	402		140,000		5,755		2,445,000
Interest rate futures	63		40,000		777		213,700
Swaptions	3,393		285,000		1,925		1,065,000

Assets - Other Derivatives
Loan purchase and interest rate lock commitments	10,773		1,724,207		10,149		1,537,162

Total Assets	$	14,709	$	2,214,207	$	35,701	$	6,659,862

Liabilities - Cash Flow Hedges
Interest rate swaps	$	0	$	0	$	(51,530)	$	139,500
Liabilities - Risk Management Derivatives
Interest rate swaps	(15)		25,000		(97,235)		2,314,300
TBAs	(263)		105,000		(13,359)		4,160,000
Interest rate futures	0		0		(10)		12,300
Liabilities - Other Derivatives
Loan purchase commitments	(1,334)		231,651		(1,290)		303,394

Total Liabilities	$	(1,612)	$	361,651	$	(163,424)	$	6,929,494
Total Derivative Financial Instruments, Net	$	13,097	$	2,575,858	$	(127,723)	$	13,589,356

March 31, 2020 December 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 90,717
4,490,000
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 commitments —
—
10,149
1,537,162
Total Assets $ 90,717
$ 4,490,000
$ 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 (110,648 ) 4,490,000
(13,359 ) 4,160,000
Interest rate futures —
—
(10 ) 12,300
Liabilities - Other Derivatives
Loan purchase commitments (3,966 ) 226,372
(1,290 ) 303,394
Total Liabilities $ (114,614 ) $ 4,716,372
$ (163,424 ) $ 6,929,494
Total Derivative Financial Instruments, Net $ (23,897 ) $ 9,206,372
$ (127,723 ) $ 13,589,356

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 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 ~~March 31,~~September 30, 2020, we were party to swaps and swaptions with an aggregate notional amount of $335 million, TBA agreements sold with an aggregate notional amount of ~~$8.98 billion.~~$245 million, and interest rate futures contracts with an aggregate notional amount of $40 million. At December 31, 2019, we were party to swaps and swaptions with an aggregate notional amount of $4.78 billion, TBA agreements sold with an aggregate notional amount of $6.61 billion, and interest rate futures contracts with an aggregate notional amount of $226 million.

During the three and nine months ended ~~March 31,~~September 30, 2020, risk management derivatives had net market valuation losses of 0 and $98 million, respectively. During the three and nine months ended September 30, 2019, risk management derivatives had net market valuation losses of ~~$98~~$36 million and ~~$45~~$147 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income on our consolidated statements of income (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 Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For the three and nine months ended ~~March 31,~~September 30, 2020, LPCs and IRLCs had net market valuation gains of $14 million and $35 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2019, LPCs and IRLCs had net market valuation gains of ~~$18~~$14 million and ~~$11~~$42 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).

Derivatives Designated as Cash Flow Hedges

To manage the variability in interest expense related to portions 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.

For the three months ended March 31, 2020 and 2019, changes in the values of designated cash flow hedges were negative $33 million and negative $6 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. During the ~~three months ended March 31,~~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 a payment of $84 million. For interest rate agreements ~~currently or~~ previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was ~~$84~~$82 million and $51 million at ~~March 31,~~September 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 September 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 nine months ended September 30, 2020, changes in the values of designated cash flow hedges were 0 and negative $33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. For the three and nine months ended September 30, 2019, changes in the values of designated cash flow hedges were negative $12 million and negative $27 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Net interest expense on cash flows hedges	$	0	$	(727)	$	(860)	$	(2,004)

Realized net losses reclassified from other comprehensive income	(1,040)		0		(2,148)		0
Total Interest Expense	$	(1,040)	$	(727)	$	(3,008)	$	(2,004)

Three Months Ended March 31,
(In Thousands) 2020 2019
Net interest expense on cash flows hedges $ (860 ) $ (637 )
Realized net losses reclassified from other comprehensive income (79 ) —
Total Interest Expense $ (939 ) $ (637 )

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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, 2019, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At ~~March 31,~~September 30, 2020, we assessed this risk as remote and did not record a specific valuation adjustment.

At ~~March 31,~~September 30, 2020, we were in compliance with our derivative counterparty ISDA agreements.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020~~

~~(Unaudited)~~

Note 12. Other Assets and Liabilities

Other assets at ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized in the following table.

Table 12.1 – Components of Other Assets


(In Thousands)	September 30, 2020		December 31, 2019
Accrued interest receivable	$	39,330	$	71,058
Investment receivable	25,767		23,330
Right-of-use asset	13,487		11,866
REO	8,535		9,462
Pledged collateral	8,172		32,945
Income tax receivables	8,148		36
FHLBC stock	5,000		43,393
Fixed assets and leasehold improvements (1)	4,408		4,901
Margin receivable	3,809		209,776



Other	7,617		12,554
Total Other Assets	$	124,273	$	419,321

(In Thousands) March 31, 2020 December 31, 2019
Margin receivable $ 93,745
$ 209,776
Investment receivable 58,541
23,330
FHLBC stock 43,393
43,393
Pledged collateral 33,191
32,945
Right-of-use asset 16,375
11,866
REO 14,366
9,462
Fixed assets and leasehold improvements ⁽¹⁾
4,966
4,901
Other 30,776
12,590
Total Other Assets $ 295,353
$ 348,263
(1)Fixed assets and leasehold improvements had a basis of $12 million and accumulated depreciation of $8 million at September 30, 2020.


~~(1)~~	~~Fixed assets and leasehold improvements had a basis of $12 million and accumulated depreciation of $7 million at March 31, 2020.~~

Accrued expenses and other liabilities at ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized in the following table.

Table 12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	September 30, 2020		December 31, 2019
Accrued interest payable	$	34,225	$	60,655

Payable to minority partner	17,492		13,189
Accrued compensation	17,127		33,888
Lease liability	15,123		13,443
Deferred consideration	14,442		0
Guarantee obligations	11,264		14,009

Current accounts payable	8,717		5,468
Residential loan and MSR repurchase reserve	8,565		4,268
Residential bridge loan holdbacks	6,350		10,682
Deferred tax liabilities	5,152		5,152


Accrued operating expenses	3,922		4,358
Contingent consideration	0		28,484

Other	13,610		13,297
Total Accrued Expenses and Other Liabilities	$	155,989	$	206,893

(In Thousands) March 31, 2020 December 31, 2019
Dividends payable $ 37,800
$ —
Lease liability 18,072
13,443
Contingent consideration 14,819
28,484
Payable to minority partner 14,804
13,189
Guarantee obligations 13,395
14,009
Accrued compensation 9,582
33,888
Residential bridge loan holdbacks 9,066
10,682
Deferred tax liabilities 5,152
5,152
Residential loan and MSR repurchase reserve 4,460
4,268
Other 36,449
23,123
Total Accrued Expenses and Other Liabilities $ 163,599
$ 146,238

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

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.

Margin Receivable and Payable

Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral. Through ~~March 31,~~September 30, 2020, we had met all margin calls due.

~~Dividends Payable~~

Dividends payable of $38 million at March 31, 2020 represent cash dividends on our common stock and certain equity awards for the first quarter of 2020, which were paid on May 8, 2020 to shareholders of record on March 16, 2020.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020~~

~~(Unaudited)~~

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

REO

The carrying value of REO at ~~March 31,~~September 30, 2020 was ~~$14~~$9 million, which included $1$3 million of REO ~~from our Legacy Sequoia entities, $7 million~~ from our residential bridge loan portfolio, $1 million from our consolidated Legacy Sequoia entities, $1 million from our consolidated Freddie Mac SLST entities, and $5$4 million from consolidated CAFL entities. At ~~March 31,~~September 30, 2020, there were 52 residential bridge loan REO assets, 3 REO assets at our Legacy Sequoia entities, ~~4 residential bridge loan REO assets,~~ 9 REO assets at our Freddie Mac SLST entities, and 23 REO assets at our CAFL entities recorded on our consolidated balance sheets. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, transfers into REO included a $5 million residential bridge loan, $1 million from Legacy Sequoia entities, ~~a $1 million residential bridge loan,~~ $1 million from Freddie Mac SLST entities, and $4$6 million from CAFL entities. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, there were REO liquidations of $1$13 million, resulting in ~~$0.5~~$0.3 million of unrealized losses which were recorded in Investment fair value changes, net, on our consolidated statements of income (loss). At December 31, 2019, there were 4 residential bridge loan REO assets, 4 REO assets at our Legacy Sequoia entities, ~~4 residential bridge loan REO assets,~~ 3 REO assets at our Freddie Mac SLST entities, and 2 REO assets at our CAFL entities recorded on our consolidated balance sheets.

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 investment banking firms. At ~~March 31,~~September 30, 2020, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants.

The table below summarizes our short-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at ~~March 31,~~September 30, 2020 and December 31, 2019.

Table 13.1 – Short-Term Debt


	March 31, 2020										September 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 Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate		Maturity	Weighted Average Days Until Maturity
Facilities										Facilities
Residential loan warehouse ⁽¹⁾	4	$	841,186	$	1,525,000	2.38	%	10/2020-3/2021	312	Residential loan warehouse (1)	4	$	81,898	$	600,000	2.90	%	10/2020-8/2021	203

Business purpose residential loan warehouse ⁽²⁾	6	756,384		1,410,000		3.51	%	12/2020-5/2022	404	Business purpose residential loan warehouse (2)	2	96,811		500,000		3.28	%	6/2021-5/2022	437
Real estate securities repo⁽¹⁾	7	485,147		—		2.77	%	4/2020-6/2020	32	Real estate securities repo (1)	3	75,054		0		2.87	%	10/2020-12/2020	38

Total Short-Term Debt Facilities	17	2,082,717								Total Short-Term Debt Facilities	9	253,763
Servicer advance financing	1	258,931		400,000		2.57	%	11/2020	244	Servicer advance financing	1	228,998		400,000		1.96	%	11/2020	61

Total Short-Term Debt		$	2,341,648							Total Short-Term Debt		$	482,761

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020

(Unaudited)

Note 13. Short-Term Debt - (continued)


	December 31, 2019
(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	$	185,894	$	1,425,000	3.23	%	1/2020-10/2020	69

Business purpose residential loan warehouse (2)	8	814,118		1,475,000		4.11	%	12/2020-5/2022	489
Real estate securities repo (1)	10	1,176,579		0		2.94	%	1/2020-3/2020	23
Total Short-Term Debt Facilities	22	2,176,591
Servicer advance financing	1	152,554		400,000		3.56	%	11/2020	335

Total Short-Term Debt		$	2,329,145

December 31, 2019
(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
$ 185,894
$ 1,425,000
3.23 % 1/2020-10/2020 69
Business purpose residential loan warehouse ⁽²⁾

8
814,118
1,475,000
4.11 % 12/2020-5/2022 489
Real estate securities repo⁽¹⁾
10
1,176,579
—
2.94 % 1/2020-3/2020 23
Total Short-Term Debt Facilities 22
2,176,591

Servicer advance financing 1
152,554
400,000
3.56 % 11/2020 335
Total Short-Term Debt $ 2,329,145

(1)Borrowings under our facilities are generally charged interest based on a specified margin over the one-month LIBOR interest rate. At September 30, 2020 and December 31, 2019, all of these borrowings were under uncommitted facilities and were due within 364 days (or less) of the borrowing date.


~~(1)~~	Borrowings under our facilities are generally charged interest based on a specified margin over the one-month LIBOR interest rate. At March 31, 2020 and December 31, 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 March 31, 2020. Borrowings under these facilities will be repaid as the underlying loans mature or are sold to third parties or transferred to securitizations.

(2)Due to the revolving nature of the borrowings under these facilities, we have classified these facilities as short-term debt at September 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 loans, securities, and other assets pledged as collateral under our short-term debt facilities at ~~March 31,~~September 30, 2020 and December 31, 2019.

Table 13.2 – Collateral for Short-Term Debt Facilities


(In Thousands)	September 30, 2020		December 31, 2019
Collateral Type
Held-for-sale residential loans	$	95,023	$	201,949
Business purpose residential loans	110,505		988,179
Real estate securities
On balance sheet	24,670		618,881
Sequoia Choice securitizations (1)	63,088		111,341
Freddie Mac SLST securitizations (1)	0		381,640
Freddie Mac K-Series securitizations (1)	26,550		252,284
CAFL securitizations (1)	0		127,840
Total real estate securities owned	114,308		1,491,986
Other assets	0		16,252
Total Collateral for Short-Term Debt Facilities	$	319,836	$	2,698,366

(In Thousands) March 31, 2020 December 31, 2019
Collateral Type
Held-for-sale residential loans $ 881,607
$ 201,949
Business purpose residential loans 908,712
988,179
Real estate securities
On balance sheet 78,909
618,881
Sequoia Choice securitizations ⁽¹⁾
51,026
111,341
Freddie Mac SLST securitizations ⁽¹⁾
307,175
381,640
Freddie Mac K-Series securitizations ⁽¹⁾
22,785
252,284
CAFL securitizations ⁽¹⁾
—
127,840
Total real estate securities owned
459,895
1,491,986
Other assets ⁽²⁾
106,467
16,252
Total Collateral for Short-Term Debt $ 2,356,681
$ 2,698,366
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.


~~(1)~~	~~Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.~~


~~(2)~~	In addition to securities that serve as collateral for our securities repo borrowings, we had posted $74 million of cash collateral as margin with our borrowing counterparties and had trade receivables from third parties of $32 million related to securities sold in March 2020, which settled in April 2020.

For the three and nine months ended ~~March 31,~~September 30, 2020, ~~and 2019,~~ the average balances of our short-term debt facilities were ~~$1.74 billion~~$313 million and ~~$1.61~~$1.42 billion, respectively. At ~~March 31,~~September 30, 2020 and December 31, 2019, accrued interest payable on our short-term debt facilities was $4$1 million and $6 million, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 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 ~~March 31,~~September 30, 2020, the fair value of servicer advances, cash and restricted cash collateralizing the securitization financing was ~~$297~~$270 million. At ~~March 31,~~September 30, 2020, the accrued interest payable balance on this financing was ~~$0.2~~$0.1 million and the unamortized capitalized commitment costs were $1$0.2 million.

We also maintain a $10 million committed line of credit with a financial institution that is secured by certain mortgage-backed securities with a fair market value of $3 million at ~~March 31,~~September 30, 2020. At both ~~March 31,~~September 30, 2020 and December 31, 2019, we had 0 outstanding borrowings on this facility.

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 ~~March 31,~~September 30, 2020.

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

March 31, 2020
(In Thousands) Within 30 days 31 to 90 days Over 90 days Total
Collateral Type
Held-for-sale residential loans $ —
$ —
$ 841,186
$ 841,186
Business purpose residential loans —
—
756,384
756,384
Real estate securities 260,035
225,112
—
485,147
Total Secured Short-Term Debt 260,035
225,112
1,597,570
2,082,717
Servicer advance financing —
—
258,931
258,931
Total Short-Term Debt $ 260,035
$ 225,112
$ 1,856,501
$ 2,341,648


	September 30, 2020
(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total
Collateral Type
Held-for-sale residential loans	$	1,217	$	0	$	80,681	$	81,898
Business purpose residential loans	0		0		96,811		96,811
Real estate securities	37,217		37,837		0		75,054

Total Secured Short-Term Debt	38,434		37,837		177,492		253,763
Servicer advance financing	0		228,998		0		228,998

Total Short-Term Debt	$	38,434	$	266,835	$	177,492	$	482,761

Note 14. Asset-Backed Securities Issued

The carrying values of ABS issued by our consolidated securitization entities at ~~March 31,~~September 30, 2020 and December 31, 2019, along with other selected information, are summarized in the following table.

Table 14.1 – Asset-Backed Securities Issued


March 31, 2020	Legacy Sequoia				Sequoia Choice				Freddie Mac SLST				Freddie Mac K-Series				CAFL			Total
September 30, 2020								September 30, 2020								Legacy Sequoia							Sequoia Choice					Freddie Mac SLST (1)				Freddie Mac K-Series					CAFL					Total
(Dollars in Thousands)				Legacy Sequoia				Sequoia Choice				Freddie Mac SLST							Freddie Mac K-Series							CAFL				Total					(Dollars in Thousands)
Certificates with principal balance							Certificates with principal balance								$	347,985					$	1,571,714						$	1,925,144				$	418,212					$	2,528,974					$	6,792,029
Interest-only certificates	1,356						10,862				24,782					14,383					93,801				145,184		Interest-only certificates					1,268						6,805					24,053			13,122			137,064	182,312
Market valuation adjustments	(87,507		)		2,836					—					15,104				(148,365	)		(217,932		)	Market valuation adjustments				(56,769)				48,045					95,138					33,531			78,112			198,057

ABS Issued, Net	$	312,201			$	1,790,094			$	1,825,000			$	447,699			$	2,086,870		$	6,461,864		ABS Issued, Net				$	292,484			$	1,626,564				$	2,044,335				$	464,865		$	2,744,150		$	7,172,398
Range of weighted average interest rates, by series	1.81% to 2.91%				4.37% to 5.04%				3.50		%		3.53		%		3.22% to 5.22%						Range of weighted average interest rates, by series				0.35% to 1.96%				2.23% to 5.02%					3.50% to 4.75%					3.39		%	3.18% to 5.53%
Stated maturities	2024 - 2036				2047 - 2049				2028 - 2029				2025				2022 - 2048						Stated maturities				2024 - 2036				2047 - 2050					2028 - 2059					2025			2022 - 2048
Number of series	20				9				2				1				11						Number of series				20				10					3					1			13

~~Note 25. Subsequent Events~~

On March 25, 2020, the SEC issued an order (the “Order”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), extending the deadlines for filing certain reports made under the Exchange Act, including quarterly reports on Form 10-Q, for registrants subject to the reporting obligations under the Exchange Act that have been particularly impacted by the pandemic and which reports have filing deadlines between March 1 and July 31, 2020. In a Current Report on Form 8-K filed on May 7, 2020, we disclosed our reliance on the Order with respect to this Quarterly Report on Form 10-Q for the three months ended March 31, 2020 (the “Form 10-Q”). We are relying on the Order because, in light of the pandemic, non-essential businesses in the State of California have been closed by the state’s governor’s order, as a result of which our personnel, our auditors, and our other advisors have generally been required to work and communicate remotely, which has slowed their ability to complete preparation and review of the Form 10-Q. Additional information regarding the impact of on our business, operations, and financial results is included in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors.”

The pandemic has had serious and adverse consequences on business conditions in North America, the principal geographic area in which we invest, and elsewhere around the globe, including limitations on travel, transportation, education, production of goods, provision of services and business operations generally. Further, the equity and credit markets have experienced significant volatility, and it is uncertain how long this volatility will continue. Although the long-term economic fallout of the pandemic is difficult to predict, the challenging business and market conditions we currently face have had and may continue to have adverse effects on our financial performance and, as a result, may adversely impact valuations of our residential loans, securities, and other investments in future periods. If the continued economic fallout is severe and/or extended, the adverse impacts may be material.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020~~

~~(Unaudited)~~

~~Note 25. Subsequent Events - (continued)~~

Continuing our efforts to reduce our outstanding debt and leverage, and to generate additional liquidity, between April 1, 2020 and May 13, 2020, we settled sales of residential mortgage loans for aggregate proceeds of approximately $1.8 billion and repaid approximately $1.5 billion of associated borrowings. Additionally, as of May 13, 2020, we had entered into agreements to sell residential mortgage loans with a principal balance of $203 million, which transactions are expected to settle during the second quarter of 2020, subject to customary closing conditions. Additionally, subsequent to March 31, 2020, we have also reduced our exposure to marginable borrowing facilities (which may be subject to margin calls if the value of the assets securing borrowings declines), by entering into two new non-marginable borrowing facilities and transferring residential loans and business purpose loans previously financed on marginable facilities onto these new non-marginable facilities. As a result of these activities, in the coming weeks, we expect to have sold or refinanced substantially all of the remaining assets financed through our FHLBC facility and to have substantially repaid our borrowings under this facility.

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.

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 ~~four~~three segments: Residential Lending, Business Purpose Lending, ~~Multifamily Investments,~~ and Third-Party ~~Residential~~ Investments. ~~Our segments are based on our organizational and management structure, which aligns with how our results are monitored and performance is assessed.~~ 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 Annual~~1 of this Quarterly Report on Form ~~10-K for the year ended December 31, 2019.~~10-Q.

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 ~~this~~our 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'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, 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 dividends in the future, and the prospects for federal housing finance reform); (ii) statements related to our financial outlook and expectations for 2020 and future years, including our ~~belief~~optimism that we will end 2020 on a high note, that excess liquidity will continue to support higher prices for mortgage related investments and enhance their scarcity value, that our ~~investment~~ portfolio ~~is well-positioned~~values still have room to recover value from ~~March 31,~~unrealized losses incurred in the first quarter of 2020, ~~levels, our expectations that mortgage rates for non-Agency-eligible borrowers will re-correlate with traditional benchmark rates over time,~~ and that benchmark rates continue converging towards zero until the economy begins growing again; our expectation that we will further reduce our outstanding secured debt that remains subject to margin calls; our belief that the substantial improvements exhibited by the private mortgage sector in recent years have created a cohort of high-quality residential and business purpose loan products that should continue to perform well through this crisis, that such improvements should acceleratesecular trends supporting our ~~market's recovery relative~~investment thesis are accelerating due to the last financial crisis, that the strength of our underwriting and knowledge of the loans we have originated or purchased through our conduits has the potential to differentiate our platform going forward, and our focus on emerging from this crisis with an enhanced business model that is capable of delivering meaning value to counterparties while taking into account the likelihood of a prolonged recession and possible resurgence of theCOVID-19 pandemic; (iii) ~~information related~~expectations with respect to mortgage loan sales transactions and securitization transactions entered into and expected to settle or close during the second quarter of 2020, repayment of associated debt balances, and replacement of certain marginable debt with new non-marginable debt; (iv) statements related toactivity in our ~~residential and business purpose lending platforms,~~Residential Lending segment, including our expectation that our expanded prime program will contribute more significantly to our 2021 loan acquisition volumes, and the potential for significantly increased industry-wide jumbo loan origination volumes and for interest rates on jumbo loans to continue to converge towards those for conforming borrowers; (iv) our expectations related to opportunities to provide technology-enabled solutions to disrupt traditional private-sector workflows; (v) statements regarding our capital available for investment, including our statement that we ~~will sell~~have ample capital available to deploy into our operating businesses and to pursue opportunistic third-party investments; (vi) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or ~~refinance substantially all of the remaining assets financed through our FHLBC facility and repay substantially all of our borrowings from the FHLBC, and our~~ plan to ~~securitize a portion~~purchase, including the amount of such loans that we identified for purchase during the ~~single-family rental~~third quarter of 2020 and at September 30, 2020, and expected fallout and the corresponding volume of residential mortgage loans ~~financed at~~expected to be available for purchase, and expected residential mortgage loan sales in the ~~FHLBC; (v)~~fourth quarter, including through forward sales agreements we entered into during the third quarter; (vii) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2020; and ~~(vi)~~(viii) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.

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;

•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.

OVERVIEW

Business Update

~~Redwood entered~~In the ~~first~~third quarter of 2020, ~~building on the strong momentum gained over the past year. While January~~we positioned ourselves to take advantage of opportunities emerging in our markets. Though we remain wary of a volatile election season and ~~February exhibited growth at our operating platforms, including strong monthly loan volumes, dynamics quickly shifted as the spread~~rising rates of COVID-19 infections in many parts of the novel coronavirus (COVID-19) accelerated into a global pandemic (the "pandemic") in mid-March. Significant dislocation in the financial markets quickly ensued, resulting in one of the fastest market declines in history. In the span of six weeks, the U.S. ~~economy shed over 30 million jobs - more than~~, our businesses are back to operating at full speed and we ~~experienced during the entire Great Financial Crisis of 2007-2008.~~

In the Great Financial Crisis, it was a bubble in residential housing and mortgage credit, rather than a public health pandemic, that led the economy into recession. Yet we have been impacted just as severely in the current crisis and in a small fraction of the time. Despite the overall strong credit quality and underlying performance of our residential and business-purpose loan assets, uncertainty related to the pandemic and its impact on the economy constrained liquidity for any sector not supported by the federal government, and our balance sheet sustained significant losses as a result.

Our book value decreased to $6.32 per share at March 31, 2020, driven to a large extent by decreases in market prices of our investments caused by rapid changes in market sentiment and the systematic repricing of mortgage-related assets financed by large financial institutions. However, nearly two-thirds of the declines in our investments, or $(5.36) per share, were negative mark-to-market adjustments on assets that remained on our balance sheet at quarter endare optimistic that we generally expect to hold for the longer term. As such, we believe our remaining investment portfolio is positioned to recover value from quarter-end levels in the event financial markets and the overall economy begin to recover from the impact of the pandemic.will end 2020 on a high note.

~~In response to the rapid deterioration in financial markets, we took necessary and timely actions to preserve our business and operating platforms, significantly repositioning~~After recasting our balance sheet and ~~increasing liquidity. During March,~~positioning our businesses to relaunch from a position of strength, we ~~began~~are now conducting new business at a rapid pace and leveraging industry relationships forged over many business cycles. But after such a profoundly challenging period for our sector and country, we were compelled to ~~sell assets, repay debt,~~think critically about the type of company we want to lead over the long-term – including how we fit into a nation grappling with civil unrest, pandemic fatigue, and ~~generate additional cash liquidity. And since March 31, 2020,~~a depressed job market.

We emerged with great clarity on who we are and where we are headed. Our business continues moving towards where our capital is most impactful – in our residential and business purpose lending segments, complemented by portfolio strategies where we hold distinct competitive advantages. With the Federal Reserve providing an unprecedented amount of stimulus to financial markets, the detachment of asset prices from certain underlying fundamentals is the most pronounced we have ~~continued~~seen since the lead up to ~~substantially reduce leverage on~~the Great Financial Crisis. A vast amount of capital is now in need of deployment, and we believe this excess liquidity will continue to support higher prices for mortgage related investments and exacerbate their scarcity value. As such, it has become a strategic priority for many investment firms to access the whole-loans that underlie such investments. This is exactly what Redwood’s residential and business purpose lending platforms are built to generate.

Demand for loans we originate or acquire has only grown stronger as the year has unfolded. This demand has enabled us to enhance our ~~balance sheet through asset sales~~distribution strategies to compete more effectively for volume while reducing our exposure to market volatility. Recently completed non-mark-to-market financing facilities supporting our residential, business purpose, and ~~debt repayments. Between April 1, 2020 and May 13, 2020,~~third party investments, including financing residential loans in forbearance, helped achieve this reduced exposure. While most of these new facilities were completed with our traditional banking counterparties, we ~~settled sales of~~are expanding our reach by also working with non-bank financing sources that will allow us to use our working capital more efficiently.

In the third quarter, our residential mortgage ~~loans for aggregate proceeds of $1.8~~lock volume was $2.12 billion, and repaid $1.5 billion of associated borrowings, and sold $53 million of securities and repaid associated borrowings. Additionally, as of May 13, 2020, we had entered into agreements to sell residential mortgage loans with a principal balance of $203 million, which transactions are expected to settle duringgrowing from nearly zero in the second ~~quarter~~quarter. It was also the highest quarterly volume sourced exclusively through our residential loan seller network in five years. Moreover, we achieved this through purchase activity with only about 40% of ~~2020, subject~~our loan sellers. We also have yet to ~~customary closing conditions. A substantial amount of these reductions in borrowings were associated with~~formally relaunch our ~~FHLBC borrowing facility,~~expanded prime program, Redwood Choice, which we ~~decided~~expect to ~~begin~~contribute more significantly to repay in March 2020. Finally, on May 13, 2020, we priced a business purpose loan securitization transaction, backed by a pool of single-family rental (SFR) loans with an aggregate principal balance of approximately $234 million, which transaction is expected to close on or about May 19, 2020, subject to customary closing conditions. As a result of these activities, at May 13, 2020, our unrestricted cash balance was $516 million. Our unrestricted cash balance declined from our previously disclosed cash balance of $552 million at May 6, 2020, primarily due to the payment of our first quarter 2020 dividend on May 8, 2020.

Another action we took to preserve liquidity was to delay the payment of our $0.32 per share first quarter dividend, which was originally scheduled to be paid on March 30, 2020. While this was a difficult decision to make, we believe it was in Redwood’s best interest while we navigated through the onset of this crisis. The first quarter dividend was paid fully in cash on May 8, 2020. We have taken, and continue to take, many additional measures to address the various impacts of the pandemic on our business. While it will take time for our industry to recover from the economic damage caused by this health crisis, we are cautiously optimistic that both Redwood, and the broader economy, can begin to recover and resume more normalized business activities in the coming quarters.

We have also undertaken a series of actions to help ensure the safety and productivity of our employees and help prevent the spread of COVID-19 among our workforce. Substantially all of our employees have been working remotely since March 16, 2020. We are maintaining our remote working policies to be consistent with actions taken and statements made by state and local government officials. In addition, we have implemented and tested our business continuity protocols to ensure the ongoing functional operation of our business as we work remotely. When applicable state and local guidelines allow our offices to fully reopen, we will do so only when we are confident that we have the processes and practices in place to safeguard the health and well-being of our employees.

~~With respect to the outlook for~~2021 acquisition volumes. Additionally, the mortgage finance industry ~~more broadly, we observed~~remains focused on the ~~Federal Reserve moving quickly to support the federally guaranteed~~refinancing opportunity for conforming mortgage market, and through its Agency mortgage-backed securities (MBS) purchase program, it has driven Agency-conforming mortgage rates down to record lows. We believe this should become a medium-term positive factor for the residential mortgage market, as it will allow many borrowers eligible for Agency-conforming mortgages to refinance their home loans, reduce their monthly payments, and free up cash to spend on other household and family needs. While the jumbo, non-conforming residential lending markets did not receive this type of governmental support, we believe mortgage rates for these mortgage products will re-correlate with traditional benchmark interest rates over time.

~~We also believe that traditional sources of funding for mortgage loan purchasers and sellers - specifically, mortgage loan warehouse facilities - need to be reevaluated in light of the~~loans. In our view, there is potential for a future health crisis. The business of aggregating, structuring, and distributing mortgage loans has typically required financing to accommodate the scale, diversification needs, and return thresholds of whole loan and securities investors. In the past, the structure and pricing of these facilities was primarily based on the credit quality of the assets financed. As we evaluate sources of financing going forward, we will need to consider the potential for another wave of COVID-19 impacts (or another health pandemic), a resulting shutdown of many or most of the significant components of the U.S. economy, and the associated market effects. Working with our lending counterparties to restructure our borrowing facilities with these factors in mind will be an important step to re-growing oursignificantly increased jumbo loan origination and acquisition volumes, driven by evolving consumer demand and the potential for interest rates on jumbo mortgage loans to continue converging towards those for conforming mortgage loans. Our recent efforts have positioned us to compete effectively in what may be a substantially larger market. The recent completion of our first Sequoia securitization backed largely by loans originated since ~~April 30, 2020,~~the COVID-19 crisis began is an important affirmation of our progress.

Similarly, our business purpose origination activity remained strong in the third quarter – providing us with a favorable combination of robust underwriting coupled with higher margins. Our third quarter single-family rental securitization was met with extremely high demand, with the AAA-rated securities pricing with an interest rate of 1.36%. In addition to the benefit from lower benchmark rates, blended credit spreads for the offered bonds were better than the execution we achieved in our final transaction of 2019, well in advance of this spring’s volatility.

As our operating strategies take shape, our investment portfolio’s asset values have continued to recover since incurring unrealized losses during the first quarter. The significant upside we have ~~reduced~~seen in these investments appears to be a story unique to Redwood – with many of our ~~exposure~~competitors exiting their non-agency portfolios in response to ~~marginable borrowing facilities (which may~~the pandemic. Though we can’t predict the pace or extent of a broad-based economic recovery, we believe our portfolio values still have room for further recovery, with the investment portfolio currently yielding in the low- to mid-double digits to our basis in those assets at September 30, 2020.

As we focus on growth opportunities ahead, we believe the secular trends supporting our housing thesis are not just intact, but accelerating due to the COVID-19 pandemic. The nationwide push toward single-family housing – whether rented or owned – is no longer a nuanced data point, but has become widely recognized as families look for more space to live socially distanced, work, and learn from home. As this shift unfolds, densely populated cities continue to see home prices and rents stay relatively flat or decline, while neighboring suburbs enjoy robust demand and home price appreciation – in many cases exceeding 10-20% over prior year levels. With over 65% of single-family homes having 3 bedrooms or more, compared to only 11% of apartment units, we expect the trend towards single-family living to continue and to be ~~subject~~supported by low interest rates.

While we are pleased with our market positioning and expectations for growth, navigating the Company through prolonged market volatility will remain a primary focus. The high standards we have set for service to ~~margin calls if~~our customers are well-established, but it is critical for us to maintain an infrastructure that can preserve this standard while allowing us to scale profitably and safely. To accomplish this, we are committed to innovating and investing in our technology.

Our businesses recently completed an updated technology roadmap that identified significant opportunities to provide technology-enabled solutions to our network of loan sellers and sponsors. We aim to disrupt traditional private-sector workflows and ideologies that have inhibited automation in the ~~value~~non-agency mortgage market.

Non-agency residential loan purchase workflows and timelines is one such opportunity. We recently announced the pilot launch of Redwood “Rapid Funding”, a technology-enabled program that will permit qualifying originators to transact with us on a significantly accelerated purchase timeline. Our delegated process allows originators to control their closing timelines; adding this feature will enable them to free up capital more quickly and remove risk from their balance sheets. Our program will also create opportunities for faster settlements to our loan buyer network – particularly depositories – that ultimately could lead to better outcomes for borrowers.

At CoreVest, our business purpose lending subsidiary, technology and data architecture have long been hallmarks of the ~~assets securing borrowings declines), by entering into two new non-marginable borrowing facilities providing financing for business purpose~~platform’s advantages in client acquisition and ~~residential whole loans, and are seeking to continue reducing our remaining marginable debt currently financing our whole-loan portfolios with new non-marginable facilities and other term facilities.~~

~~We continue to believe in focusing our investments in housing credit. The reforms undertaken since~~retention. A culture of consistent iteration of the Great Financial Crisis, coupled with disciplined underwriting and investment standards, should mean that high-quality residential and business purpose mortgage loan assets can continue to perform well through this crisis. We believe the substantial improvements exhibited by the private mortgage sector in recent years should accelerate the recoverytechnology suite – particularly in the ~~mortgage finance markets relative~~proprietary use of leading cloud-based systems to automate workflow management – keeps the ~~speed~~platform’s first-mover advantage fresh. This client-centric approach keeps customers coming back, as evidenced by our approximately 50% repeat borrower rate, but also positions us to capitalize as this area of the recovery experienced after the Great Financial Crisis. We also believe that the strength of our underwriting and knowledge of the loans we have originated or purchased through our operating platforms has the potentialmarket continues to ~~differentiate~~grow.

Though our business ~~going forward.~~

But there remain significant challenges that we must manage through during this crisis. For example, we continue to monitor trends in borrower-requested loan forbearance closely, as well as the financial health of loan servicers. One area that has already been impacted is the home purchase market, where borrowers are experiencing significantly tighter credit terms due to uncertainty amongst lenders on whether there will be reliable liquidity for newly originated loans. This is an area where we believe coordinated efforts byplatforms serve different parts of the ~~Federal government (e.g., Congress, Treasury Department, Federal Reserve and regulatory agencies) could have a positive impact.~~

~~But the biggest challenges often present the greatest opportunities. Our business remains intact and~~housing market, our ~~focus will be emerging from this crisis with a business model that is capable of delivering meaningful value~~core mission unifies them. We aim to ~~our shareholders while taking into account the likelihood of a prolonged recession and possible resurgence of the pandemic~~make quality housing accessible to all Americans, whether rented or owned. For example, we finance build-to-rent communities in the ~~coming months.~~Midwest, workforce housing in the South, and high-balance residential mortgages on the coasts. Our ~~posture will remain defensive as~~mission also speaks to the role we ~~structure~~play in our communities, and ~~manage around these significant risks, but~~motivates us to advocate for and advance inclusion and diversity initiatives across our industry. By focusing on financing solutions for all consumers and investors not served by government-sponsored loan programs, we believe we ~~will find the best path forward. With competition across our business lines expected to be significantly reduced, the need~~can make a positive impact for our ~~sourcing~~stakeholders – especially our shareholders, employees, and ~~structuring capabilities should remain strong.~~communities.

~~First~~

Third Quarter Overview

The following table presents key ~~earnings~~financial metrics for the three and nine months ended ~~March 31,~~September 30, 2020.

Table 1 – Key ~~Earnings and Return~~Financial Metrics


	Three Months Ended		Nine Months Ended
(In Thousands, except per Share Data)	September 30, 2020		September 30, 2020
Net income (loss) per diluted common share	$	1.02	$	(5.60)

Book value per share	$	9.41	$	9.41
REIT taxable income (loss) per share	$	0.07	$	(0.10)
Dividends per share	$	0.14	$	0.585

Three Months Ended
(In Thousands, except per Share Data) March 31, 2020
Net loss per diluted common share $ (8.28 )
Book value per share $ 6.32
REIT taxable income per share $ 0.33
Dividends per share $ 0.32
Unrestricted cash $ 378,233

•Our ~~first~~third quarter 2020 results ~~were significantly impacted by the pandemic, which ultimately led to substantial losses on our investments and an overall loss for the quarter. While~~benefited from renewed momentum in our operating ~~businesses saw increased volumes early~~businesses. Volumes grew significantly at our residential business, and business purpose lending results benefited from strong securitization execution and improved valuations on loans held in the first quarter, as markets became dislocated in March, profitability was negatively impacted due to less favorable execution on securitizations we completed in March, and lower marks on the remaining loan inventories we held at quarter-end. Additionally, as a result of the recent market dislocation, we determined all of the goodwill on our balance sheet was impaired.inventory.

•Our book value ~~per share declined $9.66~~increased $1.26 per share to ~~$6.32~~$9.41 per share during the ~~first~~third quarter of 2020, resulting primarily from ~~negative~~positive investment fair value changes ~~on investments and hedges~~as well as from improved mortgage banking results. During the third quarter of ~~$8.73~~2020, we repurchased three million shares of our common stock for $22 million, resulting in a $0.03 per share benefit to book value.

•During the third quarter of 2020, we entered into two separate non-recourse debt transactions and closed two non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral) loan warehouse facilities. These transactions helped reduce our recourse debt from $1.82 billion at June 30, 2020 to $1.35 billion at September 30, 2020, and reduced our marginable debt from $375 million at June 30, 2020 to $120 million at September 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 in coming quarters. Additional details on these new financing agreements, including additional details regarding market value-based margin call provisions compared to asset value-based margin call provisions, are provided in the "Liquidity and Capital Resources" section that follows in this MD&A under the heading “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities."

•Residential jumbo loan purchase commitments were ~~recorded both through~~$1.20 billion, and we purchased $176 million of residential jumbo loans during the third quarter of 2020. At September 30, 2020, our ~~consolidated statements~~pipeline of income (loss) and through accumulated comprehensive income on our consolidated balance sheets. A significant portion of these losses were unrealized and associated with assets we still held at March 31, 2020. The impairment of goodwill resulted in an expense of $0.78 per share.jumbo residential loans identified for purchase was $1.79 billion.

•Our business purpose lending platform originated ~~$487~~$261 million of business purpose mortgage loans in the ~~first~~third quarter, including ~~$260~~$196 million of single-family rental loans and ~~$227~~$66 million of residential bridge loans.

During the ~~first~~quarter, we also completed one $293 million securitization of single-family rental loans.

•During the third quarter of 2020, our residential lending platform purchased $2.70 billion of residential jumbo loans and sold $2.73 billion of loans held in inventory for our mortgage banking business, including through three Sequoia Select securitizations totaling $1.62 billion, and through Select and Choice whole loan sales to third parties of $1.11 billion.

~~During the first quarter,~~ we sold ~~$83 million of securities from our residential lending investment portfolio, $430 million of multifamily securities (representing nearly all of our multifamily mezzanine securities), $210~~$13 million of third-party ~~residential investments (including $95~~securities, and retained $16 million of ~~recently issued subordinate securities), $74 million of re-performing loan~~single-family rental ("SFR") securities ~~$23 million of Agency CRT securities, and $18 million of legacy securities.~~from a securitization we completed during the quarter.

On March 27, 2020, we announced the deferral of the payment of our previously declared first quarter dividend of $0.32 per share, which was originally scheduled to be paid on March 30, 2020. On May 8, 2020, we paid the dividend fully in cash.

~~Our unrestricted cash position increased meaningfully at March 31, 2020, as we repositioned our balance sheet to generate additional liquidity.~~

RESULTS OF OPERATIONS

Within this Results of Operations section, we provide commentary that compares results year-over-year for 2020 and 2019. Most tables include a "change" column that shows the amount by which the results from 2020 are greater or less than the results from the respective period in 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 ~~first~~third quarter of 2020, compared to the third quarter of 2019, and increases or decreases in the "nine-month periods" refer to the change in results for the first ~~quarter~~nine months of 2020, compared to the first nine months of 2019.

Consolidated Results of Operations

The following table presents the components of our net income for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

Table 2 – Net Income (Loss) ~~Income~~


	Three Months Ended March 31,										Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands, except per Share Data)	2020			2019			Change			(In Thousands, except per Share Data)	2020		2019		Change		2020		2019		Change
Net Interest Income	$	51,410		$	31,765		$	19,645		Net Interest Income	$	21,571	$	33,513	$	(11,942)	$	100,261	$	97,600	$	2,661
Non-interest Income										Non-interest Income
Mortgage banking activities, net	(28,411		)	12,309			(40,720		)	Mortgage banking activities, net	59,395		9,515		49,880		24,511		40,984		(16,473)
Investment fair value changes, net	(870,832		)	20,159			(890,991		)	Investment fair value changes, net	107,047		11,444		95,603		(611,557)		34,741		(646,298)
Other income	2,437			4,625			(2,188		)	Other income	(114)		4,356		(4,470)		3,979		13,840		(9,861)
Realized gains, net	3,852			10,686			(6,834		)	Realized gains, net	602		4,714		(4,112)		30,419		18,227		12,192
Total non-interest (loss) income, net	(892,954		)	47,779			(940,733		)
Total non-interest income (loss), net										Total non-interest income (loss), net	166,930		30,029		136,901		(552,648)		107,792		(660,440)
General and administrative expenses	(32,668		)	(23,159		)	(9,509		)	General and administrative expenses	(27,630)		(24,899)		(2,731)		(84,832)		(70,722)		(14,110)
Loan acquisition costs										Loan acquisition costs	(2,158)		(1,916)		(242)		(7,716)		(5,507)		(2,209)
Other expenses	(91,415		)	(1,038		)	(90,377		)	Other expenses	(7,788)		(2,531)		(5,257)		(104,286)		(6,021)		(98,265)
Net (loss) income before income taxes	(965,627		)	55,347			(1,020,974		)
Benefit from (provision for) income taxes	22,229			(883		)	23,112
Net (Loss) Income	$	(943,398	)	$	54,464		$	(997,862	)
Diluted (loss) earnings per common share	$	(8.28	)	$	0.49		$	(8.77	)
Net income (loss) before income taxes										Net income (loss) before income taxes	150,925		34,196		116,729		(649,221)		123,142		(772,363)
(Provision for) benefit from income taxes										(Provision for) benefit from income taxes	(9,113)		114		(9,227)		13,079		(3,102)		16,181
Net Income (Loss)										Net Income (Loss)	$	141,812	$	34,310	$	107,502	$	(636,142)	$	120,040	$	(756,182)
Diluted earnings (loss) per common share										Diluted earnings (loss) per common share	$	1.02	$	0.31	$	0.71	$	(5.60)	$	1.09	$	(6.69)

Taxable Income and Tax Provision

Taxable Income

The following table summarizes our taxable income and distributions to shareholders for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

Table 2321 – Taxable Income


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, except per Share Data)	2020 est. (1)		2019		2020 est. (1)		2019
REIT taxable (loss) income	$	7,362	$	38,626	$	(13,016)	$	91,948
Taxable REIT subsidiary income	34,975		2,821		26,890		25,865
Total Taxable (Loss) Income	$	42,337	$	41,447	$	13,874	$	117,813

REIT taxable (loss) income per share	$	0.07	$	0.34	$	(0.10)	$	0.89
Total taxable income per share	$	0.38	$	0.37	$	0.14	$	1.16

Distributions to shareholders	$	15,701	$	33,627	$	66,808	$	91,931
Distributions to shareholders per share	$	0.14	$	0.30	$	0.585	$	0.90

Three Months Ended March 31,
(In Thousands, except per Share Data)
2020 est. ⁽¹⁾

2019 est. ⁽¹⁾
REIT taxable income $ 37,527
$ 28,761
Taxable REIT subsidiary (loss) income (47,489 ) 6,697
Total Taxable (Loss) Income $ (9,962 ) $ 35,458

REIT taxable income per share $ 0.33
$ 0.30
Total taxable (loss) income per share $ (0.08 ) $ 0.37

Distributions to shareholders $ 36,741
$ 28,998
Distributions to shareholders per share $ 0.32
$ 0.30
(1)Our tax results for the three and nine months ended September 30, 2020 are estimates until we file tax returns for this year.


~~(1)~~	~~Our tax results for the three months ended March 31, 2020 and 2019 are estimates until we file tax returns for these years.~~

In accordance with Internal Revenue Code rules applicable to disaster losses, TRS taxable income for the nine months ended September 30, 2020, was adjusted to recognize $59 million of losses incurred in the first quarter of 2020 into the fourth quarter of 2019.

Under normal circumstances, our minimum REIT dividend requirement would be 90% of our annual REIT taxable income. However, we currently maintain a $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; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our NOL and any remaining amount will carry forward into 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 currently expect only a small portion, if any, of the distributions ~~both~~to shareholders in 2020 will be taxable as dividend income and the remainder will be a return of capital, which ~~are uncertain at this time. As the year progresses, we plan to provide an update on the expected characterization of 2020 dividends.~~is generally nontaxable. Under the federal income tax rules applicable to REITs, none of our 2020 dividend distributions are currently expected to be characterized as long-term capital gains.

Tax Provision under GAAP

For the three and nine months ended ~~March 31,~~September 30, 2020, we recorded a tax provision of $9 million and a tax benefit of $13 million, respectively. For the three and nine months ended September 30, 2019, we recorded a tax benefit of ~~$22~~$0.1 million and a tax provision of $1$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 switch to a benefit from income taxes from provision for income taxes year-over-year was primarily the result of GAAP losses being recorded at our TRS in 2020 versus TRS GAAP income in 2019. The benefit from income taxes ~~this period~~recorded in 2020 was partially offset by a valuation allowance being recorded against our federal net ordinary deferred tax assets. Our TRS effective tax rate in 2020 is expected to be significantly less than the federal statutory corporate tax rate, due to the valuation allowance and other permanent GAAP to tax differences. The income or loss generated at our TRS will not directly affect the tax characterization of our 2020 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, 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 losses at our TRS in 2020, we forecast that we will report net federal ordinary and capital DTAs at December 31, 2020 and consequently a valuation allowance was recorded against our net federal ordinary DTAs. However, no valuation allowance was recorded against our net federal capital DTAs as we currently expect to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years. 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.

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.

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 purchase investment securities and make other investments, to repay principal and interest on our debt, to meet margin calls associated with our debt and other obligations, to make dividend payments on our capital stock, and to fund our operations.

At ~~March 31,~~September 30, 2020, our total capital was ~~$1.51~~$1.70 billion and included ~~$0.73~~$1.05 billion of equity capital and ~~$0.79~~$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 ~~March 31,~~September 30, 2020, our unrestricted cash was ~~$378~~$451 million. As a result of continued actions we have taken to respond to the pandemic and prepare ourselves for the potential of a prolonged recession, we have generated additional cash through asset sales and debt paydowns, and as of May 13, 2020, our unrestricted cash was $516 million and we had met all margin calls due. While we believe our available cash ~~together with additional liquidity we believe we can source through additional asset sales and secured borrowing facilities,~~ is sufficient to fund our operations, ~~and to repay existing debt,~~ we may raise equity or debt capital from time to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interests of the company.

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 ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2020

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 ~~and~~ securities acquisitions, ~~and~~ sales and repayments, the profitability of mortgage banking activities, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.

During the first ~~quarter~~nine 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. ~~As a result~~Additionally, we entered into several new financing agreements that are non-marginable (i.e., not subject to margin calls based on the market value of the ~~pandemic,~~underlying collateral) and 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 ~~mortgage banking operations~~liquidity and capital position by removing sources of contingent liquidity risk (from potential market value-based margin calls), they have also ~~experienced losses.~~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 ~~$241~~$176 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were ~~negative $49~~positive $94 million and negative ~~$56~~$123 million during the first ~~three~~nine 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 liabilities and we settled nearly all of our outstanding derivative positions. As a result of these settlements and other hedging activity during the quarter, we made ~~$163~~$187 million of cash ~~payments, representing a significant outflow of~~payments. Additionally, during the six months ended June 30, 2020, our margin receivable (which was primarily associated with our hedges), decreased by $207 million, resulting in an increase to our cash ~~for~~flows from operations. These changes in operating cash flows resulted from actions taken in response to the ~~period~~pandemic that we would generally not expect to recur at such a magnitude in subsequent ~~periods, particularly while~~periods. Additionally, during the six months ended June 30, 2020, we ~~are not employing~~received $38 million in cash related to FHLBC stock that was transferred back to the ~~use~~FHLBC, upon the repayment of derivatives. Additionally, in settling the derivatives, cash margin we had previously posted to counterparties was used to offset our obligation under the contracts, and the associated reduction in our margin receivable balance contributed to a $108 million positive net change in the Accrued interest receivable and other assets line itemsubstantially all of our ~~cash flow statement.~~borrowings from the FHLBC.

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 provided from net interest income to decline in future periods.

Cash Flows from Investing Activities

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, our net cash provided by investing activities was ~~$911 million~~$3.51 billion and primarily resulted from proceeds from sales of loans and real estate securities, as well as principal payments on ~~loans and securities.~~loans. Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these ~~securities~~assets 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. As previously discussed, during the first quarter of 2020, we sold a significant amount of investments in response to the pandemic. We cannot predict the timing and impact of future sales of investment securities, if any.

Because many of our investment securities and loans are financed through various borrowing agreements, a significant portion of the proceeds from any sales or principal payments of these assets are generally used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated securitization entities would generally be used to repay ABS issued by those entities.

As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we transferred residential loans between held-for-sale and held-for-investment classification, retained securities from Sequoia and CAFL securitizations we sponsored, and ~~de-consolidated~~deconsolidated certain multifamily 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 ~~three~~nine months ended ~~March 31,~~September 30, 2020, our net cash used in financing activities was ~~$556 million.~~$3.11 billion. This primarily resulted from ~~$500 million~~$1.85 billion of net repayments of short-term debt and $2.64 billion of repayments of long-term debt, including repayments of ~~$633 million~~$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 ~~$84~~retire $125 million ~~from~~of our convertible debt in the ~~settlement~~second quarter of ~~derivatives previously hedging our variable rate trust preferred securities~~2020, and ~~subordinated notes.~~repurchased $22 million of stock in the third quarter. These outflows of cash were partially offset by ~~$134~~$306 million of proceeds from our new secured term facility financing subordinate securities and our new secured revolving debt facility financing our MSRs and certificated mortgage servicing rights, $12 million of proceeds from net ~~short-term debt borrowings, and $13 million of~~ proceeds from the ~~net~~ issuance and ~~settlement~~settlements of ABS issued. Additionally, during the nine months ended September 30, 2020, we had cash inflows of $1.25 billion related to borrowings under three new non-marginable facilities that were generally used to repay existing borrowings from marginable facilities.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we declared dividends of ~~$0.32~~$0.585 per common share. On ~~March 27,~~September 11, 2020, ~~we announced~~ the ~~deferral~~Board of ~~the payment of our previously~~Directors declared ~~first quarter~~a regular dividend of ~~$0.32~~$0.14 per share ~~and subsequently~~for the third quarter of 2020, which was paid ~~the dividend fully in cash~~ on ~~May 8,~~September 29, 2020 to shareholders of record on September 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. During the three months ended September 30, 2020, we repurchased 3,047,335 shares of our common stock pursuant to this authorization for $22 million. At ~~March 31,~~September 30, 2020, ~~$100~~$78 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities. 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.

Loan Warehouse Facilities

We maintain loan warehouse facilities to finance our residential jumbo loan inventory, SFR loan inventory and for our bridge loan investments. These facilities can be classified as short-term or long-term depending on their specific terms and provisions. At September 30, 2020, we had residential warehouse facilities outstanding with four different counterparties, with $600 million of total capacity and $518 million of available capacity. These included non-marginable facilities with $200 million of total capacity and marginable facilities with $400 million of total capacity. At September 30, 2020, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.1 billion of total capacity and $853 million of available capacity. All of these facilities are non-marginable.

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 ~~March 31,~~September 30, 2020, we had ~~$2.34 billion~~$483 million of short-term debt outstanding. During the first ~~three~~nine months of 2020, the highest balance of our short-term debt outstanding was $3.23 billion.

For further detail on our short-term debt, see Note 13 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Subsequent to March 31, 2020, we entered into a non-mark-to-market (or non-marginable) loan warehouse facility to finance residential mortgage loans. We used this facility to refinance certain loans previously financed on mark-to-market (or marginable) facilities, and may use this facility to finance loans purchased in the future. While the non-marginability of this facility generally reduces our liquidity risk relative to a marginable facility, it carries incrementally higher interest rates, which could increase our overall borrowing costs in the future, depending on our use of this facility.

Long-Term Debt

The following discusses significant activity during the first ~~quarter~~nine months 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

As a result of the economic and financial market impacts of the pandemic, the terms of our borrowing facility with the Federal Home Loan Bank of Chicago (our "FHLBC Facility") evolved and we decided to significantly reduce the financing we obtain from the FHLBC. ~~Accordingly, in March~~During the second quarter of 2020, we ~~began entering into transactions to sell several pools~~completed the sale of nearly all residential ~~whole~~ loans financed through this facility and ~~in the coming weeks we~~repaid all but $1 million of borrowings under this facility. We do not expect to ~~sell or refinance substantially all~~increase borrowings under our FHLBC Facility above the existing $1 million of borrowings outstanding.

Non-Recourse Business Purpose Loan Financing Facilities

In the ~~remaining assets financed through~~third quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-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 3.85% (with a 0.50% LIBOR floor), through July 2022. At September 30, 2020, we had borrowings under this facility totaling $158 million and ~~repay substantially all~~$1 million of unamortized deferred issuance costs, for a net carrying value of $157 million. At September 30, 2020, $216 million of bridge loans were pledged as collateral under this facility.

In the second quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-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. Borrowings under this facility may be repaid in full at our option and the facility terminated without penalty beginning 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 September 30, 2020, we had borrowings ~~from~~under this facility totaling $302 million and $4 million of unamortized deferred issuance costs, for a net carrying value of $298 million. At September 30, 2020, $369 million of bridge loans and $25 million of other BPL investments were pledged as collateral under this facility.

Recourse Business Purpose Loan Financing Facilities

In the ~~FHLBC.~~third 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 3.00% through September 2023 and are recourse to Redwood. This facility has an aggregate maximum borrowing capacity of $250 million. At September 30, 2020, we had no borrowings outstanding under this 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 4.00% (with a 1.00% LIBOR floor) through May 2022 and are recourse to Redwood. This facility has an aggregate maximum borrowing capacity of $350 million. At September 30, 2020, we had borrowings under this facility totaling $150 million and $1 million of unamortized deferred issuance costs, for a net carrying value of $150 million. At September 30, 2020, $18 million of bridge loans and $194 million of single-family rental loans were pledged as collateral under this facility.

Recourse Subordinate Securities Financing Facility

In the first quarter of 2020, we entered into a repurchase agreement providing ~~non-mark-to-market~~non-marginable recourse debt financing for ~~$103~~$112 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 February 2023. The financing facility may be terminated, at our option, in February 2023, and has a final maturity in February 2025, provided that the interest rate on amounts outstanding under the facility increases between March 2023 and February 2025.

~~Secured~~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 ~~rates~~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~~We had no borrowings outstanding under this facility ~~totaled $30 million~~ at ~~March 31,~~September 30, 2020. At ~~March 31,~~September 30, 2020, ~~$49~~$33 million of MSRs and interest-only securities were pledged as collateral under this facility. ~~In April 2020, we repaid $10 million of borrowings under this facility.~~

~~Business Purpose Loan Warehouse Facility~~

Subsequent to March 31, 2020, we entered into a non-mark-to-market (or non-marginable) loan warehouse facility to finance business purpose mortgage loans. We used this facility to refinance certain loans previously financed on mark-to-market (or marginable) facilities, and may use this facility to finance loans originated in the future. While the non-marginability of this facility generally reduces our liquidity risk relative to a marginable facility, it carries incrementally higher interest rates, which could increase our overall borrowing costs in the future, depending on our use of this facility.

Asset-Backed Securities Issued

During the first quarter of 2020, we sold subordinate securities issued by four 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 for financial reporting purposes. As a result, during the first quarter of 2020, we deconsolidated $3.86 billion of multifamily loans and other assets and $3.72 billion of multifamily ABS issued.

During the three and nine months ended September 30, 2020, we issued $515 million and $1.30 billion of ABS, respectively, through our consolidated securitization entities. This included $310 million and $847 million of CAFL ABS issued during the three and nine months ended September 30, 2020, respectively, and zero and $249 million of Sequoia Choice ABS issued during the three and nine months ended September 30, 2020, respectively. Additionally, for the three months ended September 30, 2020, this includes $205 million of ABS issued through a re-securitization entity sponsored by us. For further detail on our Asset-backed Securities Issued, see Note 14 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other Commitments and Contingencies

For additional information on commitments and contingencies that could impact our liquidity and capital resources, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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COVID-19 Pandemic-Related Mortgage Payment Forbearances

In response to the personal financial impacts of the pandemic, many residential mortgage borrowers have sought, or 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 AdvanceObligations

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.

~~At April~~As of September 30, 2020, ~~mortgage loans in a delinquent status (whether or not subject~~we had no servicing advances outstanding related to ~~forbearance) accounted for approximately 3.2% of the aggregate~~ principal ~~(or notional) balance of~~and interest on Sequoia securitized loans for which we had servicing advance funding obligations (an increase from approximately 0.9% of principal balance that were in a delinquent status (whether or not subject to forbearance) with respect to the monthly mortgage payment due in March 2020). For every 10 percentage point increase in the principal balance of Sequoia securitized mortgage loans in a delinquent status (whether or not subject to forbearance), Redwood estimates that its average monthly P&I servicing advance funding obligation would increase by $6 million. Other advance funding obligations, including with respect to T&I, are subject to variability and seasonality and are not included within this estimate.obligations.

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 origination and acquisition of mortgage loans (including those we originate or 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 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, 2019, under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing 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 ~~this~~our Quarterly Report on Form ~~10-Q.~~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 ~~above~~ under the heading “~~Business Update~~Management's Discussion and Analysis of Financial Condition and Results of Operations” ~~and elsewhere~~ within ~~this MD&A.~~our Q1 2020 Quarterly Report on Form 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, and~~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 September 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.

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Aggregate borrowing limits are stated under certain of these facilities, and certain other facilities have no stated borrowing limit, but many of the facilities are uncommitted, which means that any request we make to borrow funds under these uncommitted facilities may be declined for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. In general, financing under these facilities is obtained by transferring or pledging mortgage loans or securities to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred or pledged assets). ~~While~~

Under many of our mortgage loan warehouse facilities, our short-term securities repurchase facilities, and our secured, revolving debt facility collateralized by mortgage service rights, while transferred or pledged assets are financed under athe facility, to the extent the ~~market~~ value of the assets, or the collateral underlying those assets, declines, we are generally required to either immediately reacquire the assets or meet a margin requirement to transfer or pledge additional assets or cash in an amount at least equal to the decline in value. During the second quarter of 2020, we amended several of our mortgage loan warehouse facilities to revise these margin call provisions to remove obligations to make margin calls for changes in the market value of transferred or pledged assets, which determinations of market value were generally within the sole discretion of the lending counterparty. Under these revised agreements, if the estimated value of a property securing a financed mortgage loan declines, based on, for example, an appraisal or broker-price opinion, then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional residential mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at September 30, 2020, only our short-term securities repurchase facilities (with $75 million of borrowings outstanding at September 30, 2020), and two of our residential mortgage loan warehouse facilities (with $8 million of borrowings outstanding at September 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, 2019 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, 2019 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, 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, 2019 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, 2019 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, 2019 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, 2019 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, 2019.~~

At ~~March 31,~~September 30, 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, during the first ~~quarter~~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, ~~and~~ financial covenants that require us to maintain recourse indebtedness below a specified ratio, and financial covenants that require us to maintain a minimum dollar amount of liquidity in certain borrowing agreements on a ~~temporary or~~ permanent basis, and we ~~continue to engage in discussions with our financing counterparties with regard to such financial covenants;~~repaid and suspended certain other borrowing facilities; however, we cannot be certain ~~whether~~that we will be able to remain in compliance with these financial covenants, including upon the scheduled expiration of certain temporary covenant amendments we obtained, or whether our financing counterparties will negotiate terms or agreements in respect of these financial covenants, the timing of any such negotiations or agreements or the terms thereof. Even if we continue to obtain temporary or permanent agreements from financing counterparties to amend financial covenants, we may not be able to maintain compliance with ~~any~~ 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 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 ~~this Quarterly Report on Form~~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, 2019.

For additional information on our commitments and contingencies as of ~~March 31,~~September 30, 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 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, 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, 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, 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, 2019 and in ~~this~~our 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, 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, 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 ~~first~~third quarter of 2020 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 complaint~~litigation matters described in ~~the Superior Court~~Part 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 that~~heading “Legal Proceedings.” At September 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 March 31, 2020, approximately $128 million of principal and $12 million of interest payments had been made~~loss contingency reserves established in respect of the ~~Seattle Certificate. As of March 31, 2020, the Seattle Certificate had a remaining outstanding principal amount of approximately $5 million. The matter was subsequently resolved~~FHLB-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 Court~~our 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 March 31, 2020, approximately $14 million of principal and $1 million of interest payments had been made in respect of the Schwab Certificate. As of March 31, 2020, the Schwab Certificate had a remaining outstanding principal amount of approximately $1$2 million. On November 14, 2014, Schwab voluntarily dismissed with prejudice its negligent misrepresentation claim, which resulted in the dismissal with prejudice of SRF from the action. Subsequently, the matter was resolved and Schwab dismissed its claims against the lead underwriter of the 2005-4 RMBS. At the time the Schwab Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were also named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, Redwood could incur a loss as a result of these indemnities.

Through certain of our wholly-owned subsidiaries, we have in the past engaged in, and expect to continue to engage in, activities relating to the acquisition and securitization of residential mortgage loans. In addition, certain of our wholly-owned subsidiaries have in the past engaged in activities relating to the acquisition and securitization of debt obligations and other assets through the issuance of collateralized debt obligations (commonly referred to as CDO transactions). Because of this involvement in the securitization and CDO businesses, we could become the subject of litigation relating to these businesses, including additional litigation of the type described above, and we could also become the subject of governmental investigations, enforcement actions, or lawsuits, and governmental authorities could allege that we violated applicable law or regulation in the conduct of our business. As an example, in July 2016 we became aware of a complaint filed by the State of California on April 1, 2016 against Morgan Stanley & Co. and certain of its affiliates alleging, among other things, that there were misleading statements contained in offering materials for 28 different mortgage pass-through certificates purchased by various California investors, including various California public pension systems, from Morgan Stanley and alleging that Morgan Stanley made false or fraudulent claims in connection with the sale of those certificates. Of the 28 mortgage pass-through certificates that 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 them relating to these certificates, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, we could incur a loss as a result of these indemnities.

In addition to ~~the~~those matters, ~~described above,~~as previously disclosed, in connection with the impact of the effects of the ~~COVID-19~~ pandemic on the non-Agency mortgage finance market and on our business and operations, ~~we became more selective in making residential loan purchases. These actions have impacted our relationships with certain~~a number of the counterparties that have regularly sold residential mortgage loans to us ~~and, in some cases, these counterparties have alleged~~believe that we ~~have~~ 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 ~~decision~~decisions earlier in 2020 not to purchase certain loans from ~~them. One~~them (“Residential Loan Seller Demands”).

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 intention of reaching resolution, including through structuring 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 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 September 30, 2020, as well as an accrual for the estimated costs associated with counterparties where a resolution or go-forward framework has been agreed to or has been discussed but not finalized. In accordance with GAAP, the accrual for estimated costs is based on the opinion of management, that it is probable that these resolutions and forward-looking joint business undertakings and structured arrangements will result in an expense and the amount of expense can be reasonably estimated. At September 30, 2020, the aggregate amount of our accrual for estimated costs associated with Residential Loan Seller Demands was $6.5 million, a 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. In addition, as previously disclosed, one such counterparty filed a breach of contract lawsuit against us in May 2020 alleging that it ~~has~~had suffered in excess of $2 million of losses as a result of our alleged failure to purchase residential mortgage loans from ~~it. We may become subject~~it; and in October 2020 we and the plaintiff agreed to ~~additional litigation and claims from these counterparties or other counterparties that are similarly situated (“Residential Loan Seller Claims”), which could have a material adverse effect~~settle the lawsuit on ~~our reputation, business, financial condition, results of operations and cash flows.~~mutually satisfactory terms.

We believe that any such Residential Loan Seller Claims are without merit or subject to defenses and we intend to defend vigorously any such actions to which we become a party. In the ordinary course of evaluating and responding to any request, demand, claim or litigation, including in the case of certain of the Residential Loan Seller Claims, we have engaged and may engage in formal or informal resolution or settlement communications with certain counterparties. While we have not engaged in any formal or informal resolution or settlement communications withWith respect to Residential Loan Seller ~~Claims~~Demands that have ~~caused~~not been resolved or accrued for, our beliefs about the legal merits of these allegations and our discussions with these counterparties have resulted in us ~~to determine~~determining that a ~~material~~significant loss from these matters is ~~probable, communications, including demands, we have received from certain counterparties since mid-March 2020 relating~~not probable. With respect to ~~certain~~these remaining Residential Loan Seller ~~Claims, are a factor that has contributed to our concluding~~Demands, based on the foregoing, we have concluded that we can estimate a range of reasonably possible losses with respect to Residential Loan Seller Claims we have received. Accordingly, with respect to Residential Loan Seller Claims we have received, we estimate that thean aggregate range of reasonably possible losses with respect to ~~such~~these Residential Loan Seller ~~Claims is~~Demands of between zero and ~~$10~~$1.5 million. ~~However, future~~

Future developments (including receipt of additional information and documents relating to these matters, new or additional resolution or settlement communications relating to these matters, resolutions of similar claims against other industry participants in similar circumstances, or receipt of additional Residential Loan Seller ~~Claims)~~Demands) could result in our concluding in the future to establish ~~loss contingency~~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 ~~loss contingency~~accruals or reserves we may establish in the future relating to ~~Residential Loan Seller Claims~~these matters, may be materially higher than the accruals, reserves and the aggregate range of reasonably possible losses we have estimated above, respectively, including in the event that any of these matters proceed to trial and result in a judgment against us. We cannot be certain that 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 these matters, whether through ~~trial,~~litigation, settlement, or otherwise, will not have a material adverse effect on our financial condition or results of 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 March 31, 2020, the aggregate amount of loss contingency reserves established in respect of litigation matters was $2 million and is related to the FHLB-Seattle and Schwab matters described above.~~ 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~~litigation and we cannot be certain that the resolution of these matters, whether through trial or settlement, will not have a material adverse effect on our financial condition or results of operations in any future period.

Future developments (including resolution of substantive pre-trial motions relating to these matters, receipt of additional information and documents relating to these matters (such as through pre-trial discovery), new or additional settlement communications with plaintiffs relating to these matters, or resolutions of similar claims against other defendants in these matters) could result in our concluding in the future to establish additional loss contingency reserves or to disclose an estimate of reasonably possible losses in excess of our established reserves with respect to these matters. Our actual losses with respect to the ~~above-referenced~~above referenced litigation matters may be materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters, including in the event that any of these matters proceeds to trial and the plaintiff prevails. Other factors that could result in our concluding to establish additional loss contingency reserves or estimate additional reasonably possible losses, or could result in our actual losses with respect to the above-referenced litigation matters being materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters include that: there are significant factual and legal issues to be resolved; information obtained or rulings made during the lawsuits could affect the methodology for calculation of the available remedies; and we may have additional obligations pursuant to indemnity agreements, representations and warranties, and other contractual provisions with other parties relating to these litigation matters that could increase our potential losses.

Item 1A. Risk Factors

Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2019. In addition, the following risk factors reflect recent developments.~~

The current outbreak of COVID-19 or the future outbreak of any other highly infectious or contagious diseases could adversely impact or cause disruption to our financial condition and results of operations. The spread of COVID-19 has disrupted, and could further cause severe disruptions in, the U.S. and global economy and financial markets and create widespread business continuity and viability issues.

The COVID-19 pandemic (the "pandemic") is causing significant repercussions across regional, national and global economies and financial markets, and could trigger a period of regional, national and global economic slowdown or regional, national or global recessions. As a result of government measures taken to slow the spread of the disease (such as quarantines and travel restrictions), many businesses have been forced to close, furlough, and lay off employees, and U.S. unemployment claims have dramatically risen at unprecedented rates. The pandemic has also contributed to significant volatility, disruption, and negative pressure in financial markets. The impact of the outbreak has been rapidly evolving and if COVID-19, or another highly infectious disease, continues to spread or the response to contain it is unsuccessful, we could experience material adverse effects on our business, financial condition, liquidity, and results of operations. The extent of such effects will depend on future developments which are highly uncertain and cannot be predicted, including the geographic spread of the virus, the overall severity of the disease, the duration of the outbreak, the measures that may be taken by various governmental authorities in response to the outbreak and the possible further impacts on the global economy.

A significant decrease in economic activity or resulting decline in the housing market could have an adverse effect on our investments in mortgage loans, mortgage backed securities, and other real estate assets. In particular, COVID-19 and related economic impacts could adversely affect the availability of mortgage financing, the ability of buyers and sellers and others industry participants to conducts sales, and home values.

Further, in light of the current environment related to the pandemic on the overall economy, such as rising unemployment levels or changes in consumer behavior related to loans as well as government policies and pronouncements, borrowers may experience difficulties meeting their obligations or seek to forebear payment on their loans, which may adversely affect our results of operations. Thus, the credit risk profile of our assets may be more pronounced during severe market disruption in the mortgage, housing or related sectors, such as those being experienced now as a result of the pandemic.

The rapid development and fluidity of the circumstances resulting from this pandemic precludes any prediction as to the ultimate adverse impact of the pandemic. Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations and cash flows.

~~The continued spread of COVID-19 could negatively impact the availability of key personnel necessary to conduct our business.~~

The effects of the pandemic could adversely impact our financial condition and results of operations due to interrupted service and availability of personnel, including our executive officers and other employees that are part of our management team and an inability to recruit, attract and retain skilled personnel. To the extent our management or personnel are impacted in significant numbers by the outbreak of pandemic or epidemic disease and are not available or allowed to conduct work, our business and operating results may be negatively impacted. Moreover, the negative impacts of the pandemic necessitated a significant reduction in our workforce and additional reductions in our workforce may become necessary if economic conditions do not improve, which could negatively impact our business and results of operations. Additionally, the pandemic could negatively impact our ability to ensure operational continuity in the event our business continuity plan is not effective or ineffectually implemented or deployed during a disruption.

~~The effects of the pandemic could negatively impact our ability to finance our business and operations.~~

The effects of the pandemic could adversely impact our ability to access debt and equity capital on attractive terms, or at all. A severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our ability and mortgage loan borrowers’ ability to make regular payments of principal and interest (e.g., due to unemployment, underemployment, or reduced income or revenues, including as a result of tenants' inability to make rental payments) or to access savings or capital necessary to fund business operations or replace or renew maturing liabilities on a timely basis, and may adversely affect the valuation of financial assets and liabilities. Any of foregoing circumstances could increase margin calls under our borrowing facilities, affect our ability to meet liquidity, net worth, and leverage covenants under our borrowing facilities or have a material adverse effect on the value of investment assets we hold or our business, financial condition, results of operations and cash flows.

~~The effects of the pandemic could negatively impact our operating platforms, including our business purpose loan origination and residential loan purchase activities.~~

The effects of the pandemic could adversely impact our business and operations due to temporary or lasting changes involving the status, practices and procedures of our operating platforms, including with respect to loan origination and loan purchase activities. The impact of the pandemic has caused us to limit our residential loan purchases and reduce our business purpose loan origination activities, which may impact our relationships with business partners, customers and counterparties, breach actual or perceived obligations to them, and subject us to litigation and claims from such partners, customers and counterparties, any of which could have a material adverse effect on our reputation, business, financial condition, results of operations and cash flows. Moreover, because of the disruptions to the normal operation of mortgage finance markets, our operations focused on acquiring and distributing residential mortgage loans and originating and distributing business purpose loans may not be able to function efficiently because of, among other factors, an inability to access short-term or long-term financing for mortgage loans, a disruption to the market for securitization transactions, or our inability to access these markets or execute securitization transactions. Any or all of these impacts could result in reduced (or negative) mortgage lending income and gain on sale income, and reduced net interest income, as well as an impairment of the intangible assets we recorded on our balance sheet when we acquired 5 Arches, LLC and CoreVest American Finance Lender LLC, all of which would negatively impact our financial results.

Residential mortgage loan borrowers that have been negatively impacted by the pandemic may not make payments of principal and interest relating to their mortgage loans on a timely basis, or at all, which could negatively impact our business.

Residential mortgage loan borrowers that have been negatively impacted by the pandemic may not remit payments of principal and interest relating to their mortgage loans on a timely basis, or at all. This could be due to an inability to make such payments, an unwillingness to make such payments, or a temporary or permanent waiver of the requirement to make such payments, including under the terms of any applicable forbearance, modification, or maturity extension agreement or program. Such forbearance, waiver, or maturity extension may be available as a result of a government-sponsored or ‑imposed program or under any such agreement or program we or our sub-servicers may otherwise offer to mortgage borrowers. To the extent mortgage loan borrowers do not make payments on their loans, the value of residential mortgage loans and residential mortgage backed securities we own will likely be impaired, potentially materially. Additionally, to the extent the pandemic impacts local, regional or national economic conditions, the value of residential real estate may decline, which would also likely negatively impact the value of mortgage loans and mortgage backed securities we own, potentially materially.

We are exposed to the negative financial impact of COVID-19 related payment forbearances with respect 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, re-performing residential mortgage loans, and business purpose loans. 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.

With respect to MSRs we own that are associated with mortgage loans that become delinquent (including MSRs retained for jumbo mortgage loans that we securitize through our Sequoia securitization platform and investments we have made in excess MSRs and servicing advances), cash flows we would otherwise expect to receive from our retained investments in Sequoia securitization transactions or other investments may be redirected to other investors in mortgage backed securities issued in those securitization transactions (or may be otherwise not remitted to us) or we may be obligated to fund loan servicers' principal and interest advances, as well as advances of property taxes, insurance and other amounts. Additionally, through our investment in servicer advances and associated excess MSRs, we may fund an increased amount of servicer advances on loans underlying the associated transactions. Further, any federal assistance programs available to mortgage loan servicers may not be available to us because our business and investments are not focused on mortgage loans that are eligible to be purchased or guaranteed by Fannie Mae, Freddie Mac or governmental agencies such as the Federal Housing Administration or Department of Veteran Affairs. To the extent our otherwise expected cash flows are so impaired or to the extent we are required to fund loan servicers' advances it may have a material adverse effect on our financial condition, results of operations and cash flows.

Multifamily and business purpose mortgage loan borrowers that have been negatively impacted by the pandemic may not make payments of principal and interest relating to their mortgage loans on a timely basis, or at all, which could negatively impact our business.

Multifamily and business purpose loans and multifamily and business purpose mortgage backed securities we own are subject to similar risks as those described above with respect to residential mortgage loans, and will likely be impaired, potentially materially to the extent multifamily and business purpose loan borrowers that have been negatively impacted by the pandemic do not timely remit payments of principal and interest relating to their mortgage loans. In addition, if tenants who rent their residence from a multifamily or business purpose loan borrower are unable to make rental payments, are unwilling to make rental payments, or a waiver of the requirement to make rental payments on a timely basis, or at all, is available under the terms of any applicable forbearance or waiver agreement or program (which rental payment forbearance or waiver program may be available as a result of a government-sponsored or -imposed program or under any such agreement or program a landlord may otherwise offer to tenants), then the value of multifamily and business purpose loans and multifamily and business purpose mortgage backed securities we own will likely be impaired, potentially materially. Moreover, to the extent the economic impact of any such pandemic impacts local, regional or national economic conditions, the value of multifamily and residential real estate that secures multifamily and business purpose loans is likely to decline, which would also likely negatively impact the value of mortgage loans and mortgage backed securities we own, potentially materially.

Additionally, a significant amount of the business purpose loans that we own are short-term bridge loans that are secured by residential properties that are undergoing rehabilitation or construction and not occupied by tenants. Because these properties are generally not income producing (e.g., from rental revenue), in order to fund principal and interest payments, these borrowers may seek to renegotiate the terms of their mortgage loan, including by seeking payment forbearances, waivers, or maturity extensions as a result of being negatively impacted by the pandemic. Moreover, planned construction or rehabilitation of these properties may not be able to proceed on a timely basis or at all due to operating disruptions or government mandated moratoriums on construction, development or redevelopment. All of the foregoing factors would also likely negatively impact the value of mortgage loans and mortgage backed securities we own, potentially materially.

We have experienced, and may continue to experience, significant changes in our investment portfolio during times of severe market disruption in the mortgage, housing or related sectors, such as those experienced as a result of the pandemic.

~~The composition of our portfolio of loans, securities and other assets has changed significantly since December 31,~~ 2019 as a result of both ordinary course purchase and sale transactions, as well as a result of asset sales that we have undertaken in response to the financing market disruptions resulting from the pandemic. As a result, the composition of the assets we hold in our operating segments and investment portfolio has changed materially and presents a materially different risk profile than at December 31, 2019. Moreover, we may determine to undertake additional asset sales that are out of the ordinary course in the future, including in response to any worsening of economic or financial market conditions.

The continued spread of COVID-19 and the impact of the pandemic could negatively impact the availability of key third party service providers necessary to conduct our business and the ability of counterparties to meet contractual obligations to us.

Our financial results and results of operations could be negatively impacted by the inability of loan originators and servicers to operate, including the bankruptcy of one or more servicers, or the inability of our internal resources to effectively oversee servicers in certain of their activities or perform certain loan administration functions. For example, residential mortgage subservicers are seeking to respond to an unprecedented level of requests from mortgage borrowers for payment forbearances and, as a result, may not be able to process or respond to these requests effectively or in a manner that is in our best interests. Our business could also be negatively impacted by the inability of other third-party vendors we rely on to conduct our business and operate effectively, including vendors that provide IT services, mortgage banking support services, legal and accounting services, or other operational support services. Further, an inability of our counterparties to make or satisfy the conditions or representations and warranties in agreements they have entered into with us could also have a material adverse effect on our financial condition, results of operations and cash flows.

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.

Due to the volatility in financial markets resulting from the pandemic, the market value of our loans and securities financed under our borrowing facilities has declined significantly since December 31, 2019, in particular over a recent compressed timeframe, and we have received margin calls from counterparties under these facilities. We have satisfied all of these margins calls through May 13, 2020 by pledging additional collateral, such as cash or additional loans or securities, with a value equal to the market value decline, adjusted for the percentage of the asset value financed (our haircut percentage). These margin calls expose us to a number of significant risks, including the risks of the types described above and in our Annual Report on Form 10-K for the year ended December 31, 2019 under the headings “Risk Factors,” “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities,” and “Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” For example, we may be unable to meet these margin calls or may be required or forced to sell assets pledged as collateral under adverse market conditions to meet such margin calls as a result of a decrease in the fair values of the assets pledged as collateral.

Additionally, significant and widespread decreases in the fair values of our assets could cause us to breach the financial covenants under our borrowing facilities related to net worth and leverage. 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. During the first quarter of 2020, we amended such financial covenants in certain borrowing agreements on a temporary or permanent basis, and we continue to engage in discussions with our financing counterparties with regard to such financial covenants; however, we cannot be certain whether we will be able to remain in compliance with these financial covenants, including upon the scheduled expiration of certain temporary covenant amendments we obtained, or whether our financing counterparties will negotiate terms or agreements in respect of these financial covenants, the timing of any such negotiations or agreements or the terms thereof. Even if we continue to obtain temporary or permanent agreements from financing counterparties to amend financial covenants, we may not be able to maintain compliance with any such amended covenants.

Our borrowing facilities also contain representations and warranties related to litigation that could be breached if we are subject to litigation proceedings and claims in excess of specified dollar thresholds or that could have a material adverse effect on our business. The impact of the pandemic has caused us to limit our residential loan purchases and reduce our business purpose loan origination activities, which may impact our relationships with business partners, customers and counterparties, breach actual or perceived obligations to them, and subject us to litigation and claims from such partners, customers and counterparties. If the individual or aggregate amount of any such litigation and claims exceeds specified dollar thresholds or could have a material adverse effect on our business, we may be in breach of representations and warranties under our borrowing agreements, which breach 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.

Continued volatility in the residential credit market may cause the market value of loans and securities we own subject to financing to decline further, and our financing counterparties may make additional margin calls. Furthermore, if other market participants fail to meet margin calls associated with mortgage loans or securities they finance, their financing counterparties could terminate their financing and seek to sell significant amounts of loans and securities in the current market environment, which could further depress the market value of these types of assets and result in additional margin calls on us and other borrowers. Additionally, securities financed under our short-term securities repurchase facilities, and loans financed under certain whole-loan warehouse/secured revolving borrowing facilities and our FHLBC facility, are subject to mark-to-market treatment and may incur margin calls or may require us to repurchase such loans in the event the loans become delinquent. We may receive additional margin calls in the future and there is no assurance that we will be able to meet such margin calls. We may experience an event of default under some or all of our short- and long-term debt and financing facilities if we do not meet future margin calls or maintain compliance with financial covenants and other terms of these debt obligations, which would permit the holders of the affected indebtedness to accelerate the maturity of such indebtedness and could cause defaults under our other indebtedness, which could lead to an event of bankruptcy or insolvency, which would have a material adverse effect on our business, results of operations and financial condition.

Additionally, at the end of the fixed period applicable to the financing of a security under a securities repurchase facility (which generally does not exceed 90 days), we may request the same counterparty to renew the financing for an additional fixed period. If the same counterparty renews the financing, it may not be on terms that are as favorable to us as the expiring financing and the counterparty may require us to post additional collateral to renew the financing (which requirement would impact our liquidity in the same manner as a margin call). If the same counterparty does not renew the financing, it may be difficult for us to obtain financing for that security under one of our other securities repurchase facilities, due to the fact that the financial institution counterparties to our securities repurchase facilities generally only provide financing for securities that we purchased from them or one of their affiliates. If we are not able to obtain additional financing when we need it, we could be exposed to liquidity risks of the types described above.

~~Our results could be adversely affected by counterparty credit risk.~~

The economic impact of the pandemic and the associated volatility in the financial markets is likely to trigger a period of economic slowdown or recession, and could jeopardize the solvency of counterparties with which we do business. In the event a counterparty to our borrowings becomes insolvent, we may fail to recover the full value of our pledged collateral, thus reducing our earnings and liquidity. In addition, the insolvency of one or more of our counterparties could reduce the amount of financing available to us, which would make it more difficult for us to leverage the value of our assets and obtain substitute financing on attractive terms or at all. A material reduction in our financing sources or an adverse change in the terms of our financings could have a material adverse effect on our financial condition and results of operations. In the event a counterparty that sells us residential mortgage loans becomes insolvent or is acquired by a third party, we may be unable to enforce our loan repurchase rights in connection with a breach of loan representations and warranties and we may suffer losses if we must repurchase delinquent loans. In the event that one of our sub-servicers becomes insolvent or fails to perform, loan delinquencies and credit losses may increase and we may not receive the funds to which we are entitled. We attempt to diversify our counterparty exposure and (except with respect to loan representations and warranties) attempt to limit our counterparty exposure to counterparties with investment-grade credit ratings, although we may not always be able to do so. Our counterparty risk management strategy may prove ineffective and, accordingly, our earnings and cash flows could be adversely affected. For additional information regarding our exposure to counterparty credit risk, refer to our Annual Report on Form 10-K for the year ended December 31, 2019 under the headings “Risk Factors” and “Investments we make, hedging transactions that we enter into, and the manner in which we finance our investments and operations expose us to various risks, including liquidity risk, risks associated with the use of leverage, market risks, and counterparty risk.”

Our initiative to significantly reduce the financing we obtain from the FHLBC by beginning to repay outstanding amounts borrowed under the FHLBC facility may not be successful or may not result in our realizing our original intent in undertaking this initiative. Our outstanding borrowings under the FHLBC facility continue to expose us to liquidity risks, which may have a material adverse effect on our results of operations and financial condition. Sales of assets currently financed under the FHLBC facility have already and are expected to continue to result in a material amount of realized losses and significantly diminish future interest income, negatively impacting our results of operations and financial condition.

Our initiative to begin repaying outstanding debt under our FHLBC financing facility has taken the form of selling assets financed by these borrowings and/or transferring assets financed by these borrowings to other lending counterparties, with a portion of the proceeds of these sales and transfers being used to repay borrowings from the FHLBC. In March and April 2020, we began entering into transactions to sell residential whole loans financed under this facility and to transfer assets financed by these borrowings to other lending counterparties. Although we have entered into transactions to sell residential mortgage loans currently financed under the FHLBC facility and we have and continue to seek to transfer the financing of certain of these loans (and other loans) to other lending counterparties pending settlement of these sale transactions, these sale and transfer transactions may not be completed, in whole or in part, as a result of standard closing conditions, including, without limitation, that the counterparty to one or more of these transactions is unwilling or unable to complete the transactions or is unwilling to complete a portion of the transaction as a result of the underlying loans entering non-performing or forbearance status or otherwise being determined by the counterparty, following due diligence, to be impaired or defective. Mortgage loan assets that are financed under this facility, including assets that are the subject of a sale or transfer transaction that has not been completed, may decline in value, which could result in additional margin calls from the FHLBC, which could be significant and impair our liquidity. Although we expect to increase our cash position and liquidity as a result of these types of asset sales and transfers, if asset sales and transfers we undertake are at prices or on terms that do not result in net cash proceeds to us after repaying the associated borrowings under the FHLBC facility, then those sales or transfers would not improve our cash position or liquidity position and, in fact, could reduce our cash position and impair our liquidity. Sales of assets currently financed under the FHLBC facility have already and are expected to continue to result in a material amount of realized losses and significantly diminish our future interest income, negatively impacting our results of operations and financial condition.

In connection with the market disruptions resulting from the pandemic, we changed our interest rate hedging strategy and closed out of, or terminated substantially all of our interest rate hedges, incurring realized losses. As a result, interest rate risk exposure that is associated with certain of our assets and liabilities is no longer being hedged in the manner that we previously used to address interest rate risk and our revised approach to addressing interest rate risk may not be effective and could result in the incurrence of future realized losses.

In response to the recent market dislocations resulting from the pandemic, we made the determination that our interest rate hedges were no longer effective in hedging asset market values and, as of March 27, 2020, had terminated or closed out substantially all of our outstanding interest rate hedges and, overall, incurred realized losses. We are monitoring market conditions and determining when we believe it would be appropriate and effective to re-implement interest rate hedging strategies, including by taking into account our future business activities and assets and liabilities. Until we enter into new interest rate hedging agreements or implement other interest rate hedging strategies, we will be exposed to the impact that changes in benchmark interest rates may have on the value of the loans, securities and other assets we own that are sensitive to interest rate changes, as well as long-term debt obligations that are sensitive to interest rate changes. Moreover, to the extent the value of loans and securities we own fluctuate as a result of changes in benchmark interest rates, we may be exposed to margin calls under lending facilities that we use to finance these assets. In the past, our interest rate hedging strategy was intended to be a source of liquidity in meeting margin calls that resulted from asset valuation changes attributable to changes in benchmark interest rates, however, because we have terminated or closed out substantially all of our outstanding interest rate hedges we will not be able to rely on these hedges as such a source of liquidity. For example, if benchmark interest rates were to increase, all other factors being equal, we would expect the value of many of the loans and securities we own to decrease, resulting in the potential for counterparties under securities repurchase financing facilities or mortgage loan warehouse facilities to make margins calls on us to further secure outstanding borrowings. In addition, if benchmark interest rates were to increase, all other factors being equal, the cost of servicing our long-term floating rate debt obligations would increase. Operating our business and maintaining a portfolio of interest rate sensitive loans, securities and other assets without an interest rate risk hedging program in place could expose us to losses and liquidity risks, which could be material and which could negatively impact our results of operations and financial condition. There can be no assurance that future market conditions and our financial condition in the future will enable us to re-establish an effective interest rate risk hedging program, even if in the future we believe it would otherwise be appropriate or desirable to do so.

Dividend distributions on our common stock may not be declared or paid or dividends may decrease over time. Dividends may be paid in shares of common stock, cash or a combination of shares of common stock and cash. Changes in the amount and timing of dividend distributions we pay or in the tax characterization of dividend distributions we pay may adversely affect the market price of our common stock or may result in holders of our common stock being taxed on dividend distributions at a higher rate than initially expected.

Our dividend distributions are driven by a variety of factors, including our minimum dividend distribution requirements under the REIT tax laws and our REIT taxable income as calculated pursuant to the Code. We are generally required to distribute to our stockholders at least 90% of our REIT taxable income, although our reported financial results for GAAP purposes may differ materially from our REIT taxable income.

In the year ended December 31, 2019, we paid $129.5 million of cash dividends on our common stock, representing cumulative dividends of $1.20 per share. On February 27, 2020, our board of directors declared a regular cash dividend of $0.32 per share for the first quarter of 2020, payable on March 30, 2020 to stockholders of record on March 16, 2020. On March 27, 2020, we announced our decision to delay the payment date for such dividend and on May 8, 2020 we completed the payment in cash of such dividend.

We continue to prudently evaluate our liquidity and review the ability and advisability of paying dividends in the future in light of our financial condition and the applicable minimum dividend distribution requirements under applicable REIT tax laws and regulations. Our ability to continue to pay quarterly dividends in 2020 may be adversely affected by a number of factors, including the risk factors described in this Quarterly Report on Form 10-Q ~~and in our Annual Report on Form 10-K~~ for the ~~year~~quarter ended ~~December~~March 31, 2019. Further, we may consider paying future dividends, if at all, in shares of common stock, cash, or a combination of shares of common stock and cash. Any decision regarding the composition of such dividends will be made following an analysis and review of our liquidity, including our cash balances and cash flows, at the time of payment of the dividend. For example, we may determine to distribute shares of common stock in lieu of cash, or in combination with cash, in respect of our dividend obligations, which, among other things, could result in dilution to existing stockholders.2020.

To the extent we determine that future dividends would represent a return of capital to investors or would not be required under applicable REIT tax laws and regulations, rather than the distribution of income, we may determine to discontinue dividend payments until such time that dividends would again represent a distribution of income or be required under applicable REIT tax laws and regulations. Any reduction or elimination of our payment of dividend distributions would not only reduce the amount of dividends you would receive as a holder of our common stock, but could also have the effect of reducing the market price of our common stock and our ability to raise capital in future securities offerings.

In addition, the rate at which holders of our common stock are taxed on dividends we pay and the characterization of our dividend — be it ordinary income, capital gains, or a return of capital — could have an impact on the market price of our common stock. After we announce the expected characterization of dividend distributions we have paid, the actual characterization (and, therefore, the rate at which holders of our common stock are taxed on the dividend distributions they have received) could vary from our expectations, including due to errors, changes made in the course of preparing our corporate tax returns, or changes made in response to an audit by the Internal Revenue Service, or the IRS, with the result that holders of our common stock could incur greater income tax liabilities than expected.

We may pay taxable dividends in our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

We may satisfy the REIT 90% distribution test with taxable distributions of our common stock. The IRS has issued Revenue Procedure 2017-45 authorizing elective cash/stock dividends to be made by “publicly offered REITs.” Pursuant to Revenue Procedure 2017-45, the IRS will treat the distribution of stock pursuant to an elective cash/stock dividend as a distribution of property under Section 301 of the Code (i.e., a dividend), as long as at least 20% of the total dividend (or 10% for dividends declared after April 1, 2020 and before December 31, 2020) is available in cash and certain other parameters detailed in the Revenue Procedure are satisfied.

If we make a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we make a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

106

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended ~~March 31,~~September 30, 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. During the three months ended September 30, 2020, we repurchased 3,047,335 shares of our common stock pursuant to this authorization for $22 million. At ~~March 31,~~September 30, 2020, ~~$100~~$78 million of this current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended ~~March 31,~~September 30, 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, 2020 - July 31, 2020	—	$	—	—	$	—
August 1, 2020 - August 31, 2020	1,980	$	7.07	1,980	$	85,998
September 1, 2020 - September 30, 2020	1,067	$	7.15	1,067	$	78,369
Total	3,047	$	7.10	3,047	$	78,369



Maryland						68-0329422
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	RWT	New York Stock Exchange



		Page
PART I —		FINANCIAL INFORMATION
Item 1.		Financial Statements			2
		Consolidated Balance Sheets at ~~March 31,~~Se ptember 3 0 , 2020 (Unaudited) and December 31, 2019			2
		Consolidated Statements of Income (Loss) for the Three and Nine Months Ended ~~March 31,~~September 3 0 , 2020 and 2019 (Unaudited)			3
		Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended ~~March 31,~~September 3 0 , 2020 and 2019 (Unaudited)			4
		Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended ~~March 31,~~September 3 0 , 2020 and 2019 (Unaudited)			5
		Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 3 0 , 2020 and 2019 (Unaudited)			67
		Notes to Consolidated Financial Statements (Unaudited)			89
		Note 1. Organization			89
		Note 2. Basis of Presentation			89
		Note 3. Summary of Significant Accounting Policies			1112
		Note 4. Principles of Consolidation			1516
		Note 5. Fair Value of Financial Instruments			2124
		Note 6. Residential Loans			3433
		Note 7. Business Purpose Residential Loans			3735
		Note 8. Multifamily Loans			3938
		Note 9. Real Estate Securities			39
		Note 10. Other Investments			4443
		Note 11. Derivative Financial Instruments			4746
		Note 12. Other Assets and Liabilities			4948
		Note 13. Short-Term Debt			5049
		Note 14. Asset-Backed Securities Issued			5251
		Note 15. Long-Term Debt			5352
		Note 16. Commitments and Contingencies			5554
		Note 17. Equity			59
		Note 18. Equity Compensation Plans			6162
		Note 19. Mortgage Banking Activities, Net			6264
		Note 20. ~~Investment Fair Value Changes, Net~~Other Income			6365
		Note 21. ~~Other Income~~		64
	~~Note 22.~~ General and Administrative Expenses , L oan Acquisition Costs, and Other Expenses		6566
		Note ~~23.~~22. Taxes			6667
		Note ~~24.~~23. Segment Information			6668
Item 2.		~~Note 25. Subsequent Events~~		69
~~Item 2.~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations		7173
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			~~102~~104
Item 4.		Controls and Procedures			~~102~~104

PART II —		OTHER INFORMATION
Item 1.		Legal Proceedings			~~103~~105
Item 1A.		Risk Factors			~~105~~106
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			~~112~~107
Item 3.		Defaults Upon Senior Securities			~~112~~107
Item 4.		Mine Safety Disclosures (Not Applicable)			~~112~~107
Item 5.		Other Information			~~112~~107
Item 6.		Exhibits			~~113~~108
Signatures					~~114~~110


(In Thousands, except Share Data) (Unaudited)	September 30, 2020		December 31, 2019
ASSETS (1)
Residential loans, held-for-sale, at fair value	$	105,128	$	536,385
Residential loans, held-for-investment, at fair value	4,389,808		7,178,465
Business purpose residential loans, held-for-sale, at fair value	285,549		331,565
Business purpose residential loans, held-for-investment, at fair value	3,670,552		3,175,178
Multifamily loans, held-for-investment, at fair value	491,415		4,408,524
Real estate securities, at fair value	351,335		1,099,874
Other investments	384,628		358,130
Cash and cash equivalents	450,684		196,966
Restricted cash	73,594		93,867
Goodwill and intangible assets	60,737		161,464


Derivative assets	14,709		35,701
Other assets	124,273		419,321
Total Assets	$	10,402,412	$	17,995,440

LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net	$	482,761	$	2,329,145

Derivative liabilities	1,612		163,424
Accrued expenses and other liabilities	155,989		206,893

Asset-backed securities issued (includes $6,969,376 and $10,515,475 at fair value), net	7,172,398		10,515,475
Long-term debt, net	1,536,188		2,953,272
Total liabilities	9,348,948		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; 111,904,322 and 114,353,036 issued and outstanding	1,119		1,144
Additional paid-in capital	2,261,911		2,269,617
Accumulated other comprehensive (loss) income	(20,560)		41,513
Cumulative earnings	942,982		1,579,124
Cumulative distributions to stockholders	(2,131,988)		(2,064,167)
Total equity	1,053,464		1,827,231
Total Liabilities and Equity	$	10,402,412	$	17,995,440



(In Thousands, except Share Data) (Unaudited)	March 31, 2020			December 31, 2019
ASSETS⁽¹⁾
Residential loans, held-for-sale, at fair value	$	2,330,669		$	536,385
Residential loans, held-for-investment, at fair value	4,380,460			7,178,465
Business purpose residential loans, held-for-sale, at fair value	415,333			331,565
Business purpose residential loans, held-for-investment, at fair value	3,048,409			3,175,178
Multifamily loans, held-for-investment, at fair value	470,484			4,408,524
Real estate securities, at fair value	293,462			1,099,874
Other investments	446,220			358,130
Cash and cash equivalents	378,233			196,966
Restricted cash	25,752			93,867
Goodwill and intangible assets	68,483			161,464
Accrued interest receivable	57,215			71,058
Derivative assets	90,717			35,701
Other assets	295,353			348,263
Total Assets	$	12,300,790		$	17,995,440

LIABILITIES AND EQUITY ⁽¹⁾
Liabilities
Short-term debt, net	$	2,341,648		$	2,329,145
Accrued interest payable	40,102			60,655
Derivative liabilities	114,614			163,424
Accrued expenses and other liabilities	163,599			146,238
Asset-backed securities issued, at fair value	6,461,864			10,515,475
Long-term debt, net	2,453,761			2,953,272
Total liabilities	11,575,588			16,168,209
Commitments and Contingencies (see Note 16)
Equity
Common stock, par value $0.01 per share, 270,000,000 shares authorized; 114,837,533 and 114,353,036 issued and outstanding	1,148			1,144
Additional paid-in capital	2,275,808			2,269,617
Accumulated other comprehensive income	(85,531		)	41,513
Cumulative earnings	635,726			1,579,124
Cumulative distributions to stockholders	(2,101,949		)	(2,064,167		)
Total equity	725,202			1,827,231
Total Liabilities and Equity	$	12,300,790		$	17,995,440



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



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



One Belvedere Place, Suite 300
Mill Valley,	California	94941
(Address of Principal Executive Offices)		(Zip Code)



Common Stock, $0.01 par value per share	~~114,828,929~~111,928,020	shares outstanding as of ~~May 11,~~November 2, 2020


(In Thousands, except Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited)	2020		2019		2020		2019
Interest Income
Residential loans	$	44,921	$	77,070	$	179,331	$	230,308
Business purpose residential loans	55,637		5,446		161,710		12,231
Multifamily loans	4,918		36,829		49,960		94,134
Real estate securities	10,135		23,047		38,471		72,514
Other interest income	6,371		7,725		20,537		20,513
Total interest income	121,982		150,117		450,009		429,700
Interest Expense
Short-term debt	(5,145)		(24,239)		(45,119)		(70,732)
Asset-backed securities issued	(66,514)		(71,065)		(232,316)		(196,473)
Long-term debt	(28,752)		(21,300)		(72,313)		(64,895)
Total interest expense	(100,411)		(116,604)		(349,748)		(332,100)
Net Interest Income	21,571		33,513		100,261		97,600
Non-interest Income (Loss)
Mortgage banking activities, net	59,395		9,515		24,511		40,984
Investment fair value changes, net	107,047		11,444		(611,557)		34,741
Other income, net	(114)		4,356		3,979		13,840
Realized gains, net	602		4,714		30,419		18,227
Total non-interest income (loss), net	166,930		30,029		(552,648)		107,792
General and administrative expenses	(27,630)		(24,899)		(84,832)		(70,722)
Loan acquisition costs	(2,158)		(1,916)		(7,716)		(5,507)
Other expenses	(7,788)		(2,531)		(104,286)		(6,021)
Net Income (Loss) before (Provision for) Benefit from Income Taxes	150,925		34,196		(649,221)		123,142
(Provision for) benefit from income taxes	(9,113)		114		13,079		(3,102)
Net Income (Loss)	$	141,812	$	34,310	$	(636,142)	$	120,040

Basic earnings (loss) per common share	$	1.21	$	0.33	$	(5.60)	$	1.20
Diluted earnings (loss) per common share	$	1.02	$	0.31	$	(5.60)	$	1.09
Basic weighted average shares outstanding	113,403,102		101,872,126		113,952,308		97,214,064
Diluted weighted average shares outstanding	141,969,977		136,522,709		113,952,308		131,202,689


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


Employee stock purchase and incentive plans	11,460	0		9		—		—		—		9
Non-cash equity award compensation	—	—		3,906		—		—		—		3,906
Share repurchases	(3,047,335)	(30)		(21,629)		—		—		—		(21,659)
Common dividends declared ($0.14 per share)	—	—		—		—		—		(16,011)		(16,011)
September 30, 2020	111,904,322	$	1,119	$	2,261,911	$	(20,560)	$	942,982	$	(2,131,988)	$	1,053,464



(In Thousands)	March 31, 2020
2020 (9 months)	$	11,619
2021	15,304
2022	12,800
2023	10,091
2024	7,073
2025 and thereafter	11,596
Total Future Intangible Asset Amortization	$	68,483



	Three Months Ended March 31, 2019
(In Thousands)	Three Months Ended March 31, 2019
Supplementary pro forma information:
Net interest income	$	43,390
Non-interest income	42,976
Net income	56,028



	Three Months Ended March 31, 2020
	Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series			CAFL			Servicing Investment			Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series			CAFL			Servicing Investment			Total Consolidated VIEs
Interest income	$	3,194		$	25,083		$	21,986		$	40,172		$	30,010		$	4,083		$	124,528
Interest expense	(2,522		)	(21,510		)	(16,176		)	(38,348		)	(21,939		)	(1,577		)	(102,072		)
Net interest income	672			3,573			5,810			1,824			8,071			2,506			22,456
Non-interest income
Investment fair value changes, net	(391		)	(69,668		)	(142,161		)	(86,509		)	(67,846		)	(11,884		)	(378,459		)
Total non-interest income, net	(391		)	(69,668		)	(142,161		)	(86,509		)	(67,846		)	(11,884		)	(378,459		)
General and administrative expenses	—			—			—			—			—			(31		)	(31		)
Other expenses	—			—			—			—			—			1,882			1,882
Income (Loss) from Consolidated VIEs	$	281		$	(66,095	)	$	(136,351	)	$	(84,685	)	$	(59,775	)	$	(7,527	)	$	(354,152	)


March 31, 2020	MSRs				Senior Securities ⁽¹⁾			Subordinate Securities
September 30, 2020				September 30, 2020							MSRs			Senior Securities (1)					Subordinate Securities
(Dollars in Thousands)			MSRs				Senior Securities ⁽¹⁾					Subordinate Securities				(Dollars in Thousands)
Fair value at March 31, 2020
Fair value at September 30, 2020											Fair value at September 30, 2020			$	14,240						$	16,226					$	127,783
Expected life (in years)⁽²⁾	4				3						14		Expected life (in years) (2)				3						3						10
Prepayment speed assumption (annual CPR)⁽²⁾	21		%		28		%	15		%	Prepayment speed assumption (annual CPR) (2)		26		%			30		%				27		%
Decrease in fair value from:											Decrease in fair value from:
10% adverse change	$	1,760			$	2,414		$	1,404		10% adverse change		$	1,105				$	1,622					$	1,075
25% adverse change	4,278				5,954			3,836			25% adverse change		2,678					3,675						3,735
Discount rate assumption⁽²⁾	13		%		18		%	10		%	Discount rate assumption (2)		12		%			17		%				6		%
Decrease in fair value from:											Decrease in fair value from:
100 basis point increase	$	611			$	549		$	8,088		100 basis point increase		$	383				$	327					$	10,219
200 basis point increase	1,188				1,072			15,165			200 basis point increase		746					638						19,348
Credit loss assumption ⁽²⁾	N/A				0.22		%	0.22		%	Credit loss assumption (2)		N/A					0.38		%				0.38		%
Decrease in fair value from:											Decrease in fair value from:
10% higher losses	N/A				$	—		$	1,107		10% higher losses		N/A					$	0					$	2,274
25% higher losses	N/A				—			2,723			25% higher losses		N/A					0						5,500


~~(1)~~	~~Senior securities included $27 million and $49 million of interest-only securities at March 31, 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.~~


	September 30, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value	$	105,091	$	105,091	$	536,385	$	536,509
Residential loans, held-for-investment	4,389,808		4,389,808		7,178,465		7,178,465
Business purpose residential loans, held-for-sale	285,549		285,549		331,565		331,565
Business purpose residential loans, held-for-investment	3,670,552		3,670,552		3,175,178		3,175,178
Multifamily loans	491,415		491,415		4,408,524		4,408,524
Real estate securities	351,335		351,335		1,099,874		1,099,874

Servicer advance investments (1)	258,621		258,621		169,204		169,204
MSRs (1)	14,878		14,878		42,224		42,224

Excess MSRs (1)	35,070		35,070		31,814		31,814
Shared home appreciation options (1)	41,758		41,758		45,085		45,085
Cash and cash equivalents	450,684		450,684		196,966		196,966
Restricted cash	73,594		73,594		93,867		93,867

Derivative assets	14,709		14,709		35,701		35,701
REO (2)	8,535		9,654		9,462		10,389
Margin receivable (2)	3,809		3,809		209,776		209,776
FHLBC stock (2)	5,000		5,000		43,393		43,393
Guarantee asset (2)	579		579		1,686		1,686

Pledged collateral (2)	8,172		8,172		32,945		32,945
Liabilities
Short-term debt	$	482,761	$	482,761	$	2,329,145	$	2,329,145


Margin payable (3)	0		0		1,700		1,700
Guarantee obligation (3)	11,264		10,185		14,009		13,754
Contingent consideration (3)	0		0		28,484		28,484
Derivative liabilities	1,612		1,612		163,424		163,424
ABS issued, net
Fair value	6,969,376		6,969,376		10,515,475		10,515,475
Amortized cost	203,022		207,812		0		0
FHLBC long-term borrowings	1,000		1,000		1,999,999		1,999,999
Other long-term debt, net	886,054		885,172		183,520		184,666
Convertible notes, net	510,472		476,071		631,125		661,985
Trust preferred securities and subordinated notes, net	138,663		73,238		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.~~


September 30, 2020	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	4,494,899	$	0	$	0	$	4,494,899
Business purpose residential loans	3,956,101		0		0		3,956,101
Multifamily loans	491,415		0		0		491,415
Real estate securities	351,335		0		0		351,335

Servicer advance investments	258,621		0		0		258,621
MSRs	14,878		0		0		14,878
Excess MSRs	35,070		0		0		35,070
Shared home appreciation options	41,758		0		0		41,758
Derivative assets	14,709		464		3,472		10,773
Pledged collateral	8,172		8,172		0		0
FHLBC stock	5,000		0		5,000		0
Guarantee asset	579		0		0		579

Liabilities

Derivative liabilities	$	1,612	$	263	$	15	$	1,334

ABS issued	6,969,376		0		0		6,969,376


~~(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.


~~(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.~~


	Included in Net Income
	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Assets
Residential loans at Redwood	$	(107)	$	17,771	$	(865)	$	82,408
Business purpose residential loans	21,155		584		17,901		4,069
Net investments in consolidated Sequoia entities (1)	7,700		1,860		(22,802)		7,051
Net investments in consolidated Freddie Mac SLST entities (1)	82,209		17,300		(33,087)		31,702
Net investments in consolidated Freddie Mac K-Series entities (1)	2,165		7,445		(11,014)		13,810
Net investments in consolidated CAFL entities (1)	9,673		0		(41,048)		0
Trading securities	(3,549)		11,206		(80,358)		33,196

Servicer advance investments	25		1,585		(6,172)		3,025
MSRs	(2,376)		(5,892)		(16,798)		(16,971)
Excess MSRs	(1,127)		(1,634)		(7,650)		(2,137)
Shared home appreciation options	2,384		29		(4,286)		29
Loan purchase and interest rate lock commitments	10,791		4,678		10,773		4,757

Other assets - Guarantee asset	(191)		(216)		(1,107)		(834)

Liabilities
Loan purchase commitments	$	420	$	(1,668)	$	(1,334)	$	(1,669)


									Gain (Loss) for
September 30, 2020	Carrying Value		Fair Value Measurements Using						Three Months Ended		Nine Months Ended
(In Thousands)			Level 1		Level 2		Level 3		September 30, 2020		September 30, 2020
Assets


REO	$	3,523	$	0	$	0	$	3,523	$	(805)	$	(840)


~~(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 (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.~~


March 31, 2020	Fair Value				Input Values
September 30, 2020												September 30, 2020			Fair Value					Input Values
(Dollars in Thousands, except Input Values)			Fair Value			Unobservable Input	Range						Weighted Average⁽⁵⁾			(Dollars in Thousands, except Input Values)			Unobservable Input				Range							Weighted Average(1)
Assets														Assets
Residential loans, at fair value:														Residential loans, at fair value:

Jumbo fixed-rate loans	$	86,053		Dollar price	$	74.38	-	$	99.50		$	96.73		Jumbo fixed-rate loans		$	6,312	Prepayment rate (annual CPR)			20			-	20		%	20			%

Jumbo hybrid loans	97,956			Dollar price	$	90.00	-	$	99.00		$	97.78
																		Whole loan spread to swap rate			350			-	350		bps	350			bps


Jumbo loans committed to sell	2,146,557			Whole loan committed sales price	$	95.00	-	$	103.50		$	98.32		Jumbo loans committed to sell		98,779		Whole loan committed sales price			$	101.61		-	$	103.40		$	103.23

Loans held by Legacy Sequoia ⁽¹⁾	316,677			Liability price				N/A			N/A

Loans held by Sequoia Choice ⁽¹⁾	1,932,658			Liability price				N/A			N/A

Loans held by Freddie Mac SLST ⁽¹⁾	2,131,125			Liability price				N/A			N/A

Loans held by Legacy Sequoia (2)														Loans held by Legacy Sequoia (2)		296,765		Liability price							N/A			N/A

Loans held by Sequoia Choice (2)														Loans held by Sequoia Choice (2)		1,836,361		Liability price							N/A			N/A

Loans held by Freddie Mac SLST (2)														Loans held by Freddie Mac SLST (2)		2,256,682		Liability price							N/A			N/A

Business purpose residential loans:														Business purpose residential loans:
Single-family rental loans	415,333			Senior credit spread	290		-	290		bps	290		bps	Single-family rental loans		285,549		Senior credit spread			130			-	130		bps	130			bps
																		Subordinate credit spread			200			-	1,600		bps	551			bps
				Subordinate credit spread	400		-	2,700		bps	688		bps					Senior credit support			30			-	32		%	31			%
				Senior credit support	32		-	47		%	34		%					IO discount rate			8			-	9		%	9			%
				IO discount rate	14		-	14		%	14		%					Prepayment rate (annual CPR)			0			-	3		%	3			%
				Prepayment rate (annual CPR)	5		-	5		%	5		%					Non-securitizable loan dollar price			$	101		-	$	101		$	101

Single-family rental loans held by CAFL	2,248,665			Liability price				N/A			N/A			Single-family rental loans held by CAFL		2,969,692		Liability price							N/A			N/A

Residential bridge loans	799,744			Discount rate	9		-	17		%	12		%	Residential bridge loans		700,860		Discount rate			6			-	12		%	8			%
																		Non-performing loan dollar price			$	3		-	$	100		$	89
Multifamily loans held by Freddie Mac K-Series ⁽¹⁾	470,484			Liability price				N/A			N/A

Multifamily loans held by Freddie Mac K-Series (2)														Multifamily loans held by Freddie Mac K-Series (2)		491,415		Liability price							N/A			N/A


Trading and AFS securities	293,462			Discount rate	5		-	51		%	17		%	Trading and AFS securities		351,335		Discount rate			3			-	34		%	9			%
																		Prepayment rate (annual CPR)			7			-	65		%	24			%
				Prepayment rate (annual CPR)	6		-	34		%	12		%					Default rate			0			-	26		%	1			%
				Default rate	—		-	7		%	1		%					Loss severity			0			-	50		%	19			%
				Loss severity	—		-	50		%	9		%					CRT dollar price			$	49		-	$	103		$	84

Servicer advance investments	298,946			Discount rate	5		-	5		%	5		%	Servicer advance investments		258,621		Discount rate			3			-	4		%	4			%
				Prepayment rate (annual CPR)	8		-	14		%	14		%					Prepayment rate (annual CPR)			8			-	14		%	13			%
				Expected remaining life ⁽²⁾	2		-	2		years	2		years					Expected remaining life (3)			1			-	2		years	2			years
				Mortgage servicing income	8		-	13		bps	10		bps					Mortgage servicing income			6			-	16		bps	8			bps

MSRs	23,616			Discount rate	13		-	13		%	13		%	MSRs		14,878		Discount rate			12			-	12		%	12			%
				Prepayment rate (annual CPR)	8		-	63		%	21		%					Prepayment rate (annual CPR)			8			-	97		%	26			%
				Per loan annual cost to service	$	95	-	$	95		$	95						Per loan annual cost to service			$	95		-	$	95		$	95

Excess MSRs	31,788			Discount rate	18		-	26		%	22		%	Excess MSRs		35,070		Discount rate			15			-	21		%	18			%
				Prepayment rate (annual CPR)	9		-	14		%	11		%					Prepayment rate (annual CPR)			10			-	13		%	11			%
				Excess mortgage servicing income	8		-	17		bps	12		bps					Excess mortgage servicing income			9			-	17		bps	12			bps


~~(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.~~


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


~~(5)~~	~~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.~~


September 30, 2020			Legacy		Sequoia		Freddie Mac
(In Thousands)	Redwood		Sequoia		Choice		SLST		Total
Held-for-sale at fair value	$	105,128	$	0	$	0	$	0	$	105,128
Held-for-investment at fair value	0		296,765		1,836,361		2,256,682		4,389,808
Total Residential Loans	$	105,128	$	296,765	$	1,836,361	$	2,256,682	$	4,494,936