false2020Q3000093023612/31P5YP7YP6Mus-gaap:OtherAssetsus-gaap:AccountsPayableAndAccruedLiabilitiesCurrentAndNoncurrent0000930236rwt:RepreformingLoansSecuritiesMemberrwt:RealEstateSecuritiesPrimeMezzanineMember2019-12-310000930236rwt:SubordinateSecuritiesMember2021-01-012021-06-30

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended: ~~September~~June 30, ~~2020~~2021


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

For the Transition Period from _______________ to _______________.

Commission File Number 1-13759

REDWOOD TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)


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


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

(415) 389-7373

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:


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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Common Stock, $0.01 par value per share						~~111,928,020~~113,055,422			shares outstanding as of ~~November~~August 2, ~~2020~~2021

REDWOOD TRUST, INC.

~~2020~~2021 FORM 10-Q REPORT

TABLE OF CONTENTS


		Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at Se ~~ptember~~ 3 0 ~~, 2020~~June 30, 2021 (Unaudited) and December 31, ~~2019~~2020	2
	Consolidated Statements of Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~ 3 0 ,June 30, 2021 and 2020 ~~and 2019~~ (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~ 3 0 ,June 30, 2021 and 2020 ~~and 2019~~ (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three and ~~Nine~~Six Months Ended ~~September~~ 3 0 ,June 30, 2021 and 2020 ~~and 2019~~ (Unaudited)	5
	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~ 3 0 ,June 30, 2021 and 2020 ~~and 2019~~ (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	9
	Note 1. Organization	9
	Note 2. Basis of Presentation	9
	Note 3. Summary of Significant Accounting Policies	1211
	Note 4. Principles of Consolidation	1615
	Note 5. Fair Value of Financial Instruments	2423
	Note 6. Residential Loans	3331
	Note 7. Business Purpose ~~Residential~~ Loans	35
	Note 8. Multifamily Loans	38
	Note 9. Real Estate Securities	3938
	Note 10. Other Investments	43
	Note 11. Derivative Financial Instruments	4645
	Note 12. Other Assets and Liabilities	4847
	Note 13. Short-Term Debt	49
	Note 14. Asset-Backed Securities Issued	51
	Note 15. Long-Term Debt	5253
	Note 16. Commitments and Contingencies	54
	Note 17. Equity	5957
	Note 18. Equity Compensation Plans	6260
	Note 19. Mortgage Banking Activities, Net	6461
	Note 20. Other Income	6562
	Note 21. General and Administrative Expenses,~~, Loan~~ Loan Acquisition Costs, and Other Expenses	6663
	Note 22. Taxes	6764
	Note 23. Segment Information	6864
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7369
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~104~~95
Item 4.	Controls and Procedures	~~104~~95

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	~~105~~96
Item 1A.	Risk Factors	~~106~~96
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~107~~96
Item 3.	Defaults Upon Senior Securities	~~107~~96
Item 4.	Mine Safety Disclosures (Not Applicable)	~~107~~96
Item 5.	Other Information	~~107~~97
Item 6.	Exhibits	~~108~~98
Signatures		~~110~~100

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(In Thousands, except Share Data) (Unaudited)	(In Thousands, except Share Data) (Unaudited)	September 30, 2020		December 31, 2019		(In Thousands, except Share Data) (Unaudited)	June 30, 2021		December 31, 2020
ASSETS (1)	ASSETS (1)					ASSETS (1)
Residential loans, held-for-sale, at fair value	Residential loans, held-for-sale, at fair value	$	105,128	$	536,385	Residential loans, held-for-sale, at fair value	$	1,160,548	$	176,641
Residential loans, held-for-investment, at fair value	Residential loans, held-for-investment, at fair value	4,389,808		7,178,465		Residential loans, held-for-investment, at fair value	4,582,052		4,072,410
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
Business purpose loans, held-for-sale, at fair value						Business purpose loans, held-for-sale, at fair value	418,442		245,394
Business purpose loans, held-for-investment, at fair value						Business purpose loans, held-for-investment, at fair value	3,990,447		3,890,959
Multifamily loans, held-for-investment, at fair value	Multifamily loans, held-for-investment, at fair value	491,415		4,408,524		Multifamily loans, held-for-investment, at fair value	485,157		492,221
Real estate securities, at fair value	Real estate securities, at fair value	351,335		1,099,874		Real estate securities, at fair value	354,886		344,125
Other investments	Other investments	384,628		358,130		Other investments	308,732		348,175
Cash and cash equivalents	Cash and cash equivalents	450,684		196,966		Cash and cash equivalents	421,223		461,260
Restricted cash	Restricted cash	73,594		93,867		Restricted cash	55,048		83,190
Goodwill and intangible assets		60,737		161,464
Intangible assets						Intangible assets	49,119		56,865

Derivative assets	Derivative assets	14,709		35,701		Derivative assets	34,305		53,238
Other assets	Other assets	124,273		419,321		Other assets	136,432		130,588
Total Assets	Total Assets	$	10,402,412	$	17,995,440	Total Assets	$	11,996,391	$	10,355,066

LIABILITIES AND EQUITY (1)	LIABILITIES AND EQUITY (1)					LIABILITIES AND EQUITY (1)
Liabilities	Liabilities					Liabilities
Short-term debt, net	Short-term debt, net	$	482,761	$	2,329,145	Short-term debt, net	$	1,484,999	$	522,609

Derivative liabilities	Derivative liabilities	1,612		163,424		Derivative liabilities	3,240		16,072
Accrued expenses and other liabilities	Accrued expenses and other liabilities	155,989		206,893		Accrued expenses and other liabilities	191,705		179,340

Asset-backed securities issued (includes $6,969,376 and $10,515,475 at fair value), net		7,172,398		10,515,475
Asset-backed securities issued (includes $7,360,766 and $6,900,362 at fair value), net						Asset-backed securities issued (includes $7,360,766 and $6,900,362 at fair value), net	7,536,997		7,100,661
Long-term debt, net	Long-term debt, net	1,536,188		2,953,272		Long-term debt, net	1,484,308		1,425,485
Total liabilities	Total liabilities	9,348,948		16,168,209		Total liabilities	10,701,249		9,244,167
Commitments and Contingencies (see Note 16)	Commitments and Contingencies (see Note 16)					Commitments and Contingencies (see Note 16)	0		0
Equity	Equity					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
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 113,052,780 and 112,090,006 issued and outstanding						Common stock, par value $0.01 per share, 395,000,000 shares authorized; 113,052,780 and 112,090,006 issued and outstanding	1,131		1,121
Additional paid-in capital	Additional paid-in capital	2,261,911		2,269,617		Additional paid-in capital	2,287,412		2,264,874
Accumulated other comprehensive (loss) income		(20,560)		41,513
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)	9,740		(4,221)
Cumulative earnings	Cumulative earnings	942,982		1,579,124		Cumulative earnings	1,184,559		997,277
Cumulative distributions to stockholders	Cumulative distributions to stockholders	(2,131,988)		(2,064,167)		Cumulative distributions to stockholders	(2,187,700)		(2,148,152)
Total equity	Total equity	1,053,464		1,827,231		Total equity	1,295,142		1,110,899
Total Liabilities and Equity	Total Liabilities and Equity	$	10,402,412	$	17,995,440	Total Liabilities and Equity	$	11,996,391	$	10,355,066

——————

(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, assets of consolidated VIEs totaled ~~$8,197,095~~$8,616,435 and ~~$11,931,869,~~$8,141,069, respectively. At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, liabilities of consolidated VIEs totaled ~~$7,238,047~~$7,562,367 and ~~$10,717,072,~~$7,148,414, respectively. See Note 4 for further discussion.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,				(In Thousands, except Share Data)	Three Months Ended June 30,				Six Months Ended June 30,
(Unaudited)	(Unaudited)	2020		2019		2020		2019		(Unaudited)	2021		2020		2021		2020
Interest Income	Interest Income									Interest Income
Residential loans	Residential loans	$	44,921	$	77,070	$	179,331	$	230,308	Residential loans	$	48,433	$	54,974	$	92,088	$	134,410
Business purpose residential loans		55,637		5,446		161,710		12,231
Business purpose loans										Business purpose loans	70,323		53,419		134,511		106,073
Multifamily loans	Multifamily loans	4,918		36,829		49,960		94,134		Multifamily loans	4,860		4,870		9,646		45,042
Real estate securities	Real estate securities	10,135		23,047		38,471		72,514		Real estate securities	9,279		10,027		18,942		28,336
Other interest income	Other interest income	6,371		7,725		20,537		20,513		Other interest income	5,800		6,656		11,813		14,166
Total interest income	Total interest income	121,982		150,117		450,009		429,700		Total interest income	138,695		129,946		267,000		328,027
Interest Expense	Interest Expense									Interest Expense
Short-term debt	Short-term debt	(5,145)		(24,239)		(45,119)		(70,732)		Short-term debt	(11,195)		(16,907)		(18,968)		(39,974)
Asset-backed securities issued	Asset-backed securities issued	(66,514)		(71,065)		(232,316)		(196,473)		Asset-backed securities issued	(76,419)		(65,304)		(148,980)		(165,802)
Long-term debt	Long-term debt	(28,752)		(21,300)		(72,313)		(64,895)		Long-term debt	(20,451)		(20,455)		(42,669)		(43,561)
Total interest expense	Total interest expense	(100,411)		(116,604)		(349,748)		(332,100)		Total interest expense	(108,065)		(102,666)		(210,617)		(249,337)
Net Interest Income	Net Interest Income	21,571		33,513		100,261		97,600		Net Interest Income	30,630		27,280		56,383		78,690
Non-interest Income (Loss)	Non-interest Income (Loss)									Non-interest Income (Loss)
Mortgage banking activities, net	Mortgage banking activities, net	59,395		9,515		24,511		40,984		Mortgage banking activities, net	54,419		(5,982)		137,026		(34,884)
Investment fair value changes, net	Investment fair value changes, net	107,047		11,444		(611,557)		34,741		Investment fair value changes, net	49,480		152,228		94,567		(718,604)
Other income, net	Other income, net	(114)		4,356		3,979		13,840		Other income, net	2,126		1,165		5,969		4,093
Realized gains, net	Realized gains, net	602		4,714		30,419		18,227		Realized gains, net	8,384		25,965		11,100		29,817
Total non-interest income (loss), net	Total non-interest income (loss), net	166,930		30,029		(552,648)		107,792		Total non-interest income (loss), net	114,409		173,376		248,662		(719,578)
General and administrative expenses	General and administrative expenses	(27,630)		(24,899)		(84,832)		(70,722)		General and administrative expenses	(40,594)		(28,520)		(84,145)		(57,202)
Loan acquisition costs	Loan acquisition costs	(2,158)		(1,916)		(7,716)		(5,507)		Loan acquisition costs	(3,748)		(1,572)		(7,307)		(5,558)
Other expenses	Other expenses	(7,788)		(2,531)		(104,286)		(6,021)		Other expenses	(3,985)		(5,083)		(8,081)		(96,498)
Net Income (Loss) before (Provision for) Benefit from Income Taxes	Net Income (Loss) before (Provision for) Benefit from Income Taxes	150,925		34,196		(649,221)		123,142		Net Income (Loss) before (Provision for) Benefit from Income Taxes	96,712		165,481		205,512		(800,146)
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(9,113)		114		13,079		(3,102)		(Provision for) benefit from income taxes	(6,687)		(37)		(18,230)		22,192
Net Income (Loss)	Net Income (Loss)	$	141,812	$	34,310	$	(636,142)	$	120,040	Net Income (Loss)	$	90,025	$	165,444	$	187,282	$	(777,954)

Basic earnings (loss) per common share	Basic earnings (loss) per common share	$	1.21	$	0.33	$	(5.60)	$	1.20	Basic earnings (loss) per common share	$	0.77	$	1.41	$	1.61	$	(6.82)
Diluted earnings (loss) per common share	Diluted earnings (loss) per common share	$	1.02	$	0.31	$	(5.60)	$	1.09	Diluted earnings (loss) per common share	$	0.66	$	1.00	$	1.38	$	(6.82)
Basic weighted average shares outstanding	Basic weighted average shares outstanding	113,403,102		101,872,126		113,952,308		97,214,064		Basic weighted average shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928
Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	141,969,977		136,522,709		113,952,308		131,202,689		Diluted weighted average shares outstanding	141,761,084		147,099,079		141,139,212		114,229,928

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(In Thousands)	(In Thousands)	Three Months Ended September 30,				Nine Months Ended September 30,				(In Thousands)	Three Months Ended June 30,				Six Months Ended June 30,
(Unaudited)	(Unaudited)	2020		2019		2020		2019		(Unaudited)	2021		2020		2021		2020
Net Income (Loss)	Net Income (Loss)	$	141,812	$	34,310	$	(636,142)	$	120,040	Net Income (Loss)	$	90,025	$	165,444	$	187,282	$	(777,954)
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities	Net unrealized gain (loss) on available-for-sale securities	8,236		4,484		(19,890)		19,764		Net unrealized gain (loss) on available-for-sale securities	11,224		52,393		22,210		(28,126)
Reclassification of unrealized gain on available-for-sale securities to net income		(445)		(3,492)		(11,525)		(15,807)
Reclassification of unrealized (gain) loss on available-for-sale securities to net income										Reclassification of unrealized (gain) loss on available-for-sale securities to net income	(7,500)		2,718		(10,295)		(11,080)
Net unrealized loss on interest rate agreements	Net unrealized loss on interest rate agreements	0		(11,791)		(32,806)		(27,130)		Net unrealized loss on interest rate agreements	0		0		0		(32,806)
Reclassification of unrealized loss on interest rate agreements to net income	Reclassification of unrealized loss on interest rate agreements to net income	1,040		0		2,148		0		Reclassification of unrealized loss on interest rate agreements to net income	1,028		1,029		2,046		1,108
Total other comprehensive income (loss)	Total other comprehensive income (loss)	8,831		(10,799)		(62,073)		(23,173)		Total other comprehensive income (loss)	4,752		56,140		13,961		(70,904)
Total Comprehensive Income (Loss)	Total Comprehensive Income (Loss)	$	150,643	$	23,511	$	(698,215)	$	96,867	Total Comprehensive Income (Loss)	$	94,777	$	221,584	$	201,243	$	(848,858)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended ~~September~~June 30, ~~2020~~2021

(In Thousands, except Share Data) Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income (Loss) Cumulative
Earnings Cumulative
Distributions
to Stockholders Total
(Unaudited) Shares Amount
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, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
March 31, 2021	112,998,732	$	1,130	$	2,281,647	$	4,988	$	1,094,534	$	(2,166,724)	$	1,215,575
Net income	—	—		—		—		90,025		—		90,025
Other comprehensive income	—	—		—		4,752		—		—		4,752


Employee stock purchase and incentive plans	54,048	1		122		—		—		—		123
Non-cash equity award compensation	—	—		5,643		—		—		—		5,643

Common dividends declared ($0.18 per share)	—	—		—		—		—		(20,976)		(20,976)
June 30, 2021	113,052,780	$	1,131	$	2,287,412	$	9,740	$	1,184,559	$	(2,187,700)	$	1,295,142

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021

(In Thousands, except Share Data) Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income (Loss) Cumulative
Earnings Cumulative
Distributions
to Stockholders Total
(Unaudited) Shares Amount
December 31, 2019 114,353,036 $ 1,144 $ 2,269,617 $ 41,513 $ 1,579,124 $ (2,064,167) $ 1,827,231
Net loss — — — — (636,142) — (636,142)
Other comprehensive loss — — — (62,073) — — (62,073)
Issuance of common stock 350,088 3 5,544 — — — 5,547
Employee stock purchase and incentive plans 248,533 2 (2,767) — — — (2,765)
Non-cash equity award compensation — — 11,146 — — — 11,146
Share repurchases (3,047,335) (30) (21,629) — — — (21,659)
Common dividends declared ($0.585 per share) — — — — — (67,821) (67,821)
September 30, 2020 111,904,322 $ 1,119 $ 2,261,911 $ (20,560) $ 942,982 $ (2,131,988) $ 1,053,464


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2020	112,090,006	$	1,121	$	2,264,874	$	(4,221)	$	997,277	$	(2,148,152)	$	1,110,899
Net income	—	—		—		—		187,282		—		187,282
Other comprehensive income	—	—		—		13,961		—		—		13,961
Issuance of common stock	806,068	8		13,366		—		—		—		13,374

Employee stock purchase and incentive plans	156,706	2		(689)		—		—		—		(687)
Non-cash equity award compensation	—	—		9,861		—		—		—		9,861

Common dividends declared ($0.34 per share)	—	—		—		—		—		(39,548)		(39,548)
June 30, 2021	113,052,780	$	1,131	$	2,287,412	$	9,740	$	1,184,559	$	(2,187,700)	$	1,295,142

For the Three Months Ended ~~September~~June 30, ~~2019~~2020


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Income		Cumulative Earnings			Cumulative Distributions to Stockholders				Total			(In Thousands, except Share Data)		Common Stock				Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Cumulative Earnings				Cumulative Distributions to Stockholders				Total
(Unaudited)	(Unaudited)	Shares	Amount										(Unaudited)				Shares					Amount
June 30, 2019		97,715,021	$	977			$	2,013,044			$	48,923				$	1,495,671			$	(1,994,583)		$	1,564,032
March 31, 2020																					March 31, 2020		114,837,533		$	1,148			$	2,275,808			$	(85,531)			$	635,726			$	(2,101,949)			$	725,202
Net income	Net income	—	—		—				—		34,310			—				34,310			Net income		—		—		—				—				165,444				—				165,444
Other comprehensive loss		—	—		—				(10,799)		—			—				(10,799)
Issuance of common stock		14,375,000	144		228,339				—		—			—				228,483
Other comprehensive income																					Other comprehensive income		—		—		—				56,140				—				—				56,140

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	11,710	—		154				—		—			—				154			Employee stock purchase and incentive plans		102,664		1		(235)				—				—				—				(234)
Non-cash equity award compensation	Non-cash equity award compensation	—	—		3,297				—		—			—				3,297			Non-cash equity award compensation		—		—		4,052				—				—				—				4,052

Common dividends declared ($0.30 per share)		—	—		—				—		—			(34,418)				(34,418)
September 30, 2019		112,101,731	$	1,121	$	2,244,834			$	38,124	$	1,529,981		$	(2,029,001)			$	1,785,059
Common dividends declared ($0.125 per share)																					Common dividends declared ($0.125 per share)		—		—		—				—				—				(14,028)				(14,028)
June 30, 2020																					June 30, 2020		114,940,197		$	1,149	$	2,279,625			$	(29,391)			$	801,170			$	(2,115,977)			$	936,576

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ~~(CONTINUED)~~

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Income		Cumulative Earnings			Cumulative Distributions to Stockholders				Total			(In Thousands, except Share Data)		Common Stock				Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Cumulative Earnings				Cumulative Distributions to Stockholders				Total
(Unaudited)	(Unaudited)	Shares	Amount										(Unaudited)				Shares					Amount
December 31, 2018		84,884,344	$	849			$	1,811,422			$	61,297				$	1,409,941			$	(1,934,715)		$	1,348,794
Net income		—	—		—				—		120,040			—				120,040
December 31, 2019																					December 31, 2019		114,353,036		$	1,144			$	2,269,617			$	41,513			$	1,579,124			$	(2,064,167)			$	1,827,231
Net loss																					Net loss		—		—		—				—				(777,954)				—				(777,954)
Other comprehensive loss	Other comprehensive loss	—	—		—				(23,173)		—			—				(23,173)			Other comprehensive loss		—		—		—				(70,904)				—				—				(70,904)
Issuance of common stock	Issuance of common stock	26,666,191	267		418,324				—		—			—				418,591			Issuance of common stock		350,088		3		5,544				—				—				—				5,547
Direct stock purchase and dividend reinvestment plan		399,838	4		6,303				—		—			—				6,307

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	151,358	1		(1,767)				—		—			—				(1,766)			Employee stock purchase and incentive plans		237,073		2		(2,776)				—				—				—				(2,774)
Non-cash equity award compensation	Non-cash equity award compensation	—	—		10,552				—		—			—				10,552			Non-cash equity award compensation		—		—		7,240				—				—				—				7,240

Common dividends declared ($0.90 per share)		—	—		—				—		—			(94,286)				(94,286)
September 30, 2019		112,101,731	$	1,121	$	2,244,834			$	38,124	$	1,529,981		$	(2,029,001)			$	1,785,059
Common dividends declared ($0.445 per share)																					Common dividends declared ($0.445 per share)		—		—		—				—				—				(51,810)				(51,810)
June 30, 2020																					June 30, 2020		114,940,197		$	1,149	$	2,279,625			$	(29,391)			$	801,170			$	(2,115,977)			$	936,576

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

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


(In Thousands) (Unaudited)	(In Thousands) (Unaudited)	Nine Months Ended September 30,				(In Thousands) (Unaudited)	Six Months Ended June 30,
		2020		2019			2021		2020
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					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:
Net income (loss)						Net income (loss)	$	187,282	$	(777,954)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:						Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	Amortization of premiums, discounts, and securities issuance costs, net	6,213		(3,486)		Amortization of premiums, discounts, and securities issuance costs, net	3,998		4,083
Depreciation and amortization of non-financial assets	Depreciation and amortization of non-financial assets	13,166		5,673		Depreciation and amortization of non-financial assets	8,405		8,962
Originations of held-for-sale loans	Originations of held-for-sale loans	(654,820)		(124,392)		Originations of held-for-sale loans	(567,546)		(457,510)
Purchases of held-for-sale loans	Purchases of held-for-sale loans	(2,893,246)		(4,002,509)		Purchases of held-for-sale loans	(6,682,864)		(2,720,245)
Proceeds from sales of held-for-sale loans	Proceeds from sales of held-for-sale loans	3,224,526		2,971,811		Proceeds from sales of held-for-sale loans	4,526,370		3,126,860
Principal payments on held-for-sale loans	Principal payments on held-for-sale loans	53,677		77,100		Principal payments on held-for-sale loans	19,856		48,901
Net settlements of derivatives	Net settlements of derivatives	(187,130)		(32,902)		Net settlements of derivatives	39,697		(183,373)

Non-cash equity award compensation expense	Non-cash equity award compensation expense	11,146		10,552		Non-cash equity award compensation expense	9,861		7,240
Goodwill impairment expense	Goodwill impairment expense	88,675		0		Goodwill impairment expense	0		88,675
Market valuation adjustments	Market valuation adjustments	606,764		(62,720)		Market valuation adjustments	(213,641)		765,647
Realized gains, net	Realized gains, net	(30,419)		(18,227)		Realized gains, net	(11,100)		(29,817)
Net change in:	Net change in:					Net change in:
Accrued interest receivable and other assets	Accrued interest receivable and other assets	304,147		(141,197)		Accrued interest receivable and other assets	10,260		254,368
Accrued interest payable and accrued expenses and other liabilities	Accrued interest payable and accrued expenses and other liabilities	(82,489)		(1,049)		Accrued interest payable and accrued expenses and other liabilities	17,327		(80,219)
Net cash used in operating activities		(175,932)		(1,201,306)
Net cash (used in) provided by operating activities						Net cash (used in) provided by operating activities	(2,652,095)		55,618
Cash Flows From Investing Activities:	Cash Flows From Investing Activities:					Cash Flows From Investing Activities:
Originations of loan investments	Originations of loan investments	(327,494)		(171,915)		Originations of loan investments	(348,389)		(263,544)
Purchases of loan investment		0		(49,489)

Proceeds from sales of loan investments	Proceeds from sales of loan investments	1,574,160		9,422		Proceeds from sales of loan investments	9,231		1,574,160
Principal payments on loan investments	Principal payments on loan investments	1,652,418		1,091,652		Principal payments on loan investments	1,312,064		1,136,000
Purchases of real estate securities	Purchases of real estate securities	(106,422)		(309,839)		Purchases of real estate securities	(18,593)		(52,260)
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

Sales of securities held in consolidated securitization trusts						Sales of securities held in consolidated securitization trusts	8,197		142,990
Proceeds from sales of real estate securities	Proceeds from sales of real estate securities	634,709		487,469		Proceeds from sales of real estate securities	36,735		621,730
Principal payments on real estate securities	Principal payments on real estate securities	19,446		62,711		Principal payments on real estate securities	29,786		16,405
Purchases of servicer advance investments	Purchases of servicer advance investments	(179,419)		(69,610)		Purchases of servicer advance investments	0		(179,419)
Principal repayments from servicer advance investments	Principal repayments from servicer advance investments	83,124		150,512		Principal repayments from servicer advance investments	45,838		75,478

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	Other investing activities, net	(19,865)		(24,989)		Other investing activities, net	(5,025)		(11,139)
Net cash provided by investing activities	Net cash provided by investing activities	3,514,545		915,516		Net cash provided by investing activities	1,069,844		3,060,401
Cash Flows From Financing Activities:	Cash Flows From Financing Activities:					Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	Proceeds from borrowings on short-term debt	3,981,572		4,009,083		Proceeds from borrowings on short-term debt	6,604,603		3,655,530
Repayments on short-term debt	Repayments on short-term debt	(5,828,972)		(4,435,823)		Repayments on short-term debt	(5,421,494)		(5,322,519)
Proceeds from issuance of asset-backed securities	Proceeds from issuance of asset-backed securities	1,343,845		1,020,136		Proceeds from issuance of asset-backed securities	1,629,218		827,644
Repayments on asset-backed securities issued	Repayments on asset-backed securities issued	(1,037,546)		(720,651)		Repayments on asset-backed securities issued	(1,088,809)		(673,323)

Proceeds from issuance of long-term debt		1,251,850		387,053
Deferred long-term debt issuance costs paid		(9,526)		(7,023)
Proceeds from borrowings on long-term debt						Proceeds from borrowings on long-term debt	487,975		944,282

Repayments on long-term debt	Repayments on long-term debt	(2,640,007)		0		Repayments on long-term debt	(654,893)		(2,128,805)
Net settlements of derivatives	Net settlements of derivatives	(84,336)		0		Net settlements of derivatives	0		(84,336)
Net proceeds from issuance of common stock	Net proceeds from issuance of common stock	5,791		426,970		Net proceeds from issuance of common stock	255		5,707
Net payments on repurchase of common stock		(21,659)		0

Taxes paid on equity award distributions	Taxes paid on equity award distributions	(3,009)		0		Taxes paid on equity award distributions	(943)		(2,934)
Dividends paid	Dividends paid	(67,821)		(94,286)		Dividends paid	(39,548)		(51,810)
Other financing activities, net	Other financing activities, net	4,650		1,400		Other financing activities, net	(2,292)		(3,180)
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
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	1,514,072		(2,833,744)
Net (decrease) increase in cash, cash equivalents and restricted cash						Net (decrease) increase in cash, cash equivalents and restricted cash	(68,179)		282,275
Cash, cash equivalents and restricted cash at beginning of period (1)	Cash, cash equivalents and restricted cash at beginning of period (1)	290,833		205,077		Cash, cash equivalents and restricted cash at beginning of period (1)	544,450		290,833
Cash, cash equivalents and restricted cash at end of period (1)	Cash, cash equivalents and restricted cash at end of period (1)	$	524,278	$	506,146	Cash, cash equivalents and restricted cash at end of period (1)	$	476,271	$	573,108

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


(In Thousands) (Unaudited)	(In Thousands) (Unaudited)	Nine Months Ended September 30,				(In Thousands) (Unaudited)	Six Months Ended June 30,
		2020		2019			2021		2020

Supplemental Cash Flow Information:	Supplemental Cash Flow Information:					Supplemental Cash Flow Information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	364,875	$	319,036	Interest	$	198,364	$	267,787
Taxes	Taxes	218		6,977		Taxes	19,183		209
Supplemental Noncash Information:	Supplemental Noncash Information:					Supplemental Noncash Information:
Real estate securities retained from loan securitizations	Real estate securities retained from loan securitizations	$	46,560	$	7,759	Real estate securities retained from loan securitizations	$	9,374	$	46,560
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

Deconsolidation of multifamily loans held in securitization trusts						Deconsolidation of multifamily loans held in securitization trusts	0		(3,849,779)
Deconsolidation of multifamily ABS						Deconsolidation of multifamily ABS	0		(3,706,789)
Transfers from loans held-for-sale to loans held-for-investment	Transfers from loans held-for-sale to loans held-for-investment	770,754		1,361,015		Transfers from loans held-for-sale to loans held-for-investment	1,998,535		706,775
Transfers from loans held-for-investment to loans held-for-sale						Transfers from loans held-for-investment to loans held-for-sale	44,922		0
Transfers from residential loans to real estate owned						Transfers from residential loans to real estate owned	15,827		9,645
Transfers from long-term debt to short-term debt						Transfers from long-term debt to short-term debt	47,994		0
Right-of-use asset obtained in exchange for operating lease liability						Right-of-use asset obtained in exchange for operating lease liability	1,135		5,362

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

Issuance of common stock for 5 Arches acquisition						Issuance of common stock for 5 Arches acquisition	13,375		3,375

(1) Cash, cash equivalents, and restricted cash at ~~September~~June 30, 2021 includes cash and cash equivalents of $421 million and restricted cash of $55 million, and at December 31, 2020 includes cash and cash equivalents of ~~$451~~$461 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~~$83 million.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on ~~making credit-sensitive~~several distinct areas of housing credit. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We deliver customized housing credit investments ~~in single-family~~to a diverse mix of investors, through our best-in-class securitization platforms; whole-loan distribution activities; and our publicly-traded shares. Our consolidated investment portfolio has evolved to incorporate a diverse mix of residential, business purpose and multifamily ~~mortgages and related assets and engaging in mortgage banking activities.~~investments. 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.~~appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in 3 segments: Residential Lending, Business Purpose Lending, and Third-Party Investments.

Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income primarily consists of the 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”~~“Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the ~~company~~Company at ~~September~~June 30, ~~2020~~2021 and results of operations for all periods presented have been made. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 should not be construed as indicative of the results to be expected for the full year.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 2. Basis of Presentation - (continued)

Principles of Consolidation

In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 ~~where we maintain an ongoing involvement~~ ("Legacy Sequoia"), ~~as well as~~certain entities formed in connection with the securitization of Redwood Choice expanded-prime loans and, beginning in the second quarter of 2021, Redwood Select loans ("~~Sequoia Choice"~~Sequoia"), and entities formed in connection with the securitization of CoreVest single-family rental loans ("CAFL"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we 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.have invested. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for 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~~

~~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 entity 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~~2020 for additional information regarding ~~these~~the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 2. Basis of Presentation - (continued)

In connection with the acquisitions of 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The table below presents the amortization period ~~for each~~and carrying value of ~~these~~our intangible assets, ~~and the activity for the nine months ended September~~net of accumulated amortization at June 30, ~~2020 is summarized in the table below.~~2021.

Table 2.1 – Intangible Assets – Activity


		Carrying Value at December 31, 2019				Additions		Amortization Expense			Carrying Value at September 30, 2020				Weighted Average Amortization Period (in years)				Intangible Assets at Acquisition			Accumulated Amortization at June 30, 2021		Carrying Value at June 30, 2021		Weighted Average Amortization Period (in years)
(Dollars in Thousands)	(Dollars in Thousands)									(Dollars in Thousands)

Borrower network	Borrower network			$	43,952			$	0				$	(4,854)			$	39,098			7		Borrower network	$	45,300	$	(11,055)	$	34,245	7
Broker network	Broker network	15,083				0		(2,715)			12,368				5	Broker network			18,100			(8,447)		9,653		5
Non-compete agreements	Non-compete agreements	8,236				0		(2,375)			5,861				3	Non-compete agreements			9,500			(6,014)		3,486		3
Tradenames	Tradenames	3,472				0		(1,000)			2,472				3	Tradenames			4,000			(2,528)		1,472		3
Developed technology	Developed technology	1,613				0		(675)			938				2	Developed technology			1,800			(1,537)		263		2
Loan administration fees on existing loan assets	Loan administration fees on existing loan assets	433				0		(433)			0				1	Loan administration fees on existing loan assets			2,600			(2,600)		0		1
Total	Total	$	72,789			$	0	$	(12,052)		$	60,737			6	Total			$	81,300		$	(32,181)	$	49,119	6

All of our intangible assets are amortized on a straight-line basis. For each of the six months ended June 30, 2021 and 2020, we recorded intangible asset amortization expense of $8 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year

(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

We recorded total goodwill of $89 million in 2019 as a result of the total consideration exceeding the fair value of the net assets acquired from 5 Arches and CoreVest. The goodwill was attributed to the expected business synergies and expansion into business purpose loan markets, as well as access to the knowledgeable and experienced workforces continuing to provide services to the business. We expect $75 million of this goodwill to be deductible for tax purposes. For reporting purposes, we included the intangible assets and goodwill from these acquisitions within the Business Purpose Lending segment.



(In Thousands)	June 30, 2021
2021 (6 months)	$	7,558
2022	12,800
2023	10,091
2024	7,073
2025 and thereafter	11,597
Total Future Intangible Asset Amortization	$	49,119

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

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

During the first quarter of 2020, as a result of the deterioration in economic conditions caused by the spread of the COVID-19 pandemic (the "pandemic"), and its impact on our business, including a significant decline in the market price of our common stock, we determined that it was more likely than not that the fair value of our Business Purpose Lending reporting unit was lower than its carrying amount, including goodwill. Based on this analysis, we determined that an interim goodwill impairment test should be performed as of March 31, 2020 and prepared updated cash flow projections for the reporting unit, resulting in a reduction in the long-term forecasts of profitability for our Business Purpose Lending reporting unit as compared to the prior year forecasts. Using these projections, we concluded that the fair value of our Business Purpose Lending reporting unit was less than its carrying value, including goodwill. As a result of this evaluation, we recorded a non-cash $89 million goodwill impairment expense through Other expenses on our consolidated statements of income (loss) during the three months ended March 31, 2020. In conjunction with our assessment of goodwill, we also assessed our intangible assets for impairment at March 31, 2020 and determined they were 0t impaired. On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at June 30, 2021.

~~The~~A liability resulting from the contingent consideration arrangement with 5 Arches was initially recorded in 2019 at its acquisition-date fair value ~~of $25 million~~ as part of total consideration for the acquisition of 5 Arches. ~~These contingent earn-out payments were classified as a contingent consideration liability and carried at fair value prior to March 31, 2020.~~ During the ~~three months ended March 31, 2020,~~first quarter of 2021, we ~~made a cash payment of $11 million and granted $3 million~~distributed 806,068 shares of Redwood common stock and paid $1 million in ~~connection with the first anniversary~~cash in full settlement of the ~~purchase date. Additionally, as a result of an amendment to the agreement, we reclassified the contingent liability to a~~remaining deferred ~~liability, as the remaining payments became payable on a set timetable without any remaining contingencies. At September 30, 2020, the carrying value of~~consideration associated with this deferred liability was $14 million and was recorded as a component of Accrued expenses and other liabilities on our consolidated balance sheets. During the three and nine months ended September 30, 2020, we recorded $0.1 million and $0.6 million of contingent consideration expense, respectively, through Other expenses on our consolidated statements of income (loss). See ~~Note 16~~ ~~for additional information on our contingent consideration liability.~~

The following unaudited pro forma financial information presents Net interest income, Non-interest income, and Net income of Redwood, 5 Arches, and CoreVest combined, for the three and nine months ended September 30, 2019, as if the acquisitions occurred as of January 1, 2018. These pro forma amounts have been adjusted to include the amortization of intangible assets and acquisition-related compensation expense for both periods, and to exclude the income statement impacts related to our equity method investment in 5 Arches. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated financial results of operations that would have been reported if the acquisitions had been completed as of January 1, 2018 and should not be taken as indicative of our future consolidated results of operations.

~~Table 2.3 – Unaudited Pro Forma Financial Information~~

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
(In Thousands)
Supplementary pro forma information:
Net interest income $ 45,702 $ 133,446
Non-interest income 38,177 116,649
Net income 46,609 140,790
acquisition.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Included in Note 3 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 is a summary of our significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the ~~company’s~~company's consolidated financial position and results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

1211

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

~~Available-for-Sale Securities~~Other Investments

~~Upon adoption~~Strategic Investments

We have made and may make additional strategic investments in companies through our RWT Horizons venture investment strategy or at a corporate level. These investments can take the form of ~~ASU 2016-13, "Financial Instruments - Credit Losses" in~~equity or debt and often have conversion features. Depending on the first quarter of 2020, we modified our policy for recording impairments on available-for-sale securities. This new guidance requires that credit impairments on our available-for-sale securities be recorded in earnings using an allowance for credit losses, with the allowance limited to the amount by which the security's fair value is less than its amortized cost basis. The allowance for credit losses is calculated using a discounted cash flow approach and is measured as the difference between the beneficial interest’s amortized cost and the estimate of cash flows expected to be collected, discounted at the effective interest rate used to accrete the beneficial interest. Any allowance for credit losses in excessterms of the ~~unrealized losses on the beneficial interests are accounted~~investments, we may account for as a prospective reduction of the effective interest rate. No allowance is recorded for beneficial interests in an unrealized gain position. Favorable changes in the discounted cash flows will result in a reduction in the allowance for credit losses, if any. Any reduction in allowance for credit losses is recorded in earnings. If the allowance for credit losses has been reduced to zero, the remaining favorable changes are reflected as a prospective increase to the effective interest rate. If we intend to sell or it is more likely than not that we will be required to sell the security before it recovers in value, the entire impairment amount will be recognized in earnings with a corresponding adjustment to the security's amortized cost basis.

~~Goodwill~~

Pursuant to our adoption of ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" in the first quarter of 2020, we modified our goodwill impairment testing policy. We first assess qualitative factors to determine whether it is more likely than not thatthese investments under the fair value option or as non-marketable equity securities under the equity method of accounting or the ~~reporting unit is less than its carrying value. If, based on that assessment, we believe it is more likely than~~measurement alternative (to the extent they do not ~~that~~have a “readily determinable fair value,” or are not traded in a verifiable public market or are restricted for sale in the public market by a restricted stock legend or otherwise).

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

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

In ~~August 2018,~~October 2020, the FASB issued ASU ~~2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.~~2020-10, "Codification Improvements." This new guidance ~~amends previous~~updates various codification topics by clarifying or improving disclosure requirements. This new guidance ~~by removing and modifying~~is effective for fiscal years ending after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.

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

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

In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." This new guidance clarifies the interaction of the accounting for equity securities, equity method investments, and certain forward contracts and purchased options. This new guidance is effective for fiscal years beginning after December 15, ~~2019.~~2020. We adopted this ~~new~~ guidance, as required, in the first quarter of ~~2020,~~2021, which did not have a material impact on our consolidated financial ~~statements but impacted certain of our fair value footnote disclosures.~~statements.

In ~~January 2017,~~December 2019, the FASB issued ASU ~~2017-04, "Intangibles - Goodwill and Other~~2019-12, "Income Taxes (Topic ~~350)~~740): Simplifying the ~~Test~~Accounting for ~~Goodwill Impairment.~~Income Taxes." This new guidance simplifies the ~~subsequent measurement of goodwill~~accounting for income taxes by ~~eliminating Step 2 from~~removing certain exceptions to the ~~goodwill impairment test.~~general principles in Topic 740 and by clarifying and amending existing guidance. This new guidance is effective for fiscal years beginning after December 15, ~~2019.~~2020. We adopted this ~~new~~ guidance, as required, in the first quarter of ~~2020,~~2021, which did not have a material impact on our consolidated financial statements.

1312

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses." This new guidance provides a new impairment model that is based on expected losses rather than incurred losses to determine the allowance for credit losses. This new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which clarifies the scope of the amendments in ASU 2016-13. In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which is intended to clarify this guidance. In May 2019, the FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost. In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which is intended to clarify Codification guidance. In February 2020, the FASB issued ASU 2020-02, "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)," and in March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments." These updates amend certain sections of the guidance. We currently have only a small balance of loans receivable that are not carried at fair value and would be subject to this new guidance for allowance for credit losses. Separately, we accounted for our available-for-sale securities under the other-than-temporary impairment ("OTTI") model for debt securities prior to the issuance of this new guidance. This new guidance requires that credit impairments on our available-for-sale securities be recorded in earnings using an allowance for credit losses, with the allowance limited to the amount by which the security's fair value is less than its amortized cost basis. Subsequent reversals in credit loss estimates are recognized in income. We adopted this guidance, as required, in the first quarter of 2020, which did not have a material impact on our consolidated financial statements.

Other Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)." This new guidance simplifies the accounting for convertible debt by reducing the number of accounting models to separately present certain conversion features in equity. This new guidance is effective for fiscal years beginning after December 31, 2021. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This new guidance clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This new guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact the adoption of this standard would have on our consolidated financial statements. Through ~~September~~June 30, ~~2020,~~2021, we have not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or other transactions.

In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." This new guidance clarifies the interaction of the accounting for equity securities, equity method investments, and certain forward contracts and purchased options. This new guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on the consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance. This new guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

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

Balance Sheet Netting

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

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

The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

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


		Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet			Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount			Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in Consolidated Balance Sheet			Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet				Gross Amounts Not Offset in Consolidated Balance Sheet (1)						Net Amount
September 30, 2020 (In Thousands)						Financial Instruments			Cash Collateral (Received) Pledged
June 30, 2021 (In Thousands)															June 30, 2021 (In Thousands)			Gross Amounts of Recognized Assets (Liabilities)				Gross Amounts Offset in Consolidated Balance Sheet				Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet			Financial Instruments			Cash Collateral (Received) Pledged			Net Amount
Assets (2)	Assets (2)																		Assets (2)
Interest rate agreements	Interest rate agreements	$	3,471	$	0		$	3,471	$	(15)	$	(1,240)	$	2,216	Interest rate agreements	$	17,746			$	0			$	17,746			$	(957)		$	(11,238)		$	5,551

TBAs	TBAs	402		0			402		0		(263)		139		TBAs	2,064			0				2,064				(478)			(1,393)			193
Futures	Futures	63		0			63		0		0		63		Futures	304			0			304				(194)			0			110
Total Assets	Total Assets	$	3,936	$	—		$	3,936	$	(15)	$	(1,503)	$	2,418	Total Assets	$	20,114		$	0		$	20,114			$	(1,629)		$	(12,631)		$	5,854

Liabilities (2)	Liabilities (2)														Liabilities (2)
Interest rate agreements	Interest rate agreements	$	(15)	$	0		$	(15)	$	15	$	0	$	0	Interest rate agreements	$	(957)		$	0		$	(957)			$	957		$	0		$	0
TBAs	TBAs	(263)		$	0		(263)		0		263		0		TBAs	(1,367)			0			(1,367)				478			889			0

Futures															Futures	(194)			0			(194)				194			0			0
Loan warehouse debt	Loan warehouse debt	(81,898)		$	0		(81,898)		81,898		0		—		Loan warehouse debt	(1,049,144)			0			(1,049,144)				1,049,144			0			0
Security repurchase agreements	Security repurchase agreements	(75,054)		0			(75,054)		75,054		0		0		Security repurchase agreements	(80,938)			0			(80,938)				80,938			0			0
Total Liabilities	Total Liabilities	$	(157,230)	$	0		$	(157,230)	$	156,967	$	263	$	0	Total Liabilities	$	(1,132,600)		$	0		$	(1,132,600)			$	1,131,711		$	889		$	0

1514

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(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)


	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, 2020 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	19,951	$	0	$	19,951	$	0	$	(7,769)	$	12,182

TBAs	18,260		0		18,260		(13,423)		(4,658)		179

Total Assets	$	38,211	$	0	$	38,211	$	(13,423)	$	(12,427)	$	12,361

Liabilities (2)

TBAs	$	(15,495)	$	0	$	(15,495)	$	13,423	$	1,061	$	(1,011)

Loan warehouse debt	(137,269)		0		(137,269)		137,269		0		0
Security repurchase agreements	(77,775)		0		(77,775)		77,775		0		0
Total Liabilities	$	(230,539)	$	0	$	(230,539)	$	228,467	$	1,061	$	(1,011)

(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.

1615

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Analysis of Consolidated VIEs

At ~~September~~June 30, ~~2020,~~2021, we consolidated Legacy Sequoia, Sequoia, ~~Choice,~~CAFL, Freddie Mac SLST, and 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 Legacy Sequoia, 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 ~~September~~June 30, ~~2020,~~2021, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia, ~~Choice,~~CAFL, Freddie Mac SLST, and Freddie Mac K-Series ~~and CAFL~~ entities was $5$4 million, ~~$211~~$234 million, ~~$418~~$272 million, ~~$27~~$452 million, and ~~$232~~$31 million, respectively.

~~Beginning in 2018, we consolidated~~also consolidate 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 ~~September~~June 30, ~~2020,~~2021, 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 ~~September~~June 30, ~~2020,~~2021, the estimated fair value of our investment in the Servicing Investment entities was ~~$65~~$62 million.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~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
June 30, 2021													June 30, 2021				Legacy Sequoia									Sequoia					CAFL				Freddie Mac SLST			Freddie Mac K-Series				Servicing Investment					Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)			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	Residential loans, held-for-investment										Residential loans, held-for-investment			$	260,875						$	2,222,553						$	0						$	2,098,624		$	0					$	0					$	4,582,052
Business purpose residential loans, held-for-investment		0					0				0					0				2,192,552					0					2,192,552
Business purpose loans, held-for-investment																										Business purpose loans, held-for-investment				0				0			3,263,878				0					0			0			3,263,878
Multifamily loans, held-for-investment	Multifamily loans, held-for-investment	0			0			0			4,408,524			0						0					4,408,524		Multifamily loans, held-for-investment					0				0			0				0					485,157			0			485,157

Other investments	Other investments	0			0			0			0			0				184,802					184,802			Other investments				0				0			0				0					0			202,369			202,369
Cash and cash equivalents	Cash and cash equivalents	0			0			0			0			0				9,015					9,015			Cash and cash equivalents				0				0			0				0					0			12,459			12,459
Restricted cash	Restricted cash	143			27			0			0			0				21,766					21,936			Restricted cash				148				0			0				0					0			19,028			19,176
Accrued interest receivable	Accrued interest receivable	655			9,824			7,313			13,539			9,572				4,869					45,772			Accrued interest receivable				258				7,559			13,102				6,325					1,326			1,606			30,176
Other assets	Other assets	460			0			445			0			1,795				0					2,700			Other assets				659				0			12,596				1,636					0			6,277			21,168
Total Assets	Total Assets	$	409,148		$	2,301,314		$	2,374,973		$	4,422,063		$	2,203,919			$	220,452				$	11,931,869		Total Assets				$	261,940			$	2,230,112		$	3,289,576			$	2,106,585				$	486,483		$	241,739		$	8,616,435
Short-term debt	Short-term debt	$	0		$	0		$	0		$	0		$	0			$	152,554				$	152,554		Short-term debt				$	0			$	0		$	0			$	0				$	0		$	163,629		$	163,629
Accrued interest payable	Accrued interest payable	395			7,732			5,374			12,887			7,485				187					34,060			Accrued interest payable				124				5,521			10,183				4,490					1,200			94			21,612
Accrued expenses and other liabilities	Accrued expenses and other liabilities	0			27			0			0			0				14,956					14,983			Accrued expenses and other liabilities				0				0			0				0					0			16,360			16,360
Asset-backed securities issued	Asset-backed securities issued	402,465			2,037,198			1,918,322			4,156,239			2,001,251				0					10,515,475			Asset-backed securities issued				258,211				1,990,548			3,007,596				1,650,087					454,324			0			7,360,766
Total Liabilities	Total Liabilities	$	402,860		$	2,044,957		$	1,923,696		$	4,169,126		$	2,008,736			$	167,697				$	10,717,072		Total Liabilities				$	258,335			$	1,996,069		$	3,017,779			$	1,654,577				$	455,524		$	180,083		$	7,562,367

Number of VIEs	Number of VIEs	20			9			2			5			10				3					49			Number of VIEs				20				12			14				3					1			3			53

1816

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2020	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	285,935	$	1,565,322	$	0	$	2,221,153	$	0	$	0	$	4,072,410
Business purpose loans, held-for-investment	0		0		3,249,194		0		0		0		3,249,194
Multifamily loans, held-for-investment	0		0		0		0		492,221		0		492,221

Other investments	0		0		0		0		0		251,773		251,773
Cash and cash equivalents	0		0		0		0		0		11,579		11,579
Restricted cash	148		0		0		0		0		23,220		23,368
Accrued interest receivable	305		6,802		13,055		6,754		1,337		2,334		30,587
Other assets	638		0		2,930		646		0		5,723		9,937
Total Assets	$	287,026	$	1,572,124	$	3,265,179	$	2,228,553	$	493,558	$	294,629	$	8,141,069
Short-term debt	$	0	$	0	$	0	$	0	$	0	$	208,375	$	208,375
Accrued interest payable	141		4,697		10,278		4,846		1,177		135		21,274
Accrued expenses and other liabilities	0		50		0		0		0		18,353		18,403
Asset-backed securities issued	282,326		1,347,357		3,013,093		1,793,620		463,966		0		6,900,362
Total Liabilities	$	282,467	$	1,352,104	$	3,023,371	$	1,798,466	$	465,143	$	226,863	$	7,148,414

Number of VIEs	20		10		14		2		1		3		50

The following table presents income (loss) from these VIEs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

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																									Three Months Ended June 30, 2021
		Legacy Sequoia				Sequoia Choice		Freddie Mac SLST				Freddie Mac K-Series				CAFL		Servicing Investment				Total Consolidated VIEs					Legacy Sequoia				Sequoia				CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	4,295					$	27,555			$	11,830					$	36,829				$	0			$	3,922			$	84,431		Interest income	$	1,169	$	14,492	$	54,849	$	19,506	$	4,860	$	4,041	$	98,917
Interest expense	Interest expense	(3,452)				(23,576)		(8,709)				(35,328)				0		(2,891)				(73,956)		Interest expense			(755)				(11,374)				(43,201)		(13,927)		(4,478)		(1,110)		(74,845)
Net interest income	Net interest income	843				3,979		3,121				1,501				0		1,031				10,475		Net interest income			414				3,118				11,648		5,579		382		2,931		24,072
Non-interest income	Non-interest income																							Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(407)				2,722		17,300				7,445				0		963				28,023		Investment fair value changes, net			(216)				4,906				3,697		36,316		1,855		(2,320)		44,238

Total non-interest income, net	Total non-interest income, net	(407)				2,722		17,300				7,445				0		963				28,023		Total non-interest income, net			(216)				4,906				3,697		36,316		1,855		(2,320)		44,238
General and administrative expenses	General and administrative expenses	0				0		0				0				0		(16)				(16)		General and administrative expenses			0				0				0		0		0		(52)		(52)
Other expenses	Other expenses	0				0		0				0				0		(395)				(395)		Other expenses			0				0				0		0		0		(112)		(112)

Income from Consolidated VIEs	Income from Consolidated VIEs	$	436			$	6,701	$	20,421			$	8,946			$	0	$	1,583			$	38,087	Income from Consolidated VIEs			$	198			$	8,024			$	15,345	$	41,895	$	2,237	$	447	$	68,146

1917

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)


		Nine Months Ended September 30, 2019																									Six Months Ended June 30, 2021
		Legacy Sequoia				Sequoia Choice		Freddie Mac SLST				Freddie Mac K-Series				CAFL		Servicing Investment				Total Consolidated VIEs					Legacy Sequoia				Sequoia				CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	13,924					$	80,045			$	35,221					$	94,134				$	0			$	10,847			$	234,171		Interest income	$	2,517	$	29,975	$	103,722	$	39,665	$	9,646	$	8,263	$	193,788
Interest expense	Interest expense	(11,548)				(68,823)		(26,013)				(90,089)				0		(9,905)				(206,378)		Interest expense			(1,630)				(23,480)				(81,054)		(28,395)		(8,834)		(2,396)		(145,789)
Net interest income	Net interest income	2,376				11,222		9,208				4,045				0		942				27,793		Net interest income			887				6,495				22,668		11,270		812		5,867		47,999
Non-interest income	Non-interest income																							Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(904)				8,866		31,702				13,810				0		3,462				56,936		Investment fair value changes, net			(915)				9,804				3,411		40,433		10,776		(3,566)		59,943

Total non-interest income, net	Total non-interest income, net	(904)				8,866		31,702				13,810				0		3,462				56,936		Total non-interest income, net			(915)				9,804				3,411		40,433		10,776		(3,566)		59,943
General and administrative expenses	General and administrative expenses	0				0		0				0				0		(87)				(87)		General and administrative expenses			0				0				0		0		0		(90)		(90)
Other expenses	Other expenses	0				0		0				0				0		(864)				(864)		Other expenses			0				0				0		0		0		(442)		(442)

Income from Consolidated VIEs		$	1,472			$	20,088	$	40,910			$	17,855			$	0	$	3,453			$	83,778
Income (Loss) from Consolidated VIEs																								Income (Loss) from Consolidated VIEs			$	(28)			$	16,299			$	26,079	$	51,703	$	11,588	$	1,769	$	107,410


	Three Months Ended June 30, 2020
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,685	$	22,564	$	32,978	$	21,187	$	4,870	$	4,540	$	88,824
Interest expense	(1,518)		(19,117)		(24,446)		(15,846)		(4,380)		(1,797)		(67,104)
Net interest income	1,167		3,447		8,532		5,341		490		2,743		21,720
Non-interest income

Investment fair value changes, net	(230)		39,752		16,313		26,866		1,599		3,291		87,591


Total non-interest income, net	(230)		39,752		16,313		26,866		1,599		3,291		87,591
General and administrative expenses	0		0		0		0		0		(712)		(712)
Other expenses	0		0		0		0		0		(1,065)		(1,065)

Income from Consolidated VIEs	$	937	$	43,199	$	24,845	$	32,207	$	2,089	$	4,257	$	107,534


	Six Months Ended June 30, 2020
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	5,879	$	47,647	$	62,988	$	43,173	$	45,042	$	8,623	$	213,352
Interest expense	(4,040)		(40,627)		(46,385)		(32,022)		(42,728)		(3,374)		(169,176)
Net interest income	1,839		7,020		16,603		11,151		2,314		5,249		44,176
Non-interest income

Investment fair value changes, net	(621)		(29,916)		(51,533)		(115,295)		(84,910)		(8,593)		(290,868)


Total non-interest income, net	(621)		(29,916)		(51,533)		(115,295)		(84,910)		(8,593)		(290,868)
General and administrative expenses	0		0		0		0		0		(743)		(743)
Other expenses	0		0		0		0		0		817		817

Income (Loss) from Consolidated VIEs	$	1,218	$	(22,896)	$	(34,930)	$	(104,144)	$	(82,596)	$	(3,270)	$	(246,618)

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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

During the ~~third quarter~~three months ended June 30, 2021, we called one of our consolidated CAFL entities and repaid the associated ABS issued. In association with this call, we transferred $45 million (unpaid principal balance) of loans from held-for-investment to held-for-sale.

During 2020, we re-securitized subordinate securities we owned in our consolidated Freddie Mac SLST securitization trusts, through the transfer of 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 5152 Sequoia securitization entities sponsored by us that are still outstanding as of ~~September~~June 30, ~~2020,~~2021, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.

During the three months ended June 30, 2021, we called 3 of our unconsolidated Sequoia entities, and purchased $83 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $7 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the six months ended June 30, 2021, we called 4 of our unconsolidated Sequoia entities, and purchased $101 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $9 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At June 30, 2021, we held $97 million of loans for sale at fair value that were acquired following the calls.

The following table presents information related to securitization transactions that occurred during the three and six months ended June 30, 2021 and 2020.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Principal balance of loans transferred	$	355,924	$	0	$	1,231,803	$	1,573,703
Trading securities retained, at fair value	1,225		0		7,774		43,362
AFS securities retained, at fair value	522		0		1,600		3,198

2019

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(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 September 30, 2020 and 2019.~~

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

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~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 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 September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
Proceeds from new transfers	Proceeds from new transfers	$	0	$	376,126	$	1,610,761	$	1,138,778	Proceeds from new transfers	$	361,673	$	0	$	1,266,063	$	1,610,761
MSR fees received	MSR fees received	2,280		2,919		7,445		9,084		MSR fees received	1,336		2,475		2,943		5,165
Funding of compensating interest, net	Funding of compensating interest, net	4		(76)		(293)		(213)		Funding of compensating interest, net	(70)		(205)		(170)		(297)
Cash flows received on retained securities	Cash flows received on retained securities	5,873		6,603		19,242		20,892		Cash flows received on retained securities	16,764		6,788		25,393		13,369

The following table presents the key weighted-average assumptions used to ~~measure MSRs and~~value securities retained at the date of securitization for securitizations completed during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

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

Three Months Ended June 30, 2021

Three Months Ended June 30, 2020

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

Prepayment rates

8 %

N/A

Discount rates

N/A

Discount rates

15 %

7 %

N/A

Credit loss assumptions

N/A

0.20

Credit loss assumptions

0.25 %

N/A


		Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019					Six Months Ended June 30, 2021			Six Months Ended June 30, 2020
At Date of Securitization	At Date of Securitization	Senior IO Securities		Subordinate Securities		Senior IO Securities		Subordinate Securities		At Date of Securitization	Senior IO Securities		Subordinate Securities	Senior IO Securities		Subordinate Securities
Prepayment rates	Prepayment rates	41	%	13	%	25	%	15	%	Prepayment rates	11	%	11 %	41	%	13	%
Discount rates	Discount rates	16	%	6	%	14	%	7	%	Discount rates	15 %		6 %	16	%	6	%
Credit loss assumptions	Credit loss assumptions	0.21	%	0.22	%	0.20	%	0.20	%	Credit loss assumptions	0.23 %		0.23 %	0.21	%	0.22	%

2120

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents additional information at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
On-balance sheet assets, at fair value:	On-balance sheet assets, at fair value:					On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	Interest-only, senior and subordinate securities, classified as trading	$	19,878	$	88,425	Interest-only, senior and subordinate securities, classified as trading	$	20,527	$	20,982
Subordinate securities, classified as AFS	Subordinate securities, classified as AFS	124,132		140,649		Subordinate securities, classified as AFS	140,321		136,475
Mortgage servicing rights	Mortgage servicing rights	14,240		40,254		Mortgage servicing rights	6,496		8,413
Maximum loss exposure (1)	Maximum loss exposure (1)	$	158,250	$	269,328	Maximum loss exposure (1)	$	167,344	$	165,870
Assets transferred:	Assets transferred:					Assets transferred:
Principal balance of loans outstanding	Principal balance of loans outstanding	$	8,571,916	$	10,299,442	Principal balance of loans outstanding	$	6,326,188	$	7,728,432
Principal balance of loans 30+ days delinquent	Principal balance of loans 30+ days delinquent	200,910		41,809		Principal balance of loans 30+ days delinquent	58,362		138,029

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

The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 4.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood


September 30, 2020		MSRs				Senior Securities (1)				Subordinate Securities
June 30, 2021									June 30, 2021				MSRs					Senior Securities (1)					Subordinate Securities
(Dollars in Thousands)	(Dollars in Thousands)				MSRs				Senior Securities (1)						Subordinate Securities					(Dollars in Thousands)
Fair value at September 30, 2020
Fair value at June 30, 2021														Fair value at June 30, 2021						$	6,496				$	20,527				$	140,321
Expected life (in years) (2)	Expected life (in years) (2)	3								3						10			Expected life (in years) (2)				2					4				8
Prepayment speed assumption (annual CPR) (2)	Prepayment speed assumption (annual CPR) (2)	26		%		30		%		27		%	Prepayment speed assumption (annual CPR) (2)				38 %					25		%			33 %
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% adverse change	10% adverse change	$	1,105			$	1,622			$	1,075		10% adverse change				$	613				$	1,374				$	238
25% adverse change	25% adverse change	2,678				3,675				3,735			25% adverse change				1,422					3,120					440
Discount rate assumption (2)	Discount rate assumption (2)	12		%		17		%		6		%	Discount rate assumption (2)				12 %					18		%			3.5		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
100 basis point increase	100 basis point increase	$	383			$	327			$	10,219		100 basis point increase				$	139				$	462				$	10,058
200 basis point increase	200 basis point increase	746				638				19,348			200 basis point increase				271					900					19,174
Credit loss assumption (2)	Credit loss assumption (2)	N/A				0.38		%		0.38		%	Credit loss assumption (2)				N/A					0.39		%			0.39		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% higher losses	10% higher losses	N/A				$	0			$	2,274		10% higher losses				N/A					$	0				$	2,671
25% higher losses	25% higher losses	N/A				0				5,500			25% higher losses				N/A					0					6,384

2221

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2019		MSRs				Senior Securities (1)				Subordinate Securities
December 31, 2020									December 31, 2020				MSRs					Senior Securities (1)					Subordinate Securities
(Dollars in Thousands)	(Dollars in Thousands)				MSRs				Senior Securities (1)						Subordinate Securities					(Dollars in Thousands)
Fair value at December 31, 2019
Fair value at December 31, 2020														Fair value at December 31, 2020						$	8,413				$	17,333				$	140,124
Expected life (in years) (2)	Expected life (in years) (2)	6								6						14			Expected life (in years) (2)				2					3				8
Prepayment speed assumption (annual CPR) (2)	Prepayment speed assumption (annual CPR) (2)	11		%		14		%		16		%	Prepayment speed assumption (annual CPR) (2)				37		%			31		%			33		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% adverse change	10% adverse change	$	1,643			$	1,908			$	205		10% adverse change				$	906				$	1,557				$	452
25% adverse change	25% adverse change	3,913				5,086				1,434			25% adverse change				2,058					3,754					2,298
Discount rate assumption (2)	Discount rate assumption (2)	11		%		12		%		5		%	Discount rate assumption (2)				12		%			21		%			5		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
100 basis point increase	100 basis point increase	$	1,447			$	1,079			$	18,127		100 basis point increase				$	196				$	337				$	9,769
200 basis point increase	200 basis point increase	2,795				2,482				33,630			200 basis point increase				380					659					18,650
Credit loss assumption (2)	Credit loss assumption (2)	N/A				0.21		%		0.21		%	Credit loss assumption (2)				N/A					0.41		%			0.41		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% higher losses	10% higher losses	N/A				$	0			$	1,804		10% higher losses				N/A					$	0				$	2,409
25% higher losses	25% higher losses	N/A				0				4,520			25% higher losses				N/A					0					5,915

(1)Senior securities included ~~$16~~$21 million and ~~$49~~$17 million of interest-only securities at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

(2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.

Analysis of Unconsolidated Third-Party VIEs

Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Mortgage-Backed Securities	Mortgage-Backed Securities					Mortgage-Backed Securities
Senior	Senior	$	11,865	$	127,094	Senior	$	4,740	$	11,131
Mezzanine	Mezzanine	2,016		508,195		Mezzanine	0		2,014
Subordinate	Subordinate	193,445		235,510		Subordinate	189,298		173,523
Total Mortgage-Backed Securities	Total Mortgage-Backed Securities	207,326		870,799		Total Mortgage-Backed Securities	194,038		186,668
Excess MSR	Excess MSR	15,205		16,216		Excess MSR	12,170		14,133
Total Investments in Third-Party Sponsored VIEs	Total Investments in Third-Party Sponsored VIEs	$	222,531	$	887,015	Total Investments in Third-Party Sponsored VIEs	$	206,208	$	200,801

We determined that we are not the primary beneficiary of these third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.

Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.

2322

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 5. Fair Value of Financial Instruments

For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.

In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities


		September 30, 2020					December 31, 2019					June 30, 2021				December 31, 2020
		Carrying Value		Fair Value			Carrying Value		Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)	(In Thousands)					(In Thousands)
Assets	Assets														Assets
Residential loans, held-for-sale at fair value	Residential loans, held-for-sale at fair value	$	105,091	$	105,091		$	536,385	$	536,509	Residential loans, held-for-sale at fair value	$	1,160,513	$	1,160,513	$	176,604	$	176,604
Residential loans, held-for-investment	Residential loans, held-for-investment	4,389,808		4,389,808			7,178,465		7,178,465		Residential loans, held-for-investment	4,582,052		4,582,052		4,072,410		4,072,410
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
Business purpose loans, held-for-sale											Business purpose loans, held-for-sale	418,442		418,442		245,394		245,394
Business purpose loans, held-for-investment											Business purpose loans, held-for-investment	3,990,447		3,990,447		3,890,959		3,890,959
Multifamily loans	Multifamily loans	491,415		491,415			4,408,524		4,408,524		Multifamily loans	485,157		485,157		492,221		492,221
Real estate securities	Real estate securities	351,335		351,335			1,099,874		1,099,874		Real estate securities	354,886		354,886		344,125		344,125

Servicer advance investments (1)	Servicer advance investments (1)	258,621		258,621			169,204		169,204		Servicer advance investments (1)	184,551		184,551		231,489		231,489
MSRs (1)	MSRs (1)	14,878		14,878			42,224		42,224		MSRs (1)	8,721		8,721		8,815		8,815

Excess MSRs (1)	Excess MSRs (1)	35,070		35,070			31,814		31,814		Excess MSRs (1)	29,988		29,988		34,418		34,418
Shared home appreciation options (1)	Shared home appreciation options (1)	41,758		41,758			45,085		45,085		Shared home appreciation options (1)	44,319		44,319		42,440		42,440
Other financial instruments (2)											Other financial instruments (2)	28,556		28,556		10,203		10,203
Cash and cash equivalents	Cash and cash equivalents	450,684		450,684			196,966		196,966		Cash and cash equivalents	421,223		421,223		461,260		461,260
Restricted cash	Restricted cash	73,594		73,594			93,867		93,867		Restricted cash	55,048		55,048		83,190		83,190

Derivative assets	Derivative assets	14,709		14,709			35,701		35,701		Derivative assets	34,305		34,305		53,238		53,238
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
REO (3)											REO (3)	15,489		17,718		8,413		9,229
Margin receivable (3)											Margin receivable (3)	10,269		10,269		4,758		4,758
FHLBC stock (3)											FHLBC stock (3)	10		10		5,000		5,000
Pledged collateral (3)											Pledged collateral (3)	0		0		1,177		1,177
Liabilities	Liabilities										Liabilities
Short-term debt	Short-term debt	$	482,761	$	482,761		$	2,329,145	$	2,329,145	Short-term debt	$	1,484,999	$	1,484,999	$	522,609	$	522,609
Margin payable (4)											Margin payable (4)	19,503		19,503		0		0
Guarantee obligation (4)											Guarantee obligation (4)	8,446		5,932		10,039		7,843

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	Derivative liabilities	1,612		1,612			163,424		163,424		Derivative liabilities	3,240		3,240		16,072		16,072
ABS issued, net	ABS issued, net										ABS issued, net
Fair value	Fair value	6,969,376		6,969,376			10,515,475		10,515,475		Fair value	7,360,766		7,360,766		6,900,362		6,900,362
Amortized cost	Amortized cost	203,022		207,812			0		0		Amortized cost	176,231		180,080		200,299		204,892
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

Other long-term debt, net (5)											Other long-term debt, net (5)	833,272		834,214		774,726		783,570
Convertible notes, net (5)											Convertible notes, net (5)	512,339		531,473		511,085		499,865
Trust preferred securities and subordinated notes, net (5)											Trust preferred securities and subordinated notes, net (5)	138,697		87,188		138,674		80,910

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

(2)Includes equity, debt, and loan investments included in Other investments on our consolidated balance sheets.

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

~~(3)~~(4)These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.

(5)These liabilities are included in Long-term debt, net on our consolidated balance sheets.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, we elected the fair value option for ~~$18~~$4 million and ~~$96~~$26 million of securities, respectively, ~~$172 million~~$3.48 billion and ~~$2.86~~$6.58 billion of residential loans (principal balance), respectively, ~~$260~~and $527 million and ~~$956~~$914 million of business purpose ~~residential~~ loans (principal balance), ~~respectively, 0 and $179~~respectively. Additionally, during the three months ended June 30, 2021, we elected the fair value option for $2 million of ~~servicer advance investments, respectively, 0~~MSRs and ~~$11~~$2 million of ~~excess MSRs, respectively, and 0 and $4 million of shared home appreciation options, respectively.~~other financial instruments. We anticipate electing the fair value option for all future purchases of residential and business purpose ~~residential~~ loans that we intend to sell to third parties or transfer to securitizations, for business purpose bridge loans we hold for investment, as well as for MSRs retained from sales of residential loans, and for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.

2524

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

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


September 30, 2020		Carrying Value			Fair Value Measurements Using
June 30, 2021											June 30, 2021			Carrying Value			Fair Value Measurements Using
(In Thousands)	(In Thousands)			Carrying Value			Level 1			Level 2			Level 3		(In Thousands)					Level 1			Level 2			Level 3
Assets	Assets												Assets
Residential loans	Residential loans	$	4,494,899		$	0		$	0		$	4,494,899	Residential loans		$	5,742,565		$	0		$	0		$	5,742,565
Business purpose residential loans		3,956,101			0			0			3,956,101
Business purpose loans													Business purpose loans		4,408,889			0			0			4,408,889
Multifamily loans	Multifamily loans	491,415			0			0			491,415		Multifamily loans		485,157			0			0			485,157
Real estate securities	Real estate securities	351,335			0			0			351,335		Real estate securities		354,886			0			0			354,886

Servicer advance investments	Servicer advance investments	258,621			0			0			258,621		Servicer advance investments		184,551			0			0			184,551
MSRs	MSRs	14,878			0			0			14,878		MSRs		8,721			0			0			8,721
Excess MSRs	Excess MSRs	35,070			0			0			35,070		Excess MSRs		29,988			0			0			29,988
Shared home appreciation options	Shared home appreciation options	41,758			0			0			41,758		Shared home appreciation options		44,319			0			0			44,319
Derivative assets	Derivative assets	14,709			464			3,472			10,773		Derivative assets		34,305			2,368			17,746			14,191
Pledged collateral		8,172			8,172			0			0
FHLBC stock		5,000			0			5,000			0
Guarantee asset		579			0			0			579

Liabilities	Liabilities												Liabilities

Derivative liabilities	Derivative liabilities	$	1,612		$	263		$	15		$	1,334	Derivative liabilities		$	3,240		$	1,561		$	957		$	722

ABS issued	ABS issued	6,969,376			0			0			6,969,376		ABS issued		7,360,766			0			0			7,360,766


December 31, 2020	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	4,249,014	$	0	$	0	$	4,249,014
Business purpose loans	4,136,353		0		0		4,136,353
Multifamily loans	492,221		0		0		492,221
Real estate securities	344,125		0		0		344,125
Servicer advance investments	231,489		0		0		231,489
MSRs	8,815		0		0		8,815
Excess MSRs	34,418		0		0		34,418
Shared home appreciation options	42,440		0		0		42,440
Derivative assets	53,238		18,260		19,951		15,027
Pledged collateral	1,177		1,177		0		0
FHLBC stock	5,000		0		5,000		0

Liabilities
Derivative liabilities	$	16,072	$	15,495	$	0	$	577
ABS issued	6,900,362		0		0		6,900,362

2625

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

December 31, 2019 Carrying
Value Fair Value Measurements Using
(In Thousands) Level 1 Level 2 Level 3
Assets
Residential loans $ 7,714,745 $ 0 $ 0 $ 7,714,745
Business purpose residential loans 3,506,743 0 0 3,506,743
Multifamily loans 4,408,524 0 0 4,408,524
Real estate securities 1,099,874 0 0 1,099,874
Servicer advance investments 169,204 0 0 169,204
MSRs 42,224 0 0 42,224
Excess MSRs 31,814 0 0 31,814
Shared home appreciation options 45,085 0 0 45,085
Derivative assets 35,701 6,531 19,020 10,150
Pledged collateral 32,945 32,945 0 0
FHLBC stock 43,393 0 43,393 0
Guarantee asset 1,686 0 0 1,686
Liabilities
Contingent consideration $ 28,484 $ 0 $ 0 $ 28,484
Derivative liabilities 163,424 13,368 148,766 1,290
ABS issued 10,515,475 0 0 10,515,475

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

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

Assets
Residential Loans Business Purpose
Residential Loans Multifamily Loans Trading Securities AFS
Securities Servicer Advance Investments MSRs Excess MSRs Shared Home Appreciation Options
(In Thousands)
Beginning balance -
December 31, 2019 $ 7,714,745 $ 3,506,743 $ 4,408,524 $ 860,540 $ 239,334 $ 169,204 $ 42,224 $ 31,814 $ 45,085
Acquisitions 2,927,697 0 0 96,318 56,664 179,419 0 10,906 3,517
Originations 0 982,315 0 0 0 0 0 0 0
Sales (4,783,682) (53,434) 0 (579,466) (55,193) 0 0 0 0
Principal paydowns (1,210,117) (489,243) (5,830) (8,502) (10,345) (83,124) 0 0 (2,558)
Deconsolidations 0 0 (3,849,779) 0 0 0 0 0 0
Gains (losses) in net income (loss), net (152,145) 16,246 (61,500) (224,728) (23,287) (6,878) (27,346) (7,650) (4,286)
Other settlements, net (1)
(1,599) (6,526) 0 0 0 0 0 0 0
Ending balance -
September 30, 2020 $ 4,494,899 $ 3,956,101 $ 491,415 $ 144,162 $ 207,173 $ 258,621 $ 14,878 $ 35,070 $ 41,758

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

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


	Assets
	Residential Loans		Business Purpose Loans		Multifamily Loans		Trading Securities		AFS Securities		Servicer Advance Investments		MSRs		Excess MSRs		Shared Home Appreciation Options
(In Thousands)
Beginning balance - December 31, 2020	$	4,249,014	$	4,136,353	$	492,221	$	125,667	$	218,458	$	231,489	$	8,815	$	34,418	$	42,440

Acquisitions	6,684,292		0		0		26,367		1,600		0		2,283		0		0
Originations	0		913,704		0		0		0		0		0		0		0
Sales	(4,531,811)		(9,231)		0		(31,949)		(4,785)		0		0		0		0
Principal paydowns	(727,627)		(599,889)		(3,806)		(807)		(28,979)		(45,838)		0		0		(5,516)

Gains (losses) in net income (loss), net	70,184		(17,835)		(3,258)		23,147		14,172		(1,100)		(2,251)		(4,430)		7,395
Unrealized losses in OCI, net	0		0		0		0		11,995		0		0		0		0
Other settlements, net (1)	(1,487)		(14,213)		0		0		0		0		(126)		0		0
Ending balance - June 30, 2021	$	5,742,565	$	4,408,889	$	485,157	$	142,425	$	212,461	$	184,551	$	8,721	$	29,988	$	44,319

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


		Assets	Liabilities					Liabilities
									Guarantee Asset		Derivatives (2)				Contingent Consideration					ABS Issued								Derivatives (2)			ABS Issued
(In Thousands)	(In Thousands)			Guarantee Asset	Derivatives (2)	Contingent Consideration	ABS Issued															Derivatives (2)	ABS Issued
Beginning balance - December 31, 2019									$	1,686			$	8,860			$	28,484						$	10,515,475
Beginning balance - December 31, 2020																			Beginning balance - December 31, 2020							$	14,450		$	6,900,362

Acquisitions	Acquisitions								0		0				0					1,137,656		Acquisitions						0			1,629,218

Principal paydowns	Principal paydowns								0		0				(13,353)					(1,035,359)		Principal paydowns						0			(1,055,541)
Deconsolidations									0		0				0					(3,706,789)

Gains (losses) in net income (loss), net	Gains (losses) in net income (loss), net								(1,107)		34,620				(446)					58,393		Gains (losses) in net income (loss), net						(197)			(113,273)

Other settlements, net (1)	Other settlements, net (1)								0		(34,041)				(14,685)					0		Other settlements, net (1)						(784)			0
Ending balance - September 30, 2020									$	579	$	9,439			$	0				$	6,969,376
Ending balance - June 30, 2021																			Ending balance - June 30, 2021							$	13,469		$	7,360,766

(1) Other settlements, net for residential and business purpose ~~residential~~ loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans. Other settlements, net for contingent consideration reflects the reclassification from a contingent liability to a deferred liability during the period due to an amendment in the underlying agreement. See ~~Note 16~~ ~~for further discussion.~~

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

2826

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

The following table presents the portion of gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 Included in Net Income


		Included in Net Income									Included in Net Income
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
Assets	Assets									Assets
Residential loans at Redwood	Residential loans at Redwood	$	(107)	$	17,771	$	(865)	$	82,408	Residential loans at Redwood	$	14,130	$	(359)	$	10,481	$	(746)
Business purpose residential loans		21,155		584		17,901		4,069
Business purpose loans										Business purpose loans	28,404		31,187		40,003		(21,026)
Net investments in consolidated Sequoia entities (1)	Net investments in consolidated Sequoia entities (1)	7,700		1,860		(22,802)		7,051		Net investments in consolidated Sequoia entities (1)	4,693		39,558		8,893		(30,502)
Net investments in consolidated Freddie Mac SLST entities (1)	Net investments in consolidated Freddie Mac SLST entities (1)	82,209		17,300		(33,087)		31,702		Net investments in consolidated Freddie Mac SLST entities (1)	36,137		26,867		40,225		(115,295)
Net investments in consolidated Freddie Mac K-Series entities (1)		2,165		7,445		(11,014)		13,810
Net investments in consolidated Freddie Mac K-Series entity (1)										Net investments in consolidated Freddie Mac K-Series entity (1)	1,855		1,599		10,776		(13,180)
Net investments in consolidated CAFL entities (1)	Net investments in consolidated CAFL entities (1)	9,673		0		(41,048)		0		Net investments in consolidated CAFL entities (1)	2,908		17,125		2,556		(50,721)
Trading securities	Trading securities	(3,549)		11,206		(80,358)		33,196		Trading securities	1,772		30,647		2,262		(79,633)

Servicer advance investments	Servicer advance investments	25		1,585		(6,172)		3,025		Servicer advance investments	(940)		(136)		(1,100)		(6,198)
MSRs	MSRs	(2,376)		(5,892)		(16,798)		(16,971)		MSRs	(330)		(1,591)		273		(16,507)
Excess MSRs	Excess MSRs	(1,127)		(1,634)		(7,650)		(2,137)		Excess MSRs	(2,477)		2,971		(4,430)		(6,523)
Shared home appreciation options	Shared home appreciation options	2,384		29		(4,286)		29		Shared home appreciation options	2,080		884		7,395		(6,670)
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	10,791		4,678		10,773		4,757		Loan purchase and interest rate lock commitments	14,550		357		14,171		357

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

Liabilities	Liabilities									Liabilities
Loan purchase commitments	Loan purchase commitments	$	420	$	(1,668)	$	(1,334)	$	(1,669)	Loan purchase commitments	$	(696)	$	2,137	$	(724)	$	(1,634)

(1) Represents the portion of net gains or losses included in our consolidated statements of income (loss) related to loans and the associated ABS issued at our consolidated securitization entities held at ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, which netted together represent the change in value of our investments at the consolidated ~~VIEs.~~VIEs, excluding REO.

The following table presents information on assets recorded at fair value on a non-recurring basis at ~~September~~June 30, ~~2020.~~2021. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance sheets at ~~September~~June 30, ~~2020.~~2021.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at ~~September~~June 30, ~~2020~~2021

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)

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~


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


REO	$	1,233	$	0	$	0	$	1,233	$	(3)	$	(7)

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

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

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

Table 5.6 – Market Valuation Gains and Losses, Net


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net									Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	Residential loans held-for-sale, at fair value	$	(478)	$	(6,623)	$	(15,972)	$	289	Residential loans held-for-sale, at fair value	$	24,988	$	(2,014)	$	48,100	$	(15,494)
Residential loan purchase and forward sale commitments	Residential loan purchase and forward sale commitments	13,067		12,943		35,123		41,142		Residential loan purchase and forward sale commitments	51,919		621		(466)		22,056
Single-family rental loans held-for-sale, at fair value	Single-family rental loans held-for-sale, at fair value	43,191		1,283		55,868		4,200		Single-family rental loans held-for-sale, at fair value	25,222		1,210		35,470		12,677
Single-family rental loan purchase and interest rate lock commitments	Single-family rental loan purchase and interest rate lock commitments	0		564		341		1,273		Single-family rental loan purchase and interest rate lock commitments	744		0		744		341
Residential bridge loans		938		1,010		(4,256)		2,108
Bridge loans										Bridge loans	2,225		(1,260)		3,269		(5,194)
Trading securities (1)										Trading securities (1)	(1,095)		0		(374)		0
Risk management derivatives, net	Risk management derivatives, net	(99)		(2,972)		(52,931)		(15,387)		Risk management derivatives, net	(58,244)		0		34,578		(52,832)
Total mortgage banking activities, net (1)		$	56,619	$	6,205	$	18,173	$	33,625
Total mortgage banking activities, net (2)										Total mortgage banking activities, net (2)	$	45,759	$	(1,443)	$	121,321	$	(38,446)
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net									Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood		$	218	$	7,667	$	(93,314)	$	71,323
Residential loans at Redwood										Residential loans at Redwood	$	1,290	$	104	$	1,607	$	(93,532)
Single-family rental loans held-for-investment	Single-family rental loans held-for-investment	0		22		(20,806)		22		Single-family rental loans held-for-investment	0		2,222		0		(20,806)
Residential bridge loans held-for-investment		6,812		(742)		(10,016)		(1,363)
Bridge loans held-for-investment										Bridge loans held-for-investment	(62)		21,774		3,242		(16,828)
Trading securities	Trading securities	(3,600)		15,275		(224,679)		55,577		Trading securities	2,893		42,246		23,521		(221,079)
Servicer advance investments	Servicer advance investments	26		1,585		(6,172)		3,025		Servicer advance investments	(940)		(136)		(1,100)		(6,198)
Excess MSRs	Excess MSRs	(1,127)		(1,635)		(7,650)		(2,137)		Excess MSRs	(2,477)		2,971		(4,430)		(6,523)

Net investments in Legacy Sequoia entities (2)		(81)		(407)		(702)		(904)
Net investments in Sequoia Choice entities (2)		7,851		2,722		(22,065)		8,866
Net investments in Freddie Mac SLST entities (2)		82,214		17,300		(33,081)		31,702
Net investments in Freddie Mac K-Series entities (2)		2,166		7,445		(82,744)		13,810
Net investments in CAFL entities (2)		9,673		0		(41,048)		0
Net investments in Legacy Sequoia entities (3)										Net investments in Legacy Sequoia entities (3)	(216)		(230)		(915)		(621)
Net investments in Sequoia entities (3)										Net investments in Sequoia entities (3)	4,906		39,753		9,804		(29,916)
Net investments in Freddie Mac SLST entities (3)										Net investments in Freddie Mac SLST entities (3)	36,316		26,867		40,433		(115,295)
Net investment in Freddie Mac K-Series entity (3)										Net investment in Freddie Mac K-Series entity (3)	1,855		1,599		10,776		(84,910)
Net investments in CAFL entities (3)										Net investments in CAFL entities (3)	3,697		17,125		3,411		(50,721)
Shared home appreciation options										Shared home appreciation options	2,080		884		7,395		(6,670)
Other investments	Other investments	2,451		(355)		(9,111)		(632)		Other investments	125		(3,005)		435		(4,892)
Risk management derivatives, net	Risk management derivatives, net	0		(37,433)		(59,142)		(144,548)		Risk management derivatives, net	0		0		0		(59,142)

Credit recoveries (losses) on AFS securities	Credit recoveries (losses) on AFS securities	444		0		(1,027)		0		Credit recoveries (losses) on AFS securities	13		54		388		(1,471)
Total investment fair value changes, net	Total investment fair value changes, net	$	107,047	$	11,444	$	(611,557)	$	34,741	Total investment fair value changes, net	$	49,480	$	152,228	$	94,567	$	(718,604)
Other Income	Other Income									Other Income
MSRs	MSRs	$	(4,783)	$	(7,489)	$	(27,346)	$	(21,243)	MSRs	$	(1,381)	$	(3,955)	$	(2,247)	$	(22,563)
Risk management derivatives, net	Risk management derivatives, net	0		4,389		13,966		13,157		Risk management derivatives, net	0		0		0		13,966
Gain on re-measurement of 5 Arches investment		0		0		0		2,440
Total other income (3)		$	(4,783)	$	(3,100)	$	(13,380)	$	(5,646)

Total other income (4)										Total other income (4)	$	(1,381)	$	(3,955)	$	(2,247)	$	(8,597)
Total Market Valuation Gains (Losses), Net	Total Market Valuation Gains (Losses), Net	$	158,883	$	14,549	$	(606,764)	$	62,720	Total Market Valuation Gains (Losses), Net	$	93,858	$	146,830	$	213,641	$	(765,647)

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

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

~~(2)~~(3)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)~~(4)Other income presented above does not include net MSR fee income or provisions for repurchases for MSRs, as these amounts do not represent market valuation adjustments.

3028

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

At ~~September~~June 30, ~~2020,~~2021, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments


September 30, 2020		Fair Value					Input Values
June 30, 2021															June 30, 2021		Fair Value					Input Values
(Dollars in Thousands, except Input Values)	(Dollars in Thousands, except Input Values)			Fair Value		Unobservable Input			Range						Weighted Average(1)			(Dollars in Thousands, except Input Values)			Unobservable Input				Range							Weighted Average(1)
Assets	Assets															Assets
Residential loans, at fair value:	Residential loans, at fair value:															Residential loans, at fair value:

Jumbo fixed-rate loans	Jumbo fixed-rate loans	$	6,312		Prepayment rate (annual CPR)		20		-	20		%	20		%	Jumbo fixed-rate loans		$	232,343	Prepayment rate (annual CPR)			20			-	20		%	20			%
																				Whole loan spread to TBA price			$	2.00		-	$	2.00		$	2.00
					Whole loan spread to swap rate		350		-	350		bps	350		bps					Whole loan spread to swap rate			215			-	215		bps	215			bps

Jumbo loans committed to sell	Jumbo loans committed to sell	98,779			Whole loan committed sales price		$	101.61	-	$	103.40		$	103.23		Jumbo loans committed to sell		928,170		Whole loan committed sales price			$	100.88		-	$	103.03		$	102.38

Loans held by Legacy Sequoia (2)	Loans held by Legacy Sequoia (2)	296,765			Liability price					N/A			N/A			Loans held by Legacy Sequoia (2)		260,875		Liability price							N/A			N/A

Loans held by Sequoia Choice (2)		1,836,361			Liability price					N/A			N/A
Loans held by Sequoia (2)																Loans held by Sequoia (2)		2,222,553		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			Loans held by Freddie Mac SLST (2)		2,098,624		Liability price							N/A			N/A

Business purpose residential loans:
Business purpose loans:																Business purpose loans:
Single-family rental loans	Single-family rental loans	285,549			Senior credit spread		130		-	130		bps	130		bps	Single-family rental loans		418,442		Senior credit spread			70			-	70		bps	70			bps
					Subordinate credit spread		200		-	1,600		bps	551		bps					Subordinate credit spread			105			-	1,531		bps	391			bps
					Senior credit support		30		-	32		%	31		%					Senior credit support			34			-	34		%	34			%
					IO discount rate		8		-	9		%	9		%					IO discount rate			9			-	9		%	9			%
					Prepayment rate (annual CPR)		0		-	3		%	3		%					Prepayment rate (annual CPR)			3			-	3		%	3			%
					Non-securitizable loan dollar price		$	101	-	$	101		$	101						Non-securitizable loan dollar price			$	82		-	$	102		$	99

Single-family rental loans held by CAFL	Single-family rental loans held by CAFL	2,969,692			Liability price					N/A			N/A			Single-family rental loans held by CAFL		3,263,878		Liability price							N/A			N/A

Residential bridge loans		700,860			Discount rate		6		-	12		%	8		%
Bridge loans																Bridge loans		726,569		Discount rate			6			-	15		%	8			%
					Non-performing loan dollar price		$	3	-	$	100		$	89

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			Multifamily loans held by Freddie Mac K-Series (2)		485,157		Liability price							N/A			N/A

Trading and AFS securities	Trading and AFS securities	351,335			Discount rate		3		-	34		%	9		%	Trading and AFS securities		354,886		Discount rate			2			-	31		%	7			%
					Prepayment rate (annual CPR)		7		-	65		%	24		%					Prepayment rate (annual CPR)			8			-	62		%	28			%
					Default rate		0		-	26		%	1		%					Default rate			0			-	25		%	4			%
					Loss severity		0		-	50		%	19		%					Loss severity			0			-	50		%	22			%
					CRT dollar price		$	49	-	$	103		$	84						CRT dollar price			$	95		-	$	113		$	102

Servicer advance investments	Servicer advance investments	258,621			Discount rate		3		-	4		%	4		%	Servicer advance investments		184,551		Discount rate			3			-	3		%	3			%
					Prepayment rate (annual CPR)		8		-	14		%	13		%					Prepayment rate (annual CPR)			20			-	30		%	21			%
					Expected remaining life (3)		1		-	2		years	2		years					Expected remaining life (3)			4			-	4		years	4			years
					Mortgage servicing income		6		-	16		bps	8		bps					Mortgage servicing income			0			-	15		bps	9			bps

MSRs	MSRs	14,878			Discount rate		12		-	12		%	12		%	MSRs		8,721		Discount rate			12			-	12		%	12			%
					Prepayment rate (annual CPR)		8		-	97		%	26		%					Prepayment rate (annual CPR)			7			-	84		%	36			%
					Per loan annual cost to service		$	95	-	$	95		$	95						Per loan annual cost to service			$	96		-	$	96		$	96

Excess MSRs	Excess MSRs	35,070			Discount rate		15		-	21		%	18		%	Excess MSRs		29,988		Discount rate			13			-	16		%	15			%
					Prepayment rate (annual CPR)		10		-	13		%	11		%					Prepayment rate (annual CPR)			21			-	30		%	24			%
					Excess mortgage servicing income		9		-	17		bps	12		bps					Excess mortgage servicing income			8			-	17		bps	11			bps

3129

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

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


September 30, 2020		Fair Value					Input Values
June 30, 2021															June 30, 2021		Fair Value					Input Values
(Dollars in Thousands, except Input Values)	(Dollars in Thousands, except Input Values)			Fair Value		Unobservable Input			Range						Weighted Average (1)			(Dollars in Thousands, except Input Values)			Unobservable Input				Range							Weighted Average (1)
Assets (continued)	Assets (continued)															Assets (continued)

Shared home appreciation options	Shared home appreciation options	$	41,758		Discount rate		16		-	16		%	16		%	Shared home appreciation options		$	44,319	Discount rate			13			-	13		%	13			%
					Prepayment rate (annual CPR)		8		-	26		%	19		%					Prepayment rate (annual CPR)			16			-	24		%	17			%
					Home price appreciation		2		-	3		%	3		%					Home price appreciation			3			-	4		%	3			%

Guarantee asset		579			Discount rate		12		-	12		%	12		%
					Prepayment rate (annual CPR)		42		-	42		%	42		%

REO	REO	3,523			Loss severity		3		-	63		%	23		%	REO		1,233		Loss severity			4			-	40		%	23			%

Residential loan purchase commitments, net	Residential loan purchase commitments, net	10,282			Committed sales price		$	100.89	-	$	103.40		$	102.59		Residential loan purchase commitments, net		12,725		Committed sales price			$	102.00		-	$	103.03		$	102.64
					Pull-through rate		13		-	100		%	58		%					Pull-through rate			21			-	100		%	72			%
					Whole loan spread to TBA price		$	2.00	-	$	2.00		$	2.00						Whole loan spread to TBA price			$	2.00		-	$	2.00		$	2.00
					Whole loan spread to swap rate - fixed rate		350		-	350		bps	350		bps					Whole loan spread to swap rate			191			-	215		bps	201			bps
					Prepayment rate (annual CPR)		15		-	15		%	15		%					Prepayment rate (annual CPR)			20			-	20		%	20			%
					MSR multiple		0.8		-	4.1		x	3.4		x

Single-family rental interest rate lock commitments																Single-family rental interest rate lock commitments		744		Senior credit spread			70			-	70		bps	70			bps
																				Subordinate credit spread			105			-	1,531		bps	391			bps
																				Senior credit support			34			-	34		%	34			%
																				IO discount rate			10			-	11		%	10			%
																				Prepayment rate (annual CPR)			3			-	3		%	3			%
																				Pull-through rate			100			-	100		%	100			%

Liabilities	Liabilities															Liabilities
ABS issued (2):	ABS issued (2):															ABS issued (2):
At consolidated Sequoia entities	At consolidated Sequoia entities	1,919,048			Discount rate		2		-	30		%	3		%	At consolidated Sequoia entities		2,248,759		Discount rate			1			-	18		%	3			%
																				Prepayment rate (annual CPR)			7			-	51		%	33			%
																				Default rate			0			-	39		%	2			%
																				Loss severity			25			-	50		%	32			%

At consolidated CAFL entities (4)																At consolidated CAFL entities (4)		3,007,596		Discount rate			1			-	13		%	3			%
					Prepayment rate (annual CPR)		5		-	53		%	27		%					Prepayment rate (annual CPR)			3			-	3		%	3			%
					Default rate		0		-	40		%	2		%					Default rate			3			-	18		%	9			%
					Loss severity		0		-	50		%	31		%					Loss severity			30			-	30		%	30			%

At consolidated Freddie Mac SLST entities	At consolidated Freddie Mac SLST entities	1,841,313			Dollar price		$	1	-	$	108		$	99		At consolidated Freddie Mac SLST entities		1,650,087		Discount rate			2			-	7		%	3			%

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

At consolidated Freddie Mac K-Series entities (4)	At consolidated Freddie Mac K-Series entities (4)	464,865			Discount rate		1		-	18		%	2		%	At consolidated Freddie Mac K-Series entities (4)		454,324		Discount rate			1			-	9		%	2			%

At consolidated CAFL entities (4)		2,744,150			Discount rate		0.2		-	40		%	3		%
					Prepayment rate (annual CPR)		0		-	3		%	0		%
					Default rate		0		-	18		%	11		%
					Loss severity		30		-	30		%	30		%

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

(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. At ~~September~~June 30, ~~2020,~~2021, the fair value of securities we owned at the consolidated Sequoia, CAFL, Freddie Mac SLST, and Freddie Mac K-Series ~~and CAFL~~ entities was ~~$215~~$235 million, ~~$416~~$268 million, ~~$27~~$450 million, and ~~$229~~$31 million, respectively.

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

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

Determination of Fair Value

We generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant ~~input~~inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs - such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions - in isolation would likely result in a significantly lower or higher fair value measurement.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

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

Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 is a more detailed description of our financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy.

Note 6. Residential Loans

We acquire residential loans from third-party originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 6.1 – Classifications and Carrying Values of Residential Loans


September 30, 2020				Legacy		Sequoia		Freddie Mac
June 30, 2021												June 30, 2021			Legacy				Freddie Mac
(In Thousands)	(In Thousands)	Redwood		Sequoia		Choice		SLST		Total		(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	105,128	$	0	$	0	$	0	$	105,128	Held-for-sale at fair value	$	1,160,548	$	0	$	0	$	0	$	1,160,548
Held-for-investment at fair value	Held-for-investment at fair value	0		296,765		1,836,361		2,256,682		4,389,808		Held-for-investment at fair value	0		260,875		2,222,553		2,098,624		4,582,052
Total Residential Loans	Total Residential Loans	$	105,128	$	296,765	$	1,836,361	$	2,256,682	$	4,494,936	Total Residential Loans	$	1,160,548	$	260,875	$	2,222,553	$	2,098,624	$	5,742,600


December 31, 2019				Legacy		Sequoia		Freddie Mac
December 31, 2020												December 31, 2020			Legacy				Freddie Mac
(In Thousands)	(In Thousands)	Redwood		Sequoia		Choice		SLST		Total		(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	536,385	$	0	$	0	$	0	$	536,385	Held-for-sale at fair value	$	176,641	$	0	$	0	$	0	$	176,641
Held-for-investment at fair value	Held-for-investment at fair value	2,111,897		407,890		2,291,463		2,367,215		7,178,465		Held-for-investment at fair value	0		285,935		1,565,322		2,221,153		4,072,410
Total Residential Loans	Total Residential Loans	$	2,648,282	$	407,890	$	2,291,463	$	2,367,215	$	7,714,850	Total Residential Loans	$	176,641	$	285,935	$	1,565,322	$	2,221,153	$	4,249,051

At ~~September~~June 30, ~~2020,~~2021, we owned mortgage servicing rights associated with ~~$103 million~~$1.10 billion (principal balance) of residential loans owned at Redwood that were purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Sale

At Fair Value

The following table summarizes the characteristics of residential loans held-for-sale at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

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


(Dollars in Thousands)	(Dollars in Thousands)	September 30, 2020		December 31, 2019		(Dollars in Thousands)	June 30, 2021		December 31, 2020
Number of loans	Number of loans	118		669		Number of loans	1,316		198
Unpaid principal balance	Unpaid principal balance	$	102,921	$	524,928	Unpaid principal balance	$	1,135,356	$	172,748
Fair value of loans	Fair value of loans	$	105,128	$	536,280	Fair value of loans	$	1,160,548	$	176,641
Market value of loans pledged as collateral under short-term borrowing agreements						Market value of loans pledged as collateral under short-term borrowing agreements	$	1,152,267	$	156,355

Delinquency information						Delinquency information
Number of loans with 90+ day delinquencies	Number of loans with 90+ day delinquencies	2		1		Number of loans with 90+ day delinquencies	2		1
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	2,356	$	747	Unpaid principal balance of loans with 90+ day delinquencies	$	2,100	$	1,882
Fair value of loans with 90+ day delinquencies	Fair value of loans with 90+ day delinquencies	$	1,767	$	616	Fair value of loans with 90+ day delinquencies	$	1,397	$	1,223
Number of loans in foreclosure	Number of loans in foreclosure	0		0		Number of loans in foreclosure	0		0

Market value of loans pledged as collateral under short-term borrowing agreements		$	95,023	$	201,949

The following table provides the activity of residential loans held-for-sale during the three and six months ended June 30, 2021 and 2020.

Table 6.3 – Activity of Residential Loans Held-for-Sale


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Principal balance of loans acquired	$	3,484,633	$	57,743	$	6,580,681	$	2,687,651
Principal balance of loans sold	3,324,919		2,280,076		5,600,751		4,936,795
Net market valuation gains (losses) recorded (1)	26,278		(2,014)		49,707		(15,494)

(1)Net market valuation gains (losses) on residential loans held-for-sale are recorded primarily through Mortgage banking activities, net on our consolidated statements of income (loss).

3332

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 6. Residential Loans - (continued)

~~The following table provides the activity of residential loans held-for-sale during the three and nine months ended September 30, 2020 and 2019.~~

~~Table 6.3 – Quarterly Activity of Residential Loans Held-for-Sale~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2020 2019 2020 2019
Principal balance of loans acquired $ 172,162 $ 1,446,750 $ 2,859,813 $ 3,936,111
Principal balance of loans sold 87,868 1,534,315 5,024,663 3,921,280
Net market valuation gains (losses) recorded (1)
(478) (6,623) (15,972) 286

~~(1)Net market valuation gains (losses) on residential loans held-for-sale are recorded through Mortgage banking activities, net on our consolidated statements of income (loss).~~

Residential Loans Held-for-Investment at Fair Value

We invest in residential subordinate securities issued by Legacy Sequoia, Sequoia, and Freddie Mac SLST securitization trusts and consolidate the underlying residential loans owned by these entities for financial reporting purposes in accordance with GAAP. The following tables summarize the characteristics of the residential loans owned at ~~Redwood and at~~ consolidated Sequoia and Freddie Mac SLST entities at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

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


September 30, 2020				Legacy		Sequoia		Freddie Mac
June 30, 2021										June 30, 2021	Legacy				Freddie Mac
(Dollars in Thousands)	(Dollars in Thousands)	Redwood		Sequoia		Choice		SLST		(Dollars in Thousands)	Sequoia		Sequoia		SLST
Number of loans	Number of loans	0		1,976		2,546		13,893		Number of loans	1,733		2,775		12,902
Unpaid principal balance	Unpaid principal balance	$	0	$	352,392	$	1,811,967	$	2,304,047	Unpaid principal balance	$	295,368	$	2,193,269	$	2,107,256
Fair value of loans	Fair value of loans	$	0	$	296,765	$	1,836,361	$	2,256,683	Fair value of loans	$	260,875	$	2,222,553	$	2,098,624

Delinquency information										Delinquency information
Number of loans with 90+ day delinquencies (1)	Number of loans with 90+ day delinquencies (1)	0		49		132		1,772		Number of loans with 90+ day delinquencies (1)	43		48		1,446
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	0	$	16,076	$	102,693	$	339,537	Unpaid principal balance of loans with 90+ day delinquencies	$	14,878	$	38,502	$	261,504
Fair value of loans with 90+ day delinquencies (2)	Fair value of loans with 90+ day delinquencies (2)	$	0	N/A		N/A		N/A		Fair value of loans with 90+ day delinquencies (2)	N/A		N/A		N/A
Number of loans in foreclosure	Number of loans in foreclosure	0		21		3		175		Number of loans in foreclosure	18		3		308
Unpaid principal balance of loans in foreclosure	Unpaid principal balance of loans in foreclosure	$	0	$	4,820	$	1,814	$	28,380	Unpaid principal balance of loans in foreclosure	$	3,830	$	2,257	$	51,191


December 31, 2019				Legacy		Sequoia		Freddie Mac
December 31, 2020										December 31, 2020	Legacy				Freddie Mac
(Dollars in Thousands)	(Dollars in Thousands)	Redwood		Sequoia		Choice		SLST		(Dollars in Thousands)	Sequoia		Sequoia		SLST
Number of loans	Number of loans	2,940		2,198		3,156		14,502		Number of loans	1,908		2,177		13,605
Unpaid principal balance	Unpaid principal balance	$	2,052,778	$	424,829	$	2,240,679	$	2,428,035	Unpaid principal balance	$	333,474	$	1,550,454	$	2,247,771
Fair value of loans	Fair value of loans	$	2,111,897	$	407,890	$	2,291,463	$	2,367,215	Fair value of loans	$	285,935	$	1,565,322	$	2,221,153

Delinquency information										Delinquency information
Number of loans with 90+ day delinquencies (1)	Number of loans with 90+ day delinquencies (1)	2		39		9		587		Number of loans with 90+ day delinquencies (1)	52		94		2,110
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	1,585	$	9,803	$	6,755	$	134,680	Unpaid principal balance of loans with 90+ day delinquencies	$	17,285	$	74,742	$	389,245
Fair value of loans with 90+ day delinquencies (2)	Fair value of loans with 90+ day delinquencies (2)	$	1,424	N/A		N/A		N/A		Fair value of loans with 90+ day delinquencies (2)	N/A		N/A		N/A
Number of loans in foreclosure	Number of loans in foreclosure	0		16		3		208		Number of loans in foreclosure	21		3		245
Unpaid principal balance of loans in foreclosure	Unpaid principal balance of loans in foreclosure	$	0	$	3,673	$	2,290	$	33,042	Unpaid principal balance of loans in foreclosure	$	4,939	$	2,251	$	38,610

(1)For loans held at consolidated entities, the number of loans greater than 90 days delinquent includes loans in foreclosure.

3433

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 6. Residential Loans - (continued)

The following table provides the activity of residential loans held-for-investment at Redwood during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
Principal balance of loans acquired		$	0	$	0	$	0	$	39,194
Principal balance of loans sold		0		0		0		0

Fair value of loans transferred from HFS to HFI	Fair value of loans transferred from HFS to HFI	0		0		13,258		68,703		Fair value of loans transferred from HFS to HFI	$	0	$	0	$	0	$	13,258
Fair value of loans transferred from HFI to HFS	Fair value of loans transferred from HFI to HFS	0		0		1,870,986		22,814		Fair value of loans transferred from HFI to HFS	0		0		0		1,870,986
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	218		7,667		(93,314)		71,323		Net market valuation gains (losses) recorded (1)	0		104		0		(93,532)

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

The following table provides the activity of residential loans held-for-investment at consolidated entities during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

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

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Three Months Ended June 30, 2021

Three Months Ended June 30, 2020

Legacy

Sequoia

Freddie Mac

Legacy

Sequoia

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

Choice

SLST

Sequoia

Choice

SLST

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

270,506

N/A

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

N/A

1,205,494

N/A

270,506

N/A

Net market valuation gains (losses) recorded (2)

21,938

(5,175)

159,687

(38,996)

(21,727)

15,254

Net market valuation gains (losses) recorded (1)

4,863

(12,835)

22,579

8,081

93,932

48,587

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Six Months Ended June 30, 2021

Six Months Ended June 30, 2020

Legacy

Sequoia

Freddie Mac

Legacy

Sequoia

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

Choice

SLST

Sequoia

Choice

SLST

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

727,088

N/A

1,076,671

N/A

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

N/A

1,205,494

N/A

270,506

N/A

Net market valuation gains (losses) recorded (2)

(103)

(11,029)

39,783

5,271

4,841

94,788

Net market valuation gains (losses) recorded (1)

12,476

(15,413)

19,014

(60,933)

(16,553)

(144,433)

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

(2)For loans held at our consolidated Legacy Sequoia, Sequoia, ~~Choice,~~ and Freddie Mac SLST entities, market value changes are based on the estimated fair value of the associated ABS issued, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2~~Note 5.~~.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 7. Business Purpose ~~Residential~~ Loans

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

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


June 30, 2021	Single-Family Rental				Residential
(In Thousands)	Redwood		CAFL		Bridge		Total
Held-for-sale at fair value	$	418,442	0		$	0	$	418,442
Held-for-investment at fair value	0		3,263,878		726,569		3,990,447
Total Business Purpose Loans	$	418,442	$	3,263,878	$	726,569	$	4,408,889


December 31, 2020	Single-Family Rental				Residential
(In Thousands)	Redwood		CAFL		Bridge		Total
Held-for-sale at fair value	$	245,394	$	0	$	0	$	245,394
Held-for-investment at fair value	0		3,249,194		641,765		3,890,959
Total Business Purpose Loans	$	245,394	$	3,249,194	$	641,765	$	4,136,353

The following table provides the activity ~~commenced in connection with our acquisitions~~ of ~~5 Arches~~business purpose loans at Redwood during the three and ~~CoreVest in 2019.~~six months ended June 30, 2021 and 2020.

Table 7.2 – Activity of Business Purpose Loans at Redwood


	Three Months Ended June 30, 2021				Three Months Ended June 30, 2020
(In Thousands)	SFR at Redwood		Bridge		SFR at Redwood		Bridge
Principal balance of loans originated	$	312,217	$	215,160	$	175,876	$	58,468
Principal balance of loans sold to third parties	0		354		0		1,558
Fair value of loans transferred from HFS to HFI (1)	297,301		N/A		220,923		N/A
Fair value of loans transferred from HFI to HFS (2)	44,922		0		0		0
Mortgage banking activities income (loss) recorded (3)	25,222		978		1,210		(3,277)
Investment fair value changes recorded (4)	0		(62)		2,222		21,774

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 7. Business Purpose ~~Residential~~ Loans - (continued)

~~Business Purpose Residential Loan Originations~~


	Six Months Ended June 30, 2021				Six Months Ended June 30, 2020
(In Thousands)	SFR at Redwood		Bridge		SFR at Redwood		Bridge
Principal balance of loans originated	$	565,315	$	348,389	$	436,005	$	285,836
Principal balance of loans sold to third parties	0		9,231		26,148		22,293
Fair value of loans transferred from HFS to HFI (1)	466,705		N/A		599,032		N/A
Fair value of loans transferred from HFI to HFS (2)	44,922		0		0		0
Mortgage banking activities income (loss) recorded (3)	35,470		1,521		11,540		(3,441)
Investment fair value changes recorded (4)	0		3,242		(20,806)		(16,828)

~~During~~(1)Represents the ~~three months ended September 30, 2020, we funded $261 million of business purpose residential loans and sold $2 million of residential bridge loans and $2 million~~transfer of single-family rental loans from held-for-sale to ~~third parties. The remaining business purpose residential~~held-for-investment associated with CAFL securitizations.

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

(3)Represents net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio (residential bridge loans), or retained in our mortgage banking business (single-family rental loans) for future securitizations. Prior to the transfer of residential bridge loans to our investment portfolio, we recorded a net market valuation gain of less than $0.1 million on these loans through Mortgage banking activities, net on our consolidated statements of income (loss)portfolio. Additionally, for the three and six months ended ~~September~~June 30, 2020. Market valuation adjustments on our single-family rental loans are also recorded in Mortgage banking activities, net on our consolidated statements of income (loss) prior to their sale or securitization. Additionally, during the three and nine months ended September 30, 2020,2021, we recorded loan origination fee income ~~associated with business purpose residential loans~~ of $3$7 million and $13 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). For the three and six months ended June 30, 2020, we recorded loan origination fee income of $2 million and $11 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

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

Bridge Loans Held-for-Investment

The outstanding bridge loans held-for-investment at June 30, 2021 were first lien, interest-only loans with original maturities of six to 24 months and were comprised of 63% one-month LIBOR-indexed adjustable-rate loans and 37% fixed-rate loans. During the six months ended June 30, 2021, we transferred 4 loans with a fair value of $2 million to REO, which is included in Other assets on our consolidated balance sheets. At June 30, 2021, we had a $374 million commitment to fund bridge loans. See Note 16 for additional information on this commitment.

Single-Family Rental Loans Held-for-Investment at CAFL

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans owned by these entities. The outstanding single-family rental loans held-for-investment at CAFL at June 30, 2021 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years. During the six months ended June 30, 2021, we transferred 2 CAFL loans with a fair value of $12 million to REO, which is included in Other assets on our consolidated balance sheets. The following table ~~summarizes~~provides the ~~classifications~~activity of single-family rental loans held-for-investment at CAFL during the three and ~~carrying values~~six months ended June 30, 2021 and 2020.

Table 7.3 – Activity of Single-Family Rental Loans Held-for-Investment at CAFL


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Net market valuation gains (losses) recorded (1)	$	(1,230)	$	169,327	$	(62,132)	$	(102,590)

(1)For loans held at our consolidated CAFL entities, market value changes are based on the estimated fair value of the ~~business purpose residential loans owned at Redwood at September 30, 2020 and December 31, 2019.~~associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.

~~Table 7.1 – Classifications and Carrying Values of Business Purpose Residential Loans~~

September 30, 2020 Single-Family Rental Residential
(In Thousands) Redwood CAFL Bridge Total
Held-for-sale at fair value $ 285,549 0 $ 0 $ 285,549
Held-for-investment at fair value 0 2,969,692 700,860 3,670,552
Total Business Purpose Residential Loans $ 285,549 $ 2,969,692 $ 700,860 $ 3,956,101

December 31, 2019 Single-Family Rental Residential
(In Thousands) Redwood CAFL Bridge Total
Held-for-sale at fair value $ 331,565 $ 0 $ 0 $ 331,565
Held-for-investment at fair value 237,620 2,192,552 745,006 3,175,178
Total Business Purpose Residential Loans $ 569,185 $ 2,192,552 $ 745,006 $ 3,506,743

~~The following tables summarize the characteristics of the business purpose residential loans owned at Redwood at September 30, 2020 and December 31, 2019.~~

~~Table 7.2 – Characteristics of Business Purpose Residential Loans~~

September 30, 2020 Single-Family Rental at Redwood Single-Family Rental at CAFL Residential Bridge
(Dollars in Thousands)
Number of loans 140 1,027 2,262
Unpaid principal balance $ 272,492 $ 2,815,045 $ 708,555
Fair value of loans $ 285,549 $ 2,969,692 $ 700,860
Weighted average coupon 5.26 % 5.50 % 8.02 %
Weighted average remaining loan term (years) 7 6 1
Number of loans with 90+ day delinquencies (1)
6 26 24
Unpaid principal balance of loans with 90+ day delinquencies $ 3,018 $ 70,949 $ 38,437
Fair value of loans with 90+ day delinquencies (2)
$ 2,954 N/A $ 33,464
Number of loans in foreclosure 0 9 24
Unpaid principal balance of loans in foreclosure $ 0 $ 14,032 $ 39,755
Fair value of loans in foreclosure (2)
$ 0 N/A $ 34,489

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 7. Business Purpose ~~Residential~~ Loans - (continued)

December 31, 2019 Single-Family Rental at Redwood Single-Family Rental at CAFL Residential Bridge
(Dollars in Thousands)
Number of loans 308 783 2,653
Unpaid principal balance $ 552,848 $ 2,078,214 $ 742,528
Fair value of loans $ 569,185 $ 2,192,552 $ 745,006
Weighted average coupon 4.96 % 5.70 % 8.11 %
Weighted average remaining loan term (years) 9 7 2
Number of loans with 90+ day delinquencies (1)
2 18 31
Unpaid principal balance of loans with 90+ day delinquencies $ 1,688 $ 29,039 $ 14,186
Fair value of loans with 90+ day delinquencies (2)
$ 1,818 N/A $ 12,111
Number of loans in foreclosure 1 5 15
Unpaid principal balance of loans in foreclosure $ 130 $ 9,169 $ 8,987
Fair value of loans in foreclosure (2)
$ 130 N/A $ 6,917
Business Purpose Loan Characteristics

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

Table 7.4 – Characteristics of Business Purpose Loans


June 30, 2021	Single-Family Rental at Redwood			Single-Family Rental at CAFL			Bridge
(Dollars in Thousands)
Number of loans	112			1,121			2,471
Unpaid principal balance	$	399,900		$	3,060,949		$	729,149
Fair value of loans	$	418,442		$	3,263,878		$	726,569
Weighted average coupon	4.84		%	5.34		%	7.63		%
Weighted average remaining loan term (years)	7			5			1
Market value of loans pledged as collateral under short-term debt facilities	$	122,277		N/A			$	127,133
Market value of loans pledged as collateral under long-term debt facilities	$	246,903		N/A			$	555,791

Delinquency information
Number of loans with 90+ day delinquencies (1)	9			21			40
Unpaid principal balance of loans with 90+ day delinquencies	$	6,586		$	59,841		$	35,018
Fair value of loans with 90+ day delinquencies (2)	$	5,369		N/A			$	31,512
Number of loans in foreclosure	7			10			43
Unpaid principal balance of loans in foreclosure	$	5,976		$	24,212		$	32,611
Fair value of loans in foreclosure (2)	$	4,798		N/A			$	28,963


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

Delinquency information
Number of loans with 90+ day delinquencies (1)	10			22			31
Unpaid principal balance of loans with 90+ day delinquencies	$	7,127		$	61,440		$	39,415
Fair value of loans with 90+ day delinquencies (2)	$	6,143		N/A			$	33,605
Number of loans in foreclosure	0			10			25
Unpaid principal balance of loans in foreclosure	$	0		$	24,745		$	38,552
Fair value of loans in foreclosure (2)	$	0		N/A			$	33,066

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

~~Single-Family Rental Loans~~

During the three and nine months ended September 30, 2020, we originated $196 million and $632 million of single-family rental loans, respectively. During the nine months ended September 30, 2020, we transferred $925 million of single-family rental loans from held-for-sale to held-for-investment associated with 3 CAFL securitizations and sold $34 million to third parties. Additionally, at March 31, 2020, we transferred all held-for-investment single-family rental loans to held-for-sale. During the three and nine months ended September 30, 2020, we recorded net market valuation gains of $43 million and $34 million, respectively, on single-family rental loans. The $43 million of net market valuation gains recorded during the three months ended September 30, 2020 were recorded through Mortgage banking activities, net on our consolidated statements of income (loss). Of the $34 million of net market valuation gains recorded during the nine months ended September 30, 2020, $55 million of net market valuation gains were recorded through Mortgage banking activities, net and $21 million of net market valuation losses were recorded through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2019, we recorded net market valuation gains of $1 million and $3 million, respectively, on single-family rental loans through Mortgage banking activities, net on our consolidated statements of income (loss).

~~Single-Family Rental Loans Held-for-Investment at CAFL~~

In conjunction with our acquisition of CoreVest in the fourth quarter of 2019, we consolidated the single-family rental loans owned at certain CAFL securitization entities. The outstanding single-family rental loans held-for-investment at CAFL at September 30, 2020 were first-lien, fixed-rate loans with original maturities of ~~five~~, ~~seven, or ten years.~~

During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $88 million and a net market valuation loss of $14 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with CAFL securitizations. ~~The net impact to our income statement associated with our retained economic investment in the CAFL securitization entities is presented in~~ ~~Note 5.~~

~~Residential Bridge Loans Held-for-Investment~~

~~The outstanding residential bridge loans held-for-investment at September 30, 2020 were first lien, fixed-rate, interest-only loans with original maturities of~~ ~~six~~ ~~to 24 months. During the nine months ended September 30, 2020, we transferred 4 loans with a fair value of $5 million to REO, which is included in Other assets on our consolidated balance sheets.~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

~~Note 7. Business Purpose Residential Loans - (continued)~~

During the three and nine months ended September 30, 2020, $64 million and $324 million of newly originated residential bridge loans, respectively, were transferred to our investment portfolio. During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $7 million and a net market valuation loss of $10 million, respectively, on residential bridge loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss). During both the three and nine months ended September 30, 2019, we recorded net market valuation losses of $1 million on residential bridge loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss).

~~At September 30, 2020, we had a $225 million commitment to fund residential bridge loans. See~~ ~~Note 16~~ ~~for additional information on this commitment.~~

Note 8. Multifamily Loans

~~Since 2018, we have invested~~We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization ~~trusts~~trust and ~~were required to~~ consolidate the underlying multifamily loans owned ~~at these entities~~by this entity for financial reporting purposes in accordance with GAAP. ~~During the first quarter of 2020, we sold subordinate securities issued by four such Freddie Mac K-Series securitization trusts and deconsolidated $3.85 billion of multifamily loans. See~~ ~~Note 2~~ ~~for further discussion.~~

The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 8.1 – Characteristics of Multifamily Loans


(Dollars in Thousands)	(Dollars in Thousands)	September 30, 2020			December 31, 2019			(Dollars in Thousands)	June 30, 2021			December 31, 2020
Number of loans	Number of loans	28			279			Number of loans	28			28
Unpaid principal balance	Unpaid principal balance	$	464,680		$	4,195,000		Unpaid principal balance	$	459,002		$	462,808
Fair value of loans	Fair value of loans	$	491,415		$	4,408,524		Fair value of loans	$	485,157		$	492,221

Weighted average coupon	Weighted average coupon	4.25		%	4.13		%	Weighted average coupon	4.25		%	4.25		%
Weighted average remaining loan term (years)	Weighted average remaining loan term (years)	5			6			Weighted average remaining loan term (years)	4			5

Delinquency information								Delinquency information
Number of loans with 90+ day delinquencies	Number of loans with 90+ day delinquencies	0			0			Number of loans with 90+ day delinquencies	0			0

Number of loans in foreclosure	Number of loans in foreclosure	0			0			Number of loans in foreclosure	0			0

The outstanding multifamily loans held-for-investment at the consolidated Freddie Mac K-Series ~~entities~~entity at ~~September~~June 30, ~~2020~~2021 were first-lien, fixed-rate loans that were originated in ~~2015 and had original loan terms of ten years.~~2015. The following table provides the activity of multifamily loans held-for-investment during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	$	2,340	$	47,353	$	(61,500)	$	178,374	Net market valuation gains (losses) recorded (1)	$	(2,528)	$	18,591	$	(3,258)	$	(63,840)

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

Note 9. Real Estate Securities

We invest in real estate securities that we ~~acquire from third parties or~~ create and retain from our Sequoia ~~securitizations.~~securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Trading	Trading	$	144,162	$	860,540	Trading	$	142,425	$	125,667
Available-for-sale	Available-for-sale	207,173		239,334		Available-for-sale	212,461		218,458
Total Real Estate Securities	Total Real Estate Securities	$	351,335	$	1,099,874	Total Real Estate Securities	$	354,886	$	344,125

Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Mezzanine securities are interests that are generally subordinate to senior securities in their rights to receive cash flows, and have subordinate securities below them that are first to absorb losses. ~~Many of our mezzanine classified securities were initially rated AA through BBB- and issued in 2012 or later.~~ Subordinate securities are all interests below mezzanine. ~~Excluding~~Exclusive of our re-performing loan securities, nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

Trading Securities

~~The following table presents the fair value of trading securities by position and collateral type at September 30, 2020 and December 31, 2019.~~

~~Table 9.2 – Trading Securities by Position~~

(In Thousands) September 30, 2020 December 31, 2019
Senior $ 28,091 $ 150,067
Mezzanine 3,651 538,489
Subordinate 112,420 171,984
Total Trading Securities $ 144,162 $ 860,540

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). ~~At September~~The following table presents the fair value of trading securities by position and collateral type at June 30, ~~2020~~2021 and December 31, ~~2019, our~~2020.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	June 30, 2021		December 31, 2020
Senior
Interest-only securities (1)	$	25,267	$	28,464


Total Senior	25,267		28,464
Mezzanine
Sequoia securities	0		3,649


Total Mezzanine	0		3,649
Subordinate
RPL securities	60,887		47,448
Multifamily securities	8,266		5,592
Other third-party residential securities	48,005		40,514
Total Subordinate	117,158		93,554
Total Trading Securities	$	142,425	$	125,667

(1)Includes $17 million and $13 million of Sequoia certificated mortgage servicing rights at June 30, 2021 and December 31, 2020, respectively.

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

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	June 30, 2021		December 31, 2020
Senior (1)	$	0	$	0
Mezzanine	0		3,577
Subordinate	208,381		242,278
Total Trading Securities	$	208,381	$	245,855

(1)Our senior trading securities ~~included $28 million and $64 million of~~include interest-only securities, ~~respectively,~~ for which there is no principal ~~balance, and~~balance.

The following table provides the ~~unpaid principal balance~~activity of ~~our remaining senior~~ trading securities ~~was 0~~during the three and ~~$84 million, respectively. Our interest-only securities included $12 million~~six months ended June 30, 2021 and $36 million of certificated mortgage servicing rights at September 30, 2020 and December 31, 2019, respectively, which are securities we retained from certain of our Sequoia securitizations that represent certificated servicing strips. At September 30, 2020 and December 31, 2019, our2020.

Table 9.4 – Trading Securities Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Principal balance of securities acquired	$	1,750	$	10,250	$	17,630	$	66,721
Principal balance of securities sold	18,068		85,747		52,811		704,614
Net market valuation gains (losses) recorded (1)	1,798		42,246		23,147		(221,079)

(1)Net market valuation gains (losses) on trading securities ~~included $60 million and $161 million of RPL securities, respectively.~~

At September 30, 2020 and December 31, 2019, our mezzanine trading securities had an unpaid principal balance of $4 million and $537 million, respectively. At September 30, 2020 and December 31, 2019, theare recorded through Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of our mezzanine securities was $4 million and $538 million, respectively, and included $4 million and $39 million of Sequoia securities, respectively, 0 and $395 million of multifamily securities, respectively, and 0 and $104 million of other third-party residential securities, respectively, including 0 and $30 million of RPL securities, respectively.income (loss).

At September 30, 2020 and December 31, 2019, our subordinate trading securities had an unpaid principal balance of $266 million and $302 million, respectively. At September 30, 2020 and December 31, 2019, the fair value of our subordinate securities was $112 million and $172 million, respectively, and included $50 million and $90 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, and $55 million and $82 million, respectively, of other third-party residential securities, including $51 million and $76 million of RPL securities, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

During the three and nine months ended September 30, 2020, we acquired $11 million and $78 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $16 million and $721 million, respectively, of such securities. During the three and nine months ended September 30, 2019, we acquired $66 million and $335 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $236 million and $397 million, respectively, of such securities.

During the three and nine months ended September 30, 2020, we recorded net market valuation losses of $4 million and $225 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2019, we recorded net market valuation gains of $15 million and $56 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income (loss).

AFS Securities

The following table presents the fair value of our available-for-sale securities by position and collateral type at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table ~~9.3~~9.5 – Fair Value of Available-for-Sale Securities by Position


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Senior		$	0	$	25,792

Mezzanine	Mezzanine	2,016		13,687		Mezzanine

Other third-party residential securities						Other third-party residential securities	$	0	$	2,014
Total Mezzanine						Total Mezzanine	0		2,014
Subordinate	Subordinate	205,157		199,855		Subordinate

Sequoia securities						Sequoia securities	140,321		136,475
Multifamily securities						Multifamily securities	34,213		43,663
Other third-party residential securities						Other third-party residential securities	37,927		36,306
Total Subordinate						Total Subordinate	212,461		216,444
Total AFS Securities	Total AFS Securities	$	207,173	$	239,334	Total AFS Securities	$	212,461	$	218,458

~~At September 30, 2020 and December 31, 2019, our~~The following table provides the activity of available-for-sale securities ~~were comprised of $160 million~~during the three and ~~$230 million of residential mortgage-backed securities, respectively,~~six months ended June 30, 2021 and $48 million and $9 million of multifamily mortgage-backed securities, respectively. At September 30, 2020 and December 31, 2019, our residential available-for-sale securities were comprised of $124 million and $141 million of residential mortgage-backed securities we retained from our Sequoia securitizations, respectively, and $35 million and $90 million of other third-party residential securities, respectively.2020.

Table 9.6 – Available-for-Sale Securities Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Fair value of securities acquired	$	522	$	0	$	1,600	$	31,181
Fair value of securities sold	2,585		8,736		4,785		55,193
Net realized gains recorded	1,307		783		1,507		4,635

During the three ~~and nine~~ months ended ~~September~~June 30, ~~2020,~~2021, we called 3 of our unconsolidated Sequoia entities, and purchased ~~$25~~$83 million ~~and $57~~(unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $7 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of ~~AFS securities, respectively, and sold 0 and $55 million of AFS securities, respectively, which resulted in net realized gains of 0 and $5 million, respectively.~~income (loss). During the ~~three and nine~~six months ended ~~September~~June 30, ~~2019,~~2021, we called 4 of our unconsolidated Sequoia entities, and purchased ~~$12~~$101 million ~~and $21~~(unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $9 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of ~~AFS securities, respectively, and sold $15 million and $82 million of AFS securities, respectively, which resulted in net realized gains of $4 million and $13 million, respectively.~~income (loss).

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

At ~~September~~June 30, ~~2020,~~2021, we had ~~$45~~$31 million of AFS securities with contractual maturities less than five years, $3$4 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table presents the components of carrying value (which equals fair value) of AFS securities at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table ~~9.4~~9.7 – Carrying Value of AFS Securities


September 30, 2020
June 30, 2021										June 30, 2021
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Total		(In Thousands)	Mezzanine		Subordinate		Total
Principal balance	Principal balance	$	0	$	2,000	$	287,659	$	289,659	Principal balance	$	0	$	254,784	$	254,784
Credit reserve	Credit reserve	0		0		(43,186)		(43,186)		Credit reserve	0		(40,349)		(40,349)
Unamortized discount, net	Unamortized discount, net	0		0		(99,221)		(99,221)		Unamortized discount, net	0		(90,216)		(90,216)
Amortized cost	Amortized cost	0		2,000		145,252		147,252		Amortized cost	0		124,219		124,219
Gross unrealized gains	Gross unrealized gains	0		16		63,439		63,455		Gross unrealized gains	0		88,321		88,321
Gross unrealized losses	Gross unrealized losses	0		0		(2,507)		(2,507)		Gross unrealized losses	0		(79)		(79)
Allowance for credit losses		0		0		(1,027)		(1,027)
CECL allowance										CECL allowance	0		0		0
Carrying Value	Carrying Value	$	0	$	2,016	$	205,157	$	207,173	Carrying Value	$	0	$	212,461	$	212,461


December 31, 2019
December 31, 2020										December 31, 2020
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Total		(In Thousands)	Mezzanine		Subordinate		Total
Principal balance	Principal balance	$	26,331	$	13,512	$	264,234	$	304,077	Principal balance	$	2,000	$	281,284	$	283,284
Credit reserve	Credit reserve	(533)		0		(32,407)		(32,940)		Credit reserve	0		(44,967)		(44,967)
Unamortized discount, net	Unamortized discount, net	(10,427)		(527)		(113,301)		(124,255)		Unamortized discount, net	0		(95,718)		(95,718)
Amortized cost	Amortized cost	15,371		12,985		118,526		146,882		Amortized cost	2,000		140,599		142,599
Gross unrealized gains	Gross unrealized gains	10,450		702		81,329		92,481		Gross unrealized gains	14		77,280		77,294
Gross unrealized losses	Gross unrealized losses	(29)		0		0		(29)		Gross unrealized losses	0		(1,047)		(1,047)
CECL allowance										CECL allowance	0		(388)		(388)
Carrying Value	Carrying Value	$	25,792	$	13,687	$	199,855	$	239,334	Carrying Value	$	2,014	$	216,444	$	218,458

The following table presents the changes for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, in unamortized discount and designated credit reserves on residential AFS securities.

Table ~~9.5~~9.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities


		Three Months Ended September 30, 2020							Nine Months Ended September 30, 2020									Three Months Ended June 30, 2021						Six Months Ended June 30, 2021
		Credit Reserve				Unamortized Discount, Net			Credit Reserve				Unamortized Discount, Net					Credit Reserve				Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net
(In Thousands)	(In Thousands)							(In Thousands)
Beginning balance	Beginning balance			$	37,785						$	104,260				$	32,940			$	124,255		Beginning balance	$	44,947	$	94,188	$	44,967	$	95,718
Amortization of net discount	Amortization of net discount	0				(1,766)			0				(4,607)		Amortization of net discount			0				(1,569)		0		(3,183)
Realized credit losses	Realized credit losses	(194)				0			(897)				0		Realized credit losses			(112)				0		(249)		0
Acquisitions	Acquisitions	1,303				1,019			6,487				1,796		Acquisitions			890				368		2,825		1,208
Sales, calls, other	Sales, calls, other	0				0			(726)				(16,841)		Sales, calls, other			(718)				(7,429)		(992)		(9,729)

(Release of) transfers to credit reserves, net		4,292				(4,292)			5,382				(5,382)
Transfers to (release of) credit reserves, net															Transfers to (release of) credit reserves, net			(4,658)				4,658		(6,202)		6,202
Ending Balance	Ending Balance	$	43,186			$	99,221		$	43,186			$	99,221	Ending Balance			$	40,349			$	90,216	$	40,349	$	90,216

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses

The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table ~~9.6~~9.9 – Components of Fair Value of AFS Securities by Holding Periods

Less Than 12 Consecutive Months 12 Consecutive Months or Longer
Amortized
Cost Unrealized
Losses Fair
Value Amortized
Cost Unrealized
Losses Fair
Value
(In Thousands)
September 30, 2020 $ 32,890 $ (2,507) $ 30,330 $ 0 $ 0 $ 0
December 31, 2019 0 0 0 5,830 (29) 5,801


	Less Than 12 Consecutive Months						12 Consecutive Months or Longer
	Amortized Cost		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Losses		Fair Value
(In Thousands)
June 30, 2021	$	0	$	0	$	0	$	3,600	$	(79)	$	3,521
December 31, 2020	9,129		(1,047)		7,920		0		0		0

At ~~September~~June 30, ~~2020,~~2021, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 9688 AFS securities, of which ~~7 were in an unrealized loss position and 0~~2 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, ~~2019,~~2020, our consolidated balance sheet included ~~107~~96 AFS securities, of which ~~1 was~~5 were in an unrealized loss position and ~~1 was~~0 were in a continuous unrealized loss position for 12 consecutive months or longer.

Evaluating AFS Securities for Credit Losses

Gross unrealized losses on our AFS securities were $3$0.1 million at ~~September~~June 30, ~~2020. Pursuant to our adoption of ASU 2016-13, "Financial Instruments - Credit Losses" in the first quarter of 2020, we~~2021. We evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At ~~September~~June 30, ~~2020,~~2021, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

At ~~September~~June 30, ~~2020,~~2021, our ~~allowance for~~current expected credit ~~losses~~loss ("CECL") allowance related to our AFS securities was ~~$1 million.~~0. AFS securities for which an allowance is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at ~~September~~June 30, ~~2020.~~2021.

Table ~~9.7~~9.10 – Significant Credit Quality Indicators

~~September~~June 30, ~~2020~~2021

Subordinate Securities

Default rate

~~0.5%~~0.35%

Loss severity

~~20%~~18%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(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 September~~for the three and six months ended June 30, ~~2020.~~2021.

Table ~~9.8~~9.11 – Rollforward of Allowance for Credit Losses


		Three Months Ended		Nine Months Ended			Three Months Ended June 30, 2021				Six Months Ended June 30, 2021
(In Thousands)	(In Thousands)	September 30, 2020		September 30, 2020		(In Thousands)
Beginning balance allowance for credit losses	Beginning balance allowance for credit losses	$	1,471	$	0	Beginning balance allowance for credit losses			$	13			$	388
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	Additions to allowance for credit losses on securities for which credit losses were not previously recorded	339		1,864		Additions to allowance for credit losses on securities for which credit losses were not previously recorded	0				0
Additional increases or decreases to the allowance for credit losses on securities that had an allowance recorded in a previous period		(783)		(837)
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period						Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	(13)				(388)
Allowance on purchased financial assets with credit deterioration	Allowance on purchased financial assets with credit deterioration	0		0		Allowance on purchased financial assets with credit deterioration	0				0
Reduction to allowance for securities sold during the period	Reduction to allowance for securities sold during the period	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	Reduction to allowance for securities we intend to sell or more likely than not will be required to sell	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	Write-offs charged against allowance	0		0		Write-offs charged against allowance	0				0
Recoveries of amounts previously written off	Recoveries of amounts previously written off	0		0		Recoveries of amounts previously written off	0				0
Ending balance of allowance for credit losses	Ending balance of allowance for credit losses	$	1,027	$	1,027	Ending balance of allowance for credit losses	$	0			$	0

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~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table ~~9.9~~9.12 – Gross Realized Gains and Losses on AFS Securities


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
Gross realized gains - sales	Gross realized gains - sales	$	0	$	3,656	$	8,779	$	13,143	Gross realized gains - sales	$	1,307	$	1,074	$	1,507	$	8,779
Gross realized gains - calls	Gross realized gains - calls	0		1,058		0		5,084		Gross realized gains - calls	6,687		0		9,095		0
Gross realized losses - sales	Gross realized losses - sales	0		0		(4,144)		0		Gross realized losses - sales	0		(291)		0		(4,144)

Total Realized Gains on Sales and Calls of AFS Securities, net	Total Realized Gains on Sales and Calls of AFS Securities, net	$	0	$	4,714	$	4,635	$	18,227	Total Realized Gains on Sales and Calls of AFS Securities, net	$	7,994	$	783	$	10,602	$	4,635

Note 10. Other Investments

Other investments at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized in the following table.

Table 10.1 – Components of Other Investments


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Servicer advance investments	Servicer advance investments	$	258,621	$	169,204	Servicer advance investments	$	184,551	$	231,489
Shared home appreciation options	Shared home appreciation options	41,758		45,085		Shared home appreciation options	44,319		42,440
Excess MSRs	Excess MSRs	35,070		31,814		Excess MSRs	29,988		34,418
Mortgage servicing rights	Mortgage servicing rights	14,878		42,224		Mortgage servicing rights	8,721		8,815
Investment in multifamily loan fund		(323)		39,802

Other	Other	34,624		30,001		Other	41,153		31,013

Total Other Investments	Total Other Investments	$	384,628	$	358,130	Total Other Investments	$	308,732	$	348,175

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 10. Other Investments - (continued)

Servicer advance investments

~~In 2018, we~~We and a third-party co-investor, through 2 partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor (Refer to our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 for additional information regarding the ~~transaction)~~transactions). ~~During the nine months ended September~~At June 30, ~~2020, we funded additional purchases of outstanding servicer advances and excess MSRs under the same partnership structure. At September 30, 2020,~~2021, we had funded $94 million of total capital to the SA Buyers (see Note 16 for additional detail).

At ~~September~~June 30, ~~2020,~~2021, our servicer advance investments had a carrying value of ~~$259~~$185 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of ~~$9.71~~$8.03 billion. The outstanding servicer advance receivables associated with this investment were ~~$242~~$172 million at ~~September~~June 30, ~~2020,~~2021, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 10.2 – Components of Servicer Advance Receivables


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Principal and interest advances	Principal and interest advances	$	88,370	$	15,081	Principal and interest advances	$	80,741	$	110,923
Escrow advances (taxes and insurance advances)	Escrow advances (taxes and insurance advances)	115,352		96,732		Escrow advances (taxes and insurance advances)	68,534		79,279
Corporate advances	Corporate advances	38,337		39,769		Corporate advances	22,543		27,454
Total Servicer Advance Receivables	Total Servicer Advance Receivables	$	242,059	$	151,582	Total Servicer Advance Receivables	$	171,818	$	217,656

We account for our servicer advance investments at fair value and during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, we recorded $3$2 million and $8$5 million ~~respectively,~~ of interest income, ~~associated with these investments,~~respectively, through Other interest income, and recorded net market valuation ~~gain~~losses of ~~less than $0.1~~$1 million ~~and a net market valuation loss of $6 million, respectively,~~for both periods through Investment fair value changes, net in our consolidated statements of income (loss). During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we recorded $3 million and $9$6 million ~~respectively,~~ of interest income, ~~associated with these investments for each of these periods,~~respectively, through Other interest income, and recorded net market valuation ~~gains~~losses of $2$0.1 million and $3$6 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).

~~Mortgage Servicing Rights~~Shared Home Appreciation Options

In 2019, we entered into a flow purchase agreement to acquire shared home appreciation options. At June 30, 2021, we had acquired $47 million of shared home appreciation options under this flow purchase agreement. We ~~invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions~~account for these ~~loans. The majority of our~~ investments ~~in MSRs were made through~~under 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 September 30, 2020 and December 31, 2019, our MSRs had a~~ fair value ~~of $15 million~~option and ~~$42 million, respectively, and were associated with loans with an aggregate principal balance of $3.14 billion and $4.35 billion, respectively. During~~during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, including~~2021, we recorded net market valuation gains ~~and losses on our MSRs and related risk management derivatives, we recorded net losses~~ of $2 million and $6$7 million, respectively, related to these assets through ~~Other income~~Investment fair value changes, net on our consolidated statements of income (loss). During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we ~~recognized $0.4~~recorded a net market valuation gain of $1 million and $2a net market valuation loss of $7 million, ~~of income,~~respectively, related to these assets through Investment fair value changes, net ~~respectively, through Other income~~ on our consolidated statements of income (loss).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~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~~six months ended ~~September~~June 30, ~~2020,~~2021, we recognized $3 million and $9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million and $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~~and $4 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2020, we recognized $3 million and $6 million of interest income, respectively, through Other interest income, and recorded a net market valuation gain of $3 million and a net market valuation loss of $7 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss).

~~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. At September 30, 2020, the carrying amount of our investment in the partnership was 0 and we had 0 remaining funding obligations to the partnership. During the three and nine months ended 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 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 September 30, 2020, we recorded a net market valuation gain of $2 million and a net market valuation loss of $4 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss).

4544

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 10. Other Investments - (continued)

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 sold to third parties. During both the three and six months ended June 30, 2021, we retained $2 million of MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At June 30, 2021 and December 31, 2020, our MSRs had a fair value of $9 million and $9 million, respectively, and were associated with loans with an aggregate principal balance of $1.97 billion and $2.59 billion, respectively. During the three and six months ended June 30, 2021, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded a net loss of less than $0.1 million and net income of $1 million, respectively, through Other income on our consolidated statements of income (loss). During the three and six months ended June 30, 2020, we recorded net losses of $1 million and $3 million, respectively, through Other income on our consolidated statements of income (loss).

Note 11. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

~~Note 11. Derivative Financial Instruments - (continued)~~


	June 30, 2021				December 31, 2020
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)


Assets - Risk Management Derivatives
Interest rate swaps	$	264	$	133,000	$	224	$	42,000
TBAs	2,064		730,000		18,260		3,520,000
Interest rate futures	304		81,500		0		0
Swaptions	17,482		2,100,000		19,727		1,585,000

Assets - Other Derivatives
Loan purchase and interest rate lock commitments	14,191		2,332,511		15,027		2,617,254

Total Assets	$	34,305	$	5,377,011	$	53,238	$	7,764,254



Liabilities - Risk Management Derivatives
Interest rate swaps	$	(957)	$	87,500	$	0	$	0
TBAs	(1,367)		730,000		(15,495)		3,105,000
Interest rate futures	(194)		140,000		0		0
Liabilities - Other Derivatives
Loan purchase commitments	(722)		164,971		(577)		477,153

Total Liabilities	$	(3,240)	$	1,122,471	$	(16,072)	$	3,582,153
Total Derivative Financial Instruments, Net	$	31,065	$	6,499,482	$	37,166	$	11,346,407

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At ~~September~~June 30, 2021, we were party to swaps and swaptions with an aggregate notional amount of $2.32 billion, TBA agreements with an aggregate notional amount of $1.46 billion, and interest rate futures contracts with an aggregate notional amount of $222 million. At December 31, 2020, we were party to swaps and swaptions with an aggregate notional amount of ~~$335 million,~~$1.63 billion and TBA agreements ~~sold~~ with an aggregate notional amount of $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.$6.63 billion.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

During the three and ~~nine~~six months ended ~~September~~June 30, 2021, risk management derivatives had a net market valuation loss of $58 million and a net market valuation gain of $35 million, respectively. During the three and six months ended June 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 $36 million and $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~~six months ended ~~September~~June 30, ~~2020,~~2021, LPCs and IRLCs had net market valuation gains of ~~$14~~$53 million and ~~$35~~$0.3 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, LPCs and IRLCs had net market valuation gains of ~~$14~~$1 million and ~~$42~~$22 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).

Derivatives Designated as Cash Flow Hedges

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

During the first quarter of 2020, we terminated and settled all of our outstanding derivatives that had been designated as cash flow hedges for our long-term debt, with a payment of $84 million. For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was ~~$82~~$79 million and ~~$51~~$81 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. We ~~will amortize~~are amortizing this loss into interest expense over the remaining term of the ~~trust preferred securities and subordinated notes.~~debt they were originally hedging. As of ~~September~~June 30, ~~2020,~~2021, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

For both the three and ~~nine~~six months ended ~~September~~June 30, 2021, we did 0t have any derivatives designated as cash flow hedges. For the three and six months ended June 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~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

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)

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

~~Note 11. Derivative Financial Instruments - (continued)~~


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Net interest expense on cash flows hedges	$	0	$	0	$	0	$	(860)

Realized net losses reclassified from other comprehensive income	(1,028)		(1,029)		(2,046)		(1,108)
Total Interest Expense	$	(1,028)	$	(1,029)	$	(2,046)	$	(1,968)

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At ~~September~~June 30, ~~2020,~~2021, we assessed this risk as remote and did not record aan associated specific valuation adjustment.

At ~~September~~June 30, ~~2020,~~2021, we were in compliance with our derivative counterparty ISDA agreements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 12. Other Assets and Liabilities

Other assets at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized in the following table.

Table 12.1 – Components of Other Assets


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Accrued interest receivable	Accrued interest receivable	$	39,330	$	71,058	Accrued interest receivable	$	41,366	$	39,445
Investment receivable	Investment receivable	25,767		23,330		Investment receivable	38,281		43,176
Right-of-use asset		13,487		11,866
REO	REO	8,535		9,462		REO	15,489		8,413
Operating lease right-of-use assets						Operating lease right-of-use assets	14,370		15,012
Margin receivable						Margin receivable	10,269		4,758
Fixed assets and leasehold improvements (1)						Fixed assets and leasehold improvements (1)	7,202		4,203

Pledged collateral	Pledged collateral	8,172		32,945		Pledged collateral	0		1,177
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	Other	7,617		12,554		Other	9,455		14,404
Total Other Assets	Total Other Assets	$	124,273	$	419,321	Total Other Assets	$	136,432	$	130,588

(1)Fixed assets and leasehold improvements had a basis of ~~$12~~$14 million and accumulated depreciation of $8$7 million at ~~September~~June 30, ~~2020.~~2021.

Accrued expenses and other liabilities at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized in the following table.

Table 12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Accrued compensation						Accrued compensation	$	42,737	$	24,393
Accrued interest payable	Accrued interest payable	$	34,225	$	60,655	Accrued interest payable	35,615		34,858
Margin payable						Margin payable	19,503		14,728
Operating lease liabilities						Operating lease liabilities	15,997		16,687

Payable to minority partner	Payable to minority partner	17,492		13,189		Payable to minority partner	15,414		16,941
Accrued compensation		17,127		33,888
Lease liability		15,123		13,443
Deferred consideration		14,442		0
Unsettled trades						Unsettled trades	13,952		0
Residential loan and MSR repurchase reserve						Residential loan and MSR repurchase reserve	8,709		8,631
Guarantee obligations	Guarantee obligations	11,264		14,009		Guarantee obligations	8,446		10,039

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 income taxes payable						Accrued income taxes payable	5,395		5,614
Bridge loan holdbacks						Bridge loan holdbacks	5,394		5,708

Accrued operating expenses	Accrued operating expenses	3,922		4,358		Accrued operating expenses	4,938		5,509
Contingent consideration		0		28,484

Deferred consideration						Deferred consideration	0		14,579
Other	Other	13,610		13,297		Other	15,605		21,653
Total Accrued Expenses and Other Liabilities	Total Accrued Expenses and Other Liabilities	$	155,989	$	206,893	Total Accrued Expenses and Other Liabilities	$	191,705	$	179,340

Deferred Consideration

The deferred consideration presented in the table above is related to our acquisition of 5 Arches in 2019. During the first quarter of 2021, we distributed 806,068 shares of Redwood common stock and paid $1 million in cash in full settlement of the remaining deferred consideration associated with this acquisition.

4847

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(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 September 30, 2020, we had met all margin calls due.

REO

The following table summarizes the activity and carrying ~~value~~values of REO assets held at ~~September 30, 2020 was $9 million, which included $3 million of REO from our residential bridge loan portfolio, $1 million from our~~Redwood and at consolidated Legacy Sequoia, ~~entities, $1 million from our consolidated~~ Freddie Mac SLST, ~~entities,~~ and $4 million from consolidated CAFL entities. At September 30, 2020, there were 2 residential bridge loan REO assets, 3 REO assets at our Legacy Sequoia entities, 9 REO assets at our Freddie Mac SLST entities, and 3 REO assets at our CAFL entities ~~recorded on our consolidated balance sheets. During~~during the ~~nine~~six months ended ~~September~~June 30, ~~2020, transfers into~~2021.

Table 12.3 – REO ~~included a $5 million residential bridge loan, $1 million from Legacy Sequoia entities, $1 million from Freddie Mac SLST entities, and $6 million from CAFL entities. During~~Activity


	Six Months Ended June 30, 2021
(In Thousands)	Redwood Bridge		Legacy Sequoia		Freddie Mac SLST		CAFL		Total
Balance at beginning of period	$	4,600	$	638	$	646	$	2,529	$	8,413
Transfers to REO	2,289		65		1,548		11,924		15,826
Liquidations (1)	(5,972)		(39)		(766)		(1,949)		(8,726)
Changes in fair value, net	428		(5)		208		(655)		(24)
Balance at End of Period	$	1,345	$	659	$	1,636	$	11,849	$	15,489

(1)For the ~~nine~~six months ended ~~September~~June 30, ~~2020, there were~~2021, REO liquidations ~~of $13 million, resulting~~resulted in ~~$0.3~~less than $0.1 million of ~~unrealized~~realized 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~~

The following table provides the detail of REO assets at ~~our~~Redwood and at consolidated Legacy Sequoia, ~~entities, 3 REO assets at our~~ Freddie Mac SLST, ~~entities,~~ and ~~2 REO assets at our~~ CAFL entities ~~recorded~~at June 30, 2021 and December 31, 2020.

Table 12.4 – REO Assets


Number of REO assets	Redwood Bridge	Legacy Sequoia	Freddie Mac SLST	CAFL	Total
At June 30, 2021	3	3	18	2	26
At December 31, 2020	3	3	9	2	17

Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional descriptions of our ~~consolidated balance sheets.~~other assets and liabilities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 13. Short-Term Debt

We enter into repurchase agreements, bank warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At ~~September~~June 30, ~~2020,~~2021, 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 13.1 – Short-Term Debt


		September 30, 2020										June 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate		Maturity	Weighted Average Days Until Maturity	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities	Facilities										Facilities
Residential loan warehouse ~~(1)~~	Residential loan warehouse ~~(1)~~	4	$	81,898	$	600,000	2.90	%	10/2020-8/2021	203	Residential loan warehouse ~~(1)~~	6	$	1,049,144	$	2,350,000	1.87	%	8/2021-3/2022	211

Business purpose residential loan warehouse (2)		2	96,811		500,000		3.28	%	6/2021-5/2022	437
Business purpose loan warehouse											Business purpose loan warehouse	2	191,288		355,497		2.99	%	3/2022-5/2022	260
Real estate securities repo ~~(1)~~	Real estate securities repo ~~(1)~~	3	75,054		0		2.87	%	10/2020-12/2020	38	Real estate securities repo ~~(1)~~	3	80,938		0		1.53	%	7/2021-9/2021	35

Total Short-Term Debt Facilities	Total Short-Term Debt Facilities	9	253,763								Total Short-Term Debt Facilities	11	1,321,370
Servicer advance financing	Servicer advance financing	1	228,998		400,000		1.96	%	11/2020	61	Servicer advance financing	1	163,629		260,000		1.89	%	11/2021	153

Total Short-Term Debt	Total Short-Term Debt		$	482,761							Total Short-Term Debt		$	1,484,999


	December 31, 2020
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	4	$	137,269	$	1,300,000	2.45	%	1/2021-11/2021	268

Business purpose loan warehouse	2	99,190		500,000		3.37	%	5/2022-6/2022	521
Real estate securities repo	3	77,775		0		2.24	%	1/2021-3/2021	36
Total Short-Term Debt Facilities	9	314,234
Servicer advance financing	1	208,375		335,000		1.95	%	11/2021	334

Total Short-Term Debt		$	522,609

(1)Borrowings under our facilities are generally uncommitted and charged interest based on a specified margin over the 1- or 3-month LIBOR.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(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

~~(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.

~~(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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 13.2 – Collateral for Short-Term Debt ~~Facilities~~


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Collateral Type	Collateral Type					Collateral Type
Held-for-sale residential loans	Held-for-sale residential loans	$	95,023	$	201,949	Held-for-sale residential loans	$	1,152,267	$	156,355
Business purpose residential loans		110,505		988,179
Business purpose loans						Business purpose loans	249,410		127,029
Real estate securities	Real estate securities					Real estate securities
On balance sheet	On balance sheet	24,670		618,881		On balance sheet	16,435		23,193
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
Sequoia securitizations (1)						Sequoia securitizations (1)	62,387		63,105

Freddie Mac K-Series securitization (1)						Freddie Mac K-Series securitization (1)	30,834		28,255

Total real estate securities owned	Total real estate securities owned	114,308		1,491,986		Total real estate securities owned	109,656		114,553
Other assets		0		16,252
Restricted cash and other assets						Restricted cash and other assets	1,709		315
Total Collateral for Short-Term Debt Facilities	Total Collateral for Short-Term Debt Facilities	$	319,836	$	2,698,366	Total Collateral for Short-Term Debt Facilities	1,513,042		398,252
Cash						Cash	12,442		9,978
Restricted cash						Restricted cash	19,028		23,220
Servicer advances						Servicer advances	171,818		217,656
Total Collateral for Servicer Advance Financing						Total Collateral for Servicer Advance Financing	203,288		250,854
Total Collateral for Short-Term Debt						Total Collateral for Short-Term Debt	$	1,716,330	$	649,106

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

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the average balances of our short-term debt facilities were ~~$313 million~~$1.85 billion and $1.42 billion, respectively. At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, accrued interest payable on our short-term debt facilities was $2 million and $1 million, ~~and $6 million,~~ respectively.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~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 ~~September~~June 30, ~~2020, the fair value of servicer advances, cash and restricted cash collateralizing the securitization financing was $270 million. At September 30, 2020,~~2021, the accrued interest payable balance on this financing was $0.1 million and the unamortized capitalized commitment costs were ~~$0.2~~$0.4 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$2 million at ~~September~~June 30, ~~2020.~~2021. At both ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we had 0 outstanding borrowings on this facility.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 13. Short-Term Debt - (continued)

Remaining Maturities of Short-Term Debt

The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt ~~as well as our convertible notes~~ at ~~September~~June 30, ~~2020.~~2021.

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


		September 30, 2020									June 30, 2021
(In Thousands)	(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total		(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total
Collateral Type	Collateral Type									Collateral Type
Held-for-sale residential loans	Held-for-sale residential loans	$	1,217	$	0	$	80,681	$	81,898	Held-for-sale residential loans	$	0	$	119,462	$	929,682	$	1,049,144
Business purpose residential loans		0		0		96,811		96,811
Business purpose loans										Business purpose loans	0		0		191,288		191,288
Real estate securities	Real estate securities	37,217		37,837		0		75,054		Real estate securities	44,527		36,411		0		80,938

Total Secured Short-Term Debt	Total Secured Short-Term Debt	38,434		37,837		177,492		253,763		Total Secured Short-Term Debt	44,527		155,873		1,120,970		1,321,370
Servicer advance financing	Servicer advance financing	0		228,998		0		228,998		Servicer advance financing	0		0		163,629		163,629

Total Short-Term Debt	Total Short-Term Debt	$	38,434	$	266,835	$	177,492	$	482,761	Total Short-Term Debt	$	44,527	$	155,873	$	1,284,599	$	1,484,999

Note 14. Asset-Backed Securities Issued

The carrying values of ABS issued by our consolidated securitization entities at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, along with other selected information, are summarized in the following table.

Table 14.1 – Asset-Backed Securities Issued


September 30, 2020		Legacy Sequoia			Sequoia Choice			Freddie Mac SLST (1)			Freddie Mac K-Series					CAFL				Total
June 30, 2021										June 30, 2021				Legacy Sequoia								Sequoia				CAFL				Freddie Mac SLST (1)				Freddie Mac K-Series			Total
(Dollars in Thousands)	(Dollars in Thousands)			Legacy Sequoia						Sequoia Choice						Freddie Mac SLST (1)				Freddie Mac K-Series								CAFL							Total				(Dollars in Thousands)
Certificates with principal balance	Certificates with principal balance										Certificates with principal balance				$			291,083				$	1,946,901			$	2,746,648				$	1,718,754					$	422,534			$	7,125,920
Interest-only certificates	Interest-only certificates	1,268					6,805			24,053					13,122				137,064					182,312		Interest-only certificates			788				15,282			167,460				21,455			11,627		216,612
Market valuation adjustments	Market valuation adjustments	(56,769)			48,045			95,138			33,531					78,112					198,057		Market valuation adjustments			(33,660)				28,365				93,488			86,109				20,163			194,465

ABS Issued, Net	ABS Issued, Net	$	292,484		$	1,626,564		$	2,044,335		$	464,865				$	2,744,150			$	7,172,398	ABS Issued, Net			$	258,211			$	1,990,548			$	3,007,596		$	1,826,318			$	454,324		$	7,536,997
Range of weighted average interest rates, by series	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%						Range of weighted average interest rates, by series			0.49% to 1.46%				2.31% to 5.10%				2.62% to 5.20%			3.50% to 4.75%				3.41		%
Stated maturities	Stated maturities	2024 - 2036			2047 - 2050			2028 - 2059			2025					2022 - 2048						Stated maturities			2024 - 2036				2047 - 2051				2021 - 2031			2028 - 2059				2025
Number of series	Number of series	20			10			3			1					13						Number of series			20				12				14			3				1


December 31, 2020	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST (1)		Freddie Mac K-Series			Total
(Dollars in Thousands)
Certificates with principal balance	$	329,039	$	1,309,957	$	2,716,425	$	1,866,145	$	416,339		$	6,637,905
Interest-only certificates	1,092		4,591		162,934		23,335		13,026			204,978
Market valuation adjustments	(47,805)		32,809		133,734		104,439		34,601			257,778


ABS Issued, Net	$	282,326	$	1,347,357	$	3,013,093	$	1,993,919	$	463,966		$	7,100,661
Range of weighted average interest rates, by series	0.35% to 1.55%		2.25% to 5.04%		2.68% to 5.42%		3.50% to 4.75%		3.39		%
Stated maturities	2024 - 2036		2047 - 2050		2021 - 2031		2028 - 2059		2025
Number of series	20		10		14		3		1

(1)Includes $179 million and $205 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at June 30, 2021 and December 31, 2020, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

December 31, 2019 Legacy
Sequoia Sequoia
Choice Freddie Mac SLST Freddie Mac K-Series CAFL Total
(Dollars in Thousands)
Certificates with principal balance $ 420,056 $ 1,979,719 $ 1,842,682 $ 3,844,789 $ 1,875,007 $ 9,962,253
Interest-only certificates 1,282 16,514 30,291 217,891 90,134 356,112
Market valuation adjustments (18,873) 40,965 45,349 93,559 36,110 197,110
ABS Issued, Net $ 402,465 $ 2,037,198 $ 1,918,322 $ 4,156,239 $ 2,001,251 $ 10,515,475
Range of weighted average interest rates, by series 1.94% to 3.26% 4.40% to 5.05% 3.50 % 3.35% to 4.35% 3.25% to 5.36%
Stated maturities 2024 - 2036 2047 - 2049 2028 - 2029 2025 - 2049 2022 - 2048
Number of series 20 9 2 5 10

~~(1)Includes $208 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost.~~

During the third quarter of 2020, we transferred all of the subordinate securities we owned from two consolidated re-performing loan securitization VIEs sponsored by Freddie Mac SLST to a re-securitization trust, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. At ~~September~~June 30, ~~2020,~~2021, the ~~carrying value~~principal balance of the ABS issued was ~~$203~~$179 million, and the debt discount ~~was $5~~and deferred issuance costs were $3 million, for a carrying value of $176 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued is subject to optional redemption and interest rate step-ups prior to the stated maturity according to the terms of the respective governing agreements.

The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than its stated maturity. At ~~September~~June 30, ~~2020,~~2021, the majority of the ABS issued and outstanding had contractual maturities beyond five years. See Note 4 for detail on the carrying value components of the collateral for ABS issued and outstanding. The following table summarizes the accrued interest payable on ABS issued at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Interest due on consolidated ABS issued is payable monthly.

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


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Legacy Sequoia	Legacy Sequoia	$	180	$	395	Legacy Sequoia	$	123	$	141
Sequoia Choice		5,652		7,732
Sequoia						Sequoia	5,521		4,697
CAFL						CAFL	10,183		10,122
Freddie Mac SLST (1)	Freddie Mac SLST (1)	5,831		5,374		Freddie Mac SLST (1)	5,200		5,656
Freddie Mac K-Series	Freddie Mac K-Series	1,182		12,887		Freddie Mac K-Series	1,200		1,177
CAFL		9,180		7,298
Total Accrued Interest Payable on ABS Issued	Total Accrued Interest Payable on ABS Issued	$	22,025	$	33,686	Total Accrued Interest Payable on ABS Issued	$	22,227	$	21,793

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

~~Note 15. Long-Term Debt~~

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

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

~~FHLBC Borrowings~~

~~At September 30, 2020, $1 million of advances were~~The table below summarizes our long-term debt, including the facilities that are available to us, the outstanding ~~under our FHLBC borrowing agreement, with a~~balances, the weighted average interest rate, ~~of 0.35%. These~~and the maturity information at June 30, 2021.

Table 15.1 – Long-Term Debt


	June 30, 2021
(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit	Weighted Average Interest Rate (1)		Final Maturity
Facilities
Recourse Subordinate Securities Financing
Sequoia	$	160,102	$	(521)	$	159,581	N/A	4.21	%	9/2024
CAFL	102,424		(505)		101,919		N/A	4.21	%	2/2025
Non-Recourse BPL Financing
Facility A	45,582		(444)		45,138		45,582	L + 3.85%		7/2022
Facility B	57,616		(199)		57,417		250,000	L + 3.00%		N/A
Recourse BPL Financing
Facility C	269,100		0		269,100		450,000	L + 3.40%		6/2023
Facility D	200,275		(158)		200,117		250,000	L + 3.00%		9/2023
Total Long-Term Debt Facilities	835,099		(1,827)		833,272
Convertible notes
4.75% convertible senior notes	198,629		(2,356)		196,273		N/A	4.75	%	8/2023
5.625% convertible senior notes	150,200		(2,450)		147,750		N/A	5.625	%	7/2024
5.75% exchangeable senior notes	172,092		(3,776)		168,316		N/A	5.75	%	10/2025
Trust preferred securities and subordinated notes	139,500		(803)		138,697		N/A	L + 2.25%		7/2037
Total Long-Term Debt	$	1,495,520	$	(11,212)	$	1,484,308

(1)Variable rate borrowings mature in 2026. At December 31, 2019, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 1.88% and a weighted average maturity of six years. During the three and nine months ended September 30, 2020, we repaid 0 and $2.00 billion, respectively, of our FHLBC borrowings. At September 30, 2020, total advances under this agreement were secured by $1 million of restricted cash. We do not expect to increase borrowings under our FHLBC borrowing agreement above the existing $1 million of advances outstanding. This agreement also requires our subsidiary to purchase and hold stockare based on 1- or 3-month LIBOR ("L" in the ~~FHLBC in~~table above) plus an amount equal to a specified percentage of outstanding advances. At September 30, 2020, our subsidiary held $5 million of FHLBC stock that is included in Other assets in our consolidated balance sheets.

~~Recourse Subordinate Securities Financing Facilities~~

In 2019, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable (e.g., not subject to margin calls based on the market value of the underlying collateral) recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia Choice securitizations. The financing is fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through September 2022. The financing facility may be terminated, at our option, in September 2022, and has a final maturity in September 2024, provided that the interest rate on amounts outstanding under the facility increases between October 2022 and September 2024. At September 30, 2020, we had borrowings under this facility totaling $180 million and $1 million of unamortized deferred issuance costs, for a net carrying value of $179 million. At September 30, 2020, the fair value of real estate securities pledged as collateral under this long-term debt facility was $232 million and included Sequoia securities and securities retained from our Sequoia Choice securitizations.

In the first quarter of 2020, a subsidiary of Redwood entered into a second repurchase agreement with similar terms to provide non-marginable recourse debt financing of certain securities retained from our consolidated 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. At September 30, 2020, we had borrowings under this facility totaling $103 million and $1 million of unamortized deferred issuance costs, for a net carrying value of $102 million. At September 30, 2020, the fair value of real estate securities pledged as collateral under this long-term debt facility was $112 million and included securities retained from our consolidated CAFL securitizations.applicable spread.

Non-Recourse ~~Business Purpose Loan~~BPL Financing Facilities

In the 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. We do not have the ability to increase borrowings under this borrowing facility above the existing amounts outstanding. At September 30, 2020, we had borrowings under this facility totaling $158 million and $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.

Recourse BPL Financing Facilities

In the second quarter of 2021, we reclassified one of our recourse facilities with a ~~term facility~~borrowing capacity of ~~$355~~$450 million ~~and a revolving facility~~from short-term to long-term debt as we amended the terms 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 under~~ this facility, ~~totaling $302 million and $4 million~~including an extension of ~~unamortized deferred issuance costs,~~its maturity (see details 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.~~

"Facility C" above).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 15. Long-Term Debt - (continued)

~~Recourse Business Purpose Loan Financing Facilities~~

InThe following table below presents the 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 0 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, securities, and ~~$194 million of single-family rental loans were~~other assets pledged as collateral under ~~this facility.~~

~~Recourse Revolving Debt Facility~~

~~In the first quarter of 2020, a subsidiary of Redwood entered into a secured revolving~~our long-term debt ~~facility agreement collateralized by MSRs and certificated mortgage servicing rights. Borrowings under this facility accrue interest~~ at ~~a per annum rate equal to one-month LIBOR plus 2.75% through January 2021, with an increase in rate between February~~June 30, 2021 and December 31, 2020.

Table 15.2 – Collateral for Long-Term Debt


(In Thousands)	June 30, 2021		December 31, 2020
Collateral Type
Bridge loans	$	555,791	$	544,151
Single-family rental loans	246,903		154,774
Real estate securities
Sequoia securitizations (1)	256,910		249,446
CAFL securitizations (1)	112,207		114,044
Total real estate securities owned	369,117		363,490
Other BPL investments	0		21,414
Restricted cash	0		1,100
Total Collateral for Long-Term Debt	$	1,171,811	$	1,084,929

(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the maturity of the facility in January 2022. This facility has an aggregate maximum borrowing capacity of $50 million. We had 0 borrowings outstanding under this facility at September 30, 2020. At September 30, 2020, $33 million of MSRsloans and ~~certificated servicing rights were pledged as collateral under this facility.~~non-recourse ABS debt issued from these securitizations.

~~Convertible Notes~~

At September 30, 2020, we had $172 million principal amount outstanding of 5.75% exchangeable senior notes due 2025. During the second quarter of 2020, we repurchased $29 million par value of these notes at a discount and recorded a gain on extinguishment of $6 million in Realized gains, net on our consolidated statements of income (loss). At September 30, 2020, the accrued interest payable balance on this debt was $5 million and the unamortized deferred issuance costs were $4 million.

At September 30, 2020, we had $150 million principal amount outstanding of 5.625% convertible senior notes due 2024. During the second quarter of 2020, we repurchased $50 million par value of these notes at a discount and recorded a gain on extinguishment of $9 million in Realized gains, net on our consolidated statements of income (loss). At September 30, 2020,The following table summarizes the accrued interest payable on ~~this~~long-term debt ~~was $2 million, the unamortized deferred issuance costs were $2 million, and the debt discount was $1 million.~~

~~At September~~at June 30, 2020, we had $199 million principal amount outstanding of 4.75% convertible senior notes due 2023. During the second quarter of 2020, we repurchased $46 million par value of these notes at a discount and recorded a gain on extinguishment of $10 million in Realized gains, net on our consolidated statements of income (loss). At September 30, 2020, the accrued interest payable balance on this debt was $1 million and the unamortized deferred issuance costs were $3 million.

~~Trust Preferred Securities and Subordinated Notes~~

~~At September 30, 2020, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively. At both September 30, 2020~~2021 and December 31, ~~2019,~~2020.

Table 15.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	June 30, 2021		December 31, 2020
Long-term debt facilities	$	704	$	1,799
Convertible notes
4.75% convertible senior notes	3,564		3,564
5.625% convertible senior notes	3,896		3,896
5.75% exchangeable senior notes	2,474		2,474
Trust preferred securities and subordinated notes	585		669
Total Accrued Interest Payable on Long-Term Debt	$	11,223	$	12,402

Refer to our Annual Report on Form 10-K for the ~~accrued interest payable balance on~~year ended December 31, 2020 for a full description of our ~~trust preferred securities and subordinated notes was $1 million.~~long-term debt.

Note 16. Commitments and Contingencies

Lease Commitments

At ~~September~~June 30, ~~2020,~~2021, we were obligated under 7 non-cancelable operating leases with expiration dates through 2031 for ~~$18~~$19 million of cumulative lease payments. Our operating lease expense was ~~$3 million and~~ $2 million for ~~the nine months~~both six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019, respectively.~~2020.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

The following table presents our future lease commitments at ~~September~~June 30, ~~2020.~~2021.

Table 16.1 – Future Lease Commitments by Year


(In Thousands)	(In Thousands)	September 30, 2020		(In Thousands)	June 30, 2021
2020 (3 months)		$	930
2021		2,949
2021 (6 months)				2021 (6 months)	$	1,854
2022	2022	2,427		2022	3,714
2023	2023	1,913		2023	3,235
2024	2024	1,917		2024	2,411
2025	2025	8,039		2025	1,983
2026 and thereafter				2026 and thereafter	6,128
Total Lease Commitments	Total Lease Commitments	18,175		Total Lease Commitments	19,325
Less: Imputed interest	Less: Imputed interest	(3,052)		Less: Imputed interest	(3,328)
Lease Liability		$	15,123
Operating Lease Liabilities				Operating Lease Liabilities	$	15,997

During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, we ~~entered~~did not enter into 3any office ~~leases~~leases. During the three months ended June 30, 2021, we increased our operating lease right-of-use assets and ~~determined that each~~liabilities by $1 million as the result of ~~these leases qualified as operating~~an amendment to one of our existing leases. At ~~September~~June 30, ~~2020,~~2021, our operating lease ~~liability was $15~~liabilities were $16 million, which ~~was~~were a component of Accrued expenses and other liabilities, and our operating lease right-of-use ~~asset was $13~~assets were $14 million, which ~~was~~were a component of Other assets.

We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At ~~September~~June 30, ~~2020,~~2021, the weighted-average remaining lease term and weighted-average discount rate for our leases was 7 years and ~~5.0%~~4.9%, respectively.

Commitment to Fund ~~Residential~~ Bridge Loans

As of ~~September~~June 30, ~~2020,~~2021, we had commitments to fund up to ~~$225~~$374 million of additional advances on existing ~~residential~~ bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the customer and other terms regarding advances that must be met before we fund the commitment. At ~~September~~June 30, ~~2020,~~2021, we ~~recorded~~carried a $1$0.3 million ~~derivative~~contingent liability related to these commitments to fund construction ~~advances (see~~ ~~Note 7~~ ~~for additional detail).~~advances. We may also advance funds related to loans sold under a separate loan sale agreement that are generally repaid immediately by the loan purchaser and do not generally expose us to loss. The outstanding commitments related to these loans that we may temporarily fund totaled approximately ~~$15~~$0.3 million at ~~September~~June 30, ~~2020.~~2021. During the three and six months ended June 30, 2021, we recorded net market valuation gains of $1 million and $2 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2020, we recorded a net market valuation gain of $2 million and a net market valuation loss of $2 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).

Commitment to Fund Partnerships

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

~~5 Arches Contingent Consideration~~

As part of the consideration for our acquisition of 5 Arches, we were committed to make earn-out payments up to $29 million, payable in a mix of cash and Redwood common stock. These contingent earn-out payments were classified as a contingent consideration liability and carried at fair value prior to March 31, 2020. During the first quarter of 2020, we made a cash payment of $11 million and granted $3 million of Redwood common stock in connection with the first anniversary of the purchase date. Additionally, as a result of an amendment to the agreement, we reclassified the contingent liability to a deferred liability, as the remaining payments became payable on a set timetable without any remaining contingencies. At September 30, 2020, the balance of this liability was $14 million, which will be paid in a mix of cash and common stock in March 2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

~~Commitment to Fund Shared Home Appreciation Options~~

In the third quarter of 2019, we entered into a flow purchase agreement to acquire shared home appreciation options. The counterparty purchases an option to buy a fractional interest in a homeowner's ownership interest in residential property, and subsequently the counterparty sells the option contract to us. Pursuant to the terms of the option contract, we share in both home price appreciation and depreciation. At September 30, 2020, we had acquired $47 million of shared home appreciation options under this agreement, which are included in Other investments on our consolidated balance sheets. At September 30, 2020, we had an outstanding commitment to fund up to an additional $3 million under this agreement.

Loss Contingencies — Risk-Sharing

During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At ~~September~~June 30, ~~2020,~~2021, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was ~~fully~~partially collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At ~~September~~June 30, ~~2020,~~2021, we had not incurred any losses under these arrangements. For the three and ~~nine~~six months ended ~~September~~June 30, 2020, other income related to these arrangements was $1 million and $3 million, respectively, and net market valuation losses related to these investments were $0.3 million and $0.9 million, respectively. For the three and nine months ended September 30, 2019,2021, other income related to these arrangements was $1 million and $2 million, respectively, and net market valuation losses related to these investments were less than $0.1 million for both periods. For the three and six months ended June 30, 2020, other income related to these arrangements was $1 million and $2 million, respectively, and net market valuation losses related to these investments were less than $0.2 million and $1 million, respectively.

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at ~~September~~June 30, ~~2020,~~2021, the loans had an unpaid principal balance of ~~$1.12 billion~~$702 million and a weighted average FICO score of ~~758~~756 (at origination) and LTV ratio of 75% (at origination). At ~~September~~June 30, ~~2020, $42~~2021, $29 million of the loans were 90 days or more delinquent, ~~and 0ne~~of which one of these loans ~~were~~with an unpaid principal balance of $0.2 million was in foreclosure. At ~~September~~June 30, ~~2020,~~2021, the carrying value of our guarantee obligation was ~~$11~~$8 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to Redwood Trust, Inc. or its affiliates. At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, assets of such SPEs totaled ~~$47~~$34 million and ~~$48~~$46 million, respectively, and liabilities of such SPEs totaled ~~$11~~$8 million and ~~$14~~$10 million, respectively.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

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

Loss Contingencies — Residential Repurchase Reserve

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

At ~~September~~both June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, our repurchase reserve associated with our residential loans and MSRs was $9 million ~~and $4 million, respectively,~~ and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets.

We received 81 and 105 repurchase requests during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~did 0t repurchase any~~repurchased 1 and 0 loans, ~~during either of these periods.~~respectively. During the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, we recorded repurchase provisions of $4$0.3 million and ~~reversals of repurchase provisions of $0.2~~$4 million, respectively, that were recorded in Mortgage banking activities, net; Investment fair value changes, net; and Other income on our consolidated statements of income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 16 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 under the heading “Loss Contingencies - Litigation.” At ~~September~~June 30, ~~2020,~~2021, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 was $2 million.

In addition to those matters, as previously disclosed, in connection with the impact of the effects of the pandemic on the non-Agency mortgage finance market and on our business and operations, a number of the counterparties that have regularly sold residential mortgage loans to us believe that we breached perceived obligations to them, and requested or demanded that we purchase loans from them and/or compensate them for perceived damages resulting from our decisions earlier in 2020 not to purchase certain loans from them (“Residential Loan Seller Demands”).

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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September~~ At June 30, ~~2020~~

~~(Unaudited)~~

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

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, a portion of which was recorded through Other expense and a portion of which was recorded through Mortgage banking activities, net on our consolidated income statement. 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. In addition, as previously disclosed, one such counterparty filed a breach of contract lawsuit against us in May 2020 alleging that it had suffered in excess of $2 million of losses as a result of our alleged failure to purchase residential mortgage loans from it; and in October 2020 we and the plaintiff agreed to settle the lawsuit on mutually satisfactory terms.

During the three and nine months ended September 30, 2020, we recorded $4 million and $9 million of expenses, respectively, in association with Residential Loan Seller Demands. At September 30, 2020,2021, the aggregate amount of our accrual for estimated costs associated with ~~Residential~~the "Residential Loan Seller ~~Demands~~Demands" described in our Annual Report on Form 10-K for the year ended December 31, 2020 was ~~$6.5~~$2 million, a portion of which ~~would be~~is contingent on the successful completion of future residential loan purchase and sale transactions with certain ~~counterparties, with the expectation of generating future revenue~~counterparties. We believe we have either resolved or adequately accrued for ~~the Company.~~

~~With respect to~~any unresolved Residential Loan Seller Demands and that there are no other Residential Loan Seller Demands that have not been resolved or been accrued for, our beliefs about the legal merits of these allegations and our discussions with these counterparties have resulted in us determining that a significant loss from these matters is not probable. With respect to these remaining Residential Loan Seller Demands, based on the foregoing, we have concluded that we can estimate an aggregate range ofare reasonably possible ~~losses with respect~~ to ~~these Residential Loan Seller Demands of between 0 and $1.5 million.~~

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 Demands) could result in our concluding in the future to establish additional accruals or reserves or modify our aggregate range of reasonably possible losses with respect to these Residential Loan Seller Demand matters. Our actual losses, and any accruals or reserves we may establish in the future relating to these matters, may be materially higher than the accruals, reserves and the aggregate range of reasonably possible losses we have estimated above, respectively, including 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 and we cannot be certain that the resolution of these matters, whether through litigation, settlement, or otherwise, will not have a material ~~adverse effect on our financial condition or results of operations in any future period.~~

In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due. 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 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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

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

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

Note 17. Equity

The following table provides a summary of changes to accumulated other comprehensive income by component for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and 2019. During the three and nine months ended September 30, 2020, we recognized net unrealized gains (losses) on our Level 3 AFS securities which we owned as of September 30, 2020 of $8 million and negative $16 million, respectively.2020.

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


		Three Months Ended September 30, 2020				Three Months Ended September 30, 2019					Three Months Ended June 30, 2021				Three Months Ended June 30, 2020
(In Thousands)	(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	Balance at beginning of period	$	53,246	$	(82,637)	$	98,307	$	(49,384)	Balance at beginning of period	$	84,527	$	(79,539)	$	(1,865)	$	(83,666)
Other comprehensive income (loss) before reclassifications		8,236		0		4,484		(11,791)
Other comprehensive income before reclassifications										Other comprehensive income before reclassifications	11,224		0		52,393		0
Amounts reclassified from other accumulated comprehensive income	Amounts reclassified from other accumulated comprehensive income	(445)		1,040		(3,492)		0		Amounts reclassified from other accumulated comprehensive income	(7,500)		1,028		2,718		1,029
Net current-period other comprehensive income (loss)		7,791		1,040		992		(11,791)
Net current-period other comprehensive income										Net current-period other comprehensive income	3,724		1,028		55,111		1,029
Balance at End of Period	Balance at End of Period	$	61,037	$	(81,597)	$	99,299	$	(61,175)	Balance at End of Period	$	88,251	$	(78,511)	$	53,246	$	(82,637)


	Six Months Ended June 30, 2021				Six Months Ended June 30, 2020
(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	$	76,336	$	(80,557)	$	92,452	$	(50,939)
Other comprehensive income (loss) before reclassifications	22,210		0		(28,126)		(32,806)
Amounts reclassified from other accumulated comprehensive income (loss)	(10,295)		2,046		(11,080)		1,108
Net current-period other comprehensive income (loss)	11,915		2,046		(39,206)		(31,698)
Balance at End of Period	$	88,251	$	(78,511)	$	53,246	$	(82,637)

5957

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 17. Equity - (continued)

Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
(In Thousands) Available-for-Sale Securities Interest Rate Agreements Accounted for as Cash Flow Hedges Available-for-Sale Securities Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period $ 92,452 $ (50,939) $ 95,342 $ (34,045)
Other comprehensive income (loss)
before reclassifications (19,890) (32,806) 19,764 (27,130)
Amounts reclassified from other
accumulated comprehensive income (11,525) 2,148 (15,807) 0
Net current-period other comprehensive income (loss) (31,415) (30,658) 3,957 (27,130)
Balance at End of Period $ 61,037 $ (81,597) $ 99,299 $ (61,175)

The following table provides a summary of reclassifications out of accumulated other comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 17.2 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)


			Amount Reclassified From Accumulated Other Comprehensive Income						Amount Reclassified From Accumulated Other Comprehensive Income
		Affected Line Item in the	Three Months Ended September 30,					Affected Line Item in the	Three Months Ended June 30,
(In Thousands)	(In Thousands)	Income Statement	2020		2019		(In Thousands)	Income Statement	2021		2020
Net Realized (Gain) Loss on AFS Securities	Net Realized (Gain) Loss on AFS Securities						Net Realized (Gain) Loss on AFS Securities
Credit loss recovery on AFS securities		Investment fair value changes, net	$	(444)	$	0
Decrease in allowance for credit losses on AFS securities							Decrease in allowance for credit losses on AFS securities	Investment fair value changes, net	$	(13)	$	(54)
Gain on sale of AFS securities	Gain on sale of AFS securities	Realized gains, net	0		(3,492)		Gain on sale of AFS securities	Realized gains, net	(7,487)		2,772

			$	(444)	$	(3,492)			$	(7,500)	$	2,718
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges	Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges						Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Amortization of deferred loss	Interest expense	$	1,040	$	0	Amortization of deferred loss	Interest expense	$	1,028	$	1,029
			$	1,040	$	0			$	1,028	$	1,029

Amount Reclassified From
Accumulated Other Comprehensive Income
Affected Line Item in the Nine Months Ended September 30,
(In Thousands) Income Statement 2020 2019
Net Realized (Gain) Loss on AFS Securities
Credit loss expense on AFS securities Investment fair value changes, net $ 1,027 $ 0
Gain on sale of AFS securities Realized gains, net (12,552) (15,807)
$ (11,525) $ (15,807)
Net Realized Loss on Interest Rate
Agreements Designated as Cash Flow Hedges
Amortization of deferred loss Interest expense $ 2,148 $ 0
$ 2,148 $ 0

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

~~Note 17. Equity - (continued)~~



		Amount Reclassified From Accumulated Other Comprehensive Income
	Affected Line Item in the	Six Months Ended June 30,
(In Thousands)	Income Statement	2021		2020
Net Realized (Gain) Loss on AFS Securities
(Decrease) increase in allowance for credit losses on AFS securities	Investment fair value changes, net	$	(388)	$	1,471
Gain on sale of AFS securities	Realized gains, net	(9,907)		(12,551)

		$	(10,295)	$	(11,080)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Interest expense	$	2,046	$	1,108
		$	2,046	$	1,108

Issuance of Common Stock

~~In 2018, we~~We have an established a program to sell up to an aggregate of ~~$150~~$175 million of common stock from time to time in at-the-market ("ATM") ~~offerings. In March 2020, we increased the maximum aggregate amount~~offerings, with $110 million of ~~common stock offered under the ATM program to $175 million.~~remaining capacity available at June 30, 2021. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, we ~~issued 129,500 common~~did 0t issue any shares ~~for net proceeds of approximately $2 million through ATM offerings. At September 30, 2020, approximately $110 million remained outstanding for future offerings~~ under this program.

Direct Stock Purchase and Dividend Reinvestment Plan

During both the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, we did 0t issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. ~~During the nine months ended September~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, ~~2019, we issued 399,838 shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan, resulting in net proceeds of approximately $6 million.~~2021

(Unaudited)

Note 17. Equity - (continued)

Earnings (Loss) per Common Share

The following table provides the basic and diluted earnings (loss) per common share computations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 17.3 – Basic and Diluted Earnings (Loss) per Common Share


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, except Share Data)	(In Thousands, except Share Data)	2020		2019		2020		2019		(In Thousands, except Share Data)	2021		2020		2021		2020
Basic Earnings (Loss) per Common Share:	Basic Earnings (Loss) per Common Share:									Basic Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood	Net income (loss) attributable to Redwood	$	141,812	$	34,310	$	(636,142)	$	120,040	Net income (loss) attributable to Redwood	$	90,025	$	165,444	$	187,282	$	(777,954)
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(4,067)		(856)		(1,427)		(3,260)		Less: Dividends and undistributed earnings allocated to participating securities	(3,149)		(4,528)		(6,458)		(1,011)
Net income (loss) allocated to common shareholders	Net income (loss) allocated to common shareholders	$	137,745	$	33,454	$	(637,569)	$	116,780	Net income (loss) allocated to common shareholders	$	86,876	$	160,916	$	180,824	$	(778,965)
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	113,403,102		101,872,126		113,952,308		97,214,064		Basic weighted average common shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928
Basic Earnings (Loss) per Common Share	Basic Earnings (Loss) per Common Share	$	1.21	$	0.33	$	(5.60)	$	1.20	Basic Earnings (Loss) per Common Share	$	0.77	$	1.41	$	1.61	$	(6.82)
Diluted Earnings (Loss) per Common Share:	Diluted Earnings (Loss) per Common Share:									Diluted Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood	Net income (loss) attributable to Redwood	$	141,812	$	34,310	$	(636,142)	$	120,040	Net income (loss) attributable to Redwood	$	90,025	$	165,444	$	187,282	$	(777,954)
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(3,512)		(1,036)		(1,427)		(3,625)		Less: Dividends and undistributed earnings allocated to participating securities	(2,869)		(3,116)		(5,829)		(1,011)
Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax	Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax	6,990		8,887		0		26,271		Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax	6,990		(15,835)		13,971		0
Net income (loss) allocated to common shareholders	Net income (loss) allocated to common shareholders	$	145,290	$	42,161	$	(637,569)	$	142,686	Net income (loss) allocated to common shareholders	$	94,146	$	146,493	$	195,424	$	(778,965)
Weighted average common shares outstanding	Weighted average common shares outstanding	113,403,102		101,872,126		113,952,308		97,214,064		Weighted average common shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928
Net effect of dilutive equity awards	Net effect of dilutive equity awards	0		362,743		0		261,155		Net effect of dilutive equity awards	273,139		0		234,353		0
Net effect of assumed convertible notes conversion to common shares	Net effect of assumed convertible notes conversion to common shares	28,566,875		34,287,840		0		33,727,470		Net effect of assumed convertible notes conversion to common shares	28,566,875		32,715,790		28,566,875		0
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	141,969,977		136,522,709		113,952,308		131,202,689		Diluted weighted average common shares outstanding	141,761,084		147,099,079		141,139,212		114,229,928
Diluted Earnings (Loss) per Common Share	Diluted Earnings (Loss) per Common Share	$	1.02	$	0.31	$	(5.60)	$	1.09	Diluted Earnings (Loss) per Common Share	$	0.66	$	1.00	$	1.38	$	(6.82)

We included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights, in the calculations of basic and diluted earnings per common share as we determined that the two-class method was more dilutive than the alternative treasury stock method for these shares. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

~~Note 17. Equity - (continued)~~

During the ~~three~~six months ended ~~September~~June 30, ~~2020 and the three and nine months ended September 30, 2019,~~2021, certain of our convertible notes were determined to be dilutive and were included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense ~~and any realized gains or losses on extinguishment of debt~~ (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money) are included in the denominator.

For the ~~nine~~six months ended ~~September~~June 30, 2020, ~~32,225,825~~34.1 million of common shares related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and ~~nine~~six months ended ~~September~~June 30, 2021, the number of outstanding equity awards that were antidilutive totaled 18,645 and 17,053, respectively. For the three and six months ended June 30, 2020, the number of outstanding equity awards that were antidilutive totaled ~~13,560~~11,561 and ~~15,457,~~16,405, respectively. ~~For the three and nine months ended September~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, ~~2019, the number of outstanding equity awards that were antidilutive totaled 11,710 and 9,361, respectively.~~2021

(Unaudited)

Note 17. Equity - (continued)

Stock Repurchases

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the ~~three~~six months ended ~~September~~June 30, ~~2020,~~2021, we ~~repurchased 3,047,335 shares of our common stock pursuant to this authorization for $22 million.~~did 0t repurchase any shares. At ~~September~~June 30, ~~2020,~~2021, $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.

Note 18. Equity Compensation Plans

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, 8,629,455~~2020, 7,443,250 and ~~3,637,480~~7,957,891 shares of common stock, respectively, were available for grant ~~under our Incentive Plan. During the second quarter of 2020, Redwood shareholders approved for grant an additional 5 million shares of common stock~~ under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock and purchases under the Employee Stock Purchase Plan, totaled ~~$20~~$27 million at ~~September~~June 30, ~~2020,~~2021, as shown in the following table.

Table 18.1 – Activities of Equity Compensation Costs by Award Type


		Nine Months Ended September 30, 2020													Six Months Ended June 30, 2021
(In Thousands)	(In Thousands)	Restricted Stock Awards		Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total		(In Thousands)	Restricted Stock Awards		Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total
Unrecognized compensation cost at beginning of period	Unrecognized compensation cost at beginning of period	$	1,990	$	3,534	$	17,858	$	8,946	$	0	$	32,328	Unrecognized compensation cost at beginning of period	$	564	$	3,540	$	17,766	$	5,794	$	0	$	27,664
Equity grants	Equity grants	108		3,581		6,780		0		160		10,629		Equity grants	0		2,370		3,141		0		259		5,770
Performance-based valuation adjustment	Performance-based valuation adjustment	0		0		0		(7,352)		0		(7,352)		Performance-based valuation adjustment	0		0		0		1,072		0		1,072
Equity grant forfeitures	Equity grant forfeitures	(529)		(2,161)		(4,733)		(648)		0		(8,071)		Equity grant forfeitures	(2)		(610)		(550)		0		0		(1,162)
Equity compensation expense	Equity compensation expense	(807)		(1,067)		(6,268)		326		(80)		(7,896)		Equity compensation expense	(271)		(752)		(3,629)		(1,355)		(130)		(6,137)
Unrecognized Compensation Cost at End of Period	Unrecognized Compensation Cost at End of Period	$	762	$	3,887	$	13,637	$	1,272	$	80	$	19,638	Unrecognized Compensation Cost at End of Period	$	291	$	4,548	$	16,728	$	5,511	$	129	$	27,207

At ~~September~~June 30, ~~2020,~~2021, the weighted average amortization period remaining for all of our equity awards was one year.

Restricted Stock Awards ("RSAs")

At June 30, 2021 and December 31, 2020, there were 29,693 and 78,998 shares, respectively, of RSAs outstanding. Restrictions on these shares lapse through 2022. During the six months ended June 30, 2021, there were 0 RSAs granted, restrictions on 49,305 RSAs lapsed and those shares were distributed, and 0 RSAs were forfeited.

Restricted Stock Units ("RSUs")

At June 30, 2021 and December 31, 2020, there were 453,811 and 282,424 shares, respectively, of RSUs outstanding. Restrictions on these shares lapse through 2025. During the six months ended June 30, 2021, there were 272,261 RSUs granted, 62,494 RSUs distributed, and 38,380 RSUs forfeited.

Deferred Stock Units (“DSUs”)

At June 30, 2021 and December 31, 2020, there were 3,081,201 and 2,805,144 DSUs, respectively, outstanding of which 1,437,464 and 1,206,125, respectively, had vested. During the six months ended June 30, 2021, there were 463,213 DSUs granted, 155,995 DSUs distributed, and 31,161 DSUs forfeited. Unvested DSUs at June 30, 2021 vest through 2025.

6260

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 18. Equity Compensation Plans - (continued)

~~Restricted Stock Awards ("RSAs")~~

At September 30, 2020 and December 31, 2019, there were 80,550 and 216,470 shares, respectively, of RSAs outstanding. Restrictions on these shares lapse through 2022. During the nine months ended September 30, 2020, there were 0 RSAs granted, restrictions on 101,063 RSAs lapsed and those shares were distributed, and 34,857 RSAs were forfeited.

~~Restricted Stock Units ("RSUs")~~

At September 30, 2020 and December 31, 2019, there were 294,986 and 275,173 shares, respectively, of RSUs outstanding. Restrictions on these shares lapse through 2024. During the nine months ended September 30, 2020, there were 205,482 RSUs granted, 55,514 RSUs distributed, and 130,155 RSUs forfeited.

~~Deferred Stock Units (“DSUs”)~~

At September 30, 2020 and December 31, 2019, there were 2,420,737 and 2,630,805 DSUs, respectively, outstanding of which 1,406,190 and 1,286,063, respectively, had vested. During the nine months ended September 30, 2020, there were 494,719 DSUs granted, 413,533 DSUs distributed, and 291,253 DSUs forfeited. Unvested DSUs at September 30, 2020 vest through 2024.

Performance Stock Units (“PSUs”)

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the target number of PSUs that were unvested was ~~739,895~~955,710 and ~~839,070,~~978,735, respectively. ~~During the nine months ended September 30, 2020, 99,175 PSUs were forfeited.~~ Vesting for all PSUs will generally occur at the end of three years from their grant date based on various Total Shareholder Return ("TSR") performance calculations, as discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. With respect to PSUs granted in May 2018, the three-year performance period ended during the second quarter of 2021, resulting in the vesting of no shares of our common stock. During the ~~first~~second quarter of ~~2020,~~2021, for PSUs granted in ~~2018 and 2019,~~2020, we adjusted ~~our vesting estimate to assume that none of these awards will meet~~ the ~~minimum performance thresholds for vesting. This adjustment resulted in a reversal of~~future amortization expense by $1 million to reflect our current estimate of ~~stock-based compensation expense recorded~~the number of shares expected to vest in relation to the ~~first quarter of 2020.~~performance condition for the initial one-year vesting tranche.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of ~~600,000~~850,000 shares of common stock to be purchased in aggregate for all employees. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, 477,142~~2020, 523,991 and ~~430,772~~489,886 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at ~~September~~June 30, ~~2020.~~

2021.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

Note 19. Mortgage Banking Activities, Net

The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 19.1 – Mortgage Banking Activities


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
Residential Mortgage Banking Activities, Net	Residential Mortgage Banking Activities, Net									Residential Mortgage Banking Activities, Net
Changes in fair value of:	Changes in fair value of:									Changes in fair value of:
Residential loans, at fair value (1)	Residential loans, at fair value (1)	$	12,589	$	6,320	$	19,151	$	41,431	Residential loans, at fair value (1)	$	76,907	$	(1,393)	$	47,634	$	6,562
Risk management derivatives (2)		(10)		(1,710)		(31,304)		(11,608)
Other income (expense), net (3)		(715)		407		(7,069)		1,380
Trading securities (2)										Trading securities (2)	(1,095)		0		(374)		0
Risk management derivatives (3)										Risk management derivatives (3)	(55,740)		0		33,224		(31,294)
Other income (expense), net (4)										Other income (expense), net (4)	1,193		(6,612)		2,216		(6,354)
Total residential mortgage banking activities, net	Total residential mortgage banking activities, net	11,864		5,017		(19,222)		31,203		Total residential mortgage banking activities, net	21,265		(8,005)		82,700		(31,086)

Business Purpose Mortgage Banking Activities, Net:	Business Purpose Mortgage Banking Activities, Net:									Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:	Changes in fair value of:									Changes in fair value of:
Single-family rental loans, at fair value (1)	Single-family rental loans, at fair value (1)	43,191		1,847		56,209		5,473		Single-family rental loans, at fair value (1)	25,966		1,210		36,214		13,018
Risk management derivatives (2)		(89)		(1,262)		(21,627)		(3,779)
Residential bridge loans, at fair value		938		1,010		(4,256)		2,108
Other income, net (4)		3,491		2,903		13,407		5,979
Risk management derivatives (3)										Risk management derivatives (3)	(2,504)		0		1,354		(21,538)
Bridge loans, at fair value										Bridge loans, at fair value	2,225		(1,260)		3,269		(5,194)
Other income, net (5)										Other income, net (5)	7,467		2,073		13,489		9,916
Total business purpose mortgage banking activities, net	Total business purpose mortgage banking activities, net	47,531		4,498		43,733		9,781		Total business purpose mortgage banking activities, net	33,154		2,023		54,326		(3,798)
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net	$	59,395	$	9,515	$	24,511	$	40,984	Mortgage Banking Activities, Net	$	54,419	$	(5,982)	$	137,026	$	(34,884)

(1)For residential loans, includes changes in fair value for associated loan purchase and forward sale commitments. For single-family rental loans, includes changes in fair value for associated interest rate lock commitments.

(2)Represents fair value changes on trading securities that are being used as hedges to manage the mark-to-market risks associated with our residential mortgage banking operations.

(3)Represents market valuation changes of derivatives that were used to manage risks associated with our ~~accumulation of loans.~~mortgage banking operations.

~~(3)~~(4)Amounts in this line item include other fee income from loan acquisitions and provisions for ~~repurchases~~repurchase expense, ~~and expense related to resolving residential loan seller demands,~~ presented net.

~~(4)~~(5)Amounts in this line item include other fee income from loan originations.

6461

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 20. Other Income

The following table presents the components of Other income recorded in our consolidated statements of income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 20.1 – Other Income


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
MSR (loss) income, net	MSR (loss) income, net	$	(2,362)	$	431	$	(5,595)	$	2,342	MSR (loss) income, net	$	(43)	$	(1,424)	$	654	$	(3,233)
Risk share income	Risk share income	1,200		905		3,146		2,351		Risk share income	861		1,181		1,743		1,946
FHLBC capital stock dividend	FHLBC capital stock dividend	116		541		1,201		1,623		FHLBC capital stock dividend	25		538		50		1,085
Equity investment income		341		560		615		732
5 Arches loan administration fee income		688		1,344		2,206		3,298
Gain on re-measurement of investment in 5 Arches		0		0		0		2,441

Bridge loan fees										Bridge loan fees	911		626		1,604		1,804

Other	Other	(97)		575		2,406		1,053		Other	372		244		1,918		2,491
Other (Loss) Income		$	(114)	$	4,356	$	3,979	$	13,840
Other Income										Other Income	$	2,126	$	1,165	$	5,969	$	4,093

6562

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses

Components of our general and administrative expenses, loan acquisition costs, and other expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 are presented in the following table.

Table 21.1 – Components of General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2021		2020		2021		2020
General and Administrative Expenses	General and Administrative Expenses									General and Administrative Expenses
Fixed compensation expense	Fixed compensation expense	$	10,103	$	9,391	$	36,605	$	26,740	Fixed compensation expense	$	11,269	$	11,818	$	23,074	$	26,502
Variable compensation expense		5,882		3,489		9,171		11,356
Equity compensation expense		2,639		3,155		7,896		10,132
Annual variable compensation										Annual variable compensation	12,508		3,278		31,177		3,289
Long-term incentive award expense (1)										Long-term incentive award expense (1)	5,682		3,262		9,851		5,257
Acquisition-related equity compensation expense ~~(1)~~(2)	Acquisition-related equity compensation expense ~~(1)~~(2)	1,212		0		3,636		0		Acquisition-related equity compensation expense ~~(1)~~(2)	1,212		1,212		2,424		2,424
Systems and consulting	Systems and consulting	2,145		3,230		7,752		7,594		Systems and consulting	3,272		2,395		6,249		5,607
Office costs	Office costs	1,859		1,517		5,854		4,406		Office costs	2,024		1,887		3,832		3,995
Accounting and legal	Accounting and legal	1,601		1,767		6,605		3,852		Accounting and legal	1,221		2,788		1,935		5,004
Corporate costs	Corporate costs	831		482		2,128		1,701		Corporate costs	873		626		1,564		1,297
Other operating expenses		1,358		1,868		5,185		4,941
Other										Other	2,533		1,254		4,039		3,827
Total General and Administrative Expenses	Total General and Administrative Expenses	27,630		24,899		84,832		70,722		Total General and Administrative Expenses	40,594		28,520		84,145		57,202

Loan Acquisition Costs	Loan Acquisition Costs									Loan Acquisition Costs
Commissions	Commissions	879		659		3,027		1,432		Commissions	1,661		360		2,924		2,148
Underwriting costs	Underwriting costs	771		1,074		3,289		3,184		Underwriting costs	1,836		856		3,521		2,518
Transfer and holding costs	Transfer and holding costs	508		183		1,400		891		Transfer and holding costs	251		356		862		892

Total Loan Acquisition Costs	Total Loan Acquisition Costs	2,158		1,916		7,716		5,507		Total Loan Acquisition Costs	3,748		1,572		7,307		5,558

Other Expenses	Other Expenses									Other Expenses
Goodwill impairment expense	Goodwill impairment expense	0		0		88,675		0		Goodwill impairment expense	0		0		0		88,675
Amortization of purchase-related intangible assets	Amortization of purchase-related intangible assets	3,873		1,897		12,052		4,608		Amortization of purchase-related intangible assets	3,873		3,873		7,746		8,182
Contingent consideration expense (2)		135		236		581		547

Other	Other	3,780		398		2,978		866		Other	112		1,210		335		(359)
Total Other Expenses	Total Other Expenses	7,788		2,531		104,286		6,021		Total Other Expenses	3,985		5,083		8,081		96,498
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	37,576	$	29,346	$	196,834	$	82,250	Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	48,327	$	35,175	$	99,533	$	159,258

(1)For the three months ended June 30, 2021, long-term incentive award expense includes $4 million of expense for awards settleable in shares of our common stock and $1 million of expense for awards settleable in cash. For the six months ended June 30, 2021, long-term incentive award expense includes $7 million of expense for awards settleable in shares of our common stock and $3 million of expense for awards settleable in cash.

(2)Acquisition-related equity compensation expense relates to 588,260 shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in CoreVest. The grant date fair value of these restricted stock awards was $10 million, which ~~will be~~is being recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.

~~(2)Contingent consideration expense relates to the acquisition of 5 Arches during 2019. Refer to~~ ~~Note 2~~ ~~for additional detail.~~

6663

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

~~Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses - (continued)~~

~~Variable Compensation Expense~~

~~During the three months ended September 30, 2020,~~ ~~$8 million~~ of cash-based retention awards were granted to certain executive and non-executive employees that will vest and be paid over the next three years, subject to continued employment through the vesting periods from 2021 through 2023. Additionally, during the three months ended September 30, 2020, Long-Term Relative TSR Performance Vesting Cash Awards ("Cash Performance Awards") with an aggregate granted award value of $2 million, were granted to certain executive and non-executive employees that will vest between 0% to 400% of granted award value based on a relative total stockholder return measure, and are contingent on continued employment over a three-year service period.

The value of the cash-based retention awards is being amortized into expense on a straight-line basis over each award's respective vesting period. The Cash Performance Awards are amortized on a straight-line basis over three years, however, are remeasured at fair value each quarter-end and the cumulative straight-line expense is trued-up in respect to their updated value. For both the three and nine months ended September 30, 2020, variable compensation expense included $3 million in aggregate, related to the cash-based retention awards and the Cash Performance awards.

Note 22. Taxes

For the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, we recognized a ~~benefit~~provision for income taxes of ~~$13~~$18 million and a ~~provision~~benefit from income taxes of $3$22 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 22.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate


		September 30, 2020		September 30, 2019			June 30, 2021		June 30, 2020
Federal statutory rate	Federal statutory rate	21.0	%	21.0	%	Federal statutory rate	21.0	%	21.0	%
State statutory rate, net of Federal tax effect	State statutory rate, net of Federal tax effect	8.6	%	8.6	%	State statutory rate, net of Federal tax effect	8.6	%	8.6	%
Differences in taxable (loss) income from GAAP income	Differences in taxable (loss) income from GAAP income	(23.6)	%	(2.5)	%	Differences in taxable (loss) income from GAAP income	(14.1)	%	(23.6)	%
Change in valuation allowance	Change in valuation allowance	(4.0)	%	(2.5)	%	Change in valuation allowance	(3.3)	%	(3.2)	%
Dividends paid deduction (1)	Dividends paid deduction (1)	0	%	(22.1)	%	Dividends paid deduction (1)	(3.3)	%	0	%
Effective Tax Rate	Effective Tax Rate	2.0	%	2.5	%	Effective Tax Rate	8.9	%	2.8	%

(1)The dividends paid deduction in the effective tax rate reconciliation is generally representative of the amount of distributions to shareholders that reduce REIT taxable income. For the ~~nine~~six months ended ~~September~~June 30, 2020, the dividends paid deduction is 0% due to our REIT incurring a taxable loss during the period; therefore, there was no REIT taxable income available to apply against the dividends paid.

We assessed our tax positions for all open tax years (i.e., Federal, 2017 to ~~2020,~~2021, and State, 2016 to ~~2020)~~2021) at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~

~~(Unaudited)~~

Note 23. Segment Information

Redwood operates in 3 segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. Beginning in the second quarter of 2020, we combined what was previously our Multifamily Investments segment and Third-Party Residential Investments segment into a new segment called Third-Party Investments. Prior periods have been conformed to the current presentation. Following isFor a full description of our ~~current segments.~~

~~Residential Lending~~segments, see ~~– consists of a mortgage loan conduit that acquires residential loans from third-party originators~~Part I, Item 1—Business in our Annual Report on Form 10-K for ~~subsequent sale, securitization, or transfer into our investment portfolio, as well as~~ the investments we retain from these activities. We typically acquire prime, jumbo mortgages and the related mortgage servicing rights on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. Our investments in this segment primarily consist of residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations (some of which we consolidate for GAAP purposes) and MSRs retained from jumbo whole loans we sold or securitized. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of residential loans held-for-sale and long-term investments we hold within this segment. This segment’s main source of revenue is net interest income from its long-term investments and its inventory of loans held-for-sale, as well as income from mortgage banking activities, which includes valuation increases (or gains) on loans we acquire and subsequently sell, securitize, or transfer into our investment portfolio, and the hedges used to manage risks associated with these activities. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.

~~Business Purpose Lending~~ – consists of a platform that originates and acquires business purpose residential loans for subsequent securitization or transfer into our investment portfolio, as well as the investments we retain from these activities. We typically originate single-family rental and residential bridge loans and distribute certain single-family rental loans through our CoreVest American Finance Lender ("CAFL") private-label securitization program and retain others for investment along with our residential bridge loans. Single-family rental loans are business purpose residential mortgage loans to investors in single-family (1-4 unit) rental properties. Residential bridge loans are business purpose residential mortgage loans to investors rehabilitating and subsequently reselling or renting residential properties. Our investments in this segment primarily consist of securities retained from our CAFL securitizations (which we consolidate for GAAP purposes), and residential bridge loans. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of single-family rental loans held-for-sale and our investments. This segment’s main source of revenue is net interest income from its investments and loans held-for-sale, as well as income from mortgage banking activities, which includes valuation increases (or gains) on loans we originate or acquire and subsequently sell, securitize or transfer into our investment portfolio, and the hedges used to manage risks associated with these activities. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.

~~Third-Party Investments~~ – consists of investments in RMBS issued by third parties, investments in Freddie Mac K-Series multifamily loan securitizations and SLST reperforming loan securitizations (which we consolidate for GAAP purposes), our servicer advance investments, and other residential and multifamily credit investments not generated through our Residential or Business Purpose Lending segments. This segment’s main sources of revenue are interest income from securities and loans held-for-investment. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.year ended December 31, 2020.

Segment contribution represents the measure of profit that management uses to assess the performance of our business segments and make resource allocation and operating decisions. Certain corporate expenses not directly assigned or allocated to one of our 3 segments, as well as activity from certain consolidated Sequoia entities, are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include interest expense from our convertible notes and trust preferred securities, indirect general and administrative expenses and other expense.

6864

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 23. Segment Information - (continued)

The following tables present financial information by segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 23.1 – Business Segment Financial Information


		Three Months Ended September 30, 2020										Three Months Ended June 30, 2021
(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total			(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	Interest income	$	26,672	$	55,930	$	37,576	$	1,804	$	121,982		Interest income	$	33,033	$	70,515	$	33,972	$	1,175	$	138,695
Interest expense	Interest expense	(22,541)		(46,027)		(27,534)		(4,309)		(100,411)			Interest expense	(21,056)		(54,442)		(22,334)		(10,233)		(108,065)
Net interest income	Net interest income	4,131		9,903		10,042		(2,505)		21,571			Net interest income	11,977		16,073		11,638		(9,058)		30,630
Non-interest income	Non-interest income												Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	11,864		47,531		0		0		59,395			Mortgage banking activities, net	21,265		33,154		0		0		54,419
Investment fair value changes, net	Investment fair value changes, net	2,443		16,892		87,890		(178)		107,047			Investment fair value changes, net	3,927		3,782		42,018		(247)		49,480
Other income, net	Other income, net	(2,011)		623		340		934		(114)			Other income, net	839		1,017		5		265		2,126
Realized gains, net	Realized gains, net	0		0		602		0		602			Realized gains, net	6,687		390		1,307		0		8,384
Total non-interest income, net		12,296		65,046		88,832		756		166,930
Total non-interest income (loss), net													Total non-interest income (loss), net	32,718		38,343		43,330		18		114,409
General and administrative expenses	General and administrative expenses	(4,602)		(9,321)		(709)		(12,998)		(27,630)			General and administrative expenses	(7,793)		(13,688)		(930)		(18,183)		(40,594)
Loan acquisition costs	Loan acquisition costs	(304)		(1,660)		(194)		0		(2,158)			Loan acquisition costs	(1,887)		(1,861)		0		0		(3,748)
Other expenses	Other expenses	(3,309)		(3,874)		(470)		(135)		(7,788)			Other expenses	0		(3,873)		(112)		0		(3,985)
(Provision for) benefit from income taxes		(826)		(8,544)		257		0		(9,113)
Provision for income taxes													Provision for income taxes	(4,171)		(2,182)		(334)		0		(6,687)
Segment Contribution	Segment Contribution	$	7,386	$	51,550	$	97,758	$	(14,882)				Segment Contribution	$	30,844	$	32,812	$	53,592	$	(27,223)
Net Income	Net Income									$	141,812		Net Income									$	90,025
Non-cash amortization (expense) income, net	Non-cash amortization (expense) income, net	$	1,785	$	(6,719)	$	117	$	(1,516)	$	(6,333)		Non-cash amortization (expense) income, net	$	1,339	$	(5,584)	$	185	$	(1,955)	$	(6,015)

Nine Months Ended September 30, 2020
(In Thousands) Residential Lending Business Purpose Lending Third-Party Investments Corporate/
Other Total
Interest income $ 123,956 $ 162,732 $ 155,583 $ 7,738 $ 450,009
Interest expense (94,112) (119,854) (123,160) (12,622) (349,748)
Net interest income 29,844 42,878 32,423 (4,884) 100,261
Non-interest income
Mortgage banking activities, net (19,222) 43,733 0 0 24,511
Investment fair value changes, net (159,107) (84,837) (366,696) (917) (611,557)
Other income, net (2,278) 3,493 1,072 1,692 3,979
Realized gains, net 2,001 0 3,236 25,182 30,419
Total non-interest income, net (178,606) (37,611) (362,388) 25,957 (552,648)
General and administrative expenses (12,901) (29,977) (4,230) (37,724) (84,832)
Loan acquisition costs (1,512) (5,630) (567) (7) (7,716)
Other expenses (3,309) (100,743) 347 (581) (104,286)
Benefit from income taxes 7,827 477 4,775 0 13,079
Segment Contribution $ (158,657) $ (130,606) $ (329,640) $ (17,239)
Net Loss $ (636,142)
Non-cash amortization (expense) income, net $ 602 $ (18,050) $ 1,105 $ (3,035) $ (19,378)
Other significant non-cash expense: goodwill impairment $ 0 $ (88,675) $ 0 $ 0 $ (88,675)


	Six Months Ended June 30, 2021
(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	$	60,581	$	134,920	$	68,962	$	2,537	$	267,000
Interest expense	(40,093)		(104,517)		(45,513)		(20,494)		(210,617)
Net interest income	20,488		30,403		23,449		(17,957)		56,383
Non-interest income
Mortgage banking activities, net	82,700		54,326		0		0		137,026
Investment fair value changes, net	6,673		7,081		81,734		(921)		94,567
Other income, net	3,692		1,860		5		412		5,969
Realized gains, net	9,095		498		1,507		0		11,100
Total non-interest income, net	102,160		63,765		83,246		(509)		248,662
General and administrative expenses	(21,550)		(24,847)		(2,061)		(35,687)		(84,145)
Loan acquisition costs	(3,303)		(3,913)		(87)		(4)		(7,307)
Other expenses	(6)		(7,650)		(442)		17		(8,081)
Provision for income taxes	(14,150)		(3,503)		(577)		0		(18,230)
Segment Contribution	$	83,639	$	54,255	$	103,528	$	(54,140)
Net Income									$	187,282
Non-cash amortization (expense) income, net	$	3,005	$	(11,441)	$	41	$	(3,850)	$	(12,245)

6965

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 23. Segment Information - (continued)


		Three Months Ended September 30, 2019										Three Months Ended June 30, 2020
(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total			(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	Interest income	$	69,586	$	5,527	$	70,709	$	4,295	$	150,117		Interest income	$	36,653	$	53,742	$	36,811	$	2,740	$	129,946
Interest expense	Interest expense	(48,798)		(2,813)		(61,541)		(3,452)		(116,604)			Interest expense	(28,762)		(36,631)		(24,927)		(12,346)		(102,666)
Net interest income	Net interest income	20,788		2,714		9,168		843		33,513			Net interest income	7,891		17,111		11,884		(9,606)		27,280
Non-interest income	Non-interest income												Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	5,016		4,499		0		0		9,515			Mortgage banking activities, net	(8,005)		2,023		0		0		(5,982)
Investment fair value changes, net	Investment fair value changes, net	(11,088)		(1,073)		24,057		(452)		11,444			Investment fair value changes, net	35,085		40,401		76,972		(230)		152,228
Other income, net	Other income, net	1,878		1,918		560		0		4,356			Other income, net	230		686		(509)		758		1,165
Realized gains, net	Realized gains, net	0		0		4,714		0		4,714			Realized gains, net	205		0		578		25,182		25,965
Total non-interest income, net	Total non-interest income, net	(4,194)		5,344		29,331		(452)		30,029			Total non-interest income, net	27,515		43,110		77,041		25,710		173,376
General and administrative expenses	General and administrative expenses	(5,581)		(6,028)		(676)		(12,614)		(24,899)			General and administrative expenses	(3,700)		(9,016)		(1,986)		(13,818)		(28,520)
Loan acquisition costs	Loan acquisition costs	(867)		(756)		(180)		(113)		(1,916)			Loan acquisition costs	(175)		(1,277)		(120)		0		(1,572)
Other expenses	Other expenses	0		(1,900)		(395)		(236)		(2,531)			Other expenses	0		(3,884)		(1,065)		(134)		(5,083)
Benefit from (provision for) income taxes	Benefit from (provision for) income taxes	228		(8)		(106)		0		114			Benefit from (provision for) income taxes	3,323		2,439		(5,799)		0		(37)
Segment Contribution	Segment Contribution	$	10,374	$	(634)	$	37,142	$	(12,572)				Segment Contribution	$	34,854	$	48,483	$	79,955	$	2,152
Net Income	Net Income									$	34,310		Net Income									$	165,444
Non-cash amortization income (expense), net	Non-cash amortization income (expense), net	$	2,537	$	(2,107)	$	0	$	(1,148)	$	(718)		Non-cash amortization income (expense), net	$	(1,265)	$	(6,391)	$	312	$	(1,619)	$	(8,963)

Nine Months Ended September 30, 2019
(In Thousands) Residential Lending Business Purpose Lending Third-Party Investments Corporate/
Other Total
Interest income $ 204,036 $ 12,595 $ 199,145 $ 13,924 $ 429,700
Interest expense (145,795) (6,590) (168,167) (11,548) (332,100)
Net interest income 58,241 6,005 30,978 2,376 97,600
Non-interest income
Mortgage banking activities, net 31,202 9,782 0 0 40,984
Investment fair value changes, net (20,910) (1,833) 58,492 (1,008) 34,741
Other income, net 6,317 4,213 600 2,710 13,840
Realized gains, net 7,728 0 10,499 0 18,227
Total non-interest income, net 24,337 12,162 69,591 1,702 107,792
General and administrative expenses (17,591) (13,452) (2,239) (37,440) (70,722)
Loan acquisition costs (2,859) (2,017) (503) (128) (5,507)
Other expenses 0 (4,432) (864) (725) (6,021)
(Provision for) benefit from income taxes (1,757) 25 (1,370) 0 (3,102)
Segment Contribution $ 60,371 $ (1,709) $ 95,593 $ (34,215)
Net Income $ 120,040
Non-cash amortization income (expense), net $ 6,780 $ (4,907) $ (824) $ (1,939) $ (890)



	Six Months Ended June 30, 2020
(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	$	97,284	$	106,802	$	118,007	$	5,934	$	328,027
Interest expense	(66,324)		(68,984)		(87,428)		(26,601)		(249,337)
Net interest income	30,960		37,818		30,579		(20,667)		78,690
Non-interest income
Mortgage banking activities, net	(31,086)		(3,798)		0		0		(34,884)
Investment fair value changes, net	(161,550)		(101,729)		(454,586)		(739)		(718,604)
Other income, net	(267)		2,870		732		758		4,093
Realized gains, net	2,001		0		2,634		25,182		29,817
Total non-interest income, net	(190,902)		(102,657)		(451,220)		25,201		(719,578)
General and administrative expenses	(8,299)		(20,656)		(3,521)		(24,726)		(57,202)
Loan acquisition costs	(1,208)		(3,970)		(373)		(7)		(5,558)
Other expenses	0		(96,869)		817		(446)		(96,498)
Benefit from income taxes	8,653		9,021		4,518		0		22,192
Segment Contribution	$	(160,796)	$	(177,313)	$	(419,200)	$	(20,645)
Net Loss									$	(777,954)
Non-cash amortization income (expense), net	$	(1,053)	$	(11,316)	$	1,053	$	(1,728)	$	(13,044)
Other significant non-cash expense: goodwill impairment	$	0	$	(88,675)	$	0	$	0	$	(88,675)

7066

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 23. Segment Information - (continued)

The following table presents the components of Corporate/Other for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 23.2 – Components of Corporate/Other


		Three Months Ended September 30,													Three Months Ended June 30,
		2020						2019							2021						2020
(In Thousands)	(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total		(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	Interest income	$	1,795	$	9	$	1,804	$	4,295	$	0	$	4,295	Interest income	$	1,169	$	6	$	1,175	$	2,685	$	55	$	2,740
Interest expense	Interest expense	(1,058)		(3,251)		(4,309)		(3,452)		0		(3,452)		Interest expense	(755)		(9,478)		(10,233)		(1,518)		(10,828)		(12,346)
Net interest income	Net interest income	737		(3,242)		(2,505)		843		0		843		Net interest income	414		(9,472)		(9,058)		1,167		(10,773)		(9,606)
Non-interest income	Non-interest income													Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(81)		(97)		(178)		(407)		(45)		(452)		Investment fair value changes, net	(216)		(31)		(247)		(230)		0		(230)
Other income	Other income	0		934		934		0		0		0		Other income	0		265		265		0		758		758

Realized gains, net														Realized gains, net	0		0		0		0		25,182		25,182
Total non-interest income, net	Total non-interest income, net	(81)		837		756		(407)		(45)		(452)		Total non-interest income, net	(216)		234		18		(230)		25,940		25,710
General and administrative expenses	General and administrative expenses	0		(12,998)		(12,998)		0		(12,614)		(12,614)		General and administrative expenses	0		(18,183)		(18,183)		0		(13,818)		(13,818)
Loan acquisition costs		0		0		0		0		(113)		(113)

Other expenses	Other expenses	0		(135)		(135)		0		(236)		(236)		Other expenses	0		0		0		0		(134)		(134)

Total	Total	$	656	$	(15,538)	$	(14,882)	$	436	$	(13,008)	$	(12,572)	Total	$	198	$	(27,421)	$	(27,223)	$	937	$	1,215	$	2,152


		Nine Months Ended September 30,													Six Months Ended June 30,
		2020						2019							2021						2020
(In Thousands)	(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total		(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	Interest income	$	7,675	$	63	$	7,738	$	13,924	$	0	$	13,924	Interest income	$	2,517	$	20	$	2,537	$	5,879	$	55	$	5,934
Interest expense	Interest expense	(5,098)		(7,524)		(12,622)		(11,548)		0		(11,548)		Interest expense	(1,630)		(18,864)		(20,494)		(4,040)		(22,561)		(26,601)
Net interest income	Net interest income	2,577		(7,461)		(4,884)		2,376		0		2,376		Net interest income	887		(18,844)		(17,957)		1,839		(22,506)		(20,667)
Non-interest income	Non-interest income													Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(702)		(215)		(917)		(904)		(104)		(1,008)		Investment fair value changes, net	(915)		(6)		(921)		(621)		(118)		(739)
Other income	Other income	0		1,692		1,692		0		2,710		2,710		Other income	0		412		412		0		758		758
Realized gains, net	Realized gains, net	0		25,182		25,182		0		0		0		Realized gains, net	0		0		0		0		25,182		25,182
Total non-interest income, net	Total non-interest income, net	(702)		26,659		25,957		(904)		2,606		1,702		Total non-interest income, net	(915)		406		(509)		(621)		25,822		25,201
General and administrative expenses	General and administrative expenses	0		(37,724)		(37,724)		0		(37,440)		(37,440)		General and administrative expenses	0		(35,687)		(35,687)		0		(24,726)		(24,726)
Loan acquisition costs	Loan acquisition costs	0		(7)		(7)		0		(128)		(128)		Loan acquisition costs	0		(4)		(4)		0		(7)		(7)
Other expenses	Other expenses	0		(581)		(581)		0		(725)		(725)		Other expenses	0		17		17		0		(446)		(446)

Total	Total	$	1,875	$	(19,114)	$	(17,239)	$	1,472	$	(35,687)	$	(34,215)	Total	$	(28)	$	(54,112)	$	(54,140)	$	1,218	$	(21,863)	$	(20,645)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2020~~2021

(Unaudited)

Note 23. Segment Information - (continued)

The following table presents supplemental information by segment at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 23.3 – Supplemental Segment Information


(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
September 30, 2020
June 30, 2021												June 30, 2021
Residential loans	Residential loans	$	1,941,489	$	0	$	2,256,682	$	296,765	$	4,494,936	Residential loans	$	3,383,101	$	0	$	2,098,624	$	260,875	$	5,742,600
Business purpose residential loans		0		3,956,101		0		0		3,956,101
Business purpose loans												Business purpose loans	0		4,408,889		0		0		4,408,889
Multifamily loans	Multifamily loans	0		0		491,415		0		491,415		Multifamily loans	0		0		485,157		0		485,157
Real estate securities	Real estate securities	146,608		0		204,727		0		351,335		Real estate securities	163,609		0		191,277		0		354,886
Other investments	Other investments	14,878		25,713		344,037		0		384,628		Other investments	8,721		13,168		267,851		18,992		308,732
Goodwill and intangible assets		0		60,737		0		0		60,737
Intangible assets												Intangible assets	0		49,119		0		0		49,119
Total assets	Total assets	2,148,643		4,134,913		3,315,039		803,817		10,402,412		Total assets	3,615,860		4,576,139		3,063,094		741,298		11,996,391

December 31, 2019
December 31, 2020												December 31, 2020
Residential loans	Residential loans	$	4,939,745	$	0	$	2,367,215	$	407,890	$	7,714,850	Residential loans	$	1,741,963	$	0	$	2,221,153	$	285,935	$	4,249,051
Business purpose residential loans		0		3,506,743		0		0		3,506,743
Business purpose loans												Business purpose loans	0		4,136,353		0		0		4,136,353
Multifamily loans	Multifamily loans	0		0		4,408,524		0		4,408,524		Multifamily loans	0		0		492,221		0		492,221
Real estate securities	Real estate securities	229,074		0		870,800		0		1,099,874		Real estate securities	160,780		0		183,345		0		344,125
Other investments	Other investments	42,224		21,002		294,904		0		358,130		Other investments	8,815		21,627		317,282		451		348,175
Goodwill and intangible assets		0		161,464		0		0		161,464
Intangible assets												Intangible assets	0		56,865		0		0		56,865
Total assets	Total assets	5,410,540		3,786,641		8,028,946		769,313		17,995,440		Total assets	1,989,802		4,323,040		3,232,415		809,809		10,355,066

7268

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

–Consolidated Results of Operations

–Results of Operations by Segment

–Investments Detail

–Taxable Income and Tax Provision

• 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.

7369

Our Business

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on ~~making credit-sensitive~~several distinct areas of housing credit. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We deliver customized housing credit investments ~~in single-family~~to a diverse mix of investors through our best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded shares. Our consolidated investment portfolio has evolved to incorporate a diverse mix of residential, business purpose and multifamily ~~mortgages and related assets and engaging in mortgage banking activities.~~investments. 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.~~appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in three segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For a full description of our segments, see ~~Note 23~~ ~~of our~~ ~~Notes to Consolidated Financial Statements~~Part 1, Item 1—Business in ~~Part I, Item 1 of this Quarterly~~our Annual Report on Form ~~10-Q.~~10-K for the year ended December 31, 2020.

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 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,~~2021; (iii) statements related to our investment portfolio, including ~~our 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 portfolio ~~values still have room~~continues to ~~recover~~offer significant upside as the economy recovers, and upside from the scarcity value ~~from unrealized losses incurred in the first quarter of 2020,~~ and ~~our belief that secular trends supporting our investment thesis are accelerating due to the COVID-19 pandemic; (iii) expectations with respect to activity~~optionality embedded in our ~~Residential Lending segment, including~~portfolio, through both call rights on securitizations we have sponsored and underlying business purpose loan refinance opportunities, as well as the recurring nature of this aspect of our ~~expectation that our expanded prime program will contribute more significantly to our 2021 loan acquisition volumes,~~portfolio and the potential ~~for significantly increased industry-wide jumbo loan origination volumes~~upside inherent in each new securitization we sponsor through our platforms; (iv) statements related to our residential and ~~for interest rates on jumbo loans~~business purpose lending platforms, including that we expect our revenue mix between mortgage banking operations and our investment portfolio to continue to ~~converge~~migrate towards ~~those~~mortgage banking, and the support this migration can provide for ~~conforming borrowers; (iv)~~continued book value expansion over time through our ~~expectations~~ability to grow and retain earnings at our taxable REIT subsidiary; (v) statements related to ~~opportunities~~regulatory changes in Washington, D.C., including expectations that regulatory changes for loans on second homes and investor properties has the potential to ~~provide technology-enabled solutions~~significantly increase volumes in our market in 2021 and beyond; (vi) statements relating to ~~disrupt traditional private-sector workflows; (v) statements regarding~~ our estimate of our available capital ~~available for investment, including our statement~~(including that we ~~have ample~~estimate our available capital ~~available to deploy into our operating businesses and to pursue opportunistic third-party investments; (vi)~~at June 30, 2021 was approximately $175 million); (vii) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the ~~third~~second quarter of ~~2020~~2021 and at ~~September~~June 30, ~~2020,~~2021, and expected fallout and the corresponding volume of residential mortgage loans expected to be available for ~~purchase, and expected residential mortgage loan sales in the fourth quarter, including through forward sales agreements we entered into during the third quarter; (vii)~~purchase; (viii) statements we make regarding future dividends, including with respect to our regular quarterly dividends in ~~2020;~~2021; and ~~(viii)~~(ix) 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;~~pandemic;

•general economic trends and the performance of the housing, real estate, mortgage ~~credit,~~finance, and broader financial ~~markets, and their effects on the prices of earning assets and the credit status of borrowers;~~markets;

•federal and state legislative and regulatory developments and the actions of governmental authorities ~~including the new U.S. presidential administration,~~ and ~~in particular those affecting the mortgage industry or our business;~~entities;

•~~state and/or local regulations related~~changing benchmark interest rates, and the Federal Reserve’s actions and statements regarding monetary policy;

•our ability to ~~rent control or rent stabilization impacting single-family rental~~compete successfully;

•our ability to adapt our business model and ~~multifamily properties;~~strategies to changing circumstances;

•strategic business and capital deployment decisions we make;

•our ~~recent acquisitions~~use of ~~business purpose lending origination platforms;~~financial leverage;

•~~developments related~~our exposure to ~~the fixed income and mortgage finance markets and the Federal Reserve’s statements regarding its future open market activity and monetary policy;~~a breach of our cybersecurity or data security;

•our exposure to credit risk and the timing of credit losses within our portfolio;

•the concentration of the credit risks we are exposed to, including due to the structure of assets we hold, ~~and~~ the geographical concentration of real estate underlying assets we ~~own;~~

•own, and our exposure to ~~adjustable-rate mortgage loans;~~environmental and climate-related risks;

•the efficacy and expense of our efforts to manage or hedge credit risk, interest rate risk, and other financial and operational risks;

•changes in credit ratings on assets we own and changes in the rating agencies’ credit rating methodologies;

•changes in ~~interest rates; changes in~~ mortgage prepayment rates;

•changes in interest rates;

•our ability to redeploy our available capital into new investments;

•interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;

•our ability to finance the acquisition of real estate-related assets with short-term debt;

•changes in the values of assets we own;

•the ability of counterparties to satisfy their obligations to us;

•our exposure to the discontinuation of LIBOR;

•our exposure to liquidity risk, risks associated with the use of leverage, and market risks;

•changes in the demand from investors for residential and business purpose mortgages and investments, and our ability to distribute residential and business purpose mortgages through our whole-loan distribution channel;

•our involvement in securitization transactions, the profitability of those transactions, and the risks we are exposed to in engaging in securitization transactions;

•exposure to claims and litigation, including litigation arising from our involvement in loan origination and securitization ~~transactions;~~

•~~ongoing litigation against various trustees of RMBS~~ transactions;

•whether we have sufficient liquid assets to meet short-term needs;

•our ability to successfully ~~compete and~~ retain or attract key personnel;

•~~our ability to adapt our business model and strategies to changing circumstances;~~

•changes in our investment, financing, and hedging strategies and new risks we may be exposed to if we expand our business activities;

•our exposure to a disruption ~~or breach of the security~~ of our technology infrastructure and systems;

•~~exposure to environmental liabilities;~~

•~~our failure to comply with applicable laws and regulations;~~

•~~our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;~~

•the impact on our reputation that could result from our actions or omissions or from those of others;

•our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;

•the termination of our captive insurance subsidiary’s membership in the Federal Home Loan Bank and the implications for our income generating abilities;

•the impact of changes ~~in accounting principles~~to U.S. federal income tax laws on the U.S. housing market, mortgage finance markets, and ~~tax rules;~~our business;

•our failure to comply with applicable laws and regulation, including our ability to obtain or maintain the governmental licenses;

•our ability to maintain our status as a REIT for tax purposes;

•limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940;

•our common stock may experience price declines, volatility, and poor liquidity, and we may reduce our dividends in a variety of circumstances;

•decisions about raising, managing, and distributing capital;

•our exposure to broad market fluctuations; and

•other factors not presently identified.

This Quarterly Report on Form 10-Q may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.

7571

OVERVIEW

Business Update

InOur second quarter results included strong GAAP earnings of $90 million ($0.66 per diluted share), and a 6.5% increase in book value to $11.46 at June 30, 2021. On an annualized basis, our first half GAAP return on equity was 31%. Our total economic return to shareholders, which includes growth in book value and dividends paid, was 19% for the ~~third~~first half of 2021.

Crisp execution contributed to the second quarter being another successful quarter, but in many ways the past few months have represented a threshold moment for our company. The true potential of ~~2020,~~our business has come into sharper focus, particularly as our teams faced formidable challenges and responded with vigor. Indeed, our Residential team executed an improbably strong finish against the backdrop of severe declines in profitability for many other mortgage market participants. Additionally, our Business Purpose Lending ("BPL") team, facing stiff competition, originated significant volumes during the second quarter, reaching levels we ~~positioned ourselves~~have not seen since before the COVID-19 pandemic began.

For many residential mortgage originators, recent results were buoyed largely by direct Federal Reserve stimulus. However, with substantial progress in U.S. COVID-19 vaccinations, and a near-total economic reopening across the country, the Federal Reserve has begun reconsidering the size of its support to ~~take advantage~~the Agency mortgage market. And, in fact, during the second quarter, the rise in mortgage rates and corresponding decline in refinancing demand by homeowners triggered an unceremonious contraction in margins across the industry. Nowhere was this more apparent than the residential wholesale mortgage channel, where lenders engaged in an all-out price war to preserve volumes, pushing their profit margins to near breakeven levels or worse in the span of ~~opportunities emerging~~only a few months. Exaggerating the effects of strong competition was a surge in ~~our markets. Though we remain wary of~~pro-cyclical inflationary rhetoric, and a volatile ~~election season~~yield curve driving significant hedging and ~~rising~~execution costs for those managing large mortgage loan pipelines – including for us. Against this backdrop, in the second quarter we locked close to $4 billion in jumbo residential loans at margins towards the high-end of our historical target range, underscoring the durability of our earnings power.

During the second quarter, the business purpose lending market also became more crowded, with new competitors using lower mortgage rates to expand their market share – particularly for lower-balance bridge and rental loan products that currently represent a small minority of ~~COVID-19 infections in~~our origination mix. The shift of households out of apartment living and towards single-family detached homes – a trend that has shown no sign of ebbing despite the "reopening" of most major metropolitan areas – has led to a shortage of high-quality homes, coupled with aggressive demand from both investors and consumers alike. In many ~~parts~~regions, rent growth has been significantly outstripped by home price appreciation, highlighting the scarcity value of quality housing and the ~~U.S.,~~multiple constituencies focused on acquiring single-family homes. Leveraging a well-earned reputation as a nimble and reliable life-cycle lender, CoreVest – our business-purpose lending platform – eclipsed $500 million of fundings during the second quarter, balanced between single-family rental and bridge loan originations.

Our sustained performance through this challenging backdrop showcased our strategic foundation and is the essence of what makes Redwood unique. Our mortgage banking businesses ~~are back~~offer highly complementary products that drive durable earnings streams at the corporate level. And our investment portfolio continues to ~~operating at full speed and we are optimistic that we will end 2020 on a high note.~~

~~After recasting our balance sheet and positioning our businesses to relaunch from a position of strength, we are now conducting new business at a rapid pace and leveraging~~offer significant upside as the economy recovers, well beyond what many industry ~~relationships forged over many business cycles. But~~observers had modeled after such a ~~profoundly challenging period for~~tumultuous pandemic period. Our credit discipline and ability to create our ~~sector~~own assets remain key differentiators. The scarcity value and country, we were compelled to 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 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 –~~optionality embedded in our ~~residential~~portfolio - through both call rights on securitizations we have sponsored and underlying business purpose ~~lending segments, complemented by~~loan refinance opportunities – offer upside beyond the current discount to face value of the underlying assets. Notably, this attractive aspect of our portfolio ~~strategies where~~is a potential upside inherent in each new securitization 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 seen since the lead up to 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 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 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 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 lock volume was $2.12 billion, growing from nearly zero in the second quarter. It was also the highest quarterly volume sourced exclusively~~sponsor through our ~~residential loan seller network in five years. Moreover, we achieved this through purchase activity with only about 40% of~~platforms.

This foundation has facilitated returns that are significantly outpacing our ~~loan sellers. We also have yet to formally relaunch our expanded prime program, Redwood Choice, which we expect to contribute more~~growing dividends. Redwood's mortgage banking income significantly to our 2021 acquisition volumes. Additionally, the mortgage finance industry remains focused on the refinancing opportunity for conforming mortgage loans. In our view, there is potential for significantly increased jumbo loan origination and acquisition volumes, driven by evolving consumer demand and the potential forexceeded net 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 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,~~income at our investment ~~portfolio’s asset values have continued to recover since incurring unrealized losses~~portfolio during the first ~~quarter. The significant upside~~half of 2021, and we ~~have seen~~expect this revenue mix will likely continue to migrate toward mortgage banking and by extension our taxable subsidiaries. This proportion is significantly higher than in ~~these investments appears~~recent years and casts a spotlight on a shift in business model that had in many ways been hiding in plain sight. It can also support continued book value expansion over time and an increased level of retained earnings, a zero-cost avenue for additional capital that reduces our marginal need for funding and stands in contrast to be a story unique to Redwood – with many of our competitors exiting their non-agency portfolios in response to 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 yieldinghow others in the ~~low- to mid-double digits to our basis in those assets at September 30, 2020.~~space manage their balance sheets.

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 supported by low interest rates.

7672

Our team continues to relentlessly target a sector of the mortgage market that many had ignored since the COVID-19 pandemic began, in large part due to the absence of Federal Reserve stimulus for this industry sector. The non-Agency market we serve represents the full housing-related mortgage universe outside of government-backed mortgage programs. While it may be significantly smaller than the government-backed market, “small” is but a relative term, as the non-Agency sector is forecasted to increase volumes in 2021 from the $435 billion of originations in 2020. Importantly, this estimate reflects a regulatory pullback in demand for loans on second homes and investor properties by Fannie Mae and Freddie Mac (the “GSEs”) that has the potential to significantly increase volumes in our market in 2021 and beyond, which would be a significant tailwind across our businesses going forward. By targeting a market rather than a specific borrower cohort, our fortunes aren’t tied to the direction of the homeownership rate. Instead, we’re focused on offering a comprehensive product mix that serves both consumers and housing investors. This approach allowed us to ramp quickly after the COVID-19 crisis passed, and our hands-on, solutions-based underwriting model (versus the more prescriptive approach favored by many) keeps us responsive to the customized needs of borrowers and to shifting external trends.

We’re proud of the leadership we demonstrated in the non-Agency market across both our platforms during the second quarter. For our Residential business, strong home price appreciation across the country pushed homeowner equity to the highest levels in at least a decade and naturally drove consumers to loans outside of the conforming balance limits of the GSEs. This has begun to diversify our geographic footprint, and we are now seeing a rising percentage of loan volume coming from parts of the country other than the coasts. We recently refocused our expanded credit product offerings in response to evolving homebuying trends and changes to the CFPB’s Qualified Mortgage (“QM”) regulations. We expect these changes will substantially reduce the frictional costs for a certain cohort of higher “debt-to-income” borrowers, whose financing options remain relatively limited. Volumes in Redwood Choice – our expanded-prime residential loan acquisition program – are once again building and represented close to 15% of our residential loan lock volume in the second quarter, up materially from 5% in the first quarter of 2021. As a reminder, Choice represented as much as 40% of our residential loan lock volume pre-pandemic.

In the context of a sustained supply/demand imbalance for high-quality affordable housing, our BPL business greatly benefited from the diversity and flexibility of its products in the second quarter and continued execution of the growth plan we outlined at the start of 2021. The longevity and depth of CoreVest’s borrower relationships creates a powerful multiplier effect when new borrowers become recurring customers. This intangible was clearly on display in the second quarter as the team posted over a 50% jump in mortgage banking income. We also advanced several strategic initiatives to expand CoreVest’s product reach – most notably a strategic investment in Churchill Finance, from whom we began purchasing smaller-balance single-family rental loans early in the third quarter of 2021.

By continuing to re-invest in our infrastructure, both organically and through partnerships, we see a path to realizing transformative scale. Across our enterprise, we’ve cultivated a talented and inspired workforce and have embraced technology to serve our customers more quickly than ever before. By combining enhanced systems and process improvements with the requisite amount of shoe leather, our teams have driven significant gains in output and efficiency thus far in 2021. As we enter the third quarter of 2021, the Federal Reserve has reiterated its support for the economy, supply chains have begun to adapt to a post COVID-19 world, and interest rates have once again fallen. We’re optimistic that this presents a potential tailwind for our businesses in the third quarter, to the extent the economic recovery builds and demand for housing remains robust. The uncertain outlook for interest rates and inflation underscores the balance of our business model, through which we comprehensively serve both homeowners and housing investors that would otherwise be inefficiently financed.

While we are ~~pleased with~~excited about our ~~market positioning~~performance during the second quarter and ~~expectations~~the growth potential ahead for ~~growth, navigating~~shareholders, what ultimately differentiates our team is the ~~Company through prolonged market volatility will remain a primary focus. The high standards we have set for service~~quality of our people, and that our business provides meaningful benefits to our ~~customers are well-established, but it~~broader set of stakeholders. The impact our financing solutions have on local communities is ~~critical for~~palpable, and our experience and scale have enabled us to ~~maintain an infrastructure that can preserve this standard while allowing us~~provide attractively priced debt to ~~scale profitably~~both owner-occupants 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~~housing investors nationwide. But there remain cohorts of ~~loan sellers and sponsors. We aim to disrupt traditional private-sector workflows and ideologies that have inhibited automation in the 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 platform’s advantages in client acquisition and retention. A culture of consistent iteration of the technology suitestrong borrowers – particularly in ~~the proprietary use of leading cloud-based systems~~underserved communities – who still don’t have access to ~~automate workflow management – keeps the platform’s first-mover advantage fresh. This client-centric approach keeps customers coming back, as evidenced~~financing at an attractive rate. Redwood’s mission is to offer solutions that can benefit all borrowers not well served by government loan programs, something our ~~approximately 50% repeat borrower rate, but also positions us~~people are focused on and will hold ourselves accountable to ~~capitalize as this area of the market continues to grow.~~

Though our business platforms serve different parts of the housing market, our core mission unifies them. We aim to make quality housing accessible to all Americans, whether rented or owned. For example, we finance build-to-rent communities in the ~~Midwest, workforce housing in the South,~~months and high-balance residential mortgages on the coasts. Our mission also speaks to the role we play in our communities, and 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 can make a positive impact for our stakeholders – especially our shareholders, employees, and communities.

years ahead.

7773

~~Third~~Second Quarter Overview

The following table presents key financial metrics for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Table 1 – Key Financial Metrics


		Three Months Ended		Nine Months Ended			Three Months Ended			Six Months Ended
(In Thousands, except per Share Data)	(In Thousands, except per Share Data)	September 30, 2020		September 30, 2020		(In Thousands, except per Share Data)	June 30, 2021			June 30, 2021
Net income (loss) per diluted common share		$	1.02	$	(5.60)

Net income per diluted common share						Net income per diluted common share	$	0.66		$	1.38
Annualized GAAP return on equity						Annualized GAAP return on equity	28.7		%	31.2		%
Dividends per share						Dividends per share	$	0.18		$	0.34
Book value per share	Book value per share	$	9.41	$	9.41	Book value per share	$	11.46		$	11.46
REIT taxable income (loss) per share		$	0.07	$	(0.10)
Dividends per share		$	0.14	$	0.585

Economic return on book value (1)						Economic return on book value (1)	8.2		%	19.0		%

(1)Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period.

•Our ~~third~~second quarter ~~2020~~2021 results benefited from ~~renewed momentum~~continued strength in our operating ~~businesses. Volumes grew significantly at our residential business, and~~platforms, most notably increased business purpose ~~lending~~mortgage banking revenues on higher volume and strong margins. These results, ~~benefited from strong securitization execution and improved valuations on loans held~~along with an increase in ~~inventory.~~the value of our securities portfolio, contributed to a 6.5% increase in our book value per share during the quarter.

•In June 2021, we announced a 13% increase in our quarterly dividend to $0.18 per share for the second quarter of 2021.

•Our book value increased ~~$1.26~~$0.70 per share to ~~$9.41~~$11.46 per share during the ~~third~~second quarter of ~~2020, resulting primarily from positive investment fair value changes~~2021, as ~~well as from improved mortgage banking results. During the third quarter of 2020, we repurchased three million shares of our common stock for $22 million, resulting in a $0.03~~basic earnings per share ~~benefit to book value.~~and comprehensive income from investments significantly exceeded our second quarter dividend of $0.18 per share.

•~~During the third quarter~~Our business purpose lending platform originated $527 million 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 providedbusiness purpose mortgage loans in the ~~"Liquidity~~second quarter, including $312 million of single-family rental loans 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."~~$215 million of residential bridge loans.

•Residential jumbo loan purchase commitments were ~~$1.20~~$2.74 billion, and we purchased ~~$176 million~~$3.45 billion of residential jumbo loans during the ~~third~~second quarter of ~~2020.~~2021. At ~~September~~June 30, ~~2020,~~2021, our pipeline of residential jumbo ~~residential~~ loans identified for purchase was ~~$1.79~~$2.47 billion.

•~~Our business purpose lending platform originated $261 million of business purpose mortgage loans in the third quarter, including $196 million of single-family rental loans and $66 million~~ Additionally, at June 30, 2021, we had entered into forward sale agreements for $1.21 billion of residential ~~bridge loans. During the quarter, we also completed one $293 million securitization of single-family rental~~jumbo loans.

•During the ~~third~~second quarter of ~~2020,~~2021, we ~~sold $13~~securitized $1.81 billion of loans through four securitizations across Residential and Business Purpose Lending, and distributed $1.82 billion of jumbo loans through whole loan sales.

•During the second quarter of 2021, we settled call options on three Sequoia securitizations and one CAFL securitization, acquiring $83 million of seasoned residential jumbo loans at par and $45 million of seasoned single-family rental loans at par.

•During the second quarter of 2021, we added over $750 million of financing capacity to support growth of our operating platforms, including a refinance of $242 million of debt financing our bridge loans, reducing our cost of funds for our overall investments by over 100 basis points.

•During the second quarter of 2021, we retained $14 million of securities from a CoreVest securitization and $8 million of securities from Sequoia securitizations, purchased $2 million of other third-party securities, and ~~retained $16~~sold $10 million of ~~single-family rental ("SFR") securities~~securities.

•At June 30, 2021, our unrestricted cash was $421 million, and our estimated available capital was $175 million (which does not include approximately $100 million of available capital generated from a ~~securitization~~non-marginable secured term financing we ~~completed during the quarter.~~closed in early July 2021).

7874

RESULTS OF OPERATIONS

Within this Results of Operations section, we provide commentary that compares results year-over-year for ~~2020~~2021 and ~~2019.~~2020. Most tables include a "change" column that shows the amount by which the results from ~~2020~~2021 are greater or less than the results from the respective period in ~~2019.~~2020. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the ~~third~~second quarter of ~~2020,~~2021, compared to the ~~third~~second quarter of ~~2019,~~2020, and increases or decreases in the ~~"nine-month~~"six-month periods" refer to the change in results for the ~~first nine~~six months of ~~2020,~~2021, compared to the first ~~nine~~six months of ~~2019.~~2020.

Consolidated Results of Operations

The following table presents the components of our net income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 2 – Net Income (Loss)


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands, except per Share Data)	(In Thousands, except per Share Data)	2020		2019		Change		2020		2019		Change		(In Thousands, except per Share Data)	2021		2020		Change		2021		2020		Change
Net Interest Income	Net Interest Income	$	21,571	$	33,513	$	(11,942)	$	100,261	$	97,600	$	2,661	Net Interest Income	$	30,630	$	27,280	$	3,350	$	56,383	$	78,690	$	(22,307)
Non-interest Income	Non-interest Income													Non-interest Income
Mortgage banking activities, net	Mortgage banking activities, net	59,395		9,515		49,880		24,511		40,984		(16,473)		Mortgage banking activities, net	54,419		(5,982)		60,401		137,026		(34,884)		171,910
Investment fair value changes, net	Investment fair value changes, net	107,047		11,444		95,603		(611,557)		34,741		(646,298)		Investment fair value changes, net	49,480		152,228		(102,748)		94,567		(718,604)		813,171
Other income	Other income	(114)		4,356		(4,470)		3,979		13,840		(9,861)		Other income	2,126		1,165		961		5,969		4,093		1,876
Realized gains, net	Realized gains, net	602		4,714		(4,112)		30,419		18,227		12,192		Realized gains, net	8,384		25,965		(17,581)		11,100		29,817		(18,717)
Total non-interest income (loss), net	Total non-interest income (loss), net	166,930		30,029		136,901		(552,648)		107,792		(660,440)		Total non-interest income (loss), net	114,409		173,376		(58,967)		248,662		(719,578)		968,240
General and administrative expenses	General and administrative expenses	(27,630)		(24,899)		(2,731)		(84,832)		(70,722)		(14,110)		General and administrative expenses	(40,594)		(28,520)		(12,074)		(84,145)		(57,202)		(26,943)
Loan acquisition costs	Loan acquisition costs	(2,158)		(1,916)		(242)		(7,716)		(5,507)		(2,209)		Loan acquisition costs	(3,748)		(1,572)		(2,176)		(7,307)		(5,558)		(1,749)
Other expenses	Other expenses	(7,788)		(2,531)		(5,257)		(104,286)		(6,021)		(98,265)		Other expenses	(3,985)		(5,083)		1,098		(8,081)		(96,498)		88,417
Net income (loss) before income taxes	Net income (loss) before income taxes	150,925		34,196		116,729		(649,221)		123,142		(772,363)		Net income (loss) before income taxes	96,712		165,481		(68,769)		205,512		(800,146)		1,005,658
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(9,113)		114		(9,227)		13,079		(3,102)		16,181		(Provision for) benefit from income taxes	(6,687)		(37)		(6,650)		(18,230)		22,192		(40,422)
Net Income (Loss)	Net Income (Loss)	$	141,812	$	34,310	$	107,502	$	(636,142)	$	120,040	$	(756,182)	Net Income (Loss)	$	90,025	$	165,444	$	(75,419)	$	187,282	$	(777,954)	$	965,236
Diluted earnings (loss) per common share	Diluted earnings (loss) per common share	$	1.02	$	0.31	$	0.71	$	(5.60)	$	1.09	$	(6.69)	Diluted earnings (loss) per common share	$	0.66	$	1.00	$	(0.34)	$	1.38	$	(6.82)	$	8.20

Net Interest Income

The ~~decrease~~increase in net interest income during the ~~three-month~~three-month periods was primarily due to ~~lower~~higher average ~~asset~~ balances of residential loans held for sale during the ~~third~~second quarter of 2021, as compared to the second quarter of 2020, ~~resulting from portfolio repositioning~~due to a slowdown in loan acquisitions in the first half of 2020 related to the COVID-19 ~~pandemic, and higher borrowing costs associated with non-marginable and non-recourse debt facilities we entered into in~~pandemic. For the ~~second and third quarters of 2020.~~

~~The increase~~six-month periods, the decrease in net interest ~~income during the nine-month periods~~expense was primarily ~~due~~related to higher net interest income from bridge loans and loans held for investment at CAFL entities, which we consolidated beginning in the fourth quarter of 2019 following the acquisition of CoreVest. These increases were mostly offset by a reduction in net interest income resulting from sales of investments inaverage asset balances during the first half of 2020, as we repositioned our portfolio ~~in response to~~during the ~~COVID-19 pandemic.~~second quarter of 2020, selling a significant amount of assets and entering into new non-marginable and non-recourse borrowing facilities with higher interest rates.

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

Mortgage Banking Activities, Net

The increase in income from mortgage banking activities during the ~~three-month~~three- and six-month periods was primarily due to ~~improved valuations on SFR loans held~~an increase in ~~inventory~~loan acquisition and origination volumes at ~~June 30, 2020~~both our residential and ~~originated during the third quarter of 2020, resulting from improved securitization execution at our~~ business purpose mortgage banking ~~operations.~~

~~The decrease in income from mortgage banking activities~~businesses during ~~the nine-month periods was predominantly due to a decrease in loan acquisition volumes at our residential mortgage banking business,~~2021, as well as ~~lower~~higher margins, in both cases due to pandemic-related ~~market disruptions.~~disruptions in 2020, which adversely impacted our origination volumes in 2020.

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

Investment Fair Value Changes, Net

Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and, prior to the second quarter of 2020, interest rate hedges associated with these investments. During the three and six months ended ~~September~~June 30, 2021, positive investment fair value changes reflected continuing improvement in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained Sequoia and CAFL securities. Additional detail on our investment fair value changes during 2021 is included in the “Results of Operations bySegment” section that follows.During the three months ended June 30, 2020, investment fair value changes ~~reflected further increases in~~increased significantly, as the fair value of our investment assets ~~as spreads continued to tighten during~~recovered nearly one-third of the ~~third quarter.~~unrealized losses recognized in the first quarter of 2020. During the ~~nine~~six months ended ~~September~~June 30, 2020, the negative investment fair value changes reflected significant declines in the value of our investments in the first quarter of 2020 resulting from ~~market dislocations caused by the pandemic. Additional detail on our investment fair value changes is included in the “Results of Operations bySegment” section that follows.~~pandemic- and liquidity-related disruptions.

Other Income

The ~~decrease~~increase in other income for the three- and ~~nine-month~~six-month periods was primarily the result of ~~losses on~~an increase in income from our MSR investments, which ~~were driven primarily by increased~~generally benefited from a stabilization in prepayment speeds ~~resulting from recent declines in interest rates. Additionally, we recorded a $2 million gain associated with the re-measurement of our initial minority investment and purchase option in 5 Arches~~ during ~~the nine months ended September 30, 2019.~~2021.

Realized Gains, Net

During the three and ~~nine~~six months ended ~~September~~June 30, 2021, we realized gains of $8 million and $11 million, respectively, primarily resulting from the call of one and four seasoned Sequoia securitizations, respectively, and the sale of $3 million and $5 million of AFS securities, respectively. During the three and six months ended June 30, 2020, we realized gains of $1$26 million and $30 million, respectively, primarily resulting from ~~the sale of zero and $55 million of AFS securities, respectively, and for the nine-month period,~~ a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020. During the three and nine months ended September 30, 2019, we realized gains of $5 million and $18 million, respectively, primarily from the sale of $15 million and $82 million of AFS securities, respectively, and the call of a seasoned Sequoia securitization. Of note, all of the gains from extinguishment of debt were excluded from our diluted earnings per share for the nine months ended September 30, 2020, in accordance with GAAP. See ~~Note 17~~ ~~of our~~ ~~Notes to Consolidated Financial Statements~~ ~~in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on this calculation.~~

General and Administrative Expenses

The increase in general and administrative expenses for the three- and ~~nine-month~~six-month periods primarily resulted from ~~$4 million~~increased accruals of variable compensation expense associated with improved financial results in 2021 as compared to 2020, as well as long-term incentive award expense from awards granted in the second half of 2020. This increase was partially offset by a decrease in fixed compensation costs, legal and ~~$19 million of additional expenses, respectively, from the consolidation of 5 Arches and CoreVest operations during 2019 after their respective acquisitions.~~

~~Loan Acquisition Costs~~

~~The increase in loan acquisition~~other costs ~~for the three- and nine-month periods primarily resulted from an increase in origination activity at our business purpose mortgage banking operations, and also increased~~ as a result of ~~the acquisition of CoreVest~~cost savings measures implemented during ~~the fourth quarter of 2019.~~2020.

Other Expenses

The ~~increase~~decrease in other expenses for the three-month periods was primarily due to higher amortization expense from intangible assets we recorded in association with the acquisitions of 5 Arches and CoreVest in 2019. The increase in other expenses for the nine-monthsix-month periods was primarily due to $89 million of goodwill impairment expense at our Business Purpose Lending segment recorded in the first quarter of ~~2020.~~

2020 that was taken as a result of the onset of pandemic- and liquidity-related disruptions.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. For the ~~three-month~~three- and six-month periods, the increase in provision for income taxes was primarily the result of ~~higher~~positive GAAP income earned at our TRS in ~~the current year versus the prior year. For the nine-month periods, the change~~2021, as compared to a ~~benefit from income taxes from a provision for income taxes~~significant loss in ~~the prior year was the result of year-to-date GAAP losses at our TRS in~~ 2020. ~~The benefit from income taxes in 2020 was partially offset by a valuation allowance being recorded against our federal net ordinary deferred tax assets.~~ For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.

Net Interest Income

The following table presents the components of net interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 3 – Net Interest Income


		Three Months Ended September 30,													Three Months Ended June 30,
		2020						2019							2021						2020
(Dollars in Thousands)	(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield		(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income	Interest Income													Interest Income
Residential loans, held-for-sale	Residential loans, held-for-sale	$	434	$	53,297	3.3	%	$	10,583	$	973,917	4.3	%	Residential loans, held-for-sale	$	13,266	$	1,825,086	2.9	%	$	8,537	$	771,003	4.4	%
Residential loans - HFI at Redwood (2)		77		—		—	%	22,809		2,325,304		3.9	%

Residential loans - HFI at Legacy Sequoia (2)	Residential loans - HFI at Legacy Sequoia (2)	1,795		285,077		2.5	%	4,293		436,963		3.9	%	Residential loans - HFI at Legacy Sequoia (2)	1,169		263,735		1.8	%	2,685		305,160		3.5	%
Residential loans - HFI at Sequoia Choice (2)		20,919		1,910,771		4.4	%	27,555		2,320,989		4.7	%
Residential loans - HFI at Sequoia (2)														Residential loans - HFI at Sequoia (2)	14,492		1,444,831		4.0	%	22,565		1,826,727		4.9	%
Residential loans - HFI at Freddie Mac SLST (2)	Residential loans - HFI at Freddie Mac SLST (2)	21,696		2,153,447		4.0	%	11,830		1,278,036		3.7	%	Residential loans - HFI at Freddie Mac SLST (2)	19,506		2,111,445		3.7	%	21,187		2,115,716		4.0	%
Business purpose residential loans		19,456		1,149,171		6.8	%	5,446		296,037		7.4	%
Business purpose loans														Business purpose loans	15,474		920,189		6.7	%	20,441		1,181,644		6.9	%
Single-family rental loans - HFI at CAFL	Single-family rental loans - HFI at CAFL	36,181		2,663,541		5.4	%	—		—		—	%	Single-family rental loans - HFI at CAFL	54,849		3,336,773		6.6	%	32,978		2,379,689		5.5	%
Multifamily loans - HFI at Freddie Mac K-Series	Multifamily loans - HFI at Freddie Mac K-Series	4,918		489,736		4.0	%	36,829		3,767,847		3.9	%	Multifamily loans - HFI at Freddie Mac K-Series	4,860		488,715		4.0	%	4,870		470,896		4.1	%
Trading securities	Trading securities	6,539		140,892		18.6	%	17,877		1,168,952		6.1	%	Trading securities	5,527		140,115		15.8	%	6,587		127,506		20.7	%
Available-for-sale securities	Available-for-sale securities	3,596		135,942		10.6	%	5,170		174,530		11.8	%	Available-for-sale securities	3,752		128,413		11.7	%	3,440		128,486		10.7	%
Other interest income	Other interest income	6,371		859,808		3.0	%	7,725		612,554		5.0	%	Other interest income	5,800		779,236		3.0	%	6,656		848,105		3.1	%
Total interest income	Total interest income	121,982		9,841,682		5.0	%	150,117		13,355,129		4.5	%	Total interest income	138,695		11,438,538		4.9	%	129,946		10,154,932		5.1	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(3,558)		313,190		(4.5)	%	(18,209)		1,974,174		(3.7)	%	Short-term debt facilities	(10,085)		1,850,913		(2.2)	%	(15,110)		1,295,973		(4.7)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(1,587)		218,885		(2.9)	%	(2,891)		212,988		(5.4)	%	Short-term debt - servicer advance financing	(1,110)		164,154		(2.7)	%	(1,797)		231,312		(3.1)	%
Short-term debt - convertible notes, net		—		—		—	%	(3,139)		200,445		(6.3)	%

ABS issued - Legacy Sequoia (2)	ABS issued - Legacy Sequoia (2)	(1,058)		280,954		(1.5)	%	(3,452)		428,101		(3.2)	%	ABS issued - Legacy Sequoia (2)	(755)		260,857		(1.2)	%	(1,518)		300,773		(2.0)	%
ABS issued - Sequoia Choice (2)		(17,828)		1,708,687		(4.2)	%	(23,576)		2,085,622		(4.5)	%
ABS issued - Sequoia (2)														ABS issued - Sequoia (2)	(11,374)		1,220,211		(3.7)	%	(19,117)		1,673,361		(4.6)	%
ABS issued - Freddie Mac SLST (2)	ABS issued - Freddie Mac SLST (2)	(16,819)		1,892,967		(3.6)	%	(8,709)		1,023,046		(3.4)	%	ABS issued - Freddie Mac SLST (2)	(16,611)		1,864,842		(3.6)	%	(15,845)		1,801,798		(3.5)	%
ABS issued - Freddie Mac K-Series	ABS issued - Freddie Mac K-Series	(4,426)		464,693		(3.8)	%	(35,328)		3,559,970		(4.0)	%	ABS issued - Freddie Mac K-Series	(4,478)		459,344		(3.9)	%	(4,378)		447,886		(3.9)	%
ABS issued - CAFL	ABS issued - CAFL	(26,383)		2,509,828		(4.2)	%	—		—		—	%	ABS issued - CAFL	(43,201)		3,087,741		(5.6)	%	(24,446)		2,213,900		(4.4)	%
Long-term debt facilities														Long-term debt facilities	(10,972)		674,306		(6.5)	%	(7,995)		589,893		(5.4)	%
Long-term debt - FHLBC	Long-term debt - FHLBC	(1)		1,000		(0.4)	%	(12,311)		1,999,999		(2.5)	%	Long-term debt - FHLBC	(1)		132		(3.0)	%	(1,635)		381,465		(1.7)	%
Long-term debt - other		(28,751)		1,743,531		(6.6)	%	(8,989)		602,434		(6.0)	%
Long-term debt - corporate														Long-term debt - corporate	(9,478)		650,821		(5.8)	%	(10,825)		707,611		(6.1)	%
Total interest expense	Total interest expense	(100,411)		9,133,735		(4.4)	%	(116,604)		12,086,779		(3.9)	%	Total interest expense	(108,065)		10,233,321		(4.2)	%	(102,666)		9,643,972		(4.3)	%
Net Interest Income	Net Interest Income	$	21,571					$	33,513					Net Interest Income	$	30,630					$	27,280

8177


		Nine Months Ended September 30,													Six Months Ended June 30,
		2020						2019							2021						2020
(Dollars in Thousands)	(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield		(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income	Interest Income													Interest Income
Residential loans, held-for-sale	Residential loans, held-for-sale	$	17,220	$	599,609	3.8	%	$	30,056	$	886,902	4.5	%	Residential loans, held-for-sale	$	19,931	$	1,381,960	2.9	%	$	16,787	$	875,767	3.8	%
Residential loans - HFI at Redwood (2)	Residential loans - HFI at Redwood (2)	21,003		659,998		4.2	%	71,089		2,368,340		4.0	%	Residential loans - HFI at Redwood (2)	—		—		—	%	20,925		993,623		4.2	%
Residential loans - HFI at Legacy Sequoia (2)	Residential loans - HFI at Legacy Sequoia (2)	7,673		327,460		3.1	%	13,916		466,580		4.0	%	Residential loans - HFI at Legacy Sequoia (2)	2,517		268,724		1.9	%	5,878		348,885		3.4	%
Residential loans - HFI at Sequoia Choice (2)		68,566		1,957,484		4.7	%	80,026		2,227,573		4.8	%
Residential loans - HFI at Sequoia (2)														Residential loans - HFI at Sequoia (2)	29,975		1,414,397		4.2	%	47,647		1,981,097		4.8	%
Residential loans - HFI at Freddie Mac SLST (2)	Residential loans - HFI at Freddie Mac SLST (2)	64,869		2,203,677		3.9	%	35,221		1,238,334		3.8	%	Residential loans - HFI at Freddie Mac SLST (2)	39,665		2,143,942		3.7	%	43,173		2,229,068		3.9	%
Business purpose residential loans		62,541		1,266,493		6.6	%	12,231		219,132		7.4	%
Business purpose loans														Business purpose loans	30,789		908,543		6.8	%	43,085		1,325,798		6.5	%
Single-family rental loans - HFI at CAFL	Single-family rental loans - HFI at CAFL	99,169		2,411,312		5.5	%	—		—		—	%	Single-family rental loans - HFI at CAFL	103,722		3,296,042		6.3	%	62,988		2,283,812		5.5	%
Multifamily loans - HFI at Freddie Mac K-Series	Multifamily loans - HFI at Freddie Mac K-Series	49,960		1,711,123		3.9	%	94,134		3,191,093		3.9	%	Multifamily loans - HFI at Freddie Mac K-Series	9,646		491,282		3.9	%	45,042		2,328,527		3.9	%
Trading securities	Trading securities	26,789		336,151		10.6	%	56,138		1,188,563		6.3	%	Trading securities	11,423		136,336		16.8	%	20,249		434,852		9.3	%
Available-for-sale securities	Available-for-sale securities	11,682		139,487		11.2	%	16,376		189,881		11.5	%	Available-for-sale securities	7,519		132,823		11.3	%	8,087		141,279		11.4	%
Other interest income	Other interest income	20,537		763,898		3.6	%	20,513		582,795		4.7	%	Other interest income	11,813		801,270		2.9	%	14,166		715,416		4.0	%
Total interest income	Total interest income	450,009		12,376,692		4.8	%	429,700		12,559,193		4.6	%	Total interest income	267,000		10,975,319		4.9	%	328,027		13,658,124		4.8	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(40,158)		1,415,975		(3.8)	%	(51,424)		1,814,088		(3.8)	%	Short-term debt facilities	(16,572)		1,423,017		(2.3)	%	(36,600)		1,973,427		(3.7)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(4,961)		199,517		(3.3)	%	(9,905)		239,218		(5.5)	%	Short-term debt - servicer advance financing	(2,396)		175,132		(2.7)	%	(3,374)		189,726		(3.6)	%
Short-term debt - convertible notes, net		—		—		—	%	(9,403)		200,135		(6.3)	%

ABS issued - Legacy Sequoia (2)	ABS issued - Legacy Sequoia (2)	(5,099)		322,829		(2.1)	%	(11,548)		458,173		(3.4)	%	ABS issued - Legacy Sequoia (2)	(1,630)		265,430		(1.2)	%	(4,040)		343,997		(2.3)	%
ABS issued - Sequoia Choice (2)		(58,455)		1,757,851		(4.4)	%	(68,823)		2,018,406		(4.5)	%
ABS issued - Sequoia (2)														ABS issued - Sequoia (2)	(23,480)		1,192,582		(3.9)	%	(40,627)		1,782,702		(4.6)	%
ABS issued - Freddie Mac SLST (2)	ABS issued - Freddie Mac SLST (2)	(48,840)		1,861,309		(3.5)	%	(26,014)		997,460		(3.5)	%	ABS issued - Freddie Mac SLST (2)	(33,982)		1,906,613		(3.6)	%	(32,022)		1,845,307		(3.5)	%
ABS issued - Freddie Mac K-Series	ABS issued - Freddie Mac K-Series	(47,154)		1,614,333		(3.9)	%	(90,088)		3,012,017		(4.0)	%	ABS issued - Freddie Mac K-Series	(8,834)		462,962		(3.8)	%	(42,728)		2,195,469		(3.9)	%
ABS issued - CAFL	ABS issued - CAFL	(72,768)		2,247,583		(4.3)	%	—		—		—	%	ABS issued - CAFL	(81,054)		3,046,141		(5.3)	%	(46,385)		2,115,019		(4.4)	%
Long-term debt facilities														Long-term debt facilities	(23,804)		723,861		(6.6)	%	(10,593)		411,844		(5.1)	%
Long-term debt - FHLBC	Long-term debt - FHLBC	(10,411)		786,790		(1.8)	%	(38,728)		1,999,999		(2.6)	%	Long-term debt - FHLBC	(2)		558		(0.7)	%	(10,410)		1,184,002		(1.8)	%
Long-term debt - other		(61,902)		1,349,802		(6.1)	%	(26,167)		582,753		(6.0)	%
Long-term debt - corporate														Long-term debt - corporate	(18,863)		650,508		(5.8)	%	(22,558)		738,930		(6.1)	%
Total interest expense	Total interest expense	(349,748)		11,555,989		(4.0)	%	(332,100)		11,322,249		(3.9)	%	Total interest expense	(210,617)		9,846,804		(4.3)	%	(249,337)		12,780,423		(3.9)	%
Net Interest Income	Net Interest Income	$	100,261					$	97,600					Net Interest Income	$	56,383					$	78,690

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

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

~~The following table presents net interest income by segment for the three and nine months ended September 30, 2020 and 2019.~~

~~Table 4 – Net Interest Income by Segment~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2020 2019 Change 2020 2019 Change
Net Interest Income by Segment
Residential Lending $ 4,131 $ 20,788 $ (16,657) $ 29,844 $ 58,241 $ (28,397)
Business Purpose Lending 9,903 2,714 7,189 42,878 6,005 36,873
Third-Party Investments 10,042 9,168 874 32,423 30,978 1,445
Corporate/Other (2,505) 843 (3,348) (4,884) 2,376 (7,260)
Net Interest Income $ 21,571 $ 33,513 $ (11,942) $ 100,261 $ 97,600 $ 2,661

The Corporate/Other line item in the table above includes net interest income from consolidated Legacy Sequoia entities, and for the three and nine months ended September 30, 2020, also includes $3 million and $8 million, respectively, of interest expense on our convertible debt and trust-preferred securities. While our convertible debt and trust-preferred interest expense is generally allocated to our segments, given the large balance of undeployed capital (cash) held at a corporate level during the second and third quarters of 2020, a portion of the convertible debt expense was allocated against this capital.

Results of Operations by Segment

We report on our business using three distinct segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. Beginning in the second quarter of 2020, we combined what was previously our Multifamily Investments segment and Third-Party Residential Investments segment into a new segment called Third-Party Investments. Prior periods have been conformed to the current presentation. For additional information on our segments, refer to Note 23 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 54 – Segment Results Summary


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020		2019		Change		2020		2019		Change		(In Thousands)	2021		2020		Change		2021		2020		Change
Segment Contribution from:	Segment Contribution from:													Segment Contribution from:
Residential Lending	Residential Lending	$	7,386	$	10,374	$	(2,988)	$	(158,657)	$	60,371	$	(219,028)	Residential Lending	$	30,844	$	34,854	$	(4,010)	$	83,639	$	(160,796)	$	244,435
Business Purpose Lending	Business Purpose Lending	51,550		(634)		52,184		(130,606)		(1,709)		(128,897)		Business Purpose Lending	32,812		48,483		(15,671)		54,255		(177,313)		231,568

Third-Party Investments	Third-Party Investments	97,758		37,142		60,616		(329,640)		95,593		(425,233)		Third-Party Investments	53,592		79,955		(26,363)		103,528		(419,200)		522,728
Corporate/Other	Corporate/Other	(14,882)		(12,572)		(2,310)		(17,239)		(34,215)		16,976		Corporate/Other	(27,223)		2,152		(29,375)		(54,140)		(20,645)		(33,495)
Net Income (Loss)	Net Income (Loss)	$	141,812	$	34,310	$	107,502	$	(636,142)	$	120,040	$	(756,182)	Net Income (Loss)	$	90,025	$	165,444	$	(75,419)	$	187,282	$	(777,954)	$	965,236

The following sections provide a discussion of the results of operations at each of our three business segments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

The ~~decrease~~increase in net ~~income~~expense from Corporate/Other for the three-month periods was primarily due to $3 million of convertible debt expense allocated to this segment for the third quarter of 2020, as discussed above. The increase in net income from Corporate/Other for the nine-monththree- and six-month periods was primarily due to a $25 million gain associated with the repurchase of $125 million of convertible debt in the second quarter of 2020.

Residential Lending Segment

Overview

Our Residential Lending segment generated $7$31 million of net income during the ~~third~~second quarter of ~~2020,~~2021, driven primarily by ~~$12~~$27 million of mortgage banking income and $6 million of net interest income from investments. ~~Residential mortgage~~Mortgage banking ~~activities improved significantly during~~income decreased from the ~~third~~first quarter of ~~2020,~~2021, as loan purchase commitments ~~increased to $1.20~~of $2.7 billion in the second quarter were 22% lower than the first quarter and ~~gross~~ margins ~~recovered to pre-pandemic levels.~~normalized towards the high end of our historic target range.

Our Residential Lending segment generated ~~$33~~$53 million of net income during the ~~second~~first quarter of 2021, driven primarily by $64 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income increased significantly during the quarter, as loan purchase commitments increased 41% from the fourth quarter of 2020 driven primarily by $35 million of positive investment fair value changes. Mortgage banking income was negative for the second quarter of 2020 as we incurred incremental costs associated with the sale of our remaining loan inventory from the end of the first quarterto $3.51 billion, and ~~loan lock volumes were substantially reduced. During the second quarter, we resumed locking loans through our conduit operations, and purchased $56 million of loans during the quarter.~~

Our Residential Lending segment incurred a $199 million net loss during the first quarter of 2020, driven primarily by $197 million of negative investment fair value changes triggered by the pandemic and a $19 million net loss from mortgage banking operations, which was driven by decreased profitability on securitizations that settled later in the first quarter and from lower marks on loan inventory held at quarter-end, resulting from pandemic-related market dislocations.

~~Investment Portfolio~~

~~The following table presents details of our Residential Lending investment portfolio at September 30, 2020 and December 31, 2019.~~

~~Table 6 – Residential Lending Investments~~

(In Thousands) September 30, 2020 December 31, 2019
Residential loans at Redwood (1)
$ — $ 2,111,897
Residential securities at Redwood 146,608 229,074
Residential securities at consolidated Sequoia Choice entities (2)
209,797 254,265
Other investments 14,878 42,224
Total Segment Investments $ 371,283 $ 2,637,460
gross margins nearly doubled.

~~(1)~~
~~Excludes Sequoia Choice loans held at VIEs that we consolidate for GAAP purposes.~~

~~(2)~~Represents our retained economic investment in the consolidated Sequoia Choice securitization VIEs. For GAAP purposes, we consolidated $1.84 billion of loans and $1.63 billion of ABS issued associated with these investments at September 30, 2020.

During the third quarter of 2020, we did not add or dispose of any securities within our residential lending investment portfolio. During the second quarter of 2020, we sold $29 million of securities from our residential lending investment portfolio and retained $20 million of investment securities from a $271 million Sequoia securitization we completed during the quarter. During the first quarter of 2020, we sold $83 million of securities from our residential lending investment portfolio and retained $13 million of investment securities from three Sequoia securitizations we completed during the quarter.

As a result of the economic and financial market impacts of the pandemic, the terms of our FHLBC facility evolved and in March we began entering into transactions to sell several pools of residential whole loans financed through this facility with the objective to pay down our FHLBC borrowings. During the second quarter of 2020, we completed the sale of nearly all of our residential loans previously financed at the FHLBC, and repaid all but $1 million of borrowings under this facility. We do not expect to increase borrowings under our FHLBC facility above the existing $1 million of borrowings outstanding.

~~See the "Investments" section that follows for additional details on investments at this segment and their associated borrowings.~~

8479

~~The following table presents the components of investment fair value changes for our Residential Lending segment by investment type for the three and nine months ended September 30, 2020.~~

~~Table 7 – Investment Fair Value Changes, Net from Residential Lending~~

Three Months Ended Nine Months Ended
(In Thousands) September 30, 2020 September 30, 2020
Investment Fair Value Changes, Net
Changes in fair value of:
Residential loans held-for-investment, at Redwood $ 218 $ (93,314)
Trading securities (5,145) (50,633)
Net investments in Sequoia Choice entities (1)
7,851 (22,065)
Risk-sharing and other investments (272) (3,350)
Risk management derivatives, net — 10,735
Impairments on AFS securities (209) (480)
Investment Fair Value Changes, Net $ 2,443 $ (159,107)

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

Spreads generally continued to tighten during the third quarter of 2020, which resulted in positive fair value changes for many of our investments, recovering a further portion of the negative fair value changes incurred during the first quarter of 2020 due to the pandemic. Additionally, during the third quarter of 2020, most of our investment securities experienced increased prepayments, which generally benefited our subordinate securities, but negatively impacted our interest-only and certificated servicing securities and caused a net negative fair value change for our trading securities. Certain of our subordinate securities also experienced negative fair value changes due to increased delinquencies and loss expectations.

Mortgage Banking

The following table provides the activity of residential loans held in inventory for sale at our mortgage banking business during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Table 85 – Loan Inventory for Residential Mortgage Banking Operations — Activity


		Three Months Ended		Nine Months Ended			Three Months Ended		Six Months Ended
(In Thousands)	(In Thousands)	September 30, 2020		September 30, 2020		(In Thousands)	June 30, 2021		June 30, 2021
Balance at beginning of period	Balance at beginning of period	$	20,233	$	536,385	Balance at beginning of period	$	977,457	$	176,641
Acquisitions	Acquisitions	176,106		2,927,700		Acquisitions	3,454,818		6,582,762
Sales	Sales	(88,634)		(3,528,715)		Sales	(2,183,686)		(4,531,812)
Transfers between portfolios (1)	Transfers between portfolios (1)	—		263,172		Transfers between portfolios (1)	(1,205,494)		(1,205,494)
Principal repayments	Principal repayments	(2,317)		(80,307)		Principal repayments	(8,761)		(10,875)
Changes in fair value, net	Changes in fair value, net	(260)		(13,107)		Changes in fair value, net	29,388		52,500
Balance at End of Period	Balance at End of Period	$	105,128	$	105,128	Balance at End of Period	$	1,063,722	$	1,063,722

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

The following table ~~provides the fair value changes of~~presents our ~~residential~~mortgage banking income and loan purchase ~~and forward sale~~ commitments during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Table 8a6 – Mortgage Banking Income and Residential Loan Purchase ~~and Forward Sale~~ Commitments ~~and Associated Gains~~


		Three Months Ended		Nine Months Ended			Three Months Ended	Six Months Ended
(In Thousands)	(In Thousands)	September 30, 2020			September 30, 2020				(In Thousands)	June 30, 2021		June 30, 2021
Mortgage banking income									Mortgage banking income	$	26,893	$	91,160
Loan purchase commitments entered into	Loan purchase commitments entered into	$	2,117,808		$	5,475,334			Loan purchase commitments entered into	$	2,743,105	$	6,253,397
Market valuation gains, net		$	13,067		$	35,123

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

During the three months ended ~~September~~June 30, ~~2020,~~2021, our residential mortgage loan conduit entered into loan purchase commitments of $2.12 billion, purchased $176 million of prime residential jumbo loans and sold $89 million of loans to third parties. At September 30, 2020, we had identified $1.79locked $3.90 billion of loans ($2.74 billion adjusted for expected pipeline fallout - i.e, loan purchase commitments), including $3.33 billion of Select loans and $0.57 billion of Choice loans, and purchased $3.45 billion of loans. Approximately 60% of loans locked in the second quarter were purchase-money loans and 40% were refinancings. During the three months ended June 30, 2021, we distributed $1.82 billion of loans through whole loan sales, and completed three securitizations for a total of $1.53 billion.

At June 30, 2021, we had $1.06 billion of loans in inventory on our balance sheet, our loan pipeline included $2.47 billion of loans identified for purchase ~~(gross loan locks outstanding,~~(locked loans, unadjusted for fallout), and we had ~~outstanding~~entered into forward sale agreements for ~~$525 million~~$1.21 billion of loans. ~~This activity resulted~~

Our gross margin (mortgage banking income earned in ~~income from mortgage banking activities of $12 million~~the period divided by loan purchase commitments entered into during the period) for the ~~third~~three months ended June 30, 2021 was 98 basis points, down from 183 basis points in the first quarter of ~~2020.~~

~~During~~2021. Gross margin in the second quarter of ~~2020,~~2021 was near the high end of our ~~residential mortgage loan conduit entered into loan purchase commitments of $112 million, purchased $56 million of prime residential jumbo loans,~~historical range, despite a challenging macroeconomic backdrop that impacted securitization execution and ~~sold $711 million of loans~~increased hedging costs relative to third parties. Additionally, during the second quarter of 2020, we transferred $271 million of loans to a Sequoia securitization. This activity, along with $2 million of repurchase reserve accrual expense and $5 million of expenses associated with resolving residential loan seller demands, resulted in a loss from mortgage banking activities of $8 million for the second quarter of 2020.

~~During~~ the first quarter of 2020, our residential mortgage loan conduit entered into loan purchase commitments of $3.25 billion, purchased $2.70 billion of prime residential jumbo loans, transferred $1.62 billion of loans to a Sequoia Select securitization that were accounted for as sales, and sold $1.11 billion of jumbo loans to third parties. This activity resulted in a loss from mortgage banking activities of $23 million for the first quarter of 2020.quarter.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At ~~September~~June 30, ~~2020,~~2021, we had residential warehouse facilities outstanding with ~~four~~six different counterparties, with ~~$600 million~~$2.35 billion of total capacity and ~~$518 million~~$1.30 billion of available capacity. These included non-marginable (i.e., not subject to margin calls based on the market value of the underlying ~~collateral)~~collateral that is non-delinquent) facilities with ~~$200~~$800 million of total capacity and marginable facilities with ~~$400 million~~$1.55 billion of total capacity.

~~Business Purpose Lending Segment~~

~~Overview~~

Our Business Purpose Lending segment generated $52 million of net income during the third quarter of 2020, driven primarily by $48 million of mortgage banking income and $17 million of positive investment fair value changes. Business purpose mortgage banking activities improved from the second quarter of 2020, as spreads tightened significantly on securitization execution, resulting in improved valuations on SFR loans.

Our Business Purpose Lending segment generated $46 million of net income during the second quarter of 2020, driven primarily by $40 million of positive investment fair value changes and $14 million of net interest income from investments. Business purpose mortgage banking activities improved from the first quarter of 2020, as origination volumes began to pick up in late May and securitization pricing in the market improved into quarter end.

During the first quarter of 2020, our Business Purpose Lending segment incurred a $228 million net loss, driven primarily by $142 million of negative investment fair value changes and a $12 million net loss from mortgage banking operations, exclusive of an $89 million charge related to the full impairment of this segment's goodwill. The declines in investment fair values were triggered by the pandemic. Mortgage banking income decreased due to decreased profitability on a securitization that settled later in the first quarter and from lower marks on loan inventory held at quarter-end, resulting from the pandemic-related market dislocation.

8680

Investment Portfolio

The following table presents details of our ~~Business Purpose~~Residential Lending investment portfolio at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 97 – ~~Business Purpose~~Residential Lending Investments


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020
Single-family rental loans at Redwood (1)		$	—	$	237,620
Residential bridge loans at Redwood		700,860		745,006
Single-family rental securities at consolidated CAFL entities (2)		229,315		191,301
Residential loans at Redwood (1)						Residential loans at Redwood (1)	$	96,826	$	—
Residential securities at Redwood (2)						Residential securities at Redwood (2)	158,703		155,501
Residential securities at consolidated Sequoia entities (3)						Residential securities at consolidated Sequoia entities (3)	232,005		217,965
Other investments	Other investments	25,713		21,002		Other investments	8,721		8,815
Total Segment Investments	Total Segment Investments	$	955,888	$	1,194,929	Total Segment Investments	$	496,255	$	382,281

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

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

(3)Represents our retained economic investment in ~~securities issued by~~the consolidated ~~CAFL~~Sequoia securitization VIEs. For GAAP purposes, we consolidated ~~$2.97~~$2.22 billion of loans and ~~$2.74~~$1.99 billion of ABS issued associated with these investments at ~~September~~June 30, ~~2020.~~2021.

During the ~~third~~second quarter of ~~2020,~~2021, we ~~funded $66~~purchased $83 million of ~~business purpose bridge~~ loans from Sequoia securitizations we called, and ~~received principal payments of $155 million. In addition,~~ we retained ~~$16~~$8 million of securities from ~~a $323 million (principal balance) single-family rental loan securitization~~three Sequoia securitizations we completed during the ~~third~~ quarter. During the first quarter of 2021, we sold $4 million of securities from our residential lending investment portfolio and retained $8 million of securities from two Sequoia securitizations we completed during the quarter. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.

During the second quarter of ~~2020, we funded $54~~2021, net interest income from our residential lending investment portfolio was $6 million, of business purpose bridge loans and received principal payments of $86 million of such loans. In addition, we retained $20 million of securities from a $221 million single-family rental loan securitization we completed during the second quarter.

~~During~~consistent with the first quarter of ~~2020, we funded $206~~2021, and other income was $1 million in the second quarter of ~~business purpose bridge loans~~2021 and ~~received principal payments of $114~~$3 million ~~of such loans. In addition, we retained $42 million of securities from a single-family rental loan securitization we completed during the first quarter. During~~in the first quarter of ~~2020, we reclassified our single-family rental loans financed at the FHLBC to held-for-sale and consider them as part of our mortgage banking loan inventory as we plan to securitize these loans.~~

~~See the "Investments"~~ ~~sections that follow for additional details on investments at this segment and their associated borrowings.~~

2021.

The following table presents the components of investment fair value changes for our ~~Business Purpose~~Residential Lending segment by investment type for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Table 108 – Investment Fair Value Changes, Net from ~~Business Purpose~~Residential Lending

Three Months Ended Nine Months Ended
(In Thousands) September 30, 2020 September 30, 2020
Investment Fair Value Changes, Net
Changes in fair value of:
Single-family rental loans held-for-investment $ — $ (20,806)
Residential bridge loans held-for-investment 6,812 (10,016)
REO 407 (356)
Net investments in CAFL entities (1)
9,673 (41,048)
Other — (1,011)
Risk management derivatives, net — (11,600)
Investment Fair Value Changes, Net $ 16,892 $ (84,837)


	Three Months Ended		Six Months Ended
(In Thousands)	June 30, 2021		June 30, 2021
Investment Fair Value Changes, Net
Changes in fair value of:
Residential loans at Redwood	$	1,290	$	1,607
Trading securities	(2,250)		(4,728)
Net investments in Sequoia entities (1)	4,906		9,804
Risk-sharing and other investments	(19)		(43)

Recoveries (impairments) on AFS securities	—		33
Investment Fair Value Changes, Net	$	3,927	$	6,673

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

~~Spreads generally continued to tighten~~Strengthening credit performance helped drive spreads tighter during the ~~third quarter~~three-and six-month periods for most of ~~2020,~~our subordinate securities, which resulted in net positive fair value changes for ~~many~~our residential lending investments. Additionally, during the first half of 2021, most of our ~~investments, recovering~~investment securities experienced elevated prepayments, which generally benefited our subordinate securities, but negatively impacted our interest-only and certificated servicing securities, causing a ~~further portion of the~~net negative fair value change for our trading securities.

Business Purpose Lending Segment

Overview

Our Business Purpose Lending segment generated $33 million of net income during the second quarter of 2021, driven primarily by $35 million of mortgage banking income and $15 million of net interest income from investments. Business purpose mortgage banking income in the second quarter of 2021 benefited from a 37% increase in origination volume from the first quarter of 2021 and modest spread tightening on securitization execution during the second quarter. Our business purpose investments saw an increase in interest income in the second quarter from a higher average balance of investments compared to the first quarter of 2021 and increased positive fair value changes ~~incurred~~due to continued spread tightening.

Our Business Purpose Lending segment generated $21 million of net income during the first quarter of 2021, driven primarily by $22 million of mortgage banking income and $13 million of net interest income from investments. Business purpose mortgage banking income normalized in the first quarter of 2021, relative to the third and fourth quarters of 2020, as more modest spread tightening on securitization execution during the quarter had a reduced impact to the valuation of our loans held in inventory at the beginning of the quarter. Net interest income from BPL investments increased from the fourth quarter of 2020 due to the pandemic. While spreads generally tightened on most of our CAFL securities investments, certain of our subordinate securities experienced negative fair value changes due to increased delinquencies and loss expectations. Additionally, while spreads generally tightened on most of our residential bridge loans, we also experienced an increase in non-performing residential bridge loans (see ~~Investments~~ ~~section that follows for additional information~~higher yield maintenance income on our ~~residential~~SFR securities resulting from faster prepayments, and reduced debt costs on our bridge ~~loans and associated delinquencies).~~loan portfolio resulting from a decrease in leverage on these assets.

Mortgage Banking

The following table provides the business purpose ~~residential~~ loans origination activity at Redwood during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Table 119 – Business Purpose ~~Residential~~ Loans — Origination Activity


		Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020							Three Months Ended June 30, 2021						Six Months Ended June 30, 2021
(In Thousands)	(In Thousands)	Single-Family Rental		Residential Bridge(1)		Total		Single-Family Rental		Residential Bridge(1)		Total		(In Thousands)	Single-Family Rental		Bridge (1)		Total		Single-Family Rental		Bridge (1)		Total
Fair value at beginning of period	Fair value at beginning of period	$	379,795	$	—	$	379,795	$	331,565	$	—	$	331,565	Fair value at beginning of period	$	333,110	$	—	$	333,110	$	245,394	$	—	$	245,394
Originations	Originations	195,744		65,517		261,261		631,936		351,353		983,289		Originations	312,217		215,160		527,377		565,315		348,389		913,704

Sales	Sales	(7,695)		(1,567)		(9,262)		(33,843)		(23,860)		(57,703)		Sales	—		(354)		(354)		—		(2,231)		(2,231)
Transfers between portfolios (2)	Transfers between portfolios (2)	(322,829)		(63,979)		(386,808)		(706,443)		(324,081)		(1,030,524)		Transfers between portfolios (2)	(252,379)		(215,784)		(468,163)		(421,783)		(347,678)		(769,461)
Principal repayments	Principal repayments	(2,577)		—		(2,577)		(4,847)		—		(4,847)		Principal repayments	(3,056)		—		(3,056)		(10,120)		—		(10,120)
Changes in fair value, net	Changes in fair value, net	43,111		29		43,140		67,181		(3,412)		63,769		Changes in fair value, net	28,550		978		29,528		39,636		1,520		41,156
Fair Value at End of Period	Fair Value at End of Period	$	285,549	$	—	$	285,549	$	285,549	$	—	$	285,549	Fair Value at End of Period	$	418,442	$	—	$	418,442	$	418,442	$	—	$	418,442

(1)Our ~~residential~~ bridge loans are generally originated at our TRS and the majority are transferred to our REIT and a smaller portion sold. Origination fees and any mark-to-market changes on these loans prior to transfer are recognized as mortgage banking income. The loans held at our REIT are classified as held-for-investment, with subsequent fair value changes recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our ~~residential~~ bridge loans held-for-investment, see the Investments section that follows.

(2)For single-family rental loans, amounts represent transfers of loans from held-for-sale to held-for-investment, including when loans are securitized (and consolidated for GAAP purposes) ~~or transferred from our TRS to our REIT with the intent to hold for long-term investment.~~. For ~~residential~~ bridge loans, represents the transfer of loans from our TRS to our REIT as described in preceding footnote.

During the three months ended ~~September~~June 30, ~~2020,~~2021, we funded ~~$196~~$312 million of single-family rental loans and ~~sold $2~~$215 million of such loans to a third party. All of our outstanding SFR loans are held as inventory in our mortgage banking business and classified as held-for-sale. During the three months ended September 30, 2020, we funded $66 million of residential bridge loans, ~~sold $2 million~~representing increases of ~~loans to a third party~~23% and ~~transferred $64 million~~61% from respective first quarter 2021 volumes. Approximately 34% of ~~loans to our BPL investment portfolio. Additionally, we completed a single-family rental loan securitization, receiving gross proceeds of $323 million, backed by a combination of loans held~~SFR origination volume in ~~inventory at June 30, 2020 and newly-originated loans during the third quarter.~~

~~During~~ the second quarter of ~~2020, we funded $176 million~~2021 was generated from borrowers that previously had a bridge loan with CoreVest and 67% of ~~single-family rental loans, all of which~~total origination volumes were retained in our mortgage banking portfolio and classified as held-for-sale. During the second quarter of 2020, we funded $58 million of residential bridge loans, of which $2 million were sold to a third party and the remaining loans were transferred to our BPL investment portfolio. Additionally, we completed a $221 million single-family rental loan securitization, consisting of loans we held at the end of the first quarter of 2020.

During the first quarter of 2020, we funded $260 million of single-family rental loans and $227 million of residential bridge loans, of which $21 million of bridge loans were sold to a third party and the remaining bridge loans were transferred to our BPL investment portfolio. Additionally, during the first quarter, we completed a $378 million single-family rental loan securitization in early March.from repeat borrowers.

We utilize a combination of capital and loan warehouse facilities to manage our inventory of single-family rental loans that we hold for sale. At ~~September~~June 30, ~~2020,~~2021, we had business purpose warehouse facilities outstanding with ~~four~~five different counterparties, with ~~$1.10~~$1.30 billion of total capacity (used for both SFR and ~~$853~~bridge loans) and $587 million of available capacity. All of these facilities are non-marginable (i.e., not subject to margin calls based on the market value of the underlying ~~collateral)~~collateral that is non-delinquent).

~~Third-Party Investments Segment~~

~~Overview~~

As a result of asset sales during the first half of 2020 that were driven by the impact of the pandemic, the composition of our portfolio evolved and in the second quarter of 2020 we combined our previously reported Multifamily Investments segment with our Third-Party Residential Investments segment into a new segment called Third-Party Investments.

Our Third-Party Investments segment: generated $98 million of net income during the third quarter of 2020, driven primarily by $88 million of positive investment fair value changes and $10 million of net interest income; generated $77 million of net income during the second quarter of 2020, driven primarily by $77 million of positive investment fair value changes and $9 million of net interest income; and incurred a net loss of $504 million during the first quarter of 2020, driven primarily by $532 million of negative investment fair value changes that were triggered by the pandemic.

Investment Portfolio

The following table presents details of ~~the investments in~~ our ~~Third-Party Investments segment~~Business Purpose Lending investment portfolio at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Table 1210 – ~~Third-Party~~Business Purpose Lending Investments

(In Thousands) September 30, 2020 December 31, 2019
Residential securities at Redwood $ 149,192 $ 466,672
Residential securities at consolidated Freddie Mac SLST entities (1)
416,256 448,893
Multifamily securities at Redwood 55,535 404,128
Multifamily securities at consolidated Freddie Mac K-Series entities (2)
26,550 252,285
Other investments 344,037 294,904
Total Segment Investments $ 991,570 $ 1,866,882


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

Bridge loans at Redwood	$	726,569	$	641,765
Single-family rental securities at consolidated CAFL entities (1)	268,131		238,630
Other investments	13,168		21,627
Total Segment Investments	$	1,007,868	$	902,022

(1)Represents our economic investment in securities issued by consolidated ~~Freddie Mac SLST~~CAFL securitization ~~entities.~~VIEs. For GAAP purposes, we consolidated ~~$2.26~~$3.26 billion of loans and ~~$1.84~~$3.01 billion of ABS issued associated with these investments at ~~September~~June 30, ~~2020.~~2021.

~~(2)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes,~~During the second quarter of 2021, we ~~consolidated $491~~funded $215 million of business purpose bridge loans and ~~$465~~received principal payments of $115 million. In addition, we retained $14 million of ~~ABS issued associated with these investments at September 30, 2020.~~

~~During the third quarter, we retained $28 million of multifamily~~ securities from a $276 million (principal balance) single-family rental loan securitization ~~issued through our multifamily joint venture, purchased $15 million of CRT and third-party investments, and sold $13 million of CRT and third-party investments.~~

we completed during the second quarter. See the "~~Investments"~~Investments Detail" section that follows for additional details on ~~these investments.~~our investments and their associated borrowings.

The following table presents the components of investment fair value changes for our ~~Third-Party Investments~~Business Purpose Lending segment by investment type for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Table 1311 – Investment Fair Value Changes, Net from ~~Third-Party Investments~~Business Purpose Lending

Three Months Ended Nine Months Ended
(In Thousands) September 30, 2020 September 30, 2020
Investment Fair Value Changes, Net
Changes in fair value of:
Trading securities $ 1,544 $ (174,047)
Servicer advance investments 26 (6,172)
Excess MSRs (1,127) (7,650)
Shared home appreciation options 2,384 (4,286)
Net investments in Freddie Mac SLST entities (1)
82,214 (33,081)
Net investments in Freddie Mac K-Series entities (1)
2,166 (82,744)
Risk management derivatives, net — (58,158)
Other 30 (11)
Impairments on AFS securities 653 (547)
Investment Fair Value Changes, Net $ 87,890 $ (366,696)


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

Bridge loans held-for-investment	$	(62)	$	3,242
REO	147		428
Net investments in CAFL entities (1)	3,697		3,411


Investment Fair Value Changes, Net	$	3,782	$	7,081

Spreads ~~generally continued to tighten~~tightened during the ~~third~~second quarter of ~~2020,~~2021 for our CAFL subordinate securities, with positive fair value changes for these assets more than offsetting the decline in the value of our CAFL interest-only securities from a reduction in their basis through the receipt of regular cash flows.

Spreads generally tightened during the first quarter of 2021 for our BPL investments overall, which resulted in positive fair value changes for ~~many of our investments, particularly our investments in consolidated Freddie Mac SLST securitizations, recovering a further portion of the negative fair value changes incurred~~bridge loans and subordinate CAFL securities. We also had positive resolutions on several previously delinquent bridge loans during the first quarter of ~~2020 due to the pandemic. While spreads generally tightened on most~~2021, resulting in over $2 million of ~~our third-party investments, certain of our subordinate securities experienced negative~~positive fair value changes ~~due to increased delinquencies and loss expectations. Additionally,~~for recoveries in excess of our prior quarter-end carrying values. Positive fair value changes for our CAFL subordinate securities were mostly offset by a decline in the value of our CAFL interest-only securities from a reduction in their basis through the receipt of regular cash flows.

Third-Party Investments Segment

Overview

Our Third-Party Investments segment generated $54 million of net income during the ~~third~~second quarter of ~~2020, most~~2021, driven primarily by $42 million of positive investment fair value changes and $12 million of net interest income, and generated $50 million of net income during the first quarter of 2021, driven primarily by $40 million of positive investment fair value changes and $12 million of net interest income. Positive investment fair value changes in 2021 reflected continuing improvement in credit performance and spread tightening, particularly for our RPL and multifamily securities.

Investment Portfolio

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

Table 12 – Third-Party Investments


(In Thousands)	June 30, 2021		December 31, 2020
Residential securities at Redwood	$	148,798	$	134,090
Residential securities at consolidated Freddie Mac SLST entities (1)	450,173		428,179
Multifamily securities at Redwood	42,479		49,255
Multifamily securities at consolidated Freddie Mac K-Series entity (2)	30,833		28,255
Other investments (3)	127,138		135,590
Total Segment Investments	$	799,421	$	775,369

(1)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $2.10 billion of loans and $1.65 billion of ABS issued associated with these investments at June��30, 2021.

(2)Represents our economic investment in securities issued by a consolidated Freddie Mac K-Series securitization entity. For GAAP purposes, we consolidated $485 million of loans and $454 million of ABS issued associated with this investment at June 30, 2021.

(3)Other investments includes our servicer advance investments, which for purposes of this table are presented net of $164 million of non-recourse short-term securitization debt, secured by servicing advances and other servicing-related assets at June 30, 2021.

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

See the "Investments Detail" section that follows for additional details on these investments and their associated borrowings.

The following table presents the components of investment fair value changes for our Third-Party Investments segment by investment type for the three and six months ended June 30, 2021.

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


	Three Months Ended		Six Months Ended
(In Thousands)	June 30, 2021		June 30, 2021
Investment Fair Value Changes, Net
Changes in fair value of:
Residential securities	$	5,143	$	28,249
Net investments in Freddie Mac SLST entities (1)	36,316		40,433
Net investment in Freddie Mac K-Series entity (1)	1,855		10,776
Servicer advance investments	(940)		(1,100)
Excess MSRs	(2,477)		(4,430)
Shared home appreciation options	2,080		7,395

Other	28		57
Recoveries (impairments) on AFS securities	13		354
Investment Fair Value Changes, Net	$	42,018	$	81,734

Continued strengthening of credit and elevated prepayment speeds helped drive credit spreads tighter on our third-party assets in the first and second quarters of 2021, in particular for our investments in reperforming loan assets (primarily represented by our net investment securities experienced increased prepayments, which generally benefited our subordinate securities, but negatively impacted our interest-only trading securities and excess MSR investments, and caused a net negative fair value change for excess MSRs.in Freddie Mac SLST entities in the table above).

9084

Investments Detail

This section presents additional details on certain of our investment assets and their activity during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

~~Residential Loans at Residential Lending Investment~~Real Estate Securities Portfolio

The following table ~~provides the~~sets forth our real estate securities activity ~~of residential loans at our Residential Lending investment portfolio during~~by collateral type for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Table 14 – ~~Residential Loans at Residential Lending Investment Portfolio -~~Real Estate Securities Activity by Collateral Type

~~Three Months Ended~~

~~Nine Months Ended~~

~~(In Thousands)~~

~~September 30, 2020~~

~~Fair value at beginning of period~~

—

~~2,111,897~~

~~Sales~~

—

~~(1,254,935)~~

~~Transfers between portfolios~~ ~~(1)~~

—

~~(533,612)~~

~~Principal repayments~~

—

~~(229,818)~~

~~Changes in fair value, net~~

—

~~(93,532)~~

~~Fair Value at End of Period~~

—


Three Months Ended June 30, 2021	Residential						Multifamily		Total
(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine
Beginning fair value	$	31,580	$	—	$	284,656	$	48,084	$	364,320

Acquisitions
Sequoia securities	1,226		—		522		—		1,748
Third-party securities	962		—		1,750		—		2,712
Sales

Third-party securities	—		—		(10,988)		—		(10,988)
Gains on sales and calls, net	—		—		7,994		—		7,994
Effect of principal payments (1)	—		—		(12,436)		(4,827)		(17,263)
Change in fair value, net	(8,501)		—		15,642		(778)		6,363
Ending Fair Value (2)	$	25,267	$	—	$	287,140	$	42,479	$	354,886


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

Acquisitions
Sequoia securities	7,775		—		1,600		—		9,375
Third-party securities	962		—		12,700		4,930		18,592
Sales
Sequoia securities	—		(3,664)		—		—		(3,664)
Third-party securities	—		(2,060)		(31,010)		—		(33,070)
Gains on sales and calls, net	—		60		10,542		—		10,602
Effect of principal payments (1)	—		(26)		(17,547)		(10,803)		(28,376)
Change in fair value, net	(11,934)		27		50,112		(903)		37,302
Ending Fair Value (2)	$	25,267	$	—	$	287,140	$	42,479	$	354,886

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

(2)At June 30, 2021, excludes $232 million and ~~their reclassification between held-for-sale and held-for-investment.~~

~~During the second quarter of 2020, we completed the sale of nearly all of our residential loans previously held for investment and financed at our FHLBC facility, and repaid all but $1~~$268 million of ~~borrowings under this facility. The remaining loans were reclassified~~securities retained from our consolidated Sequoia and CAFL securitizations, respectively, as ~~held-for-sale~~well as $450 million and ~~included as part of our residential mortgage banking loan inventory. We do not expect to increase borrowings under our FHLBC facility above the existing $1~~$31 million of ~~borrowings outstanding.~~securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-Series securitizations, respectively.

At June 30, 2021, our securities consisted of fixed-rate assets (86%), adjustable-rate assets (12%), and hybrid assets that reset within the next year (2%).

~~Single-Family Rental Loans at Business Purpose Lending Investment Portfolio~~

~~The following table provides~~We directly finance our holdings of real estate securities with a combination of capital and collateralized debt in the ~~activity~~form of ~~single-family rental loans at our Business Purpose Lending investment portfolio during the~~repurchase (or “repo”) financing. At June 30, 2021, we had short-term debt incurred through repurchase facilities of $81 million with three ~~and nine months ended September 30, 2020.~~

~~Table 15 –Single-Family Rental Loans at Business Purpose Lending Investment Portfolio - Activity~~

~~Three Months Ended~~

~~Nine Months Ended~~

~~(In Thousands)~~

~~September 30, 2020~~

~~Fair value at beginning of period~~

—

~~237,620~~

~~Transfers between portfolios~~

—

~~(215,417)~~

~~Principal repayments~~

—

~~(1,397)~~

~~Changes in fair value, net~~

—

~~(20,806)~~

~~Fair Value at End of Period~~

—

~~During the second quarter, we transferred all~~different counterparties, which was secured by $110 million of our single-family rental loans previously financed at the FHLBC and held for investment to newly established non-marginable warehouse facilities, repaid our associated FHLBC debt, and now classify these loans as held-for-sale as part of our business purpose mortgage banking loan inventory.

real estate securities (including securities owned in consolidated securitization entities).

9185

~~Residential~~ At June 30, 2021, real estate securities with a fair value of $369 million (including securities owned in consolidated Sequoia and CAFL securitization entities), were financed with long-term, non-mark-to-market recourse debt through our subordinate securities financing facilities. Additionally, at June 30, 2021, we had $450 million of re-performing loan securities financed with $179 million of non-recourse securitization debt. The remaining $407 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

Bridge Loans Held-for-Investment at Redwood Portfolio

The following table provides the activity of ~~residential~~ bridge loans held-for-investment at Redwood during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Table 1615 – ~~Residential~~ Bridge Loans Held-for-Investment at Redwood - Activity


		Three Months Ended		Nine Months Ended			Three Months Ended		Six Months Ended
(In Thousands)	(In Thousands)	September 30, 2020		September 30, 2020		(In Thousands)	June 30, 2021		June 30, 2021
Fair value at beginning of period	Fair value at beginning of period	$	787,367	$	745,006	Fair value at beginning of period	$	626,484	$	641,765

Sales						Sales	—		(7,000)
Transfers between portfolios (1)	Transfers between portfolios (1)	63,979		323,945		Transfers between portfolios (1)	215,785		347,679
Transfers to REO	Transfers to REO	(2,691)		(4,598)		Transfers to REO	(806)		(2,289)
Principal repayments	Principal repayments	(154,572)		(354,167)		Principal repayments	(114,748)		(256,726)
Changes in fair value, net	Changes in fair value, net	6,777		(9,326)		Changes in fair value, net	(146)		3,140
Fair Value at End of Period	Fair Value at End of Period	$	700,860	$	700,860	Fair Value at End of Period	$	726,569	$	726,569

(1)All of our ~~residential~~ bridge loans are originated at our TRS then transferred to our REIT. Origination fees and any mark-to-market changes on these loans prior to transfer are recognized as mortgage banking income. Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes recorded through Investment fair value changes, net on our consolidated statements of income (loss).

Our ~~$701~~$727 million of ~~residential~~ bridge loans held-for-investment at ~~September~~June 30, ~~2020~~2021 were comprised of first-lien, ~~fixed-rate,~~ interest-only loans with a weighted average coupon of ~~8.02%~~7.63% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was ~~730~~727 and the weighted average LTV ratio of these loans was ~~67%~~65%. At ~~September~~June 30, ~~2020,~~2021, of the ~~2,262~~2,471 loans in this portfolio, 2443 of these loans with an aggregate fair value of $29 million and an aggregate unpaid principal balance of $33 million were in foreclosure, of which 40 loans with an aggregate fair value of $32 million and an unpaid principal balance of ~~$38~~$35 million were greater than 90 days ~~delinquent, of which 24 loans with an aggregate fair value of $34 million and an unpaid principal balance of $40 million were in foreclosure.~~delinquent.

During the second and third quarters of 2020, we entered into new non-recourse facilities to finance bridge loan investments and we entered into new non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral) recourse facilities that will be used to finance business purpose bridge loans. 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.

~~Real Estate Securities Portfolio~~

~~The following table sets forth our real estate securities activity by collateral type for the three and nine months ended September 30, 2020.~~

~~Table 17 – Real Estate Securities Activity by Collateral Type~~

Three Months Ended September 30, 2020 Residential Multifamily Total
(In Thousands) Senior Mezzanine Subordinate Mezzanine
Beginning fair value $ 32,860 $ 3,514 $ 252,901 $ 27,161 $ 316,436
Acquisitions
Third-party securities 2,598 2,000 11,000 28,314 43,912
Sales
Third-party securities — — (12,929) — (12,929)
Effect of principal payments (1)
— (17) (889) (546) (1,452)
Change in fair value, net (7,367) 170 11,959 606 5,368
Ending Fair Value (2)
$ 28,091 $ 5,667 $ 262,042 $ 55,535 $ 351,335

Nine Months Ended September 30, 2020 Residential Multifamily Total
(In Thousands) Senior Mezzanine Subordinate Mezzanine
Beginning fair value $ 175,859 $ 151,797 $ 368,090 $ 404,128 $ 1,099,874
Acquisitions
Sequoia securities 43,363 — 3,198 — 46,561
Third-party securities 19,225 2,000 25,750 59,446 106,421
Sales
Sequoia securities (33,375) (31,334) (6,394) — (71,103)
Third-party securities (115,354) (93,728) (66,991) (287,483) (563,556)
Gains on sales and calls, net 3,357 400 2,482 (1,604) 4,635
Effect of principal payments (1)
(4,464) (991) (4,989) (4,561) (15,005)
Change in fair value, net (60,520) (22,477) (59,104) (114,391) (256,492)
Ending Fair Value (2)
$ 28,091 $ 5,667 $ 262,042 $ 55,535 $ 351,335

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

~~(2)~~At September 30, 2020, excludes $210 million and $229 million of securities retained from our consolidated Sequoia Choice and CAFL securitizations, respectively, as well as $416 million and $27 million of securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-Series securitizations, respectively.

During the three months ended September 30, 2020, we sold $13 million of securities and during the three months ended June 30, 2020, we sold $82 million of securities, in our normal course of business. During the three months ended March 31, 2020, we sold $540 million of securities to reposition our portfolio and generate liquidity in response to the pandemic. At September 30, 2020, our securities consisted of fixed-rate assets (81%), adjustable-rate assets (16%), hybrid assets that reset within the next year (2%), and hybrid assets that reset between 12 and 36 months (1%).

We ~~directly~~ finance our ~~holdings of real estate securities~~bridge loans with a combination of ~~capital~~recourse, non-marginable warehouse facilities and ~~collateralized debt in the form of repurchase (or “repo”) financing. The following table presents the fair value of our residential securities that were financed with repurchase debt at September~~non-recourse, non-marginable warehouse facilities. At June 30, ~~2020.~~

~~Table 18 – Real Estate Securities Financed with Repurchase Debt~~

September 30, 2020
Real Estate Securities (1)
Repurchase Debt Allocated Capital
Weighted Average
Price(2)
Financing Haircut(3)
(Dollars in Thousands, except Weighted Average Price)
Residential Securities
Mezzanine (4)
$ 63,088 $ (44,459) $ 18,629 $ 102 30 %
Total Residential Securities 63,088 (44,459) 18,629 102 30 %
Multifamily Securities (5)
51,220 (30,595) 20,625 69 40 %
Total $ 114,308 $ (75,054) $ 39,254

~~(1)Amounts represent carrying value of securities, which are held at GAAP fair value.~~

~~(2)GAAP fair value per $100 of principal.~~

~~(3)Allocated capital divided by GAAP fair value.~~

~~(4)Includes $63 million of securities we owned that were issued by consolidated Sequoia Choice securitizations, which we consolidate in accordance with GAAP.~~

~~(5)Includes $27 million of securities we owned that were issued by consolidated Freddie Mac K-Series securitizations, which we consolidate in accordance with GAAP.~~

~~At September 30, 2020,~~2021, we had ~~short-term~~$99 million of debt incurred through ~~repurchase~~short-term warehouse facilities ~~of $75 million,~~with two different counterparties, which was secured by ~~$114~~$127 million of real estate securities (including securities owned in consolidated securitization entities). Our repo borrowings were made under facilities with three different counterparties, and the weighted average cost of funds for these facilities during the third quarter of 2020 was approximately 3.57% per annum.

At September 30, 2020, real estate securities with a fair value of $345 million (including securities owned in consolidated Sequoia Choice and CAFL securitization entities), were financed with long-term, non-mark-to-market recourse debt through our subordinate securities financing facilities. Additionally, at September 30, 2020, we had $416 million of re-performing loan securities financed with $208 million of non-recourse securitization debt. The remaining $358 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

The following table presents our real estate securities at September 30, 2020, categorized by portfolio vintage (the years the securities were issued), and by priority of cash flows (senior, mezzanine, and subordinate). We have additionally separated securities issued through our Sequoia platform or by third parties, including the Agencies.

~~Table 19 – Real Estate Securities by Vintage and Type~~

September 30, 2020 Sequoia 2012-2020 Third Party 2013-2020 Agency CRT 2018-2020 Third Party <=2008 Total Residential Securities Multifamily 2019-2020 Total Real Estate Securities
(In Thousands)
Senior (1)
$ 16,226 $ 11,862 $ — $ 3 $ 28,091 $ — $ 28,091
Mezzanine (2)
3,651 2,016 — — 5,667 — 5,667
Subordinate (1)
124,132 82,168 49,761 5,981 262,042 55,535 317,577
Total Securities (3)
$ 144,009 $ 96,046 $ 49,761 $ 5,984 $ 295,800 $ 55,535 $ 351,335

~~(1)~~At September 30, 2020, senior Sequoia and third-party securities included $28 million of IO securities. At September 30, 2020, subordinate third-party securities included $13 million of IO securities. Our interest-only securities included $12 million of certificated mortgage servicing investments securities at September 30, 2020 that we retained from certain of our Sequoia securitizations. These securities represent certificated servicing strips and therefore may be negatively impacted by the operating and funding costs related to servicing the associated securitized mortgage loans.

~~(2)Mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later.~~

~~(3)~~At September 30, 2020, excluded $210 million, $416 million, $27 million, and $229 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series, and CAFL securitizations, respectively. For GAAP purposes we consolidated $7.55 billion of loans, and ~~$6.68 billion~~$384 million of ~~non-recourse ABS~~ debt ~~associated~~incurred through long-term facilities with ~~these retained securities.~~

~~The following tables present the components~~four different counterparties, which was secured by $556 million of ~~the interest income we earned on AFS securities for the three and nine months ended September 30, 2020.~~

~~Table 20 – Interest Income — AFS Securities~~

Three Months Ended September 30, 2020 Yield as a Result of
Interest Income Discount (Premium) Amortization Total Interest Income Average Amortized Cost Interest Income Discount (Premium) Amortization Total Interest Income
(Dollars in Thousands)
Residential
Mezzanine $ 6 $ — $ 6 $ 782 3.07 % — % 3.07 %
Subordinate 1,824 1,766 3,590 135,160 5.40 % 5.23 % 10.63 %
Total AFS Securities $ 1,830 $ 1,766 $ 3,596 $ 135,942 5.38 % 5.20 % 10.58 %

Nine Months Ended September 30, 2020 Yield as a Result of
Interest Income Discount (Premium) Amortization Total Interest Income Average Amortized Cost Interest Income Discount (Premium) Amortization Total Interest Income
(Dollars in Thousands)
Residential
Senior $ 221 $ 529 $ 750 $ 4,481 6.58 % 15.74 % 22.32 %
Mezzanine 103 14 117 3,251 4.22 % 0.57 % 4.79 %
Subordinate 6,751 4,064 10,815 131,755 6.83 % 4.11 % 10.94 %
Total AFS Securities $ 7,075 $ 4,607 $ 11,682 $ 139,487 6.77 % 4.40 % 11.17 %
loans.

9486

Taxable Income and Tax Provision

Taxable Income

The following table summarizes our taxable income and distributions to shareholders for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Table 2116 – Taxable Income (Loss)

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 June 30,				Six Months Ended June 30, (1)
(In Thousands, except per Share Data)	2021 est. (2)		2020 est. (2)		2021 est. (2)		2020 est. (2)
REIT taxable income (loss)	$	12,497	$	(57,905)	$	22,779	$	(20,378)
Taxable REIT subsidiary income (loss)	30,671		(19,496)		83,732		(8,085)
Total Taxable Income (Loss)	$	43,168	$	(77,401)	$	106,511	$	(28,463)

REIT taxable income (loss) per share	$	0.11	$	(0.50)	$	0.20	$	(0.17)
Total taxable income (loss) per share	$	0.38	$	(0.67)	$	0.94	$	(0.24)

Distributions to shareholders	$	20,346	$	14,366	$	38,423	$	51,107
Distributions to shareholders per share	$	0.18	$	0.125	$	0.34	$	0.445

(1)~~Our tax results for the three and nine months ended September 30, 2020 are estimates until we file tax returns for this year.~~

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

(2)Our tax results for the three and six months ended June 30, 2021 and 2020 are estimates until we file tax returns for these years.

Net capital gains realized in 2021 are not included in REIT taxable income as they are offset by a capital loss carryforward of $328 million which was generated in 2020. Any unused portion of the capital loss carryforward will expire at the end of 2025.

Under normal circumstances, our minimum REIT dividend requirement would be 90% of our annual REIT taxable income. However, we currently maintain a ~~$28~~$36 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~~ Of the $36 million of NOLs, $29 million will ~~be determined based on our full-year~~expire after 2029, if not utilized by then, and $7 million have an indefinite carryover period. The $7 million of NOLs is available to offset 80% of taxable income ~~and dividend distributions.~~ in any given year.

We currently expect ~~only a small portion, if any,~~all or nearly all of ~~the~~our 2021 dividend distributions to ~~shareholders in 2020 will~~ be taxable as ~~dividend~~ordinary income ~~and the remainder will~~for federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is ~~generally nontaxable.~~nontaxable (provided it does not exceed a shareholder's tax basis in Redwood shares) and reduces a shareholder's basis in Redwood shares (but not below zero). To the extent such distributions exceed a shareholder's basis in Redwood shares, such excess amount would be taxable as capital gain. Under the federal income tax rules applicable to REITs, none of ~~our 2020~~Redwood’s 2021 dividend distributions are currently expected to be characterized as long-term capital ~~gains.~~gain dividends. The income or loss generated at our TRS will not directly affect the tax characterization of our 2021 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.

Tax Provision under GAAP

For the three and ~~nine~~six months ended ~~September~~June 30, 2021, we recorded tax provisions of $7 million and $18 million, respectively. For the three and six months ended June 30, 2020, we recorded a tax provision of ~~$9 million~~$37 thousand and a tax benefit of ~~$13 million, respectively. For the three and nine months ended September 30, 2019, we recorded a tax benefit of $0.1 million and a tax provision of $3~~$22 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~~provision for income taxes from ~~provision for~~a benefit from income taxes year-over-year was primarily the result of GAAP ~~losses~~income being recorded at our TRS in ~~2020~~2021 versus TRS GAAP ~~income~~losses in ~~2019. The benefit from income taxes recorded in 2020 was partially offset by a valuation allowance being recorded against our federal net ordinary deferred tax assets.~~2020. Our TRS effective tax rate in ~~2020~~2021 is expected to be ~~significantly less~~slightly higher than the federal statutory corporate tax rate, due to ~~the~~a federal 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,~~2020, we reported net federal ordinary and capital ~~deferred tax liabilities ("DTLs"), and, as such, had no associated valuation allowance.~~

AsDTAs with 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~~full valuation allowance ~~was~~of $17 million recorded against our net federal ordinary ~~DTAs.~~DTAs based on our determination that their realization was not assured. However, no valuation allowance was recorded against our net federal capital DTAs as we currently expect to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years.

We forecast that we will report net federal ordinary DTAs at December 31, 2021 and, consequently, a valuation allowance remains recorded against our net federal ordinary DTAs. At December 31, 2020, we reported a valuation allowance of $134 million recorded against our net state DTAs. Consistent with prior periods, we continued to maintain a valuation allowance against our net state ~~DTAs. Our~~DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs exist. As GAAP income at our TRS has been strong for the past several quarters, we are continuing to monitor our estimate of the realizability of our net deferred tax assets ~~could change~~and will reassess the need for a valuation allowance, in whole or in part, in future ~~periods to the extent that actual or revised estimates of future taxable income during the carryforward periods change from current expectations.~~periods.

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.

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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 ~~September~~June 30, ~~2020,~~2021, our total capital was ~~$1.70~~$1.95 billion and included ~~$1.05~~$1.30 billion of equity capital and ~~$0.65 billion~~$651 million of convertible notes and long-term debt on our consolidated balance sheet, including $199 million of convertible debt due in 2023, $150 million of convertible debt due in 2024, $172 million of exchangeable debt due in 2025, and $140 million of trust-preferred securities due in 2037.

As of ~~September~~June 30, ~~2020,~~2021, our unrestricted cash was ~~$451 million.~~$421 million, and we estimate we had approximately $175 million of available capital (which does not include approximately $100 million of available capital generated from a non-marginable secured term financing we closed in early July). While we believe our available cash is sufficient to fund our operations, we may raise equity or debt capital from time to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interests of the company.

In the discussion that follows and throughout this document, we distinguish between marginable and non-marginable debt. When we refer to non-marginable debt and marginable debt, we are referring to whether or not such debt is subject to market value-based margin calls on underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is generally determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional residential loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency of the mortgage or security being financed, or a decline in the value of the underlying asset securing the collateral. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the value of the property securing the mortgage loan that is financed by us under a loan warehouse facility.

We also distinguish between recourse and non-recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.

We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential loan warehouse facilities, securities repurchase facilities, and other short- and long-term debt facilities and other risks relating to our use of derivatives. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."

Cash Flows and Liquidity for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021

Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the profitability of mortgage banking activities, the timing and amount of securities acquisitions, sales and repayments, ~~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 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. 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 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 liquidity and capital position by removing sources of contingent liquidity risk (from potential market value-based margin calls), they have also reduced our overall amount of earning assets and increased our borrowing costs. In the near-term, while we maintain a higher balance of cash, this will reduce our cash flows from operations. However, given our significant cash position, we believe we are positioned well to meet our near-term liquidity needs.

Cash Flows from Operating Activities

Cash flows from operating activities were negative ~~$176 million~~$2.65 billion during the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were positive ~~$94~~$52 million and ~~negative $123~~positive $58 million during the first ~~nine~~six months of ~~2020~~2021 and ~~2019,~~2020, 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 $187 million of cash 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 flows from operations. These changes in operating cash flows resulted from actions taken in response to the pandemic that we would generally not expect to recur at such a magnitude in subsequent periods. Additionally, during the six months ended June 30, 2020, we received $38 million in cash related to FHLBC stock that was transferred back to the FHLBC, upon the repayment of substantially all of our borrowings from the FHLBC.

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Cash Flows from Investing Activities

During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, our net cash provided by investing activities was ~~$3.51~~$1.07 billion and primarily resulted from proceeds from ~~sales of loans and real estate securities, as well as~~ principal payments on ~~loans.~~loans held-for-investment. Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these assets in order to manage our liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market conditions.

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 ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, we transferred ~~residential~~ loans between held-for-sale and held-for-investment classification and retained securities from ~~Sequoia and CAFL~~ securitizations we sponsored, ~~and 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 ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, our net cash ~~used in~~provided by financing activities was ~~$3.11~~$1.51 billion. This primarily resulted from ~~$1.85~~$1.18 billion of proceeds from net short-term debt borrowings used to finance higher levels of loan inventory for our mortgage banking businesses, particularly for residential loans held-for-sale, as that business has seen a sustained increase in acquisition volumes. Additionally $540 million of net proceeds were generated from ABS issued. These cash inflows were partially offset by $167 million of net repayments of ~~short-term debt and $2.64 billion of repayments of~~ long-term debt, including repayments of $2.00 billion of FHLBC borrowings, which were associated with the sales of a significant amount of assets noted in the investing activities section above. Additionally, we paid $97 million to purchase and retire $125 million of our convertible debt in the second quarter of 2020, and repurchased $22 million of stock in the third quarter. These outflows of cash were partially offset by $306 million of net proceeds from the issuance and 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.debt.

During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, we declared dividends of ~~$0.585~~$0.34 per common share. On ~~September 11, 2020,~~June 10, 2021, the Board of Directors declared a regular dividend of ~~$0.14~~$0.18 per share for the ~~third~~second quarter of ~~2020,~~2021, which was paid on ~~September 29, 2020~~June 30, 2021 to shareholders of record on ~~September 22, 2020.~~June 23, 2021.

In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, and restricted stock units, which are ~~stock-based~~generally long-term compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent cash payment in that same per share amount on each outstanding deferred stock unit, cash-settled deferred stock unit, and restricted stock unit.

Repurchase Authorization

In February 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~~June 30, ~~2020,~~2021, we ~~repurchased 3,047,335 shares of our common stock pursuant to this authorization for $22 million.~~did not repurchase any shares. At ~~September~~June 30, ~~2020,~~2021, $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~~June 30, ~~2020,~~2021, we had residential warehouse facilities outstanding with ~~four~~six different counterparties, with ~~$600 million~~$2.35 billion of total capacity and ~~$518 million~~$1.30 billion of available capacity. These included non-marginable facilities with ~~$200~~$800 million of total capacity and marginable facilities with ~~$400 million~~$1.55 billion of total capacity. At ~~September~~June 30, ~~2020,~~2021, we had business purpose warehouse facilities outstanding with ~~four~~five different counterparties, with ~~$1.1~~$1.30 billion of total capacity and ~~$853~~$587 million of available capacity. All $1.30 billion 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 ~~September~~June 30, ~~2020,~~2021, we had ~~$483 million~~$1.48 billion of short-term debt outstanding. During the first ~~nine~~six months of ~~2020,~~2021, the highest balance of our short-term debt outstanding was ~~$3.23~~$2.66 billion.

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

Long-Term Debt

The following discusses significant activity related to our long-term debt during the first ~~nine months~~half of ~~2020 and other information about our long-term debt.~~2021. For further detail on our long-term debt, see Note 15 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

~~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. During the second quarter of 2020, we completed the sale of nearly all residential loans financed through this facility and repaid all but $1 million of borrowings under this facility. We do not expect to increase borrowings under our FHLBC Facility above the existing $1 million of borrowings outstanding.

Non-Recourse ~~Business Purpose Loan~~BPL Financing Facilities

In the 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 $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,~~2021,we repaid one of our non-recourse BPL financing facilities that had a ~~subsidiary~~balance of ~~Redwood~~$242 million at March 31, 2021, and entered into a ~~repurchase agreement providing non-marginable,~~new 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 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 third quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable financing for~~finance business purpose bridge loans ~~and single-family rental loans. Borrowings under this facility accrue interest at~~with 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~~total borrowing capacity of $250 million. ~~At September 30, 2020, we had no borrowings outstanding under this facility.~~

Recourse BPL Financing Facilities

In the second quarter of ~~2020,~~2021, we reclassified one of our recourse facilities with 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,~~$450 million from short-term to long-term debt as we ~~had borrowings under~~amended the terms of this facility, ~~totaling $150 million and $1 million~~including an extension 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-marginable recourse debt financing for $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.

~~Recourse Revolving Debt Facility~~

In the first quarter of 2020, a subsidiary of Redwood entered into a secured revolving debt facility agreement collateralized by MSRs and certificated mortgage servicing rights. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 2.75% through January 2021, with an increase in rate between February 2021 and the maturity of the facility in January 2022. This facility has an aggregate maximum borrowing capacity of $50 million. We had no borrowings outstanding under this facility at September 30, 2020. At September 30, 2020, $33 million of MSRs and interest-only securities were pledged as collateral under this facility.its maturity.

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~~six months ended ~~September~~June 30, ~~2020,~~2021, we issued ~~$515 million~~$1.48 billion and ~~$1.30~~$1.63 billion of ABS ~~respectively,~~ through our consolidated securitization ~~entities.~~entities, respectively. This included ~~$310~~$282 million and ~~$847~~$430 million of CAFL ABS issued during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively, and ~~zero and $249 million~~$1.20 billion of Sequoia ~~Choice~~ ABS issued during the three ~~and nine~~ months ended ~~September~~June 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.~~2021. 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.~~10-Q, which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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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.

~~As of September 30, 2020, we had no servicing advances outstanding related to principal and interest on Sequoia securitized loans for which we had servicing advance funding obligations.~~

Risks Relating to Debt Incurred Under Short- and Long-Term Borrowing Facilities

As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and origination of residential and ~~acquisition of~~business purpose mortgage loans (including those we acquire and 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~~stock. Recourse 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,~~2020, 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,~~I, Item 1A of our ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~March~~December 31, ~~2020 (the "Q1 2020 10-Q").~~2020. Many of the risks described above materialized during the first quarter of 2020 as a result of ~~the pandemic~~pandemic- and ~~its impact~~liquidity-related disruptions and their impacts on the economy and financial markets, as described under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” within our ~~Q1 2020~~ Quarterly Report on Form ~~10-Q.~~10-Q for the quarter ended March 31, 2020.

Our sources of debt financing include secured borrowings under residential and business purpose mortgage loan warehouse facilities (including recourse and non-recourse warehouse facilities), short-term securities repurchase facilities, a $10 million committed line of short-term secured credit from a bank, short-term servicer advance financing, a secured, revolving debt facility collateralized by mortgage servicing rights, and subordinate securities financing facilities. During the second quarter of 2020, we repaid secured borrowings by our wholly-owned subsidiary, RWT Financial, LLC, under its borrowing facility with the FHLBC and ~~at September 30, 2020, $1 million~~during the second quarter of 2021, we repaid the remaining amount of outstanding advances ~~remained outstanding. We do not expect~~under our borrowing facility. Under federal regulations applicable to ~~be able to increase borrowings under this borrowing facility above~~ the ~~existing $1 million of~~FHLBC, we can no longer borrow advances ~~outstanding.~~from the FHLBC.

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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).

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 the facility, to the extent the 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~~June 30, ~~2020,~~2021, only our short-term securities repurchase facilities (with ~~$75~~$81 million of borrowings outstanding at ~~September~~June 30, ~~2020)~~2021), and ~~two~~three of our residential mortgage loan warehouse facilities (with $8$664 million of borrowings outstanding at ~~September~~June 30, ~~2020)~~2021) retain market-value based margin call provisions.

Margin call provisions under these facilities are further described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”

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~~2020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 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~~2020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 under the heading “Market Risks,” if and when those loans or securities become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility.

At ~~September~~June 30, ~~2020,~~2021, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. 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 and second quarters of 2020, we amended~~with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at June 30, 2021 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio ~~and financial covenants that require us to maintain a minimum dollar amount~~at Redwood, at June 30, 2021 our level of liquidity in certain borrowing agreements on a permanent basis, and we repaid and suspended certain other borrowing facilities; however, we cannot be certain that we will be able to maintain compliance with such amended covenants. Such covenants, if breached, can resultrecourse indebtedness resulted in our being ~~required to immediately repay all outstanding amounts borrowed under~~in compliance with 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~~at a level such that we could ~~result~~incur at least $600 million in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements~~” in Part II, Item 1A of our Q1 2020 10-Q.~~additional recourse indebtedness.

~~102~~93

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.~~2020.

For additional information on our commitments and contingencies as of ~~September~~June 30, ~~2020,~~2021, 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.~~2020. Management discusses the ongoing development and selection of these critical accounting policies with the audit committee of the board of directors.

We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities, increases or decreases in earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates. Our critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements are included in the "Critical Accounting Policies and Estimates" section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets, has caused additional volatility impacting many of our estimates. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Continued volatility resulting from the pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility.

Market Risks

We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019.~~2020.

Other Risks

In addition to the market and other risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019 and in our Quarterly Report on Form 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.

~~103~~94

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,~~2020, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, ~~2019.~~2020.

Item 4. Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

There have been no changes in our internal control over financial reporting during the ~~third~~second quarter of ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~104~~95

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~There is no significant update regarding~~For information on our legal proceedings, see Note 16 to the ~~litigation matters described in Part I, Item 3 in Redwood’s Annual~~Financial Statements within this Quarterly Report on Form ~~10-K for the year ended December 31, 2019~~10-Q under the heading ~~“Legal Proceedings.” At September 30, 2020,~~"Loss Contingencies - Litigation, Claims and Demands," which supplements the ~~aggregate amount of loss contingency reserves established~~disclosures included in ~~respect of~~Note 16 to the ~~FHLB-Seattle and Schwab litigation matters described~~Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2019 was $2 million.~~

~~In addition to those matters, as previously disclosed, in connection with~~2020 under the ~~impact of the effects of the pandemic on the non-Agency mortgage finance market~~heading “Loss Contingencies - Litigation, Claims and on our business and operations, a number of the counterparties that have regularly sold residential mortgage loans to us believe that we breached perceived obligations to them, and requested or demanded that we purchase loans from them and/or compensate them for perceived damages resulting from our decisions earlier in 2020 not to purchase certain loans from them (“Residential Loan Seller Demands”).

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 had suffered in excess of $2 million of losses as a result of our alleged failure to purchase residential mortgage loans from it; and in October 2020 we and the plaintiff agreed to settle the lawsuit on mutually satisfactory terms.

With respect to Residential Loan Seller Demands that have 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 determining that a significant loss from these matters is not probable. With respect to these remaining Residential Loan Seller Demands, based on the foregoing, we have concluded that we can estimate an aggregate range of reasonably possible losses with respect to these Residential Loan Seller Demands of between zero and $1.5 million.

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 Demands) could result in our concluding in the future to establish additional accruals or reserves or modify our aggregate range of reasonably possible losses with respect to these Residential Loan Seller Demand matters. Our actual losses, and any accruals or reserves we may establish in the future relating to these matters, may be materially higher than the accruals, reserves and the aggregate range of reasonably possible losses we have estimated above, respectively, including 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 and we cannot be certain that the resolution of these matters, whether through litigation, settlement, or otherwise, will not have a material adverse effect on our financial condition or results of operations in any future period.

~~105~~

Demands.”

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 and in our Quarterly Report on Form 10-Q for the quarter ended March 31,~~ 2020.

~~106~~

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

During the three months ended ~~September~~June 30, ~~2020,~~2021, 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~~June 30, ~~2020,~~2021, we ~~repurchased 3,047,335 shares of our common stock pursuant to this authorization for $22 million.~~did not repurchase any shares. At ~~September~~June 30, ~~2020,~~2021, $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 ~~September~~June 30, ~~2020.~~2021.

Total Number of Shares Purchased or Acquired Average
Price per
Share Paid Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)
July 1, 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


	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)
April 1, 2021 - April 30, 2021	—	(1)	$	10.70	—	$	—
May 1, 2021 - May 31, 2021	—		$	—	—	$	—
June 1, 2021 - June 30, 2021	—		$	—	—	$	78,369
Total	—		$	10.70	—	$	78,369

(1)Represents fewer than 1,000 shares reacquired to satisfy tax withholding requirements related to the vesting of restricted shares.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Not Applicable

Item 5. Other Information

On ~~November 6, 2020, Redwood amended~~August 4, 2021, we issued a Participation Notice under the Company’s Change in Control Severance Plan (the “CIC Plan”) to Mr. Collin Cochrane, Chief Accounting Officer, and ~~restated its~~Mr. Shoshone (“Bo”) Stern, Managing Director - Portfolio Strategy and Risk, to designate them as participants in the CIC Plan. Mr. Stern’s Participation Notice was effective on August 4, 2021 and Mr. Cochrane’s Participation Notice is effective on March 2, 2022, subject to his continued employment ~~agreements~~by the Company through March 2, 2022. As participants in the CIC Plan, Mr. Cochrane and Mr. Stern will be eligible to receive certain severance benefits, including a cash payment of 150% of their “Base Compensation” (as defined in the CIC Plan), if their employment with the Company is terminated without “cause” or for “good reason” and such termination is a “Qualifying Termination” related to a “Change-in-Control”, as each of ~~Christopher J. Abate (Redwood’s CEO), Dashiell I.~~ ~~Robinson~~ (Redwood’s President), and Andrew P. Stone (Redwood’s Executive Vice President, General Counsel, and Secretary). These agreements were amended and restated to, among other things, update or clarify certainthose terms is defined ~~terms and vesting-related provisions and to reflect previously disclosed compensation terms applicable to these officers.~~in the CIC Plan. The ~~three amended and restated employment agreements are filed as Exhibits 10.1, 10.2, and 10.3 to this Quarterly Report on Form 10-Q (collectively, the “Amended Employment Agreements”) and the~~foregoing description of the ~~Amended Employment Agreements set forth in this Part II, Item 5~~terms of the CIC Plan does not purport to be complete and is qualified in its entirety by ~~reference to~~ the full text of the ~~Amended Employment Agreements.~~

CIC Plan included as Exhibit 10.6 hereto.

~~107~~97

Item 6. Exhibits


Exhibit Number						Exhibit
3.1						Articles of Amendment and Restatement of the Registrant, effective July 6, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1, filed on August 6, 2008)
3.1.1						Articles Supplementary of the Registrant, effective August 10, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.1, filed on August 6, 2008)
3.1.2						Articles Supplementary of the Registrant, effective August 11, 1995 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.2, filed on August 6, 2008)
3.1.3						Articles Supplementary of the Registrant, effective August 9, 1996 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.3, filed on August 6, 2008)
3.1.4						Certificate of Amendment of the Registrant, effective June 30, 1998 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.4, filed on August 6, 2008)
3.1.5						Articles Supplementary of the Registrant, effective April 7, 2003 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.5, filed on August 6, 2008)
3.1.6						Articles of Amendment of the Registrant, effective June 12, 2008 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.6, filed on August 6, 2008)
3.1.7						Articles of Amendment of the Registrant, effective May 19, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2009)
3.1.8						Articles of Amendment of the Registrant, effective May 24, 2011 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 20, 2011)
3.1.9						Articles of Amendment of the Registrant, effective May 18, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2012)
3.1.10						Articles of Amendment of the Registrant, effective May 16, 2013 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2013)
3.1.11						Articles of Amendment of the Registrant, effective May 16, 2019 (incorporated by reference to the Registrant's Current Report on Form 8-K, Exhibit 3.1, filed on May 17, 2019)
3.1.12						Articles of Amendment of the Registrant, effective June 15, 2020 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on June 15, 2020)
3.2.1						Amended and Restated Bylaws of the Registrant, as adopted on March 5, 2008 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.1, filed on August 8, 2018)
3.2.2						First Amendment to Amended and Restated Bylaws of the Registrant, as adopted on May 17, 2012 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.2, filed on August 8, 2018)
3.2.3						Second Amendment to Amended and Restated Bylaws of the Registrant, as adopted on May 22, 2018 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.3, filed on August 8, 2018)
10.1*						~~Fifth~~Sixth Amended and Restated Employment Agreement, dated as of ~~November 6, 2020,~~June 10, 2021 , by and between Christopher J. Abate and the Registrant (filed herewith)
10.2*						~~Third~~Fourth Amended and Restated Employment Agreement, dated as of ~~November 6, 2020,~~June 10, 2021, by and between Dashiell I. Robinson and the Registrant (filed herewith)
10.3*						~~Fifth~~Sixth Amended and Restated Employment Agreement, dated as of ~~November 6, 2020,~~June 10, 2021, by and between Andrew P. Stone and the Registrant (filed herewith)
10.4*						Amended and Restated Employment Agreement, dated as of June 10, 2021, by and between Brooke E. Carillo and the Registrant (filed herewith)
10.5*						Amended and Restated Employment Agreement, dated as of June 10, 2021, by and between Sasha G. Macomber and the Registrant (filed herewith)
10.6*						Redwood Trust, Inc. Change in Control Severance Plan, dated November 3, 2020 (filed herewith)
10.7						Sixth Amendment to Lease Agreement, dated as of December 4, 2020, between ARTIS HRA Inverness Point, LP, as Landlord, and the Registrant, as Tenant (filed herewith)
10.8						Seventh Amendment to Lease Agreement, dated as of May 21, 2021, between ARTIS HRA Inverness Point, LP, as Landlord, and the Registrant, as Tenant (filed herewith)
31.1						Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1						Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2						Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


Exhibit Number						Exhibit
101						Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended ~~September~~June 30, ~~2020,~~2021, is filed in inline XBRL-formatted interactive data files: (i) Consolidated Balance Sheets at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019;~~2020; (ii) Consolidated Statements of Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019;~~2020; (iii) Statements of Consolidated Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019;~~2020; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019;~~2020; (v) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019;~~2020; and (vi) Notes to Consolidated Financial Statements.

~~108~~


Exhibit Number						~~Exhibit~~
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

______________________

* Indicates exhibits that include management contracts or compensatory plan arrangements.

~~109~~99

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		REDWOOD TRUST, INC.

Date:	~~November 6, 2020~~August 4, 2021	By:	/s/ Christopher J. Abate
			Christopher J. Abate
			Chief Executive Officer
			(Principal Executive Officer)

Date:	~~November 6, 2020~~August 4, 2021	By:	/s/ Brooke E. Carillo
			Brooke E. Carillo
			Chief Financial Officer
			(Principal Financial Officer)

Date:	August 4, 2021	By:	/s/ Collin L. Cochrane
			Collin L. Cochrane
			Chief ~~Financial~~Accounting Officer
			(Principal ~~Financial and~~ Accounting Officer)

~~110~~100


	Assets
	Residential Loans		Business Purpose Residential Loans		Multifamily Loans		Trading Securities		AFS Securities		Servicer Advance Investments		MSRs		Excess MSRs		Shared Home Appreciation Options
(In Thousands)
Beginning balance - December 31, 2019	$	7,714,745	$	3,506,743	$	4,408,524	$	860,540	$	239,334	$	169,204	$	42,224	$	31,814	$	45,085

Acquisitions	2,927,697		0		0		96,318		56,664		179,419		0		10,906		3,517
Originations	0		982,315		0		0		0		0		0		0		0
Sales	(4,783,682)		(53,434)		0		(579,466)		(55,193)		0		0		0		0
Principal paydowns	(1,210,117)		(489,243)		(5,830)		(8,502)		(10,345)		(83,124)		0		0		(2,558)
Deconsolidations	0		0		(3,849,779)		0		0		0		0		0		0
Gains (losses) in net income (loss), net	(152,145)		16,246		(61,500)		(224,728)		(23,287)		(6,878)		(27,346)		(7,650)		(4,286)

Other settlements, net (1)	(1,599)		(6,526)		0		0		0		0		0		0		0
Ending balance - September 30, 2020	$	4,494,899	$	3,956,101	$	491,415	$	144,162	$	207,173	$	258,621	$	14,878	$	35,070	$	41,758


September 30, 2020	Real Estate Securities (1)		Repurchase Debt		Allocated Capital		Weighted Average Price(2)		Financing Haircut(3)
(Dollars in Thousands, except Weighted Average Price)
Residential Securities

Mezzanine (4)	$	63,088	$	(44,459)	$	18,629	$	102	30	%

Total Residential Securities	63,088		(44,459)		18,629		102		30	%
Multifamily Securities (5)	51,220		(30,595)		20,625		69		40	%

Total	$	114,308	$	(75,054)	$	39,254


September 30, 2020	Sequoia 2012-2020		Third Party 2013-2020		Agency CRT 2018-2020		Third Party <=2008		Total Residential Securities		Multifamily 2019-2020		Total Real Estate Securities
(In Thousands)
Senior (1)	$	16,226	$	11,862	$	—	$	3	$	28,091	$	—	$	28,091
Mezzanine (2)	3,651		2,016		—		—		5,667		—		5,667
Subordinate (1)	124,132		82,168		49,761		5,981		262,042		55,535		317,577

Total Securities (3)	$	144,009	$	96,046	$	49,761	$	5,984	$	295,800	$	55,535	$	351,335


Three Months Ended September 30, 2020									Yield as a Result of
	Interest Income		Discount (Premium) Amortization		Total Interest Income		Average Amortized Cost		Interest Income		Discount (Premium) Amortization		Total Interest Income
(Dollars in Thousands)
Residential

Mezzanine	$	6	$	—	$	6	$	782	3.07	%	—	%	3.07	%
Subordinate	1,824		1,766		3,590		135,160		5.40	%	5.23	%	10.63	%
Total AFS Securities	$	1,830	$	1,766	$	3,596	$	135,942	5.38	%	5.20	%	10.58	%