~~0000930236rwt:BusinessPurposeBridgeLoansMember2020-12-31~~false2022Q3000093023612/31P6M0.0956823http://fasb.org/us-gaap/2022#AccountsPayableAndAccruedLiabilitiesCurrentAndNoncurrenthttp://fasb.org/us-gaap/2022#OtherAssets

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended: September 30, ~~2021~~2022


☐			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						~~114,674,962~~113,349,651			shares outstanding as of November ~~1, 2021~~2, 2022

REDWOOD TRUST, INC.

~~2021~~2022 FORM 10-Q REPORT

TABLE OF CONTENTS


		Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at September 30, ~~2021~~2022 (Unaudited) and December 31, ~~2020~~2021	2
	Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	3
	Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~ for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	9
	Note 1. Organization	9
	Note 2. Basis of Presentation	910
	Note 3. Summary of Significant Accounting Policies	1114
	Note 4. Principles of Consolidation	1517
	Note 5. Fair Value of Financial Instruments	2425
	Note 6. Residential Loans	3433
	Note 7. Business Purpose Loans	3836
	Note 8. Consolidated Agency Multifamily Loans	4240
	Note 9. Real Estate Securities	4241
	Note 10. Home Equity Investments (HEI)	46
	Note 1 1 . Other Investments	46
	Note 1 2 . Derivative Financial Instruments	48
	Note ~~11. Derivative Financial Instruments~~1 3 . Other Assets and Liabilities	50
	Note ~~12. Other Assets and Liabilities~~1 4 . Short-Term Debt	5251
	Note ~~13. Short-Term Debt~~1 5 . Asset-Backed Securities Issued	54
	Note ~~14. Asset-Backed Securities Issued~~1 6 . Long-Term Debt	5657
	Note ~~15. Long-Term Debt~~1	597
	~~Note 16.~~. Commitments and Contingencies	60
	Note ~~17.~~1 8 . Equity	63
	Note ~~18.~~1 9 . Equity Compensation Plans	66
	Note ~~19.~~20 . Mortgage Banking Activities, Net	67
	Note ~~20.~~2 1 . Other Income, Net	68
	Note ~~21.~~2 2 . General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	69
	Note ~~22.~~2 3 . Taxes	70
	Note ~~23.~~2 4 . Segment Information	70

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	75
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~106~~107
Item 4.	Controls and Procedures	~~106~~107

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	~~107~~108
Item 1A.	Risk Factors	~~107~~108
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~107~~108
Item 3.	Defaults Upon Senior Securities	~~107~~108
Item 4.	Mine Safety Disclosures (Not Applicable)	~~107~~108
Item 5.	Other Information	~~108~~109
Item 6.	Exhibits	~~109~~110
Signatures		~~110~~112

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, 2021		December 31, 2020		(In Thousands, except Share Data) (Unaudited)	September 30, 2022		December 31, 2021
ASSETS (1)	ASSETS (1)					ASSETS (1)
Residential loans, held-for-sale, at fair value	Residential loans, held-for-sale, at fair value	$	1,495,079	$	176,641	Residential loans, held-for-sale, at fair value	$	834,262	$	1,845,282
Residential loans, held-for-investment, at fair value	Residential loans, held-for-investment, at fair value	4,721,389		4,072,410		Residential loans, held-for-investment, at fair value	4,918,294		5,747,150
Business purpose loans, held-for-sale, at fair value	Business purpose loans, held-for-sale, at fair value	466,346		245,394		Business purpose loans, held-for-sale, at fair value	337,238		358,309
Business purpose loans, held-for-investment, at fair value	Business purpose loans, held-for-investment, at fair value	4,227,209		3,890,959		Business purpose loans, held-for-investment, at fair value	4,919,980		4,432,680
Multifamily loans, held-for-investment, at fair value		482,791		492,221
Consolidated Agency multifamily loans, at fair value						Consolidated Agency multifamily loans, at fair value	427,458		473,514
Real estate securities, at fair value	Real estate securities, at fair value	353,286		344,125		Real estate securities, at fair value	259,212		377,411
Home equity investments						Home equity investments	340,437		192,740
Other investments	Other investments	422,366		348,175		Other investments	412,762		449,229
Cash and cash equivalents	Cash and cash equivalents	556,989		461,260		Cash and cash equivalents	297,092		450,485
Restricted cash	Restricted cash	88,717		83,190		Restricted cash	71,996		80,999
Goodwill						Goodwill	23,373		—
Intangible assets	Intangible assets	45,246		56,865		Intangible assets	44,130		41,561

Derivative assets	Derivative assets	51,103		53,238		Derivative assets	65,213		26,467
Other assets	Other assets	162,193		130,588		Other assets	194,500		231,117
Total Assets	Total Assets	$	13,072,714	$	10,355,066	Total Assets	$	13,145,947	$	14,706,944

LIABILITIES AND EQUITY (1)	LIABILITIES AND EQUITY (1)					LIABILITIES AND EQUITY (1)
Liabilities	Liabilities					Liabilities
Short-term debt, net	Short-term debt, net	$	1,750,941	$	522,609	Short-term debt, net	$	2,110,279	$	2,177,362

Derivative liabilities	Derivative liabilities	10,972		16,072		Derivative liabilities	6,782		3,317
Accrued expenses and other liabilities	Accrued expenses and other liabilities	251,576		179,340		Accrued expenses and other liabilities	201,125		245,788

Asset-backed securities issued (includes $7,756,101 and $6,900,362 at fair value), net		8,183,825		7,100,661
Asset-backed securities issued (includes $7,564,312 and $8,843,147 at fair value), net						Asset-backed securities issued (includes $7,564,312 and $8,843,147 at fair value), net	8,139,293		9,253,557
Long-term debt, net	Long-term debt, net	1,499,577		1,425,485		Long-term debt, net	1,534,226		1,640,833
Total liabilities	Total liabilities	11,696,891		9,244,167		Total liabilities	11,991,705		13,320,857
Commitments and Contingencies (see Note 16)		0		0
Commitments and Contingencies (see Note 17)						Commitments and Contingencies (see Note 17)
Equity	Equity					Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 114,661,762 and 112,090,006 issued and outstanding		1,147		1,121
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 113,343,014 and 114,892,309 issued and outstanding						Common stock, par value $0.01 per share, 395,000,000 shares authorized; 113,343,014 and 114,892,309 issued and outstanding	1,133		1,149
Additional paid-in capital	Additional paid-in capital	2,312,272		2,264,874		Additional paid-in capital	2,345,152		2,316,799
Accumulated other comprehensive income (loss)		1,923		(4,221)
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(64,935)		(8,927)
Cumulative earnings	Cumulative earnings	1,272,845		997,277		Cumulative earnings	1,197,428		1,316,890
Cumulative distributions to stockholders	Cumulative distributions to stockholders	(2,212,364)		(2,148,152)		Cumulative distributions to stockholders	(2,324,536)		(2,239,824)
Total equity	Total equity	1,375,823		1,110,899		Total equity	1,154,242		1,386,087
Total Liabilities and Equity	Total Liabilities and Equity	$	13,072,714	$	10,355,066	Total Liabilities and Equity	$	13,145,947	$	14,706,944

——————

(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, assets of consolidated VIEs totaled ~~$9,358,317~~$9,449,163 and ~~$8,141,069,~~$10,661,081, respectively. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, liabilities of consolidated VIEs totaled ~~$8,391,761~~$8,448,479 and ~~$7,348,713,~~$9,619,347, 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 September 30,				Nine Months Ended September 30,
(Unaudited)	(Unaudited)	2021		2020		2021		2020		(Unaudited)	2022		2021		2022		2021
Interest Income	Interest Income									Interest Income
Residential loans	Residential loans	$	53,993	$	44,921	$	146,081	$	179,331	Residential loans	$	61,002	$	53,993	$	191,252	$	146,081
Business purpose loans	Business purpose loans	67,129		55,637		201,640		161,710		Business purpose loans	95,197		67,129		270,430		201,640
Multifamily loans		4,846		4,918		14,492		49,960
Consolidated Agency multifamily loans										Consolidated Agency multifamily loans	4,762		4,846		14,247		14,492
Real estate securities	Real estate securities	14,242		10,135		33,184		38,471		Real estate securities	6,989		14,242		30,772		33,184
Other interest income	Other interest income	5,512		6,371		17,325		20,537		Other interest income	9,712		5,512		27,816		17,325
Total interest income	Total interest income	145,722		121,982		412,722		450,009		Total interest income	177,662		145,722		534,517		412,722
Interest Expense	Interest Expense									Interest Expense
Short-term debt	Short-term debt	(11,826)		(5,145)		(30,794)		(45,119)		Short-term debt	(23,944)		(11,826)		(49,093)		(30,794)
Asset-backed securities issued	Asset-backed securities issued	(73,732)		(66,514)		(222,712)		(232,316)		Asset-backed securities issued	(90,910)		(73,732)		(285,464)		(222,712)
Long-term debt	Long-term debt	(18,196)		(28,752)		(60,865)		(72,313)		Long-term debt	(27,873)		(18,196)		(71,435)		(60,865)
Total interest expense	Total interest expense	(103,754)		(100,411)		(314,371)		(349,748)		Total interest expense	(142,727)		(103,754)		(405,992)		(314,371)
Net Interest Income	Net Interest Income	41,968		21,571		98,351		100,261		Net Interest Income	34,935		41,968		128,525		98,351
Non-interest Income (Loss)
Non-interest (Loss) Income										Non-interest (Loss) Income
Mortgage banking activities, net	Mortgage banking activities, net	63,163		59,395		200,189		24,511		Mortgage banking activities, net	16,535		63,163		2,833		200,189
Investment fair value changes, net	Investment fair value changes, net	26,077		107,047		120,644		(611,557)		Investment fair value changes, net	(57,697)		26,077		(151,789)		120,644
Other income, net	Other income, net	2,388		(114)		8,357		3,979		Other income, net	4,027		2,388		17,016		8,357
Realized gains, net	Realized gains, net	6,703		602		17,803		30,419		Realized gains, net	—		6,703		2,581		17,803
Total non-interest income (loss), net		98,331		166,930		346,993		(552,648)
Total non-interest (loss) income, net										Total non-interest (loss) income, net	(37,135)		98,331		(129,359)		346,993
General and administrative expenses	General and administrative expenses	(47,692)		(27,630)		(131,837)		(84,832)		General and administrative expenses	(40,107)		(47,692)		(106,927)		(131,837)
Loan acquisition costs	Loan acquisition costs	(4,621)		(2,158)		(11,928)		(7,716)		Loan acquisition costs	(2,426)		(4,621)		(10,371)		(11,928)
Other expenses	Other expenses	(4,023)		(7,788)		(12,104)		(104,286)		Other expenses	(4,261)		(4,023)		(11,814)		(12,104)
Net Income (Loss) before (Provision for) Benefit from Income Taxes		83,963		150,925		289,475		(649,221)
Benefit from (provision for) income taxes		4,323		(9,113)		(13,907)		13,079
Net Income (Loss)		$	88,286	$	141,812	$	275,568	$	(636,142)
Net (Loss) Income before Benefit from (Provision for) Income Taxes										Net (Loss) Income before Benefit from (Provision for) Income Taxes	(48,994)		83,963		(129,946)		289,475
(Provision for) benefit from income taxes										(Provision for) benefit from income taxes	(1,417)		4,323		10,484		(13,907)
Net (Loss) Income										Net (Loss) Income	$	(50,411)	$	88,286	$	(119,462)	$	275,568

Basic earnings (loss) per common share		$	0.75	$	1.21	$	2.36	$	(5.60)
Diluted earnings (loss) per common share		$	0.65	$	1.02	$	2.03	$	(5.60)
Basic (loss) earnings per common share										Basic (loss) earnings per common share	$	(0.44)	$	0.75	$	(1.04)	$	2.36
Diluted (loss) earnings per common share										Diluted (loss) earnings per common share	$	(0.44)	$	0.65	$	(1.04)	$	2.03
Basic weighted average shares outstanding	Basic weighted average shares outstanding	112,995,847		113,403,102		112,754,691		113,952,308		Basic weighted average shares outstanding	116,087,890		112,995,847		118,530,172		112,754,691
Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	141,855,471		141,969,977		141,575,385		113,952,308		Diluted weighted average shares outstanding	116,087,890		141,855,471		118,530,172		141,575,385

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) Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) 2021 2020 2021 2020
Net Income (Loss) $ 88,286 $ 141,812 $ 275,568 $ (636,142)
Other comprehensive income (loss):
Net unrealized (loss) gain on available-for-sale securities (2,658) 8,236 19,552 (19,890)
Reclassification of unrealized (gain) loss on available-for-sale securities to net income (6,200) (445) (16,495) (11,525)
Net unrealized loss on interest rate agreements — — — (32,806)
Reclassification of unrealized loss on interest rate agreements to net income 1,041 1,040 3,087 2,148
Total other comprehensive (loss) income (7,817) 8,831 6,144 (62,073)
Total Comprehensive Income (Loss) $ 80,469 $ 150,643 $ 281,712 $ (698,215)


(In Thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited)	2022		2021		2022		2021
Net (Loss) Income	$	(50,411)	$	88,286	$	(119,462)	$	275,568
Other comprehensive (loss) income:
Net unrealized (loss) gain on available-for-sale securities	(8,731)		(2,658)		(60,013)		19,552
Reclassification of unrealized loss (gain) on available-for-sale securities to net (loss) income	544		(6,200)		918		(16,495)

Reclassification of unrealized loss on interest rate agreements to net (loss) income	1,040		1,041		3,087		3,087
Total other comprehensive (loss) income	(7,147)		(7,817)		(56,008)		6,144
Total Comprehensive (Loss) Income	$	(57,558)	$	80,469	$	(175,470)	$	281,712

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 30, ~~2021~~2022

(In Thousands, except Share Data) Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income Cumulative
Earnings Cumulative
Distributions
to Stockholders Total
(Unaudited) Shares Amount
June 30, 2021 113,052,780 $ 1,131 $ 2,287,412 $ 9,740 $ 1,184,559 $ (2,187,700) $ 1,295,142
Net income — — — — 88,286 — 88,286
Other comprehensive loss — — — (7,817) — — (7,817)
Issuance of common stock 1,585,709 16 19,810 — — — 19,826
Employee stock purchase and incentive plans 23,273 — 153 — — — 153
Non-cash equity award compensation — — 4,897 — — — 4,897
Common dividends declared ($0.21 per share) — — — — — (24,664) (24,664)
September 30, 2021 114,661,762 $ 1,147 $ 2,312,272 $ 1,923 $ 1,272,845 $ (2,212,364) $ 1,375,823


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
June 30, 2022	116,753,174	$	1,168	$	2,363,709	$	(57,788)	$	1,247,839	$	(2,296,837)	$	1,258,091
Net (loss)	—	—		—		—		(50,411)		—		(50,411)
Other comprehensive (loss)	—	—		—		(7,147)		—		—		(7,147)


Employee stock purchase and incentive plans	38,698	—		34		—		—		—		34
Non-cash equity award compensation	—	—		5,068		—		—		—		5,068
Share repurchases	(3,448,858)	(35)		(23,659)		—		—		—		(23,694)
Common dividends declared ($0.23 per share)	—	—		—		—		—		(27,699)		(27,699)
September 30, 2022	113,343,014	$	1,133	$	2,345,152	$	(64,935)	$	1,197,428	$	(2,324,536)	$	1,154,242

For the Nine Months Ended September 30, ~~2021~~2022

(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 — — — — 275,568 — 275,568
Other comprehensive income — — — 6,144 — — 6,144
Issuance of common stock 2,391,777 24 33,176 — — — 33,200
Employee stock purchase and incentive plans 179,979 2 (536) — — — (534)
Non-cash equity award compensation — — 14,758 — — — 14,758
Common dividends declared ($0.55 per share) — — — — — (64,212) (64,212)
September 30, 2021 114,661,762 $ 1,147 $ 2,312,272 $ 1,923 $ 1,272,845 $ (2,212,364) $ 1,375,823

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


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2021	114,892,309	$	1,149	$	2,316,799	$	(8,927)	$	1,316,890	$	(2,239,824)	$	1,386,087
Net (loss)	—	—		—		—		(119,462)		—		(119,462)
Other comprehensive (loss)	—	—		—		(56,008)		—		—		(56,008)
Issuance of common stock	5,232,869	52		67,424		—		—		—		67,476

Employee stock purchase and incentive plans	346,727	3		(1,151)		—		—		—		(1,148)
Non-cash equity award compensation	—	—		18,505		—		—		—		18,505
Share repurchases	(7,128,891)	(71)		(56,425)		—		—		—		(56,496)
Common dividends declared ($0.69 per share)	—	—		—		—		—		(84,712)		(84,712)
September 30, 2022	113,343,014	$	1,133	$	2,345,152	$	(64,935)	$	1,197,428	$	(2,324,536)	$	1,154,242

(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 — 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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)

For the Three Months Ended September 30, 2021


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
June 30, 2021	113,052,780	$	1,131	$	2,287,412	$	9,740	$	1,184,559	$	(2,187,700)	$	1,295,142
Net income	—	—		—		—		88,286		—		88,286
Other comprehensive income	—	—		—		(7,817)		—		—		(7,817)
Issuance of common stock	1,585,709	16		19,810		—		—		—		19,826
Direct stock purchase and dividend reinvestment plan	—	—		153		—		—		—		153
Employee stock purchase and incentive plans	23,273	—		—		—		—		—		—
Non-cash equity award compensation	—	—		4,897		—		—		—		4,897

Common dividends declared ($0.21 per share)	—	—		—		—		—		(24,664)		(24,664)
September 30, 2021	114,661,762	$	1,147	$	2,312,272	$	1,923	$	1,272,845	$	(2,212,364)	$	1,375,823

For the Nine Months Ended September 30, ~~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	—	—		—		—		275,568		—		275,568
Other comprehensive income	—	—		—		6,144		—		—		6,144
Issuance of common stock	2,391,777	24		33,176		—		—		—		33,200

Employee stock purchase and incentive plans	179,979	2		(536)		—		—		—		(534)
Non-cash equity award compensation	—	—		14,758		—		—		—		14,758

Common dividends declared ($0.55 per share)	—	—		—		—		—		(64,212)		(64,212)
September 30, 2021	114,661,762	$	1,147	$	2,312,272	$	1,923	$	1,272,845	$	(2,212,364)	$	1,375,823

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

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


(In Thousands) (Unaudited)	(In Thousands) (Unaudited)	Nine Months Ended September 30,				(In Thousands) (Unaudited)	Nine Months Ended September 30,
		2021		2020			2022		2021
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					Cash Flows From Operating Activities:
Net income (loss)		$	275,568	$	(636,142)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Net (loss) income						Net (loss) income	$	(119,462)	$	275,568
Adjustments to reconcile net (loss) income to net cash used in operating activities:						Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	Amortization of premiums, discounts, and securities issuance costs, net	300		6,213		Amortization of premiums, discounts, and securities issuance costs, net	2,041		300
Depreciation and amortization of non-financial assets	Depreciation and amortization of non-financial assets	12,674		13,166		Depreciation and amortization of non-financial assets	12,115		12,674
Originations of held-for-sale loans	Originations of held-for-sale loans	(960,419)		(654,820)		Originations of held-for-sale loans	(913,477)		(960,419)
Purchases of held-for-sale loans	Purchases of held-for-sale loans	(9,902,028)		(2,893,246)		Purchases of held-for-sale loans	(3,734,972)		(9,902,028)
Proceeds from sales of held-for-sale loans	Proceeds from sales of held-for-sale loans	6,948,264		3,224,526		Proceeds from sales of held-for-sale loans	4,110,949		6,948,264
Principal payments on held-for-sale loans	Principal payments on held-for-sale loans	49,619		53,677		Principal payments on held-for-sale loans	160,985		49,619
Net settlements of derivatives	Net settlements of derivatives	27,412		(187,130)		Net settlements of derivatives	158,868		27,412

Non-cash equity award compensation expense	Non-cash equity award compensation expense	14,758		11,146		Non-cash equity award compensation expense	18,505		14,758
Goodwill impairment expense		—		88,675

Market valuation adjustments	Market valuation adjustments	(292,056)		606,764		Market valuation adjustments	183,487		(292,056)
Realized gains, net	Realized gains, net	(17,803)		(30,419)		Realized gains, net	(2,581)		(17,803)
Net change in:	Net change in:					Net change in:
Accrued interest receivable and other assets	Accrued interest receivable and other assets	(9,680)		304,147		Accrued interest receivable and other assets	56,156		(9,680)
Accrued interest payable and accrued expenses and other liabilities	Accrued interest payable and accrued expenses and other liabilities	73,120		(82,489)		Accrued interest payable and accrued expenses and other liabilities	(62,046)		73,120
Net cash used in operating activities	Net cash used in operating activities	(3,780,271)		(175,932)		Net cash used in operating activities	(129,432)		(3,780,271)
Cash Flows From Investing Activities:	Cash Flows From Investing Activities:					Cash Flows From Investing Activities:
Originations of loan investments	Originations of loan investments	(557,327)		(327,494)		Originations of loan investments	(1,377,714)		(557,327)
Purchases of loan investments	Purchases of loan investments	(35,713)		—		Purchases of loan investments	(22,006)		(35,713)
Proceeds from sales of loan investments	Proceeds from sales of loan investments	9,484		1,574,160		Proceeds from sales of loan investments	—		9,484
Principal payments on loan investments	Principal payments on loan investments	1,950,151		1,652,418		Principal payments on loan investments	1,666,514		1,950,151
Purchases of real estate securities	Purchases of real estate securities	(29,342)		(106,422)		Purchases of real estate securities	(15,006)		(29,342)

Sales of securities held in consolidated securitization trusts	Sales of securities held in consolidated securitization trusts	8,197		142,990		Sales of securities held in consolidated securitization trusts	—		8,197
Proceeds from sales of real estate securities	Proceeds from sales of real estate securities	37,500		634,709		Proceeds from sales of real estate securities	27,471		37,500
Principal payments on real estate securities	Principal payments on real estate securities	46,904		19,446		Principal payments on real estate securities	26,584		46,904
Purchases of servicer advance investments		—		(179,419)
Principal repayments from servicer advance investments		58,248		83,124

Principal repayments from servicer advance investments, net						Principal repayments from servicer advance investments, net	65,772		58,248

Purchases of home equity investment contracts		(109,174)		(986)
Acquisition of Riverbend, net of cash acquired						Acquisition of Riverbend, net of cash acquired	(40,636)		—
Purchases of HEIs						Purchases of HEIs	(176,439)		(109,174)
Principal payments on HEIs						Principal payments on HEIs	35,187		—
Other investing activities, net	Other investing activities, net	(15,915)		22,019		Other investing activities, net	(20,768)		(15,915)
Net cash provided by investing activities	Net cash provided by investing activities	1,363,013		3,514,545		Net cash provided by investing activities	168,959		1,363,013
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	9,847,178		3,981,572		Proceeds from borrowings on short-term debt	4,149,726		9,847,178
Repayments on short-term debt	Repayments on short-term debt	(8,443,664)		(5,828,972)		Repayments on short-term debt	(5,192,165)		(8,443,664)
Proceeds from issuance of asset-backed securities	Proceeds from issuance of asset-backed securities	2,822,785		1,343,845		Proceeds from issuance of asset-backed securities	1,420,289		2,822,785
Repayments on asset-backed securities issued	Repayments on asset-backed securities issued	(1,549,766)		(1,037,546)		Repayments on asset-backed securities issued	(1,288,294)		(1,549,766)

Proceeds from borrowings on long-term debt	Proceeds from borrowings on long-term debt	948,674		1,251,850		Proceeds from borrowings on long-term debt	1,678,805		948,674
Deferred long-term debt issuance costs paid						Deferred long-term debt issuance costs paid	(17,925)		—
Repayments on long-term debt						Repayments on long-term debt	(873,820)		(1,055,475)

Repayments on long-term debt		(1,055,475)		(2,640,007)
Net settlements of derivatives		—		(84,336)
Payments on repurchase of common stock						Payments on repurchase of common stock	(56,496)		—
Taxes paid on equity award distributions						Taxes paid on equity award distributions	(1,571)		(957)
Net proceeds from issuance of common stock	Net proceeds from issuance of common stock	20,248		5,791		Net proceeds from issuance of common stock	67,899		20,248
Net payments on repurchase of common stock		—		(21,659)
Taxes paid on equity award distributions		(957)		(3,009)
Dividends paid	Dividends paid	(64,212)		(67,821)		Dividends paid	(84,712)		(64,212)
Other financing activities, net	Other financing activities, net	(6,297)		(4,876)		Other financing activities, net	(3,659)		(6,297)
Net cash provided by (used in) financing activities		2,518,514		(3,105,168)
Net increase in cash, cash equivalents and restricted cash		101,256		233,445
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(201,923)		2,518,514
Net (decrease) increase in cash, cash equivalents and restricted cash						Net (decrease) increase in cash, cash equivalents and restricted cash	(162,396)		101,256
Cash, cash equivalents and restricted cash at beginning of period (1)	Cash, cash equivalents and restricted cash at beginning of period (1)	544,450��		290,833		Cash, cash equivalents and restricted cash at beginning of period (1)	531,484		544,450
Cash, cash equivalents and restricted cash at end of period (1)	Cash, cash equivalents and restricted cash at end of period (1)	$	645,706	$	524,278	Cash, cash equivalents and restricted cash at end of period (1)	$	369,088	$	645,706

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

(In Thousands)
(Unaudited) Nine Months Ended September 30,
2021 2020
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 298,507 $ 364,875
Taxes 28,092 218
Supplemental Noncash Information:
Real estate securities retained from loan securitizations $ 9,375 $ 46,560
Retention of mortgage servicing rights from loan securitizations and sales 7,065 —
Deconsolidation of multifamily loans held in securitization trusts — (3,849,779)
Deconsolidation of multifamily ABS — (3,706,789)
Transfers from loans held-for-sale to loans held-for-investment 3,005,041 770,754
Transfers from loans held-for-investment to loans held-for-sale 44,922 —
Transfers from residential loans to real estate owned 21,655 12,547
Transfers from long-term debt to short-term debt 93,150 —
Right-of-use asset obtained in exchange for operating lease liability 1,135 5,362
Reduction in operating lease liability due to lease modification — 1,466
Issuance of common stock for 5 Arches acquisition 13,375 3,375


(In Thousands) (Unaudited)	Nine Months Ended September 30,
	2022		2021
























































Supplemental Cash Flow Information:
Cash paid during the period for:
Interest	$	378,691	$	298,507
Taxes paid	3,894		28,092
Supplemental Noncash Information:
Real estate securities retained from loan securitizations	$	—	$	9,375
Retention of mortgage servicing rights from loan securitizations and sales	4,543		7,065




Transfers from loans held-for-sale to loans held-for-investment	2,643,027		3,005,041
Transfers from loans held-for-investment to loans held-for-sale	—		44,922
Transfers from residential loans to real estate owned	4,033		21,655
Transfers from long-term debt to short-term debt	908,627		93,150
Right-of-use asset obtained in exchange for operating lease liability	—		1,135

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

(1) Cash, cash equivalents, and restricted cash ~~at September 30, 2021~~ includes cash and cash equivalents of ~~$557~~$297 million and restricted cash of ~~$89~~$72 million ~~and~~ at ~~December 31, 2020~~September 30, 2022, and includes cash and cash equivalents of ~~$461~~$450 million and restricted cash of ~~$83 million.~~$81 million at December 31, 2021.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing ~~credit.~~credit, with a mission to help make quality housing, whether rented or owned, accessible to all American households. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not well served by government programs. We deliver customized housing credit investments to a diverse mix of investors through our best-in-class securitization ~~platforms;~~platforms, whole-loan distribution ~~activities;~~activities and our publicly-traded ~~shares.~~securities. Our ~~consolidated~~aggregation, origination and investment ~~portfolio has~~activities have evolved to incorporate a diverse mix of residential, business purpose and multifamily ~~investments.~~assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in 3three segments: Residential ~~Lending,~~Mortgage Banking, Business Purpose ~~Lending,~~Mortgage Banking, and ~~Third-Party Investments.~~Investment Portfolio.

Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income primarily consists of the 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 “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are generally not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our taxable REIT subsidiaries” or “TRS.”

Redwood Trust, Inc. was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, and for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the Company at September 30, ~~2021~~2022 and results of operations for all periods ~~presented have been made.~~presented. The results of operations for the three and nine months ended September 30, ~~2021~~2022 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~~

~~September 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 ("Legacy Sequoia"), certain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans ("Sequoia"), entities formed in connection with the securitization of CoreVest single-family rental and bridge loans ("CAFL"), and ~~beginning in the third quarter of 2021,~~ an entity ~~("Point HEI")~~ formed in connection with the securitization of home equity investment contracts ("HEIs"). 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 have invested. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for certain entities we are exposed to financial risks associated with our role as a sponsor or co-sponsor, servicing administrator, collateral administrator or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

For financial reporting purposes, the underlying loans owned at the consolidated Legacy Sequoia, Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment, at fair value, the underlying loans at the consolidated Freddie Mac K-Series entity are shown under ~~Multifamily~~Consolidated Agency multifamily loans, ~~held-for-investment~~ at fair value, the underlying single-family rental and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, and the underlying HEIs at the consolidated ~~Point~~ HEI securitization entity are shown under ~~Other~~Home equity investments, at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income, ~~(loss),~~ we ~~recorded~~record interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as fair value changes, other income and expenses associated with these entities' activities. See Note 1415 for further discussion on ABS issued.

We also consolidate 2two partnerships ("Servicing Investment" entities) through which we have invested in servicing-related assets. We maintain an 80% ownership interest in each entity and have determined that we are the primary beneficiary of these partnerships.

See Note 4 for further discussion on principles of consolidation.

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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 2. Basis of Presentation - (continued)

Acquisitions

Riverbend Funding, LLC

On July 1, 2022, we acquired Riverbend Funding LLC ("Riverbend"), a private mortgage lender for residential transitional and commercial real estate investors. Aggregate consideration for this acquisition included an initial cash payment of approximately $44 million (with a remaining estimated provisional purchase consideration payable subject to reconciliation and final settlement), and a potential earnout component to be paid contingent on Riverbend generating specified revenues over a threshold amount during the two-year period ending July 1, 2024, up to a maximum potential amount payable of $25.3 million. Based on the terms of the merger agreement, we determined that the earnout component should be accounted for as contingent purchase consideration, which was valued at zero at the acquisition.

We accounted for the acquisition of Riverbend under the acquisition method of accounting pursuant to ASC 805. We performed the purchase price allocation and recorded underlying assets acquired and liabilities assumed based on their estimated fair values using the information available as of each acquisition date, with the excess of the purchase price allocated to intangible assets and goodwill. Through September 30, 2022, there were no significant changes to our purchase price allocations, which are summarized in the following table.

Table 2.1 - Purchase Price Allocation


(In Thousands)	Riverbend
Acquisition Date	July 1, 2022
Purchase price:
Cash	$	44,126
Provisional consideration payable	477
Contingent consideration, at fair value	—


Total consideration	$	44,603

Allocated to:
Business purpose loans, at fair value	$	59,748
Other investments	2,443
Cash and cash equivalents	3,490
Other assets	13,306
Goodwill	23,373
Intangible assets	13,300
Total assets acquired	115,660
Short-term debt, net	67,423
Accrued expenses and other liabilities	3,634
Total liabilities assumed	71,057
Total net assets acquired	$	44,603

We recognized $1 million of acquisition costs related to our acquisition of Riverbend during the nine months ended September 30, 2022. These costs primarily related to accounting, consulting, and legal expenses and are included in our General and administrative expenses on our consolidated statements of income (loss).

5 Arches and CoreVest

Refer toNote 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021, for ~~additional~~ information regarding the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations.

1011

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 2. Basis of Presentation - (continued)

Intangible Assets and Goodwill

In connection with the ~~acquisitions~~acquisition of Riverbend on July 1, 2022, and 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $13 million, $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at September 30, ~~2021.~~2022.

Table ~~2.1~~2.2 – Intangible Assets – Activity


		Intangible Assets at Acquisition				Accumulated Amortization at September 30, 2021			Carrying Value at September 30, 2021				Weighted Average Amortization Period (in years)				Intangible Assets at Acquisition			Accumulated Amortization at September 30, 2022		Carrying Value at September 30, 2022		Weighted Average Amortization Period (in years)
(Dollars in Thousands)	(Dollars in Thousands)							(Dollars in Thousands)
Borrower network	Borrower network			$	45,300						$	(12,672)			$	32,628			7		Borrower network	$	56,300	$	(19,537)	$	36,763	7
Broker network	Broker network	18,100				(9,352)			8,748				5	Broker network			18,100			(12,972)		5,128		5
Non-compete agreements	Non-compete agreements	9,500				(6,806)			2,694				3	Non-compete agreements			11,400			(9,567)		1,833		3
Tradenames	Tradenames	4,000				(2,861)			1,139				3	Tradenames			4,400			(3,994)		406		3
Developed technology	Developed technology	1,800				(1,763)			37				2	Developed technology			1,800			(1,800)		—		2
Loan administration fees on existing loan assets	Loan administration fees on existing loan assets	2,600				(2,600)			—				1	Loan administration fees on existing loan assets			2,600			(2,600)		—		1
Total	Total	$	81,300			$	(36,054)		$	45,246			6	Total			$	94,600		$	(50,470)	$	44,130	6

All of our intangible assets are amortized on a straight-line basis. For ~~both of~~ the three and nine months ended September 30, ~~2021 and 2020,~~2022, we recorded intangible asset amortization expense of $4 million and $11 million, respectively. For the three and nine months ended September 30, 2021, we recorded intangible asset amortization expense of $4 million and $12 ~~million.~~million, respectively. Estimated future amortization expense is summarized in the table below.

Table ~~2.2~~2.3 – Intangible Asset Amortization Expense by Year


(In Thousands)	(In Thousands)	September 30, 2021		(In Thousands)	September 30, 2022
2021 (3 months)		$	3,685
2022		12,800
2022 (3 months)				2022 (3 months)	$	3,238
2023	2023	10,091		2023	12,430
2024	2024	7,073		2024	9,413
2025 and thereafter		11,597
2025				2025	8,426
2026				2026	6,695
2027 and thereafter				2027 and thereafter	3,928
Total Future Intangible Asset Amortization	Total Future Intangible Asset Amortization	$	45,246	Total Future Intangible Asset Amortization	$	44,130

On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at September 30, ~~2021.~~2022.

We recorded total goodwill of $23 million during the three months ended September 30, 2022 as a result of the total consideration exceeding the fair value of the net assets acquired from Riverbend. The goodwill was attributed to the expected business synergies and expansion into new business purpose loan markets, as well as access to the knowledgeable and experienced workforce continuing to provide complementary sourcing of assets for the business. We expect $23 million of this goodwill to be deductible for tax purposes. For reporting purposes, we included the intangible assets and goodwill from these acquisitions within our Business Purpose Mortgage Banking segment.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 2. Basis of Presentation - (continued)

Table 2.4 – Goodwill - Activity



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

The potential liability resulting from the contingent consideration arrangement with ~~5 Arches~~Riverbend was ~~initially~~ recorded ~~in 2019~~ at its acquisition-date fair value of zeroas part of the total consideration for the acquisition of ~~5 Arches.~~Riverbend. At September 30, 2022, the estimated fair value of this contingent liability was zero on our consolidated balance sheets. Our contingent consideration liability is recorded at fair value and periodic changes in the estimated fair value are recorded through Other expenses on our consolidated statements of income (loss). During the ~~first quarter~~period ended September 30, 2022, we did not record any contingent consideration income or expense related to our acquisition of ~~2021, we distributed 806,068 shares~~Riverbend. See Note 17 for additional information on our contingent consideration liability.

The following unaudited pro forma financial information presents Net interest income, Non-interest income, and Net income of Redwood, ~~common stock~~as if the acquisition of Riverbend occurred as of January 1, 2021. These pro forma amounts have been adjusted to include the amortization of intangible assets for all periods. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated financial results of operations that would have been reported if the acquisition had been completed as of January 1, 2021 and ~~paid~~should not be taken as indicative of our future consolidated results of operations.

During the period from July 1, 2022 to September 30, 2022, Riverbend had net interest income of $1 million, ~~in cash in full settlement~~non-interest income of ~~the remaining deferred consideration associated with this acquisition.~~$0.5 million, and a net loss of $1 million, which included intangible asset amortization expense of 0.6 million.

Table 2.5 – Unaudited Pro Forma Financial Information



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2022		2021		2022		2021
Supplementary pro forma information:
Net interest income	$	34,935	$	43,174	$	132,475	$	100,570
Non-interest (loss) income	(37,135)		102,436		(121,614)		355,456
Net (loss) income	(50,411)		89,923		(117,090)		278,134

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

~~Other Investments~~

~~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 equity or debt and often have conversion features. Depending on the terms of the investments, we may account for these investments under the fair value option or as non-marketable equity securities under the equity method of accounting or the measurement alternative (to the extent they do not 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 investee. Under the equity method of accounting, we generally elect to record our share of earnings or losses from equity method investments on a one-quarter lag and we assess our investments for impairment 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 measurement alternative, the carrying value of our investment is measured at cost, less any impairment, 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 as a component of Other income, net on our consolidated statements of income (loss).

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

In August 2021, the FASB issued ASU 2021-06, "Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update)." This new guidance aligns certain SEC paragraphs in the codification with new SEC rules issued in May 2020 related to changes to the disclosure requirements for acquired and disposed businesses. We adopted this guidance upon issuance in the third quarter of 2021, which did not have a material impact on our consolidated financial statements.

In October 2020, the FASB issued ASU 2020-10, "Codification Improvements." This new guidance updates various codification topics by clarifying or improving disclosure requirements. 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 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 SEC paragraphs in the codification with new SEC rules issued in March 2020 related to changes to the disclosure requirements for registered debt securities. This new 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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

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. 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 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. We adopted this guidance, as required, in the first quarter of 2021, 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 iswas effective for fiscal years beginning after December 31, 2021. We adopted this guidance in the first quarter of 2022, which did not have a material impact on our consolidated financial statements.

Other Recent Accounting Pronouncements

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued to (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the accounting and disclosure requirements of ASU 2022-03 and we plan to adopt this new guidance by the required date. We do not anticipate that this update will have a material impact on our financial statements.

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the current expected credit loss ("CECL") model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method," which will expand companies' abilities to hedge the benchmark interest rate risk of portfolios of financial assets (or beneficial interests) in a fair value hedge. The ASU expands the use of the portfolio layer method (previously referred to as the last-of-layer method) to allow multiple hedges of a single closed portfolio of assets using spot starting, forward starting, and amortizing-notional swaps. The ASU also permits both prepayable and non-prepayable financial assets to be included in the closed portfolio of assets hedged in a portfolio layer hedge. The ASU further requires that basis adjustments not be allocated to individual assets for active portfolio layer method hedges, but rather be maintained on the closed portfolio of assets as a whole. This guidance is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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

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 30, ~~2021,~~2022, we have not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or other transactions.

We have an established cross-functional group that has evaluated our exposure to LIBOR, reviewed relevant contracts and has monitored regulatory updates to assess the potential impact to our business, processes and technology from the ultimate full cessation of LIBOR in 2023, and has established a LIBOR transition plan to facilitate an orderly transition to alternative reference rates. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability with LIBOR exposure. At September 30, 2022, our primary LIBOR exposure included the following: $689 million of repo or warehouse debt, $37 million of interest rate swaps, $757 million of bridge loans, and $140 million of trust preferred securities and subordinated notes debt. Since December 31, 2021, certain of our contracts, such as interest rate swaps, have experienced an orderly market transition and we have transitioned a substantial portion of our derivative positions off of LIBOR-benchmarks. Other contracts, such as warehouse debt agreements, require bilateral amendments, many of which we have amended or are currently in the process of amending.

We anticipate most of these facilities will be amended in 2022, with sufficient time remaining to resolve the remainder, which also have fallback provisions for benchmark replacement. In early 2022, we began benchmarking all newly originated bridge loans to the Secured Overnight Financing Rate (“SOFR”), and our existing portfolio of bridge loans are short-dated and we expect the vast majority to mature before the LIBOR cessation date in 2023. Additionally, as a result of legislation that was passed in the state of New York, our trust preferred securities and subordinated notes are expected to convert to SOFR upon the cessation of LIBOR.

Balance Sheet Netting

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

The following table ~~below~~ presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

~~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
September 30, 2021 (In Thousands) Financial Instruments Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements $ 33,628 $ — $ 33,628 $ (74) $ (32,408) $ 1,146
TBAs 8,213 — 8,213 (4,278) (3,117) 818
Total Assets $ 41,841 $ — $ 41,841 $ (4,352) $ (35,525) $ 1,964
Liabilities (2)
Interest rate agreements $ (74) $ — $ (74) $ 74 $ — $ —
TBAs (7,599) — (7,599) 4,278 3,321 —
Futures (749) — (749) — 749 —
Loan warehouse debt (1,335,464) — (1,335,464) 1,335,464 — —
Security repurchase agreements (79,766) — (79,766) 79,766 — —
Total Liabilities $ (1,423,652) $ — $ (1,423,652) $ 1,419,582 $ 4,070 $ —

1415

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

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

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


	Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet		Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount
September 30, 2022 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	24,626	$	—	$	24,626	$	(23)	$	(7,638)	$	16,965

TBAs	13,568		—		13,568		(529)		(12,077)		962
Futures	26,275		—		26,275		(2)		(10,675)		15,598
Total Assets	$	64,469	$	—	$	64,469	$	(554)	$	(30,390)	$	33,525

Liabilities (2)
Interest rate agreements	$	(23)	$	—	$	(23)	$	23	$	—	$	—
TBAs	(6,545)		—		(6,545)		529		1,280		(4,736)
Futures	(2)		—		(2)		2		—		—
Loan warehouse debt	(224,370)		—		(224,370)		224,370		—		—

Total Liabilities	$	(230,940)	$	—	$	(230,940)	$	224,924	$	1,280	$	(4,736)


		Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance 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
December 31, 2020 (In Thousands)						Financial Instruments			Cash Collateral (Received) Pledged
December 31, 2021 (In Thousands)															December 31, 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	$	19,951	$	—		$	19,951	$	—	$	(7,769)	$	12,182	Interest rate agreements	$	18,929			$	—			$	18,929			$	(1,251)		$	(16,046)		$	1,632

TBAs	TBAs	18,260		—			18,260		(13,423)		(4,658)		179		TBAs	2,880			—				2,880				(633)			(704)			1,543

Futures															Futures	25			—			25				(25)			—			—
Total Assets	Total Assets	$	38,211	$	—		$	38,211	$	(13,423)	$	(12,427)	$	12,361	Total Assets	$	21,834		$	—		$	21,834			$	(1,909)		$	(16,750)		$	3,175

Liabilities (2)	Liabilities (2)														Liabilities (2)
Interest rate agreements															Interest rate agreements	$	(1,251)		$	—		$	(1,251)			$	1,251		$	—		$	—
TBAs															TBAs	$	(658)		$	—		$	(658)			$	633		$	15		$	(10)
Futures															Futures	(905)			—			(905)				25			880			—
Loan warehouse debt															Loan warehouse debt	(572,720)			—			(572,720)				572,720			—			—

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

Loan warehouse debt		(137,269)		—			(137,269)		137,269		—		—
Security repurchase agreements		(77,775)		—			(77,775)		77,775		—		—
Total Liabilities	Total Liabilities	$	(230,539)	$	—		$	(230,539)	$	228,467	$	1,061	$	(1,011)	Total Liabilities	$	(575,534)		$	—		$	(575,534)			$	574,629		$	895		$	(10)

(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column ~~("Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet")~~ by instrument. In certain cases, ~~there is~~we have pledged excess cash collateral or financial assets ~~we have pledged~~ to a counterparty (which, ~~may,~~ in certain circumstances, may be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, ~~any of~~ these excess amounts are excluded from the ~~table although~~table; they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.

(2)Interest rate agreements and TBAs are components of ~~derivatives~~derivative instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by certain residential and business purpose loans, ~~and security repurchase agreements are components~~is a component of Short-term debt and Long-term debt on our consolidated balance sheets.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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

For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be aggregated and treated as a single transaction. For certain categories of these instruments, ~~some of~~ our transactions generally are cleared and settled through one or more clearinghouses that are substituted as our counterparty. References herein to master netting arrangements or similar agreements include the arrangements and agreements governing the clearing and settlement of these transactions through the clearinghouses. In the event of the termination and close-out of any of those transactions, the corresponding master netting agreement or similar agreement provides for settlement on a net basis. Any such settlement would include the proceeds of the liquidation of any corresponding collateral, subject to certain limitations on termination, settlement, and liquidation of collateral that may apply in the event of the bankruptcy or insolvency of a party. Such limitations should not inhibit the eventual practical realization of the principal benefits of those transactions or the corresponding master netting arrangement or similar agreement and any corresponding collateral.

Note 4. Principles of Consolidation

GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

~~Note 4. Principles of Consolidation - (continued)~~

Analysis of Consolidated VIEs

At September 30, ~~2021,~~2022, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and ~~Point~~ HEI 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 certain securitizations, we are exposed to financial risks associated with our role as a sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

We also consolidate 2two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At September 30, ~~2021,~~2022, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 1011 for a further description of these entities and the investments they hold and Note 1213 for additional information on the minority partner’s non-controlling interest. Additionally, 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 1314 for additional information on the servicer advance financing.

During ~~the third quarter of~~ 2021, we consolidated a ~~Point~~HEI securitization entity formed to invest in ~~Point~~ HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At September 30, 2022 and December 31, 2021, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 1213 for additional information on non-controlling interests in the entity. We consolidate the ~~Point~~HEI securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

~~Note 4. Principles of Consolidation - (continued)~~

For certain of our consolidated VIEs, we have elected to account for the assets and liabilities of these entities as collateralized financing entities ("CFE"). A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. The net equity in an entity accounted for under the CFE election effectively represents the fair value of the beneficial interests we own in the entity. ~~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, 2021 Legacy
Sequoia Sequoia CAFL
SFR Freddie Mac SLST Freddie Mac
K-Series Servicing Investment Point HEI Total
Consolidated
CFE VIEs
(Dollars in Thousands)
Residential loans, held-for-investment $ 242,234 $ 2,479,750 $ — $ 1,999,405 $ — $ — $ — $ 4,721,389
Business purpose loans, held-for-investment — — 3,402,410 — — — — 3,402,410
Multifamily loans, held-for-investment — — — — 482,791 — — 482,791
Other investments — — — — — 187,880 167,442 355,322
Cash and cash equivalents — — — — — 12,977 — 12,977
Restricted cash 148 — — — — 19,872 5,033 25,053
Accrued interest receivable 232 7,869 13,451 6,068 1,321 1,068 — 30,009
Other assets 275 — 13,172 1,958 — 6,283 50 21,738
Total Assets $ 242,889 $ 2,487,619 $ 3,429,033 $ 2,007,431 $ 484,112 $ 228,080 $ 172,525 $ 9,051,689
Short-term debt $ — $ — $ — $ — $ — $ 151,910 $ — $ 151,910
Accrued interest payable 108 5,918 10,691 4,279 1,195 97 — 22,288
Accrued expenses and other liabilities — — 224 — — 15,835 16,740 32,799
Asset-backed securities issued 239,447 2,243,299 3,126,405 1,550,111 451,402 — 145,437 7,756,101
Total Liabilities $ 239,555 $ 2,249,217 $ 3,137,320 $ 1,554,390 $ 452,597 $ 167,842 $ 162,177 $ 7,963,098
Fair value of our investments $ 3,062 $ 236,451 $ 287,813 $ 451,252 $ 31,389 $ 60,238 $ 10,348 $ 1,080,553
Number of VIEs 20 13 15 3 1 3 1 56

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~

~~(Unaudited)~~

~~Note 4. Principles of Consolidation - (continued)~~

December 31, 2020 Legacy
Sequoia Sequoia CAFL
SFR Freddie Mac SLST Freddie Mac
K-Series Servicing Investment Point HEI Total
Consolidated
CFE VIEs
(Dollars in Thousands)
Residential loans, held-for-investment $ 285,935 $ 1,565,322 $ — $ 2,221,153 $ — $ — $ — $ 4,072,410
Business purpose loans, held-for-investment — — 3,249,194 — — — — 3,249,194
Multifamily loans, held-for-investment — — — — 492,221 — — 492,221
Other investments — — — — — 251,773 — 251,773
Cash and cash equivalents — — — — — 11,579 — 11,579
Restricted cash 148 — — — — 23,220 — 23,368
Accrued interest receivable 305 6,802 13,055 6,754 1,337 2,334 — 30,587
Other assets 638 — 2,930 646 — 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 $ — $ — $ — $ — $ — $ 208,375 $ — $ 208,375
Accrued interest payable 141 4,697 10,278 4,846 1,177 135 — 21,274
Accrued expenses and other liabilities — 50 — — — 18,353 — 18,403
Asset-backed securities issued 282,326 1,347,357 3,013,093 1,793,620 463,966 — — 6,900,362
Total Liabilities $ 282,467 $ 1,352,104 $ 3,023,371 $ 1,798,466 $ 465,143 $ 226,863 $ — $ 7,148,414
Fair value of our investments $ 4,559 $ 220,020 $ 241,808 $ 430,087 $ 28,415 $ 67,766 $ — $ 992,655
Number of VIEs 20 10 14 2 1 3 — 50

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

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

Three Months Ended September 30, 2021
Legacy
Sequoia Sequoia CAFL
SFR Freddie Mac SLST Freddie Mac
K-Series Servicing Investment Point HEI Total
Consolidated
CFE VIEs
(Dollars in Thousands)
Interest income $ 1,042 $ 18,867 $ 48,723 $ 18,707 $ 4,846 $ 3,905 $ — $ 96,090
Interest expense (641) (15,368) (37,415) (13,303) (4,460) (1,018) — (72,205)
Net interest income 401 3,499 11,308 5,404 386 2,887 — 23,885
Non-interest income
Investment fair value changes, net (247) 3,314 2,943 13,849 554 (2,080) 47 18,380
Other income — — 10 — — — — 10
Total non-interest income, net (247) 3,314 2,953 13,849 554 (2,080) 47 18,390
General and administrative expenses — — — — — (60) — (60)
Other expenses — — — — — (149) — (149)
Income from Consolidated VIEs $ 154 $ 6,813 $ 14,261 $ 19,253 $ 940 $ 598 $ 47 $ 42,066

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

~~Note 4. Principles of Consolidation - (continued)~~

Nine Months Ended September 30, 2021
Legacy
Sequoia Sequoia CAFL
SFR Freddie Mac SLST Freddie Mac
K-Series Servicing Investment Point HEI Total
Consolidated
CFE VIEs
(Dollars in Thousands)
Interest income $ 3,559 $ 48,842 $ 152,445 $ 58,372 $ 14,492 $ 12,168 $ — $ 289,878
Interest expense (2,271) (38,848) (118,469) (41,698) (13,294) (3,414) — (217,994)
Net interest income 1,288 9,994 33,976 16,674 1,198 8,754 — 71,884
Non-interest income
Investment fair value changes, net (1,162) 13,118 6,354 54,282 11,330 (5,646) 47 78,323
Other income — — 10 — — — — 10
Total non-interest income, net (1,162) 13,118 6,364 54,282 11,330 (5,646) 47 78,333
General and administrative expenses — — — — — (150) — (150)
Other expenses — — — — — (591) — (591)
Income from Consolidated VIEs $ 126 $ 23,112 $ 40,340 $ 70,956 $ 12,528 $ 2,367 $ 47 $ 149,476

Three Months Ended September 30, 2020
Legacy
Sequoia Sequoia CAFL
SFR Freddie Mac SLST Freddie Mac
K-Series Servicing Investment Point HEI Total
Consolidated
CFE VIEs
(Dollars in Thousands)
Interest income $ 1,795 $ 20,919 $ 36,181 $ 21,696 $ 4,918 $ 4,403 $ — $ 89,912
Interest expense (1,059) (17,828) (26,383) (15,473) (4,426) (1,587) — (66,756)
Net interest income 736 3,091 9,798 6,223 492 2,816 — 23,156
Non-interest income
Investment fair value changes, net (81) 7,851 9,692 82,214 2,166 (422) — 101,420
Total non-interest income, net (81) 7,851 9,692 82,214 2,166 (422) — 101,420
General and administrative expenses — — — — — (41) — (41)
Other expenses — — — — — (471) — (471)
Income from Consolidated VIEs $ 655 $ 10,942 $ 19,490 $ 88,437 $ 2,658 $ 1,882 $ — $ 124,064

Nine Months Ended September 30, 2020
Legacy
Sequoia Sequoia CAFL
SFR Freddie Mac SLST Freddie Mac
K-Series Servicing Investment Point HEI Total
Consolidated
CFE VIEs
(Dollars in Thousands)
Interest income $ 7,674 $ 68,566 $ 99,169 $ 64,869 $ 49,960 $ 13,026 $ — $ 303,264
Interest expense (5,099) (58,455) (72,768) (47,495) (47,154) (4,961) — (235,932)
Net interest income 2,575 10,111 26,401 17,374 2,806 8,065 — 67,332
Non-interest income
Investment fair value changes, net (702) (22,065) (41,841) (33,081) (82,744) (9,015) — (189,448)
Total non-interest income, net (702) (22,065) (41,841) (33,081) (82,744) (9,015) — (189,448)
General and administrative expenses — — — — — (784) — (784)
Other expenses — — — — — 346 — 346
Income (Loss) from Consolidated VIEs $ 1,873 $ (11,954) $ (15,440) $ (15,707) $ (79,938) $ (1,388) $ — $ (122,554)

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

In addition to our consolidated VIEs for which we made the CFE election, we consolidate ~~additional~~certain VIEs for which we did not make the CFE election, and elected to account for the ABS issued by these entities at amortized cost. These include our CAFL Bridge ~~securitization,~~securitizations, Freddie Mac SLST re-securitization, and Servicing Investment entities.

The following table presents a summary of the assets and liabilities of our consolidated VIEs.

Table 4.1 – Assets and Liabilities of Consolidated VIEs


September 30, 2022	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST(1)		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	198,161	$	3,237,170	$	—	$	1,482,964	$	—	$	—	$	—	$	4,918,295
Business purpose loans, held-for-investment	—		—		3,531,229		—		—		—		—		3,531,229
Consolidated Agency multifamily loans	—		—		—		—		427,458		—		—		427,458

Home equity investments													139,728		139,728
Other investments	—		—		—		—		—		307,723		—		307,723
Cash and cash equivalents	—		—		—		—		—		15,923		—		15,923
Restricted cash	92		78		15,889		—		—		18,569		3,540		38,168
Accrued interest receivable	226		11,295		17,497		5,247		1,299		720		—		36,284
Other assets	407		—		24,084		2,544		—		7,270		50		34,355
Total Assets	$	198,886	$	3,248,543	$	3,588,699	$	1,490,755	$	428,757	$	350,205	$	143,318	$	9,449,163
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	233,104	$	—	$	233,104
Accrued interest payable	224		9,003		11,202		3,630		1,173		348		—		25,580
Accrued expenses and other liabilities	(58)		80		1,903		—		—		24,223		24,354		50,502
Asset-backed securities issued	197,354		3,013,249		3,179,487		1,249,041		395,411		—		104,751		8,139,293
Total Liabilities	$	197,520	$	3,022,332	$	3,192,592	$	1,252,671	$	396,584	$	257,675	$	129,105	$	8,448,479

Value of our investments in VIEs(1)	$	1,214	$	223,920	$	393,015	$	236,467	$	32,047	$	92,530	$	14,213	$	993,406
Number of VIEs	20		17		19		3		1		3		1		64

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2021	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST(1)		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	230,455	$	3,628,465	$	—	$	1,888,230	$	—	$	—	$	—	$	5,747,150
Business purpose loans, held-for-investment	—		—		3,766,316		—		—		—		—		3,766,316
Consolidated Agency multifamily loans	—		—		—		—		473,514		—		—		473,514

Other investments	—		—		—		—		—		384,754		159,553		544,307
Cash and cash equivalents	—		—		—		—		—		6,481		—		6,481
Restricted cash	148		5		15,221		—		—		25,420		5,292		46,086
Accrued interest receivable	210		10,885		15,737		5,792		1,315		1,462		—		35,401
Other assets	61		—		32,510		2,028		—		7,177		50		41,826
Total Assets	$	230,874	$	3,639,355	$	3,829,784	$	1,896,050	$	474,829	$	425,294	$	164,895	$	10,661,081
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	294,447	$	—	$	294,447
Accrued interest payable	99		8,452		11,030		4,055		1,190		192		—		25,018
Accrued expenses and other liabilities	—		5		1,171		—		—		28,115		17,034		46,325
Asset-backed securities issued	227,881		3,383,048		3,474,898		1,588,463		441,857		—		137,410		9,253,557
Total Liabilities	$	227,980	$	3,391,505	$	3,487,099	$	1,592,518	$	443,047	$	322,754	$	154,444	$	9,619,347

Value of our investments in VIEs(1)	$	2,634	$	245,417	$	339,419	$	301,795	$	31,657	$	102,540	$	10,451	$	1,033,913
Number of VIEs	20		16		16		3		1		3		1		60

(1)Value of our investments in VIEs, as presented in this table, represent the fair value of our economic interests in the VIEs only for consolidated VIEs we account for under the CFE election. CAFL includes SFR loan securitizations we account for under the CFE election and two bridge loan securitizations for which we did not make the CFE election. As of September 30, 2022 and December 31, 2021, the fair value of our interests in the CAFL SFR securitizations were $314 million and $302 million, respectively, and the remaining values were associated with our interests in the CAFL Bridge securitizations, for which the ABS issued is carried at amortized historical cost. Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a resecuritization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. As of September 30, 2022 and December 31, 2021, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election were $335 million and $445 million, respectively, with the difference from the tables above representing ABS issued and carried at amortized historical cost.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Table 4.2 – Income (Loss) from Consolidated VIEs


	Three Months Ended September 30, 2022
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,475	$	31,587	$	61,439	$	16,098	$	4,762	$	7,800	$	—	$	123,161
Interest expense	(1,486)		(27,541)		(44,804)		(12,829)		(4,377)		(2,606)		—		(93,643)
Net interest income	(11)		4,046		16,635		3,269		385		5,194		—		29,518
Non-interest income

Investment fair value changes, net	(328)		(10,936)		(4,527)		(41,892)		316		(3,286)		(584)		(61,237)
Other income	—		—		286		—		—		—		—		286

Total non-interest income, net	(328)		(10,936)		(4,241)		(41,892)		316		(3,286)		(584)		(60,951)
General and administrative expenses	—		—		—		—		—		(55)		—		(55)
Other expenses	—		—		—		—		—		(372)		—		(372)

Income (loss) from Consolidated VIEs	$	(339)	$	(6,890)	$	12,394	$	(38,623)	$	701	$	1,481	$	(584)	$	(31,860)


	Nine Months Ended September 30, 2022
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	3,595	$	95,608	$	195,381	$	49,851	$	14,247	$	23,287	$	—	$	381,969
Interest expense	(3,154)		(84,041)		(145,207)		(40,286)		(13,099)		(6,110)		—		(291,897)
Net interest income	441		11,567		50,174		9,565		1,148		17,177		—		90,072
Non-interest income

Investment fair value changes, net	(1,378)		(20,644)		(23,972)		(74,796)		390		(11,259)		4,028		(127,631)
Other income	—		—		631		—		—		—		—		631

Total non-interest income, net	(1,378)		(20,644)		(23,341)		(74,796)		390		(11,259)		4,028		(127,000)
General and administrative expenses	—		—		—		—		—		(130)		—		(130)
Other expenses	—		—		—		—		—		(1,158)		—		(1,158)

Income (loss) from Consolidated VIEs	$	(937)	$	(9,077)	$	26,833	$	(65,231)	$	1,538	$	4,630	$	4,028	$	(38,216)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)


	Three Months Ended September 30, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,042	$	18,867	$	48,937	$	18,707	$	4,846	$	3,905	$	—	$	96,304
Interest expense	(641)		(15,368)		(37,489)		(15,774)		(4,460)		(1,018)		—		(74,750)
Net interest income	401		3,499		11,448		2,933		386		2,887		—		21,554
Non-interest income

Investment fair value changes, net	(247)		3,314		2,943		13,849		554		(2,080)		47		18,380


Other income	—		—		10		—		—		—		—		10
Total non-interest income, net	(247)		3,314		2,953		13,849		554		(2,080)		47		18,390
General and administrative expenses	—		—		—		—		—		(60)		—		(60)
Other expenses	—		—		—		—		—		(149)		—		(149)

Income (loss) from Consolidated VIEs	$	154	$	6,813	$	14,401	$	16,782	$	940	$	598	$	47	$	39,735


	Nine Months Ended September 30, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	3,559	$	48,842	$	152,659	$	58,372	$	14,492	$	12,168	$	—	$	290,092
Interest expense	(2,271)		(38,848)		(118,543)		(49,756)		(13,294)		(3,414)		—		(226,126)
Net interest income	1,288		9,994		34,116		8,616		1,198		8,754		—		63,966
Non-interest income

Investment fair value changes, net	(1,162)		13,118		6,354		54,282		11,330		(5,646)		47		78,323


Other income	—		—		10		—		—		—		—		10
Total non-interest income, net	(1,162)		13,118		6,364		54,282		11,330		(5,646)		47		78,333
General and administrative expenses	—		—		—		—		—		(150)		—		(150)
Other expenses	—		—		—		—		—		(591)		—		(591)

Income (loss) from Consolidated VIEs	$	126	$	23,112	$	40,480	$	62,898	$	12,528	$	2,367	$	47	$	141,558

We consolidate the assets and liabilities of certain Sequoia, CAFL and ~~Point~~ HEI securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia, CAFL and ~~Point~~ HEI securitization entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity, including rights to direct loss mitigation activities; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia, CAFL and ~~Point~~ HEI securitization entities in accordance with GAAP.

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

~~During the three months ended~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021, we did not call any~~2022

(Unaudited)

Note 4. Principles of our consolidated CAFL entities. During the nine months ended September 30, 2021, we called 1 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.Consolidation - (continued)

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.

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 5046 Sequoia securitization entities sponsored by us that are still outstanding as of September 30, ~~2021,~~2022, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and 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 September 30, ~~2021,~~2022, we did not call any of our unconsolidated Sequoia entities. During the nine months ended September 30, 2022, we called 2three of our unconsolidated Sequoia entities, and purchased ~~$66~~$102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 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 nine months ended September 30, 2021, we called 6 of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15$0.3 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At September 30, ~~2021,~~2022, we held ~~$151~~$158 million of loans for sale at fair value that were acquired following the calls.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 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, ~~2021~~2022 and ~~2020.~~2021.

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Principal balance of loans transferred	Principal balance of loans transferred	$	—	$	—	$	1,231,803	$	1,573,703	Principal balance of loans transferred	$	—	$	—	$	—	$	1,231,803
Trading securities retained, at fair value	Trading securities retained, at fair value	—		—		7,774		43,362		Trading securities retained, at fair value	—		—		—		7,774
AFS securities retained, at fair value	AFS securities retained, at fair value	—		—		1,600		3,198		AFS securities retained, at fair value	—		—		—		1,600

The following table summarizes the cash flows during the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 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 September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Proceeds from new transfers	Proceeds from new transfers	$	—	$	—	$	1,266,063	$	1,610,761	Proceeds from new transfers	$	—	$	—	$	—	$	1,266,063
MSR fees received	MSR fees received	1,095		2,280		4,038		7,445		MSR fees received	737		1,095		2,365		4,038
Funding of compensating interest, net	Funding of compensating interest, net	54		4		(116)		(293)		Funding of compensating interest, net	(11)		54		(41)		(116)
Cash flows received on retained securities	Cash flows received on retained securities	16,724		5,873		42,117		19,242		Cash flows received on retained securities	3,096		16,724		20,380		42,117

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents the key weighted-average assumptions used to value securities retained at the date of securitization for securitizations completed during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

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

Three Months Ended September 30, ~~2021~~2022

Three Months Ended September 30, ~~2020~~2021

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

Discount rates

N/A

Credit loss assumptions

N/A


		Nine Months Ended September 30, 2021			Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
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	11	%	11 %	41	%	13	%	Prepayment rates	N/A	N/A	11	11 %
Discount rates	Discount rates	15 %		6 %	16	%	6	%	Discount rates	N/A	N/A	15 %	6 %
Credit loss assumptions	Credit loss assumptions	0.23 %		0.23 %	0.21	%	0.22	%	Credit loss assumptions	N/A	N/A	0.23 %	0.23 %

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

~~Note 4. Principles of Consolidation - (continued)~~

The following table presents additional information at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
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	$	18,380	$	20,982	Interest-only, senior and subordinate securities, classified as trading	$	28,511	$	18,214
Subordinate securities, classified as AFS	Subordinate securities, classified as AFS	128,874		136,475		Subordinate securities, classified as AFS	78,065		127,542
Mortgage servicing rights	Mortgage servicing rights	6,068		8,413		Mortgage servicing rights	11,915		6,450
Maximum loss exposure (1)	Maximum loss exposure (1)	$	153,322	$	165,870	Maximum loss exposure (1)	$	118,491	$	152,206
Assets transferred:	Assets transferred:					Assets transferred:
Principal balance of loans outstanding	Principal balance of loans outstanding	$	5,542,244	$	7,728,432	Principal balance of loans outstanding	$	4,146,817	$	4,959,234
Principal balance of loans 30+ days delinquent	Principal balance of loans 30+ days delinquent	32,422		138,029		Principal balance of loans 30+ days delinquent	21,803		30,594

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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


September 30, 2021		MSRs			Senior Securities (1)				Subordinate Securities
September 30, 2022								September 30, 2022				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, 2021
Fair value at September 30, 2022													Fair value at September 30, 2022						$	11,915				$	28,511				$	78,065
Expected life (in years) (2)	Expected life (in years) (2)	2							4						8			Expected life (in years) (2)				7					7				16
Prepayment speed assumption (annual CPR) (2)	Prepayment speed assumption (annual CPR) (2)	36 %			25		%		32 %			Prepayment speed assumption (annual CPR) (2)				8		%			11		%			8		%
Decrease in fair value from:	Decrease in fair value from:											Decrease in fair value from:
10% adverse change	10% adverse change	$	502		$	1,173			$	57		10% adverse change				$	334				$	942				$	570
25% adverse change	25% adverse change	1,173			2,789				141			25% adverse change				810					2,291					1,132
Discount rate assumption (2)	Discount rate assumption (2)	12 %			18		%		3.8 %			Discount rate assumption (2)				11		%			12		%			8		%
Decrease in fair value from:	Decrease in fair value from:											Decrease in fair value from:
100 basis point increase	100 basis point increase	$	134		$	417			$	9,353		100 basis point increase				$	441				$	1,001				$	7,714
200 basis point increase	200 basis point increase	261			812				17,829			200 basis point increase				852					1,889					14,345
Credit loss assumption (2)	Credit loss assumption (2)	N/A			0.34		%		0.34		%	Credit loss assumption (2)				N/A					0.04		%			0.04		%
Decrease in fair value from:	Decrease in fair value from:											Decrease in fair value from:
10% higher losses	10% higher losses	N/A			$	—			$	2,190		10% higher losses				N/A					N/A					$	190
25% higher losses	25% higher losses	N/A			—				5,473			25% higher losses				N/A					N/A					254

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

~~Note 4. Principles of Consolidation - (continued)~~


December 31, 2020		MSRs				Senior Securities (1)				Subordinate Securities
December 31, 2021									December 31, 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 December 31, 2020
Fair value at December 31, 2021														Fair value at December 31, 2021						$	6,450				$	18,214				$	127,542
Expected life (in years) (2)	Expected life (in years) (2)	2								3						8			Expected life (in years) (2)				3					4				5
Prepayment speed assumption (annual CPR) (2)	Prepayment speed assumption (annual CPR) (2)	37		%		31		%		33		%	Prepayment speed assumption (annual CPR) (2)				29		%			23		%			32 %
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% adverse change	10% adverse change	$	906			$	1,557			$	452		10% adverse change				$	447				$	1,130				$	531
25% adverse change	25% adverse change	2,058				3,754				2,298			25% adverse change				1,020					2,596					1,440
Discount rate assumption (2)	Discount rate assumption (2)	12		%		21		%		5		%	Discount rate assumption (2)				12 %					16		%			5		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
100 basis point increase	100 basis point increase	$	196			$	337			$	9,769		100 basis point increase				$	152				$	426				$	4,801
200 basis point increase	200 basis point increase	380				659				18,650			200 basis point increase				297					829					9,139
Credit loss assumption (2)	Credit loss assumption (2)	N/A				0.41		%		0.41		%	Credit loss assumption (2)				N/A					0.35		%			0.35		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% higher losses	10% higher losses	N/A				$	—			$	2,409		10% higher losses				N/A					N/A					$	1,528
25% higher losses	25% higher losses	N/A				—				5,915			25% higher losses				N/A					N/A					3,819

(1)Senior securities included ~~$18~~$29 million and ~~$17~~$18 million of interest-only securities at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Analysis of Unconsolidated Third-Party VIEs

Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Mortgage-Backed Securities	Mortgage-Backed Securities					Mortgage-Backed Securities
Senior	Senior	$	4,114	$	11,131	Senior	$	348	$	3,572
Mezzanine		—		2,014

Subordinate	Subordinate	201,918		173,523		Subordinate	152,288		228,083
Total Mortgage-Backed Securities	Total Mortgage-Backed Securities	206,032		186,668		Total Mortgage-Backed Securities	152,636		231,655
Excess MSR	Excess MSR	11,368		14,133		Excess MSR	7,662		10,400
Total Investments in Third-Party Sponsored VIEs	Total Investments in Third-Party Sponsored VIEs	$	217,400	$	200,801	Total Investments in Third-Party Sponsored VIEs	$	160,298	$	242,055

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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 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.

2425

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

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

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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


		September 30, 2021					December 31, 2020					September 30, 2022				December 31, 2021
		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		$	1,495,044	$	1,495,044		$	176,604	$	176,604
Residential loans, held-for-investment		4,721,389		4,721,389			4,072,410		4,072,410
Business purpose loans, held-for-sale		466,346		466,346			245,394		245,394
Business purpose loans, held-for-investment		4,227,209		4,227,209			3,890,959		3,890,959
Multifamily loans		482,791		482,791			492,221		492,221
Real estate securities		353,286		353,286			344,125		344,125
Residential loans, held-for-sale, at fair value											Residential loans, held-for-sale, at fair value	$	834,262	$	834,262	$	1,845,248	$	1,845,248
Residential loans, held-for-investment, at fair value											Residential loans, held-for-investment, at fair value	4,918,294		4,918,294		5,747,150		5,747,150
Business purpose loans, held-for-sale, at fair value											Business purpose loans, held-for-sale, at fair value	337,238		337,238		358,309		358,309
Business purpose loans, held-for-investment, at fair value											Business purpose loans, held-for-investment, at fair value	4,919,980		4,919,980		4,432,680		4,432,680
Consolidated Agency multifamily loans, at fair value											Consolidated Agency multifamily loans, at fair value	427,458		427,458		473,514		473,514
Real estate securities, at fair value											Real estate securities, at fair value	259,212		259,212		377,411		377,411
Servicer advance investments (1)	Servicer advance investments (1)	170,062		170,062			231,489		231,489		Servicer advance investments (1)	274,934		274,934		350,923		350,923
MSRs (1)	MSRs (1)	12,389		12,389			8,815		8,815		MSRs (1)	24,796		24,796		12,438		12,438
Excess MSRs (1)	Excess MSRs (1)	29,185		29,185			34,418		34,418		Excess MSRs (1)	40,452		40,452		44,231		44,231
HEIs (1)	HEIs (1)	167,856		167,856			42,440		42,440		HEIs (1)	340,437		340,437		192,740		192,740
Other investments ~~(2)~~(1)	Other investments ~~(2)~~(1)	17,574		17,574			18,847		18,847		Other investments ~~(2)~~(1)	11,174		11,174		12,663		12,663
Cash and cash equivalents	Cash and cash equivalents	556,989		556,989			461,260		461,260		Cash and cash equivalents	297,092		297,092		450,485		450,485
Restricted cash	Restricted cash	88,717		88,717			83,190		83,190		Restricted cash	71,996		71,996		80,999		80,999
Derivative assets	Derivative assets	51,103		51,103			53,238		53,238		Derivative assets	65,213		65,213		26,467		26,467
REO ~~(3)~~(2)	REO ~~(3)~~(2)	18,863		21,657			8,413		9,229		REO ~~(3)~~(2)	3,683		4,105		36,126		39,272
Margin receivable ~~(3)~~(2)	Margin receivable ~~(3)~~(2)	16,503		16,503			4,758		4,758		Margin receivable ~~(3)~~(2)	6,683		6,683		7,269		7,269
FHLBC stock (3)		10		10			5,000		5,000
Pledged collateral (3)		—		—			1,177		1,177

Liabilities	Liabilities										Liabilities
Short-term debt(3)	Short-term debt(3)	$	1,750,941	$	1,750,941		$	522,609	$	522,609	Short-term debt(3)	$	1,912,694	$	1,912,694	$	2,177,362	$	2,177,362
Margin payable (4)	Margin payable (4)	48,298		48,298			—		—		Margin payable (4)	30,389		30,389		24,368		24,368
Guarantee obligation (4)		7,902		5,263			10,039		7,843

Point HEI non-controlling interest		16,722		16,722			—		—
Guarantee obligations (4)											Guarantee obligations (4)	6,532		5,237		7,459		7,133
HEI securitization non-controlling interest											HEI securitization non-controlling interest	24,355		24,355		17,035		17,035
Derivative liabilities	Derivative liabilities	10,972		10,972			16,072		16,072		Derivative liabilities	6,782		6,782		3,317		3,317
ABS issued, net	ABS issued, net										ABS issued, net
Fair value		7,756,101		7,756,101			6,900,362		6,900,362
Amortized cost		427,724		428,059			200,299		204,892

At fair value											At fair value	7,564,312		7,564,312		8,843,147		8,843,147
At amortized cost											At amortized cost	574,981		541,773		410,410		410,471
Other long-term debt, net (5)	Other long-term debt, net (5)	847,889		848,929			774,726		783,570		Other long-term debt, net (5)	868,851		858,810		988,483		989,570
Convertible notes, net (5)	Convertible notes, net (5)	512,979		539,067			511,085		499,865		Convertible notes, net (5)	724,205		651,888		513,629		537,300
Trust preferred securities and subordinated notes, net (5)	Trust preferred securities and subordinated notes, net (5)	138,709		94,163			138,674		80,910		Trust preferred securities and subordinated notes, net (5)	138,755		76,725		138,721		97,650

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

(2)~~Comprised of financial instruments included in Other investments on our consolidated balance sheets.~~

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

(3)Short-term debt excludes short-term convertible notes, which are included below under "Convertible notes, net."

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

(5)These liabilities are primarily included in Long-term debt, net on our consolidated balance sheets. Convertible notes, net also includes convertible notes classified as Short-term debt. See

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

14 for more information on Short-term debt.

During the three and nine months ended September 30, ~~2021,~~2022, we elected the fair value option for ~~$11 million~~zero and ~~$37~~$5 million of securities, respectively, ~~$3.17~~$0.34 billion and ~~$9.75~~$3.60 billion of residential loans (principal balance), respectively, ~~$637~~and $630 million and ~~$1.55~~$2.47 billion of business purpose loans (principal balance), ~~respectively, $5 million and $9 million of MSRs, respectively, and $11 million and $15 million of other financial instruments,~~ respectively. Additionally, during the three and nine months ended September 30, ~~2021,~~2022, we elected the fair value option for ~~$122~~$80 million and $176 million of ~~HEIs.~~HEIs, respectively, and zero and $8 million of Other Investments, respectively. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, ~~for business purpose bridge loans, HEIs, MSRs retained from sales of residential loans, and~~as well as for certain securities we purchase, including IO securities, ~~and~~ fixed-rate securities rated investment grade or ~~higher.~~higher and HEIs.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(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 30, ~~2021~~2022 and December 31, ~~2020,~~2021, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

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


September 30, 2021		Carrying Value			Fair Value Measurements Using
September 30, 2022											September 30, 2022			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	$	6,216,433		$	—		$	—		$	6,216,433	Residential loans		$	5,752,524		$	—		$	—		$	5,752,524
Business purpose loans	Business purpose loans	4,693,555			—			—			4,693,555		Business purpose loans		5,257,218			—			—			5,257,218
Multifamily loans		482,791			—			—			482,791
Consolidated Agency multifamily loans													Consolidated Agency multifamily loans		427,458			—			—			427,458
Real estate securities	Real estate securities	353,286			—			—			353,286		Real estate securities		259,212			—			—			259,212
Servicer advance investments	Servicer advance investments	170,062			—			—			170,062		Servicer advance investments		274,934			—			—			274,934
MSRs	MSRs	12,389			—			—			12,389		MSRs		24,796			—			—			24,796
Excess MSRs	Excess MSRs	29,185			—			—			29,185		Excess MSRs		40,452			—			—			40,452
HEIs	HEIs	167,856			—			—			167,856		HEIs		340,437			—			—			340,437
Other investments	Other investments	17,574			—			—			17,574		Other investments		11,174			—			—			11,174
Derivative assets	Derivative assets	51,103			8,213			33,628			9,262		Derivative assets		65,213			39,843			24,626			744

Liabilities	Liabilities												Liabilities
Non-controlling interest in consolidated Point HEI entity		$	16,722		$	—		$	—		$	16,722
HEI securitization non-controlling interest													HEI securitization non-controlling interest		$	24,355		$	—		$	—		$	24,355
Derivative liabilities	Derivative liabilities	10,972			8,348			74			2,550		Derivative liabilities		6,782			6,547			23			212
ABS issued	ABS issued	7,756,101			—			—			7,756,101		ABS issued		7,564,312			—			—			7,564,312

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

December 31, 2020 Carrying
Value Fair Value Measurements Using
(In Thousands) Level 1 Level 2 Level 3
Assets
Residential loans $ 4,249,014 $ — $ — $ 4,249,014
Business purpose loans 4,136,353 — — 4,136,353
Multifamily loans 492,221 — — 492,221
Real estate securities 344,125 — — 344,125
Servicer advance investments 231,489 — — 231,489
MSRs 8,815 — — 8,815
Excess MSRs 34,418 — — 34,418
HEIs 42,440 — — 42,440
Other investments 18,847 — — 18,847
Derivative assets 53,238 18,260 19,951 15,027
Pledged collateral 1,177 1,177 — —
FHLBC stock 5,000 — 5,000 —
Liabilities
Derivative liabilities $ 16,072 $ 15,495 $ — $ 577
ABS issued 6,900,362 — — 6,900,362


December 31, 2021	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	7,592,398	$	—	$	—	$	7,592,398
Business purpose loans	4,790,989		—		—		4,790,989
Consolidated Agency multifamily loans	473,514		—		—		473,514
Real estate securities	377,411		—		—		377,411
Servicer advance investments	350,923		—		—		350,923
MSRs	12,438		—		—		12,438
Excess MSRs	44,231		—		—		44,231
HEIs	192,740		—		—		192,740
Other investments	17,574		—		—		17,574
Derivative assets	26,467		2,906		18,928		4,633

FHLBC stock	10		—		10		—

Liabilities
HEI securitization non-controlling interest	$	17,035	$	—	$	—	$	17,035
Derivative liabilities	3,317		1,563		1,251		503
ABS issued	8,843,147		—		—		8,843,147

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

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

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, ~~2021.~~2022.

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


		Assets																														Assets
		Residential Loans				Business Purpose Loans		Multifamily Loans				Trading Securities		AFS Securities			Servicer Advance Investments				Excess MSRs		HEIs				Other					Residential Loans				Business Purpose Loans				Consolidated Agency Multifamily Loans				Trading Securities		AFS Securities		Servicer Advance Investments		Excess MSRs		HEIs		MSRs and Other Investments
(In Thousands)	(In Thousands)															(In Thousands)
Beginning balance - December 31, 2020				$	4,249,014					$	4,136,353			$	492,221				$	125,667					$	218,458				$	231,489			$	34,418			$	42,440			$	27,662
Beginning balance - December 31, 2021																													Beginning balance - December 31, 2021			$	7,592,398			$	4,790,989			$	473,514			$	170,619	$	206,792	$	350,923	$	44,231	$	192,740	$	25,101

Acquisitions	Acquisitions	9,926,335				38,176		—				37,117		1,600			—				—		122,373				14,615		Acquisitions			3,585,882				181,814				—				5,006		10,000		—		—		176,439		8,293
Originations	Originations	—				1,515,262		—				—		—			—				—		—				—		Originations			—				2,291,192				—				—		—		—		—		—		—
Sales	Sales	(6,958,669)				(9,484)		—				(32,704)		(4,785)			—				—		—				—		Sales			(3,702,359)				(414,998)				—				(27,471)		—		—		—		—		(3,044)
Principal paydowns	Principal paydowns	(1,051,390)				(942,096)		(5,685)				(1,783)		(45,120)			(58,248)				—		(10,220)				(9,224)		Principal paydowns			(734,577)				(1,086,983)				(5,936)				(1,202)		(25,381)		(65,772)		—		(35,187)		(137)

Gains (losses) in net income (loss), net	Gains (losses) in net income (loss), net	53,549				(25,658)		(3,745)				24,713		26,998			(3,179)				(5,233)		13,263				(2,974)		Gains (losses) in net income (loss), net			(985,958)				(503,832)				(40,120)				(30,019)		12,560		(10,217)		(3,779)		6,445		9,336
Unrealized losses in OCI, net	Unrealized losses in OCI, net	—				—		—				—		3,125			—				—		—				—		Unrealized losses in OCI, net			—				—				—				—		(61,692)		—		—		—		—
Other settlements, net (1)	Other settlements, net (1)	(2,406)				(18,998)		—				—		—			—				—		—				(116)		Other settlements, net (1)			(2,862)				(964)				—				—		—		—		—		—		(3,579)
Ending balance - September 30, 2021		$	6,216,433			$	4,693,555	$	482,791			$	153,010	$	200,276		$	170,062			$	29,185	$	167,856			$	29,963
Ending balance - September 30, 2022																													Ending balance - September 30, 2022			$	5,752,524			$	5,257,218			$	427,458			$	116,933	$	142,279	$	274,934	$	40,452	$	340,437	$	35,970


		Liabilities					Liabilities
								Derivatives (2)				Point HEI Non-Controlling Interest			ABS Issued								Derivatives (2)		HEI Securitization Non-Controlling Interest		ABS Issued
(In Thousands)	(In Thousands)		Derivatives (2)	Point HEI Non-Controlling Interest	ABS Issued	(In Thousands)												Derivatives (2)	HEI Securitization Non-Controlling Interest	ABS Issued
Beginning balance - December 31, 2020										$	14,450			$			—				$	6,900,362
Beginning balance - December 31, 2021																	Beginning balance - December 31, 2021						$	4,130	$	17,035	$	8,843,147

Acquisitions	Acquisitions							—				16,639			2,552,785		Acquisitions						—		—		1,205,289

Principal paydowns	Principal paydowns							—				—			(1,500,357)		Principal paydowns						—		—		(1,242,859)

Gains (losses) in net income (loss), net	Gains (losses) in net income (loss), net							17,806				83			(196,689)		Gains (losses) in net income (loss), net						(53,962)		7,320		(1,241,265)

Other settlements, net (1)	Other settlements, net (1)							(25,544)				—			—		Other settlements, net (1)						50,364		—		—
Ending balance - September 30, 2021								$	6,712			$	16,722		$	7,756,101
Ending balance - September 30, 2022																	Ending balance - September 30, 2022						$	532	$	24,355	$	7,564,312

(1) Other settlements, net, for residential and business purpose loans, represents the transfer of loans to REO, ~~and~~ for derivatives, ~~the settlement of forward sale commitments and~~represents the transfer of the fair value of loan purchase orand interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental ~~loans.~~business purpose loans, and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

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

The following table presents the portion of fair value gains or losses included in our consolidated statements of income ~~(loss)~~ that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, ~~2021~~2022 and ~~2020.~~2021. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 are not included in this presentation.

Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, ~~2021~~2022 and ~~2020~~2021 Included in Net Income (Loss)


		Included in Net Income									Included in Net Income (Loss)
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Assets	Assets									Assets
Residential loans at Redwood	Residential loans at Redwood	$	6,553	$	(107)	$	9,371	$	(865)	Residential loans at Redwood	$	(28,762)	$	6,553	$	(42,952)	$	9,371
Business purpose loans	Business purpose loans	18,810		21,155		19,829		17,901		Business purpose loans	(10,967)		18,810		(39,019)		19,829
Net investments in consolidated Sequoia entities (1)	Net investments in consolidated Sequoia entities (1)	2,885		7,700		11,779		(22,802)		Net investments in consolidated Sequoia entities (1)	(11,264)		2,885		(22,467)		11,779
Net investments in consolidated Freddie Mac SLST entities (1)	Net investments in consolidated Freddie Mac SLST entities (1)	13,781		82,209		54,006		(33,087)		Net investments in consolidated Freddie Mac SLST entities (1)	(41,969)		13,781		(75,043)		54,006
Net investments in consolidated Freddie Mac K-Series entity (1)		555		2,165		11,330		(11,014)
Net investments in consolidated Freddie Mac K-Series entities (1)										Net investments in consolidated Freddie Mac K-Series entities (1)	316		555		390		11,330
Net investments in consolidated CAFL SFR entities (1)	Net investments in consolidated CAFL SFR entities (1)	2,943		9,673		5,500		(41,048)		Net investments in consolidated CAFL SFR entities (1)	(6,585)		2,943		(24,365)		5,500
Net investment in consolidated Point HEI entity (1)		47		—		129		—
Net investment in consolidated HEI securitization entity (1)										Net investment in consolidated HEI securitization entity (1)	(1,652)		47		11,348		129
Trading securities	Trading securities	1,547		(3,549)		3,824		(80,358)		Trading securities	(12,668)		1,547		(34,104)		3,824

Servicer advance investments	Servicer advance investments	(2,079)		25		(3,179)		(6,172)		Servicer advance investments	(3,905)		(2,079)		(10,218)		(3,179)
MSRs	MSRs	(235)		(2,376)		(49)		(16,798)		MSRs	1,653		(235)		9,118		(49)
Excess MSRs	Excess MSRs	(803)		(1,127)		(5,233)		(7,650)		Excess MSRs	(351)		(803)		(3,779)		(5,233)
HEIs at Redwood	HEIs at Redwood	(41)		2,384		21		(4,286)		HEIs at Redwood	(4,903)		(41)		(2,272)		21
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	9,021		10,791		9,261		10,773		Loan purchase and interest rate lock commitments	723		9,021		744		9,261

Liabilities	Liabilities									Liabilities
Non-controlling interest in consolidated Point HEI entity		$	(83)	$	—	$	(83)	$	—
HEI securitization non-controlling interest										HEI securitization non-controlling interest	$	1,068	$	(83)	$	(7,320)	$	(83)
Loan purchase commitments	Loan purchase commitments	(2,570)		420		(2,550)		(1,334)		Loan purchase commitments	(212)		(2,570)		(212)		(2,550)

(1) Represents the portion of net fair value gains or losses included in our consolidated statements of income (loss) related to securitized loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at September 30, ~~2021~~2022 and ~~2020,~~2021, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under CFE election, excluding REO.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, ~~2021.~~2022. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance sheets at September 30, ~~2021.~~2022.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, ~~2021~~2022

Gain (Loss) for

September 30, 2021

Carrying
Value

Fair Value Measurements Using

Three Months Ended

Nine Months Ended

September 30, 2022

Carrying
Value

Fair Value Measurements Using

Three Months Ended

Nine Months Ended

(In Thousands)

Carrying
Value

Level 1

Level 2

Level 3

September 30, 2021

(In Thousands)

Level 1

Level 2

Level 3

September 30, 2022

Assets

REO

622

—

622

(1)

(4)

Strategic investments

17,350

—

17,350

(25)

10,000

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

2021.

Table 5.6 – Market Valuation Gains and Losses, Net


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
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	$	9,045	$	(478)	$	57,145	$	(15,972)	Residential loans held-for-sale, at fair value	$	(20,060)	$	9,045	$	(71,776)	$	57,145
Residential loan purchase commitments	Residential loan purchase commitments	18,817		13,067		18,351		35,123		Residential loan purchase commitments	(2,716)		18,817		(53,236)		18,351
Single-family rental loans held-for-sale, at fair value	Single-family rental loans held-for-sale, at fair value	19,205		43,191		54,675		55,868		Single-family rental loans held-for-sale, at fair value	(19,325)		19,205		(83,827)		54,675
Single-family rental loan interest rate lock commitments	Single-family rental loan interest rate lock commitments	(744)		—		—		341		Single-family rental loan interest rate lock commitments	19		(744)		(666)		—
Bridge loans	Bridge loans	3,433		938		6,702		(4,256)		Bridge loans	(9)		3,433		2,242		6,702
Trading securities (1)	Trading securities (1)	32		—		(342)		—		Trading securities (1)	148		32		4,249		(342)
Risk management derivatives, net	Risk management derivatives, net	3,539		(99)		38,117		(52,931)		Risk management derivatives, net	48,363		3,539		164,137		38,117
Total mortgage banking activities, net (2)	Total mortgage banking activities, net (2)	$	53,327	$	56,619	$	174,648	$	18,173	Total mortgage banking activities, net (2)	$	6,420	$	53,327	$	(38,877)	$	174,648
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net									Investment Fair Value Changes, Net
Residential loans at Redwood		$	816	$	218	$	2,423	$	(93,314)
Single-family rental loans held-for-investment		—		—		—		(20,806)
Residential loans held-for-sale, at fair value (called Sequoia loans)										Residential loans held-for-sale, at fair value (called Sequoia loans)	$	(6,614)	$	816	$	(18,876)	$	2,423

Bridge loans held-for-investment	Bridge loans held-for-investment	900		6,812		4,142		(10,016)		Bridge loans held-for-investment	2,482		900		(9,220)		4,142
Trading securities	Trading securities	1,546		(3,600)		25,067		(224,679)		Trading securities	(12,668)		1,546		(34,268)		25,067
Servicer advance investments	Servicer advance investments	(2,079)		26		(3,179)		(6,172)		Servicer advance investments	(3,905)		(2,079)		(10,217)		(3,179)
Excess MSRs	Excess MSRs	(803)		(1,127)		(5,233)		(7,650)		Excess MSRs	(351)		(803)		(3,779)		(5,233)
Net investments in Legacy Sequoia entities (3)	Net investments in Legacy Sequoia entities (3)	(247)		(81)		(1,162)		(702)		Net investments in Legacy Sequoia entities (3)	(328)		(247)		(1,378)		(1,162)
Net investments in Sequoia entities (3)	Net investments in Sequoia entities (3)	3,314		7,851		13,118		(22,065)		Net investments in Sequoia entities (3)	(10,936)		3,314		(20,644)		13,118
Net investments in Freddie Mac SLST entities (3)	Net investments in Freddie Mac SLST entities (3)	13,849		82,214		54,282		(33,081)		Net investments in Freddie Mac SLST entities (3)	(41,892)		13,849		(74,796)		54,282
Net investment in Freddie Mac K-Series entity (3)	Net investment in Freddie Mac K-Series entity (3)	554		2,166		11,330		(82,744)		Net investment in Freddie Mac K-Series entity (3)	316		554		390		11,330
Net investments in CAFL entities (3)		2,943		9,673		6,354		(41,048)
Net investment in Point HEI entity (3)		47		—		47		—
Net investments in CAFL SFR entities (3)										Net investments in CAFL SFR entities (3)	(6,585)		2,943		(24,365)		6,354
Net investment in HEI securitization entity (3)										Net investment in HEI securitization entity (3)	(584)		47		4,028		47
HEIs at Redwood	HEIs at Redwood	5,622		2,384		13,017		(4,286)		HEIs at Redwood	(4,774)		5,622		(1,986)		13,017
Other investments	Other investments	(385)		67		50		(4,825)		Other investments	1,445		(385)		12,028		50
Risk management derivatives, net	Risk management derivatives, net	—		—		—		(59,142)		Risk management derivatives, net	27,241		—		33,609		—
Credit recoveries (losses) on AFS securities		—		444		388		(1,027)
Credit (losses) recoveries on AFS securities										Credit (losses) recoveries on AFS securities	(544)		—		(2,315)		388
Total investment fair value changes, net	Total investment fair value changes, net	$	26,077	$	107,047	$	120,644	$	(611,557)	Total investment fair value changes, net	$	(57,697)	$	26,077	$	(151,789)	$	120,644
Other Income	Other Income									Other Income
MSRs	MSRs	$	(989)	$	(4,783)	$	(3,236)	$	(27,346)	MSRs	$	1,236	$	(989)	$	8,031	$	(3,236)
Risk management derivatives, net		—		—		—		13,966
Other										Other	(852)		—		(852)		—

Total other income (4)	Total other income (4)	$	(989)	$	(4,783)	$	(3,236)	$	(13,380)	Total other income (4)	$	384	$	(989)	$	7,179	$	(3,236)
Total Market Valuation Gains (Losses), Net	Total Market Valuation Gains (Losses), Net	$	78,415	$	158,883	$	292,056	$	(606,764)	Total Market Valuation Gains (Losses), Net	$	(50,893)	$	78,415	$	(183,487)	$	292,056

(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the ~~mark-to-market~~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.

(3)Includes changes in fair value of the residential loans held-for-investment, securitized ~~Point~~ HEIs, REO and the ABS issued at the entities, which, netted together, represent the change in value of our investments at the consolidated ~~VIEs.~~VIEs accounted for under the CFE election.

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

3130

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

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

At September 30, ~~2021,~~2022, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~ 2021.

The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments


September 30, 2021		Fair Value					Input Values
September 30, 2022															September 30, 2022		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	$	624,477		Prepayment rate (annual CPR)		20		-	20		%	20		%	Jumbo fixed-rate loans		$	718,347	Whole loan spread to swap rate			201			-	400		bps	202			bps
					Whole loan spread to TBA price		$	3.00	-	$	3.00		$	3.00
					Whole loan spread to swap rate		202		-	202		bps	202		bps					Called loan dollar price			$	92		-	$	92		$	92

Jumbo loans committed to sell	Jumbo loans committed to sell	870,568			Whole loan committed sales price		$	101.90	-	$	103.32		$	102.46		Jumbo loans committed to sell		115,883		Whole loan committed sales price			$	96		-	$	102		$	98

Loans held by Legacy Sequoia (2)	Loans held by Legacy Sequoia (2)	242,234			Liability price					N/A			N/A			Loans held by Legacy Sequoia (2)		198,160		Liability price							N/A			N/A

Loans held by Sequoia (2)	Loans held by Sequoia (2)	2,479,750			Liability price					N/A			N/A			Loans held by Sequoia (2)		3,237,170		Liability price							N/A			N/A

Loans held by Freddie Mac SLST (2)	Loans held by Freddie Mac SLST (2)	1,999,405			Liability price					N/A			N/A			Loans held by Freddie Mac SLST (2)		1,482,964		Liability price							N/A			N/A

Business purpose loans:	Business purpose loans:															Business purpose loans:
Single-family rental loans	Single-family rental loans	466,346			Senior credit spread		65		-	65		bps	65		bps	Single-family rental loans		281,105		Senior credit spread			210			-	210		bps	210			bps
					Subordinate credit spread		110		-	1,523		bps	401		bps					Subordinate credit spread			275			-	1,025		bps	458			bps
					Senior credit support		35		-	35		%	35		%					Senior credit support			36			-	36		%	36			%
					IO discount rate		9		-	9		%	9		%					IO discount rate			8			-	9		%	8			%
					Prepayment rate (annual CPR)		3		-	3		%	3		%					Prepayment rate (annual CPR)			3			-	3		%	3			%
					Non-securitizable loan dollar price		$	76	-	$	111		$	101						Whole loan dollar price			$	84		-	$	99		$	86

Single-family rental loans held by CAFL (2)	Single-family rental loans held by CAFL (2)	3,402,410			Liability price					N/A			N/A			Single-family rental loans held by CAFL (2)		3,018,994		Liability price							N/A			N/A

Bridge loans	Bridge loans	824,799			Discount rate		4		-	15		%	6		%	Bridge loans		1,957,119		Whole loan discount rate			5			-	15		%	9			%
																				Senior credit spread			285			-	285		bps	285			bps
																				Subordinate credit spread			345			-	1,200		%	680			%
																				Senior credit support			43			-	43		%	43			%
																				Prepayment rate (annual CPR)			—			-	—		%	—			%

Multifamily loans held by Freddie Mac K-Series (2)	Multifamily loans held by Freddie Mac K-Series (2)	482,791			Liability price					N/A			N/A			Multifamily loans held by Freddie Mac K-Series (2)		427,458		Liability price							N/A			N/A

Trading and AFS securities	Trading and AFS securities	353,286			Discount rate		2		-	38		%	7		%	Trading and AFS securities		259,212		Discount rate			5			-	18		%	10			%
					Prepayment rate (annual CPR)		8		-	58		%	27		%					Prepayment rate (annual CPR)			6			-	65		%	12			%
					Default rate		—		-	25		%	4		%					Default rate			—			-	12		%	0.4			%
					Loss severity		—		-	50		%	24		%					Loss severity			—			-	50		%	25			%
					CRT dollar price		$	96	-	$	116		$	104						CRT dollar price			$	73		-	$	93		$	85

Servicer advance investments	Servicer advance investments	170,062			Discount rate		2		-	3		%	2		%	Servicer advance investments		274,934		Discount rate			2			-	5		%	4			%
					Prepayment rate (annual CPR)		20		-	30		%	21		%					Prepayment rate (annual CPR)			14			-	30		%	14			%
					Expected remaining life (3)		5		-	5		years	5		years					Expected remaining life (3)			5			-	5		yrs	5			yrs
					Mortgage servicing income		2		-	11		bps	9		bps					Mortgage servicing income			—			-	18		bps	7			bps

MSRs	MSRs	12,389			Discount rate		12		-	15		%	13		%	MSRs		24,796		Discount rate			11			-	69		%	11			%
					Prepayment rate (annual CPR)		6		-	80		%	28		%
					Per loan annual cost to service		$	95	-	$	95		$	95

Excess MSRs		29,185			Discount rate		13		-	16		%	15		%
					Prepayment rate (annual CPR)		21		-	30		%	25		%					Prepayment rate (annual CPR)			4			-	28		%	8			%
					Excess mortgage servicing income		8		-	17		bps	11		bps					Per loan annual cost to service			$	93		-	$	93		$	93

3231

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

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

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


September 30, 2021		Fair Value					Input Values
September 30, 2022															September 30, 2022		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)

HEIs at Redwood		$	414		Dollar Price		$	92	-	$	124		$	105

HEIs held by Point HEI entity		167,442			Liability price					N/A			N/A

REO		622			Loss severity		11		-	40		%	22		%

Excess MSRs																Excess MSRs		40,452	Discount rate			13			-	19		%	18			%
																			Prepayment rate (annual CPR)			10			-	100		%	18			%
																			Excess mortgage servicing income			8			-	19		bps	11			bps

HEIs																HEIs		200,709	Discount rate			10			-	10		%	10			%
																			Prepayment rate (annual CPR)			1			-	23		%	16			%
																			Home price appreciation			(7)			-	4		%	3			%

HEIs held by HEI securitization entity																HEIs held by HEI securitization entity		139,728	Liability price			N/A				N/A			N/A

Residential loan purchase commitments, net	Residential loan purchase commitments, net	6,712			Committed sales price		$	102.11	-	$	102.77		$	102.54		Residential loan purchase commitments, net		531	Whole loan spread to swap rate			201			-	201		bps	201			bps
					Pull-through rate		4		-	100		%	71		%
					Whole loan spread to TBA price		$	3.00	-	$	3.00		$	3.00
					Whole loan spread to swap rate		185		-	202		bps	201		bps
					Prepayment rate (annual CPR)		20		-	20		%	20		%				Pull-through rate			26			-	100		%	78			%
																			Committed sales price			$	99		-	$	102		$	100

Liabilities	Liabilities															Liabilities
ABS issued (2):	ABS issued (2):															ABS issued (2):
At consolidated Sequoia entities	At consolidated Sequoia entities	2,482,746			Discount rate		1		-	18		%	3		%	At consolidated Sequoia entities		3,210,603	Discount rate			4			-	18		%	6			%
					Prepayment rate (annual CPR)		7		-	55		%	33		%				Prepayment rate (annual CPR)			5			-	24		%	13			%
					Default rate		—		-	36		%	2		%				Default rate			—			-	33		%	1			%
					Loss severity		25		-	50		%	32		%				Loss severity			25			-	50		%	32			%

At consolidated CAFL SFR entities (4)	At consolidated CAFL SFR entities (4)	3,126,405			Discount rate		1		-	13		%	3		%	At consolidated CAFL SFR entities (4)		2,703,223	Discount rate			0.3			-	16		%	6			%
					Prepayment rate (annual CPR)		3		-	3		%	3		%				Prepayment rate (annual CPR)			—			-	3		%	0.2			%
					Default rate		2		-	18		%	9		%				Default rate			4			-	21		%	6			%
					Loss severity		30		-	30		%	30		%				Loss severity			30			-	40		%	30			%

At consolidated Freddie Mac SLST entities	At consolidated Freddie Mac SLST entities	1,550,111			Discount rate		2		-	7		%	3		%	At consolidated Freddie Mac SLST entities		1,150,323	Discount rate			5			-	8		%	6			%
																			Prepayment rate (annual CPR)			6			-	8		%	6			%
					Prepayment rate (annual CPR)		6		-	8		%	6		%				Default rate			13			-	14		%	14			%
					Default rate		9		-	10		%	9		%				Loss severity			35			-	35		%	35			%
					Loss severity		35		-	35		%	35		%

At consolidated Freddie Mac K-Series entities (4)	At consolidated Freddie Mac K-Series entities (4)	451,402			Discount rate		1		-	8		%	2		%	At consolidated Freddie Mac K-Series entities (4)		395,411	Discount rate			3			-	9		%	5			%

At consolidated Point HEI entity (4)		145,437			Discount rate		3		-	15		%	4		%
At consolidated HEI securitization entity (4)																At consolidated HEI securitization entity (4)		104,751	Discount rate			9			-	15		%	10			%
					Prepayment rate (annual CPR)		20		-	20		%	20		%				Prepayment rate (annual CPR)			20			-	20		%	20			%
					Default rate		6		-	6		%	6		%
					Loss severity		25		-	25		%	25		%
					Home price appreciation		3		-	4		%	3		%				Home price appreciation			(7)			-	4		%	3			%

(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 and HEIs held by consolidated entities ~~was~~is based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At September 30, ~~2021,~~2022, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and ~~Point~~ HEI securitization entities was ~~$240~~$224 million, ~~$288~~$314 million, ~~$451~~$335 million, ~~$31~~$32 million, and ~~$10~~$14 million, respectively.

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

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

3332

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(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 inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs -in isolation — such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions ~~- in isolation~~— would likely result in a significantly lower or higher fair value measurement.

Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 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.

~~In addition to the Level 3 financial instruments included in Table 5.7 above, certain~~Certain of our Other investments ~~(comprised~~(inclusive of strategic investments in early-stage start-up companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We ~~generally~~initially record these investments at cost and adjust their fair value ~~these assets~~ based on ~~our original investment price until there is an~~ observable price ~~change in an orderly transaction for~~changes, such as follow-on capital raises or secondary sales, and will also evaluate impacts to valuation from changing market conditions and underlying business performance. As of September 30, 2022, the ~~identical or similar investment~~carrying value of ~~the same issuer.~~these investments was $10 million.

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 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 6.1 – Classifications and Carrying Values of Residential Loans


September 30, 2021				Legacy				Freddie Mac
September 30, 2022												September 30, 2022			Legacy				Freddie Mac
(In Thousands)	(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total		(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	1,495,079	$	—	$	—	$	—	$	1,495,079	Held-for-sale at fair value	$	834,262	$	—	$	—	$	—	$	834,262
Held-for-investment at fair value	Held-for-investment at fair value	—		242,234		2,479,750		1,999,405		4,721,389		Held-for-investment at fair value	—		198,160		3,237,170		1,482,964		4,918,294
Total Residential Loans	Total Residential Loans	$	1,495,079	$	242,234	$	2,479,750	$	1,999,405	$	6,216,468	Total Residential Loans	$	834,262	$	198,160	$	3,237,170	$	1,482,964	$	5,752,556


December 31, 2020				Legacy				Freddie Mac
December 31, 2021												December 31, 2021			Legacy				Freddie Mac
(In Thousands)	(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total		(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	176,641	$	—	$	—	$	—	$	176,641	Held-for-sale at fair value	$	1,845,282	$	—	$	—	$	—	$	1,845,282
Held-for-investment at fair value	Held-for-investment at fair value	—		285,935		1,565,322		2,221,153		4,072,410		Held-for-investment at fair value	—		230,455		3,628,465		1,888,230		5,747,150
Total Residential Loans	Total Residential Loans	$	176,641	$	285,935	$	1,565,322	$	2,221,153	$	4,249,051	Total Residential Loans	$	1,845,282	$	230,455	$	3,628,465	$	1,888,230	$	7,592,432

At September 30, ~~2021,~~2022, we owned mortgage servicing rights associated with ~~$1.40 billion~~$853 million (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.

3433

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(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 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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


(Dollars in Thousands)	(Dollars in Thousands)	September 30, 2021		December 31, 2020		(Dollars in Thousands)	September 30, 2022			December 31, 2021
Number of loans	Number of loans	1,958		198		Number of loans	1,054			2,196
Unpaid principal balance	Unpaid principal balance	$	1,464,767	$	172,748	Unpaid principal balance	$	874,412		$	1,813,865
Fair value of loans	Fair value of loans	$	1,495,079	$	176,641	Fair value of loans	$	834,262		$	1,845,282
Market value of loans pledged as collateral under short-term borrowing agreements	Market value of loans pledged as collateral under short-term borrowing agreements	$	1,478,424	$	156,355	Market value of loans pledged as collateral under short-term borrowing agreements	$	828,192		$	1,838,797
Weighted average coupon						Weighted average coupon	4.99		%	3.27		%

Delinquency information	Delinquency information					Delinquency information
Number of loans with 90+ day delinquencies	Number of loans with 90+ day delinquencies	4		1		Number of loans with 90+ day delinquencies	1			3
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	3,159	$	1,882	Unpaid principal balance of loans with 90+ day delinquencies	$	209		$	2,923
Fair value of loans with 90+ day delinquencies	Fair value of loans with 90+ day delinquencies	$	2,490	$	1,223	Fair value of loans with 90+ day delinquencies	$	170		$	2,304
Number of loans in foreclosure	Number of loans in foreclosure	—		—		Number of loans in foreclosure	—			—

The following table provides the activity of residential loans held-for-sale during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Principal balance of loans acquired(1)	Principal balance of loans acquired(1)	$	3,167,186	$	172,162	$	9,747,867	$	2,859,813	Principal balance of loans acquired(1)	$	336,698	$	3,167,186	$	3,597,339	$	9,747,867
Principal balance of loans sold	Principal balance of loans sold	2,360,862		87,868		6,787,490		4,750,615		Principal balance of loans sold	662,302		2,360,862		3,727,993		6,787,490
Principal balance of loans transferred to HFI	Principal balance of loans transferred to HFI	448,878		—		1,623,000		274,048		Principal balance of loans transferred to HFI	—		448,878		687,192		1,623,000
Net market valuation gains (losses) recorded ~~(1)~~(2)	Net market valuation gains (losses) recorded ~~(1)~~(2)	9,861		(478)		59,568		(15,972)		Net market valuation gains (losses) recorded ~~(1)~~(2)	(26,674)		9,861		(90,652)		59,568

(1)For the three and nine months ended September 30, 2022, includes zero and $102 million of loans acquired through calls of zero and three seasoned Sequoia securitizations, respectively.

(2)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).

3534

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 6. Residential Loans - (continued)

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 consolidated Sequoia and Freddie Mac SLST entities at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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


September 30, 2021		Legacy				Freddie Mac
September 30, 2022								September 30, 2022	Legacy						Freddie Mac
(Dollars in Thousands)	(Dollars in Thousands)	Sequoia		Sequoia		SLST		(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	Number of loans	1,653		3,022		12,444		Number of loans	1,372			4,666			11,054
Unpaid principal balance	Unpaid principal balance	$	278,815	$	2,447,402	$	2,022,724	Unpaid principal balance	$	218,298		$	3,902,938		$	1,753,301
Fair value of loans	Fair value of loans	$	242,234	$	2,479,750	$	1,999,405	Fair value of loans	$	198,160		$	3,237,170		$	1,482,964
Weighted average coupon								Weighted average coupon	3.23		%	3.25		%	4.50		%

Delinquency information	Delinquency information							Delinquency information
Number of loans with 90+ day delinquencies (1)	Number of loans with 90+ day delinquencies (1)	40		30		1,168		Number of loans with 90+ day delinquencies (1)	33			13			1,295
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	14,038	$	24,438	$	209,913	Unpaid principal balance of loans with 90+ day delinquencies	$	5,532		$	11,404		$	223,260
Fair value of loans with 90+ day delinquencies (2)	Fair value of loans with 90+ day delinquencies (2)	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	18		4		305		Number of loans in foreclosure	16			6			332
Unpaid principal balance of loans in foreclosure	Unpaid principal balance of loans in foreclosure	$	4,416	$	2,863	$	52,319	Unpaid principal balance of loans in foreclosure	$	1,852		$	5,928		$	56,755


December 31, 2020		Legacy				Freddie Mac
December 31, 2021								December 31, 2021	Legacy						Freddie Mac
(Dollars in Thousands)	(Dollars in Thousands)	Sequoia		Sequoia		SLST		(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	Number of loans	1,908		2,177		13,605		Number of loans	1,583			4,300			11,986
Unpaid principal balance	Unpaid principal balance	$	333,474	$	1,550,454	$	2,247,771	Unpaid principal balance	$	264,057		$	3,605,469		$	1,932,241
Fair value of loans	Fair value of loans	$	285,935	$	1,565,322	$	2,221,153	Fair value of loans	$	230,455		$	3,628,465		$	1,888,230
Weighted average coupon								Weighted average coupon	1.87		%	3.39		%	4.51		%

Delinquency information	Delinquency information							Delinquency information
Number of loans with 90+ day delinquencies (1)	Number of loans with 90+ day delinquencies (1)	52		94		2,110		Number of loans with 90+ day delinquencies (1)	32			18			1,208
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	17,285	$	74,742	$	389,245	Unpaid principal balance of loans with 90+ day delinquencies	$	7,482		$	15,124		$	212,961
Fair value of loans with 90+ day delinquencies (2)	Fair value of loans with 90+ day delinquencies (2)	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	21		3		245		Number of loans in foreclosure	10			2			241
Unpaid principal balance of loans in foreclosure	Unpaid principal balance of loans in foreclosure	$	4,939	$	2,251	$	38,610	Unpaid principal balance of loans in foreclosure	$	2,188		$	1,624		$	43,637

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

(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(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 months ended September 30, 2021 and 2020.~~

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

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2021 2020 2021 2020
Fair value of loans transferred from HFS to HFI $ — $ — $ — $ 13,258
Fair value of loans transferred from HFI to HFS — — — 1,870,986
Net market valuation gains (losses) recorded (1)
— 218 — (93,314)

~~(1)~~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 months ended September 30, 2021 and 2020.~~

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

Three Months Ended September 30, 2021 Three Months Ended September 30, 2020
Legacy Freddie Mac Legacy Freddie Mac
(In Thousands) Sequoia Sequoia SLST Sequoia Sequoia SLST
Fair value of loans transferred from HFS to HFI (1)
N/A $ 464,189 N/A N/A $ — N/A
Net market valuation gains (losses) recorded (2)
(2,580) (11,663) (13,836) 21,938 (5,175) 159,687

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Legacy Freddie Mac Legacy Freddie Mac
(In Thousands) Sequoia Sequoia SLST Sequoia Sequoia SLST
Fair value of loans transferred from HFS to HFI (1)
N/A $ 1,669,683 N/A N/A $ 270,506 N/A
Net market valuation gains (losses) recorded (2)
9,896 (27,076) 5,177 (38,996) (21,727) 15,254

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

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

Table 6.5 – Activity of Residential Loans Held-for-Investment at Consolidated Entities

Three Months Ended September 30, 2022

Three Months Ended September 30, 2021

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

—

N/A

464,189

N/A

Net market valuation gains (losses) recorded

5,182

(202,825)

(104,040)

(2,580)

(11,663)

(13,836)

Nine Months Ended September 30, 2022

Nine Months Ended September 30, 2021

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

684,491

N/A

1,669,683

N/A

Net market valuation gains (losses) recorded

12,286

(685,042)

(224,543)

9,896

(27,076)

5,177

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

REO

See Note 13 for detail on residential loans transferred to REO during 2022.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

Note 7. Business Purpose Loans

We originate and invest in business purpose loans, including single-family rental ("SFR") loans and bridge loans. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


September 30, 2021		Single-Family Rental				Bridge
September 30, 2022												September 30, 2022	Single-Family Rental				Bridge
(In Thousands)	(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total		(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	466,346	—		$	—	$	—	$	466,346	Held-for-sale at fair value	$	281,105	—		$	56,133	$	—	$	337,238
Held-for-investment at fair value	Held-for-investment at fair value	—		3,402,410		548,445		276,354		4,227,209		Held-for-investment at fair value	—		3,018,994		1,388,750		512,236		4,919,980
Total Business Purpose Loans	Total Business Purpose Loans	$	466,346	$	3,402,410	$	548,445	$	276,354	$	4,693,555	Total Business Purpose Loans	$	281,105	$	3,018,994	$	1,444,883	$	512,236	$	5,257,218

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

~~Single-Family Rental Loans~~

Nearly all of the outstanding single-family rental loans at September 30, 2021 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with less than 1% with original maturities of 30 years.

~~Bridge Loans~~

The outstanding bridge loans held-for-investment at September 30, 2021 were first-lien, interest-only loans with original maturities of six to 24 months and were comprised of 69% one-month LIBOR-indexed adjustable-rate loans and 31% fixed-rate loans.

~~At September 30, 2021, we had a $426 million commitment to fund bridge loans. See~~ ~~Note 16~~ ~~for additional information on this commitment.~~


December 31, 2021	Single-Family Rental				Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	358,309	$	—	$	—	$	—	$	358,309
Held-for-investment at fair value	—		3,488,074		666,364		278,242		4,432,680
Total Business Purpose Loans	$	358,309	$	3,488,074	$	666,364	$	278,242	$	4,790,989

3836

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Nearly all of the outstanding SFR loans at September 30, 2022 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with 2% having original maturities of 30 years. The outstanding bridge loans held-for-investment at September 30, 2022 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of 39% one-month LIBOR-indexed adjustable-rate loans, 48% one-month SOFR-indexed adjustable-rate loans, and 13% fixed-rate loans.

At September 30, 2022, we had commitments to fund bridge loans of $990 million. See Note 17 for additional information on these commitments.

The following table provides the activity of business purpose loans at Redwood during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table 7.2 – Activity of Business Purpose Loans at Redwood


		Three Months Ended September 30, 2021				Three Months Ended September 30, 2020					Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
(In Thousands)	(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood		(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	Principal balance of loans originated	$	392,620	$	208,938	$	195,744	$	65,517	Principal balance of loans originated	$	99,281	$	470,425	$	392,620	$	208,938
Principal balance of loans acquired(1)	Principal balance of loans acquired(1)	2,463		35,713		—		—		Principal balance of loans acquired(1)	—		59,977		2,463		35,713
Principal balance of loans sold to third parties	Principal balance of loans sold to third parties	—		253		7,695		1,567		Principal balance of loans sold to third parties	37,202		48,279		—		253
Fair value of loans transferred from HFS to HFI (1)		332,670		276,354		326,405		N/A
Fair value of loans transferred from HFI to HFS (2)		—		N/A		—		N/A
Fair value of loans transferred (2)										Fair value of loans transferred (2)	266,181		77,362		332,670		276,354

Mortgage banking activities income (loss) recorded ~~(3)~~(4)	Mortgage banking activities income (loss) recorded ~~(3)~~(4)	19,205		3,691		43,191		29		Mortgage banking activities income (loss) recorded ~~(3)~~(4)	(19,325)		(110)		19,205		3,691
Investment fair value changes recorded ~~(4)~~(5)	Investment fair value changes recorded ~~(4)~~(5)	—		900		—		6,812		Investment fair value changes recorded ~~(4)~~(5)	—		(679)		—		900


		Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
(In Thousands)	(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood		(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	Principal balance of loans originated	$	957,935	$	557,327	$	631,749	$	351,353	Principal balance of loans originated	$	865,253	$	1,424,604	$	957,935	$	557,327
Principal balance of loans acquired(1)	Principal balance of loans acquired(1)	2,463		35,713		—		—		Principal balance of loans acquired(1)	100,349		81,983		2,463		35,713
Principal balance of loans sold to third parties	Principal balance of loans sold to third parties	—		9,484		33,843		23,860		Principal balance of loans sold to third parties	368,704		48,279		—		9,484
Fair value of loans transferred from HFS to HFI (1)		799,375		276,354		925,437		N/A
Fair value of loans transferred (2)										Fair value of loans transferred (2)	561,218		465,966		799,375		276,354
Fair value of loans transferred from HFI to HFS ~~(2)~~(3)	Fair value of loans transferred from HFI to HFS ~~(2)~~(3)	44,922		N/A		—		N/A		Fair value of loans transferred from HFI to HFS ~~(2)~~(3)	—		—		44,922		N/A
Mortgage banking activities income (loss) recorded ~~(3)~~(4)	Mortgage banking activities income (loss) recorded ~~(3)~~(4)	54,675		5,212		54,731		(3,412)		Mortgage banking activities income (loss) recorded ~~(3)~~(4)	(83,827)		1,129		54,675		5,212
Investment fair value changes recorded ~~(4)~~(5)	Investment fair value changes recorded ~~(4)~~(5)	—		4,142		(20,806)		(10,016)		Investment fair value changes recorded ~~(4)~~(5)	—		(6,747)		—		4,142

(1)~~Represents~~Bridge at Redwood for the three and nine months ended September 30, 2022, includes $60 million of loans acquired as part of the Riverbend acquisition.

(2)For SFR at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL SFR securitizations. For Bridge at Redwood, represents the transfer of bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their securitization.

~~(2)~~(3)Represents the transfer of single-family rental loans from held-for-investment to held-for-sale associated with the call of a consolidated CAFL securitization during the second quarter of 2021.

~~(3)~~(4)Represents net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three and nine months ended September 30, ~~2021,~~2022, we recorded loan origination fee income of $9$10 million and $22 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2020, we recorded loan origination fee income of $3 million and $13$36 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

~~(4)~~(5)Represents net market valuation changes for loans classified as ~~held-for-investment.~~held-for-investment and associated interest-only strip liabilities.

3937

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loans Held-for-Investment at CAFL

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. ~~During the nine months ended September 30, 2021, we transferred 3 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 provides the activity of business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2021 and 2020.~~

~~Table 7.3 – Activity of Business Purpose Loans Held-for-Investment at CAFL~~

Three Months Ended
September 30, 2021 Three Months Ended
September 30, 2020
(In Thousands) SFR at
CAFL Bridge at CAFL SFR at
CAFL Bridge at CAFL
Net market valuation gains (losses) recorded (1)
$ (34,803) $ — $ 88,271 $ —

Nine Months Ended
September 30, 2021 Nine Months Ended
September 30, 2020
(In Thousands) SFR at
CAFL Bridge at CAFL SFR at
CAFL Bridge at CAFL
Net market valuation gains (losses) recorded (1)
$ (96,934) $ — $ (14,319) $ —

~~(1)~~For loans held at our consolidated CAFL entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity ~~guidelines.~~guidelines, and are recorded through Investment fair value changes, net on our consolidated statements of income (loss). The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2. The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2022 and 2021.

Table 7.3 – Activity of Business Purpose Loans Held-for-Investment at CAFL


	Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
(In Thousands)	SFR at CAFL		Bridge at CAFL		SFR at CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded	$	(108,980)	$	1,906	$	(34,803)	$	—


	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
(In Thousands)	SFR at CAFL		Bridge at CAFL		SFR at CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded	$	(419,182)	$	50	$	(96,934)	$	—

REO

See Note 1213 for detail on ~~BPL~~business purpose loans transferred to REO during ~~2021.~~

2022.

4038

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loan Characteristics

The following tables summarize the characteristics of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 7.4 – Characteristics of Business Purpose Loans

September 30, 2021 SFR at Redwood SFR at
CAFL Bridge at Redwood Bridge at CAFL
(Dollars in Thousands)
Number of loans 123 1,157 1,092 1,589
Unpaid principal balance $ 451,295 $ 3,207,118 $ 550,711 $ 272,243
Fair value of loans $ 466,346 $ 3,402,411 $ 548,445 $ 276,354
Weighted average coupon 4.57 % 5.27 % 7.48 % 7.19 %
Weighted average remaining loan term (years) 7 6 1 1
Market value of loans pledged as collateral under short-term debt facilities $ 127,930 N/A $ 126,725 N/A
Market value of loans pledged as collateral under long-term debt facilities $ 298,014 N/A $ 373,597 N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)
7 15 35 —
Unpaid principal balance of loans with 90+ day delinquencies $ 5,067 $ 39,423 $ 30,132 $ —
Fair value of loans with 90+ day delinquencies (2)
$ 2,664 N/A $ 26,525 $ —
Number of loans in foreclosure 6 10 34 —
Unpaid principal balance of loans in foreclosure $ 4,978 $ 22,004 $ 26,177 $ —
Fair value of loans in foreclosure (2)
$ 2,619 N/A $ 22,570 $ —
December 31, 2020 SFR at Redwood SFR at
CAFL Bridge at Redwood Bridge at CAFL
(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 N/A
Market value of loans pledged as collateral under long-term debt facilities $ 154,774 N/A $ 544,151 N/A
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 — 10 25 —
Unpaid principal balance of loans in foreclosure $ — $ 24,745 $ 38,552 $ —
Fair value of loans in foreclosure (2)
$ — N/A $ 33,066 $ —


September 30, 2022	SFR at Redwood			SFR at CAFL(1)			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	202			1,142			1,585			1,994
Unpaid principal balance	$	317,556		$	3,316,706		$	1,452,180		$	510,839
Fair value of loans	$	281,105		$	3,018,994		$	1,444,883		$	512,236
Weighted average coupon	5.14		%	5.22		%	8.06		%	8.04		%
Weighted average remaining loan term (years)	15			6			2			1
Market value of loans pledged as collateral under short-term debt facilities	$	279,846		N/A			$	702,899		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	—		N/A			$	699,704		N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)	1			15			51			47
Unpaid principal balance of loans with 90+ day delinquencies	$	536		$	31,296		$	33,822		$	7,063
Fair value of loans with 90+ day delinquencies (2)	$	528		N/A			$	31,140		$	7,144
Number of loans in foreclosure (3)	1			7			49			—
Unpaid principal balance of loans in foreclosure	$	536		$	10,335		$	33,471		$	—
Fair value of loans in foreclosure (3)	$	528		N/A			$	30,789		$	—


December 31, 2021	SFR at Redwood			SFR at CAFL(1)			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	245			1,173			1,134			1,640
Unpaid principal balance	$	348,232		$	3,340,949		$	670,392		$	274,617
Fair value of loans	$	358,309		$	3,488,074		$	666,364		$	278,242
Weighted average coupon	4.73		%	5.17		%	6.91		%	7.05		%
Weighted average remaining loan term (years)	12			6			1			1
Market value of loans pledged as collateral under short-term debt facilities	$	75,873		N/A			$	91,814		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	244,703		N/A			$	554,597		N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)	6			18			31			—
Unpaid principal balance of loans with 90+ day delinquencies	$	5,384		$	41,998		$	18,032		$	—
Fair value of loans with 90+ day delinquencies (2)	$	4,238		N/A			$	14,218		$	—
Number of loans in foreclosure (3)	7			9			28			—
Unpaid principal balance of loans in foreclosure	$	5,473		$	12,648		$	18,043		$	—
Fair value of loans in foreclosure (3)	$	4,305		N/A			$	14,257		$	—

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Footnotes to Table 7.4

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

~~(2)~~The fair value of the loans held by consolidated CAFL entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.

(2)The number of loans 90-or-more days delinquent includes loans in foreclosure.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~(3)May include loans that are less than 90 days delinquent.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

Note 8. Consolidated Agency Multifamily Loans

We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of ~~the~~our consolidated Agency multifamily loans ~~consolidated at Redwood~~ at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 8.1 – Characteristics of Consolidated Agency Multifamily Loans


(Dollars in Thousands)	(Dollars in Thousands)	September 30, 2021			December 31, 2020			(Dollars in Thousands)	September 30, 2022			December 31, 2021
Number of loans	Number of loans	28			28			Number of loans	28			28
Unpaid principal balance	Unpaid principal balance	$	457,123		$	462,808		Unpaid principal balance	$	449,232		$	455,168
Fair value of loans	Fair value of loans	$	482,791		$	492,221		Fair value of loans	$	427,458		$	473,514
Weighted average coupon	Weighted average coupon	4.25		%	4.25		%	Weighted average coupon	4.25		%	4.25		%
Weighted average remaining loan term (years)	Weighted average remaining loan term (years)	4			5			Weighted average remaining loan term (years)	3			4

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

Number of loans in foreclosure	Number of loans in foreclosure	—			—			Number of loans in foreclosure	—			—

The outstanding consolidated Agency multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at September 30, ~~2021~~2022 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of multifamily loans held-for-investment during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table 8.2 – Activity of Consolidated Agency Multifamily Loans Held-for-Investment


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	$	(487)	$	2,340	$	(3,745)	$	(61,500)	Net market valuation gains (losses) recorded (1)	$	(13,691)	$	(487)	$	(40,120)	$	(3,745)

(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 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 9. Real Estate Securities

We invest in real estate securities that we create and retain from our Sequoia securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Trading	Trading	$	153,010	$	125,667	Trading	$	116,933	$	170,619
Available-for-sale	Available-for-sale	200,276		218,458		Available-for-sale	142,279		206,792
Total Real Estate Securities	Total Real Estate Securities	$	353,286	$	344,125	Total Real Estate Securities	$	259,212	$	377,411

Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. 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. Subordinate securities are all interests below mezzanine. 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~~

~~September 30, 2021~~

~~(Unaudited)~~

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

Trading Securities

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"). The following table presents the fair value of trading securities by position and collateral type at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Senior	Senior					Senior
Interest-only securities (1)	Interest-only securities (1)	$	22,494	$	28,464	Interest-only securities (1)	$	28,860	$	21,787

Total Senior	Total Senior	22,494		28,464		Total Senior	28,860		21,787
Mezzanine
Sequoia securities		—		3,649

Total Mezzanine		—		3,649

Subordinate	Subordinate					Subordinate
RPL securities	RPL securities	64,845		47,448		RPL securities	31,963		65,140
Multifamily securities	Multifamily securities	11,298		5,592		Multifamily securities	8,021		10,549
Other third-party residential securities	Other third-party residential securities	54,373		40,514		Other third-party residential securities	48,089		73,143
Total Subordinate	Total Subordinate	130,516		93,554		Total Subordinate	88,073		148,832
Total Trading Securities	Total Trading Securities	$	153,010	$	125,667	Total Trading Securities	$	116,933	$	170,619

(1)Includes ~~$15~~$25 million and ~~$13~~$15 million of Sequoia certificated mortgage servicing rights at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The following table presents the unpaid principal balance of trading securities by position and collateral type at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Senior (1)	Senior (1)	$	—	$	—	Senior (1)	$	—	$	—
Mezzanine		—		3,577

Subordinate	Subordinate	216,771		242,278		Subordinate	220,888		235,306
Total Trading Securities	Total Trading Securities	$	216,771	$	245,855	Total Trading Securities	$	220,888	$	235,306

(1)Our senior trading securities include interest-only securities, for which there is no principal balance.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table provides the activity of trading securities during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table 9.4 – Trading Securities Activity


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Principal balance of securities acquired(1)	Principal balance of securities acquired(1)	$	10,750	$	11,000	$	28,380	$	77,721	Principal balance of securities acquired(1)	$	—	$	10,750	$	—	$	28,380
Principal balance of securities sold(1)	Principal balance of securities sold(1)	750		15,903		53,561		720,517		Principal balance of securities sold(1)	—		750		12,716		53,561
Net market valuation gains (losses) recorded ~~(1)~~(2)	Net market valuation gains (losses) recorded ~~(1)~~(2)	1,578		(3,600)		24,725		(224,679)		Net market valuation gains (losses) recorded ~~(1)~~(2)	(12,521)		1,578		(30,019)		24,725

(1)For the three and nine months ended September 30, 2021, excludes $1 million and $3 million of securities bought and sold during the same quarter, respectively.

(2)Net market valuation gains (losses) on trading securities are recorded through Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income (loss).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

AFS Securities

The following table presents the fair value of our available-for-sale ("AFS") securities by position and collateral type at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021

Mezzanine

Other third-party residential securities		$	—	$	2,014
Total Mezzanine		—		2,014

Subordinate	Subordinate					Subordinate
Sequoia securities	Sequoia securities	128,874		136,475		Sequoia securities	$	78,065	$	127,542
Multifamily securities	Multifamily securities	31,320		43,663		Multifamily securities	13,211		22,166
Other third-party residential securities	Other third-party residential securities	40,082		36,306		Other third-party residential securities	51,003		57,084
Total Subordinate	Total Subordinate	200,276		216,444		Total Subordinate	142,279		206,792
Total AFS Securities	Total AFS Securities	$	200,276	$	218,458	Total AFS Securities	$	142,279	$	206,792

The following table provides the activity of available-for-sale securities during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table 9.6 – Available-for-Sale Securities Activity


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Fair value of securities acquired	Fair value of securities acquired	$	—	$	25,483	$	1,600	$	56,664	Fair value of securities acquired	$	—	$	—	$	10,000	$	1,600
Fair value of securities sold	Fair value of securities sold	—		—		4,785		55,193		Fair value of securities sold	—		—		—		4,785

Principal balance of securities called										Principal balance of securities called	—		11,565		14,486		25,970
Net unrealized (losses) gains on AFS securities (1)										Net unrealized (losses) gains on AFS securities (1)	(8,731)		(2,658)		(60,013)		19,552

(1)Net unrealized (losses) gains on AFS securities are recorded on our consolidated balance sheets through Accumulated other comprehensive loss.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

At September 30, ~~2021,~~2022, we had ~~$28~~$10 million of AFS securities with contractual maturities less than five years, $4$1 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 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 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 9.7 – Carrying Value of AFS Securities


September 30, 2022
(In Thousands)	Total
Principal balance	$	227,715
Credit reserve	(30,247)
Unamortized discount, net	(61,015)
Amortized cost	136,453
Gross unrealized gains	19,017
Gross unrealized losses	(10,876)
CECL allowance	(2,315)
Carrying Value	$	142,279

September 30, 2021
(In Thousands) Mezzanine Subordinate Total
Principal balance $ — $ 238,459 $ 238,459
Credit reserve — (29,448) (29,448)
Unamortized discount, net — (88,108) (88,108)
Amortized cost — 120,903 120,903
Gross unrealized gains — 79,406 79,406
Gross unrealized losses — (33) (33)
CECL allowance — — —
Carrying Value $ — $ 200,276 $ 200,276

December 31, 2020
(In Thousands) Mezzanine Subordinate Total
Principal balance $ 2,000 $ 281,284 $ 283,284
Credit reserve — (44,967) (44,967)
Unamortized discount, net — (95,718) (95,718)
Amortized cost 2,000 140,599 142,599
Gross unrealized gains 14 77,280 77,294
Gross unrealized losses — (1,047) (1,047)
CECL allowance — (388) (388)
Carrying Value $ 2,014 $ 216,444 $ 218,458


December 31, 2021
(In Thousands)	Total
Principal balance	$	242,852
Credit reserve	(27,555)
Unamortized discount, net	(76,023)
Amortized cost	139,274
Gross unrealized gains	67,815
Gross unrealized losses	(297)
CECL allowance	—
Carrying Value	$	206,792

The following table presents the changes for the three and nine months ended September 30, ~~2021,~~2022, in unamortized discount and designated credit reserves on residential AFS securities.

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

Three Months Ended
September 30, 2021 Nine Months Ended
September 30, 2021
Credit
Reserve Unamortized
Discount, Net Credit
Reserve Unamortized
Discount, Net
(In Thousands)
Beginning balance $ 40,349 $ 90,216 $ 44,967 $ 95,718
Amortization of net discount — (6,437) — (9,620)
Realized credit losses (184) — (433) —
Acquisitions — — 2,825 1,208
Sales, calls, other (320) (6,068) (1,312) (15,797)
Transfers to (release of) credit reserves, net (10,397) 10,397 (16,599) 16,599
Ending Balance $ 29,448 $ 88,108 $ 29,448 $ 88,108


	Three Months Ended September 30, 2022				Nine Months Ended September 30, 2022
	Credit Reserve		Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net
(In Thousands)
Beginning balance	$	30,619	$	61,303	$	27,555	$	76,023
Amortization of net discount	—		(830)		—		(10,647)
Realized credit recoveries (losses), net	170		—		244		—
Acquisitions	—		—		—		—
Sales, calls, other	—		—		(343)		(1,570)

Transfers to (release of) credit reserves, net	(542)		542		2,791		(2,791)
Ending Balance	$	30,247	$	61,015	$	30,247	$	61,015

4543

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses

The following table presents the ~~components comprising the~~ total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table 9.9 – ~~Components of Fair Value of~~ AFS Securities in Gross Unrealized Loss Position by Holding Periods

Less Than 12 Consecutive Months 12 Consecutive Months or Longer
Amortized
Cost Unrealized
Losses Fair
Value Amortized
Cost Unrealized
Losses Fair
Value
(In Thousands)
September 30, 2021 $ — $ — $ — $ 1,600 $ (33) $ 1,567
December 31, 2020 9,129 (1,047) 7,920 — — —


	Less Than 12 Consecutive Months				12 Consecutive Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(In Thousands)
September 30, 2022	$	65,585	$	(10,685)		$	1,409	$	(191)
December 31, 2021	6,827		(251)			1,554		(46)

At September 30, ~~2021,~~2022, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 8481 AFS securities, of which 135 were in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, ~~2020,~~2021, our consolidated balance sheet included 9685 AFS securities, of which 5four were in an unrealized loss position and ~~zero were~~one was 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 ~~$33 thousand~~$11 million at September 30, ~~2021.~~2022. 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 30, ~~2021,~~ 2022, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected ~~cash~~cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

At September 30, ~~2021,~~2022, our current expected credit loss ("CECL") allowance related to our AFS securities was ~~zero.~~$2.3 million. 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~~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 30, ~~2021.~~2022.

Table 9.10 – Significant Credit Quality Indicators

September 30, ~~2021~~2022

Subordinate Securities

Default rate

~~N/A~~0.8%

Loss severity

~~N/A~~20%

4644

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table details the activity related to the allowance for credit losses for AFS securities for the three and nine months ended September 30, ~~2021.~~2022.

Table 9.11 – Rollforward of Allowance for Credit Losses

~~Three Months Ended September 30, 2021~~

~~Nine Months Ended September 30, 2021~~

~~(In Thousands)~~

~~Beginning balance allowance for credit losses~~

—

~~388~~

~~Additions to allowance for credit losses on securities for which credit losses were not previously recorded~~

—

~~Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period~~

—

~~(388)~~

~~Allowance on purchased financial assets with credit deterioration~~

—

~~Reduction to allowance for securities sold during the period~~

—

~~Reduction to allowance for securities we intend to sell or more likely than not will be required to sell~~

—

~~Write-offs charged against allowance~~

—

~~Recoveries of amounts previously written off~~

—

~~Ending balance of allowance for credit losses~~

—


	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
(In Thousands)
Beginning balance allowance for credit losses	$	1,771	$	—

Additions to allowance for credit losses on securities for which credit losses were not previously recorded	30		1,520
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	514		795
Allowance on purchased financial assets with credit deterioration	—		—
Reduction to allowance for securities sold during the period	—		—
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell	—		—
Write-offs charged against allowance	—		—
Recoveries of amounts previously written off	—		—
Ending balance of allowance for credit losses	$	2,315	$	2,315

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of ~~income (loss).~~income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Gross realized gains - sales	Gross realized gains - sales	$	—	$	—	$	1,507	$	8,779	Gross realized gains - sales	$	—	$	—	$	—	$	1,507
Gross realized gains - calls	Gross realized gains - calls	6,389		—		15,484		—		Gross realized gains - calls	—		6,389		1,914		15,484
Gross realized losses - sales	Gross realized losses - sales	—		—		—		(4,144)		Gross realized losses - sales	—		—		—		—

Total Realized Gains on Sales and Calls of AFS Securities, net	Total Realized Gains on Sales and Calls of AFS Securities, net	$	6,389	$	—	$	16,991	$	4,635	Total Realized Gains on Sales and Calls of AFS Securities, net	$	—	$	6,389	$	1,914	$	16,991

During the ~~three~~nine months ended September 30, ~~2021,~~2022, we called 2three of our unconsolidated Sequoia entities and purchased ~~$66~~$102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6$0.3 million gain on the securities we owned from these ~~securitizations, which was recognized through Realized~~securitizations. The remaining realized gains ~~net on our consolidated statements of income (loss). During~~were from third-party securities we owned that were called during the nine months ended September 30, 2021, we called 6 of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss).2022.

4745

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note 10. Home Equity Investments (HEI)

Home equity investments at September 30, 2022 and December 31, 2021 are summarized in the following table.

Table 10.1 – Home Equity Investments


(In Thousands)	September 30, 2022		December 31, 2021
HEIs at Redwood	$	200,709	$	33,187
HEIs held at consolidated HEI securitization entity	139,728		159,553
Total Home Equity Investments	$	340,437	$	192,740

We purchase home equity investment contracts from third party originators under flow purchase agreements. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property.

At September 30, 2022, we had flow purchase agreements with HEI originators with $149 million of cumulative purchase commitments outstanding. See Note 17 for additional information on these commitments.

As of September 30, 2022, we owned $201 million of HEIs at Redwood and consolidated $140 million of HEIs through the HEI securitization entity. We account for these investments under the fair value option and during the three and nine months ended September 30, 2022, we recorded net market valuation losses of $5 million and losses of $2 million, respectively, related to HEIs owned at Redwood through Investment fair value changes, net on our consolidated statements of income (loss).

We consolidate the HEI securitization in accordance with GAAP and have elected to account for it under the CFE election. During the three and nine months ended September 30, 2022, we recorded net market valuation losses of $1 million and gains of $4 million (including $1 million and $3 million of interest expense), respectively, related to our net investment in the HEI securitization entity through Investment fair value changes, net on our consolidated statements of income (loss).

Note ~~10.~~11. Other Investments

Other investments at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are summarized in the following table.

Table ~~10.1~~11.1 – Components of Other Investments


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Servicer advance investments	Servicer advance investments	$	170,062	$	231,489	Servicer advance investments	$	274,934	$	350,923
HEIs		167,856		42,440
Strategic investments	Strategic investments	31,108		4,449		Strategic investments	71,607		35,702
Excess MSRs	Excess MSRs	29,185		34,418		Excess MSRs	40,452		44,231
Mortgage servicing rights	Mortgage servicing rights	12,389		8,815		Mortgage servicing rights	24,796		12,438

Other	Other	11,766		26,564		Other	973		5,935
Total Other Investments	Total Other Investments	$	422,366	$	348,175	Total Other Investments	$	412,762	$	449,229

Servicer advance investments

We and a third-party co-investor, through 2two 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~~co-investor. Refer toNote 10 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 for additional information regarding the ~~transactions).~~transactions. At both September 30, 2022 and December 31, 2021, we had cumulatively funded ~~$94~~$148 million of total capital to the SA ~~Buyers (see~~Buyers. See Note 1617 for additional ~~detail).~~detail on these commitments.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 11. Other Investments - (continued)

At September 30, ~~2021,~~2022, our servicer advance investments had a carrying value of ~~$170~~$275 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of ~~$7.53~~$11.68 billion. The outstanding servicer advance receivables associated with this investment were ~~$159~~$245 million at September 30, ~~2021,~~2022, which were financed with short-term non-recourse securitization ~~debt (see~~debt. See Note 1314 for additional detail on this ~~debt).~~debt. The servicer advance receivables were comprised of the following types of advances at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table ~~10.2~~11.2 – Components of Servicer Advance Receivables


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Principal and interest advances	Principal and interest advances	$	77,116	$	110,923	Principal and interest advances	$	89,816	$	94,148
Escrow advances (taxes and insurance advances)	Escrow advances (taxes and insurance advances)	62,117		79,279		Escrow advances (taxes and insurance advances)	117,971		172,847
Corporate advances	Corporate advances	20,175		27,454		Corporate advances	37,394		43,958
Total Servicer Advance Receivables	Total Servicer Advance Receivables	$	159,408	$	217,656	Total Servicer Advance Receivables	$	245,181	$	310,953

We account for our servicer advance investments at fair value and during the three and nine months ended September 30, ~~2021,~~2022, we recorded $2$5 million and $7 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2 million and $3 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded $3 million and $8$15 million of interest income, respectively, through Other interest income, and recorded a net market valuation ~~gain~~loss of ~~less than $0.1~~$4 million and ~~a net market valuation~~ loss of $6$10 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).

Strategic Investments

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

~~Note 10. Other Investments - (continued)~~

~~HEIs~~

~~In 2019,~~Strategic investments represent investments we ~~entered into~~made in companies either through our RWT Horizons venture investment platform or separately at a ~~flow purchase agreement to acquire home equity investment contracts from Point Digital.~~corporate level. At September 30, ~~2021,~~2022, we had ~~acquired $47~~made a total of 27 investments in companies through RWT Horizons with a total carrying value of $24 million, ~~of HEIs under this flow purchase agreement. We account for these investments under the fair value option and during~~as well as six corporate-level investments. During the three and nine months ended September 30, ~~2021,~~2022, we ~~recorded~~recognized a net ~~market~~mark-to-market valuation ~~gains~~gain of $6$1 million and ~~$13~~$11 million, respectively, ~~related to these assets through~~on our strategic investments, which was recorded in Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, ~~2020,~~2022, we recorded ~~a net market valuation gain~~losses of $2$0.3 million and ~~a net market valuation loss of $4~~$0.4 million, respectively, ~~related to these assets through Investment fair value changes,~~in Other income, net ~~on our consolidated statements of income (loss).~~

~~During the three months ended September 30, 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased~~ ~~$122 million~~ ~~of additional HEIs~~ from ~~other contributors to the securitization, then transferred $170 million of HEIs to the Point HEI securitization entity and issued~~ ~~$146 million~~ ~~of ABS (See~~ ~~Note 4~~ ~~for further discussion on the Point securitization entity and~~ ~~Note 14~~ ~~for further discussion on ABS issued). We retained subordinate certificates from the entity valued at $10 million as of~~ ~~September 30, 2021, representing our economic interest in the entity. The other contributors to the securitization own subordinate certificates in the entity that were valued at $17 million at~~ ~~September 30, 2021~~ ~~and are carried on our balance sheet as non-controlling interests within the Accrued expenses and other liabilities line item of our consolidated balance sheets.~~

~~We consolidate the Point HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. During the three months ended~~ ~~September 30, 2021, we recorded net market valuation gains of less than~~ ~~$0.1 million related to our net investment in the Point HEI entity through Investment fair value changes, net on our consolidated statements of income (loss).~~

~~During three months ended~~ ~~September 30, 2021, we amended our flow purchase agreement with Point Digital and committed to purchase additional HEIs. See~~ ~~Note 16~~ ~~for additional detail on this commitment.~~

~~Strategic Investments~~

Strategic investments represent investments we have made in companies through our RWT Horizons venture investment strategy or at a corporate level. At September 30, 2021, we had made 11 investments in companies through RWT Horizons and two corporate investments, including our investment in Churchill Finance. See ~~Note 3~~ ~~for additional detail on how we account for~~ our strategic investments.

Excess MSRs

In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and nine months ended September 30, ~~2021,~~2022, we recognized $3$4 million and $9$12 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1$0.4 million and $5 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, 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$4 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss).

Mortgage Servicing Rights

We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The 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 the three and nine months ended September 30, ~~2021,~~2022, we retained zero and $5 million, ~~and $9 million~~respectively, of MSRs ~~respectively,~~ from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At September 30, 2022 and December 31, 2021, our MSRs had a fair value of $25 million and $12 million, respectively, and were associated with loans with an aggregate principal balance of $2.22 billion and $2.12 billion, respectively. During the three and nine months ended September 30, 2022, including net market valuation gains and losses on our MSRs, we recorded net income of $3 million and $13 million, respectively, through Other income on our consolidated statements of income (loss) related to our MSRs.

4947

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

~~Note 10. Other Investments - (continued)~~

At September 30, 2021 and December 31, 2020, our MSRs had a fair value of $12 million and $9 million, respectively, and were associated with loans with an aggregate principal balance of $2.29 billion and $2.59 billion, respectively. During the three and nine months ended September 30, 2021, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded net income of $0.3 million and $1 million, respectively, through Other income on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded net losses of $2 million and $6 million, respectively, through Other income on our consolidated statements of income (loss).

Note ~~11.~~12. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table ~~11.1~~12.1 – Fair Value and Notional Amount of Derivative Financial Instruments


		September 30, 2021					December 31, 2020					September 30, 2022				December 31, 2021
		Fair Value		Notional Amount			Fair Value		Notional Amount			Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)	(In Thousands)					(In Thousands)

Assets - Risk Management Derivatives	Assets - Risk Management Derivatives														Assets - Risk Management Derivatives
Interest rate swaps	Interest rate swaps	$	3,213	$	293,200		$	224	$	42,000	Interest rate swaps	$	24,626	$	459,000	$	611	$	161,500
TBAs	TBAs	8,213		2,205,000			18,260		3,520,000		TBAs	13,568		565,000		2,880		2,440,000

Interest rate futures											Interest rate futures	26,275		681,500		25		9,000
Swaptions	Swaptions	30,415		1,335,000			19,727		1,585,000		Swaptions	—		—		18,318		1,660,000

Assets - Other Derivatives	Assets - Other Derivatives										Assets - Other Derivatives
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	9,262		1,687,314			15,027		2,617,254		Loan purchase and interest rate lock commitments	744		87,157		4,633		971,631

Total Assets	Total Assets	$	51,103	$	5,520,514		$	53,238	$	7,764,254	Total Assets	$	65,213	$	1,792,657	$	26,467	$	5,242,131

Liabilities - Risk Management Derivatives	Liabilities - Risk Management Derivatives										Liabilities - Risk Management Derivatives
Interest rate swaps	Interest rate swaps	$	(74)	$	40,500		$	—	$	—	Interest rate swaps	$	(23)	$	10,000	$	(1,251)	$	283,100
TBAs	TBAs	(7,599)		2,190,000			(15,495)		3,105,000		TBAs	(6,545)		255,000		(658)		870,000
Interest rate futures	Interest rate futures	(749)		133,200			—		—		Interest rate futures	(2)		300		(905)		62,500
Liabilities - Other Derivatives	Liabilities - Other Derivatives										Liabilities - Other Derivatives
Loan purchase commitments		(2,550)		1,084,579			(577)		477,153
Loan purchase and interest rate lock commitments											Loan purchase and interest rate lock commitments	(212)		58,544		(503)		404,190

Total Liabilities	Total Liabilities	$	(10,972)	$	3,448,279		$	(16,072)	$	3,582,153	Total Liabilities	$	(6,782)	$	323,844	$	(3,317)	$	1,619,790
Total Derivative Financial Instruments, Net	Total Derivative Financial Instruments, Net	$	40,131	$	8,968,793		$	37,166	$	11,346,407	Total Derivative Financial Instruments, Net	$	58,431	$	2,116,501	$	23,150	$	6,861,921

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At September 30, 2022, we were party to swaps and swaptions with an aggregate notional amount of $469 million, TBA agreements with an aggregate notional amount of $820 million, and interest rate futures contracts with an aggregate notional amount of $682 million. At December 31, 2021, we were party to swaps and swaptions with an aggregate notional amount of ~~$1.67~~$2.10 billion, ~~TBA agreements~~futures with an aggregate notional amount of $4.40 billion, and interest rate futures contracts with an aggregate notional amount of $133 million. At December 31, 2020, we were party to swaps and swaptions with an aggregate notional amount of $1.63 billion$72 million and TBA agreements with an aggregate notional amount of ~~$6.63~~$3.31 billion.

~~During~~For the three and nine months ended September 30, 2022, risk management derivatives had net market valuation gains of $76 million and gains of $198 million, respectively. For the three and nine months ended September 30, 2021, risk management derivatives had net market valuation gains of $4 million and gains of $38 million, respectively. ~~During the three and nine months ended September 30, 2020, risk management derivatives had net market valuation losses of 0 and $98 million, respectively. These market~~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).

5048

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~11.~~12. Derivative Financial Instruments - (continued)

Loan Purchase and Interest Rate Lock Commitments

~~LPCs~~Loan purchase commitments ("LPCs") and ~~IRLCs~~interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. For the three and nine months ended September 30, 2022, LPCs and IRLCs had net market valuation losses of $3 million and losses of $54 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For both the three and nine months ended September 30, 2021, LPCs and IRLCs had net market valuation gains of $18 million, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2020, LPCs and IRLCs had net market valuation gains of $13 million and $35 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 a portion of our long-term debt that 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 ~~$77~~$73 million and ~~$81~~$76 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of September 30, ~~2021,~~2022, 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 months ended September 30, 2021, we did not have any derivatives designated as cash flow hedges. For the three and nine months ended September 30, 2020, changes in the values of designated cash flow hedges were zero and negative $33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~11.2~~12.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
Net interest expense on cash flows hedges	Net interest expense on cash flows hedges	$	—	$	—	$	—	$	(860)	Net interest expense on cash flows hedges	$	—	$	—	$	—	$	—

Realized net losses reclassified from other comprehensive income	Realized net losses reclassified from other comprehensive income	(1,041)		(1,040)		(3,086)		(2,148)		Realized net losses reclassified from other comprehensive income	(1,040)		(1,041)		(3,086)		(3,086)
Total Interest Expense	Total Interest Expense	$	(1,041)	$	(1,040)	$	(3,086)	$	(3,008)	Total Interest Expense	$	(1,040)	$	(1,041)	$	(3,086)	$	(3,086)

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, ~~2021,~~2022, we assessed this risk as remote and did not record an associated specific valuation adjustment.

At September 30, ~~2021,~~2022, we were in compliance with our derivative counterparty ISDA agreements.

5149

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~12.~~13. Other Assets and Liabilities

Other assets at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are summarized in the following table.

Table ~~12.1~~13.1 – Components of Other Assets


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Accrued interest receivable	Accrued interest receivable	$	41,997	$	39,445	Accrued interest receivable	$	54,944	$	47,515
Investment receivable	Investment receivable	32,420		43,176		Investment receivable	50,149		82,781
Deferred tax asset	Deferred tax asset	20,153		871		Deferred tax asset	20,867		20,867
Operating lease right-of-use assets						Operating lease right-of-use assets	17,126		18,772
Income tax receivables						Income tax receivables	13,959		22
Fixed assets and leasehold improvements (1)						Fixed assets and leasehold improvements (1)	12,411		9,019
Margin receivable						Margin receivable	6,683		7,269
REO	REO	18,863		8,413		REO	3,683		36,126
Margin receivable		16,503		4,758
Operating lease right-of-use assets		13,659		15,012
Fixed assets and leasehold improvements (1)		9,344		4,203

Pledged collateral		—		1,177

Other	Other	9,254		13,533		Other	14,678		8,746
Total Other Assets	Total Other Assets	$	162,193	$	130,588	Total Other Assets	$	194,500	$	231,117

(1)Fixed assets and leasehold improvements had a basis of ~~$17~~$22 million and accumulated depreciation of $7$9 million at September 30, ~~2021.~~2022.

Accrued expenses and other liabilities at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are summarized in the following table.

Table ~~12.2~~13.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Payable to non-controlling interests						Payable to non-controlling interests	$	47,487	$	42,670
Accrued interest payable						Accrued interest payable	46,938		39,297
Margin payable						Margin payable	30,389		24,368
Accrued compensation	Accrued compensation	$	64,354	$	24,393	Accrued compensation	23,488		74,636
Margin payable		48,298		14,728
Accrued interest payable		34,545		34,858
Payable to non-controlling interests (1)		31,781		16,941
Operating lease liabilities	Operating lease liabilities	15,771		16,687		Operating lease liabilities	19,533		20,960
Guarantee obligations						Guarantee obligations	6,532		7,459
Residential loan and MSR repurchase reserve						Residential loan and MSR repurchase reserve	5,754		9,306
Accrued operating expenses						Accrued operating expenses	4,956		4,377
Current accounts payable						Current accounts payable	4,722		8,273

Accrued income taxes payable		11,336		5,614
Residential loan and MSR repurchase reserve		9,003		8,631
Guarantee obligations		7,902		10,039

Accrued operating expenses		4,068		5,509
Bridge loan holdbacks	Bridge loan holdbacks	3,784		5,708		Bridge loan holdbacks	3,930		3,109

Deferred consideration		—		14,579

Other	Other	20,734		21,653		Other	7,396		11,333
Total Accrued Expenses and Other Liabilities	Total Accrued Expenses and Other Liabilities	$	251,576	$	179,340	Total Accrued Expenses and Other Liabilities	$	201,125	$	245,788

~~(1)~~Refer to ~~Includes $11 million and $17 million of payables~~Note 12 to ~~non-controlling interest holders~~the Consolidated Financial Statements included in our ~~consolidated Servicing Investment~~Annual Report on Form 10-K for the year ended December 31, 2021 for additional descriptions of our other assets and ~~Point HEI entities, respectively, as~~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, ~~2021. Includes $17 million payable to a non-controlling interest holder in our consolidated Servicing Investment entities at December 31, 2020.~~

~~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,~~2022, 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.~~had met all margin calls due.

5250

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~12.~~13. Other Assets and Liabilities - (continued)

REO

The following table summarizes the activity and carrying values of REO assets held at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities during the nine months ended September 30, ~~2021.~~2022.

Table ~~12.3~~13.3 – REO Activity


		Nine Months Ended September 30, 2021											Nine Months Ended September 30, 2022
(In Thousands)	(In Thousands)	Bridge(1)		Legacy Sequoia		Freddie Mac SLST		CAFL SFR		Total		(In Thousands)	Bridge		Legacy Sequoia		Freddie Mac SLST		SFR at CAFL		Total
Balance at beginning of period	Balance at beginning of period	$	4,600	$	638	$	646	$	2,529	$	8,413	Balance at beginning of period	$	13,067	$	61	$	2,028	$	20,970	$	36,126
Transfers to REO	Transfers to REO	7,074		65		2,591		11,924		21,654		Transfers to REO	963		407		2,664		—		4,034
Liquidations ~~(2)~~(1)	Liquidations ~~(2)~~(1)	(7,387)		(607)		(1,555)		(1,990)		(11,539)		Liquidations ~~(2)~~(1)	(14,271)		(505)		(2,395)		(20,970)		(38,141)
Changes in fair value, net	Changes in fair value, net	536		178		276		(655)		335		Changes in fair value, net	974		443		247		—		1,664
Balance at End of Period	Balance at End of Period	$	4,823	$	274	$	1,958	$	11,808	$	18,863	Balance at End of Period	$	733	$	406	$	2,544	$	—	$	3,683

(1)~~Includes activity of bridge loans at Redwood and at consolidated CAFL bridge entity.~~

~~(2)~~For the nine months ended September 30, ~~2021,~~2022, REO liquidations resulted in ~~$0.3~~$2 million of realized ~~losses,~~gains, which were recorded in Investment fair value changes, net on our consolidated statements of income (loss).

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

~~Table 12.4 – REO Assets~~

Number of REO assets Bridge Legacy Sequoia Freddie Mac SLST CAFL SFR Total
At September 30, 2021 5 2 20 2 29
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 other assets and liabilities.~~

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

Note ~~13.~~14. Short-Term Debt

We enter into repurchase agreements ("repo"), loan warehouse agreements, and other forms of collateralized (and ~~generally~~partially uncommitted) short-term borrowings with several banks and major investment banking firms. At September 30, ~~2021,~~2022, 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 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table ~~13.1~~14.1 – Short-Term Debt

September 30, 2021
(Dollars in Thousands) Number of Facilities Outstanding Balance Limit
Weighted Average Interest Rate (1)
Maturity Weighted Average Days Until Maturity
Facilities
Residential loan warehouse 7 $ 1,335,464 $ 2,700,000 1.89 % 11/2021-8/2022 156
Business purpose loan warehouse 2 183,800 350,000 3.39 % 3/2022-7/2022 201
Real estate securities repo
3 79,766 — 1.23 % 10/2021-12/2021 34
Total Short-Term Debt Facilities 12 1,599,030
Servicer advance financing 1 151,911 260,000 1.89 % 11/2021 61
Total Short-Term Debt $ 1,750,941

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 — 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.~~


	September 30, 2022
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity (2)	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	9	$	748,962	$	2,850,000	4.83	%	12/2022 - 9/2023	150

Business purpose loan warehouse	4	775,491		1,750,000		5.67	%	3/2023 - 9/2023	289
Real estate securities repo	7	124,435		—		3.50	%	10/2022 - 12/2022	32

Total Short-Term Debt Facilities	20	1,648,888
Servicer advance financing	1	233,104		290,000		4.94	%	11/2023	397
Promissory notes	N/A	30,702		N/A		6.58	%	N/A	N/A
Convertible notes, net	N/A	197,585		N/A		4.75	%	8/2023	319
Total Short-Term Debt		$	2,110,279

5451

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~13.~~14. Short-Term Debt - (continued)


	December 31, 2021
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	7	$	1,669,344	$	2,900,000	1.87	%	1/2022-12/2022	153

Business purpose loan warehouse	2	138,746		350,000		3.34	%	3/2022-7/2022	105
Real estate securities repo	4	74,825		—		1.13	%	1/2022-3/2022	33
Total Short-Term Debt Facilities	13	1,882,915
Servicer advance financing	1	294,447		350,000		1.90	%	11/2022	306
Convertible notes, net	N/A	—
Total Short-Term Debt		$	2,177,362

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

(2)Promissory notes payable on demand to lender with 90-day notice. Assumed maturity date at September 30, 2022 is December 30, 2022 for this presentation.

The following table below presents the value of loans, securities, and other assets pledged as collateral under our short-term debt at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table ~~13.2~~14.2 – Collateral for Short-Term Debt


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Collateral Type	Collateral Type					Collateral Type
Held-for-sale residential loans	Held-for-sale residential loans	$	1,478,424	$	156,355	Held-for-sale residential loans	$	828,192	$	1,838,797
Business purpose loans	Business purpose loans	254,655		127,029		Business purpose loans	982,745		167,687
Real estate securities	Real estate securities					Real estate securities
On balance sheet	On balance sheet	14,367		23,193		On balance sheet	60,457		5,823
Sequoia securitizations (1)	Sequoia securitizations (1)	62,075		63,105		Sequoia securitizations (1)	77,470		61,525

Freddie Mac K-Series securitization (1)	Freddie Mac K-Series securitization (1)	31,388		28,255		Freddie Mac K-Series securitization (1)	32,047		31,657

Total real estate securities owned	Total real estate securities owned	107,830		114,553		Total real estate securities owned	169,974		99,005
Restricted cash and other assets	Restricted cash and other assets	1,709		315		Restricted cash and other assets	4,116		1,962
Total Collateral for Short-Term Debt Facilities	Total Collateral for Short-Term Debt Facilities	1,842,618		398,252		Total Collateral for Short-Term Debt Facilities	1,985,027		2,107,451
Cash	Cash	12,975		9,978		Cash	15,891		6,480
Restricted cash	Restricted cash	19,872		23,220		Restricted cash	18,569		25,420
Servicer advances	Servicer advances	159,408		217,656		Servicer advances	274,934		310,953
Total Collateral for Servicer Advance Financing	Total Collateral for Servicer Advance Financing	192,255		250,854		Total Collateral for Servicer Advance Financing	309,394		342,853
Total Collateral for Short-Term Debt	Total Collateral for Short-Term Debt	$	2,034,873	$	649,106	Total Collateral for Short-Term Debt	$	2,294,421	$	2,450,304

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

For the three and nine months ended September 30, ~~2021,~~2022, the average ~~balances~~balance of our short-term debt facilities ~~were $1.98~~was $1.64 billion and ~~$1.61~~$1.65 billion, respectively. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, accrued interest payable on our short-term debt facilities was $5 million and $2 million, ~~and $1 million,~~ respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 14. Short-Term Debt - (continued)

Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. At September 30, ~~2021,~~2022, the accrued interest payable balance on this financing was ~~$0.1~~$0.3 million and the unamortized capitalized commitment costs were $0.1 million.

In connection with our acquisition of Riverbend, we assumed $43 million of promissory notes which are payable on demand with a 90-day notice from the lender or which may be repaid by us with a 90-day notice. These unsecured, non-marginable, recourse notes were issued in three separate series with fixed interest rates between 6% and 8%. During the three months ended September 30, 2022, we repaid $12 million of principal of these notes.

We also maintain a $10 million committed line of credit with a financial institution that is secured by certain mortgage-backed securities with a fair market value of $2$1 million at September 30, ~~2021.~~2022. At both September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had no outstanding borrowings on this facility.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

During the three and nine months ended September 30, ~~2021~~2022, business purpose loan warehouse facilities with a borrowing limits of $450 million and $900 million, respectively, were reclassified to short-term debt from long-term debt as the maturity of these facilities became less than one year.

~~(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 at September 30, ~~2021.~~2022.

Table ~~13.3~~14.3 – Short-Term Debt by Collateral Type and Remaining Maturities


		September 30, 2021									September 30, 2022
(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	$	—	$	278,663	$	1,056,801	$	1,335,464	Held-for-sale residential loans	$	—	$	262,804	$	486,158	$	748,962
Business purpose loans	Business purpose loans	—		—		183,800		183,800		Business purpose loans	—		—		775,491		775,491
Real estate securities	Real estate securities	43,800		35,966		—		79,766		Real estate securities	72,233		52,202		—		124,435
Total Secured Short-Term Debt	Total Secured Short-Term Debt	43,800		314,629		1,240,601		1,599,030		Total Secured Short-Term Debt	72,233		315,006		1,261,649		1,648,888
Servicer advance financing	Servicer advance financing	—		151,911		—		151,911		Servicer advance financing	—		—		233,104		233,104

Promissory notes										Promissory notes	—		30,702		—		30,702
Convertible notes, net										Convertible notes, net	—		—		197,585		197,585
Total Short-Term Debt	Total Short-Term Debt	$	43,800	$	466,540	$	1,240,601	$	1,750,941	Total Short-Term Debt	$	72,233	$	345,708	$	1,692,338	$	2,110,279

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note ~~14.~~15. Asset-Backed Securities Issued

ABS issued represents securities issued by non-recourse securitization entities we consolidate under GAAP. The majority of our ABS issued is carried at fair value under the CFE election (see Note 4 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by our consolidated securitization entities at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, along with other selected information, are summarized in the following table.

Table ~~14.1~~15.1 – Asset-Backed Securities Issued


September 30, 2021		Legacy Sequoia			Sequoia			CAFL (1)			Freddie Mac SLST (2)			Freddie Mac K-Series				Point HEI					Total
September 30, 2022													September 30, 2022				Legacy Sequoia									Sequoia					CAFL (1)					Freddie Mac SLST (2)			Freddie Mac K-Series				HEI					Total
(Dollars in Thousands)	(Dollars in Thousands)			Legacy Sequoia						Sequoia			CAFL (1)					Freddie Mac SLST (2)					Freddie Mac K-Series											Point HEI							Total				(Dollars in Thousands)
Certificates with principal balance	Certificates with principal balance										Certificates with principal balance			$	213,786						$	3,650,411						$	3,375,688							$	1,344,521		$	412,764					$	112,380					$	9,109,550
Interest-only certificates	Interest-only certificates	739					21,003				189,946					19,787				10,885					—					242,360			Interest-only certificates				170			62,311				134,348					13,930			8,075			—	218,834
Market valuation adjustments	Market valuation adjustments	(35,249)			22,808			68,684			60,625			19,863						117					136,848		Market valuation adjustments					(16,602)					(699,473)			(330,549)				(109,410)					(25,428)			(7,629)			(1,189,091)

ABS Issued, Net	ABS Issued, Net	$	239,447		$	2,243,299		$	3,393,576		$	1,710,664		$	451,402			$	145,437				$	8,183,825		ABS Issued, Net				$	197,354				$	3,013,249		$	3,179,487			$	1,249,041				$	395,411		$	104,751		$	8,139,293
Range of weighted average interest rates, by series(3)	Range of weighted average interest rates, by series(3)	0.49% to 1.45%			2.34% to 5.07%			2.34% to 5.21%			3.50% to 4.75%			3.41		%		3.27		%						Range of weighted average interest rates, by series(3)				2.52% to 3.90%					2.56% to 4.99%			2.34% to 5.93%				3.50% to 4.75%					3.41		%	3.76		%
Stated maturities(3)	Stated maturities(3)	2024 - 2036			2047 - 2051			2021 - 2031			2028 - 2059			2025				2052								Stated maturities(3)				2024 - 2036					2047-2052			2027-2032				2028-2059					2025			2052
Number of series	Number of series	20			13			16			3			1				1								Number of series				20					17			19				3					1			1

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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


December 31, 2020		Legacy Sequoia			Sequoia			CAFL			Freddie Mac SLST (2)			Freddie Mac K-Series				Point HEI					Total
December 31, 2021													December 31, 2021				Legacy Sequoia									Sequoia					CAFL(1)					Freddie Mac SLST (2)			Freddie Mac K-Series				HEI					Total
(Dollars in Thousands)	(Dollars in Thousands)			Legacy Sequoia						Sequoia			CAFL					Freddie Mac SLST (2)					Freddie Mac K-Series											Point HEI							Total				(Dollars in Thousands)
Certificates with principal balance	Certificates with principal balance										Certificates with principal balance			$	259,505						$	3,353,073						$	3,264,766							$	1,535,638		$	418,700					$	138,792					$	8,970,474
Interest-only certificates	Interest-only certificates	1,092					4,591				162,934					23,335				13,026					—					204,978			Interest-only certificates				619			32,749				193,725					11,714			10,184			—	248,991
Market valuation adjustments	Market valuation adjustments	(47,805)			32,809			133,734			104,439			34,601						—					257,778		Market valuation adjustments					(32,243)					(2,774)			16,407				41,111					12,973			(1,382)			34,092

ABS Issued, Net	ABS Issued, Net	$	282,326		$	1,347,357		$	3,013,093		$	1,993,919		$	463,966			$	—				$	7,100,661		ABS Issued, Net				$	227,881				$	3,383,048		$	3,474,898			$	1,588,463				$	441,857		$	137,410		$	9,253,557
Range of weighted average interest rates, by series(3)	Range of weighted average interest rates, by series(3)	0.35% to 1.55%			2.25% to 5.04%			2.68% to 5.42%			3.50% to 4.75%			3.39		%		—		%						Range of weighted average interest rates, by series(3)				0.23% to 1.44%					2.40% to 5.03%			2.64% to 5.24%				3.50% to 4.75%					3.41		%	3.31		%
Stated maturities(3)	Stated maturities(3)	2024 - 2036			2047 - 2050			2021 - 2031			2028 - 2059			2025				—								Stated maturities(3)				2024 - 2036					2047-2052			2027-2031				2028-2059					2025			2052
Number of series	Number of series	20			10			14			3			1				—								Number of series				20					16			16				3					1			1

(1)Includes $485 million and $270 million (principal balance) of ABS issued by atwo CAFL bridge securitization ~~trust~~trusts sponsored by Redwood and accounted for at amortized cost at September 30, ~~2021.~~2022 and December 31, 2021, respectively.

(2)Includes ~~$163~~$100 million and ~~$205~~$145 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

(3)Certain ABS issued by CAFL, Freddie Mac SLST, and ~~Point~~ HEI securitization entities isare subject to early redemption and interest rate step-ups as described below.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 15. Asset-Backed Securities Issued - (continued)

During the second quarter of 2022, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest bridge loans (presented within CAFL in Table 15.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $215 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2022, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $7 million in total, for a net carrying value of $208 million. The weighted average stated coupon of the ABS issued was 4.32% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in May 2024, and beginning in June 2025, the interest rate on the ABS issued increases by 2% through final maturity in May 2029. The ABS issued by this securitization were collateralized by $229 million of bridge loans and $19 million of restricted cash and other assets at September 30, 2022. The securitization is structured with $250 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 24 months of the transaction (through May 2024), unless an amortization event occurs prior to the expiration of the 24-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest bridge loans (presented within CAFL in table ~~14.1~~15.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, ~~2021,~~2022, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $3$2 million, for a net carrying value of ~~$267~~$268 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were ~~backed~~collateralized by ~~assets including $276~~$283 million of bridge loans and ~~$28~~$24 million of restricted cash and other assets at September 30, ~~2021.~~2022. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024)., unless an amortization event occurs prior to the expiration of the 30-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of the ~~Point~~ HEI securitization entity formed in connection with the securitization of HEIs, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of ~~income (loss).~~income. The ABS issued by the ~~Point~~ HEI securitization entity are subject to an optional redemption in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.

During the third quarter of 2020, we transferred all of the subordinate securities we owned from two consolidated re-performing loan securitization VIEs sponsored by Freddie Mac SLST to a re-securitization trust, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, ~~2021,~~2022, the principal balance of the ABS issued was ~~$163~~$100 million, and the debt discount and deferred issuance costs ~~were $3~~totaled $1 million, for a net carrying value of ~~$161~~$99 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued isare subject to an optional redemption in July 2022 and in July 2023 the ABS interest rate steps up to 7.75%.

5755

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~14.~~15. Asset-Backed Securities Issued - (continued)

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~~the stated maturity. At September 30, ~~2021,~~2022, 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 30, ~~2021~~2022 and December 31, ~~2020.~~2021. Interest due on consolidated ABS issued is payable monthly.

Table ~~14.2~~15.2 – Accrued Interest Payable on Asset-Backed Securities Issued


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Legacy Sequoia	Legacy Sequoia	$	107	$	141	Legacy Sequoia	$	223	$	99
Sequoia	Sequoia	5,918		4,697		Sequoia	9,003		8,452
CAFL	CAFL	10,760		10,122		CAFL	11,202		11,030
Freddie Mac SLST (1)	Freddie Mac SLST (1)	4,925		5,656		Freddie Mac SLST (1)	4,026		4,630
Freddie Mac K-Series	Freddie Mac K-Series	1,195		1,177		Freddie Mac K-Series	1,173		1,190
Total Accrued Interest Payable on ABS Issued	Total Accrued Interest Payable on ABS Issued	$	22,905	$	21,793	Total Accrued Interest Payable on ABS Issued	$	25,627	$	25,401

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

5856

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~15.~~16. Long-Term Debt

The ~~table~~tables below ~~summarizes~~summarize our long-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at September 30, 2022 and December 31, 2021.

Table ~~15.1~~16.1 – Long-Term Debt


		September 30, 2021											September 30, 2022
(Dollars in Thousands)	(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit	Weighted Average Interest Rate (1)		Final Maturity	(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit		Weighted Average Interest Rate (1)		Final Maturity
Facilities	Facilities											Facilities
Recourse Subordinate Securities Financing	Recourse Subordinate Securities Financing											Recourse Subordinate Securities Financing
Sequoia		$	147,182	$	(417)	$	146,765	N/A	4.21	%	9/2024
Facility A												Facility A	$	131,316	$	—	$	131,316	N/A		4.21	%	9/2024
CAFL	CAFL											CAFL
Facility A		102,370		(429)		101,941		N/A	4.21	%	2/2025
Facility B	Facility B	95,011		(439)		94,572		N/A	4.75	%	6/2026	Facility B	102,006		(126)		101,880		N/A		4.21	%	2/2025
Facility C												Facility C	71,792		(189)		71,603		N/A		4.75	%	6/2026
Non-Recourse BPL Financing	Non-Recourse BPL Financing											Non-Recourse BPL Financing
Facility C		105,961		(320)		105,641		250,000	L + 3.00%		N/A
Facility D												Facility D	565,028		(976)		564,052		$	750,000	L + 2.51%		N/A
Recourse BPL Financing	Recourse BPL Financing											Recourse BPL Financing
Facility D		168,228		—		168,228		450,000	L + 3.10%		6/2023
Facility E		230,883		(141)		230,742		250,000	L + 3.00%		9/2023
Facility G												Facility G	—		—		—		500,000		SOFR + 2.25% - 2.50%		9/2024

Total Long-Term Debt Facilities	Total Long-Term Debt Facilities	849,635		(1,746)		847,889						Total Long-Term Debt Facilities	870,142		(1,291)		868,851
Convertible notes	Convertible notes											Convertible notes
4.75% convertible senior notes		198,629		(2,098)		196,531		N/A	4.75	%	8/2023

5.625% convertible senior notes	5.625% convertible senior notes	150,200		(2,262)		147,938		N/A	5.625	%	7/2024	5.625% convertible senior notes	150,200		(1,484)		148,716		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	5.75% exchangeable senior notes	172,092		(3,582)		168,510		N/A	5.75	%	10/2025	5.75% exchangeable senior notes	172,092		(2,769)		169,323		N/A		5.75	%	10/2025
7.75% convertible senior notes												7.75% convertible senior notes	215,000		(6,419)		208,581		N/A		7.75	%	6/2027
Trust preferred securities and subordinated notes	Trust preferred securities and subordinated notes	139,500		(791)		138,709		N/A	L + 2.25%		7/2037	Trust preferred securities and subordinated notes	139,500		(745)		138,755		N/A		L + 2.25%		7/2037
Total Long-Term Debt	Total Long-Term Debt	$	1,510,056	$	(10,479)	$	1,499,577					Total Long-Term Debt	$	1,546,934	$	(12,708)	$	1,534,226

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 16. Long-Term Debt - (continued)


	December 31, 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
Facility A	$	144,385	$	(313)	$	144,072	N/A		4.21	%	9/2024
CAFL
Facility B	102,351		(353)		101,998		N/A		4.21	%	2/2025
Facility C	91,707		(376)		91,331		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility D	307,215		(507)		306,708		$	400,000	L + 2.75%		N/A
Recourse BPL Financing
Facility E	234,349		(123)		234,226		450,000		L + 2.21%		9/2023
Facility F	110,148		—		110,148		450,000		L + 3.35%		6/2023
Total Long-Term Debt Facilities	990,155		(1,672)		988,483
Convertible notes
4.75% convertible senior notes	198,629		(1,836)		196,793		N/A		4.75	%	8/2023
5.625% convertible senior notes	150,200		(2,072)		148,128		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	172,092		(3,384)		168,708		N/A		5.75	%	10/2025
Trust preferred securities and subordinated notes	139,500		(779)		138,721		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,650,576	$	(9,743)	$	1,640,833

(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table above) or 1-month SOFR plus an applicable spread.

Refer to Note 15 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for a full description of our long-term debt.

Non-Recourse BPL Financing Facility

During the three months ended March 31, 2022, we amended facility D (see Table 16.1 above) to increase the borrowing limit from $400 million to $600 million. During the three months ended September 30, 2022, we amended facility D to increase the borrowing limit from $600 million to $750 million.

Recourse ~~Subordinate Securities~~BPL Financing Facilities

InDuring the ~~third quarter of 2021,~~three months ended September 30, 2022, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable ~~recourse debt~~ financing of certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024. The financing facility may be terminated, at our option,for business purpose bridge loan and single-family rental loans (Facility G in June 2023, and has a final maturity in June 2026, provided that the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026. See "Facility B" above for details onTable 16.1 above). At September 30, 2022, there were no borrowings ~~and securities pledged as collateral~~ under this ~~facility at~~facility. During the three months ended September 30, ~~2021.~~

~~Non-Recourse BPL Financing Facilities~~

~~In the third quarter of 2021, we~~2022, Facility E was reclassified ~~one of our non-recourse facilities from long-term~~ to short-term debt as the maturity of this facility was less than one ~~year at September~~year.

During the three months ended June 30, ~~2021.~~2022, Facility F was reclassified to short-term debt as the maturity of this facility was less than one year. During the three months ended March 31, 2022, we amended the interest rate for Facilities E and F (see Table 16.1 above) to be indexed to a spread over one-month SOFR compared to a LIBOR-indexed spread.

5958

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~15.~~16. Long-Term Debt - (continued)

In the second quarter of 2021, we repaid one of our non-recourse BPL financing facilities that had a balance of $242 million at March 31, 2021, and entered into a new non-recourse facility to finance business purpose bridge loans with a total borrowing capacity of $250 million (see details for "Facility C" above).

~~Recourse BPL Financing Facilities~~Convertible Notes

In June 2022, we issued $215 million principal amount of 7.75% convertible senior notes due 2027. These notes require semi-annual interest payments at a fixed annual coupon rate of 7.75% until maturity or conversion, which will be no later than June 15, 2027. After deducting the ~~second quarter~~underwriting discount and offering costs, we received $208 million of ~~2021, we~~net proceeds. Including amortization of deferred debt issuance costs, the effective interest expense yield on these notes was approximately 8.50% per annum. We may elect to settle conversions either entirely in cash or in a combination of cash and shares of common stock. Upon conversion, the conversion value will be paid in cash up to at least the principal amount of the notes being converted. The initial conversion rate of the notes is 95.6823 common shares per $1,000 principal amount of notes (equivalent to a conversion price of $10.45 per common share).

During the three months ended September 30, 2022, $199 million principal amount of 4.75% convertible debt and $1 million of unamortized deferred issuance costs were reclassified ~~one of our recourse facilities with a borrowing capacity of $450 million~~ from ~~short-term to~~ long-term debt to short-term debt as ~~we amended~~ the ~~terms~~maturity of ~~this facility, including an extension~~the notes was less than one year as of ~~its maturity (see details for "Facility D" above).~~August 2022.

The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table ~~15.2~~16.2 – Collateral for Long-Term Debt


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Collateral Type	Collateral Type					Collateral Type
Bridge loans	Bridge loans	$	373,597	$	544,151	Bridge loans	$	699,704	$	554,597
Single-family rental loans	Single-family rental loans	298,014		154,774		Single-family rental loans	—		244,703
Real estate securities	Real estate securities					Real estate securities
Sequoia securitizations (1)	Sequoia securitizations (1)	246,892		249,446		Sequoia securitizations (1)	184,363		247,227
CAFL securitizations (1)	CAFL securitizations (1)	256,976		114,044		CAFL securitizations (1)	240,683		260,405
Total real estate securities owned		503,868		363,490
Other BPL investments		—		21,414
Restricted cash		—		1,100

Total Collateral for Long-Term Debt	Total Collateral for Long-Term Debt	$	1,175,479	$	1,084,929	Total Collateral for Long-Term Debt	$	1,124,750	$	1,306,932

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

The following table summarizes the accrued interest payable on long-term debt at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table ~~15.3~~16.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021
Long-term debt facilities	Long-term debt facilities	$	900	$	1,799	Long-term debt facilities	$	2,685	$	815
Convertible notes	Convertible notes					Convertible notes
4.75% convertible senior notes	4.75% convertible senior notes	1,206		3,564		4.75% convertible senior notes	—		3,564
5.625% convertible senior notes	5.625% convertible senior notes	1,784		3,896		5.625% convertible senior notes	1,784		3,896
5.75% exchangeable senior notes	5.75% exchangeable senior notes	4,948		2,474		5.75% exchangeable senior notes	4,947		2,474
7.75% convertible senior notes						7.75% convertible senior notes	5,184		—
Trust preferred securities and subordinated notes	Trust preferred securities and subordinated notes	572		669		Trust preferred securities and subordinated notes	1,228		581
Total Accrued Interest Payable on Long-Term Debt	Total Accrued Interest Payable on Long-Term Debt	$	9,410	$	12,402	Total Accrued Interest Payable on Long-Term Debt	$	15,828	$	11,330

~~Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a full description of our long-term debt.~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note ~~16.~~17. Commitments and Contingencies

Lease Commitments

At September 30, ~~2021,~~2022, we were obligated under 7ten non-cancelable operating leases with expiration dates through 2031 for ~~$18~~$22 million of cumulative lease payments. ~~Our operating lease expense was $3 million for both~~For the nine-month periods ended September 30, 2022 and 2021 our operating lease expense was $4 million and ~~2020.~~

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2021~~

~~(Unaudited)~~

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

$3 million, respectively.

The following table presents our future lease commitments at September 30, ~~2021.~~2022.

Table ~~16.1~~17.1 – Future Lease Commitments by Year


(In Thousands)	(In Thousands)	September 30, 2021		(In Thousands)	September 30, 2022
2021 (3 months)		$	928
2022		3,714
2022 (3 months)				2022 (3 months)	$	1,216
2023	2023	3,235		2023	4,956
2024	2024	2,411		2024	4,601
2025	2025	1,983		2025	3,580
2026 and thereafter		6,128
2026				2026	3,420
2027 and thereafter				2027 and thereafter	4,553
Total Lease Commitments	Total Lease Commitments	18,399		Total Lease Commitments	22,326
Less: Imputed interest	Less: Imputed interest	(2,628)		Less: Imputed interest	(2,793)
Operating Lease Liabilities	Operating Lease Liabilities	$	15,771	Operating Lease Liabilities	$	19,533

During the nine months ended September 30, ~~2021,~~2022, we did not enter into any new office leases. During the ~~nine~~three months ended September 30, ~~2021,~~2022, we ~~increased our~~assumed three operating ~~lease right-of-use assets and liabilities by $1 million~~office leases as ~~the~~a result of ~~an amendment to one~~our acquisition of ~~our existing leases.~~Riverbend on July 1, 2022. At September 30, ~~2021,~~2022, our operating lease liabilities were ~~$16~~$20 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were ~~$14~~$17 million, which were a component of Other assets.

We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At September 30, ~~2021,~~2022, the weighted-average remaining lease term and weighted-average discount rate for our leases was 75 years and ~~4.9%~~5.2%, respectively.

Commitment to Fund Bridge Loans

As of September 30, ~~2021,~~2022, we had commitments to fund up to ~~$426~~$990 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At September 30, ~~2021,~~2022, we carried a $1$3 million contingent liability related to these commitments to fund construction advances. During the three and nine months ended September 30, 2022, we recorded a net market valuation gain of $1 million and a net market valuation loss of $2 million, respectively, related to this liability through Mortgage banking activities, net and Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2021, we recorded a net market valuation loss of $0.3 million and a net market valuation gain of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $1 million and a net market valuation loss of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).

Commitment to Fund Partnerships

In 2018, we invested in 2two partnerships created to acquire and manage certain mortgage servicing related ~~assets (see~~assets. See Note 1011 for additional ~~detail).~~detail on these investments. In connection with this investment, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.

6160

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~16.~~17. Commitments and Contingencies - (continued)

Commitment to Acquire HEIs

At September 30, 2022, we had outstanding flow purchase agreements with multiple third parties, with an aggregate commitment to purchase $350 million of HEIs, $149 million of which commitments remained outstanding. These purchase agreements specify monthly minimum and maximum amounts of HEIs subject to such purchase commitments. We may terminate the purchase agreement and associated purchase commitment relating to $85 million of remaining commitments upon 90 days prior notice. We account for these investments under the fair value option. See Note 10 for additional detail on these investments.

Commitments to Fund Strategic Investments

In the ~~third~~first quarter of 2022, we entered into a $25 million commitment to an investment fund with the mission of providing quality workforce housing opportunities in several California urban communities, including the San Francisco Bay Area. At September 30, 2022, we had funded $15 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

In 2021, we ~~amended an existing flow purchase agreement with Point Digital to acquire HEIs that Point Digital originates with homeowners. Each HEI provides the owner of such HEI the right to purchase~~entered into a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property. At ~~September 30, 2021, we had an outstanding~~ commitment to fund a $5 million RWT Horizons investment. At September 30, 2022, we had funded $1 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

Riverbend Contingent Consideration

As part of the consideration for our acquisition of Riverbend, we may make earnout payments payable in cash, based on generating specified revenues over a threshold amount during the two-year period ending July 1, 2024, up to ~~$125 million under~~a maximum potential amount payable of $25.3 million. These contingent earnout payments are classified as a contingent consideration liability on our consolidated balance sheets and carried at fair value. At September 30, 2022, our estimated fair value of this ~~agreement.~~contingent liability was zero.

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 30, ~~2021,~~2022, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was 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 30, ~~2021,~~2022, we had incurred less than ~~$0.1 million~~$100 thousand of cumulative losses under these arrangements. For the three and nine months ended September 30, ~~2021,~~2022, 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 and $0.1 million, respectively. For the three and nine months ended September 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 $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 30, ~~2021,~~2022, the loans had an unpaid principal balance of ~~$618~~$454 million, ~~and~~ a weighted average FICO score of 756 (at origination), and LTV ratio of 74% (at origination). At September 30, ~~2021, $21~~2022, $10 million of the loans were 90 ~~days~~ or more days delinquent, of which ~~one~~four of these loans with an unpaid principal balance of ~~$0.2~~$1 million ~~was~~were in foreclosure. At September 30, ~~2021,~~2022, the carrying value of our guarantee obligation was $8$7 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 us. At both September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, assets of such SPEs totaled ~~$34~~$30 million, ~~and $46 million, respectively,~~ and liabilities of such SPEs totaled ~~$8 million~~$7 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 17. Commitments and ~~$10 million, respectively.~~Contingencies - (continued)

Loss Contingencies — Residential Repurchase Reserve

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

At ~~both~~ September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, our repurchase reserve associated with our residential loans and MSRs was $6 million and $9 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets.

During the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, we received 3seven and 8eight repurchase requests, respectively, and repurchased 1one and ~~zero loans,~~one loan(s), respectively. During the three and nine months ended September 30, 2022, we recorded a repurchase provision expense of $0.1 million and a reversal of repurchase provision expense of $4 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2021, ~~and 2020,~~ we recorded repurchase ~~provisions~~provision expense of $0.3 million and $0.6 million, ~~and $4 million,~~ respectively, ~~that~~which were recorded in Mortgage banking activities, ~~net; Investment fair value changes, net;~~net, and Other income on our consolidated statements of income (loss).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 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, ~~2020~~2021 under the heading “Loss Contingencies - ~~Litigation.~~Litigation, Claims and Demands.” At September 30, ~~2021,~~2022, 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, ~~2020~~2021 was $2 million. At

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021, the aggregate amount of our accrual for estimated costs associated with the "Residential Loan Seller Demands" described in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million, a portion of which is contingent on the successful completion of future residential loan purchase and sale transactions with certain counterparties. We believe we have either resolved or adequately accrued for any unresolved Residential Loan Seller Demands and that there are no other Residential Loan Seller Demands that are reasonably possible to result in a material loss.2022

(Unaudited)

Note ~~17.~~18. Equity

The following table provides a summary of changes to accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~17.1~~18.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component


		Three Months Ended September 30, 2021				Three Months Ended September 30, 2020					Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
(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	$	88,251	$	(78,511)	$	53,246	$	(82,637)	Balance at beginning of period	$	16,595	$	(74,383)	$	88,251	$	(78,511)
Other comprehensive (loss) income before reclassifications	Other comprehensive (loss) income before reclassifications	(2,658)		—		8,236		—		Other comprehensive (loss) income before reclassifications	(8,731)		—		(2,658)		—
Amounts reclassified from other accumulated comprehensive income (loss)		(6,200)		1,041		(445)		1,040
Amounts reclassified from other accumulated comprehensive (income) loss										Amounts reclassified from other accumulated comprehensive (income) loss	544		1,040		(6,200)		1,041
Net current-period other comprehensive (loss) income	Net current-period other comprehensive (loss) income	(8,858)		1,041		7,791		1,040		Net current-period other comprehensive (loss) income	(8,187)		1,040		(8,858)		1,041
Balance at End of Period	Balance at End of Period	$	79,393	$	(77,470)	$	61,037	$	(81,597)	Balance at End of Period	$	8,408	$	(73,343)	$	79,393	$	(77,470)


		Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
(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	$	76,336	$	(80,557)	$	92,452	$	(50,939)	Balance at beginning of period	$	67,503	$	(76,430)	$	76,336	$	(80,557)
Other comprehensive income (loss) before reclassifications		19,552		—		(19,890)		(32,806)
Amounts reclassified from other accumulated comprehensive income (loss)		(16,495)		3,087		(11,525)		2,148
Net current-period other comprehensive income (loss)		3,057		3,087		(31,415)		(30,658)
Other comprehensive (loss) income before reclassifications										Other comprehensive (loss) income before reclassifications	(60,013)		—		19,552		—
Amounts reclassified from other accumulated comprehensive (income) loss										Amounts reclassified from other accumulated comprehensive (income) loss	918		3,087		(16,495)		3,087
Net current-period other comprehensive (loss) income										Net current-period other comprehensive (loss) income	(59,095)		3,087		3,057		3,087
Balance at End of Period	Balance at End of Period	$	79,393	$	(77,470)	$	61,037	$	(81,597)	Balance at End of Period	$	8,408	$	(73,343)	$	79,393	$	(77,470)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~17.~~18. Equity - (continued)

The following table provides a summary of reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~17.2~~18.2 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)


			Amount Reclassified From Accumulated Other Comprehensive Income						Amount Reclassified From Accumulated Other Comprehensive (Loss)
		Affected Line Item in the	Three Months Ended September 30,					Affected Line Item in the	Three Months Ended September 30,
(In Thousands)	(In Thousands)	Income Statement	2021		2020		(In Thousands)	Income Statement	2022		2021
Net Realized (Gain) Loss on AFS Securities	Net Realized (Gain) Loss on AFS Securities						Net Realized (Gain) Loss on AFS Securities
Decrease in allowance for credit losses on AFS securities		Investment fair value changes, net	$	—	$	(445)
Increase (decrease) in allowance for credit losses on AFS securities							Increase (decrease) in allowance for credit losses on AFS securities	Investment fair value changes, net	$	544	$	—
Gain on sale of AFS securities	Gain on sale of AFS securities	Realized gains, net	(6,200)		—		Gain on sale of AFS securities	Realized gains, net	—		(6,200)

			$	(6,200)	$	(445)			$	544	$	(6,200)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges	Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges						Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Amortization of deferred loss	Interest expense	$	1,041	$	1,040	Amortization of deferred loss	Interest expense	$	1,040	$	1,041
			$	1,041	$	1,040			$	1,040	$	1,041


			Amount Reclassified From Accumulated Other Comprehensive Income						Amount Reclassified From Accumulated Other Comprehensive (Loss)
		Affected Line Item in the	Nine Months Ended September 30,					Affected Line Item in the	Nine Months Ended September 30,
(In Thousands)	(In Thousands)	Income Statement	2021		2020		(In Thousands)	Income Statement	2022		2021
Net Realized (Gain) Loss on AFS Securities	Net Realized (Gain) Loss on AFS Securities						Net Realized (Gain) Loss on AFS Securities
(Decrease) increase in allowance for credit losses on AFS securities		Investment fair value changes, net	$	(388)	$	1,026
Increase (decrease) in allowance for credit losses on AFS securities							Increase (decrease) in allowance for credit losses on AFS securities	Investment fair value changes, net	$	2,315	$	(388)
Gain on sale of AFS securities	Gain on sale of AFS securities	Realized gains, net	(16,107)		(12,552)		Gain on sale of AFS securities	Realized gains, net	(1,397)		(16,107)

			$	(16,495)	$	(11,526)			$	918	$	(16,495)
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	$	3,087	$	2,148	Amortization of deferred loss	Interest expense	$	3,087	$	3,087
			$	3,087	$	2,148			$	3,087	$	3,087

Issuance of Common Stock

We have an established program to sell ~~up to an aggregate of $175 million of~~ common stock from time to time in at-the-market ("ATM") offerings. During the nine months ended September 30, ~~2021,~~2022, we issued ~~1,466,669~~5.2 million common shares for net proceeds of ~~$18~~$67 million under this program. ~~At September 30, 2021, approximately $92~~During the three months ended March 31, 2022, we increased the capacity of this program to $175 million, all of which remained outstanding for future offerings under this ~~program.~~program as of September 30, 2022.

Direct Stock Purchase and Dividend Reinvestment Plan

During the nine months ended September 30, ~~2021, we issued 119,040 shares of common stock for net proceeds of $1 million through our Direct Stock Purchase and Dividend Reinvestment Plan. During the nine months ended September 30, 2020,~~2022, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At September 30, ~~2021,~~2022, approximately 6 million shares remained outstanding for future offerings under this plan.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~17.~~18. Equity - (continued)

Earnings ~~(Loss)~~ per Common Share

The following table provides the basic and diluted (loss) earnings ~~(loss)~~ per common share computations for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~17.3~~18.3 – Basic and Diluted Earnings ~~(Loss)~~ per Common Share


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, except Share Data)	(In Thousands, except Share Data)	2021		2020		2021		2020		(In Thousands, except Share Data)	2022		2021		2022		2021
Basic Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood		$	88,286	$	141,812	$	275,568	$	(636,142)
Basic Earnings per Common Share:										Basic Earnings per Common Share:
Net (loss) income attributable to Redwood										Net (loss) income attributable to Redwood	$	(50,411)	$	88,286	$	(119,462)	$	275,568
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(2,984)		(4,067)		(8,979)		(1,427)		Less: Dividends and undistributed earnings allocated to participating securities	(1,158)		(2,984)		(3,445)		(8,979)
Net income (loss) allocated to common shareholders		$	85,302	$	137,745	$	266,589	$	(637,569)
Net (loss) income allocated to common shareholders										Net (loss) income allocated to common shareholders	$	(51,569)	$	85,302	$	(122,907)	$	266,589
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	112,995,847		113,403,102		112,754,691		113,952,308		Basic weighted average common shares outstanding	116,087,890		112,995,847		118,530,172		112,754,691
Basic Earnings (Loss) per Common Share		$	0.75	$	1.21	$	2.36	$	(5.60)
Diluted Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood		$	88,286	$	141,812	$	275,568	$	(636,142)
Basic (Loss) Earnings per Common Share										Basic (Loss) Earnings per Common Share	$	(0.44)	$	0.75	$	(1.04)	$	2.36
Diluted Earnings per Common Share:										Diluted Earnings per Common Share:
Net (loss) income attributable to Redwood										Net (loss) income attributable to Redwood	$	(50,411)	$	88,286	$	(119,462)	$	275,568
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(2,747)		(3,512)		(8,151)		(1,427)		Less: Dividends and undistributed earnings allocated to participating securities	(1,158)		(2,747)		(3,445)		(8,151)
Add back: Interest expense on convertible notes for the period, net of tax	Add back: Interest expense on convertible notes for the period, net of tax	6,870		6,990		20,585		—		Add back: Interest expense on convertible notes for the period, net of tax	—		6,870		—		20,585
Net income (loss) allocated to common shareholders		$	92,409	$	145,290	$	288,002	$	(637,569)
Net (loss) income allocated to common shareholders										Net (loss) income allocated to common shareholders	$	(51,569)	$	92,409	$	(122,907)	$	288,002
Weighted average common shares outstanding	Weighted average common shares outstanding	112,995,847		113,403,102		112,754,691		113,952,308		Weighted average common shares outstanding	116,087,890		112,995,847		118,530,172		112,754,691
Net effect of dilutive equity awards	Net effect of dilutive equity awards	292,749		—		253,819		—		Net effect of dilutive equity awards	—		292,749		—		253,819
Net effect of assumed convertible notes conversion to common shares	Net effect of assumed convertible notes conversion to common shares	28,566,875		28,566,875		28,566,875		—		Net effect of assumed convertible notes conversion to common shares	—		28,566,875		—		28,566,875
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	141,855,471		141,969,977		141,575,385		113,952,308		Diluted weighted average common shares outstanding	116,087,890		141,855,471		118,530,172		141,575,385
Diluted Earnings (Loss) per Common Share		$	0.65	$	1.02	$	2.03	$	(5.60)
Diluted (Loss) Earnings per Common Share										Diluted (Loss) Earnings per Common Share	$	(0.44)	$	0.65	$	(1.04)	$	2.03

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

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

For the three and nine months ended September 30, ~~2020, 32.2 million~~2022, 49,137,808 and 37,307,705 of common shares, respectively, related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2022, the number of outstanding equity awards that were antidilutive totaled 249,178 and 268,737, respectively. For the three and nine months ended September 30, 2021, the number of outstanding equity awards that were antidilutive totaled 22,102 and 18,736, ~~respectively. For the three and nine months ended September 30, 2020, the number of outstanding equity awards that were antidilutive totaled 13,560 and 15,457,~~ respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~17.~~18. Equity - (continued)

Stock Repurchases

In ~~February 2018,~~July 2022, our Board of Directors approved an authorization for the repurchase of up to $125 million 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~~replaced our previous ~~share~~$100 million stock repurchase authorization. This authorization ~~approved in February 2016 and~~ has no expiration ~~date. This repurchase authorization~~date and does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the ~~nine~~three months ended September 30, ~~2021,~~2022, we ~~did not repurchase any shares.~~repurchased 3.4 million shares of our common stock for a total cost of $24 million. At September 30, ~~2021, $78~~2022, $101 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities. During the nine months ended September 30, 2022, we repurchased 7.1 million shares of our common stock for a total cost of $56 million under our current and previously-approved Board of Director authorizations.

Note ~~18.~~19. Equity Compensation Plans

At September 30, ~~2021~~2022 and December 31, ~~2020, 7,273,676~~2021, 5,258,817 and ~~7,957,891~~5,958,390 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock and purchases under the Employee Stock Purchase Plan, totaled ~~$26~~$35 million at September 30, ~~2021,~~2022, as shown in the following table.

Table ~~18.1~~19.1 – Activities of Equity Compensation Costs by Award Type


		Nine Months Ended September 30, 2021													Nine Months Ended September 30, 2022
(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	$	564	$	3,540	$	17,766	$	5,794	$	—	$	27,664	Unrecognized compensation cost at beginning of period	$	84	$	3,589	$	26,473	$	12,237	$	—	$	42,383
Equity grants	Equity grants	—		2,370		5,766		—		335		8,471		Equity grants	—		2,513		7,960		—		323		10,796
Performance-based valuation adjustment	Performance-based valuation adjustment	—		—		—		1,072		—		1,072		Performance-based valuation adjustment	—		—		—		(3,205)		—		(3,205)
Equity grant forfeitures	Equity grant forfeitures	(2)		(670)		(550)		—		—		(1,222)		Equity grant forfeitures	(5)		(448)		(101)		—		—		(554)
Equity compensation expense	Equity compensation expense	(375)		(1,188)		(5,681)		(2,002)		(251)		(9,497)		Equity compensation expense	(79)		(1,567)		(10,412)		(2,524)		(242)		(14,824)
Unrecognized Compensation Cost at End of Period	Unrecognized Compensation Cost at End of Period	$	187	$	4,052	$	17,301	$	4,864	$	84	$	26,488	Unrecognized Compensation Cost at End of Period	$	—	$	4,087	$	23,920	$	6,508	$	81	$	34,596

At September 30, ~~2021,~~2022, the weighted average amortization period remaining for all of our equity awards was ~~one year.~~less than two years.

Restricted Stock Awards ("RSAs")

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were ~~29,693~~1,551 and ~~78,998~~28,141 shares ~~respectively,~~ of RSAs ~~outstanding.~~outstanding, respectively. Restrictions on these shares lapse ~~through~~during 2022. During the nine months ended September 30, ~~2021,~~2022, there were no RSAs granted, restrictions on ~~49,305~~26 RSAs lapsed and those shares were distributed, and no341 RSAs were forfeited.

Restricted Stock Units ("RSUs")

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were ~~445,183~~476,893 and ~~282,424 shares, respectively, of~~431,072 RSUs ~~outstanding.~~outstanding, respectively. During the nine months ended September 30, ~~2021,~~2022, there were ~~272,261~~208,717 RSUs granted, ~~64,759~~123,869 RSUs distributed, and ~~44,743~~39,027 RSUs forfeited. Unvested RSUs at September 30, ~~2021~~2022 vest through ~~2025.~~2026.

Deferred Stock Units (“DSUs”)

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were ~~3,318,540~~4,911,777 and ~~2,805,144~~4,022,088 DSUs outstanding, respectively, ~~outstanding~~ of which ~~1,546,724~~2,217,327 and ~~1,206,125,~~1,469,903, respectively, had vested. During the nine months ended September 30, ~~2021,~~2022, there were ~~700,552~~1,214,533 DSUs granted, ~~155,995~~316,546 DSUs distributed, and ~~31,161~~8,298 DSUs forfeited. Unvested DSUs at September 30, ~~2021~~2022 vest through ~~2025.~~2026.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~18.~~19. Equity Compensation Plans - (continued)

Performance Stock Units (“PSUs”)

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the target number of PSUs that were unvested was ~~955,710~~1,267,849 and ~~978,735,~~1,473,883, respectively. Vesting for PSUs generally occurs ~~at the end of~~ three years from their respective grant dates based on various total shareholder return performance calculations, as discussed in Note 18 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020. With respect to~~2021. During the nine months ended September 30, 2022, for PSUs granted in ~~May~~2020 and 2021, we decreased the book value total shareholder return estimate for the 2022 performance period, reducing the future equity compensation expense related to these awards by $3 million.

For 206,034 target PSU awards that were granted in December 2018, the ~~three-year~~ performance vesting period ended ~~during the second quarter of 2021, resulting~~on January 1, 2022. These 2018 PSU awards failed to reach a threshold level under their performance-based vesting criteria and resulted in the vesting of no shares of our common stock. During the second quarter of 2021, for PSUs granted in 2020, we adjusted the future amortization expense by $1 million to reflect our current estimate of the number of shares expected to vest in relation to the performance condition for the initial one-year vesting tranche.stock underlying these PSUs.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of 850,000 shares of common stock to be purchased in aggregate for all employees. As of September 30, ~~2021~~2022 and December 31, ~~2020, 546,093~~2021, 505,496 and ~~489,886~~569,728 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at September 30, ~~2021.~~2022.

Note ~~19.~~20. 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 months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~19.1~~20.1 – Mortgage Banking Activities


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
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)	$	27,862	$	12,589	$	75,496	$	19,151	Residential loans, at fair value (1)	$	(22,776)	$	27,862	$	(125,012)	$	75,496
Trading securities (2)	Trading securities (2)	32		—		(342)		—		Trading securities (2)	148		32		4,249		(342)
Risk management derivatives (3)	Risk management derivatives (3)	3,963		(10)		37,187		(31,304)		Risk management derivatives (3)	24,319		3,963		107,573		37,187
Other income (expense), net (4)	Other income (expense), net (4)	1,089		(715)		3,305		(7,069)		Other income (expense), net (4)	467		1,089		5,496		3,305
Total residential mortgage banking activities, net	Total residential mortgage banking activities, net	32,946		11,864		115,646		(19,222)		Total residential mortgage banking activities, net	2,158		32,946		(7,694)		115,646

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)	18,461		43,191		54,675		56,209		Single-family rental loans, at fair value (1)	(19,306)		18,461		(84,493)		54,675
Risk management derivatives (3)	Risk management derivatives (3)	(424)		(89)		930		(21,627)		Risk management derivatives (3)	24,044		(424)		56,564		930
Bridge loans, at fair value	Bridge loans, at fair value	3,433		938		6,702		(4,256)		Bridge loans, at fair value	(9)		3,433		2,242		6,702
Other income, net (5)	Other income, net (5)	8,747		3,491		22,236		13,407		Other income, net (5)	9,648		8,747		36,214		22,236
Total business purpose mortgage banking activities, net	Total business purpose mortgage banking activities, net	30,217		47,531		84,543		43,733		Total business purpose mortgage banking activities, net	14,377		30,217		10,527		84,543
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net	$	63,163	$	59,395	$	200,189	$	24,511	Mortgage Banking Activities, Net	$	16,535	$	63,163	$	2,833	$	200,189

(1)For residential loans, includes changes in fair value for associated loan purchase ~~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 mortgage banking operations.

(4)Amounts in this line item include other fee income from loan acquisitions and provisions for ~~repurchase expense,~~repurchases, presented net.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~20.~~21. Other Income, Net

The following table presents the components of Other income recorded in our consolidated statements of income ~~(loss)~~ for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~20.1~~21.1 – Other Income, Net


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
MSR (loss) income, net (1)		$	295	$	(2,362)	$	949	$	(5,595)
Agency risk sharing agreement income		575		1,200		2,318		3,146
FHLBC capital stock dividend		3		116		53		1,201
MSR income, net (1)										MSR income, net (1)	$	2,890	$	295	$	12,569	$	949
Bridge loan fees										Bridge loan fees	1,489		1,131		3,952		2,735
Risk share income										Risk share income	279		575		1,062		2,318

Bridge loan fees		1,131		716		2,735		2,520

Other	Other	384		216		2,302		2,707		Other	(631)		387		(567)		2,355
Other Income, Net	Other Income, Net	$	2,388	$	(114)	$	8,357	$	3,979	Other Income, Net	$	4,027	$	2,388	$	17,016	$	8,357

(1)Includes servicing fees and fair value changes for MSRs, ~~and associated hedges,~~ net.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~21.~~22. 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 months ended September 30, ~~2021~~2022 and ~~2020~~2021 are presented in the following table.

Table ~~21.1~~22.1 – 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 September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2022		2021		2022		2021
General and Administrative Expenses	General and Administrative Expenses									General and Administrative Expenses
Fixed compensation expense(1)	Fixed compensation expense(1)	$	11,285	$	10,103	$	34,359	$	36,605	Fixed compensation expense(1)	$	18,626	$	11,285	$	45,364	$	34,359
Annual variable compensation		19,844		5,882		51,021		9,171
Annual variable compensation expense										Annual variable compensation expense	3,521		19,844		8,689		51,021
Long-term incentive award expense ~~(1)~~(2)	Long-term incentive award expense ~~(1)~~(2)	4,915		2,639		14,766		7,896		Long-term incentive award expense ~~(1)~~(2)	4,998		4,915		16,190		14,766
Acquisition-related equity compensation expense ~~(2)~~(3)	Acquisition-related equity compensation expense ~~(2)~~(3)	1,189		1,212		3,613		3,636		Acquisition-related equity compensation expense ~~(2)~~(3)	—		1,189		—		3,613
Systems and consulting	Systems and consulting	2,975		2,145		9,224		7,752		Systems and consulting	3,909		2,975		10,796		9,224
Office costs	Office costs	2,197		1,859		6,029		5,854		Office costs	2,381		2,197		6,489		6,029
Accounting and legal	Accounting and legal	1,197		1,601		3,132		6,605		Accounting and legal	1,775		1,197		5,026		3,132
Corporate costs	Corporate costs	964		831		2,528		2,128		Corporate costs	928		964		2,792		2,528
Other	Other	3,126		1,358		7,165		5,185		Other	3,969		3,126		11,581		7,165
Total General and Administrative Expenses	Total General and Administrative Expenses	47,692		27,630		131,837		84,832		Total General and Administrative Expenses	40,107		47,692		106,927		131,837

Loan Acquisition Costs	Loan Acquisition Costs									Loan Acquisition Costs
Commissions	Commissions	1,906		879		4,830		3,027		Commissions	1,549		1,906		6,279		4,830
Underwriting costs	Underwriting costs	2,351		771		5,872		3,289		Underwriting costs	545		2,351		3,013		5,872
Transfer and holding costs	Transfer and holding costs	364		508		1,226		1,400		Transfer and holding costs	332		364		1,079		1,226

Total Loan Acquisition Costs	Total Loan Acquisition Costs	4,621		2,158		11,928		7,716		Total Loan Acquisition Costs	2,426		4,621		10,371		11,928

Other Expenses	Other Expenses									Other Expenses
Goodwill impairment expense		—		—		—		88,675

Amortization of purchase-related intangible assets	Amortization of purchase-related intangible assets	3,873		3,873		11,619		12,052		Amortization of purchase-related intangible assets	3,891		3,873		10,731		11,619

Other	Other	150		3,915		485		3,559		Other	370		150		1,083		485
Total Other Expenses	Total Other Expenses	4,023		7,788		12,104		104,286		Total Other Expenses	4,261		4,023		11,814		12,104
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	56,336	$	37,576	$	155,869	$	196,834	Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	46,794	$	56,336	$	129,112	$	155,869

(1)Includes $3 million of severance and transition-related expenses for the three and nine months ended September 30, 2022.

(2)For the three months ended September 30, 2022 and 2021, long-term incentive award expense ~~includes~~included $5 million and $3 million of expense for awards settleable in shares of our common stock, and $0.1 million and $1 million of expense for awards settleable in cash, respectively. For the nine months ended September 30, 2022 and 2021, long-term incentive award expense included $15 million and $10 million of expense for awards settleable in shares of our common stock, and $1 million of expense for awards settleable in cash. For the nine months ended September 30, 2021, long-term incentive award expense includes $10 million of expense for awards settleable in shares of our common stock and $4 million of expense for awards settleable in ~~cash.~~cash, respectively.

~~(2)~~(3)Acquisition-related equity compensation expense relates to 588,260 shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in ~~CoreVest.~~CoreVest in 2019. The grant date fair value of these restricted stock awards was $10 million, which ~~is being~~was recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

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

Long-Term Cash-Based Awards and Cash Settled Deferred Stock Units

During the nine months ended September 30, 2022, $2 million of long-term cash-based retention awards were granted to employees that will vest and be paid over a three-year period, subject to continued employment through the vesting periods from 2022 through 2025. At both September 30, 2022 and December 31, 2021, the unamortized compensation cost of long-term cash-based awards was $4 million.

During the nine months ended September 30, 2022, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020 and 2021 vest over four years through 2025. At September 30, 2022 and December 31, 2021, the unamortized compensation cost of cash-settled deferred stock units was $2 million and $7 million, respectively. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period.

Refer to Note 21 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

Note ~~22.~~23. Taxes

We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. To qualify as a REIT, the Company must distribute at least 90% of its annual REIT taxable income and meet certain other requirements that relate to, among ~~others,~~other things, the assets it holds, the income it generates, and the composition of its stockholders.

For the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, we recognized a benefit from income taxes of $10 million and a provision for income taxes of $14 ~~million and a benefit from income taxes of $13~~ million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~22.1~~23.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate

September 30, 2021 September 30, 2020
Federal statutory rate 21.0 % 21.0 %
State statutory rate, net of Federal tax effect 8.6 % 8.6 %
Differences in taxable (loss) income from GAAP income (13.1) % (23.6) %
Change in valuation allowance (6.8) % (4.0) %
Dividends paid deduction (1)
(4.9) % — %
Effective Tax Rate 4.8 % 2.0 %

~~(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 months ended September 30, 2020, the dividends paid deduction is 0% because there was no REIT taxable income available to apply against the dividends paid. This was due to our REIT incurring a taxable loss during the period.


	September 30, 2022		September 30, 2021
Federal statutory rate	21.0	%	21.0	%
State statutory rate, net of Federal tax effect	8.6	%	8.6	%
Differences in taxable (loss) income from GAAP income	(29.6)	%	(13.1)	%
Change in valuation allowance	(2.4)	%	(6.8)	%
Dividends paid deduction	10.5	%	(4.9)	%
Effective Tax Rate	8.1	%	4.8	%

We assessed our tax positions for all open tax years (i.e., Federal, 2018 to 2022, and State, 2017 to ~~2021, and State, 2016 to 2021)~~2022) at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

For the three months ended September 30, 2021, we reassessed the valuation allowance on our deferred tax assets ("DTAs") noting an increase in positive evidence related to our ability to utilize certain DTAs. The positive evidence includes significant revenue growth in recent quarters and expectations regarding future profitability at our TRS. After assessing both the positive and negative evidence, we determined it was more likely than not that we will realize all of our federal DTAs. Therefore, we reversed our federal valuation allowance of $17 million as a discrete benefit in the third quarter of 2021. In addition to the federal valuation allowance release, we determined it was more likely than not that we will realize a portion of our state DTAs and, as such, reversed $3 million of state valuation allowance as a discrete item in the third quarter of 2021. Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs exist and we project most of our state DTAs will expire prior to their utilization.

Note ~~23.~~24. Segment Information

Redwood operates in 3three segments: Residential ~~Lending,~~Mortgage Banking, Business Purpose ~~Lending,~~Mortgage Banking and ~~Third-Party Investments.~~Investment Portfolio. The accounting policies of the reportable segments are the same as those described in Note 3 — Summary of Significant Accounting Policies. For a full description of our segments, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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 3three 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~23.~~24. Segment Information - (continued)

The following tables present financial information by segment for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~23.1~~24.1 – Business Segment Financial Information


	Three Months Ended September 30, 2022
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	9,882	$	9,082	$	156,882	$	1,816	$	177,662
Interest expense	(8,083)		(5,971)		(111,876)		(16,797)		(142,727)
Net interest income	1,799		3,111		45,006		(14,981)		34,935
Non-interest (loss) income
Mortgage banking activities, net	2,158		14,377		—		—		16,535
Investment fair value changes, net	—		—		(61,780)		4,083		(57,697)
Other income, net	—		399		3,906		(278)		4,027
Realized gains, net	—		—		—		—		—
Total non-interest income (loss), net	2,158		14,776		(57,874)		3,805		(37,135)
General and administrative expenses	(5,735)		(18,535)		(3,502)		(12,335)		(40,107)
Loan acquisition costs	(550)		(1,876)		—		—		(2,426)
Other expenses	—		(3,891)		(370)		—		(4,261)
Benefit from (provision for) income taxes	1,688		2,559		(5,664)		—		(1,417)
Segment Contribution	$	(640)	$	(3,856)	$	(22,404)	$	(23,511)
Net (Loss)									$	(50,411)
Non-cash amortization (expense) income, net	$	(185)	$	(3,609)	$	(3,658)	$	(2,843)	$	(10,295)

Three Months Ended September 30, 2021
(In Thousands) Residential Lending Business Purpose Lending Third-Party Investments Corporate/
Other Total
Interest income $ 44,220 $ 67,235 $ 33,218 $ 1,049 $ 145,722
Interest expense (25,395) (46,834) (21,370) (10,155) (103,754)
Net interest income 18,825 20,401 11,848 (9,106) 41,968
Non-interest income
Mortgage banking activities, net 32,946 30,217 — — 63,163
Investment fair value changes, net 2,285 3,470 20,569 (247) 26,077
Other income, net 874 1,184 — 330 2,388
Realized gains, net 6,389 314 — — 6,703
Total non-interest income (loss), net 42,494 35,185 20,569 83 98,331
General and administrative expenses (8,989) (13,987) (1,415) (23,301) (47,692)
Loan acquisition costs (2,395) (2,175) (51) — (4,621)
Other expenses — (3,873) (150) — (4,023)
(Provision for) benefit from income taxes (11,139) (3,485) (335) 19,282 4,323
Segment Contribution $ 38,796 $ 32,066 $ 30,466 $ (13,042)
Net Income $ 88,286
Non-cash amortization (expense) income, net $ 5,862 $ (4,713) $ 276 $ (1,995) $ (570)


		Nine Months Ended September 30, 2021											Nine Months Ended September 30, 2022
(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	Interest income	$	104,801	$	202,155	$	102,180	$	3,586	$	412,722	Interest income	$	36,048	$	22,509	$	471,932	$	4,028	$	534,517
Interest expense	Interest expense	(65,488)		(151,351)		(66,883)		(30,649)		(314,371)		Interest expense	(23,316)		(12,797)		(331,047)		(38,832)		(405,992)
Net interest income	Net interest income	39,313		50,804		35,297		(27,063)		98,351		Net interest income	12,732		9,712		140,885		(34,804)		128,525
Non-interest income
Non-interest (loss) income												Non-interest (loss) income
Mortgage banking activities, net	Mortgage banking activities, net	115,646		84,543		—		—		200,189		Mortgage banking activities, net	(7,694)		10,527		—		—		2,833
Investment fair value changes, net	Investment fair value changes, net	8,958		10,551		102,303		(1,168)		120,644		Investment fair value changes, net	—		—		(165,297)		13,508		(151,789)
Other income, net	Other income, net	4,566		3,044		5		742		8,357		Other income, net	—		2,028		15,423		(435)		17,016
Realized gains, net	Realized gains, net	15,484		812		1,507		—		17,803		Realized gains, net	—		—		2,581		—		2,581
Total non-interest income, net		144,654		98,950		103,815		(426)		346,993
Total non-interest (loss) income, net												Total non-interest (loss) income, net	(7,694)		12,555		(147,293)		13,073		(129,359)
General and administrative expenses	General and administrative expenses	(30,539)		(38,834)		(3,476)		(58,988)		(131,837)		General and administrative expenses	(17,918)		(40,076)		(9,676)		(39,257)		(106,927)
Loan acquisition costs	Loan acquisition costs	(5,698)		(6,088)		(138)		(4)		(11,928)		Loan acquisition costs	(2,848)		(7,523)		—		—		(10,371)
Other expenses	Other expenses	(6)		(11,523)		(592)		17		(12,104)		Other expenses	74		(10,731)		(1,157)		—		(11,814)
(Provision for) benefit from income taxes		(25,289)		(6,988)		(912)		19,282		(13,907)
Benefit from (provision for) income taxes												Benefit from (provision for) income taxes	8,283		9,009		(6,808)		—		10,484
Segment Contribution	Segment Contribution	$	122,435	$	86,321	$	133,994	$	(67,182)			Segment Contribution	$	(7,371)	$	(27,054)	$	(24,049)	$	(60,988)
Net Income										$	275,568
Net (Loss)												Net (Loss)									$	(119,462)
Non-cash amortization (expense) income, net	Non-cash amortization (expense) income, net	$	8,867	$	(16,154)	$	317	$	(5,845)	$	(12,815)	Non-cash amortization (expense) income, net	$	(699)	$	(11,563)	$	4,385	$	(6,428)	$	(14,305)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~23.~~24. Segment Information - (continued)


		Three Months Ended September 30, 2020											Three Months Ended September 30, 2021
(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	Interest income	$	26,672	$	55,930	$	37,576	$	1,804	$	121,982	Interest income	$	14,712	$	3,967	$	125,994	$	1,049	$	145,722
Interest expense	Interest expense	(21,401)		(44,159)		(24,238)		(10,613)		(100,411)		Interest expense	(7,537)		(2,013)		(84,049)		(10,155)		(103,754)
Net interest income	Net interest income	5,271		11,771		13,338		(8,809)		21,571		Net interest income	7,175		1,954		41,945		(9,106)		41,968
Non-interest income	Non-interest income											Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	11,864		47,531		—		—		59,395		Mortgage banking activities, net	32,946		30,217		—		—		63,163
Investment fair value changes, net	Investment fair value changes, net	2,443		16,892		87,890		(178)		107,047		Investment fair value changes, net	—		—		26,324		(247)		26,077
Other income, net	Other income, net	(2,011)		623		340		934		(114)		Other income, net	—		216		1,842		330		2,388
Realized gains, net	Realized gains, net	—		—		602		—		602		Realized gains, net	—		—		6,703		—		6,703
Total non-interest income, net	Total non-interest income, net	12,296		65,046		88,832		756		166,930		Total non-interest income, net	32,946		30,433		34,869		83		98,331
General and administrative expenses	General and administrative expenses	(4,602)		(9,321)		(709)		(12,998)		(27,630)		General and administrative expenses	(7,891)		(12,017)		(4,483)		(23,301)		(47,692)
Loan acquisition costs	Loan acquisition costs	(304)		(1,660)		(194)		—		(2,158)		Loan acquisition costs	(2,395)		(2,175)		(51)		—		(4,621)
Other expenses	Other expenses	(3,309)		(3,874)		(470)		(135)		(7,788)		Other expenses	—		(3,873)		(150)		—		(4,023)
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(826)		(8,544)		257		—		(9,113)		(Provision for) benefit from income taxes	(10,429)		(3,485)		(1,045)		19,282		4,323
Segment Contribution	Segment Contribution	$	8,526	$	53,418	$	101,054	$	(21,186)			Segment Contribution	$	19,406	$	10,837	$	71,085	$	(13,042)
Net Income	Net Income									$	141,812	Net Income									$	88,286
Non-cash amortization income (expense), net		$	1,785	$	(6,719)	$	117	$	(1,516)	$	(6,333)
Non-cash amortization (expense) income, net												Non-cash amortization (expense) income, net	$	(33)	$	(4,224)	$	5,682	$	(1,995)	$	(570)

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 (87,725) (113,143) (111,666) (37,214) (349,748)
Net interest income 36,231 49,589 43,917 (29,476) 100,261
Non-interest income
Mortgage banking activities, net (19,222) 43,733 — — 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 — 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 — 13,079
Segment Contribution $ (152,270) $ (123,895) $ (318,146) $ (41,831)
Net Loss $ (636,142)
Non-cash amortization income (expense), net $ 732 $ (18,035) $ 1,170 $ (3,244) $ (19,377)
Other significant non-cash expense: goodwill impairment $ — $ (88,675) $ — $ — $ (88,675)



	Nine Months Ended September 30, 2021
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	35,536	$	9,849	$	363,751	$	3,586	$	412,722
Interest expense	(19,903)		(5,134)		(258,685)		(30,649)		(314,371)
Net interest income	15,633		4,715		105,066		(27,063)		98,351
Non-interest income
Mortgage banking activities, net	115,646		84,543		—		—		200,189
Investment fair value changes, net	—		—		121,812		(1,168)		120,644
Other income, net	—		494		7,121��		742		8,357
Realized gains, net	—		—		17,803		—		17,803
Total non-interest income (loss), net	115,646		85,037		146,736		(426)		346,993
General and administrative expenses	(27,478)		(34,567)		(10,804)		(58,988)		(131,837)
Loan acquisition costs	(5,686)		(5,528)		(710)		(4)		(11,928)
Other expenses	(6)		(11,523)		(592)		17		(12,104)
Provision for income taxes	(23,640)		(6,988)		(2,561)		19,282		(13,907)
Segment Contribution	$	74,469	$	31,146	$	237,135	$	(67,182)
Net Income									$	275,568
Non-cash amortization income (expense), net	$	8,867	$	(16,154)	$	317	$	(5,845)	$	(12,815)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~23.~~24. Segment Information - (continued)

The following table presents the components of Corporate/Other for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table ~~23.2~~24.2 – Components of Corporate/Other


		Three Months Ended September 30,													Three Months Ended September 30,
		2021						2020							2022						2021
(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	$	1,042	$	7	$	1,049	$	1,795	$	9	$	1,804	Interest income	$	1,473	$	343	$	1,816	$	1,042	$	7	$	1,049
Interest expense	Interest expense	(641)		(9,514)		(10,155)		(1,059)		(9,554)		(10,613)		Interest expense	(1,486)		(15,311)		(16,797)		(641)		(9,514)		(10,155)
Net interest income	Net interest income	401		(9,507)		(9,106)		736		(9,545)		(8,809)		Net interest income	(13)		(14,968)		(14,981)		401		(9,507)		(9,106)
Non-interest income	Non-interest income													Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(247)		—		(247)		(81)		(97)		(178)		Investment fair value changes, net	(329)		4,412		4,083		(247)		—		(247)
Other income	Other income	—		330		330		—		934		934		Other income	—		(278)		(278)		—		330		330

Total non-interest income, net	Total non-interest income, net	(247)		330		83		(81)		837		756		Total non-interest income, net	(329)		4,134		3,805		(247)		330		83
General and administrative expenses	General and administrative expenses	—		(23,301)		(23,301)		—		(12,998)		(12,998)		General and administrative expenses	—		(12,335)		(12,335)		—		(23,301)		(23,301)

Loan acquisition costs														Loan acquisition costs	—		—		—		—		—		—
Other expenses	Other expenses	—		—		—		—		(135)		(135)		Other expenses	—		—		—		—		—		—
Provision for income taxes	Provision for income taxes	—		19,282		19,282		—		—		—		Provision for income taxes	—		—		—		—		19,282		19,282
Total	Total	$	154	$	(13,196)	$	(13,042)	$	655	$	(21,841)	$	(21,186)	Total	$	(342)	$	(23,169)	$	(23,511)	$	154	$	(13,196)	$	(13,042)


		Nine Months Ended September 30,													Nine Months Ended September 30,
		2021						2020							2022						2021
(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	$	3,559	$	27	$	3,586	$	7,674	$	64	$	7,738	Interest income	$	3,593	$	435	$	4,028	$	3,559	$	27	$	3,586
Interest expense	Interest expense	(2,271)		(28,378)		(30,649)		(5,099)		(32,115)		(37,214)		Interest expense	(3,154)		(35,678)		(38,832)		(2,271)		(28,378)		(30,649)
Net interest income	Net interest income	1,288		(28,351)		(27,063)		2,575		(32,051)		(29,476)		Net interest income	439		(35,243)		(34,804)		1,288		(28,351)		(27,063)
Non-interest income	Non-interest income													Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(1,162)		(6)		(1,168)		(702)		(215)		(917)		Investment fair value changes, net	(1,379)		14,887		13,508		(1,162)		(6)		(1,168)
Other income	Other income	—		742		742		—		1,692		1,692		Other income	—		(435)		(435)		—		742		742
Realized gains, net		—		—		—		—		25,182		25,182

Total non-interest income, net	Total non-interest income, net	(1,162)		736		(426)		(702)		26,659		25,957		Total non-interest income, net	(1,379)		14,452		13,073		(1,162)		736		(426)
General and administrative expenses	General and administrative expenses	—		(58,988)		(58,988)		—		(37,724)		(37,724)		General and administrative expenses	—		(39,257)		(39,257)		—		(58,988)		(58,988)
Loan acquisition costs	Loan acquisition costs	—		(4)		(4)		—		(7)		(7)		Loan acquisition costs	—		—		—		—		(4)		(4)
Other expenses	Other expenses	—		17		17		—		(581)		(581)		Other expenses	—		—		—		—		17		17
Provision for income taxes	Provision for income taxes	—		19,282		19,282		—		—		—		Provision for income taxes	—		—		—		—		19,282		19,282
Total	Total	$	126	$	(67,308)	$	(67,182)	$	1,873	$	(43,704)	$	(41,831)	Total	$	(940)	$	(60,048)	$	(60,988)	$	126	$	(67,308)	$	(67,182)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2021~~2022

(Unaudited)

Note ~~23.~~24. Segment Information - (continued)

The following table presents supplemental information by segment at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Table ~~23.3~~24.3 – Supplemental Segment Information


(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
September 30, 2021
September 30, 2022												September 30, 2022
Residential loans	Residential loans	$	3,974,829	$	—	$	1,999,405	$	242,234	$	6,216,468	Residential loans	$	676,458	$	—	$	4,877,938	$	198,160	$	5,752,556
Business purpose loans	Business purpose loans	—		4,693,555		—		—		4,693,555		Business purpose loans	—		337,238		4,919,980		—		5,257,218
Multifamily loans		—		—		482,791		—		482,791
Consolidated Agency multifamily loans												Consolidated Agency multifamily loans	—		—		427,458		—		427,458
Real estate securities	Real estate securities	150,368		—		202,918		—		353,286		Real estate securities	—		—		259,212		—		259,212
Home equity investments												Home equity investments	—		—		340,437		—		340,437
Other investments												Other investments	—		—		341,155		71,607		412,762
Goodwill												Goodwill	—		23,373		—		—		23,373
Intangible assets												Intangible assets	—		44,130		—		—		44,130
Total assets												Total assets	738,301		473,748		11,301,836		632,062		13,145,947

December 31, 2021												December 31, 2021
Residential loans												Residential loans	$	1,673,235	$	—	$	5,688,742	$	230,455	$	7,592,432
Business purpose loans												Business purpose loans	—		347,860		4,443,129		—		4,790,989
Consolidated Agency multifamily loans												Consolidated Agency multifamily loans	—		—		473,514		—		473,514
Real estate securities												Real estate securities	4,927		—		372,484		—		377,411
Home equity investments												Home equity investments	—		—		192,740		—		192,740
Other investments	Other investments	12,389		6,767		379,102		24,108		422,366		Other investments	—		—		413,527		35,702		449,229
Intangible assets	Intangible assets	—		45,246		—		—		45,246		Intangible assets	—		41,561		—		—		41,561
Total assets	Total assets	4,219,950		4,860,226		3,088,815		903,723		13,072,714		Total assets	1,716,285		464,967		11,770,486		755,206		14,706,944

December 31, 2020
Residential loans		$	1,741,963	$	—	$	2,221,153	$	285,935	$	4,249,051
Business purpose loans		—		4,136,353		—		—		4,136,353
Multifamily loans		—		—		492,221		—		492,221
Real estate securities		160,780		—		183,345		—		344,125
Other investments		8,815		21,627		317,282		451		348,175
Intangible assets		—		56,865		—		—		56,865
Total assets		1,989,802		4,323,040		3,232,415		809,809		10,355,066

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~~five main sections:

• Overview

• Results of Operations

–Consolidated Results of Operations

–Results of Operations by Segment

–~~Investments Detail~~

–Income Taxes

• Liquidity and Capital Resources

• ~~Off-Balance Sheet Arrangements and Contractual Obligations~~

•Critical Accounting ~~Policies and~~ Estimates

• ~~New Accounting Standards~~Market and Other Risks

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part II, Item 8, Financial Statements and Supplementary Data in our most recent Annual Report on Form 10-K, as well as the sections entitled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, 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,”~~MD&A and our consolidated financial statements and notes thereto, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our website can be found at www.redwoodtrust.com. We make available, free of charge through the investor ~~information~~relations section of our website, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). We also make available, free of charge, access to our charters for our Audit Committee, Compensation Committee, and Governance and Nominating Committee, our Corporate Governance Standards, and our Code of Ethics governing our directors, officers, and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any executive officer or director of Redwood. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, and may include disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.

Our Investor Relations Department can be contacted at One Belvedere Place, Suite 300, Mill Valley, CA 94941, Attn: Investor Relations, telephone (866) 269-4976.

Our Business

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing ~~credit.~~credit, with a mission to help make quality housing, whether rented or owned, accessible to all American households. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not well served by government programs. We deliver customized housing credit investments to a diverse mix of investors through our best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded ~~shares.~~securities. Our ~~consolidated~~aggregation, origination and investment ~~portfolio has~~activities have evolved to incorporate a diverse mix of residential, business purpose and multifamily ~~investments.~~assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in three segments: Residential ~~Lending,~~Mortgage Banking, Business Purpose ~~Lending,~~Mortgage Banking, and ~~Third-Party Investments.~~Investment Portfolio. For a full description of our segments, see Part 1, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Cautionary Statement

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020,~~2021, 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, and our ability to pay dividends in the ~~future, and the prospects for federal housing finance reform)~~future); (ii) statements related to our financial outlook and expectations for ~~2021~~2022 and future ~~years;~~years, including statements regarding the economic impact of inflation, supply chain disruptions, and war in Europe; (iii) statements regarding our expectations with respect to Riverbend’s integration into, and effect upon, the Redwood and CoreVest businesses; (iv) statements related to our opportunities for growth, including ~~by continuing~~opportunities to ~~creatively expand distribution channels~~grow and increase our market share for our ~~loans products; (iv)~~residential and business purpose mortgage banking platforms; (v) statements related to our investment portfolio, including that there remains potential upside in our portfolio through ~~a combination of accretable~~ market discount, and ~~call rights~~ that at September 30, 2022, our securities portfolio had approximately $458 million of net discount to par (approximately $4.05 per share), which we ~~control, and that we reinitiated our flow purchase arrangement with Point, providing us with continuing HEI acquisition and securitization opportunities; (v)~~have the potential to recover over time; (vi) statements related to RWT Horizons and our residential and business purpose lending platforms, including that we expect CoreVest to continue to consider issuing bridge loan securitizations in conjunction with our traditional SFR loan securitizations; (vi)strategic investment initiatives; (vii) statements relating to our estimate of our available capital (including that we estimate our available capital at September 30, ~~2021~~2022 was approximately ~~$350~~$160 million); ~~(vii)~~(viii) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the third quarter of ~~2021~~2022 and at September 30, ~~2021, and~~2022, expected fallout and the corresponding volume of residential mortgage loans expected to be available for ~~purchase; (viii)~~purchase, and residential mortgage loans subject to forward sale commitments; (ix) statements we make regarding future dividends, including with respect to our regular quarterly dividends in ~~2021;~~2022; and ~~(ix)~~(x) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.

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

Important factors, among others, that may affect our actual results include:

•the impact of the COVID-19 pandemic;

•general economic trends and the performance of the housing, real estate, mortgage finance, and broader financial markets;

•federal and state legislative and regulatory developments and the actions of governmental authorities and entities;

•changing benchmark interest rates, and the Federal Reserve’s actions and statements regarding monetary policy;

•our ability to compete successfully;

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

•strategic business and capital deployment decisions we make;

•our use of financial leverage;

•our exposure to 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, the geographical concentration of real estate underlying assets we own, and our exposure to 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 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;

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

•our ability to successfully retain or attract key personnel;

•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 of our technology infrastructure and systems;

•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 to U.S. federal income tax laws on the U.S. housing market, mortgage finance markets, and 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.

OVERVIEW

Business Update

Our GAAP book value declined to $10.18 per share at September 30, 2022, a 5.6% decline from $10.78 per share at June 30, 2022, driving a GAAP loss of $(0.44) per share for the third quarter. As was the case in the second quarter, mark-to-market adjustments were the primary driver of our GAAP loss for the quarter and contributed $(0.50) per share of unrealized fair value changes in the third quarter.

During the third quarter, we ~~hosted~~focused on maintaining liquidity and maximizing our balance sheet flexibility. We ended the quarter with $297 million of unrestricted cash on hand, unencumbered assets of $491 million, and approximately $3.8 billion of excess capacity on our warehouse lines. We were successful during the quarter in adding $900 million of new financing capacity across multiple borrowing facilities (with both new and existing domestic depository institutions) to further support our operating platforms. Our overall recourse leverage ratio(1) was 2.6x, which included only 0.8x secured recourse leverage within our Investment Portfolio(2). This allowed us to remain opportunistic across our operating segments, a posture we expect to carry through year-end.

For the third quarter, we deployed $235 million of capital, which included repurchases of our common stock, the acquisition of Riverbend Funding, LLC (“Riverbend”), and further investments in organically created business-purpose loans (“BPL”) and third-party investments. We closed the Riverbend acquisition on July 1, 2022, and have progressed with key integration workstreams that we expect to be largely completed by year-end. At current levels, we believe there is an attractive opportunity to invest in our own common shares and, as such, we expect opportunistic share repurchases to be an on-going option for capital deployment in the near term.

Within our Investment Portfolio, at September 30, 2022, we had $3.6 billion of economic investments; 77% of which were organically created and 23% of which were purchased from third-parties. We estimate there was $458 million (or $4.05 per share) of net discount to par value at September 30, 2022 that we believe represents potential upside in Redwood’s ~~third annual Investor Day. During~~book value.

Our investment portfolio sits in a strong fundamental credit position given consistent cash flows, underlying seasoning and robust home price appreciation. Delinquencies in our ~~event~~portfolio remain low, at approximately 2% across our organically-created Residential and BPL investments combined at September 30, 2022. We believe the seasoning of our portfolio assets is a positive factor in light of near-term downward pressure on home prices expected as a result of the Federal Reserve's monetary policy actions. Our portfolio overall has benefited from significant appreciation in home prices and rents the last several years, providing a tailwind to fundamental performance even in a more stressed housing market. This inherent downside protection may support the potential recoverability of the unrealized losses we affirmed our commitment to our corporate mission to make quality housing, whether rented or owned, accessible to all American households, and discussed the Company's vision of being the leading operator and strategic capital provider driving sustainable innovation in housing finance.

We have ~~significantly broadened our business within the housing market~~taken over the ~~past several years. This includes expanding~~last few quarters.

While markets need to stabilize for our operating businesses to return to their optimal levels of operations, both of our mortgage banking ~~platform~~platforms delivered substantially better quarter-on-quarter results as compared to the second quarter of 2022, notwithstanding continued market dislocation. Across our Residential and ~~investment portfolio beyond~~Business Purpose Mortgage Banking businesses, we distributed almost $1 billion of loans during the jumbo residential mortgage space, while maintaining the core competencies of the firm around our expertise in residential housing credit. Our expansion includes our acquisition of CoreVest in 2019 – which has now been part of our platform for two years – and investments in several other areas of housing finance. More recently, our approach toquarter. Despite capital deployment has continued to evolve. Our progress this year growing our RWT Horizons initiative – investing in advanced technologies with the potential to transform our businesses – reflects an important step in that process. While our capital remains predominantly allocated to our operating businesses and investment portfolio, RWT Horizons reflects our beliefmarkets in the ~~strategic importance~~consumer residential sector remaining largely distressed, we sold $612 million of ~~innovation~~residential loans to various whole loans buyers at accretive levels and ~~partnership in driving profitable scale.~~

within our historical target range for gain on sale margins. Our ~~strategic vision is based upon~~BPL team also completed an innovative $274 million private SFR securitization at the ~~vast addressable market we see in front~~end of us, driven by macroeconomic and market forces that have made liquidity sourced from the private markets essential for a robust housing finance system, for both consumers and investors alike. The recent modest increase in benchmark rates belies a lack of yield in the market that – but for some brief and notable intervals – has been persistent for over a decade. Taken together, this puts a premium on enterprises that can directly access markets efficiently and with discipline. We believe that these competencies, coupled with capital optimization and efficiency gains, will drive our financial results, and continuing to creatively expand distribution channels for mortgage loans we originate or acquire will be an important part of our evolution.

~~Turning to~~ the third quarter, ~~of 2021, after a successful first half of the year, our team continued its strong performance. CoreVest maintained its momentum, funding $639~~in addition to selling $85 million of loans. Our ability to distribute loans ~~for~~through both securitization and whole loan sales in challenging markets is a testament to the quarter, including $239 million in September alone. Our third quarter results saw strong contributions from both our SFR and Bridge lending teams, and we made key progress in our correspondent loan business, including our strategic investment in Churchill. Meanwhile, the Residential business identified $4.7 billion of loans for purchase in the third quarter (locked loans, unadjusted for fallout). Notwithstanding that benchmark interest rates hit lows not seen since February, almost 60%strength of our ~~residential loan locks during the third quarter were on purchase-money loans, which we believe is indicative of~~platforms, the quality of our ~~pipeline~~products and the depth of our ~~sellers.~~whole loan networks.

~~Our investment portfolio~~We expect conditions in the consumer residential sector to remain challenging for a number of quarters as industry volumes continue to be affected by rapidly increasing mortgage rates, which, along with record home price appreciation in recent years, has pushed housing affordability to new lows. The spread between mortgage rates and the 10-year Treasury recently reached an all-time high, even as the 10-year Treasury yield itself has risen over 250 basis points since the beginning of the year. The institution that has been the largest buyer of mortgage-backed securities, the Federal Reserve, has exited the market, and money center banks and overseas investors have also pulled back significantly. This dynamic, in the near term, has resulted in significant market risk for those aggregating loans for future securitizations, including us.

As a result of these market conditions, we have remained conservatively positioned in ~~step with this operating progress, appreciating in value by approximately 2% during the third quarter of 2021. We believe there remains potential upside in~~Residential Mortgage Banking, reducing our ~~securities portfolio from a combination of accretable market discount and call rights that we control.~~

These factors contributed to another strong quarter of financial results, with GAAP earnings of $0.65 per diluted share, a 27% annualized return on equity for the third quarter of 2021. Book value increased 4.7%quarterly jumbo loan locks(3) in the third quarter to ~~$12.00 per share, contributing to an overall year-to-date increase of 21%. We declared a third quarter dividend of $0.21 per share~~$461 million and ~~have now earned a 27% economic return year to date, which represents growth in GAAP book value combined with dividends paid.~~

~~Additionally, we executed a series of strategic~~focusing on moving risk expediently, operating efficiently and ~~novel transactions across various disciplines within our firm that both positively contributed to earnings and provided indicators~~preserving flexibility. This includes ongoing rationalization of our operating progress. Our Residential team completed a securitization leveraging blockchain technology for enhanced payment reporting for Sequoia investors. Historically, RMBS investors have needed to wait until well into the following month to see a month’s worthcost structure and disciplined pipeline management, including through maintaining lower overall loan inventory balances and nimble distribution strategies with whole loan buyers. In light of ~~remittance details on underlying loans. Liquid Mortgage – an early portfolio company of RWT Horizons – has coordinated with~~these conditions, we intentionally reduced our ~~sub-servicer to publish daily remittance information on a public blockchain. We believe this implementation is just the first step in the application of this type of technology~~capital allocation to our ~~business.~~

~~Next, we completed CoreVest’s first securitization~~Residential Mortgage Banking business by almost 60% since the beginning of ~~bridge loans, which priced competitively against comparable transactions~~2022. We see attractive uses for this freed-up capital, including investment opportunities in residential credit made possible by the market. This new form of distribution provides a valuable capital management tool with a 30-month reinvestment feature. We expect CoreVest to continue to consider issuing bridge loan securitizations in conjunction with our traditional single-family rental ("SFR") loan securitizations, having recently priced the 19th overall CAFL securitization in October 2021.

market downturn.

~~Finally,~~Turning to Business Purpose Mortgage Banking, while we ~~co-sponsored a securitization backed entirely by residential Home Equity Investment contracts (“HEIs”). Co-sponsored with Point Digital, a financial technology company,~~have seen some resiliency in demand for shorter duration bridge loan products that we originate, we expect volumes to moderate from record levels earlier this ~~transaction allowed~~year as higher interest rates and macroeconomic uncertainty cause housing investors to participate in a new sector of the residential housing finance market that enables homeowners to participate in the benefits of home price appreciation without having to sell their homes or incur additional debt obligations.be more cautious. In ~~parallel with this securitization, we renewed our flow purchase arrangement with Point, providing us with continuing HEI acquisition and securitization opportunities.~~

~~RWT Horizons also continued its investment activity, completing six investments during~~ the third quarter, ~~while continuing to analyze a broad array~~we saw this trend play out as 83% of ~~opportunities~~our origination volume was in ~~the pipeline, including several~~our bridge product and 17% was in ~~the climate analytics area, which continues to be of interest as traditional methods of predicting how climate change can impact property valuation~~our SFR product. As affordability remains challenged, we believe that strong occupancy rates, low vacancies, and ~~insurability~~high consumer mortgage rates should continue to ~~evolve. With a direct relationship to our firmwide ESG work, we expect to continue dedicating focus to this type of opportunity through RWT Horizons.~~

~~As we approach the end of 2021, we are proceeding cautiously. We see several macro~~support strong and market risks ahead, including COVID-19 variants, rising inflation, central bank tapering (now officially signaled by the Federal Reserve) and Federal debt ceiling extension uncertainty, among others. More fundamentally, recent trends in unemployment claims data suggest that the economy is still in a recovery phase and the current economic situation is far from stable, notwithstanding consistent upward pressure on home prices and rents that has otherwise been favorable to our business results. Our interest rate, capital and broader risk management posture reflects this cautious view: while we have generated strong earnings thus far in 2021, we have done so with record levels of cash ~~on hand – including $557 million at September 30, 2021.~~

~~We are also focused on making a positive impact~~flows for our ~~people,~~rental loan products. We have long promoted our ~~customers,~~BPL franchise as a life-cycle lender and our ~~communities,~~ability to provide both short- and ~~the overall society within which we operate. We believe this focus on a business model vision and a set of core values can produce~~ long-term ~~and sustainable benefits~~financing options makes us an attractive lender for all our stakeholders. Going forward, we expect to continue operating to fulfill our broadly-conceived mission, focusing on the significant addressable markets in front of us, embracing the cusp of innovation, running a business grounded in fundamentals and sound analysis, and nurturing a diverse talent bench engaged and aligned with our values.borrowers.

Footnotes to Business Update

(1) Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $8.9 billion of consolidated securitization debt (ABS issued and servicer advance financing) and other debt that is non-recourse to Redwood, and tangible stockholders' equity excludes $68 million of goodwill and intangible assets.

(2) Secured recourse leverage for our investment portfolio is defined as secured recourse debt financing our investment portfolio assets divided by capital allocated to our investment portfolio.

(3) Lock volume does not account for potential fallout from pipeline that typically occurs through the lending process.

Third Quarter Overview

The following table presents key financial metrics for the three and nine months ended September 30, ~~2021.~~2022.

Table 1 – Key Financial Results and Metrics

Three Months Ended Nine Months Ended
(In Thousands, except per Share Data) September 30, 2021 September 30, 2021
Net income per diluted common share $ 0.65 $ 2.03
Annualized GAAP return on equity 26.7 % 29.6 %
Dividends per share $ 0.21 $ 0.55
Book value per share $ 12.00 $ 12.00
Economic return on book value (1)
6.5 % 26.6 %


	Three Months Ended			Nine Months Ended
(In Thousands, except per Share Data)	September 30, 2022			September 30, 2022
Net (loss) income per diluted common share	$	(0.44)		$	(1.04)
Annualized GAAP return on equity	(16.4)		%	(11.8)		%
Dividends per share	$	0.23		$	0.69
Book value per share	$	10.18		$	10.18
Economic return on book value (1)	(3.4)%			(9.9)%

(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.

Business Highlights

Investment Portfolio

•~~Our third quarter 2021 results reflect ongoing strength~~Deployed $167 million of ~~our operating platforms with higher volumes~~capital into new organic and strong margins driving increased revenues, improved returns in our investment portfolio from more efficient financing, and a tax benefit realized during the quarter. These results, along with an increase in the value of our securities portfolio attributable to continued positive fundamental trends, contributed to a 4.7% increase in our book value per share during the quarter.third-party investments

•~~In September 2021, we announced a 17% increase in our quarterly dividend to $0.21 per share for the third quarter of 2021.~~Credit performance remained strong with stable delinquencies and continued declining LTVs

•~~Our book value increased $0.54 per share to $12.00 per share during the third quarter~~Investment Portfolio secured recourse leverage of ~~2021,~~0.8x as ~~basic earnings per share significantly exceeded our third quarter dividend~~ of ~~$0.21 per share.~~September 30, 2022

Business Purpose Mortgage Banking

•Funded $570 million in business purpose loans, 83% Bridge and 17% Single-Family Rental ("SFR")

•~~Our business purpose lending platform funded $639~~Securitized $274 million of ~~business purpose mortgage~~ loans in ~~the third quarter, including $394 million of single-family rental~~a private securitization backed by SFR loans ~~and $245 million of residential bridge loans.~~

•~~During~~Closed the ~~third quarter~~previously announced acquisition of ~~2021, we locked~~Riverbend Funding, LLC and its subsidiaries ("Riverbend"), a ~~record $4.74 billion~~best-in-class private mortgage lender to investors in transitional residential and multifamily real estate, for an initial cash purchase price of ~~jumbo loans with over 125 discrete sellers, jumbo loan purchase commitments were $3.29 billion, and we purchased $3.18 billion of residential jumbo loans.~~approximately $44 million paid at closing (and subject to certain adjustments including potential earnout consideration)

Residential Mortgage Banking

•~~During the third quarter of 2021, we securitized $1.03 billion of loans through three securitizations across Residential and Business Purpose Lending, and distributed $2.43 billion~~Distributed $612 million of jumbo loans through whole loan ~~sales.~~sales; at September 30, 2022, total net jumbo loan exposure was $712 million

•~~During~~Intentionally maintained light volume, locking $461 million of jumbo loans, down from $1.0 billion in second quarter 2022; loan purchase commitments were $256 million, down from $538 million in second quarter 2022

Financing Highlights

•Maintained robust balance sheet with unrestricted cash of $297 million and unencumbered assets of $491 million at September 30, 2022

•Added $900 million of new financing capacity across multiple borrowing facilities (with both new and existing domestic depository institutions) in the third quarter to further support operating platforms

◦Successfully renewed warehouse lines with maturities in the third quarter at unchanged advance rates

◦Ended third quarter with $3.8 billion of 2021, we completed a securitization backed entirely by residential home equity investment contracts ("HEIs"), issuing approximately $146 million of securities through a transaction co-sponsored with Point Digital.unused financing capacity across Residential and Business Purpose Mortgage Banking segments

•~~During~~Total margin call activity in the third quarter resulted in a net return of ~~2021, we funded six venture investments through our RWT Horizons venture investment initiative.~~cash to Redwood from financing and hedging counterparties

•~~During~~Repurchased 3.4 million shares of Redwood’s common stock at a cost of $24 million, resulting in $0.12 per share of book value accretion in the third quarter ~~of 2021, we added over $350 million of financing capacity to support growth of our operating platforms and completed a~~

RWT Horizons Highlights

•Completed three new ~~$100 million non-marginable term financing collateralized by retained securities~~investments in ~~our investment portfolio.~~the third quarter

•~~At September 30, 2021, our unrestricted cash was $557~~Since inception, RWT Horizons has completed 27 technology venture investments in 24 companies with an aggregate of over $26 million ~~and our estimated available capital was $350 million.~~

of investment commitments

RESULTS OF OPERATIONS

Within this Results of Operations section, we provide commentary that compares results year-over-year for ~~2021~~2022 and ~~2020.~~2021. Most tables include a "change" column that shows the amount by which the results from ~~2021~~2022 are greater or less than the results from the respective period in ~~2020.~~2021. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the third quarter of ~~2021,~~2022, compared to the third quarter of ~~2020,~~2021, and increases or decreases induring the "nine-month periods" refer to the change in results for the nine months ~~of 2021,~~ended September 30, 2022 compared to the ~~first~~ nine months ~~of 2020.~~ended September 30, 2021.

Consolidated Results of Operations

The following table presents the components of our net (loss) income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

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


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands, except per Share Data)	(In Thousands, except per Share Data)	2021		2020		Change		2021		2020		Change		(In Thousands, except per Share Data)	2022		2021		Change		2022		2021		Change
Net Interest Income	Net Interest Income	$	41,968	$	21,571	$	20,397	$	98,351	$	100,261	$	(1,910)	Net Interest Income	$	34,935	$	41,968	$	(7,033)	$	128,525	$	98,351	$	30,174
Non-interest Income	Non-interest Income													Non-interest Income
Mortgage banking activities, net	Mortgage banking activities, net	63,163		59,395		3,768		200,189		24,511		175,678		Mortgage banking activities, net	16,535		63,163		(46,628)		2,833		200,189		(197,356)
Investment fair value changes, net	Investment fair value changes, net	26,077		107,047		(80,970)		120,644		(611,557)		732,201		Investment fair value changes, net	(57,697)		26,077		(83,774)		(151,789)		120,644		(272,433)
Other income		2,388		(114)		2,502		8,357		3,979		4,378
Other income, net														Other income, net	4,027		2,388		1,639		17,016		8,357		8,659
Realized gains, net	Realized gains, net	6,703		602		6,101		17,803		30,419		(12,616)		Realized gains, net	—		6,703		(6,703)		2,581		17,803		(15,222)
Total non-interest income (loss), net		98,331		166,930		(68,599)		346,993		(552,648)		899,641
Total non-interest (loss) income, net														Total non-interest (loss) income, net	(37,135)		98,331		(135,466)		(129,359)		346,993		(476,352)
General and administrative expenses	General and administrative expenses	(47,692)		(27,630)		(20,062)		(131,837)		(84,832)		(47,005)		General and administrative expenses	(40,107)		(47,692)		7,585		(106,927)		(131,837)		24,910
Loan acquisition costs	Loan acquisition costs	(4,621)		(2,158)		(2,463)		(11,928)		(7,716)		(4,212)		Loan acquisition costs	(2,426)		(4,621)		2,195		(10,371)		(11,928)		1,557
Other expenses	Other expenses	(4,023)		(7,788)		3,765		(12,104)		(104,286)		92,182		Other expenses	(4,261)		(4,023)		(238)		(11,814)		(12,104)		290
Net income (loss) before income taxes		83,963		150,925		(66,962)		289,475		(649,221)		938,696
Benefit from (provision for) income taxes		4,323		(9,113)		13,436		(13,907)		13,079		(26,986)
Net Income (Loss)		$	88,286	$	141,812	$	(53,526)	$	275,568	$	(636,142)	$	911,710
Diluted earnings (loss) per common share		$	0.65	$	1.02	$	(0.37)	$	2.03	$	(5.60)	$	7.63
Net (loss) income before income taxes														Net (loss) income before income taxes	(48,994)		83,963		(132,957)		(129,946)		289,475		(419,421)
(Provision for) benefit from income taxes														(Provision for) benefit from income taxes	(1,417)		4,323		(5,740)		10,484		(13,907)		24,391
Net (Loss) Income														Net (Loss) Income	$	(50,411)	$	88,286	$	(138,697)	$	(119,462)	$	275,568	$	(395,030)
Diluted (loss) earnings per common share														Diluted (loss) earnings per common share	$	(0.44)	$	0.65	$	(1.09)	$	(1.04)	$	2.03	$	(3.07)

Net Interest Income

~~The increase~~Net interest income from our investment portfolio increased by $3 million and $36 million during the three and nine-month periods, respectively, and generally resulted from higher average asset balances in 2022, as we increased our investments in bridge loans and in securities we retained from CoreVest securitizations during the prior twelve months. We recognized elevated levels of discount accretion on our available-for-sale securities and yield maintenance income on our SFR securities during the first quarter of 2022. In association with a continued rise in interest rates throughout 2022, prepayment speeds on many of our assets slowed, and resulted in a reduction in discount accretion and yield maintenance income on our SFR securities in the second and third quarters. Additionally, net interest income from Business Purpose Mortgage Banking operations increased by $1 million and $5 million, during the three and nine-month periods, respectively, as a result of higher average balances of SFR loan inventory during the respective periods.

These increases were offset by $6 million and $8 million decreases in net interest income during the ~~three-month~~three and nine-month periods, ~~was primarily due to~~respectively, from higher ~~average asset balances~~corporate interest expense resulting from the issuance of new convertible debt in June 2022 and from our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates in 2022. Additionally, Residential Mortgage Banking operations experienced $5 million and $3 million decreases in net interest income during the ~~third quarter of 2021, as well~~three and nine-month periods, respectively, as a ~~higher net interest margin, driven by the combination~~result of a lower average ~~cost~~balance of ~~funds~~loan inventory in the respective periods.

Continued increases in benchmark interest rates and ~~higher discount accretion on~~borrowing spreads could negatively impact our ~~available-for-sale securities. For the nine-month periods, the decrease in~~future net interest ~~expense was primarily related~~income in relation to ~~higher average asset balances during~~ the ~~first half~~portion of ~~2020,~~our fixed-rate assets that are financed with floating-rate debt, as well as in relation to fixed-rate debt that matures in the near-term that is refinanced with new debt at current market rates. Additionally, to the extent we ~~repositioned~~add incremental leverage to our investment portfolio, ~~during the second quarter of 2020, selling a significant amount of assets.~~net interest income could decrease while proceeds from those financings are redeployed into other assets or if additional capital is deployed into HEIs which do not earn interest income.

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

Mortgage Banking Activities, Net

The ~~increase~~decrease in income from mortgage banking activities during the ~~three-~~three and nine-month periods was ~~primarily due~~attributable to $31 million and $123 million decreases, respectively, from our Residential Mortgage Banking operations and $16 million and $74 million decreases, respectively, from our Business Purpose Mortgage Banking operations.

The decreases from Residential Mortgage Banking operations were attributable to lower acquisition volumes as well as decreased margins during 2022, as a sharp increase in mortgage rates during 2022 contributed to an ~~increase~~industry-wide decrease in ~~loan acquisition~~residential mortgage origination activity. Additionally, given market volatility, we focused on risk management and ~~origination~~were deliberate in moderating volume and transferring financial risk quickly during 2022. Margins and profitability for Residential Mortgage Banking during the first nine months of 2022 were impacted by wider credit spreads for securitizations and whole loans, as well as increased rate volatility, which resulted in higher hedging costs. In the third quarter of 2022, margins recovered on improved distribution execution.

Despite increased volumes ~~at both our residential~~during the first nine months of 2022, Business Purpose Mortgage Banking income declined year-over-year, as continued market volatility and ~~business purpose~~extreme credit spread widening in 2022 negatively impacted profitability. Spreads stabilized in the third quarter and volume remained fairly healthy, which contributed to $14 million of BPL mortgage banking ~~businesses during 2021, due to pandemic-related disruptions~~activity income in ~~2020, which adversely impacted our origination volumes in 2020.~~the third quarter of 2022.

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~~their associated interest rate hedges. During the ~~second quarter~~three and nine months ended September 30, 2022, negative investment fair value changes reflected extreme levels of ~~2020,~~credit spread widening across many of our longer-duration, fixed-rate investments, partially offset by fair value increases in our IO securities, MSRs, and interest rate hedges, ~~associated with these investments.~~ which benefited from rising interest rates. While our home equity investments ("HEIs") experienced price increases in the first half of 2022 due to home price appreciation, in the third quarter of 2022, they saw declines in prices as the outlook for home price appreciation deteriorated. Negative fair value changes primarily reflected unrealized mark-to-market losses, while fundamental credit performance, including delinquencies and LTVs, remained stable across our portfolio.

During the three and nine months ended September 30, 2021, positive investment fair value changes reflected ~~continuing improvement~~improvements in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained CAFL SFR securities.

Additional detail on our investment fair value changes during ~~2021~~2022 is included in the “Results of Operations by Segment” section that ~~follows.~~follows as well as

~~During the three months ended September 30, 2020, investment fair value changes reflected increases in the fair value~~Table 5.6 of our ~~investment assets from improved credit performance and spread tightening. During the nine months ended September 30, 2020, the negative investment fair value changes reflected significant declines~~Notes to Consolidated Financial Statements in ~~the value~~Part 1, Item 1 of ~~our investments in the first quarter of 2020 resulting from market dislocations caused by the pandemic.~~this Quarterly Report on Form 10-Q.

Other Income

The increase in other income for the ~~three-~~three and ~~nine-month~~nine month periods ~~was~~ primarily ~~the result of an~~resulted from higher income on our MSR investments, which increased by $3 million and $12 million, respectively. The increase in income from ~~our MSR investments, which generally benefited~~MSRs was primarily due to positive valuation changes resulting from a ~~stabilization~~slowdown in prepayment speeds during ~~2021.~~2022 as interest rates rose.

Additional detail on our other income is presented in Table 21.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Realized Gains, Net

During the three and nine months ended September 30, 2022, we realized gains of zero and $3 million, respectively, primarily resulting from calls associated with third-party available-for-sale ("AFS") securities during the first quarter of 2022. During the three and nine months ended September 30, 2021, we realized gains of $7 million and $18 million, respectively, primarily resulting from the call of two and six seasoned Sequoia securitizations, respectively. During the three and nine months ended September 30, 2020, we realized gains of $1 million and $30 million, respectively, primarily resulting from the sale of AFS securities, 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.

General and Administrative Expenses

~~The~~General and administration expenses decreased for the three and nine month periods, primarily due to $16 million and $42 million decreases in variable compensation expense, respectively, associated with the decreases in earnings during the respective periods. Additionally, fixed compensation expense in the second quarter of 2022 included a $2 million benefit from a payroll tax refund related to a prior year that was realized during the quarter. These decreases were offset by a $1 million increase in ~~general~~costs associated with the acquisition of Riverbend, including $1 million of direct transaction costs incurred over the second and third quarters of 2022, and $2 million of fixed compensation costs in the third quarter of 2022 from the addition of Riverbend employees. Additionally, in the third quarter of 2022, we incurred $4 million of employee severance and transition-related expenses.

Additional detail on our General and administrative expenses ~~for the three- and nine-month periods primarily resulted from increased accruals~~is presented in Table 22.1 of ~~variable compensation expense associated with improved financial results~~our Notes to Consolidated Financial Statements in ~~2021 as compared to 2020, as well as long-term incentive award expense from awards granted in the second half~~Part 1, Item 1 of ~~2020.~~this Quarterly Report on Form 10-Q.

Loan Acquisition Costs

~~The increase in loan~~Loan acquisition costs for our mortgage banking operations decreased $2 million for both the ~~three-~~three and ~~nine-month~~nine month periods, ~~was primarily due to higher loan origination volumes throughout 2021 as compared to 2020.~~

~~Other Expenses~~

The decrease in other expenses for the nine-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 that was taken as a result of ~~the onset of pandemic- and liquidity-related disruptions.~~lower loan origination volumes in 2022.

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. Losses from our mortgage banking operations during the first nine months of 2022 contributed to a tax benefit during that period. For the ~~three-month periods,~~third quarter of 2022, a small loss from our ~~income~~mortgage banking operations was more than offset by gains on hedges associated with certain of our investments, resulting in a tax provision ~~decreased as~~for the quarter.

During the third quarter of 2021, we realized a $19 million benefit from the release of valuation allowance on a portion of our deferred tax ~~assets. This decrease was partially offset by an increase in GAAP income recorded at our TRS and state taxes~~assets contributing to a net tax benefit during ~~2021. For the nine-month periods, the~~that quarter. The tax provision infor the nine months ended September 30, 2021 ~~is reflective of the~~reflects positive income earned atfrom our ~~taxable subsidiaries,~~mortgage banking operations during that period, partially offset by the benefit from the release of valuation ~~allowance and higher state taxes, as compared to a tax benefit in 2020 reflective of a net loss incurred in that period.~~allowance.

For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.

8283

Net Interest Income

The following table presents the components of net interest income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table 3 – Net Interest Income


		Three Months Ended September 30,													Three Months Ended September 30,
		2021						2020							2022						2021
(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	$	15,377	$	1,936,882	3.2	%	$	434	$	53,297	3.3	%	Residential loans, held-for-sale	$	11,844	$	984,365	4.8	%	$	15,377	$	1,936,882	3.2	%
Residential loans - HFI at Redwood (2)		—		—		—	%	77		—		—	%

Residential loans - HFI at Legacy Sequoia (2)	Residential loans - HFI at Legacy Sequoia (2)	1,042		248,791		1.7	%	1,795		285,077		2.5	%	Residential loans - HFI at Legacy Sequoia (2)	1,473		199,264		3.0	%	1,042		248,791		1.7	%
Residential loans - HFI at Sequoia (2)	Residential loans - HFI at Sequoia (2)	18,867		2,104,357		3.6	%	20,919		1,910,771		4.4	%	Residential loans - HFI at Sequoia (2)	31,587		3,468,730		3.6	%	18,867		2,104,357		3.6	%
Residential loans - HFI at Freddie Mac SLST (2)	Residential loans - HFI at Freddie Mac SLST (2)	18,707		2,043,813		3.7	%	21,696		2,153,447		4.0	%	Residential loans - HFI at Freddie Mac SLST (2)	16,098		1,600,215		4.0	%	18,707		2,043,813		3.7	%
Business purpose loans at Redwood		18,192		1,019,393		7.1	%	19,456		1,149,171		6.8	%
Single-family rental loans - HFI at CAFL		48,723		3,455,645		5.6	%	36,181		2,663,541		5.4	%
Bridge loans - HFI at CAFL		214		12,015		7.1	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series		4,846		483,930		4.0	%	4,918		489,736		4.0	%
Business purpose loans - HFS														Business purpose loans - HFS	9,070		535,017		6.8	%	4,090		314,641		5.2	%
Business purpose loans - HFI														Business purpose loans - HFI	24,688		1,257,222		7.9	%	14,102		704,752		8.0	%
Single-family rental loans - HFI at CAFL (2)														Single-family rental loans - HFI at CAFL (2)	50,959		2,960,614		6.9	%	48,723		3,455,645		5.6	%
Bridge loans - HFI at CAFL (2)														Bridge loans - HFI at CAFL (2)	10,480		529,993		7.9	%	214		12,015		7.1	%
Multifamily loans at Freddie Mac K-Series (2)														Multifamily loans at Freddie Mac K-Series (2)	4,762		439,966		4.3	%	4,846		483,930		4.0	%
Trading securities	Trading securities	5,710		147,925		15.4	%	6,539		140,892		18.6	%	Trading securities	3,924		131,626		11.9	%	5,710		147,925		15.4	%
Available-for-sale securities	Available-for-sale securities	8,532		120,183		28.4	%	3,596		135,942		10.6	%	Available-for-sale securities	3,065		136,203		9.0	%	8,532		120,183		28.4	%
Other interest income	Other interest income	5,512		769,308		2.9	%	6,371		859,808		3.0	%	Other interest income	9,712		898,111		4.3	%	5,512		769,308		2.9	%
Total interest income	Total interest income	145,722		12,342,242		4.7	%	121,982		9,841,682		5.0	%	Total interest income	177,662		13,141,326		5.4	%	145,722		12,342,242		4.7	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(10,808)		1,982,726		(2.2)	%	(3,558)		313,190		(4.5)	%	Short-term debt facilities	(19,436)		1,561,146		(5.0)	%	(10,808)		1,982,726		(2.2)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(1,018)		149,450		(2.7)	%	(1,587)		218,885		(2.9)	%	Short-term debt - servicer advance financing	(2,606)		225,002		(4.6)	%	(1,018)		149,450		(2.7)	%

Promissory notes														Promissory notes	(572)		33,302		(6.9)	%	—		—		—	%
Short-term debt - convertible notes, net														Short-term debt - convertible notes, net	(1,330)		100,895		(5.3)	%	—		—		—	%
ABS issued - Legacy Sequoia (2)	ABS issued - Legacy Sequoia (2)	(641)		245,910		(1.0)	%	(1,058)		280,954		(1.5)	%	ABS issued - Legacy Sequoia (2)	(1,486)		198,166		(3.0)	%	(641)		245,910		(1.0)	%
ABS issued - Sequoia (2)	ABS issued - Sequoia (2)	(15,368)		1,872,636		(3.3)	%	(17,828)		1,708,687		(4.2)	%	ABS issued - Sequoia (2)	(27,541)		3,233,716		(3.4)	%	(15,368)		1,872,636		(3.3)	%
ABS issued - Freddie Mac SLST (2)	ABS issued - Freddie Mac SLST (2)	(15,774)		1,765,465		(3.6)	%	(16,819)		1,892,967		(3.6)	%	ABS issued - Freddie Mac SLST (2)	(12,829)		1,325,930		(3.9)	%	(15,774)		1,765,465		(3.6)	%
ABS issued - Freddie Mac K-Series		(4,460)		453,031		(3.9)	%	(4,426)		464,693		(3.8)	%
ABS issued - CAFL		(37,489)		3,118,792		(4.8)	%	(26,383)		2,509,828		(4.2)	%
ABS issued - Freddie Mac K-Series (2)														ABS issued - Freddie Mac K-Series (2)	(4,377)		408,164		(4.3)	%	(4,460)		453,031		(3.9)	%
ABS issued - CAFL (2)														ABS issued - CAFL (2)	(44,677)		3,075,551		(5.8)	%	(37,489)		3,118,792		(4.8)	%
Long-term debt facilities	Long-term debt facilities	(8,715)		881,669		(4.0)	%	(19,198)		1,094,608		(7.0)	%	Long-term debt facilities	(14,464)		1,148,700		(5.0)	%	(8,715)		881,669		(4.0)	%
Long-term debt - FHLBC		—		—		—	%	(1)		1,000		(0.4)	%
Long-term debt - corporate	Long-term debt - corporate	(9,481)		651,468		(5.8)	%	(9,553)		648,923		(5.9)	%	Long-term debt - corporate	(13,409)		761,712		(7.0)	%	(9,481)		651,468		(5.8)	%
Total interest expense	Total interest expense	(103,754)		11,121,147		(3.7)	%	(100,411)		9,133,735		(4.4)	%	Total interest expense	(142,727)		12,072,284		(4.7)	%	(103,754)		11,121,147		(3.7)	%
Net Interest Income	Net Interest Income	$	41,968					$	21,571					Net Interest Income	$	34,935					$	41,968

8384


		Nine Months Ended September 30,													Nine Months Ended September 30,
		2021						2020							2022						2021
(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	$	35,308	$	1,568,966	3.0	%	$	17,220	$	599,609	3.8	%	Residential loans, held-for-sale	$	42,201	$	1,406,219	4.0	%	$	35,308	$	1,568,966	3.0	%
Residential loans - HFI at Redwood (2)		—		—		—	%	21,003		659,998		4.2	%

Residential loans - HFI at Legacy Sequoia (2)	Residential loans - HFI at Legacy Sequoia (2)	3,559		262,007		1.8	%	7,673		327,460		3.1	%	Residential loans - HFI at Legacy Sequoia (2)	3,592		211,707		2.3	%	3,559		262,007		1.8	%
Residential loans - HFI at Sequoia (2)	Residential loans - HFI at Sequoia (2)	48,842		1,644,256		4.0	%	68,566		1,957,484		4.7	%	Residential loans - HFI at Sequoia (2)	95,608		3,732,108		3.4	%	48,842		1,644,256		4.0	%
Residential loans - HFI at Freddie Mac SLST (2)	Residential loans - HFI at Freddie Mac SLST (2)	58,372		2,110,555		3.7	%	64,869		2,203,677		3.9	%	Residential loans - HFI at Freddie Mac SLST (2)	49,851		1,717,544		3.9	%	58,372		2,110,555		3.7	%
Business purpose loans		48,982		945,899		6.9	%	62,541		1,266,493		6.6	%
Single-family rental loans - HFI at CAFL		152,444		3,349,828		6.1	%	99,169		2,411,312		5.5	%
Bridge loans - HFI at CAFL		214		4,049		7.0	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series		14,492		488,804		4.0	%	49,960		1,711,123		3.9	%
Business purpose loans - HFS														Business purpose loans - HFS	22,823		536,366		5.7	%	10,105		277,486		4.9	%
Business purpose loans - HFI														Business purpose loans - HFI	52,226		1,003,673		6.9	%	38,877		668,413		7.8	%
Single-family rental loans - HFI at CAFL (2)														Single-family rental loans - HFI at CAFL (2)	173,630		3,070,972		7.5	%	152,444		3,349,828		6.1	%
Bridge loans - HFI at CAFL(2)														Bridge loans - HFI at CAFL(2)	21,751		412,766		7.0	%	214		4,049		7.0	%
Multifamily loans at Freddie Mac K-Series (2)														Multifamily loans at Freddie Mac K-Series (2)	14,247		451,757		4.2	%	14,492		488,804		4.0	%
Trading securities	Trading securities	17,133		140,241		16.3	%	26,789		336,151		10.6	%	Trading securities	13,520		151,898		11.9	%	17,133		140,241		16.3	%
Available-for-sale securities	Available-for-sale securities	16,051		128,564		16.6	%	11,682		139,487		11.2	%	Available-for-sale securities	17,252		137,134		16.8	%	16,051		128,564		16.6	%
Other interest income	Other interest income	17,325		790,499		2.9	%	20,537		763,898		3.6	%	Other interest income	27,816		917,975		4.0	%	17,325		790,499		2.9	%
Total interest income	Total interest income	412,722		11,433,668		4.8	%	450,009		12,376,692		4.8	%	Total interest income	534,517		13,750,119		5.2	%	412,722		11,433,668		4.8	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(27,380)		1,609,295		(2.3)	%	(40,158)		1,415,975		(3.8)	%	Short-term debt facilities	(41,081)		1,628,316		(3.4)	%	(27,380)		1,609,295		(2.3)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(3,414)		166,605		(2.7)	%	(4,961)		199,517		(3.3)	%	Short-term debt - servicer advance financing	(6,110)		241,582		(3.4)	%	(3,414)		166,605		(2.7)	%

Promissory notes														Promissory notes	(572)		11,223		(6.8)	%	—		—		—	%
Short-term debt - convertible notes, net														Short-term debt - convertible notes, net	(1,330)		34,001		(5.2)	%	—		—		—	%
ABS issued - Legacy Sequoia (2)	ABS issued - Legacy Sequoia (2)	(2,271)		258,915		(1.2)	%	(5,099)		322,829		(2.1)	%	ABS issued - Legacy Sequoia (2)	(3,154)		209,931		(2.0)	%	(2,271)		258,915		(1.2)	%
ABS issued - Sequoia (2)	ABS issued - Sequoia (2)	(38,848)		1,419,153		(3.6)	%	(58,455)		1,757,851		(4.4)	%	ABS issued - Sequoia (2)	(84,041)		3,491,194		(3.2)	%	(38,848)		1,419,153		(3.6)	%
ABS issued - Freddie Mac SLST (2)	ABS issued - Freddie Mac SLST (2)	(49,756)		1,859,559		(3.6)	%	(48,840)		1,861,309		(3.5)	%	ABS issued - Freddie Mac SLST (2)	(40,287)		1,424,032		(3.8)	%	(49,756)		1,859,559		(3.6)	%
ABS issued - Freddie Mac K-Series		(13,294)		459,648		(3.9)	%	(47,154)		1,614,333		(3.9)	%
ABS issued - CAFL		(118,543)		3,041,714		(5.2)	%	(72,768)		2,247,583		(4.3)	%
ABS issued - Freddie Mac K-Series (2)														ABS issued - Freddie Mac K-Series (2)	(13,099)		419,954		(4.2)	%	(13,294)		459,648		(3.9)	%
ABS issued - CAFL (2)														ABS issued - CAFL (2)	(144,883)		3,105,387		(6.2)	%	(118,543)		3,041,714		(5.2)	%
Long-term debt facilities	Long-term debt facilities	(32,518)		776,846		(5.6)	%	(29,789)		641,094		(6.2)	%	Long-term debt facilities	(37,664)		1,231,057		(4.1)	%	(32,518)		776,846		(5.6)	%
Long-term debt - FHLBC	Long-term debt - FHLBC	(2)		374		(0.7)	%	(10,411)		786,790		(1.8)	%	Long-term debt - FHLBC	—		—		—	%	(2)		374		(0.7)	%
Long-term debt - corporate	Long-term debt - corporate	(28,345)		650,828		(5.8)	%	(32,113)		708,708		(6.0)	%	Long-term debt - corporate	(33,771)		706,504		(6.4)	%	(28,345)		650,828		(5.8)	%
Total interest expense	Total interest expense	(314,371)		10,242,937		(4.1)	%	(349,748)		11,555,989		(4.0)	%	Total interest expense	(405,992)		12,503,181		(4.3)	%	(314,371)		10,242,937		(4.1)	%
Net Interest Income	Net Interest Income	$	98,351					$	100,261					Net Interest Income	$	128,525					$	98,351

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

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

Interest income from multifamily loans at Freddie Mac K-Series and the interest expense from ABS issued - Freddie Mac K-Series represent activity from our consolidated Freddie Mac K-Series entities. Interest income from single-family rental loans - HFI at CAFL, bridge loans - HFI at CAFL and the interest expense from ABS issued - CAFL represent activity from our consolidated CAFL entities.

8485

Results of Operations by Segment

We report on our business using three ~~distinct~~ segments: Residential ~~Lending,~~Mortgage Banking, Business Purpose ~~Lending,~~Mortgage Banking, and ~~Third-Party Investments.~~Investment Portfolio. For additional information on our segments, refer to Note 2324 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 (loss) income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

Table 4 – Segment Results Summary

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2021 2020 Change 2021 2020 Change
Segment Contribution from:
Residential Lending $ 38,796 $ 8,526 $ 30,270 $ 122,435 $ (152,270) $ 274,705
Business Purpose Lending 32,066 53,418 (21,352) 86,321 (123,895) 210,216
Third-Party Investments 30,466 101,054 (70,588) 133,994 (318,146) 452,140
Corporate/Other (13,042) (21,186) 8,144 (67,182) (41,831) (25,351)
Net Income (Loss) $ 88,286 $ 141,812 $ (53,526) $ 275,568 $ (636,142) $ 911,710


	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2022		2021		Change		2022		2021		Change
Segment Contribution from:
Residential Mortgage Banking	$	(640)	$	19,406	$	(20,046)	$	(7,371)	$	74,469	$	(81,840)
Business Purpose Mortgage Banking	(3,856)		10,837		(14,693)		(27,054)		31,146		(58,200)
Investment Portfolio	(22,404)		71,085		(93,489)		(24,049)		237,135		(261,184)
Corporate/Other	(23,511)		(13,042)		(10,469)		(60,988)		(67,182)		6,194
Net (Loss) Income	$	(50,411)	$	88,286	$	(138,697)	$	(119,462)	$	275,568	$	(395,030)

The ~~following~~ sections that follow provide ~~a discussion of the results of operations at each of~~further detail on our three business segments and their results of operations for the three and nine months ended September 30, ~~2021.~~2022.

Corporate/Other

The ~~decrease~~increase in net expense from Corporate/Other for the three-month periods was primarily due to ~~the reversal of~~a $19 million ~~of valuation allowance on our deferred tax assets~~benefit from taxes in the third quarter of ~~2021. This decrease was partially~~2021 resulting from the reversal of a deferred tax asset valuation allowance, as well as $6 million of higher interest expense in the third quarter of 2022 resulting from the issuance of new convertible debt in June 2022 and from our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates. These increases in expenses were offset by ~~higher accruals of~~$11 million and $20 million decreases in the three- and nine-month periods, respectively, in compensation expense for corporate employees, primarily related to variable compensation, ~~expense associated~~which decreased in association with ~~improved financial results in 2021.~~ lower earnings year-over-year.

The ~~increase~~decrease in net expense from Corporate/Other for the nine-month periods was primarily due to a ~~$25~~$20 million ~~gain associated~~decrease in compensation expense for corporate employees, primarily related to variable compensation, which decreased in association with ~~the repurchase of $125~~lower earnings year-over-year, offset both by $8 million of ~~convertible debt~~higher interest expense in 2022 and the ~~second quarter of 2020.~~

~~Residential Lending Segment~~

~~Overview~~

~~Our Residential Lending segment generated $39~~$19 million ~~of net~~benefit from income ~~during the third quarter of~~taxes in 2021 driven primarily by $40 million of mortgage banking income and $12 million of net interest income from investments. Mortgage banking income increased from the second quarter of 2021, as loan purchase commitments of $3.3 billion in the third quarter were 20% higher than the second quarter and margins improved from the second quarter. Net interest income from investments increased approximately $5 million in the third quarter of 2021 from the second quarter of 2021, due to increased discount amortization on our available-for-sale securities.

Our Residential Lending segment generated $31 million of net income during the second quarter of 2021, driven primarily by $27 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income decreased from the first quarter of 2021, as loan purchase commitments of $2.7 billion in the second quarter were 22% lower than the first quarter and margins normalized towards the high end of our historic target range.

Our Residential Lending segment generated $53 million of net income during the 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 to $3.51 billion, and gross margins nearly doubled.

described previously.

8586

Residential Mortgage Banking Segment

Our Residential Mortgage Banking segment consists of a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale to whole loan buyers, securitization through our Sequoia private-label securitization program, or transfer into our investment portfolio. We typically acquire prime jumbo mortgages and the related mortgage servicing rights on a flow basis from our extensive network of loan sellers. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of residential loans held-for-sale within this segment. This segment’s main source of mortgage banking income is net interest income from 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. Direct operating expenses and tax expenses associated with these activities are also included in this segment.

Net income from this segment is primarily comprised of net interest income earned on loans while they are held in inventory, mortgage banking activities income (including mark-to-market adjustments on loans from the time they are purchased to when they are sold or securitized, mark-to-market adjustments on new and outstanding loan purchase commitments and gains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate securities that we retain from our Sequoia securitizations (many of which we consolidate for GAAP purposes) are transferred to and held in our Investment Portfolio segment.

The following table provides the activity of residential loans held in inventory for sale at our mortgage banking business during the three and nine months ended September 30, ~~2021.~~2022.

Table 5 – Loan Inventory for Residential Mortgage Banking Operations — Activity


		Three Months Ended		Nine Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	September 30, 2021		September 30, 2021		(In Thousands)	September 30, 2022		September 30, 2022
Balance at beginning of period	Balance at beginning of period	$	1,063,722	$	176,641	Balance at beginning of period	$	990,924	$	1,673,236
Acquisitions	Acquisitions	3,176,004		9,758,766		Acquisitions	337,922		3,483,833
Sales	Sales	(2,426,858)		(6,958,670)		Sales	(602,842)		(3,653,601)
Transfers between portfolios (1)		(464,189)		(1,669,683)
Transfers between segments (1)						Transfers between segments (1)	—		(684,491)
Principal repayments	Principal repayments	(15,280)		(26,155)		Principal repayments	(29,486)		(72,771)
Changes in fair value, net	Changes in fair value, net	10,630		63,130		Changes in fair value, net	(20,060)		(69,748)
Balance at End of Period	Balance at End of Period	$	1,344,029	$	1,344,029	Balance at End of Period	$	676,458	$	676,458

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

During the three and nine months ended September 30, 2022, our residential mortgage loan conduit locked $461 million and $4.10 billion of loans, respectively ($256 million and $2.75 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), including $379 million and $3.59 billion of Select loans and $82 million and $512 million of Choice loans, respectively, and purchased $338 million and $3.48 billion of loans, respectively. During the three months ended September 30, 2022, approximately 80% of locked loans were purchase-money loans and 20% were refinancings. During the three and nine months ended September 30, 2022, we distributed $612 million and $3.68 billion of loans (unpaid principal balance) through whole loan sales, respectively. During the nine months ended September 30, 2022, we completed one securitization backed by $687 million of loans (unpaid principal balance).

At September 30, 2022, we had total net jumbo loan exposure of $712 million (down 5% from June 30, 2022), with an average gross mortgage rate of 5%. This balance included $703 million (principal value) of loans in inventory on our balance sheet, $146 million of loans identified for purchase (locked loans, unadjusted for fallout), and $137 million of forward sale agreements for loans. Given current market conditions, we reduced our capital allocation to Residential Mortgage Banking to $150 million at the end of the third quarter of 2022, down from $200 million at the end of the second quarter of 2022. As we look ahead, we expect conditions in the consumer residential sector to remain challenging for a number of quarters as industry volumes continue to be affected by rapidly increasing mortgage rates, which, along with record home price appreciation in recent years, has pushed housing affordability to new lows.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At September 30, 2022, we had residential warehouse facilities outstanding with nine different counterparties, with $2.85 billion of total capacity and $2.10 billion of available capacity. These included non-marginable facilities (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent) with $1.38 billion of total capacity and marginable facilities with $1.48 billion of total capacity.

The following table presents key earnings and operating metrics for our ~~mortgage banking income and loan purchase commitments~~Residential Mortgage Banking segment during the three and nine months ended September 30, ~~2021.~~2022.

Table 6 – Residential Mortgage Banking ~~Income~~Earnings Summary and ~~Residential Loan Purchase Commitments~~Operating Metrics

Three Months Ended Nine Months Ended
(In Thousands) September 30, 2021 September 30, 2021
Mortgage banking income $ 40,121 $ 131,281
Loan purchase commitments entered into $ 3,288,102 $ 9,541,499


	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2022		2021		Change		2022		2021		Change
Mortgage banking (loss) income	$	3,957	$	40,121	$	(36,164)	$	5,038	$	131,279	$	(126,241)
Operating expenses	(6,285)		(10,286)		4,001		(20,692)		(33,170)		12,478
Benefit from (provision for) income taxes	1,688		(10,429)		12,117		8,283		(23,640)		31,923
Segment Contribution	$	(640)	$	19,406	$	(20,046)	$	(7,371)	$	74,469	$	(81,840)
Loan purchase commitments (loan locks, adjusted for expected fallout)	$	256,044	$	3,288,102	$	(3,032,058)	$	2,749,910	$	9,541,499	$	(6,791,589)

~~Mortgage~~Residential mortgage banking income presented in the table above is comprised of net interest income from residential loans held-for-sale in inventory and mortgage banking ~~activities. Income~~activities, net 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/expensesthis segment (see Note 1920 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further ~~detail)~~detail on the composition of mortgage banking activities, net). Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.

~~During the three months ended September 30, 2021,~~The decrease in contribution from our residential mortgage ~~loan conduit locked $4.74 billion of loans ($3.29 billion adjusted for expected pipeline fallout - i.e, loan purchase commitments), including $4.21 billion of Select loans~~banking operations during the three- and ~~$0.53 billion of Choice loans, and purchased $3.18 billion of loans. Approximately 59% of loans locked~~nine-month periods was primarily attributable to lower mortgage banking activities income, as discussed in the ~~third quarter were purchase-money loans and 41% were refinancings. During the three months ended September 30, 2021, we distributed $2.43 billion~~preceding Consolidated Results of ~~loans through whole loan sales, and completed one securitization backed by $449 million of loans (unpaid principal balance).~~

At September 30, 2021, we had $1.34 billion of loans in inventory on our balance sheet, our loan pipeline included $2.77 billion of loans identified for purchase (locked loans, unadjusted for fallout), and we had entered into forward sale agreements for $662 million of loans.

Our gross margin (mortgage banking income earned in the period divided by loan purchase commitments entered into during the period) for the three months ended September 30, 2021 was 122 basis points, up from 98 basis points in the second quarter of 2021.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At September 30, 2021, we had residential warehouse facilities outstanding with seven different counterparties, with $2.70 billion of total capacity and $1.36 billion of available capacity. These included non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral that is non-delinquent) facilities with $1.18 billion of total capacity and marginable facilities with $1.53 billion of total capacity.

~~Investment Portfolio~~

~~The following table presents details of our Residential Lending investment portfolio at September 30, 2021 and December 31, 2020.~~

~~Table 7 – Residential Lending Investments~~

(In Thousands) September 30, 2021 December 31, 2020
Residential loans at Redwood (1)
$ 151,050 $ —
Residential securities at Redwood (2)
145,430 155,501
Residential securities at consolidated Sequoia entities (3)
236,451 217,965
Other investments 12,389 8,815
Total Segment Investments $ 545,320 $ 382,281

~~(1)Balance consists of loans called from Sequoia securitizations. Excludes Sequoia loans held at VIEs that we 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 the consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $2.48 billion of loans and $2.24 billion of ABS issued associated with these investments at September 30, 2021.

During the third quarter of 2021, we purchased $66 million of loans from Sequoia securitizations we called, and we retained $2 million of securities from one Sequoia securitization we completed during the quarter. During the second quarter of 2021, we purchased ~~$83 million~~ of loans from Sequoia securitizations we called, and we retained $8 million of securities from three Sequoia securitizations we completed during the 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"~~Operations section ~~that follows for additional details on our investments and their associated borrowings.~~

~~During the third quarter~~ of ~~2021, net interest income from our residential lending investment portfolio was $12 million, which increased $5 million from the second quarter of 2021, and other income was $1 million~~this MD&A. While margins improved in the third quarter of ~~2021, consistent with~~2022, a re-widening of credit spreads or further rate volatility could continue to negatively impact our margins and profitability. The decreases in mortgage banking income were partially offset by lower general and administrative expenses, which declined during the ~~second quarter of 2021. The increase in net interest income was~~three- and nine-month periods, primarily due to ~~higher discount accretion~~lower variable compensation expenses.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income on our available-for-sale securities, driven by expectations for certain of our retained Sequoia securities to be called over the next several quarters, affecting our cash flow forecasts and effective yields for those investments.

taxes. The ~~following table presents the components of investment fair value changes for our Residential Lending segment by investment type~~benefit from income taxes for the ~~three and nine months ended September 30, 2021.~~

~~Table 8 – Investment Fair Value Changes, Net from Residential Lending~~

Three Months Ended Nine Months Ended
(In Thousands) September 30, 2021 September 30, 2021
Investment Fair Value Changes, Net
Changes in fair value of:
Residential loans at Redwood $ 816 $ 2,423
Trading securities (1,825) (6,553)
Net investments in Sequoia entities (1)
3,314 13,118
Risk-sharing and other investments (20) (63)
Recoveries (impairments) on AFS securities — 33
Investment Fair Value Changes, Net $ 2,285 $ 8,958
third quarter of 2022 was due to an overall GAAP loss incurred at our TRS during that period.

~~(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.

Strengthening credit performance helped drive spreads tighter during the three-and nine-month periods for most of our subordinate securities, which resulted in net positive fair value changes for our residential lending investments. Additionally, during the first nine months of 2021, most of our investment securities experienced elevated prepayments, which generally benefited our subordinate securities, but negatively impacted our interest-only and certificated servicing securities, causing a net negative fair value change for our trading securities.

Business Purpose ~~Lending~~Mortgage Banking Segment

~~Overview~~

Our Business Purpose ~~Lending~~Mortgage Banking segment ~~generated $32 million~~consists of ~~net~~a platform that originates and acquires business purpose loans (consisting of SFR loans and bridge loans) for subsequent securitization, sale to whole loan buyers, or transfer into our investment portfolio. SFR loans are business purpose mortgage loans to investors in single-family (primarily 1-4 unit) rental properties. Bridge loans are business purpose mortgage loans to investors rehabilitating and subsequently reselling or renting residential and multifamily properties. We typically originate SFR loans and distribute most of our SFR loans through our CAFL private-label securitization program and, on occasion, will sell them as whole loans. We originate and acquire bridge loans and typically transfer these loans into our Investment Portfolio where they will be retained for investment; on occasion, we may sell them as whole loans. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of SFR loans held-for-sale.

Net income ~~during the third quarter of 2021, driven~~from this segment is primarily ~~by $32 million of mortgage banking income and $18 million~~comprised of net interest income from investments. Our business purpose investments saw an increase in interest income in the third quarter from a higher average balance of investments and lower cost of funds, compared to the second quarter of 2021, and increased positive fair value changes due to continued strength in credit performance and spread tightening.

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 tighteningearned 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 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 while they are held in inventory, ~~at the beginning of the quarter. Net interest~~mortgage banking activities income ~~from BPL investments increased~~(including mark-to-market adjustments on loans from the ~~fourth quarter of 2020 due~~time they are purchased to ~~higher yield maintenance~~when they are sold, securitized or transferred into our investment portfolio, fee income earned on originations, and gains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate securities that we retain from our ~~SFR securities resulting from faster prepayments,~~CAFL securitizations (which we consolidate for GAAP purposes) and ~~reduced debt costs on~~bridge loans we originate in this segment are transferred to and held in our ~~bridge loan portfolio resulting from a decrease in leverage on these assets.~~

Investment Portfolio segment.

~~Mortgage Banking~~On July 1, 2022, we closed the previously announced acquisition of Riverbend, a private mortgage lender to investors in transitional residential and multifamily real estate. This acquisition adds capacity, product breadth and geographic footprint to our existing bridge loan origination platform.

The following table provides business purpose ~~loans funding~~loan origination activity at Redwood during the three and nine months ended September 30, ~~2021.~~2022.

Table 97 – Business Purpose Loans — Funding Activity


		Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021							Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022
(In Thousands)	(In Thousands)	Single-Family Rental		Bridge (1)		Total		Single-Family Rental		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	$	418,442	$	—	$	418,442	$	245,394	$	—	$	245,394	Fair value at beginning of period	$	505,171	$	—	$	505,171	$	358,309	$	—	$	358,309
Fundings	Fundings	395,083		244,652		639,735		960,398		593,041		1,553,439		Fundings	99,736		470,425		570,161		966,648		1,446,610		2,413,258

Sales	Sales	—		(253)		(253)		—		(2,484)		(2,484)		Sales	(34,970)		(48,279)		(83,249)		(366,720)		(48,279)		(414,999)
Transfers between portfolios (2)		(332,670)		(246,096)		(578,766)		(754,453)		(593,774)		(1,348,227)
Transfers between segments (2)														Transfers between segments (2)	(266,181)		(423,425)		(689,606)		(561,218)		(1,400,849)		(1,962,067)
Principal repayments	Principal repayments	(36,970)		—		(36,970)		(47,090)		—		(47,090)		Principal repayments	(5,582)		(2,220)		(7,802)		(37,166)		(2,220)		(39,386)
Riverbend loans acquired at acquisition														Riverbend loans acquired at acquisition	—		59,748		59,748		—		59,748		59,748
Changes in fair value, net	Changes in fair value, net	22,461		1,697		24,158		62,097		3,217		65,314		Changes in fair value, net	(17,069)		(116)		(17,185)		(78,748)		1,123		(77,625)
Fair Value at End of Period	Fair Value at End of Period	$	466,346	$	—	$	466,346	$	466,346	$	—	$	466,346	Fair Value at End of Period	$	281,105	$	56,133	$	337,238	$	281,105	$	56,133	$	337,238

(1)We originate bridge loans at our TRS and then transfer them to our REIT. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated statements of income (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge ~~securitization,~~securitizations, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of ~~income (loss).~~income. Once loans are transferred into ~~this~~a securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our bridge loans held-for-investment, see the ~~Investments~~ Investment Portfolio section that follows.

(2)For single-family rental loans, amounts represent ~~the fair value of~~ transfers of loans from held-for-sale at our Business Purpose Mortgage Banking segment to held-for-investment ~~including when loans are securitized (and consolidated for GAAP purposes). For bridge loans, represents~~at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP. Bridge loan amounts represent the transfer of loans originated or acquired by our Business Purpose Mortgage Banking segment at our TRS and transferred to our Investment Portfolio segment at our REIT as described in the preceding footnote.

~~Business~~SFR loan fundings for the three and nine months ended September 30, 2022 included zero and $100 million of loans acquired from third parties, respectively. Bridge loan fundings for the three and nine months ended September 30, 2022 included zero and $22 million of loans acquired from third parties, respectively. During the three and nine months ended September 30, 2022, we acquired $60 million of bridge loans with our acquisition of Riverbend on July 1, 2022. During the nine months ended September 30, 2022, we completed two business purpose ~~mortgage banking income was $23~~loan securitizations backed by $588 million ~~$35~~of SFR loans, including a private securitization of $274 million ~~and $32 million~~of loans in the ~~first,~~third quarter with a large global institutional investor. During the nine months ended September 30, 2022, we completed one business purpose loan securitization backed by approximately $250 million of bridge loans that includes a 24-month revolving feature. At September 30, 2022, we had $281 million of SFR loans and $56 million of bridge loans in inventory on our balance sheet.

During the third quarter of 2022, the decline in overall volume was predominantly in our SFR product, as borrowers continue in this higher rate environment to prefer short-term fully prepayable bridge loans, for which demand remains elevated (driven by multifamily product). Given current market conditions, we reduced our capital allocation to Business Purpose Mortgage Banking to $100 million at the end of the third quarter of 2022, down from $150 million at the end of the second quarter of 2022 (excluding capital associated with goodwill and ~~third quarters~~intangibles). While the fourth quarter has historically been a very busy one for BPL originations – with sponsors often seeking to complete transactions by year-end – we would expect the recent slowdown in lending activity to continue in some capacity, as transaction flow ebbs and borrowers not facing near-term maturities wait for more favorable conditions.

We utilize a combination of ~~2021, respectively.~~capital and loan warehouse facilities to manage our inventory of business purpose loans that we hold for sale. At September 30, 2022, we had business purpose warehouse facilities outstanding with six different counterparties, with $3.00 billion of total capacity (used for both SFR and bridge loans) and $1.66 billion of available capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent).

The following table presents an earnings summary for our Business Purpose Mortgage ~~banking~~Banking segment for the three and nine months ended September 30, 2022 and 2021.

Table 8 – Business Purpose Mortgage Banking Earnings Summary


	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2022		2021		Change		2022		2021		Change
Mortgage banking income	$	17,887	$	32,387	$	(14,500)	$	22,267	$	89,752	$	(67,485)
Operating expenses	(24,302)		(18,065)		(6,237)		(58,330)		(51,618)		(6,712)
Benefit from income taxes	2,559		(3,485)		6,044		9,009		(6,988)		15,997
Segment Contribution	$	(3,856)	$	10,837	$	(14,693)	$	(27,054)	$	31,146	$	(58,200)

Business Purpose Mortgage Banking income presented in the table above is comprised of net interest income from ~~single-family rental~~SFR loans held-for-sale in inventory, ~~and~~ mortgage banking activities, ~~income from single family rental and bridge loans~~net (see Note 1920 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities).

~~Business purpose funding volumes increased steadily through the first nine months of 2021. These growing volumes, along with improved SFR securitization execution~~, and other income, net for this segment. Operating expenses presented in the ~~second~~table above includes general and ~~third quarters of 2021, drove strong~~administrative expenses, loan acquisition costs and other expenses for this segment.

The decrease in contribution from our business purpose mortgage banking operations during the three and nine month periods was attributable to lower mortgage banking income ~~results for those periods. Approximately 66%~~and higher operating expenses. While margins stabilized during the third quarter of ~~total origination volumes~~2022, mortgage banking income year-to-date was negatively impacted by severe credit spread widening in the first half 2022 and remains challenged given current market conditions. Continued rate volatility or a further widening of spreads would continue to impact our margins and profitability at this business.

General and administrative expenses increased during the three- and nine-month periods, as lower variable compensation expenses were offset by higher fixed compensation and other costs associated with an increased headcount during 2022, in particular from the addition of employees from the Riverbend acquisition. Additionally, in the third quarter, ~~were 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 30, 2021, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.30 billion of total capacity (used for both SFR and bridge loans) and $663incurred $4 million of ~~available capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not~~employee severance and transition-related expenses at this segment.

Activity at this segment is performed within our taxable REIT subsidiary and subject to ~~margin calls based on~~federal and state income taxes. The benefit from income taxes during the ~~market value of the underlying collateral that is non-delinquent).~~three- and nine-month periods in 2022 was due to an overall GAAP loss incurred at our TRS during those periods.

Investment Portfolio Segment

Our Investment Portfolio segment consists of investments sourced through our residential and business purpose mortgage banking operations, including primarily securities retained from our residential and business purpose loan securitization activities (some of which we consolidate for GAAP purposes), business purpose residential and multifamily bridge loans, as well as third-party investments including RMBS issued by third parties (including Agency CRT securities), investments in Freddie Mac K-Series multifamily loan securitizations and re-performing loan securitizations (both of which we consolidate for GAAP purposes), servicer advance investments, HEIs, and other housing-related investments. This segment’s main sources of income are net interest income and other income from investments, changes in fair value of investments and associated hedges, and realized gains and losses upon the sale of securities. Direct operating expenses and tax provisions associated with these activities are also included in this segment.

The following table presents details of our ~~Business Purpose Lending investment portfolio~~Investment Portfolio at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021 organized by investments organically created through our mortgage banking segments and those acquired from third-parties. Amounts presented in the table represent our retained economic investments in consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted.

Table 109 – ~~Business Purpose Lending Investments~~Investment Portfolio - Detail of Economic Interests


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	September 30, 2022		December 31, 2021

Organic Residential Investments						Organic Residential Investments
Residential loans at Redwood (1)						Residential loans at Redwood (1)	$	157,804	$	172,047
Residential securities at Redwood						Residential securities at Redwood	106,576		143,838
Residential securities at consolidated Sequoia entities (2)						Residential securities at consolidated Sequoia entities (2)	223,920		245,417
Other investments(3)						Other investments(3)	48,100		12,438
Organic Business Purpose Investments						Organic Business Purpose Investments
Bridge loans	Bridge loans	$	824,799	$	641,765	Bridge loans	1,900,986		944,606
Single-family rental securities at consolidated CAFL entities (1)		287,813		238,630

Other investments(3)		6,767		21,627
Single-family rental securities at consolidated CAFL SFR entities (4)						Single-family rental securities at consolidated CAFL SFR entities (4)	314,431		301,506
Other investments						Other investments	972		5,935
Third-Party Investments						Third-Party Investments
Residential securities at Redwood						Residential securities at Redwood	131,055		195,930
Residential securities at consolidated Freddie Mac SLST entities (5)						Residential securities at consolidated Freddie Mac SLST entities (5)	335,185		444,751
Multifamily securities at Redwood						Multifamily securities at Redwood	21,232		32,715
Multifamily securities at consolidated Freddie Mac K-Series entities (6)						Multifamily securities at consolidated Freddie Mac K-Series entities (6)	32,047		31,657
Servicing investments (7)						Servicing investments (7)	92,530		102,540
HEIs (8)						HEIs (8)	214,922		43,638
Other investments						Other investments	7,664		10,400
Total Segment Investments	Total Segment Investments	$	1,119,379	$	902,022	Total Segment Investments	$	3,587,424	$	2,687,418

(1)Balance comprised of loans called from Sequoia securitizations.

(2)Represents our retained economic investment in securities issued by consolidated ~~CAFL~~Sequoia securitization VIEs. For GAAP purposes, we consolidated ~~$3.40~~$3.24 billion of loans and ~~$3.13~~$3.01 billion of ABS issued associated with these investments at September 30, 2022. We consolidated $3.63 billion of loans and $3.38 billion of ABS issued associated with these investments at December 31, 2021.

~~In September 2021, we completed a CAFL securitization backed by $272 million (principal balance) of bridge loans. See the "~~(3)~~Investments Detail"~~ ~~section that follows for additional details on our~~Organic residential other investments ~~and their associated borrowings.~~

~~The following table presents the components of investment fair value changes for our Business Purpose Lending segment by investment type for the three and nine months ended~~at September 30, ~~2021.~~

~~Table 11 – Investment Fair Value Changes, Net from Business Purpose Lending~~

Three Months Ended Nine Months Ended
(In Thousands) September 30, 2021 September 30, 2021
Investment Fair Value Changes, Net
Changes in fair value of:
Bridge loans held-for-investment $ 900 $ 4,142
REO 108 536
Net investments in CAFL SFR entities (1)
2,943 6,354
Other (481) (481)
Investment Fair Value Changes, Net $ 3,470 $ 10,551

~~(1)Includes changes in fair value~~2022 includes net risk share investments 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 tightened throughout 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. ~~We also had positive resolutions on several previously delinquent bridge loans during 2021, resulting in positive fair value changes for recoveries in excess of carrying values.~~

~~Third-Party Investments Segment~~

~~Overview~~

~~Our Third-Party Investments segment generated~~$23 million, representing $30 million of restricted cash and other assets, net ~~income during the third quarter~~ of ~~2021, driven primarily~~other liabilities of $7 million.

(4)Represents our retained economic investment in securities issued by ~~$21 million~~consolidated CAFL SFR securitization VIEs. For GAAP purposes, we consolidated $3.02 billion of ~~positive investment fair value changes~~loans and ~~$12 million~~$2.70 billion of net interest income. Our Third-Party Investments segment generated $54 million of net income during the second quarter of 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~~ABS issued associated with these investments ~~in our Third-Party Investments segment~~ at September 30, ~~2021~~2022. We consolidated $3.49 billion of loans and $3.21 billion of ABS issued associated with these investments at December 31, ~~2020.~~

~~Table 12 – Third-Party Investments~~

(In Thousands) September 30, 2021 December 31, 2020
Residential securities at Redwood $ 160,300 $ 134,090
Residential securities at consolidated Freddie Mac SLST entities (1)
451,252 428,179
Multifamily securities at Redwood 42,618 49,255
Multifamily securities at consolidated Freddie Mac K-Series entity (2)
31,389 28,255
Other investments (3)
379,102 317,282
Total Segment Investments $ 1,064,661 $ 957,061
2021.

~~(1)~~(5)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated ~~$2.00~~$1.48 billion of loans and ~~$1.55~~$1.15 billion of ABS issued associated with these investments at September 30, 2022. We consolidated $1.89 billion of loans and $1.45 billion of ABS issued associated with these investments at December 31, 2021.

~~(2)~~(6)Represents our economic investment in securities issued by a consolidated Freddie Mac K-Series securitization ~~entity.~~entities. For GAAP purposes, we consolidated ~~$483~~$427 million of loans and ~~$451~~$395 million of ABS issued associated with ~~this investment~~these investments at September 30, 2022. We consolidated $474 million of loans and $442 million of ABS issued associated with these investments at December 31, 2021.

~~(3)~~(7)Represents our economic investment in consolidated Servicing Investment variable interest entities. At September 30, ~~2021, Other investments presented in this table includes $188~~2022, for GAAP purposes, we consolidated $308 million of servicing investments owned in our consolidated Servicing Investment entities. At September 30, 2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of servicing investments, $152and $233 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these ~~entities). Additionally, at September 30,~~entities. At December 31, 2021, ~~Other investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for~~for GAAP purposes, we consolidated ~~$167~~$385 million of servicing investments and $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.

(8)At September 30, 2022 and December 31, 2021, represents HEIs owned at Redwood of $201 million and $33 million, respectively, as well as our retained economic investment in securities issued by the consolidated HEI securitization entity of $14 million and $10 million, respectively. At September 30, 2022, for GAAP purposes, we consolidated $140 million of HEIs and ~~$145~~$105 million of ABS issued, as well as other assets and liabilities for ~~this entity).~~

~~During~~ the ~~third quarter of~~consolidated HEI securitization entity. At December 31, 2021, ~~in conjunction with co-sponsoring a securitization of HEIs,~~for GAAP purposes, we ~~purchased~~ ~~$122 million~~ ~~of additional HEIs from other contributors to the securitization, then transferred $170~~consolidated $160 million of HEIs toand $137 million of ABS issued, as well as other assets and liabilities for the ~~Point~~consolidated HEI securitization ~~entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of~~ ~~September 30, 2021, representing our economic interest in the~~ entity.

~~Additionally,~~The growth in our Investment Portfolio during the ~~third quarter~~first nine months of ~~2021, we purchased $11 million of other~~2022 was primarily attributable to a net increase in business purpose bridge loans and incremental investments in HEIs through third-party investments. 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.

flow purchase agreements. See the "Investments ~~Detail"~~Detail and Activity section that follows for additional ~~details~~detail on ~~these~~our portfolio investments and their associated borrowings.

The following table presents ~~the components of investment fair value changes~~an earnings summary for our ~~Third-Party Investments~~Investment Portfolio segment ~~by investment type~~ for the three and nine months ended September 30, 2022 and 2021.

Table 1310 – Investment ~~Fair Value Changes, Net~~Portfolio Earnings Summary


	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2022		2021		Change		2022		2021		Change
Net interest income	$45,006		$41,945		$	3,061	$	140,885	$	105,066	$	35,819
Investment fair value changes, net	(61,780)		26,324		(88,104)		(165,297)		121,812		(287,109)
Other income, net	3,906		1,842		2,064		15,423		7,121		8,302
Realized gains, net	—		6,703		(6,703)		2,581		17,803		(15,222)
Operating expenses	(3,872)		(4,684)		812		(10,833)		(12,106)		1,273
Benefit from (provision for) income taxes	(5,664)		(1,045)		(4,619)		(6,808)		(2,561)		(4,247)
Segment Contribution	$	(22,404)	$	71,085	$	(93,489)	$	(24,049)	$	237,135	$	(261,184)

The decrease in contribution from ~~Third-Party Investments~~

Three Months Ended Nine Months Ended
(In Thousands) September 30, 2021 September 30, 2021
Investment Fair Value Changes, Net
Changes in fair value of:
Residential securities $ 3,371 $ 31,620
Net investments in Freddie Mac SLST entities (1)
13,849 54,282
Net investment in Freddie Mac K-Series entity (1)
554 11,330
Net investment in Point HEI entity (1)
47 47
Servicer advance investments (2,079) (3,179)
Excess MSRs (803) (5,233)
HEIs at Redwood 5,622 13,017
Other 8 65
Recoveries (impairments) on AFS securities — 354
Investment Fair Value Changes, Net $ 20,569 $ 102,303

~~(1)Includes changes in~~the Investment Portfolio during the three- and nine-month periods was primarily attributable to negative investment fair value changes, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These decreases were partially offset by higher net interest income and other income during the ~~loans held-for-investment, securitized Point HEIs,~~three- and nine-month periods, each as discussed in the ~~ABS issued at the entities, which netted together represent the change in value~~Consolidated Results of ~~our investments (subordinate securities) at the consolidated VIEs.~~Operations section of this MD&A.

~~Continued strengthening~~The increase in net interest income from our Investment Portfolio during the nine-month periods primarily resulted from an increase in the average balance of ~~credit and elevated prepayment speeds helped drive credit spreads tighter on our third-party assets in 2021, in particular for our~~ investments in ~~re-performing loan assets (primarily represented~~that period in 2022 as we deployed capital into new investments, including primarily into business purpose bridge loans. Net interest income for the nine months ended September 30, 2022, included yield maintenance income (triggered by ~~our net investment in Freddie Mac SLST entities~~prepayments) received on retained SFR securities of $8 million in the ~~table above). HEI valuations benefited from our securitization~~first quarter of ~~HEIs~~2022, $4 million in the second quarter of 2022, and $3 million in the third quarter of 2022. Additionally, during the first quarter of 2022, we recorded $8 million of discount accretion for AFS securities, much of which was associated with securities we expected to be called given high prepayment speeds experienced during 2021. ~~The decline~~As a result of interest rate increases, early in 2022 we changed our assumptions for expected call dates for certain available-for-sale securities and discount accretion income from these securities declined, resulting in $1 million of discount accretion in both the second and third quarters of 2022. Net interest income from the investment portfolio was also impacted by higher borrowing costs in 2022, driven primarily by rising benchmark interest rates. While the majority of the floating-rate debt utilized within our investment portfolio finances floating-rate assets, we do have some exposure to rising interest rates and further increases in benchmark interest rates or borrowing spreads could negatively impact our net interest income. Additionally, to the extent market interest rates remain elevated and we refinance fixed-rate debt that matures in the near-term, our interest costs could increase and negatively impact our net interest income.

Investment fair value changes, net is primarily comprised of the change in fair value (both realized and unrealized) of our ~~Servicer advance~~portfolio investments accounted for under the fair value option and ~~excess MSRs is~~hedges associated with these investments. See Table 5.6 in Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of investment fair value changes (the difference in amounts in the table above and in Table 5.6 in the notes to our consolidated financial statements relates to fair value changes for investments held at corporate/other). The negative investment fair value changes in the first nine months of 2022 were predominantly unrealized and resulted primarily ~~attributable~~from credit spread widening across many of our investments. Rising interest rates and slower actual and expected prepayment speeds resulted in positive fair value changes for our interest-only securities and hedges allocated to our investment portfolio, which partially offset the negative fair value changes. Additionally, credit improvements in several of our investments including, in particular, our retained CAFL SFR securities and bridge loans positively impacted fair values for those assets. While our investments generally continue to experience stable credit performance, further spread widening, a ~~reduction~~deterioration in ~~their basis through the receipt of regular cash flows.~~credit, or declines in home price appreciation could result in additional negative investment fair value changes for our investments.

Other income, net within this segment is primarily comprised of income (loss) from our MSR investments, bridge loan extension fees, and risk share investment income. Details on the composition of Other income, net are included inNote 21 in Part I, Item 1 of this Quarterly Report on Form 10-Q. Realized gains, net generally result from sales or calls of available-for-sale securities we own. Refer to the analysis of this line item in the Consolidated Results of Operations section of this MD&A for an explanation of activity during 2022. Operating expenses at this segment are primarily attributable to compensation expenses and decreased overall during the three and nine month periods, as decreases in variable compensation were partially offset by higher fixed compensation costs resulting from higher headcount in 2022. We hold certain of our investments, primarily our MSRs, at our taxable REIT subsidiary. Our Provision for income taxes at this segment is primarily driven by the amount of income earned from portfolio assets as well as from gains or losses from hedges held at the TRS and, for 2022, reflects positive net income earned from investment portfolio activities at our taxable REIT subsidiary.

Investments Detail and Activity

This section presents additional details on our ~~investment assets~~investments and their activity during the three and nine months ended September 30, ~~2021.~~2022.

Real Estate Securities Portfolio

The following table ~~presents activity of~~sets forth our real estate securities ~~on balance sheet~~activity by collateral type for the three and nine months ended September 30, ~~2021.~~2022.

Table 1411 – ~~Activity of~~ Real Estate Securities ~~at Redwood~~Activity by Collateral Type(1)


Three Months Ended September 30, 2021		Residential						Multifamily		Total
Three Months Ended September 30, 2022												Three Months Ended September 30, 2022	Residential		Multifamily		Total
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine		Total		(In Thousands)	Senior		Subordinate				Mezzanine
Beginning fair value	Beginning fair value	$	25,267	$	—	$	287,140	$	42,479			Beginning fair value	$	31,496	$	231,652	$	21,130		$	284,278
Transfers		—		—		—		—		—

Acquisitions	Acquisitions	—		—		6,750		4,000		10,750		Acquisitions	—		—		—			—
Sales	Sales	—		—		(755)		—		(755)		Sales	(4,142)		—		—			(4,142)
Gains on sales and calls, net	Gains on sales and calls, net	—		—		6,389		—		6,389		Gains on sales and calls, net	—		—		—			—
Effect of principal payments ~~(1)~~(2)	Effect of principal payments ~~(1)~~(2)	—		—		(13,204)		(3,261)		(16,465)		Effect of principal payments ~~(1)~~(2)	—		(359)		—			(359)
Change in fair value, net	Change in fair value, net	(2,773)		—		1,854		(600)		(1,519)		Change in fair value, net	1,506		(22,173)		102			(20,565)
Ending Fair Value	Ending Fair Value	$	22,494	$	—	$	288,174	$	42,618	$	353,286	Ending Fair Value	$	28,860	$	209,120	$	21,232		$	259,212


Nine Months Ended September 30, 2021		Residential						Multifamily		Total
Nine Months Ended September 30, 2022												Nine Months Ended September 30, 2022	Residential		Multifamily		Total
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine		Total		(In Thousands)	Senior		Subordinate				Mezzanine
Beginning fair value	Beginning fair value	$	28,464	$	5,663	$	260,743	$	49,255			Beginning fair value	$	21,787	$	322,909	$	32,715		$	377,411

Acquisitions	Acquisitions	8,737		—		21,050		8,930		38,717		Acquisitions	5,006		10,000		—			15,006
Sales	Sales	—		(5,724)		(31,765)		—		(37,489)		Sales	(14,334)		(13,137)		—			(27,471)
Gains on sales and calls, net	Gains on sales and calls, net	—		60		16,931		—		16,991		Gains on sales and calls, net	—		1,914		—			1,914
Effect of principal payments ~~(1)~~(2)	Effect of principal payments ~~(1)~~(2)	—		(26)		(30,751)		(14,064)		(44,841)		Effect of principal payments ~~(1)~~(2)	—		(16,036)		(8,688)			(24,724)
Change in fair value, net	Change in fair value, net	(14,707)		27		51,966		(1,503)		35,783		Change in fair value, net	16,401		(96,530)		(2,795)			(82,924)
Ending Fair Value	Ending Fair Value	$	22,494	$	—	$	288,174	$	42,618	$	353,286	Ending Fair Value	$	28,860	$	209,120	$	21,232		$	259,212

(1)~~The effect~~Amounts presented in this table include securities reported on our balance sheet and do not include securities we own in consolidated entities. See the following table for a presentation of all securities we own, including those in consolidated entities.

(2)Effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.

At September 30, ~~2021,~~2022, our securities at Redwood (exclusive of securities owned in consolidated entities) consisted of fixed-rate assets ~~(86%~~(90%), adjustable-rate assets ~~(11%~~(7%), and hybrid assets that reset within the next year (3%).

The following table sets forth activity in our ~~entire~~ real estate securities portfolio ~~by segment~~ for the three and nine months ended September 30, ~~2021.~~2022, organized by investments organically created through our mortgage banking segments and acquired from third-parties. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.

Table 1512 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities ~~by Segment~~


Three Months Ended September 30, 2021		Residential(1)				BPL		Third-Party Investments									Total
		Sequoia Securities on Balance Sheet		Consolidated Sequoia Securities		Consolidated CAFL Securities		Consolidated SLST Securities			Consolidated Multifamily Securities				Other Third-Party Securities(1)
Three Months Ended September 30, 2022									Three Months Ended September 30, 2022				Residential Organic						Business Purpose Organic				Third-Party Investments													Total
																			Sequoia Securities on Balance Sheet				Consolidated Sequoia Securities				Consolidated CAFL Securities				Consolidated SLST Securities							Consolidated Multifamily Securities					Other Third-Party Securities
(In Thousands)	(In Thousands)		Sequoia Securities on Balance Sheet				Consolidated Sequoia Securities			Consolidated CAFL Securities				Consolidated SLST Securities			Consolidated Multifamily Securities				Other Third-Party Securities(1)								Total					(In Thousands)
Beginning fair value	Beginning fair value							Beginning fair value				$	112,562			$		236,777		$			307,413			$	390,416				$	31,732								$	171,716						$	1,250,616
Acquisitions(1)	Acquisitions(1)	—			1,965			16,646			—				—		10,750		Acquisitions(1)			—				—					13,603					—				—					—				13,603
Sales	Sales	—		—		—		—			—				(755)		(755)	Sales		—				—				—						—				—					(4,142)				(4,142)
Gains on sales and calls, net	Gains on sales and calls, net	6,389		—		—		—			—				—		6,389	Gains on sales and calls, net		—				—				—						—				—					—				—
Effect of principal payments (2)	Effect of principal payments (2)	(12,212)		(832)		—		(12,769)			—				(4,253)		(30,066)	Effect of principal payments (2)		(123)				(1,856)				—					(13,144)				—					(236)				(15,359)
Change in fair value, net	Change in fair value, net	(7,770)		3,313		2,943		13,849			554				6,251		19,140	Change in fair value, net		(5,863)				(11,001)				(6,585)					(42,088)				315					(14,702)				(79,924)
Ending Fair Value	Ending Fair Value	147,254		236,451		287,720		451,253			31,388				206,032		1,360,098	Ending Fair Value		$	106,576			$	223,920			$		314,431				$	335,184			$	32,047				$	152,636			$	1,164,794


Nine Months Ended September 30, 2021		Residential				BPL		Third-Party Investments									Total
		Sequoia Securities on Balance Sheet		Consolidated Sequoia Securities		Consolidated CAFL Securities		Consolidated SLST Securities			Consolidated Multifamily Securities				Other Third-Party Securities
Nine Months Ended September 30, 2022									Nine Months Ended September 30, 2022				Residential Organic						Business Purpose Organic				Third-Party Investments													Total
																			Sequoia Securities on Balance Sheet				Consolidated Sequoia Securities				Consolidated CAFL Securities				Consolidated SLST Securities							Consolidated Multifamily Securities					Other Third-Party Securities
(In Thousands)	(In Thousands)		Sequoia Securities on Balance Sheet				Consolidated Sequoia Securities			Consolidated CAFL Securities				Consolidated SLST Securities			Consolidated Multifamily Securities				Other Third-Party Securities								Total					(In Thousands)
Beginning fair value	Beginning fair value							Beginning fair value				$	145,757			$		245,417		$			301,506			$	444,751				$	31,657								$	231,654						$	1,400,742
Acquisitions(1)	Acquisitions(1)	9,375			7,746			53,846			—				—		29,342		Acquisitions(1)			—				3,742					37,290					—				—					15,006				56,038
Sales	Sales	(3,664)		—		—		—			(8,197)				(33,825)		(45,686)	Sales		(3,854)				(612)				—						—				—					(23,617)				(28,083)
Gains on sales and calls, net	Gains on sales and calls, net	15,484		—		—		—			—				1,507		16,991	Gains on sales and calls, net		284				—				—						—				—					1,630				1,914
Effect of principal payments (2)	Effect of principal payments (2)	(28,928)		(2,377)		(11,110)		(31,207)			—				(15,913)		(89,535)	Effect of principal payments (2)		(10,755)				(3,889)				—					(34,716)				—					(13,969)				(63,329)
Change in fair value, net	Change in fair value, net	(2,469)		13,117		6,354		54,282			11,330				38,252		120,866	Change in fair value, net		(24,856)				(20,738)				(24,365)					(74,851)				390					(58,068)				(202,488)
Ending Fair Value	Ending Fair Value	147,254		236,451		287,720		451,253			31,388				206,032		1,360,098	Ending Fair Value		$	106,576			$	223,920			$		314,431				$	335,184			$	32,047				$	152,636			$	1,164,794

(1)AtDuring the nine months ended September 30, ~~2021, $3~~2022, we retained $4 million of securities used as hedges for our residential mortgage banking operations are included within the "Other third-party securities" column of this table. These same securities are presented as a component of securities within our residential lending segment on our segment balance sheet.from one Sequoia securitization.

(2)~~The effect~~Effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.

At September 30, 2022, our securities (both those held on our balance sheet and our economic interests in consolidated VIEs) consisted of fixed-rate assets (98%), adjustable-rate assets (1%) and hybrid assets that reset within the next year (1%).

We directly finance our holdings of real estate securities with a combination of non-recourse debt, non-marginable term debt and marginable debt in the form of repurchase (or “repo”) financing. At September 30, 2022, real estate securities with a fair value of $425 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with $305 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities, re-performing loan securities with a fair value of $335 million were financed with $99 million of non-recourse securitization debt, and real estate securities with a fair value of $170 million (including securities owned in consolidated securitization entities) were financed with $124 million of short-term debt incurred through repurchase facilities with seven different counterparties. The remaining $235 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at September 30, ~~2021.~~2022. This table includes both our securities held on balance sheet and our economic ~~interest~~interests in securities we own in securitizations we consolidate in accordance with GAAP.

Table 1613 – Credit Statistics of Real Estate Securities ~~Credit Statistics~~Owned at Redwood and in Consolidated Entities


September 30, 2021											Weighted Average Values for Non-IO Securities
		Market Value - IO Securities			Market Value - Non-IO Securities			Principal Balance - Non-IO Securities			Coupon				90+ Delinquency			3-Month Prepayment Rate			Investment Thickness(1)
September 30, 2022													September 30, 2022													Weighted Average Values
																									Market Value - IO Securities				Market Value - Non-IO Securities				Principal Balance - Non-IO Securities				Gross Weighted Average Coupon					90+ Delinquency				3-Month Prepayment Rate				Investment Thickness(1)
(Dollars in Thousands)	(Dollars in Thousands)			Market Value - IO Securities						Market Value - Non-IO Securities				Principal Balance - Non-IO Securities						Coupon							90+ Delinquency								3-Month Prepayment Rate									Investment Thickness(1)				(Dollars in Thousands)
Sequoia securities on balance sheet	Sequoia securities on balance sheet										Sequoia securities on balance sheet					$	28,511		$		78,065			$	140,149				3.8	%			0.4	%					10		%					7	%
Consolidated Sequoia securities	Consolidated Sequoia securities	9,329					227,122				243,524				4.6	%		2.84	%		51	%			31	%		Consolidated Sequoia securities				23,955				199,965				246,570					4.7	%			2.0	%		16	%	42	%
Total Sequoia Securities	Total Sequoia Securities	27,709			355,996			396,912			4.3	%			2.05	%		48	%		22	%	Total Sequoia Securities			52,466				278,030				386,719				4.4		%			1.5		%		14		%		30	%
Consolidated Freddie Mac SLST securities	Consolidated Freddie Mac SLST securities	17,714			433,539			547,393			3.1	%			10.98	%		14	%		28	%	Consolidated Freddie Mac SLST securities			18,089				317,095				498,023				4.5		%			12.9		%		8		%		29	%
RPL securities on balance sheet	RPL securities on balance sheet	998			64,845			143,877			3.6	%			5.11	%		16	%		7	%	RPL securities on balance sheet			347				31,963				142,734				4.3		%			3.7		%		8		%		2	%
Total RPL Securities	Total RPL Securities	18,712			498,384			691,270			3.2	%			10.21	%		14	%		25	%	Total RPL Securities			18,436				349,058				640,757				4.5		%			12.0		%		8		%		26	%
Consolidated Freddie Mac K-Series securities	Consolidated Freddie Mac K-Series securities	—			31,388			36,468			4.1	%			—	%		—	%		20	%	Consolidated Freddie Mac K-Series securities			—				32,047				36,468				4.3		%			—		%		—		%		10	%
Multifamily securities on balance sheet	Multifamily securities on balance sheet	2,039			40,579			41,241			3.2	%			0.02	%		15	%		8	%	Multifamily securities on balance sheet			166				21,066				22,809				4.1		%			—		%		24		%		11	%
Total Multifamily Securities	Total Multifamily Securities	2,039			71,967			77,709			3.6	%			0.01	%		8	%		13	%	Total Multifamily Securities			166				53,113				59,277				4.2		%			—		%		10		%		11	%
Consolidated CAFL securities	Consolidated CAFL securities	49,828			237,892			354,319			5.1	%			1.87	%		15	%		13	%	Consolidated CAFL securities			34,268				280,163				424,677				5.3		%			2.2		%		16		%		17	%
Other third-party securities	Other third-party securities	3,164			94,407			116,725			4.5	%			2.03	%		34	%		5	%	Other third-party securities			12				99,082				142,912				3.4		%			0.6		%		10		%		2	%
Total Securities	Total Securities	$	101,452		$	1,258,646		$	1,636,935														Total Securities			$	105,348			$	1,059,446			$	1,654,342

(1)Investment thickness represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. We generally own first loss positions in Sequoia, RPL and CAFL securities. We own both first loss and mezzanine positions (positions credit enhanced by subordinate securities) in multifamily and other third-party securities.

We ~~directly finance~~primarily target investments that have a sensitivity to housing credit risk, typically sourced through our ~~holdings~~operating businesses where we control the underwriting and review of ~~real estate~~underlying collateral. During the first nine months of 2022, our investment portfolio continued to demonstrate strong performance across a range of credit metrics, including loan delinquencies which generally remained stable, and loan-to-value ratios (LTVs), which continued to decline or remain stable. Given the seasoned nature of our investments (particularly within our RPL securities ~~with a combination~~and Sequoia securities), many of ~~capital~~these investments are supported by substantial home price appreciation and ~~collateralized debt~~borrower equity in the form of repurchase (or “repo”) financing. At September 30, 2021, we had short-term debt incurred through repurchase facilities of $80 million with three different counterparties, which was secured by $108 million of real estate securities (including securities owned in consolidated securitization entities).

At September 30, 2021, real estate securities with a fair value of $504 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 September 30, 2021, we had $451 million of re-performing loan securities financed with $161 million of non-recourse securitization debt. The remaining $297 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

underlying homes.

Bridge Loans Held-for-Investment

The following table provides the activity of bridge loans held-for-investment during the three and nine months ended September 30, ~~2021.~~2022.

Table 1714 – Bridge Loans Held-for-Investment - Activity


		Three Months Ended		Nine Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	September 30, 2021		September 30, 2021		(In Thousands)	September 30, 2022		September 30, 2022
Fair value at beginning of period	Fair value at beginning of period	$	726,569	$	641,765	Fair value at beginning of period	$	1,651,489	$	944,606

Sales		—		(7,000)

Transfers between portfolios (1)	Transfers between portfolios (1)	246,096		593,775		Transfers between portfolios (1)	423,425		1,400,849
Transfers to REO	Transfers to REO	(4,785)		(7,074)		Transfers to REO	—		(963)
Principal repayments	Principal repayments	(145,975)		(402,701)		Principal repayments	(175,007)		(436,545)
Changes in fair value, net	Changes in fair value, net	2,894		6,034		Changes in fair value, net	1,079		(6,961)
Fair Value at End of Period	Fair Value at End of Period	$	824,799	$	824,799	Fair Value at End of Period	$	1,900,986	$	1,900,986

(1)We originate bridge loans at our TRS and then transfer them to our REIT. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated statements of income (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge ~~securitization,~~securitizations, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into this securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). ~~For the carrying value and activity~~

Our $1.90 billion of ~~our~~ bridge loans held-for-investment ~~see the~~ ~~Investments~~ ~~section that follows.~~

~~Our $825~~and $56 million of b~~ridge~~bridge loans ~~held-for-investment~~held-for-sale at September 30, ~~2021~~2022 were comprised of first-lien, interest-only loans with a weighted average c~~oupon~~coupon of ~~7.48%~~8.05% and original maturities of six to 2436 months. At origination, the weighted average FICO score of borrowers backing these loans was ~~741~~743 and the weighted average LTV ratio of these loans was ~~68%~~66%. At September 30, ~~2021,~~2022, of the ~~1,092~~3,579 loans in this portfolio, 3449 of these loans with an aggregate fair value of ~~$23~~$31 million and an aggregate unpaid principal balance of ~~$26~~$33 million were in foreclosure ~~of which 35~~and 98 loans with an aggregate fair value of ~~$27~~$38 million and an unpaid principal balance of ~~$30~~$41 million were ~~greater than~~90-or-more days delinquent (certain loans in foreclosure were also at least 90 days ~~delinquent.~~delinquent).

We finance our bridge loans with a combination of recourse, non-marginable warehouse facilities, ~~and~~ non-recourse, non-marginable warehouse ~~facilities.~~facilities, and non-recourse securitization debt. During the second quarter of 2022, we completed our second bridge loan securitization. This bridge loan securitization included a 24-month revolving feature that allows us to add additional loans as loans within the structure pay down. The two bridge securitization structures have $550 million of total capacity. At September 30, ~~2021,~~2022, we ~~had $83~~had: $524 million of debt incurred through short-term warehouse facilities with ~~one different counterparty,~~four counterparties, which was secured by ~~$127~~$703 million of ~~loans, and $279~~business purpose bridge loans; $565 million of debt incurred through long-term facilities with ~~three~~two different counterparties, which was secured by ~~$374~~$700 million of ~~loans. Additionally,~~business purpose bridge loans; and $485 million of securitization debt secured by $512 million of business purpose bridge loans and $16 million of restricted cash.

The following table provides the composition of bridge loans held-for-investment by product type as of September 30, 2022 and December 31, 2021.

Table 15 – Bridge Loans Held-for-Investment - By Product Type


(In Thousands)	September 30, 2022		December 31, 2021
Multifamily	$	1,049,538	$	326,004



Renovate / Build to rent	660,870		375,729
Fix and Flip	107,333		150,928
Other	83,245		91,945
Fair Value at End of Period	$	1,900,986	$	944,606

Residential Loans

The following table provides the activity of residential loans held at our investment portfolio during the three and nine months ended September 30, 2022.

Table 16 – Investment Portfolio Residential Loans - Activity


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2022		September 30, 2022
Fair value at beginning of period	$	222,144	$	172,048
Acquisitions	—		102,258

Sales	(48,759)		(48,759)


Principal repayments	(8,967)		(48,831)
Changes in fair value, net	(6,614)		(18,912)
Fair Value at End of Period	$	157,804	$	157,804

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

Home Equity Investments

Table 17 – HEI at Investment Portfolio Segment - Activity


Home Equity Investments(1)		Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2022	September 30, 2022
Balance at beginning of period		$	276,366	$	192,740
New/additional investments		79,050		176,439
Sales/distribution		—		—
Repayments		(9,361)		(35,187)
Changes in fair value, net		(5,618)		6,445
Other		—		—
Balance at End of Period		$	340,437	$	340,437

(1)Our home equity investments presented in this table as of September 30, 2022, include $140 million of HEIs owned in our consolidated HEI securitization entity and $201 millionof HEIs owned directly at Redwood. At September 30, 2022, our economic investment in the consolidated HEI securitization entity was $14 million (for GAAP purposes, we consolidated $140 million of HEIs and $105 million of ABS issued, as well as other assets and liabilities for this entity).

Changes in fair value, net for HEIs primarily reflects changes in actual and expected home price appreciation (HPA). While home prices generally increased during the first half of 2022, in the third quarter of ~~2021, we completed~~2022, some regions began experiencing home price declines leading to a ~~securitization~~downward adjustment of ~~CoreVest bridge loans. The ABS issued by~~our HPA assumptions, which negatively affected HEI valuations. Additional details on our HEIs is included in Note 10 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).Quarterly Report on Form 10-Q.

9697

Other Investments

The following table sets forth our other investments activity at our Investment Portfolio segment by ~~segment~~significant asset type for the three and nine months ended September 30, ~~2021.~~2022.

Table 18 – Other Investments byat Investment Portfolio Segment - Activity(1)


Three Months Ended September 30, 2021		Residential			BPL			Third-Party Investments(1)			Corporate/Other					Total
Three Months Ended September 30, 2022										Three Months Ended September 30, 2022				Servicing Investments(2)										MSRs and Excess Servicing		Other				Total
(In Thousands)	(In Thousands)			Residential				BPL					Third-Party Investments(1)					Corporate/Other															Total	(In Thousands)					MSRs and Excess Servicing
Balance at beginning of period	Balance at beginning of period									Balance at beginning of period					$	273,210				$	64,363			$	1,868	$	339,441
New/additional investments	New/additional investments	4,782					—			125,373				5,050					135,205			New/additional investments			—						—				—			—

Reductions in investments		—			(6,959)			(17,116)			—					(24,075)
Sales/distribution																		Sales/distribution				—						—				(813)				(813)
Servicer advances (repayments), net																		Servicer advances (repayments), net				5,629						—				—				5,629
Changes in fair value, net	Changes in fair value, net	(1,047)			482			2,995			66					2,496		Changes in fair value, net				(3,905)						885				25				(2,995)
Other	Other	(67)			76			—			—					9		Other				—						—				(107)				(107)
Balance at End of Period	Balance at End of Period	$	12,389		$	6,767		$	379,102		$	24,108				$	422,366	Balance at End of Period				$	274,934					$	65,248			$	973			$	341,155


Nine Months Ended September 30, 2021		Residential			BPL			Third-Party Investments			Corporate/Other					Total
Nine Months Ended September 30, 2022										Nine Months Ended September 30, 2022				Servicing Investments(2)										MSRs and Excess Servicing		Other				Total
(In Thousands)	(In Thousands)			Residential				BPL					Third-Party Investments					Corporate/Other															Total	(In Thousands)					MSRs and Excess Servicing
Balance at beginning of period	Balance at beginning of period									Balance at beginning of period					$	350,923				$	56,669			$	5,935	$	413,527
New/additional investments	New/additional investments	7,065					—			125,373				23,550					155,988			New/additional investments			—						4,543				—			4,543

Reductions in investments		—			(16,012)			(68,470)			—					(84,482)
Sales/distribution																		Sales/distribution				—						—				(5,582)				(5,582)
Servicer (repayments) advances, net																		Servicer (repayments) advances, net				(65,772)						—				—				(65,772)
Changes in fair value, net	Changes in fair value, net	(3,299)			1,076			4,916			106					2,799		Changes in fair value, net				(10,217)						4,245				757				(5,215)
Other	Other	(192)			76			—			1					(115)		Other				—						(209)				(137)				(346)
Balance at End of Period	Balance at End of Period	$	12,389		$	6,767		$	379,102		$	24,108				$	422,366	Balance at End of Period				$	274,934					$	65,248			$	973			$	341,155

(1)~~At September 30, 2021 (our "Balance at End of Period"), Third-party investments presented in this table includes $188~~Excludes $72 million of Strategic investments which are included in Corporate/Other.

(2)Our servicing investments are owned inthrough our consolidated Servicing Investment entities. At September 30, ~~2021,~~2022, our economic investment in these entities was ~~$60~~$93 million (for GAAP purposes, we consolidated ~~$188~~$308 million of servicing investments, ~~$152~~$233 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities). ~~Additionally,~~ At ~~September 30, 2021, Third-party investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30,~~December 31, 2021, our economic investment in ~~this entity~~these entities was ~~$10~~$103 million (for GAAP purposes, we consolidated ~~$167~~$385 million of ~~HEIs and $145~~servicing investments, $294 million of ~~ABS issued,~~non-recourse short-term securitization debt, as well as other assets and liabilities for ~~this entity)~~these entities).

~~During the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased~~ ~~$122 million~~ of additional HEIs from other contributors to the securitization (included within "Third-Party Investments" in the table above), then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of ~~September 30, 2021, representing our economic interest in the entity.~~

During the first nine months of 2021, in addition to the HEIs acquired in the third quarter described above, other new/ additional investments included MSRs retained from whole loan sales at our Residential Segment and strategic investments through our RWT Horizons venture investment strategy within Corporate/Other.

~~During the first nine months of 2021, reductions~~Reductions in investments for ~~Third-Party Investments was~~our servicing investments primarily ~~attributable to the recovery~~represents recoveries of servicing advances within our consolidated servicing VIEs. ~~Our economic investment~~Changes in ~~these entities was $60 million at~~fair value, net for MSRs and Excess Servicing for the three and nine months ended September 30, ~~2021 and $68 million at December 31, 2020.~~2022 includes a reduction in basis from the regular receipt of scheduled cash flows, which was more than offset by a positive impact to fair value from a decrease in forecasted prepayment speeds. Additional details on our Other Investments is included in Note 11 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

9798

Income Taxes

Taxable Income, REIT Status and Dividend Characterization

As a REIT, under the Internal Revenue Code, Redwood is required to distribute to shareholders at least 90% of its annual REIT taxable income, excluding net capital gains, and meet certain other requirements that relate to, among other matters, the assets it holds, the income it generates, and the composition of its stockholders. To the extent Redwood retains REIT taxable income, including net capital gains, it is taxed at corporate tax rates. Redwood also earns taxable income at its taxable REIT subsidiaries (TRS), which it is not required to distribute under the Internal Revenue Code.

In September ~~2021,~~2022, our Board of Directors declared a regular dividend of ~~$0.21~~$0.23 per share for the third quarter of ~~2021,~~2022, which was paid on September 30, ~~2021~~2022 to shareholders of record on September 23, ~~2021.~~2022. As of September 30, ~~2021,~~2022, our year-to-date dividend distributions of ~~$0.55~~$0.69 per share exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and we would not be able to elect to be taxed as a REIT for four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.

While our minimum REIT dividend requirement is generally 90% of our annual REIT taxable income, we carried a $37 million federal net operating loss carry forward (NOL) into ~~2021~~2022 at our REIT that affords us the ability to retain REIT taxable income up to the NOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of NOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our NOL and any remaining NOL amount will carry forward into future years.

WeWhile the exact amount is uncertain at this time, we currently expect ~~all or nearly all~~a significant portion of our ~~2021~~2022 dividend distributions to be taxable as ordinary income for federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is 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 Redwood’s ~~2021~~2022 dividend distributions are currently expected to be characterized as long-term capital gain dividends. The income or loss generated at our TRS will not directly affect the tax characterization of our ~~2021~~2022 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.

Tax Provision under GAAP

For the three and nine months ended September 30, 2022, we recorded a tax provision of $1 million and a tax benefit of $10 million, respectively. For the three and nine months ended September 30, 2021, we recorded a tax benefit of $4 million and a tax provision of $14 ~~million, respectively. For the three and nine months ended September 30, 2020, we recorded a tax provision of $9 million and a tax benefit of $13~~ 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. For the nine-month periods, the switch to a tax ~~provision~~benefit from a tax ~~benefit~~provision year-over-year was primarily the result of GAAP income being recorded at our TRS during this period in 2021 versus GAAP losses being recorded at our TRS during this period in ~~2020.~~2022. For the three-month periods, while GAAP income was earned at the TRS during both periods, the switch to a tax ~~benefit~~provision from a tax ~~provision~~benefit year-over-year was due to the release of valuation allowance on a portion of our deferred tax assets ~~partially offset by an increase~~ in state taxes. While our TRS effective tax rate in the prior year approximated the federal statutory corporate tax rate (due to state NOL carryforwards), for 2021 and 2022 we expect it to increase (exclusive of the valuation allowance release) due to California’s temporary suspension of net operating loss carryforwards.2021.

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~~To the extent we determine it is more likely than not that we will not be able to ~~which realization of our DTAs is not assured and~~realize a deferred tax asset, we establish a valuation allowance accordingly. At December 31, ~~2020,~~2021, we reported net federal ordinary and capital DTAs with ~~a full valuation allowance of $17 million recorded against our net federal ordinary 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~~them. We continue to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years. At December 31, 2020, we reported a valuation allowance of $134 million recorded against our net state DTAs.

For the three months ended September 30, 2021, we reassessed the valuation allowance noting the increase in positive evidence related to our ability to utilize certain deferred tax assets. The positive evidence includes significant revenue growth and expectations regarding future profitability at our TRS. After assessing both the positive evidence and negative evidence, we determinedbelieve it ~~was~~is more likely than not that we will realize all of our federal deferred tax ~~assets. Therefore, we reversed our federal~~assets; therefore, there continues to be no valuation allowance recorded against our net federal DTAs. As we have experienced year-to-date GAAP losses at our TRS, we are continuing to monitor our estimate of ~~$17 million as~~the realizability of our net deferred tax assets and will reassess the need for a ~~discrete benefit in the third quarter of 2021. In addition to the federal~~ valuation allowance, ~~release, we determined it was more likely than not that we will realize a portion of our state deferred assets and, as such, reversed $3 million of state valuation allowance as a discrete item~~ in ~~the third quarter of 2021.~~ whole or in part, in future periods.

Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs exist and we project most of our state DTAs will expire prior to their utilization.

LIQUIDITY AND CAPITAL RESOURCES

Summary

In addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash and liquidity consist of borrowings under mortgage loan warehouse facilities, secured term financing facilities, securities repurchase agreements, payments of principal and interest we receive from our investment ~~portfolios,~~portfolio assets, proceeds from the sale of investment portfolio assets, and cash generated from our operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations and manage hedges associated with those activities, 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 30, ~~2021,~~2022, our total capital was ~~$2.03~~$2.02 billion and included ~~$1.38~~$1.15 billion of equity capital and ~~$652~~$863 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, $215 million of convertible debt due in 2027 and $140 million of trust-preferred securities due in 2037.

As of September 30, ~~2021,~~2022, our unrestricted cash was ~~$557~~$297 million, and we estimate we had approximately ~~$350~~$160 million of available capital. 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 based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is ~~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~~mortgage loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency ofor another credit event related to the mortgage or security being financed, or a decline in the value of the underlying asset securing the ~~collateral.~~collateral, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of loans, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse ~~facility.~~facility, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender).

We also distinguish between recourse and non-recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.

At September 30, 2022, in aggregate, we had $2.86 billion of secured recourse debt outstanding, financing our mortgage banking and investment portfolio, of which $480 million was marginable and $2.38 billion was non-marginable.

We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under ~~residential~~ 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."

100

Repurchase Authorization

During the third quarter of 2022, our Board of Directors approved an authorization for the repurchase of up to $125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. This common stock repurchase authorization replaced the $100 million common stock repurchase authorization approved by the Board of Directors in 2018, has no time limit, may be modified, suspended or discontinued at any time, and does not obligate us to acquire any specific number of shares or securities. The Board of Directors also continued its previous authorization for the repurchase of outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above.

During the three and nine months ended September 30, 2022, we repurchased 3.4 million and 7.1 million shares of our common stock for $24 million and $56 million, respectively. At September 30, 2022, $101 million of the authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities. Subsequent to September 30, 2022, and through November 4, 2022, we repurchased $3 million of our convertible notes due in August 2023.

Cash Flows and Liquidity for the Nine Months Ended September 30, ~~2021~~2022

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

Cash Flows from Operating Activities

Cash flows from operating activities were negative ~~$3.78 billion~~$129 million during the nine months ended September 30, ~~2021.~~2022. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. ~~Excluding~~During the first nine months of 2022, excluding cash flows from the purchase, origination, sale, ~~and~~ principal payments of loans classified as held-for-sale and the settlement of associated derivatives (which cumulatively totaled $218 million), cash flows from operating activities were positive ~~$84 million and positive $94 million during the first nine months of 2021 and 2020, respectively.~~

~~100~~

$88 million.

Cash Flows from Investing Activities

During the nine months ended September 30, ~~2021,~~2022, our net cash provided by investing activities was ~~$1.36 billion~~$169 million and primarily resulted from proceeds from principal payments on loans ~~held-for-investment. Although we generally intend~~held-for-investment, securities and other investment in excess of cash deployed 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.~~

investments. 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.

Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these assets in order to manage our liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market conditions.

As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the nine months ended September 30, ~~2021,~~2022, we transferred loans between held-for-sale and held-for-investment classification and ~~retained securities from securitizations we sponsored,~~long-term debt to short-term debt, which represent significant non-cash transactions that were not included in cash flows from investing activities.

101

Cash Flows from Financing Activities

During the nine months ended September 30, ~~2021,~~2022, our net cash provided by financing activities was ~~$2.52 billion.~~$202 million. This primarily resulted from ~~$1.40 billion of proceeds from~~ net ~~short-term~~long-term debt borrowings ~~used to finance higher levels~~ of ~~loan inventory for our mortgage banking businesses, particularly for residential loans held-for-sale,~~$787 million, which included the issuance of $215 million of convertible debt in June 2022, as ~~that business has seen a sustained increase in acquisition volumes. Additionally, $1.27 billion~~well as $132 million of net ~~proceeds were generated~~borrowings under ABS issued, including from the issuance of CAFL SFR, CAFL bridge and Sequoia ABS ~~issued.~~securitizations during the nine months ended September 30, 2022. These ~~cash inflows~~amounts were partially offset by ~~$107 million~~$1.04 billion of net ~~repayments~~paydowns on short-term borrowings, resulting primarily from a reduction in financed loan inventory at our mortgage banking operations through September 30, 2022, as well as the payment of ~~long-term debt.~~our three quarterly dividends totaling $85 million. Cash raised through stock issuances under our ATM program of $68 million during the first quarter of 2022 were partially offset by stock repurchases of $56 million during the second and third quarters of 2022.

During the nine months ended September 30, ~~2021,~~2022, we declared dividends of ~~$0.55~~$0.69 per common share. On September 13, ~~2021,~~2022, the Board of Directors declared a regular dividend of ~~$0.21~~$0.23 per share for the third quarter of ~~2021,~~2022, which was paid on September 30, ~~2021~~2022 to shareholders of record on September 23, ~~2021.~~2022.

In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, and restricted stock units, which are 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~~

Material Cash Requirements

In ~~February 2018, our Board~~the normal course of ~~Directors approved an authorization for~~business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the ~~repurchase~~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 ~~our common stock, increasing~~ the ~~total amount authorized for repurchases of common stock to $100 million,~~transaction.

Our material cash requirements from known contractual and ~~also authorized~~other obligations during 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 ninetwelve months ~~ended~~following September 30, ~~2021, we did not repurchase any shares.~~ 2022 include maturing short-term debt, interest payments on short-term and long-term debt, payments on operating leases, and funding commitments for bridge loans and under HEI flow purchase agreements. Our material cash requirements from known contractual and other obligations beyond the twelve months following September 30, 2022 include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for bridge loans and under HEI flow purchase agreements.

At September 30, ~~2021, $78~~2022, we had commitments to fund up to $990 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment (e.g. funding is dependent on actual progress on a project and we retain the option to conduct due diligence with respect to each draw request to confirm conditions have been met). Approximately $650 million of the ~~current authorization remained~~commitments are for longer-term build-for-rent loans (which generally have funding caps below their full commitment amount) and are expected to fund over the next eight quarters. Additionally, at September 30, 2022, we had $1.66 billion of available warehouse capacity for business purpose loans and the ~~repurchase of shares~~majority of our ~~common stock and we also continued~~$1.96 billion balance of bridge loans outstanding matures over the next 12 to ~~be authorized to repurchase outstanding debt securities. Like other investments we may make, any repurchases~~24 months, which will provide an additional source 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~~that can be ~~classified as short-term or long-term depending on their specific terms and provisions.~~ used to fund our commitments.

At September 30, ~~2021,~~2022, we had ~~residential warehouse facilities~~ outstanding flow purchase agreements with ~~seven different counterparties,~~multiple third parties, with ~~$2.70 billion~~an aggregate commitment to purchase $350 million of ~~total capacity~~HEIs, $149 million of which commitments remained outstanding. These purchase agreements specify monthly minimum and ~~$1.36 billion~~maximum amounts of ~~available capacity. These included non-marginable facilities with $1.18 billion~~HEIs subject to such purchase commitments. We may terminate the purchase agreement and associated purchase commitment relating to $85 million of ~~total capacity and marginable facilities with $1.53 billion of total capacity. At~~remaining commitments upon 90 days prior notice. Subsequent to September 30, ~~2021,~~2022, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.30 billion of total capacity and $663 million of available capacity. All $1.30 billion of these facilities are non-marginable.

~~101~~

~~Short-Term Debt~~

In the ordinary course of our business, we utilize several different types of borrowing facilities and use cash borrowings under these facilities to, among other things, fund the acquisition of loans (including those we acquire and originate in anticipation of securitization), finance investments in securities, BPL bridge loans and other investments, and otherwise fund our business and operations. At September 30, 2021, we had $1.75 billion of short-term debt outstanding. During the first nine months of 2021, the highest balance of our short-term debt outstanding was $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 of 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.~~

~~Recourse Subordinate Securities Financing~~

~~In the third quarter of 2021, a subsidiary of Redwood~~ entered into a repurchase agreement providing ~~non-marginable recourse debt~~ financing ~~of certain securities retained from our consolidated CAFL securitizations.~~for HEIs. The ~~financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023,~~committed amount and ~~has a final maturity in June 2026, provided that the interest rate on amounts outstanding~~maximum borrowing limit under the facility ~~increases between June 2024~~is $150 million and ~~June 2026.~~the facility has a one-year term. As of the date of this report, there were no borrowings outstanding under this facility.

~~Non-Recourse BPL Financing Facilities~~

~~In the third quarter of 2021, we reclassified one~~For additional information regarding our material cash requirements, see Part II, Item 7 of our ~~non-recourse facilities from long-term to short-term debt as the maturity of this facility was less than one year at September 30, 2021.~~

~~Recourse BPL Financing Facilities~~

In the second quarter of 2021, we reclassified one of our recourse facilities with a borrowing capacity of $450 million from short-term to long-term debt as we amended the terms of this facility, including an extension of its maturity.

~~Asset-Backed Securities Issued~~

During the three and nine months ended September 30, 2021, we issued $1.19 billion and $2.82 billion of ABS through our consolidated securitization entities, respectively. This included $583 million and $1.01 billion of CAFL ABS issued during the three and nine months ended September 30, 2021, respectively, and $462 million and $1.66 billion of Sequoia ABS issued during the three and nine months ended September 30, 2021, respectively. Additionally, during the three months ended September 30, 2021, we issued $146 million of Point ABS. 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~~Annual Report on Form ~~10-Q.~~10-K for the year ended December 31, 2021 under the caption

~~Other Commitments and Contingencies~~

Contractual Obligations. For additional information on commitments and contingencies as of September 30, 2022 that could impact our liquidity and capital resources, see Note 1617 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~

2021.

102

Several of our loan warehouse facilities were established with initial one-year terms and are regularly amended on an annual basis to extend the terms for an additional year ahead of their maturity. We renewed several of these facilities in the first nine months of 2022 and have other such facilities with scheduled maturities during the next twelve months. While there is no assurance of our ability to renew these facilities, given current market conditions we would expect to extend these in the normal course of business.

We expect to meet our obligations coming due in less than one year from September 30, 2022, through a combination of cash on hand, payments of principal and interest we receive from our investment portfolio assets, proceeds from the sale of investment portfolio assets, cash generated from our operating activities, or incremental borrowings under existing, new or amended financing arrangements. As of September 30, 2022, we had approximately $500 million of pledgeable and unencumbered assets.

During the first nine months of 2022, the highest balance of our short-term debt outstanding was $2.39 billion. See Note 14 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our short-term debt. See Note 15 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our long-term debt.

Liquidity Needs for our Mortgage Banking Activities

We generally use loan warehouse facilities to finance the residential loans we acquire and the business purpose loans we originate or acquire in our mortgage banking operations while we aggregate the loans for sale or securitization. These facilities may be designated as short-term or long-term for financial reporting purposes, depending on the remaining maturity of the facility or the amount of time individual borrowings may remain outstanding on a facility.

At September 30, 2022, we had residential warehouse facilities outstanding with nine different counterparties, with $2.85 billion of total capacity and $2.10 billion of available capacity. These included non-marginable facilities with $1.38 billion of total capacity and marginable facilities with $1.48 billion of total capacity.

At September 30, 2022, we had business purpose warehouse facilities outstanding with six different counterparties, with $3 billion of total capacity and $1.66 billion of available capacity. All of these facilities are non-marginable.

Several of these facilities have variable interest rates based on LIBOR or SOFR benchmarks and recent policy statements from the Federal Reserve indicate the likelihood of further increases in the federal funds rate, which would result in higher benchmark rates and interest costs for us under certain of our debt facilities.

As discussed above, several of the facilities we use to finance our mortgage banking loan inventory are short-term in nature and will require renewals. Additionally, because several of our warehouse facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks. Additional information regarding risks related to the debt we use to finance our mortgage banking operations can be found under the heading "Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities" that follows within this section.

Liquidity Needs for our Investment Portfolio

We use various forms of secured recourse and non-recourse debt to finance assets in our investment portfolio. We distinguish our debt between recourse and non-recourse, as our non-recourse debt is mostly comprised of ABS issued, which has unique characteristics that differentiate it in important ways from our recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.

ABS issued represents debt of securitization entities that we consolidate for GAAP reporting purposes. Our exposure to these entities is primarily through the financial interests we have purchased or retained from these entities (typically subordinate securities and interest only securities). Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood. As the debt issued by these entities is not a direct obligation of Redwood, and since the debt generally can remain outstanding for the full term of the loans it is financing within each securitization, this debt effectively provides permanent financing for these assets. SeeNotes 4 and 15, respectively, in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our principles of consolidation and our asset-backed securities issued.

Separately, we use non-recourse debt in the form of non-marginable term facilities to finance a portion of our business purpose bridge loan portfolio. While this debt is non-recourse to Redwood, it does have fixed terms with prepayment options that allows us to refinance this debt or ultimately repay it upon maturity. The remainder of the debt we use to finance our investments is recourse debt. For securities we have financed, the majority of our financing is in the form of recourse non-marginable secured term debt, with the smaller remaining amount being marginable securities repurchase debt. Additionally, a portion of our business purpose bridge loan portfolio is financed with recourse non-marginable secured term debt.

103

We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. Recent policy statements from the Federal Reserve indicate the likelihood of further increases in the federal funds rate, which if enacted could result in lower net interest income to the extent our variable rate assets and liabilities are not aligned. Additionally, to the extent interest rates remain elevated or increase further, certain fixed-rate term borrowings that mature in the coming quarters could have to be refinanced at higher interest rates, which could cause a reduction in net interest income.

Corporate Capital

In addition to secured recourse and non-recourse debt we use specifically in association with our mortgage banking operations and within our investment portfolio, we also use unsecured recourse debt to finance our overall operations. This is generally in the form of convertible debt securities we issue in the public markets and also includes trust preferred securities. SeeNote 15 in Part II, Item 8 of our Annual Report on Form 10-K, for additional information on our long-term debt.

Risks Relating to Debt Incurred Under Short- and Long-Term Borrowing Facilities

As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition ~~and~~and/or origination of residential and business purpose mortgage loans (including those we acquire ~~and~~or originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our common stock. Recourse debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 21A of our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, under the ~~caption~~caption(s) “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 I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. Many of the risks described above materialized during the first quarter of 2020 as a result of pandemic- and 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 Quarterly Report on Form 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.

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 by the lender for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. In general, financing under these facilities is obtained by transferring or pledging mortgage loans or securities to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred or pledged assets).

Under many of our mortgage loan warehouse facilities and 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~~We refer to borrowing facilities ~~to revise these~~with margin call provisions ~~to remove obligations to make margin calls for~~based solely on the lender's determination, in its discretion, of changes in the market value of transferred or pledged assets, ~~which determinations of market~~as marginable debt. Borrowing facilities that we refer to as non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value ~~were generally within the sole discretion~~ of the ~~lending counterparty. Under these revised agreements,~~underlying asset securing the collateral, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of athe property securing ~~a financed~~the mortgage loan ~~declines,~~that is financed by us under a loan warehouse facility, or based on ~~for example, an appraisal or broker-price opinion, then~~the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender), in which case the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional ~~residential~~ mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at September 30, ~~2021,~~2022, only our short-term securities repurchase facilities (with ~~$80~~$124 million of borrowings outstanding at September 30, ~~2021)~~2022), and ~~four~~six of our residential mortgage loan warehouse facilities (with ~~$618~~$356 million of borrowings outstanding at September 30, ~~2021)~~2022) retain market-value based margin call ~~provisions.~~provisions based solely on the lender's determination of market value and, as such, are considered marginable.

104

Margin call provisions under these facilities are further described in Part I, Item 21A of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 21A of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 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.”

~~103~~

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, ~~2020~~2021 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, ~~2020~~2021 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, ~~2020~~2021 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, ~~2020~~2021 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 30, ~~2021,~~2022, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at September 30, ~~2021~~2022 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at September 30, ~~2021~~2022 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur ~~at least $600 million~~more than $5 billion in additional recourse indebtedness.

~~104~~105

~~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, 2020.~~

~~For additional information on our commitments and contingencies as of September 30, 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 and the possible effects of changes in estimates on our consolidated financial statements is included in Note 2 — Basis of Presentation and Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form ~~10-Q~~10-Q.

We have elected the fair value option of accounting for a significant portion of the assets and some of the liabilities on our balance sheet, and the majority of these assets and liabilities utilize Level 3 valuation inputs, which require a significant level of estimation uncertainty. See Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our assets and liabilities accounted for at fair value at September 30, 2022, including the significant inputs used to estimate their fair values and the impact the changes in their fair values had to our financial condition and results of operations. See Note 5 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, ~~2020. Management discusses~~2021, incorporated herein by reference, for the ~~ongoing development and selection of~~same information on these ~~critical accounting policies with the audit committee of the board of directors.~~

We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities ~~increases or decreases~~as of December 31, 2021. Periodic fluctuations in the values of these assets and liabilities are inherently volatile and thus can lead to significant period-to-period GAAP earnings ~~from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing of~~volatility.

Additional detail on our ~~reported earnings may be impacted by technical accounting issues and estimates. Our~~ critical accounting ~~policies and the possible effects of changes in~~ estimates ~~on our consolidated financial statements are~~is 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, ~~2020.~~2021, under the heading "Critical Accounting Estimates."

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~~MARKET AND OTHER RISKS

We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~

~~Other Risks~~2021.

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, ~~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.~~2021.

~~105~~106

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, ~~2020,~~2021, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, ~~2020.~~2021.

Item 4. Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

There have been no changes in our internal control over financial reporting during the third quarter of ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~106~~107

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information on our legal proceedings, see Note 1617 to the Financial Statements within this Quarterly Report on Form 10-Q under the heading "Loss Contingencies - Litigation, Claims and Demands," which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 under the heading “Loss Contingencies - Litigation, Claims and 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, ~~2020.~~2021.

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

During the three months ended September 30, ~~2021,~~2022, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

In ~~February 2018,~~July 2022, our Board of Directors authorized the repurchase of up to $125 million of common stock. This common stock repurchase authorization replaces the $100 million common stock repurchase authorization approved anby the Board of Directors in 2018, has no time limit and may be modified, suspended or discontinued at any time. The Board of Directors also continued its previous authorization for the repurchase of ~~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.~~securities. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three months ended September 30, ~~2021,~~2022, we ~~did not repurchase any shares.~~repurchased 3.4 million shares of our common stock for a total cost of $24 million. At September 30, ~~2021, $78~~2022, $101 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. During the nine months ended September 30, 2022, we repurchased 7.1 million shares of our common stock for a total cost of $56 million under our current and previously-approved Board of Director authorizations.

The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended September 30, ~~2021.~~2022.

~~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, 2021 - July 31, 2021~~

—

~~August 1, 2021 - August 31, 2021~~

—

~~September 1, 2021 - September 30, 2021~~

—

~~78,369~~

~~Total~~

—

~~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)
July 1, 2022 - July 31, 2022	—	$	—	—	$	—
August 1, 2022 - August 31, 2022	1,126	$	8.07	1,126	$	115,907
September 1, 2022 - September 30, 2022	2,322	$	6.30	2,322	$	101,265
Total	3,448	$	6.88	3,448	$	101,265

Item 3. Defaults Upon Senior Securities

None.

Item 4. Not Applicable

~~107~~108

Item 5. Other Information

Effective November ~~3, 2021,~~2, 2022, our Board of Directors adopted Amended and Restated Bylaws of the Company in order to ~~among other things:~~

•~~Reflect~~incorporate changes to the ~~Maryland General Corporation Law or Maryland law practice;~~

•~~Clarify timing~~provisions in Article II of ~~delivery with respect~~the Bylaws relating to ~~electronically delivered notices of~~ annual meetings of ~~stockholders;~~

•~~Clarify that it is permitted for the Board~~stockholders. These changes include, among other things, updated provisions related to ~~hold, or allow~~ stockholder ~~participation at,~~ meetings ~~of stockholders~~held by phone, video, and remote communications, ~~technology~~updated requirements related to the ~~extent permitted under Maryland law;~~

•~~Clarify that~~form of proxy cards and proxy solicitation by stockholders, updated information required to be included in a ~~stockholder be a stockholder~~stockholder's notice of ~~record,~~nomination of individuals for election as ~~of the record date set for determining stockholders entitled to vote at the annual meeting, for any such stockholder proponent to make nominations or proposals;~~

•~~Update the information that a stockholder proponent must provide, including information about~~ a director, ~~nominee proposed~~and accompanying certifications to be made by the stockholder submitting such ~~stockholder proponent, information such proponent must provide~~nomination, and clarify provisions relating to ~~certain persons acting in concert~~compliance with ~~such stockholder, and certain written undertakings required from a proposed nominee;~~federal proxy rules, including Exchange Act Rule 14a-9, by stockholders submitting nominations.

•~~Require a stockholder proponent to appear in person or by proxy at the meeting set for such proponent’s proposal in order for the proposal to be considered at such meeting;~~

•~~Update the record date determination applicable to a meeting of stockholders that has been postponed or adjourned;~~

•~~Address recent developments in public company governance;~~

•~~Clarify certain corporate roles, responsibilities and procedures; and~~

•~~Clarify and conform language, style and practice.~~

The preceding summary of the amendment and restatement of the Bylaws of the Company is qualified in its entirety by reference to, and should be read in connection with, the complete copy of the Amended and Restated Bylaws attached ~~hereto~~ as Exhibit 3.2.1to this Quarterly Report on Form 10-Q and incorporated by reference herein.

On November 3, 2022, Redwood amended and restated its employment agreements with each of Christopher J. Abate (Redwood’s CEO), Dashiell I. Robinson (Redwood’s President), Brooke E. Carillo (Redwood’s CFO), Andrew P. Stone (Redwood’s Executive Vice President, Chief Legal Officer, and Secretary), and Sasha G. Macomber (Redwood’s Chief Human Resource Officer). These agreements were amended and restated to, among other things, update or clarify certain defined terms, update and clarify certain notice and cure terms, and update provisions related to arbitration and costs related to dispute resolution, as well as to reflect previously disclosed compensation terms applicable to these officers.

The preceding summary of the five amended and restated employment agreements is qualified in its entirety by reference to, and should be read in connection with, the complete copies of the amended and restated employment agreements attached as Exhibits 10.2, 10.3, 10.4, 10.5 and 10.6 to this Quarterly Report on Form 10-Q and incorporated by reference herein.

~~108~~109

Item 6. Exhibits


Exhibit Number						Exhibit
3.1						Articles of Amendment and Restatement of the Registrant, effective July 6, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1, filed on August 6, 2008)
3.1.1						Articles Supplementary of the Registrant, effective August 10, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.1, filed on August 6, 2008)
3.1.2						Articles Supplementary of the Registrant, effective August 11, 1995 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.2, filed on August 6, 2008)
3.1.3						Articles Supplementary of the Registrant, effective August 9, 1996 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.3, filed on August 6, 2008)
3.1.4						Certificate of Amendment of the Registrant, effective June 30, 1998 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.4, filed on August 6, 2008)
3.1.5						Articles Supplementary of the Registrant, effective April 7, 2003 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.5, filed on August 6, 2008)
3.1.6						Articles of Amendment of the Registrant, effective June 12, 2008 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.6, filed on August 6, 2008)
3.1.7						Articles of Amendment of the Registrant, effective May 19, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2009)
3.1.8						Articles of Amendment of the Registrant, effective May 24, 2011 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 20, 2011)
3.1.9						Articles of Amendment of the Registrant, effective May 18, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2012)
3.1.10						Articles of Amendment of the Registrant, effective May 16, 2013 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2013)
3.1.11						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 November ~~November 3, 2021~~2 , 202 2 (filed herewith )
10.1*						Third Amendment to Amended and Restated Executive Deferred Compensation Plan, effected as of August 25, 2022 (filed herewith)
10.2*						Seventh Amended and Restated Employment Agreement, dated as of November 3, 2022, by and between Christopher J. Abate and the Registrant (filed herewith)
10.3*						Fifth Amended and Restated Employment Agreement, dated as of November 3, 2022, by and between Dashiell I. Robinson and the Registrant (filed herewith)
10.4*						Second Amended and Restated Employment Agreement, dated as of November 3, 2022, by and between Brooke E. Carillo and the Registrant (filed herewith)
10.5*						Seventh Amended and Restated Employment Agreement, dated as of November 3, 2022, by and between Andrew P. Stone and the Registrant (filed herewith)
10.6*						Second Amended and Restated Employment Agreement, dated as of November 3, 2022, by and between Sasha G. Macomber and the Registrant (filed herewith)
31.1						Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1						Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2						Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

110


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 30, ~~2021,~~2022, is filed in inline XBRL-formatted interactive data files: (i) Consolidated Balance Sheets at September 30, ~~2021~~2022 and December 31, ~~2020;~~2021; (ii) Consolidated Statements of Income (Loss) for the three and nine months ended September 30, ~~2021~~2022 and ~~2020;~~2021; (iii) Statements of Consolidated Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2021~~2022 and ~~2020;~~2021; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, ~~2021~~2022 and ~~2020;~~2021; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2021~~2022 and ~~2020;~~2021; and (vi) Notes to Consolidated Financial Statements.
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~~111

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		REDWOOD TRUST, INC.

Date:	November 4, ~~2021~~2022	By:	/s/ Christopher J. Abate
			Christopher J. Abate
			Chief Executive Officer
			(Principal Executive Officer)

Date:	November 4, ~~2021~~2022	By:	/s/ Brooke E. Carillo
			Brooke E. Carillo
			Chief Financial Officer
			(Principal Financial Officer)

Date:	November 4, ~~2021~~2022	By:	/s/ Collin L. Cochrane
			Collin L. Cochrane
			Chief Accounting Officer
			(Principal Accounting Officer)

~~110~~112


	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, 2021	$	—	$	—	$	—	$	1,600	$	(33)	$	1,567
December 31, 2020	9,129		(1,047)		7,920		—		—		—


Number of REO assets	Bridge	Legacy Sequoia	Freddie Mac SLST	CAFL SFR	Total
At September 30, 2021	5	2	20	2	29
At December 31, 2020	3	3	9	2	17


	September 30, 2021		September 30, 2020
Federal statutory rate	21.0	%	21.0	%
State statutory rate, net of Federal tax effect	8.6	%	8.6	%
Differences in taxable (loss) income from GAAP income	(13.1)	%	(23.6)	%
Change in valuation allowance	(6.8)	%	(4.0)	%
Dividends paid deduction (1)	(4.9)	%	—	%
Effective Tax Rate	4.8	%	2.0	%