0000930236rwt:~~ToBeAnnouncedContractsMemberus-gaap:DerivativeFinancialInstrumentsAssetsMember2022-12-31~~StrategicInvestmentsMember2022-07-012022-09-30

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended: ~~June~~September 30, 2023


☐			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
10% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock, par value $0.01 per share	RWT PRA	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						~~114,234,643~~118,636,302			shares outstanding as of ~~August 1,~~November 6, 2023

REDWOOD TRUST, INC.

2023 FORM 10-Q REPORT

TABLE OF CONTENTS


		Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at ~~June~~September 30,, 2023 (Unaudited) and December 31, 2022	2
	Consolidated Statements of Income (~~Loss)~~ (Loss) for the Three and ~~Six~~ Nine Months Ended ~~June~~September 30,, 2023 and 2022 (Unaudited)	3
	Consolidated Statements of Comprehensive Income (~~Loss)~~ (Loss) for the Three and ~~Six~~Nine Months Ended ~~June~~September 30,, 2023 and 2022 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three and ~~Six~~ Nine Months Ended ~~June~~September 30,, 2023 and 2022 (Unaudited)	5
	Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30,, 2023 and 2022 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	9
	Note 1. Organization	9
	Note 2. Basis of Presentation	9
	Note 3. Summary of Significant Accounting Policies	12
	Note 4. Principles of Consolidation	15
	Note 5. Fair Value of Financial Instruments	22
	Note 6. Residential Loans	31
	Note 7. Business Purpose Loans	34
	Note 8. Consolidated Agency Multifamily Loans	38
	Note 9. Real Estate Securities	39
	Note 10. Home Equity Investments (HEI)	44
	Note 1 1 . Other Investments	45
	Note 1 2 . Derivative Financial Instruments	47
	Note 1 3 . Other Assets and Liabilities	48
	Note 1 4 . Short-Term Debt	51
	Note 1 5 . Asset-Backed Securities Issued	54
	Note 1 6 . Long-Term Debt	57
	Note 1 7 . Commitments and Contingencies	60
	Note 1 8 . Equity	63
	Note 1 9 . Equity Compensation Plans	66
	Note 20 . Mortgage Banking Activities, Net	68
	Note 21. Other Income, Net	69
	Note 22. Operating Expenses	70
	Note 2 3 . Taxes	72
	Note 2 4 . Segment Information	73

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	78
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~111~~112
Item 4.	Controls and Procedures	~~111~~112

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	~~112~~113
Item 1A.	Risk Factors	~~112~~113
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~112~~113
Item 3.	Defaults Upon Senior Securities	~~112~~113
Item 4.	Mine Safety Disclosures (Not Applicable)	~~112~~113
Item 5.	Other Information	~~112~~113
Item 6.	Exhibits	~~113~~114
Signatures		~~114~~116

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)	June 30, 2023		December 31, 2022		(In Thousands, except Share Data) (Unaudited)	September 30, 2023		December 31, 2022
ASSETS (1)	ASSETS (1)					ASSETS (1)
Residential loans, held-for-sale, at fair value	Residential loans, held-for-sale, at fair value	$	196,737	$	780,781	Residential loans, held-for-sale, at fair value	$	610,946	$	780,781
Residential loans, held-for-investment, at fair value	Residential loans, held-for-investment, at fair value	5,259,162		4,832,407		Residential loans, held-for-investment, at fair value	5,236,391		4,832,407
Business purpose loans, held-for-sale, at fair value	Business purpose loans, held-for-sale, at fair value	282,836		364,073		Business purpose loans, held-for-sale, at fair value	102,777		364,073
Business purpose loans, held-for-investment, at fair value	Business purpose loans, held-for-investment, at fair value	4,943,887		4,968,513		Business purpose loans, held-for-investment, at fair value	5,146,553		4,968,513
Consolidated Agency multifamily loans, at fair value	Consolidated Agency multifamily loans, at fair value	420,096		424,551		Consolidated Agency multifamily loans, at fair value	420,554		424,551
Real estate securities, at fair value	Real estate securities, at fair value	166,819		240,475		Real estate securities, at fair value	129,445		240,475
Home equity investments, at fair value	Home equity investments, at fair value	427,307		403,462		Home equity investments, at fair value	431,272		403,462
Other investments	Other investments	355,537		390,938		Other investments	340,361		390,938
Cash and cash equivalents	Cash and cash equivalents	357,308		258,894		Cash and cash equivalents	203,622		258,894
Restricted cash	Restricted cash	89,534		70,470		Restricted cash	56,101		70,470
Goodwill	Goodwill	23,373		23,373		Goodwill	23,373		23,373
Intangible assets	Intangible assets	34,677		40,892		Intangible assets	31,570		40,892
Derivative assets	Derivative assets	20,436		20,830		Derivative assets	37,686		20,830
Other assets	Other assets	219,025		211,240		Other assets	250,487		211,240
Total Assets	Total Assets	$	12,796,734	$	13,030,899	Total Assets	$	13,021,138	$	13,030,899

LIABILITIES AND EQUITY (1)	LIABILITIES AND EQUITY (1)					LIABILITIES AND EQUITY (1)
Liabilities	Liabilities					Liabilities
Short-term debt, net	Short-term debt, net	$	1,457,122	$	2,029,679	Short-term debt, net	$	1,476,654	$	2,029,679

Derivative liabilities	Derivative liabilities	2,316		16,855		Derivative liabilities	8,781		16,855
Accrued expenses and other liabilities	Accrued expenses and other liabilities	228,114		180,203		Accrued expenses and other liabilities	208,294		180,203

Asset-backed securities issued (includes $7,702,826 and $7,424,132 at fair value), net		8,183,170		7,986,752
Asset-backed securities issued (includes $7,910,345 and $7,424,132 at fair value), net						Asset-backed securities issued (includes $7,910,345 and $7,424,132 at fair value), net	8,392,050		7,986,752
Long-term debt, net	Long-term debt, net	1,801,874		1,733,425		Long-term debt, net	1,829,560		1,733,425
Total liabilities	Total liabilities	11,672,596		11,946,914		Total liabilities	11,915,339		11,946,914
Commitments and Contingencies (see Note 17)	Commitments and Contingencies (see Note 17)					Commitments and Contingencies (see Note 17)
Equity	Equity					Equity
Preferred stock, par value $0.01 per share, 2,800,000 shares authorized; 2,800,000 and zero issued and outstanding	Preferred stock, par value $0.01 per share, 2,800,000 shares authorized; 2,800,000 and zero issued and outstanding	66,923		—		Preferred stock, par value $0.01 per share, 2,800,000 shares authorized; 2,800,000 and zero issued and outstanding	66,923		—
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 114,177,992 and 113,484,675 issued and outstanding		1,142		1,135
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 118,503,762 and 113,484,675 issued and outstanding						Common stock, par value $0.01 per share, 395,000,000 shares authorized; 118,503,762 and 113,484,675 issued and outstanding	1,185		1,135
Additional paid-in capital	Additional paid-in capital	2,358,675		2,349,845		Additional paid-in capital	2,395,247		2,349,845
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(62,091)		(68,868)		Accumulated other comprehensive loss	(64,738)		(68,868)
Cumulative earnings	Cumulative earnings	1,157,686		1,153,370		Cumulative earnings	1,125,126		1,153,370
Cumulative distributions to stockholders	Cumulative distributions to stockholders	(2,398,197)		(2,351,497)		Cumulative distributions to stockholders	(2,417,944)		(2,351,497)
Total equity	Total equity	1,124,138		1,083,985		Total equity	1,105,799		1,083,985
Total Liabilities and Equity	Total Liabilities and Equity	$	12,796,734	$	13,030,899	Total Liabilities and Equity	$	13,021,138	$	13,030,899

——————

(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At ~~June~~September 30, 2023 and December 31, 2022, assets of consolidated VIEs totaled ~~$9,492,706~~$9,639,117 and $9,257,291, respectively. At ~~June~~September 30, 2023 and December 31, 2022, liabilities of consolidated VIEs totaled ~~$8,439,522~~$8,635,696 and $8,270,276, 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 June 30,				Six Months Ended June 30,				(In Thousands, except Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited)	(Unaudited)	2023		2022		2023		2022		(Unaudited)	2023		2022		2023		2022
Interest Income	Interest Income									Interest Income
Residential loans	Residential loans	$	56,751	$	65,047	$	114,625	$	130,250	Residential loans	$	62,512	$	61,002	$	177,137	$	191,252
Business purpose loans	Business purpose loans	98,264		80,934		195,560		175,233		Business purpose loans	93,020		95,197		288,580		270,430
Consolidated Agency multifamily loans	Consolidated Agency multifamily loans	4,697		4,732		9,315		9,485		Consolidated Agency multifamily loans	4,677		4,762		13,992		14,247
Real estate securities	Real estate securities	6,223		7,828		12,651		23,783		Real estate securities	5,111		6,989		17,762		30,772
Other interest income	Other interest income	13,046		8,914		25,346		18,104		Other interest income	11,754		9,712		37,100		27,816
Total interest income	Total interest income	178,981		167,455		357,497		356,855		Total interest income	177,074		177,662		534,571		534,517
Interest Expense	Interest Expense									Interest Expense
Short-term debt	Short-term debt	(28,711)		(13,661)		(60,539)		(25,149)		Short-term debt	(27,323)		(23,944)		(87,862)		(49,093)
Asset-backed securities issued	Asset-backed securities issued	(90,093)		(88,859)		(177,558)		(194,554)		Asset-backed securities issued	(91,323)		(90,910)		(268,881)		(285,464)
Long-term debt	Long-term debt	(34,081)		(24,447)		(66,867)		(43,562)		Long-term debt	(38,077)		(27,873)		(104,944)		(71,435)
Total interest expense	Total interest expense	(152,885)		(126,967)		(304,964)		(263,265)		Total interest expense	(156,723)		(142,727)		(461,687)		(405,992)
Net Interest Income	Net Interest Income	26,096		40,488		52,533		93,590		Net Interest Income	20,351		34,935		72,884		128,525
Non-Interest Income (Loss)
Non-Interest (Loss) Income										Non-Interest (Loss) Income
Mortgage banking activities, net	Mortgage banking activities, net	16,552		(30,017)		33,223		(13,702)		Mortgage banking activities, net	19,440		16,535		52,663		2,833
Investment fair value changes, net	Investment fair value changes, net	(4,596)		(87,972)		(4,723)		(94,092)		Investment fair value changes, net	(31,430)		(57,697)		(36,153)		(151,789)
Other income, net	Other income, net	4,158		7,006		8,714		12,989		Other income, net	2,346		4,027		11,060		17,016
Realized gains, net	Realized gains, net	1,056		—		1,054		2,581		Realized gains, net	50		—		1,104		2,581
Total non-interest income (loss), net		17,170		(110,983)		38,268		(92,224)
Total non-interest (loss) income, net										Total non-interest (loss) income, net	(9,594)		(37,135)		28,674		(129,359)
General and administrative expenses	General and administrative expenses	(30,805)		(30,199)		(66,360)		(63,475)		General and administrative expenses	(29,697)		(38,244)		(96,057)		(101,719)
Portfolio management costs	Portfolio management costs	(3,100)		(1,767)		(6,610)		(3,345)		Portfolio management costs	(3,661)		(1,863)		(10,271)		(5,208)
Loan acquisition costs	Loan acquisition costs	(1,444)		(3,480)		(2,733)		(7,945)		Loan acquisition costs	(1,880)		(2,426)		(4,613)		(10,371)
Other expenses	Other expenses	(4,975)		(3,468)		(8,659)		(7,553)		Other expenses	(4,633)		(4,261)		(13,292)		(11,814)
Net Income (Loss) before (Provision for) Benefit from Income Taxes		2,942		(109,409)		6,439		(80,952)
Net Loss before (Provision for) Benefit from Income Taxes										Net Loss before (Provision for) Benefit from Income Taxes	(29,114)		(48,994)		(22,675)		(129,946)
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(69)		9,443		1,054		11,901		(Provision for) benefit from income taxes	(1,696)		(1,417)		(642)		10,484
Net Income (Loss)		$	2,873	$	(99,966)	$	7,493	$	(69,051)
Net Loss										Net Loss	$	(30,810)	$	(50,411)	$	(23,317)	$	(119,462)
Dividends on preferred stock	Dividends on preferred stock	(1,758)		—		(3,177)		—		Dividends on preferred stock	(1,750)		—		(4,927)		—
Net Income (Loss) available (related) to common stockholders		$	1,115	$	(99,966)	$	4,316	$	(69,051)
Net Loss related to common stockholders										Net Loss related to common stockholders	$	(32,560)	$	(50,411)	$	(28,244)	$	(119,462)

Net income (loss) available (related) to common stockholders - Basic		$	—	$	(0.85)	$	0.02	$	(0.60)
Net income (loss) available (related) to common stockholders - Diluted		$	—	$	(0.85)	$	0.02	$	(0.60)
Net loss related to common stockholders - Basic										Net loss related to common stockholders - Basic	$	(0.29)	$	(0.44)	$	(0.27)	$	(1.04)
Net loss related to common stockholders - Diluted										Net loss related to common stockholders - Diluted	$	(0.29)	$	(0.44)	$	(0.27)	$	(1.04)
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	114,051,017		119,660,173		113,830,347		119,771,554		Basic weighted average common shares outstanding	115,465,977		116,087,890		114,381,548		118,530,172
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	114,445,262		119,660,173		114,255,292		119,771,554		Diluted weighted average common shares outstanding	115,465,977		116,087,890		114,381,548		118,530,172

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME ~~(LOSS)~~


(In Thousands)	(In Thousands)	Three Months Ended June 30,				Six Months Ended June 30,				(In Thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited)	(Unaudited)	2023		2022		2023		2022		(Unaudited)	2023		2022		2023		2022
Net Income (Loss)		$	2,873	$	(99,966)	$	7,493	$	(69,051)
Net (Loss) Income										Net (Loss) Income	$	(30,810)	$	(50,411)	$	(23,317)	$	(119,462)
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Net unrealized (loss) gain on available-for-sale securities	Net unrealized (loss) gain on available-for-sale securities	(688)		(33,409)		4,319		(51,282)		Net unrealized (loss) gain on available-for-sale securities	(3,921)		(8,731)		398		(60,013)
Reclassification of unrealized loss on available-for-sale securities to net income (loss)	Reclassification of unrealized loss on available-for-sale securities to net income (loss)	604		1,066		411		374		Reclassification of unrealized loss on available-for-sale securities to net income (loss)	234		544		645		918

Reclassification of unrealized loss on interest rate agreements to net income (loss)	Reclassification of unrealized loss on interest rate agreements to net income (loss)	1,029		1,029		2,047		2,047		Reclassification of unrealized loss on interest rate agreements to net income (loss)	1,040		1,040		3,087		3,087
Total other comprehensive income (loss)		945		(31,314)		6,777		(48,861)
Comprehensive Income (Loss)		$	3,818	$	(131,280)	$	14,270	$	(117,912)
Total other comprehensive (loss) income										Total other comprehensive (loss) income	(2,647)		(7,147)		4,130		(56,008)
Comprehensive (Loss) Income										Comprehensive (Loss) Income	$	(33,457)	$	(57,558)	$	(19,187)	$	(175,470)
Dividends on preferred stock	Dividends on preferred stock	$	(1,758)	$	—	$	(3,177)	$	—	Dividends on preferred stock	$	(1,750)	$	—	$	(4,927)	$	—
Comprehensive income (loss) available (related) to common stockholders		$	2,060	$	(131,280)	$	11,093	$	(117,912)
Comprehensive Loss Related to Common Stockholders										Comprehensive Loss Related to Common Stockholders	$	(35,207)	$	(57,558)	$	(24,114)	$	(175,470)

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 ~~June~~September 30, 2023


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Preferred Stock				Common Stock						Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)				Cumulative Earnings			Cumulative Distributions to Stockholders				Total			(In Thousands, except Share Data)	Preferred Stock				Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	(Unaudited)			Shares			Par Value									(Unaudited)				Shares								Par Value
March 31, 2023				$	66,923		113,864,456			$	1,139					$	2,355,139						$	(63,036)			$	1,156,571			$	(2,379,056)		$	1,137,680
Net income		—				—		—				—		—				2,873			—				2,873
Other comprehensive income		—				—		—				—		945				—			—				945

June 30, 2023																												June 30, 2023	$	66,923			114,177,992			$	1,142	$	2,358,675	$	(62,091)	$	1,157,686	$	(2,398,197)	$	1,124,138
Net (loss)																												Net (loss)	—				—			—		—		—		(30,810)		—		(30,810)
Other comprehensive (loss)																												Other comprehensive (loss)	—				—			—		—		(2,647)		—		—		(2,647)
Issuance of common stock																												Issuance of common stock					4,244,580			42		33,286		—		—		—		33,328

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	—				313,536		3				(1,664)		—				—			—				(1,661)			Employee stock purchase and incentive plans	—				81,190			1		(124)		—		—		—		(123)
Non-cash equity award compensation	Non-cash equity award compensation	—				—		—				5,200		—				—			—				5,200			Non-cash equity award compensation	—				—			—		3,410		—		—		—		3,410

Preferred dividends declared ($0.625 per share)	Preferred dividends declared ($0.625 per share)	—				—		—				—		—				(1,758)			—				(1,758)			Preferred dividends declared ($0.625 per share)	—				—			—		—		—		(1,750)		—		(1,750)
Common dividends declared ($0.16 per share)(1)	Common dividends declared ($0.16 per share)(1)	—				—		—				—		—				—			(19,141)				(19,141)			Common dividends declared ($0.16 per share)(1)	—				—			—		—		—		—		(19,747)		(19,747)
June 30, 2023		$	66,923			114,177,992		$	1,142			$	2,358,675	$	(62,091)			$	1,157,686		$	(2,398,197)			$	1,124,138
September 30, 2023																												September 30, 2023	$	66,923			118,503,762			$	1,185	$	2,395,247	$	(64,738)	$	1,125,126	$	(2,417,944)	$	1,105,799

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2023


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Preferred Stock				Common Stock						Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)				Cumulative Earnings			Cumulative Distributions to Stockholders				Total			(In Thousands, except Share Data)	Preferred Stock				Common Stock						Additional Paid-In Capital			Accumulated Other Comprehensive (Loss)			Cumulative Earnings			Cumulative Distributions to Stockholders			Total
(Unaudited)	(Unaudited)			Shares			Par Value									(Unaudited)				Shares								Par Value
December 31, 2022	December 31, 2022			$	—		113,484,675			$	1,135					$	2,349,845						$	(68,868)			$	1,153,370			$	(2,351,497)		$	1,083,985	December 31, 2022		$	—		113,484,675			$	1,135		$	2,349,845		$	(68,868)		$	1,153,370	$	(2,351,497)	$	1,083,985
Net Income		—				—		—				—		—				7,493			—				7,493
Net (loss)																												Net (loss)	—				—			—			—			—			(23,317)			—			(23,317)
Other comprehensive income	Other comprehensive income	—				—		—				—		6,777				—			—				6,777			Other comprehensive income	—				—			—			—			4,130			—			—			4,130

Issuance of common stock																												Issuance of common stock	—				4,244,580			42			33,286			—			—			—			33,328

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	—				693,317		7				(2,712)		—				—			—				(2,705)			Employee stock purchase and incentive plans	—				774,507			8			(2,836)			—			—			—			(2,828)
Non-cash equity award compensation	Non-cash equity award compensation	—				—		—				11,542		—				—			—				11,542			Non-cash equity award compensation	—				—			—			14,952			—			—			—			14,952

Issuance of preferred stock	Issuance of preferred stock	66,923				—		—				—		—				—			—				66,923			Issuance of preferred stock	66,923				—			—			—			—			—			—			66,923
Preferred dividends declared ($1.22917 per share)		—				—		—				—		—				(3,177)			—				(3,177)
Common dividends declared ($0.39 per share)		—				—		—				—		—				—			(46,700)				(46,700)
June 30, 2023		$	66,923			114,177,992		$	1,142			$	2,358,675	$	(62,091)			$	1,157,686		$	(2,398,197)			$	1,124,138
Preferred dividends declared ($1.85417 per share)																												Preferred dividends declared ($1.85417 per share)	—				—			—			—			—			(4,927)			—			(4,927)
Common dividends declared ($0.55 per share)(1)																												Common dividends declared ($0.55 per share)(1)	—				—			—			—			—			—			(66,447)			(66,447)
September 30, 2023																												September 30, 2023	$	66,923			118,503,762			$	1,185		$	2,395,247		$	(64,738)		$	1,125,126		$	(2,417,944)		$	1,105,799

For the Three Months Ended ~~June~~September 30, 2022


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Preferred Stock		Common Stock						Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)				Cumulative Earnings			Cumulative Distributions to Stockholders				Total			(In Thousands, except Share Data)	Preferred Stock			Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	(Unaudited)		Shares		Par Value									(Unaudited)				Shares								Par Value
March 31, 2022			—		120,289,243			$	1,203					$	2,391,344						$	(26,474)			$	1,347,805		$	(2,268,612)		$	1,445,266
June 30, 2022																										June 30, 2022	—			116,753,174			$	1,168	$	2,363,709	$	(57,788)	$	1,247,839	$	(2,296,837)	$	1,258,091
Net (loss)	Net (loss)	—		—		—				—		—				(99,966)			—				(99,966)			Net (loss)	—			—			—		—		—		(50,411)		—		(50,411)
Other comprehensive (loss)	Other comprehensive (loss)	—		—		—				—		(31,314)				—			—				(31,314)			Other comprehensive (loss)	—			—			—		—		(7,147)		—		—		(7,147)

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	—		143,964		1				(135)		—				—			—				(134)			Employee stock purchase and incentive plans	—			38,698			—		34		—		—		—		34
Non-cash equity award compensation	Non-cash equity award compensation	—		—		—				5,266		—				—			—				5,266			Non-cash equity award compensation	—			—			—		5,068		—		—		—		5,068
Share repurchases	Share repurchases			(3,680,033)		(36)				(32,766)		—				—			—				(32,802)			Share repurchases				(3,448,858)			(35)		(23,659)		—		—		—		(23,694)
Common dividends declared ($0.23 per share)(1)	Common dividends declared ($0.23 per share)(1)	—		—		—				—		—				—			(28,225)				(28,225)			Common dividends declared ($0.23 per share)(1)	—			—			—		—		—		—		(27,699)		(27,699)
June 30, 2022		—		116,753,174		$	1,168			$	2,363,709	$	(57,788)			$	1,247,839		$	(2,296,837)			$	1,258,091
September 30, 2022																										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, 2022


(In Thousands, except Share Data)	Preferred Stock	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (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)(1)	—	—	—		—		—		—		(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

(1) Includes dividends and dividend equivalents declared on common stock and stock-based compensation awards

~~For the Six Months Ended June 30, 2022~~

(In Thousands, except Share Data) Preferred Stock Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income (Loss) Cumulative
Earnings Cumulative
Distributions
to Stockholders Total
(Unaudited) Shares Amount
December 31, 2022 — 114,892,309 $ 1,149 $ 2,316,799 $ (8,927) $ 1,316,890 $ (2,239,824) $ 1,386,087
Net (loss) — — — — — (69,051) — (69,051)
Other comprehensive (loss) — — — — (48,861) — — (48,861)
Issuance of common stock — 5,232,869 52 67,423 — — — 67,475
Employee stock purchase and incentive plans — 308,029 3 (1,183) — — — (1,180)
Non-cash equity award compensation — — — 13,436 — — — 13,436
Share repurchases (3,680,033) (36) (32,766) — — — (32,802)
Common dividends declared ($0.46 per share) — — — — — — (57,013) (57,013)
June 30, 2022 — 116,753,174 $ 1,168 $ 2,363,709 $ (57,788) $ 1,247,839 $ (2,296,837) $ 1,258,091

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)	Six Months Ended June 30,				(In Thousands) (Unaudited)	Nine Months Ended September 30,
		2023		2022			2023		2022
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					Cash Flows From Operating Activities:
Net income (loss)	Net income (loss)	$	7,493	$	(69,051)	Net income (loss)	$	(23,317)	$	(119,462)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:					Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of premiums, discounts, and debt issuance costs, net	Amortization of premiums, discounts, and debt issuance costs, net	10,190		(2,538)		Amortization of premiums, discounts, and debt issuance costs, net	14,137		2,041
Depreciation and amortization of non-financial assets	Depreciation and amortization of non-financial assets	7,333		7,710		Depreciation and amortization of non-financial assets	11,082		12,115
Originations of held-for-sale loans	Originations of held-for-sale loans	(360,273)		(766,852)		Originations of held-for-sale loans	(577,098)		(913,477)
Purchases of held-for-sale loans	Purchases of held-for-sale loans	(242,235)		(3,395,459)		Purchases of held-for-sale loans	(1,051,236)		(3,734,972)
Proceeds from sales of held-for-sale loans	Proceeds from sales of held-for-sale loans	582,346		3,376,600		Proceeds from sales of held-for-sale loans	692,392		4,110,949
Principal payments on held-for-sale loans	Principal payments on held-for-sale loans	38,820		114,731		Principal payments on held-for-sale loans	45,326		160,985
Net settlements of derivatives	Net settlements of derivatives	(17,235)		112,649		Net settlements of derivatives	(5,023)		158,868
Non-cash equity award compensation expense	Non-cash equity award compensation expense	11,542		13,436		Non-cash equity award compensation expense	14,952		18,505
Market valuation adjustments	Market valuation adjustments	(17,594)		132,594		Market valuation adjustments	(1,275)		183,487
Realized (gains) losses, net	Realized (gains) losses, net	(1,054)		(2,581)		Realized (gains) losses, net	(1,104)		(2,581)
Net change in:	Net change in:					Net change in:
Other assets	Other assets	3,358		63,829		Other assets	14,687		56,156
Accrued expenses and other liabilities	Accrued expenses and other liabilities	878		(75,856)		Accrued expenses and other liabilities	(984)		(62,046)
Net cash provided by (used in) operating activities		23,569		(490,788)
Net cash used in operating activities						Net cash used in operating activities	(867,461)		(129,432)
Cash Flows From Investing Activities:	Cash Flows From Investing Activities:					Cash Flows From Investing Activities:
Originations of loan investments	Originations of loan investments	(455,665)		(954,179)		Originations of loan investments	(674,500)		(1,377,714)
Purchases of loan investments	Purchases of loan investments	—		(22,006)		Purchases of loan investments	—		(22,006)
Proceeds from sales of loans						Proceeds from sales of loans	5,351		—
Principal payments on loan investments	Principal payments on loan investments	725,687		1,160,403		Principal payments on loan investments	1,126,609		1,666,514
Purchases of real estate securities	Purchases of real estate securities	(9,855)		(15,006)		Purchases of real estate securities	(9,855)		(15,006)
Proceeds from sales of real estate securities	Proceeds from sales of real estate securities	98,338		23,329		Proceeds from sales of real estate securities	138,111		27,471
Principal payments on real estate securities	Principal payments on real estate securities	637		26,033		Principal payments on real estate securities	950		26,584
Repayments from servicer advance investments, net	Repayments from servicer advance investments, net	37,268		71,401		Repayments from servicer advance investments, net	55,828		65,772
Purchases of HEIs		(25,513)		(97,389)
Repayments on HEIs		17,031		25,826
Acquisition of Riverbend, net of cash acquired						Acquisition of Riverbend, net of cash acquired	—		(40,636)
Purchases of HEI						Purchases of HEI	(25,626)		(176,439)
Repayments on HEI						Repayments on HEI	26,153		35,187
Other investing activities, net	Other investing activities, net	(1,677)		(14,573)		Other investing activities, net	(3,787)		(20,768)
Net cash provided by investing activities	Net cash provided by investing activities	386,251		203,839		Net cash provided by investing activities	639,234		168,959
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	1,033,741		3,450,606		Proceeds from borrowings on short-term debt	1,956,373		4,149,726
Repayments on short-term debt	Repayments on short-term debt	(1,593,853)		(4,125,634)		Repayments on short-term debt	(2,393,313)		(5,192,165)
Proceeds from issuance of asset-backed securities	Proceeds from issuance of asset-backed securities	635,081		1,167,711		Proceeds from issuance of asset-backed securities	1,240,121		1,420,289
Repayments on asset-backed securities issued	Repayments on asset-backed securities issued	(446,451)		(954,136)		Repayments on asset-backed securities issued	(657,638)		(1,288,294)
Proceeds from borrowings on long-term debt	Proceeds from borrowings on long-term debt	311,278		1,424,088		Proceeds from borrowings on long-term debt	442,039		1,678,805
Deferred long-term debt issuance costs paid	Deferred long-term debt issuance costs paid	(1,329)		(17,363)		Deferred long-term debt issuance costs paid	(1,640)		(17,925)
Repayments on long-term debt	Repayments on long-term debt	(244,908)		(726,076)		Repayments on long-term debt	(451,253)		(873,820)
Payments on repurchase of common stock	Payments on repurchase of common stock	—		(26,857)		Payments on repurchase of common stock	—		(56,496)
Taxes paid on equity award distributions	Taxes paid on equity award distributions	(3,017)		(1,477)		Taxes paid on equity award distributions	(3,288)		(1,571)
Net proceeds from issuance of common stock	Net proceeds from issuance of common stock	312		67,770		Net proceeds from issuance of common stock	33,788		67,899
Net proceeds from issuance of preferred stock	Net proceeds from issuance of preferred stock	66,923		—		Net proceeds from issuance of preferred stock	66,923		—
Dividends paid on common stock	Dividends paid on common stock	(46,700)		(57,013)		Dividends paid on common stock	(66,447)		(84,712)
Dividends paid on preferred stock	Dividends paid on preferred stock	(1,699)		—		Dividends paid on preferred stock	(3,449)		—
Other financing activities, net	Other financing activities, net	(1,720)		(2,300)		Other financing activities, net	(3,630)		(3,659)
Net cash (used in) provided by financing activities		(292,342)		199,319
Net increase (decrease) in cash, cash equivalents and restricted cash		117,478		(87,630)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	158,586		(201,923)
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(69,641)		(162,396)
Cash, cash equivalents and restricted cash at beginning of period (1)	Cash, cash equivalents and restricted cash at beginning of period (1)	329,364		531,484		Cash, cash equivalents and restricted cash at beginning of period (1)	329,364		531,484
Cash, cash equivalents and restricted cash at end of period (1)	Cash, cash equivalents and restricted cash at end of period (1)	$	446,842	$	443,854	Cash, cash equivalents and restricted cash at end of period (1)	$	259,723	$	369,088

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


(In Thousands) (Unaudited)	(In Thousands) (Unaudited)	Six Months Ended June 30,				(In Thousands) (Unaudited)	Nine Months Ended September 30,
		2023		2022			2023		2022

Supplemental Cash Flow Information:	Supplemental Cash Flow Information:					Supplemental Cash Flow Information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	287,699	$	247,968	Interest	$	436,879	$	378,691
Taxes (refunded) paid	Taxes (refunded) paid	(1,049)		3,894		Taxes (refunded) paid	(1,034)		3,894
Supplemental Noncash Information:	Supplemental Noncash Information:					Supplemental Noncash Information:
Dividends declared but not paid on preferred stock	Dividends declared but not paid on preferred stock	1,478		—		Dividends declared but not paid on preferred stock	1,478		—
Retention of mortgage servicing rights from loan securitizations and sales	Retention of mortgage servicing rights from loan securitizations and sales	—		4,543		Retention of mortgage servicing rights from loan securitizations and sales	—		4,543

Transfers from loans held-for-sale to loans held-for-investment	Transfers from loans held-for-sale to loans held-for-investment	1,137,194		1,953,421		Transfers from loans held-for-sale to loans held-for-investment	2,009,030		2,643,027

Transfers from residential loans to real estate owned	Transfers from residential loans to real estate owned	11,874		3,132		Transfers from residential loans to real estate owned	53,906		4,033
Operating lease right-of-use assets obtained in exchange for operating lease liabilities	Operating lease right-of-use assets obtained in exchange for operating lease liabilities	337		—		Operating lease right-of-use assets obtained in exchange for operating lease liabilities	337		—
Reduction in operating lease liabilities due to lease modification	Reduction in operating lease liabilities due to lease modification	274		—		Reduction in operating lease liabilities due to lease modification	274		—
Transfers from short-term debt to long-term debt						Transfers from short-term debt to long-term debt	325,173		—
Transfers from long-term debt to short-term debt	Transfers from long-term debt to short-term debt	—		367,431		Transfers from long-term debt to short-term debt	427,021		908,627

(1) Cash, cash equivalents, and restricted cash includes cash and cash equivalents of ~~$357~~$204 million and restricted cash of ~~$90~~$56 million at ~~June~~September 30, 2023, and includes cash and cash equivalents of ~~$371~~$297 million and restricted cash of ~~$73~~$72 million at ~~June~~September 30, 2022.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit, with a mission to help make quality housing, whether rented or owned, accessible to all American households. Our operating platforms occupy a unique position in 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 securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential and business purpose ~~and multifamily~~housing credit 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 Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio.

Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income primarily consists of the 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 portfolio.

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. For a full description of our business, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2022.

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at ~~June~~September 30, 2023 and December 31, 2022, and for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022. 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, 2022. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the Company at ~~June~~September 30, 2023 and results of operations for all periods presented. The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2023 should not be construed as indicative of the results to be expected for the full year.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 BPL term and bridge loans ("CAFL") and an entity formed in connection with the securitization of home equity investment contracts ("~~HEIs"~~HEI"). 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 Consolidated Agency multifamily loans, at fair value, the underlying BPL term and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, and the underlying ~~HEIs~~HEI at the consolidated HEI securitization entity are shown under Home equity investments, at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income, we 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 15 for further discussion on ABS issued.

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

See Note 4 for further discussion on principles of consolidation.

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, valuation allowances, 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

~~June~~September 30, 2023

(Unaudited)

Note 2. Basis of Presentation - (continued)

Acquisitions

On July 1, 2022, we acquired Riverbend Funding LLC ("Riverbend"), a private mortgage lender for residential transitional and commercial real estate investors. Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding this acquisition, including purchase price allocations. Additionally, in 2019 we acquired 5 Arches and CoreVest, an originator and portfolio manager of business purpose residential loans. In connection with these acquisitions, we identified and recorded finite-lived intangible assets totaling $95 million. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at ~~June~~September 30, 2023.

Table 2.1 – Intangible Assets – Activity


		Intangible Assets at Acquisition				Accumulated Amortization at June 30, 2023			Carrying Value at June 30, 2023				Weighted Average Amortization Period (in years)				Intangible Assets at Acquisition			Accumulated Amortization at September 30, 2023		Carrying Value at September 30, 2023		Weighted Average Amortization Period (in years)
(Dollars in Thousands)	(Dollars in Thousands)							(Dollars in Thousands)
Borrower network	Borrower network			$	56,300						$	(25,570)			$	30,730			7		Borrower network	$	56,300	$	(27,580)	$	28,720	7
Broker network	Broker network	18,100				(15,687)			2,413				5	Broker network			18,100			(16,592)		1,508		5
Non-compete agreements	Non-compete agreements	11,400				(10,133)			1,267				3	Non-compete agreements			11,400			(10,292)		1,108		3
Tradenames	Tradenames	4,400				(4,133)			267				3	Tradenames			4,400			(4,166)		234		3
Developed technology	Developed technology	1,800				(1,800)			—				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	$	94,600			$	(59,923)		$	34,677			6	Total			$	94,600		$	(63,030)	$	31,570	6

All of our intangible assets are amortized on a straight-line basis. For the ~~six~~nine months ended ~~June~~September 30, 2023, we recorded intangible asset amortization expense of $6$9 million. For the ~~six~~nine months ended ~~June~~September 30, 2022, we recorded intangible asset amortization expense of $7$11 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year


(In Thousands)	(In Thousands)	June 30, 2023		(In Thousands)	September 30, 2023
2023 (6 months)		$	6,216
2023 (3 months)				2023 (3 months)	$	3,109
2024	2024	9,412		2024	9,412
2025	2025	8,426		2025	8,426
2026	2026	6,694		2026	6,694
2027	2027	1,571		2027	1,571
2028 and thereafter	2028 and thereafter	2,358		2028 and thereafter	2,358
Total Future Intangible Asset Amortization	Total Future Intangible Asset Amortization	$	34,677	Total Future Intangible Asset Amortization	$	31,570

On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at ~~June~~September 30, 2023.

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. For reporting purposes, we included the intangible assets and goodwill from the Riverbend acquisition within our Business Purpose Mortgage Banking segment. There were no changes to the balance of goodwill during the ~~three~~nine months ended ~~June~~September 30, 2023.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 2. Basis of Presentation - (continued)

The potential liability resulting from the contingent consideration arrangement with Riverbend was recorded at its acquisition-date fair value of zero as part of the total consideration for the acquisition of Riverbend. At ~~June~~September 30, 2023, 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. During the ~~six~~nine months ended ~~June~~September 30, 2023, we did not record any contingent consideration income or expense related to our acquisition of Riverbend. See Note 17 for additional information on our contingent consideration liability.

The following unaudited pro forma financial information presents Net interest income, Non-interest income, and Net income of Redwood, as if the acquisition of Riverbend occurred as of January 1, 2022. 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, 2022 and should not be taken as indicative of our future consolidated results of operations.

Table 2.3 – Unaudited Pro Forma Financial Information


		Three Months Ended June 30, 2022		Six Months Ended June 30, 2022					Three Months Ended September 30, 2022			Nine Months Ended September 30, 2022
(In Thousands)	(In Thousands)				(In Thousands)
Supplementary pro forma information:	Supplementary pro forma information:							Supplementary pro forma information:
Net interest income	Net interest income	$	42,726		$	97,540		Net interest income		$	34,935		$	132,475
Non-interest (loss) income	Non-interest (loss) income	(106,880)		(84,479)			Non-interest (loss) income		(37,135)			(121,614)
Net (loss) income	Net (loss) income	(99,359)		(67,131)			Net (loss) income		(50,411)			(117,090)

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, 2022 is a summary of our significant accounting policies.

Recent Accounting Pronouncements

Newly Adopted Accounting Standard Updates ("ASUs")

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 new guidance was effective for fiscal years beginning after December 31, 2022. We adopted this guidance in the first quarter of 2023, which did not have a material impact on our consolidated financial statements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

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

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 new guidance was effective for fiscal years beginning after December 31, 2022. We adopted this guidance in the first quarter of 2023, which did not have a material impact on our consolidated financial statements.

In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848." This new guidance defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. Through ~~June~~September 30, 2023, we ~~have~~had not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or other transactions.

At September 30, 2023, we had no remaining LIBOR-indexed financial assets or liabilities. Our bridge loans and trust preferred securities that were previously indexed to LIBOR at June 30, 2023, were transitioned to SOFR indexes in the third quarter of 2023.

Other Recent Accounting Pronouncements Pending Adoption

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 (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to~~clarifies that a contractual ~~restrictions that prohibit~~restriction on the sale of an equity security ~~(2) to amend a related illustrative example,~~should not be considered in measuring its fair value and ~~(3) to introduce~~introduces 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 ~~anticipation~~August 2023, the FASB issued ASU 2023-05, "Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement." ASU 2023-05 requires a joint venture, upon formation, to initially measure its assets and liabilities at fair value. This generally aligns the treatment to be consistent with the guidance for business combinations. Joint venture entities that are private companies may elect to include customer-related intangible assets and non-competition agreements within goodwill and not as separate intangible assets. This new guidance is effective for all joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. Joint ventures formed prior to the adoption date may elect to apply the new guidance retrospectively back to their original formation date. We are evaluating the accounting and disclosure requirements of ~~the full cessation of LIBOR in 2023,~~ASU 2023-05 and we ~~established a LIBOR transition~~ plan to ~~facilitate an orderly transition to alternative reference rates.~~ ~~At June 30, 2023,~~adopt this new guidance by the required date. We do not anticipate that this update will have a material impact on our ~~primary LIBOR exposure included the following: $703 million of bridge loans and $140 million of trust preferred securities and subordinated debt.~~ In ~~2022, we began benchmarking all newly originated BPL bridge loans to SOFR.~~ ~~The legacy LIBOR-indexed BPL bridge loans we have outstanding have fallback provisions for benchmark rate replacement.~~ ~~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.~~financial statements.

Balance Sheet Netting

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

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

The following table 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 ~~June~~September 30, 2023 and December 31, 2022.

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


		Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet			Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount			Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in Consolidated Balance Sheet			Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet				Gross Amounts Not Offset in Consolidated Balance Sheet (1)						Net Amount
June 30, 2023 (In Thousands)						Financial Instruments			Cash Collateral (Received) Pledged
September 30, 2023 (In Thousands)															September 30, 2023 (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	$	10,126	$	—		$	10,126	$	—	$	(5,140)	$	4,986	Interest rate agreements	$	13,819			$	—			$	13,819			$	—		$	(9,428)		$	4,391
TBAs	TBAs	3,536		—			3,536		(920)		(2,066)		550		TBAs	16,613			—				16,613				(1,169)			(14,032)			1,412
Futures	Futures	3,333		—			3,333		—		—		3,333		Futures	2,187			—			2,187				(199)			(146)			1,842
Total Assets	Total Assets	$	16,995	$	—		$	16,995	$	(920)	$	(7,206)	$	8,869	Total Assets	$	32,619		$	—		$	32,619			$	(1,368)		$	(23,606)		$	7,645

Liabilities (2)	Liabilities (2)														Liabilities (2)

TBAs	TBAs	$	(920)	$	—		$	(920)	$	920	$	—	$	—	TBAs	$	(5,495)		$	—		$	(5,495)			$	1,169		$	4,326		$	—
Futures	Futures	—		—			—		—		—		—		Futures	(199)			—			(199)				199			—			—
Loan warehouse debt	Loan warehouse debt	(32,602)		—			(32,602)		32,602		—		—		Loan warehouse debt	(325,880)			—			(325,880)				325,880			—			—

Total Liabilities	Total Liabilities	$	(33,522)	$	—		$	(33,522)	$	33,522	$	—	$	—	Total Liabilities	$	(331,574)		$	—		$	(331,574)			$	327,248		$	4,326		$	—


	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, 2022 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	14,625	$	—	$	14,625	$	—	$	(5,944)	$	8,681

TBAs	1,893		—		1,893		(1,873)		—		20
Futures	3,976		—		3,976		(57)		—		3,919
Total Assets	$	20,494	$	—	$	20,494	$	(1,930)	$	(5,944)	$	12,620

Liabilities (2)

TBAs	$	(16,784)	$	—	$	(16,784)	$	1,873	$	4,518	$	(10,393)
Futures	(57)		—		(57)		57		—		—
Loan warehouse debt	(224,695)		—		(224,695)		224,695		—		—

Total Liabilities	$	(241,536)	$	—	$	(241,536)	$	226,625	$	4,518	$	(10,393)

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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, 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.

Analysis of Consolidated VIEs

At ~~June~~September 30, 2023, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. 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 two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At ~~June~~September 30, 2023, we held an 80% ownership interest in, and were responsible for the management of, each such entity. See Note 11 for a further description of these entities and the investments they hold and Note 13 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 14 for additional information on the servicer advance financing.

During 2021, we consolidated an HEI securitization entity formed to invest in ~~HEIs~~HEI that we determined was a VIE and for which we determined we were the primary beneficiary. At ~~June~~September 30, 2023 and December 31, 2022, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 13 for additional information on non-controlling interests in the entity. We consolidate the HEI securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2023~~

~~(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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

In addition to our consolidated VIEs for which we made the CFE election, we consolidate certain VIEs for which we did not make the CFE election, and elected to account for the ABS issued by these entities at amortized cost. These include our CAFL Bridge securitizations, Freddie Mac SLST re-securitization, and Servicing Investment entities. In January 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS issued.

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

Table 4.1 – Assets and Liabilities of Consolidated VIEs


June 30, 2023		Legacy Sequoia			Sequoia			CAFL(1)			Freddie Mac SLST(1)			Freddie Mac K-Series					Servicing Investment			HEI				Total Consolidated VIEs
September 30, 2023													September 30, 2023				Legacy Sequoia								Sequoia						CAFL(1)				Freddie Mac SLST(1)					Freddie Mac K-Series					Servicing Investment				HEI				Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)			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	Residential loans, held-for-investment												Residential loans, held-for-investment					$	150,152			$	3,774,090						$	—					$	1,312,149				$	—						$	—					$	—				$	5,236,391
Business purpose loans, held-for-investment	Business purpose loans, held-for-investment	—					—				3,280,085			—					—					—				—				3,280,085		Business purpose loans, held-for-investment					—					—				3,494,669				—					—					—			—	3,494,669
Consolidated Agency multifamily loans	Consolidated Agency multifamily loans	—			—			—			—			420,096					—			—				420,096			Consolidated Agency multifamily loans			—					—					—				—				420,554					—					—			420,554

Home equity investments	Home equity investments	—			—			—			—			—					—			129,264				129,264			Home equity investments			—					—					—				—				—					—					129,150			129,150
Other investments	Other investments	—			—			—			—			—					268,151			—				268,151			Other investments			—					—					—				—				—					252,650					—			252,650
Cash and cash equivalents	Cash and cash equivalents	—			—			69			—			—					19,910			—				19,979			Cash and cash equivalents			—					—					—				—				—					15,198					—			15,198
Restricted cash	Restricted cash	64			73			55,351			—			—					—			4,124				59,612			Restricted cash			67					76					24,127				—				—					—					4,015			28,285
Accrued interest receivable	Accrued interest receivable	343			14,472			17,992			4,985			1,281					(239)			—				38,834			Accrued interest receivable			333					15,263					19,267				4,900				1,275					2,232					—			43,270
Other assets	Other assets	—			—			7,265			2,372			—					7,836			50				17,523			Other assets			—					—					8,062				2,865				—					7,973					50			18,950
Total Assets	Total Assets	$	163,629		$	3,718,299		$	3,360,762		$	1,399,543		$	421,377				$	295,658		$	133,438			$	9,492,706		Total Assets			$	150,552				$	3,789,429				$	3,546,125			$	1,319,914			$	421,829				$	278,053				$	133,215		$	9,639,117
Short-term debt	Short-term debt	$	—		$	—		$	—		$	—		$	—				$	162,981		$	—			$	162,981		Short-term debt			$	—				$	—				$	—			$	—			$	—				$	154,128				$	—		$	154,128
Accrued interest payable	Accrued interest payable	317			11,222			10,286			3,455			1,155					401			—				26,836			Accrued interest payable			310					12,695					11,181				3,398				1,150					385					—			29,119
Accrued expenses and other liabilities	Accrued expenses and other liabilities	(106)			80			3,395			—			—					39,271			23,895				66,535			Accrued expenses and other liabilities			(106)					80					2,736				—				—					32,062					25,627			60,399
Asset-backed securities issued	Asset-backed securities issued	162,049			3,485,390			2,955,520			1,096,972			387,581					—			95,658				8,183,170			Asset-backed securities issued			149,202					3,568,505					3,134,929				1,058,991				387,650					—					92,773			8,392,050
Total Liabilities	Total Liabilities	$	162,260		$	3,496,692		$	2,969,201		$	1,100,427		$	388,736				$	202,653		$	119,553			$	8,439,522		Total Liabilities			$	149,406				$	3,581,280				$	3,148,846			$	1,062,389			$	388,800				$	186,575				$	118,400		$	8,635,696

Value of our investments in VIEs(1)	Value of our investments in VIEs(1)	$	1,173		$	218,357		$	388,730		$	297,587		$	32,515				$	93,005		$	13,885			$	1,045,252		Value of our investments in VIEs(1)			$	950				$	205,581				$	394,184			$	256,023			$	32,904				$	91,478				$	14,815		$	995,935
Number of VIEs	Number of VIEs	20			19			19			2			1					3			1				65			Number of VIEs			20					20					20				2				1					3					1			67

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 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	$	184,932	$	3,190,417	$	—	$	1,457,058	$	—	$	—	$	—	$	4,832,407
Business purpose loans, held-for-investment	—		—		3,461,367		—		—		—		—		3,461,367
Consolidated Agency multifamily loans	—		—		—		—		424,551		—		—		424,551
Home equity investments	—		—		—		—		—		—		132,627		132,627
Other investments	—		—		—		—		—		301,213		—		301,213
Cash and cash equivalents	—		—		710		—		—		12,765		—		13,475
Restricted cash	69		73		26,296		—		—		—		3,424		29,862
Accrued interest receivable	284		11,227		18,102		5,144		1,293		342		—		36,392
Other assets	637		—		14,265		2,898		—		7,547		50		25,397
Total Assets	$	185,922	$	3,201,717	$	3,520,740	$	1,465,100	$	425,844	$	321,867	$	136,101	$	9,257,291
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	206,510	$	—	$	206,510
Accrued interest payable	282		8,880		10,918		3,561		1,167		492		—		25,300
Accrued expenses and other liabilities	—		81		4,559		—		—		24,745		22,329		51,714
Asset-backed securities issued	184,191		2,971,109		3,115,807		1,222,150		392,785		—		100,710		7,986,752
Total Liabilities	$	184,473	$	2,980,070	$	3,131,284	$	1,225,711	$	393,952	$	231,747	$	123,039	$	8,270,276

Value of our investments in VIEs(1)	$	1,285	$	219,299	$	385,927	$	237,807	$	31,767	$	90,120	$	13,062	$	979,267
Number of VIEs	20		17		19		3		1		3		1		64

(1)Value of our investments in VIEs, as presented in this table, represents the fair value of our economic interests in the consolidated VIEs that we account for under the CFE election. CAFL includes BPL term loan securitizations we account for under the CFE election and two BPL bridge loan securitizations for which we did not make the CFE election. As of ~~June~~September 30, 2023 and December 31, 2022, the fair value of our interests in the CAFL Term securitizations were ~~$306~~$316 million and $304 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. At December 31, 2022, Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a re-securitization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. In January 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS issued. As of ~~June~~September 30, 2023 and December 31, 2022, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election was ~~$298~~$256 million and $323 million, respectively, with the difference reflected in the December 31, 2022 table above due to ABS issued and carried at amortized historical cost.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following tables present income (loss) from these VIEs for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 4.2 – Income (Loss) from Consolidated VIEs


		Three Months Ended June 30, 2023																												Three Months Ended September 30, 2023
		Legacy Sequoia				Sequoia		CAFL				Freddie Mac SLST			Freddie Mac K-Series				Servicing Investment		HEI				Total Consolidated VIEs					Legacy Sequoia				Sequoia				CAFL				Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	2,740					$	37,478						$	54,583					$	15,273				$	4,698			$	7,911			$	—			$	122,683		Interest income	$	2,596	$	40,180	$	52,940	$	15,065	$	4,677	$	8,069	$	—	$	123,527
Interest expense	Interest expense	(2,659)				(33,994)		(38,545)				(10,650)			(4,311)				(3,796)		—				(93,955)		Interest expense			(2,487)				(35,810)				(38,273)				(10,523)		(4,290)		(3,410)		—		(94,793)
Net interest income	Net interest income	81				3,484		16,038				4,623			387				4,115		—				28,728		Net interest income			109				4,370				14,667				4,542		387		4,659		—		28,734
Non-interest income	Non-interest income																										Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(10)				928		11,601				(16,563)			385				5,253		453				2,047		Investment fair value changes, net			(215)				(4,966)				(6,562)				(32,388)		390		3,059		968		(39,714)
Other income	Other income	—				—		212				—			—				—		—				212		Other income			—				—				377				—		—		—		—		377

Total non-interest income, net	Total non-interest income, net	(10)				928		11,813				(16,563)			385				5,253		453				2,259		Total non-interest income, net			(215)				(4,966)				(6,185)				(32,388)		390		3,059		968		(39,337)
General and administrative expenses	General and administrative expenses	—				—		—				—			—				(3)		—				(3)		General and administrative expenses			—				—				—				—		—		(89)		—		(89)
Other expenses	Other expenses	—				—		—				—			—				(1,904)		—				(1,904)		Other expenses			—				—				—				—		—		(1,526)		—		(1,526)

Income (loss) from Consolidated VIEs	Income (loss) from Consolidated VIEs	$	71			$	4,412	$	27,851			$	(11,940)		$	772			$	7,461	$	453			$	29,080	Income (loss) from Consolidated VIEs			$	(106)			$	(596)			$	8,482			$	(27,846)	$	777	$	6,103	$	968	$	(12,218)


		Six Months Ended June 30, 2023																												Nine Months Ended September 30, 2023
		Legacy Sequoia				Sequoia		CAFL				Freddie Mac SLST			Freddie Mac K-Series				Servicing Investment		HEI				Total Consolidated VIEs					Legacy Sequoia				Sequoia				CAFL				Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	5,283					$	72,122						$	109,020					$	30,766				$	9,316			$	15,725			$	—			$	242,232		Interest income	$	7,879	$	112,302	$	161,960	$	45,831	$	13,993	$	23,794	$	—	$	365,759
Interest expense	Interest expense	(5,163)				(64,049)		(78,087)				(21,868)			(8,552)				(7,644)		—				(185,363)		Interest expense			(7,650)				(99,859)				(116,360)				(32,392)		(12,842)		(11,054)		—		(280,157)
Net interest income	Net interest income	120				8,073		30,933				8,898			764				8,081		—				56,869		Net interest income			229				12,443				45,600				13,439		1,151		12,740		—		85,602
Non-interest income	Non-interest income																										Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(104)				3,370		1,919				(7,629)			748				4,206		878				3,388		Investment fair value changes, net			(319)				(1,596)				(4,643)				(40,017)		1,138		7,265		1,846		(36,326)
Other income	Other income	—				—		384				—			—				—		—				384		Other income			—				—				761				—		—		—		—		761

Total non-interest income, net	Total non-interest income, net	(104)				3,370		2,303				(7,629)			748				4,206		878				3,772		Total non-interest income, net			(319)				(1,596)				(3,882)				(40,017)		1,138		7,265		1,846		(35,565)
General and administrative expenses	General and administrative expenses	—				—		—				—			—				7		—				7		General and administrative expenses			—				—				—				—		—		(82)		—		(82)
Other expenses	Other expenses	—				—		—				—			—				(2,481)		—				(2,481)		Other expenses			—				—				—				—		—		(4,007)		—		(4,007)

Income from Consolidated VIEs		$	16			$	11,443	$	33,236			$	1,269		$	1,512			$	9,813	$	878			$	58,167
Income (loss) from Consolidated VIEs																											Income (loss) from Consolidated VIEs			$	(90)			$	10,847			$	41,718			$	(26,578)	$	2,289	$	15,916	$	1,846	$	45,948

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)


		Three Months Ended June 30, 2022																												Three Months Ended September 30, 2022
		Legacy Sequoia				Sequoia		CAFL				Freddie Mac SLST			Freddie Mac K-Series				Servicing Investment		HEI				Total Consolidated VIEs					Legacy Sequoia				Sequoia				CAFL				Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	1,108					$	31,923						$	56,608					$	16,553				$	4,732			$	7,568			$	—			$	118,492		Interest income	$	1,475	$	31,587	$	61,439	$	16,098	$	4,762	$	7,800	$	—	$	123,161
Interest expense	Interest expense	(967)				(28,329)		(41,923)				(13,372)			(4,351)				(1,842)		—				(90,784)		Interest expense			(1,486)				(27,541)				(44,804)				(12,829)		(4,377)		(2,606)		—		(93,643)
Net interest income	Net interest income	141				3,594		14,685				3,181			381				5,726		—				27,708		Net interest income			(11)				4,046				16,635				3,269		385		5,194		—		29,518
Non-interest income	Non-interest income																										Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(336)				(5,886)		(22,109)				(35,940)			(190)				(4,505)		1,201				(67,765)		Investment fair value changes, net			(328)				(10,936)				(4,527)				(41,892)		316		(3,286)		(584)		(61,237)

Other income	Other income	—				—		255				—			—				—		—				255		Other income			—				—				286				—		—		—		—		286
Total non-interest income, net	Total non-interest income, net	(336)				(5,886)		(21,854)				(35,940)			(190)				(4,505)		1,201				(67,510)		Total non-interest income, net			(328)				(10,936)				(4,241)				(41,892)		316		(3,286)		(584)		(60,951)
General and administrative expenses	General and administrative expenses	—				—		—				—			—				(44)		—				(44)		General and administrative expenses			—				—				—				—		—		(55)		—		(55)
Other expenses	Other expenses	—				—		—				—			—				(235)		—				(235)		Other expenses			—				—				—				—		—		(372)		—		(372)

Income (loss) from Consolidated VIEs	Income (loss) from Consolidated VIEs	$	(195)			$	(2,292)	$	(7,169)			$	(32,759)		$	191			$	942	$	1,201			$	(40,081)	Income (loss) from Consolidated VIEs			$	(339)			$	(6,890)			$	12,394			$	(38,623)	$	701	$	1,481	$	(584)	$	(31,860)


		Six Months Ended June 30, 2022																												Nine Months Ended September 30, 2022
		Legacy Sequoia				Sequoia		CAFL				Freddie Mac SLST			Freddie Mac K-Series				Servicing Investment		HEI				Total Consolidated VIEs					Legacy Sequoia				Sequoia				CAFL				Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	2,120					$	64,021						$	133,942					$	33,753				$	9,485			$	15,487			$	—			$	258,808		Interest income	$	3,595	$	95,608	$	195,381	$	49,851	$	14,247	$	23,287	$	—	$	381,969
Interest expense	Interest expense	(1,668)				(56,500)		(100,403)				(27,457)			(8,722)				(3,504)		—				(198,254)		Interest expense			(3,154)				(84,041)				(145,207)				(40,286)		(13,099)		(6,110)		—		(291,897)
Net interest income	Net interest income	452				7,521		33,539				6,296			763				11,983		—				60,554		Net interest income			441				11,567				50,174				9,565		1,148		17,177		—		90,072
Non-interest income	Non-interest income																										Non-interest income
Investment fair value changes, net	Investment fair value changes, net	(1,050)				(9,708)		(19,445)				(32,904)			74				(7,973)		4,612				(66,394)		Investment fair value changes, net			(1,378)				(20,644)				(23,972)				(74,796)		390		(11,259)		4,028		(127,631)
Other income	Other income	—				—		345				—			—				—		—				345		Other income			—				—				631				—		—		—		—		631
Total non-interest income, net	Total non-interest income, net	(1,050)				(9,708)		(19,100)				(32,904)			74				(7,973)		4,612				(66,049)		Total non-interest income, net			(1,378)				(20,644)				(23,341)				(74,796)		390		(11,259)		4,028		(127,000)
General and administrative expenses	General and administrative expenses	—				—		—				—			—				(75)		—				(75)		General and administrative expenses			—				—				—				—		—		(130)		—		(130)
Other expenses	Other expenses	—				—		—				—			—				(786)		—				(786)		Other expenses			—				—				—				—		—		(1,158)		—		(1,158)

Income (loss) from Consolidated VIEs	Income (loss) from Consolidated VIEs	$	(598)			$	(2,187)	$	14,439			$	(26,608)		$	837			$	3,149	$	4,612			$	(6,356)	Income (loss) from Consolidated VIEs			$	(937)			$	(9,077)			$	26,833			$	(65,231)	$	1,538	$	4,630	$	4,028	$	(38,216)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 46 Sequoia securitization entities sponsored by us that are still outstanding as of ~~June~~September 30, 2023, 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.

The following table summarizes the cash flows during the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.3 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022

MSR fees received	MSR fees received	$	672	$	764	$	1,356	$	1,628	MSR fees received	$	664	$	737	$	2,020	$	2,365
Funding of compensating interest, net	Funding of compensating interest, net	(1)		(14)		(2)		(30)		Funding of compensating interest, net	(1)		(11)		(3)		(41)
Cash flows received on retained securities	Cash flows received on retained securities	2,721		3,158		5,684		17,284		Cash flows received on retained securities	3,254		3,096		8,938		20,380

The following table presents additional information at ~~June~~September 30, 2023 and December 31, 2022, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.4 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
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	$	29,868	$	28,722	Interest-only, senior and subordinate securities, classified as trading	$	32,772	$	28,722
Subordinate securities, classified as AFS	Subordinate securities, classified as AFS	77,047		74,367		Subordinate securities, classified as AFS	73,160		74,367
Mortgage servicing rights	Mortgage servicing rights	11,621		11,589		Mortgage servicing rights	11,562		11,589
Maximum loss exposure (1)	Maximum loss exposure (1)	$	118,536	$	114,678	Maximum loss exposure (1)	$	117,494	$	114,678
Assets transferred:	Assets transferred:					Assets transferred:
Principal balance of loans outstanding	Principal balance of loans outstanding	$	3,912,490	$	4,052,922	Principal balance of loans outstanding	$	3,830,002	$	4,052,922
Principal balance of loans 30+ days delinquent	Principal balance of loans 30+ days delinquent	26,036		27,739		Principal balance of loans 30+ days delinquent	18,498		27,739

(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

~~June~~September 30, 2023

(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 ~~June~~September 30, 2023 and December 31, 2022.

Table 4.5 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood


June 30, 2023		MSRs				Senior Securities (1)				Subordinate Securities
September 30, 2023									September 30, 2023				MSRs					Senior Securities (1)					Subordinate Securities
(Dollars in Thousands)	(Dollars in Thousands)				MSRs				Senior Securities (1)						Subordinate Securities					(Dollars in Thousands)
Fair value at June 30, 2023
Fair value at September 30, 2023														Fair value at September 30, 2023						$	11,562				$	32,772				$	73,160
Expected life (in years) (2)	Expected life (in years) (2)	7								7						15			Expected life (in years) (2)				8					10				15
Prepayment speed assumption (annual CPR) (2)	Prepayment speed assumption (annual CPR) (2)	7		%		10		%		8		%	Prepayment speed assumption (annual CPR) (2)				6		%			5		%			8		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% adverse change	10% adverse change	$	289			$	1,025			$	439		10% adverse change				$	207				$	589				$	458
25% adverse change	25% adverse change	703				2,427				1,034			25% adverse change				513					1,400					1,086
Discount rate assumption (2)	Discount rate assumption (2)	11		%		12		%		8		%	Discount rate assumption (2)				13		%			14		%			9		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
100 basis point increase	100 basis point increase	$	428			$	1,006			$	7,421		100 basis point increase				$	405				$	1,547				$	6,878
200 basis point increase	200 basis point increase	830				1,945				13,829			200 basis point increase				827					2,782					12,831
Credit loss assumption (2)	Credit loss assumption (2)	N/A				0.04		%		0.04		%	Credit loss assumption (2)				N/A					0.03		%			0.03		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% higher losses	10% higher losses	N/A				N/A				$	45		10% higher losses				N/A					N/A					$	31
25% higher losses	25% higher losses	N/A				N/A				115			25% higher losses				N/A					N/A					80


December 31, 2022	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at December 31, 2022	$	11,589		$	28,722		$	74,367
Expected life (in years) (2)	7			7			16
Prepayment speed assumption (annual CPR) (2)	8		%	10		%	8		%
Decrease in fair value from:
10% adverse change	$	311		$	970		$	386
25% adverse change	779			2,344			907
Discount rate assumption (2)	11		%	12		%	9		%
Decrease in fair value from:
100 basis point increase	$	430		$	980		$	7,198
200 basis point increase	832			1,894			13,394
Credit loss assumption (2)	N/A			0.03		%	0.03		%
Decrease in fair value from:
10% higher losses	N/A			N/A			$	31
25% higher losses	N/A			N/A			76

(1)Senior securities included ~~$30~~$33 million and $29 million of interest-only securities at ~~June~~September 30, 2023 and December 31, 2022, 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

~~June~~September 30, 2023

(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 ~~June~~September 30, 2023 and December 31, 2022, grouped by asset type.

Table 4.6 – Third-Party Sponsored VIE Summary


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Mortgage-Backed Securities	Mortgage-Backed Securities					Mortgage-Backed Securities
Senior	Senior	$	8,196	$	145	Senior	$	8,397	$	145

Subordinate	Subordinate	51,708		137,241		Subordinate	15,116		137,241
Total Mortgage-Backed Securities	Total Mortgage-Backed Securities	59,904		137,386		Total Mortgage-Backed Securities	23,513		137,386
Excess MSR	Excess MSR	6,030		7,082		Excess MSR	5,590		7,082
Total Investments in Third-Party Sponsored VIEs	Total Investments in Third-Party Sponsored VIEs	$	65,934	$	144,468	Total Investments in Third-Party Sponsored VIEs	$	29,103	$	144,468

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.

Note 5. Fair Value of Financial Instruments

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 ~~June~~September 30, 2023 and December 31, 2022.

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


		June 30, 2023					December 31, 2022					September 30, 2023				December 31, 2022
		Carrying Value		Fair Value			Carrying Value		Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)	(In Thousands)					(In Thousands)
Assets	Assets														Assets
Residential loans, held-for-sale, at fair value	Residential loans, held-for-sale, at fair value	$	196,737	$	196,737		$	780,781	$	780,781	Residential loans, held-for-sale, at fair value	$	610,918	$	610,918	$	780,781	$	780,781
Residential loans, held-for-investment, at fair value	Residential loans, held-for-investment, at fair value	5,259,162		5,259,162			4,832,407		4,832,407		Residential loans, held-for-investment, at fair value	5,236,391		5,236,391		4,832,407		4,832,407
Business purpose loans, held-for-sale, at fair value	Business purpose loans, held-for-sale, at fair value	282,836		282,836			364,073		364,073		Business purpose loans, held-for-sale, at fair value	102,777		102,777		364,073		364,073
Business purpose loans, held-for-investment, at fair value	Business purpose loans, held-for-investment, at fair value	4,943,887		4,943,887			4,968,513		4,968,513		Business purpose loans, held-for-investment, at fair value	5,146,553		5,146,553		4,968,513		4,968,513
Consolidated Agency multifamily loans, at fair value	Consolidated Agency multifamily loans, at fair value	420,096		420,096			424,551		424,551		Consolidated Agency multifamily loans, at fair value	420,554		420,554		424,551		424,551
Real estate securities, at fair value	Real estate securities, at fair value	166,819		166,819			240,475		240,475		Real estate securities, at fair value	129,445		129,445		240,475		240,475
HEIs		427,307		427,307			403,462		403,462
HEI											HEI	431,272		431,272		403,462		403,462
Servicer advance investments (1)	Servicer advance investments (1)	234,304		234,304			269,259		269,259		Servicer advance investments (1)	219,813		219,813		269,259		269,259
MSRs (1)	MSRs (1)	26,242		26,242			25,421		25,421		MSRs (1)	26,033		26,033		25,421		25,421
Excess MSRs (1)	Excess MSRs (1)	39,877		39,877			39,035		39,035		Excess MSRs (1)	38,427		38,427		39,035		39,035
Other investments (1)	Other investments (1)	5,847		5,847			6,155		6,155		Other investments (1)	5,583		5,583		6,155		6,155
Cash and cash equivalents	Cash and cash equivalents	357,308		357,308			258,894		258,894		Cash and cash equivalents	203,622		203,622		258,894		258,894
Restricted cash	Restricted cash	89,534		89,534			70,470		70,470		Restricted cash	56,101		56,101		70,470		70,470
Derivative assets	Derivative assets	20,436		20,436			20,830		20,830		Derivative assets	37,686		37,686		20,830		20,830

Margin receivable (2)	Margin receivable (2)	2,043		2,043			13,802		13,802		Margin receivable (2)	10,536		10,536		13,802		13,802

Liabilities	Liabilities										Liabilities
Short-term debt (3)	Short-term debt (3)	$	1,344,624	$	1,344,624		$	1,853,664	$	1,853,664	Short-term debt (3)	$	1,329,017	$	1,327,134	$	1,853,664	$	1,853,664
Margin payable (4)	Margin payable (4)	7,512		7,512			5,944		5,944		Margin payable (4)	25,210		25,210		5,944		5,944
Guarantee obligations (4)	Guarantee obligations (4)	6,079		4,378			6,344		4,738		Guarantee obligations (4)	5,913		3,734		6,344		4,738
HEI securitization non-controlling interest	HEI securitization non-controlling interest	23,895		23,895			22,329		22,329		HEI securitization non-controlling interest	25,627		25,627		22,329		22,329
Derivative liabilities	Derivative liabilities	2,316		2,316			16,855		16,855		Derivative liabilities	8,781		8,781		16,855		16,855
ABS issued, net	ABS issued, net										ABS issued, net
at fair value	at fair value	7,702,826		7,702,826			7,424,132		7,424,132		at fair value	7,910,345		7,910,345		7,424,132		7,424,132
at amortized cost	at amortized cost	480,344		447,171			562,620		524,768		at amortized cost	481,705		454,973		562,620		524,768
Other long-term debt, net (5)	Other long-term debt, net (5)	1,144,232		1,087,998			1,077,200		1,069,946		Other long-term debt, net (5)	1,320,733		1,315,014		1,077,200		1,069,946
Convertible notes, net (5)	Convertible notes, net (5)	631,349		580,543			693,473		638,049		Convertible notes, net (5)	517,662		489,828		693,473		638,049
Trust preferred securities and subordinated notes, net (5)	Trust preferred securities and subordinated notes, net (5)	138,790		90,675			138,767		83,700		Trust preferred securities and subordinated notes, net (5)	138,802		97,650		138,767		83,700

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

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

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

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

(5)These liabilities are primarily included in Long-term debt, net on our consolidated balance sheets. Convertible notes, net also includes convertible notes classified as Short-term debt. See Note 14 for more information on Short-term debt.

During the three and ~~six~~nine months ended ~~June~~September 30, 2023, we elected the fair value option for ~~$6 million~~zero and $8 million of securities, respectively, ~~$182~~$858 million and ~~$235 million~~$1.1 billion (principal balance) of residential loans, respectively, and ~~$406~~$411 million and ~~$845 million~~$1.26 billion (principal balance) of business purpose loans, respectively. Additionally, during the three and ~~six~~nine months ended ~~June~~September 30, 2023, we elected the fair value option for $9$0.1 million and $26 million of ~~HEIs,~~HEI, respectively. For ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, 2023, we elected the fair value option for zero and $1 million, respectively, of Other investments. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities, ~~fixed-rate securities rated investment grade or higher,~~HEI and ~~HEIs.~~certain equity investments.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 ~~June~~September 30, 2023 and December 31, 2022, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

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


June 30, 2023		Carrying Value			Fair Value Measurements Using
September 30, 2023											September 30, 2023			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	$	5,455,869		$	—		$	—		$	5,455,869	Residential loans		$	5,847,309		$	—		$	—		$	5,847,309
Business purpose loans	Business purpose loans	5,226,723			—			—			5,226,723		Business purpose loans		5,249,330			—			—			5,249,330
Consolidated Agency multifamily loans	Consolidated Agency multifamily loans	420,096			—			—			420,096		Consolidated Agency multifamily loans		420,554			—			—			420,554
Real estate securities	Real estate securities	166,819			—			—			166,819		Real estate securities		129,445			—			—			129,445
HEIs		427,307			—			—			427,307
HEI													HEI		431,272			—			—			431,272
Servicer advance investments	Servicer advance investments	234,304			—			—			234,304		Servicer advance investments		219,813			—			—			219,813
MSRs	MSRs	26,242			—			—			26,242		MSRs		26,033			—			—			26,033
Excess MSRs	Excess MSRs	39,877			—			—			39,877		Excess MSRs		38,427			—			—			38,427
Other investments	Other investments	5,847			—			—			5,847		Other investments		5,583			—			—			5,583
Derivative assets	Derivative assets	20,436			6,869			10,125			3,442		Derivative assets		37,686			18,800			13,819			5,067

Liabilities	Liabilities												Liabilities
HEI securitization non-controlling interest	HEI securitization non-controlling interest	$	23,895		$	—		$	—		$	23,895	HEI securitization non-controlling interest		$	25,627		$	—		$	—		$	25,627
Derivative liabilities	Derivative liabilities	2,316			920			—			1,396		Derivative liabilities		8,781			5,694			—			3,087
ABS issued	ABS issued	7,702,826			—			—			7,702,826		ABS issued		7,910,345			—			—			7,910,345


December 31, 2022	December 31, 2022	Carrying Value			Fair Value Measurements Using								December 31, 2022		Carrying Value			Fair Value Measurements Using
(In Thousands)	(In Thousands)			Level 1			Level 2			Level 3	(In Thousands)						Level 1			Level 2			Level 3
Assets	Assets													Assets
Residential loans	Residential loans	$	5,613,157		$	—		$	—		$	5,613,157	Residential loans		$	5,613,157		$	—		$	—		$	5,613,157
Business purpose loans	Business purpose loans	5,332,586			—			—			5,332,586		Business purpose loans		5,332,586			—			—			5,332,586
Consolidated Agency multifamily loans	Consolidated Agency multifamily loans	424,551			—			—			424,551		Consolidated Agency multifamily loans		424,551			—			—			424,551
Real estate securities	Real estate securities	240,475			—			—			240,475		Real estate securities		240,475			—			—			240,475
HEIs		403,462			—			—			403,462
HEI													HEI		403,462			—			—			403,462
Servicer advance investments	Servicer advance investments	269,259			—			—			269,259		Servicer advance investments		269,259			—			—			269,259
MSRs	MSRs	25,421			—			—			25,421		MSRs		25,421			—			—			25,421
Excess MSRs	Excess MSRs	39,035			—			—			39,035		Excess MSRs		39,035			—			—			39,035
Other investments	Other investments	6,155			—			—			6,155		Other investments		6,155			—			—			6,155
Derivative assets	Derivative assets	20,830			5,869			14,625			336		Derivative assets		20,830			5,869			14,625			336

Liabilities	Liabilities												Liabilities
HEI securitization non-controlling interest	HEI securitization non-controlling interest	$	22,329		$	—		$	—		$	22,329	HEI securitization non-controlling interest		$	22,329		$	—		$	—		$	22,329
Derivative liabilities	Derivative liabilities	16,855			16,841			—			14		Derivative liabilities		16,855			16,841			—			14
ABS issued	ABS issued	7,424,132			—			—			7,424,132		ABS issued		7,424,132			—			—			7,424,132

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 ~~six~~nine months ended ~~June~~September 30, 2023.

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		Consolidated Agency Multifamily Loans				Trading Securities		AFS Securities			HEIs				Servicer Advance Investments		Excess MSRs				MSRs and Other Investments					Residential Loans				Business Purpose Loans				Consolidated Agency Multifamily Loans				Trading Securities		AFS Securities		HEI		Servicer Advance Investments		Excess MSRs		MSRs and Other Investments
(In Thousands)	(In Thousands)															(In Thousands)
Beginning balance - December 31, 2022	Beginning balance - December 31, 2022			$	5,613,157					$	5,332,586			$	424,552				$	108,329					$	132,146				$	403,462			$	269,259			$	39,035			$	31,576		Beginning balance - December 31, 2022	$	5,613,157	$	5,332,586	$	424,552	$	108,329	$	132,146	$	403,462	$	269,259	$	39,035	$	31,576
Acquisitions	Acquisitions	235,479				—		—				7,883		1,979			25,513				—		—				500		Acquisitions			1,050,444				—				—				7,883		1,979		25,626		—		—		500
Originations	Originations	—				844,799		—				—		—			—				—		—				—		Originations			—				1,255,680				—				—		—		—		—		—		—
Sales	Sales	(172,801)				(409,790)		—				(55,087)		(41,775)			—				—		—				(272)		Sales			(226,646)				(471,336)				—				(82,270)		(54,339)		—		—		—		(272)
Principal paydowns	Principal paydowns	(230,957)				(529,404)		(4,145)				(258)		(385)			(17,031)				(37,268)		—				(100)		Principal paydowns			(363,128)				(802,610)				(6,198)				(324)		(632)		(26,153)		(55,828)		—		(114)
Gains (losses) in net income, net	Gains (losses) in net income, net	12,129				(4,870)		(311)				8,456		650			15,363				2,313		842				635		Gains (losses) in net income, net			(224,162)				(17,809)				2,200				14,423		946		28,337		6,382		(608)		426
Unrealized losses in OCI, net	Unrealized losses in OCI, net	—				—		—				—		4,881			—				—		—				—		Unrealized losses in OCI, net			—				—				—				—		1,304		—		—		—		—
Other settlements, net (1)	Other settlements, net (1)	(1,138)				(6,598)		—				—		—			—				—		—				(250)		Other settlements, net (1)			(2,356)				(47,181)				—				—		—		—		—		—		(500)
Ending balance - June 30, 2023		$	5,455,869			$	5,226,723	$	420,096			$	69,323	$	97,496		$	427,307			$	234,304	$	39,877			$	32,089
Ending balance - September 30, 2023																													Ending balance - September 30, 2023			$	5,847,309			$	5,249,330			$	420,554			$	48,041	$	81,404	$	431,272	$	219,813	$	38,427	$	31,616


				Liabilities													Liabilities
		Derivatives (2)				HEI Securitization Non-Controlling Interest				ABS Issued					Derivatives (2)			HEI Securitization Non-Controlling Interest		ABS Issued
(In Thousands)	(In Thousands)							(In Thousands)
Beginning balance - December 31, 2022	Beginning balance - December 31, 2022			$	322			$	22,329				$	7,424,132		Beginning balance - December 31, 2022		$	322	$	22,329	$	7,424,132
Acquisitions	Acquisitions	—				—				635,080		Acquisitions			—			—		1,240,120
Principal paydowns	Principal paydowns	—				—				(360,697)		Principal paydowns			—			—		(571,883)
Gains (losses) in net income, net	Gains (losses) in net income, net	2,505				1,566				4,311		Gains (losses) in net income, net			10,086			3,298		(182,023)
Other settlements, net (1)	Other settlements, net (1)	(781)				—				—		Other settlements, net (1)			(8,428)			—		—
Ending balance - June 30, 2023		$	2,046			$	23,895			$	7,702,826
Ending balance - September 30, 2023												Ending balance - September 30, 2023			$	1,980		$	25,627	$	7,910,346

(1) Other settlements, net: for residential and business purpose loans, represents the transfer of loans to REO; for derivatives, represents the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential and 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

~~June~~September 30, 2023

(Unaudited)

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

The following table presents the portion of fair value gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at ~~June~~September 30, 2023 and 2022. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 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 ~~June~~September 30, 2023 and 2022 Included in Net Income


		Included in Net Income (loss)									Included in Net Income (loss)
		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
Assets	Assets									Assets
Residential loans at Redwood	Residential loans at Redwood	$	(680)	$	(15,995)	$	(466)	$	(31,858)	Residential loans at Redwood	$	(3,963)	$	(28,762)	$	(4,404)	$	(42,952)
Business purpose loans at Redwood and CAFL Bridge	Business purpose loans at Redwood and CAFL Bridge	(23,033)		(28,385)		(17,877)		(36,566)		Business purpose loans at Redwood and CAFL Bridge	(15,646)		(10,967)		(25,876)		(39,019)
Net investments in consolidated Sequoia entities (1)	Net investments in consolidated Sequoia entities (1)	170		(6,222)		2,519		(11,203)		Net investments in consolidated Sequoia entities (1)	(4,471)		(11,264)		(1,952)		(22,467)
Net investments in consolidated Freddie Mac SLST entities (1)	Net investments in consolidated Freddie Mac SLST entities (1)	(16,760)		(36,014)		(8,001)		(33,074)		Net investments in consolidated Freddie Mac SLST entities (1)	(32,397)		(41,969)		(40,398)		(75,043)
Net investments in consolidated Freddie Mac K-Series entities (1)	Net investments in consolidated Freddie Mac K-Series entities (1)	385		(190)		748		74		Net investments in consolidated Freddie Mac K-Series entities (1)	390		316		1,138		390
Net investments in consolidated CAFL Term entities (1)	Net investments in consolidated CAFL Term entities (1)	10,707		(21,828)		1,897		(17,780)		Net investments in consolidated CAFL Term entities (1)	(3,800)		(6,585)		(1,903)		(24,365)
Net investment in consolidated HEI securitization entity (1)	Net investment in consolidated HEI securitization entity (1)	1,251		3,371		2,445		13,000		Net investment in consolidated HEI securitization entity (1)	2,700		(1,652)		5,145		11,348
Trading securities	Trading securities	1,829		(17,501)		3,073		(19,884)		Trading securities	4,408		(12,668)		5,795		(34,104)
Available-for-sale securities	Available-for-sale securities	(71)		—		(99)		—		Available-for-sale securities	66		—		(32)		—
HEIs at Redwood		7,676		1,549		11,053		2,701
HEI at Redwood										HEI at Redwood	8,705		(4,903)		19,592		(2,272)
Servicer advance investments	Servicer advance investments	3,665		(3,231)		2,313		(6,313)		Servicer advance investments	4,069		(3,905)		6,383		(10,218)
MSRs	MSRs	1,692		4,248		1,278		7,644		MSRs	160		1,653		1,425		9,118
Excess MSRs	Excess MSRs	1,070		(2,220)		842		(3,428)		Excess MSRs	(1,450)		(351)		(608)		(3,779)
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	3,442		2,056		3,442		2,007		Loan purchase and interest rate lock commitments	5,061		723		5,067		744

Liabilities	Liabilities									Liabilities
Non-controlling interest in consolidated HEI entity	Non-controlling interest in consolidated HEI entity	$	—	$	(2,170)	$	—	$	(8,388)	Non-controlling interest in consolidated HEI entity	$	(1,732)	$	1,068	$	(3,298)	$	(7,320)
Loan purchase commitments	Loan purchase commitments	(1,396)		(488)		(1,396)		(527)		Loan purchase commitments	(3,087)		(212)		(3,087)		(212)

(1) Represents the portion of net fair value gains or losses included in our consolidated statements of income related to securitized loans, securitized ~~HEIs,~~HEI, and the associated ABS issued at our consolidated securitization entities held at ~~June~~September 30, 2023 and 2022, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election, excluding REO.

The following table presents information on assets recorded at fair value on a non-recurring basis at ~~June~~September 30, 2023. 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 ~~June~~September 30, 2023.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at ~~June~~September 30, 2023


														Gain (Loss) for																				Gain (Loss) for
June 30, 2023		Carrying Value			Fair Value Measurements Using									Three Months Ended			Six Months Ended
September 30, 2023																	September 30, 2023			Carrying Value			Fair Value Measurements Using										Three Months Ended				Nine Months Ended
(In Thousands)	(In Thousands)			Carrying Value			Level 1			Level 2			Level 3			June 30, 2023			June 30, 2023		(In Thousands)					Level 1			Level 2			Level 3				September 30, 2023				September 30, 2023
Assets	Assets																		Assets

Strategic investments	Strategic investments	$	15,550		$	—		$	—		$	15,550		$	(2,650)		$	(2,650)	Strategic investments		$	6,750		$	—		$	—		$	6,750			$	100			$	(2,550)
REO	REO	2,350			—			—			2,350			(470)			(653)		REO		423			—			—			423				(65)				(65)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 5.6 – Market Valuation Gains and Losses, Net


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net									Mortgage Banking Activities, Net
Residential loans held-for-sale	Residential loans held-for-sale	$	(1,085)	$	(24,517)	$	5,909	$	(51,716)	Residential loans held-for-sale	$	(8,683)	$	(20,060)	$	(2,774)	$	(71,776)
Residential loan purchase commitments	Residential loan purchase commitments	2,420		(8,897)		2,181		(50,520)		Residential loan purchase commitments	5,864		(2,716)		8,045		(53,236)
BPL term loans held-for-sale	BPL term loans held-for-sale	(1,132)		(40,034)		11,534		(64,502)		BPL term loans held-for-sale	1,600		(19,325)		13,214		(83,827)
BPL term loan interest rate lock commitments	BPL term loan interest rate lock commitments	—		40		—		(685)		BPL term loan interest rate lock commitments	—		19		—		(666)
BPL bridge loans	BPL bridge loans	2,297		116		3,450		2,251		BPL bridge loans	1,438		(9)		4,808		2,242
Trading securities (1)	Trading securities (1)	1,923		1,315		1,923		4,101		Trading securities (1)	(482)		148		2,188		4,249
Risk management derivatives, net	Risk management derivatives, net	5,426		25,387		(3,041)		115,774		Risk management derivatives, net	15,591		48,363		11,802		164,137
Total mortgage banking activities, net (2)	Total mortgage banking activities, net (2)	$	9,849	$	(46,590)	$	21,956	$	(45,297)	Total mortgage banking activities, net (2)	$	15,328	$	6,420	$	37,283	$	(38,877)
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net									Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood (called Sequoia loans)	Residential loans held-for-investment, at Redwood (called Sequoia loans)	$	—	$	(8,010)	$	183	$	(12,262)	Residential loans held-for-investment, at Redwood (called Sequoia loans)	$	—	$	(6,614)	$	183	$	(18,876)
BPL term loans held-for-sale	BPL term loans held-for-sale	(13,625)		—		(13,625)		—		BPL term loans held-for-sale	—		—		(14,430)		—
BPL bridge loans held-for-investment	BPL bridge loans held-for-investment	(8,149)		(9,559)		(6,773)		(11,702)		BPL bridge loans held-for-investment	(16,899)		2,482		(22,867)		(9,220)
Trading securities	Trading securities	4,572		(17,358)		6,533		(21,600)		Trading securities	5,738		(12,668)		12,271		(34,268)
Servicer advance investments	Servicer advance investments	3,665		(3,231)		2,313		(6,312)		Servicer advance investments	4,069		(3,905)		6,382		(10,217)
Excess MSRs	Excess MSRs	1,070		(2,220)		842		(3,428)		Excess MSRs	(1,450)		(351)		(608)		(3,779)
Net investments in Legacy Sequoia entities (3)	Net investments in Legacy Sequoia entities (3)	(10)		(336)		(104)		(1,050)		Net investments in Legacy Sequoia entities (3)	(215)		(328)		(319)		(1,378)
Net investments in Sequoia entities (3)	Net investments in Sequoia entities (3)	928		(5,886)		3,370		(9,708)		Net investments in Sequoia entities (3)	(4,256)		(10,936)		(886)		(20,644)
Net investments in Freddie Mac SLST entities (3)	Net investments in Freddie Mac SLST entities (3)	(16,563)		(35,940)		(7,629)		(32,904)		Net investments in Freddie Mac SLST entities (3)	(32,388)		(41,892)		(40,017)		(74,796)
Net investment in Freddie Mac K-Series entity (3)	Net investment in Freddie Mac K-Series entity (3)	385		(190)		748		74		Net investment in Freddie Mac K-Series entity (3)	390		316		1,138		390
Net investments in CAFL Term entities (3)	Net investments in CAFL Term entities (3)	10,707		(21,828)		1,897		(17,780)		Net investments in CAFL Term entities (3)	(3,800)		(6,585)		(1,903)		(24,365)
Net investments in HEI securitization entities (3)	Net investments in HEI securitization entities (3)	453		1,201		878		4,612		Net investments in HEI securitization entities (3)	968		(584)		1,846		4,028
HEIs at Redwood		8,468		1,596		12,308		2,788
HEI at Redwood										HEI at Redwood	9,290		(4,774)		21,598		(1,986)
Other investments	Other investments	(3,359)		10,460		(3,794)		10,583		Other investments	(414)		1,445		(4,208)		12,028
Risk management derivatives, net	Risk management derivatives, net	7,679		4,395		(1,025)		6,368		Risk management derivatives, net	7,471		27,241		6,446		33,609
Credit losses on AFS securities, net	Credit losses on AFS securities, net	(71)		(1,066)		(99)		(1,771)		Credit losses on AFS securities, net	66		(544)		(33)		(2,315)
Other	Other	(746)		—		(746)		—		Other	—		—		(746)		—
Total investment fair value changes, net	Total investment fair value changes, net	$	(4,596)	$	(87,972)	$	(4,723)	$	(94,092)	Total investment fair value changes, net	$	(31,430)	$	(57,697)	$	(36,153)	$	(151,789)
Other Income	Other Income									Other Income
MSRs	MSRs	$	1,411	$	3,827	$	821	$	6,795	MSRs	$	(209)	$	1,236	$	612	$	8,031
Other	Other	(340)		—		(460)		—		Other	(7)		(852)		(467)		(852)
Total other income (4)	Total other income (4)	$	1,071	$	3,827	$	361	$	6,795	Total other income (4)	$	(216)	$	384	$	145	$	7,179
Total Market Valuation Gains (Losses), Net	Total Market Valuation Gains (Losses), Net	$	6,324	$	(130,735)	$	17,594	$	(132,594)	Total Market Valuation Gains (Losses), Net	$	(16,318)	$	(50,893)	$	1,275	$	(183,487)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

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

Footnotes to Table 5.6

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

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

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

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

At ~~June~~September 30, 2023, 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, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

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

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


June 30, 2023		Fair Value					Input Values
September 30, 2023															September 30, 2023		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 loans	Jumbo loans	$	182,383		Whole loan spread to TBA price		$	3.91	-	$	3.91		$	3.91		Jumbo loans		$	540,782	Senior credit spread to TBA price(2)			$	1.63			$	2.63		$	1.71
																				Subordinate credit spread(2)			275				1020		bps	438			bps
																				Senior credit support(2)			7				7		%	7			%
																				IO discount rate(2)			10				10		%	10			%
																				Prepayment rate (annual CPR)(2)			15				15		%	15			%

Jumbo loans committed to sell	Jumbo loans committed to sell	14,318			Whole loan committed sales price		$	100	-	$	102		$	101		Jumbo loans committed to sell		70,136		Whole loan committed sales price			$	98		-	$	101		$	98

Loans held by Legacy Sequoia (2)		163,222			Liability price					N/A			N/A
Loans held by Legacy Sequoia (3)																Loans held by Legacy Sequoia (3)		150,152		Liability price							N/A			N/A

Loans held by Sequoia (2)		3,703,754			Liability price					N/A			N/A
Loans held by Sequoia (3)																Loans held by Sequoia (3)		3,774,090		Liability price							N/A			N/A

Loans held by Freddie Mac SLST (2)		1,392,186			Liability price					N/A			N/A
Loans held by Freddie Mac SLST (3)																Loans held by Freddie Mac SLST (3)		1,312,149		Liability price							N/A			N/A

Business purpose loans:	Business purpose loans:															Business purpose loans:
BPL term loans	BPL term loans	269,886			Senior credit spread(3)		185		-	185		bps	185		bps	BPL term loans		72,149		Senior credit spread(2)			185			-	185		bps	185			bps
					Subordinate credit spread(3)		275		-	915		bps	491		bps					Subordinate credit spread(2)			325			-	818		bps	468			bps
					Senior credit support(3)		36		-	36		%	36		%					Senior credit support(2)			35			-	35		%	35			%
					IO discount rate(3)		8		-	8		%	8		%					IO discount rate(2)			8			-	9		%	8			%
					Prepayment rate (annual CPR)(3)		—		-	3		%	3		%					Prepayment rate (annual CPR)(2)			—			-	3		%	3			%
					Dollar price of NPLs		$	58	-	$	100		$	59						Dollar price of non-performing loans			$	60		-	$	100		$	61

BPL term loans held by CAFL (2)		2,783,731			Liability price					N/A			N/A
BPL term loans held by CAFL (3)																BPL term loans held by CAFL (3)		2,969,217		Liability price							N/A			N/A

BPL bridge loans	BPL bridge loans	2,173,106			Whole loan discount rate		4		-	15		%	9		%	BPL bridge loans		2,207,964		Whole loan discount rate			6			-	12		%	9			%
					Whole loan spread		545		-	545		bps	545		bps					Whole loan spread			520			-	520		bps	520			bps
																				Dollar price of non-performing loans			$48			-	$	100		$	91
Multifamily loans held by Freddie Mac K-Series (2)		420,096			Liability price					N/A			N/A

Multifamily loans held by Freddie Mac K-Series (3)																Multifamily loans held by Freddie Mac K-Series (3)		420,554		Liability price							N/A			N/A

Trading and AFS securities	Trading and AFS securities	166,819			Discount rate		6		-	18		%	9		%	Trading and AFS securities		129,445		Discount rate			6			-	18		%	11			%
					Prepayment rate (annual CPR)		4		-	65		%	9		%					Prepayment rate (annual CPR)			4			-	65		%	10			%
					Default rate		—		-	14		%	0.4		%					Default rate			—			-	14		%	0.1			%
					Loss severity		—		-	50		%	23		%					Loss severity			—			-	50		%	22			%
					CRT dollar price		$	97	-	$	99		$	98

HEIs		298,043			Discount rate		10		-	10		%	10		%
HEI																HEI		302,122		Discount rate			10			-	11		%	10			%
					Prepayment rate (annual CPR)		1		-	23		%	16		%					Prepayment rate (annual CPR)			1			-	20		%	15			%
					Home price appreciation (depreciation)		(3)		-	4		%	3		%					Home price appreciation (depreciation)			(1)			-	3		%	3			%

HEIs held by HEI securitization entity		129,264			Discount Rate					N/A			N/A
HEI held by HEI securitization entity(3)																HEI held by HEI securitization entity(3)		129,150		Liability price							N/A			N/A

Servicer advance investments	Servicer advance investments	234,304			Discount rate		2		-	5		%	4		%	Servicer advance investments		219,813		Discount rate			3			-	5		%	4			%
					Prepayment rate (annual CPR)		11		-	30		%	14		%					Prepayment rate (annual CPR)			11			-	30		%	14			%
					Expected remaining life (4)		6		-	6		yrs	6		yrs					Expected remaining life (4)			6			-	6		yrs	6			yrs
					Mortgage servicing income		—		-	18		bps	3		bps					Mortgage servicing income			—			-	18		bps	4			bps

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

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

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


June 30, 2023		Fair Value					Input Values
September 30, 2023															September 30, 2023		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)

MSRs	MSRs	$	26,242		Discount rate		11		-	46		%	11		%	MSRs		$	26,033	Discount rate			12			-	73		%	13			%
					Prepayment rate (annual CPR)		4		-	25		%	7		%					Prepayment rate (annual CPR)			3			-	21		%	6			%
					Per loan annual cost to service		$	93	-	$	93		$	93						Per loan annual cost to service			$	93		-	$	93		$	93

Excess MSRs	Excess MSRs	39,877			Discount rate		13		-	19		%	18		%	Excess MSRs		38,427		Discount rate			13			-	19		%	18			%
					Prepayment rate (annual CPR)		10		-	100		%	17		%					Prepayment rate (annual CPR)			10			-	100		%	17			%
					Excess mortgage servicing amount		8		-	20		bps	11		bps					Excess mortgage servicing amount			8			-	20		bps	11			bps

Residential loan purchase commitments, net	Residential loan purchase commitments, net	2,046			Whole loan spread to TBA price		$	3.91	-	$	3.91		$	3.91		Residential loan purchase commitments, net		1,980		Senior credit spread to TBA price(2)			$	1.63			$	2.63		$	1.71
Residential loan purchase commitments, net																				Subordinate credit spread(2)			275			-	1020		bps	438			bps
																				Senior credit support(2)			7			-	7		%	7			%
																				IO discount rate(2)			10			-	10		%	10			%
																				Prepayment rate (annual CPR)(2)			15			-	15		%	15			%
					Pull-through rate		17		-	100		%	68		%					Pull-through rate			22			-	100		%	68			%
					Committed sales price		$	100	-	$	103		$	101						Committed sales price			$	102		-	$	103		$	102

Liabilities	Liabilities															Liabilities

ABS issued (2):
ABS issued (3):																ABS issued (3):
At consolidated Sequoia entities	At consolidated Sequoia entities	3,647,439			Discount rate		4		-	18		%	7		%	At consolidated Sequoia entities		3,717,707		Discount rate			4			-	19		%	8			%
					Prepayment rate (annual CPR)		4		-	35		%	10		%					Prepayment rate (annual CPR)			3			-	25		%	8			%
					Default rate		—		-	14		%	1		%					Default rate			—			-	16		%	1			%
					Loss severity		25		-	50		%	31		%					Loss severity			25			-	50		%	31			%

At consolidated CAFL Term entities	At consolidated CAFL Term entities	2,475,176			Discount rate		—		-	12		%	7		%	At consolidated CAFL Term entities		2,653,224		Discount rate			6			-	12		%	7			%
					Prepayment rate (annual CPR)		—		-	3		%	0.1		%					Prepayment rate (annual CPR)			—			-	3		%	0.1			%
					Default rate		5		-	14		%	7		%					Default rate			5			-	14		%	7			%
					Loss severity		30		-	40		%	30		%					Loss severity			30			-	40		%	30			%

At consolidated Freddie Mac SLST entities	At consolidated Freddie Mac SLST entities	1,096,972			Discount rate		5		-	16		%	6		%	At consolidated Freddie Mac SLST entities		1,058,991		Discount rate			6			-	16		%	7			%
					Prepayment rate (annual CPR)		6		-	6		%	6		%					Prepayment rate (annual CPR)			6			-	6		%	6			%
					Default rate		8		-	9		%	9		%					Default rate			12			-	14		%	13			%
					Loss severity		35		-	35		%	35		%					Loss severity			25			-	25		%	25			%

At consolidated Freddie Mac K-Series entities (4)		387,581			Discount rate		3		-	10		%	6		%
At consolidated Freddie Mac K-Series entities (3)																At consolidated Freddie Mac K-Series entities (3)		387,650		Discount rate			3			-	10		%	6			%

At consolidated HEI entities	At consolidated HEI entities	95,658			Discount rate		10		-	14		%	10		%	At consolidated HEI entities		92,773		Discount rate			10			-	16		%	11			%
					Prepayment rate (annual CPR)		20		-	20		%	20		%					Prepayment rate (annual CPR)			20			-	20		%	20			%

					Home price appreciation (depreciation)		(3)		-	4		%	3		%					Home price appreciation (depreciation)			(1)			-	3		%	3			%

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

(2)Values represent pricing inputs used in securitization pricing model. Credit spreads represent spreads to applicable swap rates unless specified otherwise.

(3)The fair value of the loans and ~~HEIs~~HEI held by consolidated entities is based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At ~~June~~September 30, 2023, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was ~~$218~~$206 million, ~~$306~~$316 million, ~~$298~~$256 million, $33 million, and ~~$14~~$15 million, respectively.

~~(3)Values represent pricing inputs used in securitization pricing model. Credit spreads generally represent spreads to applicable swap rates.~~

(4)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).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 — 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, 2022 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.

Certain of our Other investments (inclusive of strategic investments in early-stage 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 initially record these investments at cost and adjust their fair value based on observable price 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 ~~June~~September 30, 2023, the carrying value of these investments was $6 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 ~~June~~September 30, 2023 and December 31, 2022.

Table 6.1 – Classifications and Carrying Values of Residential Loans


June 30, 2023				Legacy				Freddie Mac
September 30, 2023												September 30, 2023			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	$	196,737	$	—	$	—	$	—	$	196,737	Held-for-sale at fair value	$	610,946	$	—	$	—	$	—	$	610,946
Held-for-investment at fair value	Held-for-investment at fair value	—		163,222		3,703,754		1,392,186		5,259,162		Held-for-investment at fair value	—		150,152		3,774,090		1,312,149		5,236,391
Total Residential Loans	Total Residential Loans	$	196,737	$	163,222	$	3,703,754	$	1,392,186	$	5,455,899	Total Residential Loans	$	610,946	$	150,152	$	3,774,090	$	1,312,149	$	5,847,337


December 31, 2022			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	780,781	$	—	$	—	$	—	$	780,781
Held-for-investment at fair value	—		184,932		3,190,417		1,457,058		4,832,407
Total Residential Loans	$	780,781	$	184,932	$	3,190,417	$	1,457,058	$	5,613,188

At ~~June~~September 30, 2023, we owned mortgage servicing rights associated with ~~$191~~$653 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Sale

The following table summarizes the characteristics of residential loans held-for-sale at ~~June~~September 30, 2023 and December 31, 2022.

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


(Dollars in Thousands)	(Dollars in Thousands)	June 30, 2023			December 31, 2022			(Dollars in Thousands)	September 30, 2023			December 31, 2022
Number of loans	Number of loans	185			994			Number of loans	665			994
Unpaid principal balance	Unpaid principal balance	$	197,272		$	822,063		Unpaid principal balance	$	658,540		$	822,063
Fair value of loans	Fair value of loans	$	196,737		$	780,781		Fair value of loans	$	610,946		$	780,781
Market value of loans pledged as collateral under short-term borrowing agreements	Market value of loans pledged as collateral under short-term borrowing agreements	$	192,910		$	775,545		Market value of loans pledged as collateral under short-term borrowing agreements	$	608,649		$	775,545
Weighted average coupon	Weighted average coupon	6.68		%	5.12		%	Weighted average coupon	5.43		%	5.12		%

Delinquency information	Delinquency information							Delinquency information
Number of loans with 90+ day delinquencies	Number of loans with 90+ day delinquencies	1			1			Number of loans with 90+ day delinquencies	—			1
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	205		$	208		Unpaid principal balance of loans with 90+ day delinquencies	$	—		$	208
Fair value of loans with 90+ day delinquencies	Fair value of loans with 90+ day delinquencies	$	167		$	170		Fair value of loans with 90+ day delinquencies	$	—		$	170
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 ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
Principal balance of loans acquired (1)	Principal balance of loans acquired (1)	$	181,972	$	1,145,450	$	235,018	$	3,260,641	Principal balance of loans acquired (1)	$	857,974	$	336,698	$	1,092,992	$	3,597,339
Principal balance of loans sold	Principal balance of loans sold	8,925		1,238,327		182,078		3,065,691		Principal balance of loans sold	53,743		662,302		235,821		3,727,993
Principal balance of loans transferred to HFI	Principal balance of loans transferred to HFI	—		—		657,295		687,192		Principal balance of loans transferred to HFI	337,752		—		995,047		687,192
Net market valuation gains (losses) recorded (2)	Net market valuation gains (losses) recorded (2)	(1,085)		(32,527)		6,093		(63,978)		Net market valuation gains (losses) recorded (2)	(8,683)		(26,674)		(2,590)		(90,652)

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

(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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 ~~June~~September 30, 2023 and December 31, 2022.

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


June 30, 2023		Legacy						Freddie Mac
September 30, 2023											September 30, 2023	Legacy						Freddie Mac
(Dollars in Thousands)	(Dollars in Thousands)	Sequoia			Sequoia			SLST			(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	Number of loans	1,157			5,232			10,604			Number of loans	1,098			5,460			10,448
Unpaid principal balance	Unpaid principal balance	$	175,961		$	4,374,517		$	1,671,451		Unpaid principal balance	$	164,904		$	4,624,113		$	1,641,178
Fair value of loans (2)	Fair value of loans (2)	$	163,222		$	3,703,754		$	1,392,186		Fair value of loans (2)	$	150,152		$	3,774,090		$	1,312,149
Weighted average coupon	Weighted average coupon	6.11		%	3.54		%	4.50		%	Weighted average coupon	6.35		%	3.73		%	4.50		%

Delinquency information	Delinquency information										Delinquency information
Number of loans with 90+ day delinquencies (1)	Number of loans with 90+ day delinquencies (1)	20			7			877			Number of loans with 90+ day delinquencies (1)	24			9			818
Unpaid principal balance of loans with 90+ day delinquencies(1)	Unpaid principal balance of loans with 90+ day delinquencies(1)	$	4,354		$	5,214		$	150,437		Unpaid principal balance of loans with 90+ day delinquencies(1)	$	5,460		$	7,599		$	139,349
Fair value of loans with 90+ day delinquencies	Fair value of loans with 90+ day delinquencies	N/A			N/A			N/A			Fair value of loans with 90+ day delinquencies	N/A			N/A			N/A
Number of loans in foreclosure	Number of loans in foreclosure	7			3			326			Number of loans in foreclosure	14			6			317
Unpaid principal balance of loans in foreclosure	Unpaid principal balance of loans in foreclosure	$	1,072		$	2,308		$	57,362		Unpaid principal balance of loans in foreclosure	$	2,742		$	4,842		$	52,918


December 31, 2022	December 31, 2022	Legacy						Freddie Mac			December 31, 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	1,304			4,624			10,882			Number of loans	1,304			4,624			10,882
Unpaid principal balance	Unpaid principal balance	$	204,404		$	3,847,091		$	1,719,236		Unpaid principal balance	$	204,404		$	3,847,091		$	1,719,236
Fair value of loans (2)	Fair value of loans (2)	$	184,932		$	3,190,417		$	1,457,058		Fair value of loans (2)	$	184,932		$	3,190,417		$	1,457,058
Weighted average coupon	Weighted average coupon	4.51		%	3.25		%	4.50		%	Weighted average coupon	4.51		%	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)	30			10			1,211			Number of loans with 90+ day delinquencies (1)	30			10			1,211
Unpaid principal balance of loans with 90+ day delinquencies(1)	Unpaid principal balance of loans with 90+ day delinquencies(1)	$	6,824		$	7,799		$	209,397		Unpaid principal balance of loans with 90+ day delinquencies(1)	$	6,824		$	7,799		$	209,397
Fair value of loans with 90+ day delinquencies	Fair value of loans with 90+ day delinquencies	N/A			N/A			N/A			Fair value of loans with 90+ day delinquencies	N/A			N/A			N/A
Number of loans in foreclosure	Number of loans in foreclosure	11			5			427			Number of loans in foreclosure	11			5			427
Unpaid principal balance of loans in foreclosure	Unpaid principal balance of loans in foreclosure	$	1,166		$	4,654		$	72,440		Unpaid principal balance of loans in foreclosure	$	1,166		$	4,654		$	72,440

(1)For loans held at consolidated entities, the number and UPB of loans 90-or-more 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. 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

~~June~~September 30, 2023

(Unaudited)

Note 6. Residential Loans - (continued)

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, and are recorded in Investment fair value changes, net on our consolidated statements of income. The following table provides the activity of residential loans held-for-investment at consolidated entities during the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

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

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

Legacy

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

—

N/A

—

N/A

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

N/A

337,752

N/A

—

N/A

Net market valuation gains (losses) recorded

6,718

(53,765)

(44,147)

779

(211,486)

(76,735)

Net market valuation gains (losses) recorded

(2,242)

(175,011)

(51,046)

5,182

(202,825)

(104,040)

Six Months Ended June 30, 2023

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2023

Nine Months Ended September 30, 2022

Legacy

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

657,295

N/A

684,491

N/A

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

N/A

995,047

N/A

684,491

N/A

Net market valuation gains (losses) recorded

6,256

8,102

(11,710)

7,104

(482,217)

(120,503)

Net market valuation gains (losses) recorded

4,014

(166,909)

(62,756)

12,286

(685,042)

(224,543)

(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 loan REO activity during 2023.

Note 7. Business Purpose Loans

We originate and invest in business purpose loans, including term 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 ~~June~~September 30, 2023 and December 31, 2022.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


June 30, 2023		BPL Term				BPL Bridge
September 30, 2023												September 30, 2023	BPL Term				BPL 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	$	269,886	—		$	12,950	$	—	$	282,836	Held-for-sale at fair value	$	72,149	—		$	30,628	$	—	$	102,777
Held-for-investment at fair value	Held-for-investment at fair value	—		2,783,731		1,663,802		496,354		4,943,887		Held-for-investment at fair value	—		2,969,217		1,651,883		525,453		5,146,553
Total Business Purpose Loans	Total Business Purpose Loans	$	269,886	$	2,783,731	$	1,676,752	$	496,354	$	5,226,723	Total Business Purpose Loans	$	72,149	$	2,969,217	$	1,682,511	$	525,453	$	5,249,330


December 31, 2022	BPL Term				BPL Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	358,791	$	—	$	5,282	$	—	$	364,073
Held-for-investment at fair value	—		2,944,984		1,507,146		516,383		4,968,513
Total Business Purpose Loans	$	358,791	$	2,944,984	$	1,512,428	$	516,383	$	5,332,586

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 7. Business Purpose Loans - (continued)

All of the outstanding BPL term loans at ~~June~~September 30, 2023 were first-lien, fixed-rate loans with original maturities of three, five, seven, or ten years.

The outstanding BPL bridge loans held-for-investment at ~~June~~September 30, 2023 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of ~~33% one-month LIBOR-indexed adjustable-rate loans, 60%~~78% one-month SOFR-indexed adjustable-rate loans, and 7%22% fixed-rate loans (in each case based on unpaid principal balance). ~~As described above within Note 3, LIBOR-indexed BPL bridge loans we hold have fallback provisions for benchmark rate replacement in connection with the cessation of LIBOR in 2023.~~

At ~~June~~September 30, 2023, we had ~~$755~~$623 million in commitments to fund BPL bridge loans. 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 ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 7.2 – Activity of Business Purpose Loans at Redwood


		Three Months Ended June 30, 2023				Three Months Ended June 30, 2022					Three Months Ended September 30, 2023				Three Months Ended September 30, 2022
(In Thousands)	(In Thousands)	BPL Term at Redwood		BPL Bridge at Redwood		BPL Term at Redwood		BPL Bridge at Redwood		(In Thousands)	BPL Term at Redwood		BPL Bridge at Redwood		BPL Term at Redwood		BPL Bridge at Redwood
Principal balance of loans originated	Principal balance of loans originated	$	128,622	$	269,713	$	323,245	$	542,241	Principal balance of loans originated	$	105,777	$	303,284	$	99,281	$	470,425
Principal balance of loans acquired	Principal balance of loans acquired	—		8,149		38,457		19,023		Principal balance of loans acquired	—		1,820		—		59,977
Principal balance of loans sold to third parties	Principal balance of loans sold to third parties	180,404		19,260		—		—		Principal balance of loans sold to third parties	27,436		34,061		37,202		48,279
Fair value of loans transferred ~~(2)~~(1)	Fair value of loans transferred ~~(2)~~(1)	—		(140,186)		(295,037)		(306,313)		Fair value of loans transferred ~~(2)~~(1)	(278,751)		(116,679)		266,181		(77,362)

Mortgage banking activities income (loss) recorded (3)	Mortgage banking activities income (loss) recorded (3)	(1,132)		2,291		(40,034)		(1,136)		Mortgage banking activities income (loss) recorded (3)	1,600		1,438		(19,325)		(110)
Investment fair value changes recorded (2)(4)		(13,625)		(8,778)		—		(5,309)
Investment fair value changes recorded (4)										Investment fair value changes recorded (4)	—		(16,899)		—		(679)


		Six Months Ended June 30, 2023				Six Months Ended June 30, 2022					Nine Months Ended September 30, 2023				Nine Months Ended September 30, 2022
(In Thousands)	(In Thousands)	BPL Term at Redwood		BPL Bridge at Redwood		BPL Term at Redwood		BPL Bridge at Redwood		(In Thousands)	BPL Term at Redwood		BPL Bridge at Redwood		BPL Term at Redwood		BPL Bridge at Redwood
Principal balance of loans originated	Principal balance of loans originated	$	302,700	$	524,865	$	765,972	$	954,179	Principal balance of loans originated	$	408,477	$	828,149	$	865,253	$	1,424,604
Principal balance of loans acquired	Principal balance of loans acquired	—		17,234		100,349		22,006		Principal balance of loans acquired	—		19,054		100,349		81,983
Principal balance of loans sold to third parties	Principal balance of loans sold to third parties	398,106		31,807		331,502		—		Principal balance of loans sold to third parties	425,542		65,868		368,704		48,279
Fair value of loans transferred (1)(2)	Fair value of loans transferred (1)(2)	—		(220,978)		(295,037)		(388,604)		Fair value of loans transferred (1)(2)	(278,751)		(337,657)		561,218		(465,966)

Mortgage banking activities income (loss) recorded (3)	Mortgage banking activities income (loss) recorded (3)	11,534		3,453		(64,502)		1,240		Mortgage banking activities income (loss) recorded (3)	13,214		4,808		(83,827)		1,129
Investment fair value changes recorded (2)(4)	Investment fair value changes recorded (2)(4)	(13,625)		(7,266)		—		(6,068)		Investment fair value changes recorded (2)(4)	(14,430)		(22,867)		—		(6,747)

(1)For BPL term at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL term securitizations. For BPL bridge at Redwood, represents the transfer of BPL bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their ~~securitization.~~inclusion in an existing bridge loan securitization with a replenishment feature.

(2)During the ~~three~~nine months ended ~~June~~September 30, 2023, we substituted a pool of held-for-sale term loans at Redwood for a non-performing held-for-investment term loan at a consolidated CAFL securitization, each with unpaid principal balances of approximately $28 million. The negative investment fair value changes recorded for BPL Term at Redwood during the ~~three and six~~nine months ended ~~June~~September 30, 2023 were attributable to this substitution, with an equal and offsetting positive fair value change recorded for BPL Term at CAFL (related to the retained bond we own in the associated consolidated CAFL securitization).

(3)Represents loan origination fee income and net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio and, for bridge loans, when transferred into a securitization. See Table 20.1 for additional detail on Mortgage banking activities income (loss).

(4)For BPL Bridge at Redwood, represents net market valuation changes for loans classified as held-for-investment and associated interest-only strip liabilities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 BPL term loans and bridge loans owned by these entities. For loans held at our consolidated CAFL Term entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines, and are recorded through Investment fair value changes, net on our consolidated statements of income. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2. We did not elect to account for the CAFL Bridge securitizations under the CFE guidelines.

REO

See Note 13 for detail on business purpose loan REO activity during 2023.

The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

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


		Three Months Ended June 30, 2023				Three Months Ended June 30, 2022					Three Months Ended September 30, 2023				Three Months Ended September 30, 2022
(In Thousands)	(In Thousands)	BPL Term at CAFL		BPL Bridge at CAFL		BPL Term at CAFL		BPL Bridge at CAFL		(In Thousands)	BPL Term at CAFL		BPL Bridge at CAFL		BPL Term at CAFL		BPL Bridge at CAFL
Net market valuation gains (losses) recorded(1)	Net market valuation gains (losses) recorded(1)	$	(37,780)	$	1,192	$	(118,299)	$	(281)	Net market valuation gains (losses) recorded(1)	$	(1,360)	$	(2,560)	$	(108,980)	$	1,906
Transfers	Transfers	—		140,186		295,037		306,313		Transfers	278,751		116,679		—		—


		Six Months Ended June 30, 2023				Six Months Ended June 30, 2022					Nine Months Ended September 30, 2023				Nine Months Ended September 30, 2022
(In Thousands)	(In Thousands)	BPL Term at CAFL		BPL Bridge at CAFL		BPL Term at CAFL		BPL Bridge at CAFL		(In Thousands)	BPL Term at CAFL		BPL Bridge at CAFL		BPL Term at CAFL		BPL Bridge at CAFL
Net market valuation gains (losses) recorded(1)	Net market valuation gains (losses) recorded(1)	$	(601)	$	600	$	(310,202)	$	(1,856)	Net market valuation gains (losses) recorded(1)	$	(1,961)	$	(1,960)	$	(419,182)	$	50
Transfers	Transfers	—		220,978		295,037		388,604		Transfers	278,751		337,657		—		—

(1)Net market valuation gains (losses) on business purpose loans held-for-investment at CAFL are recorded through Investment fair value changes, net on our consolidated statements of income. For loans held at our consolidated CAFL term 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. 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

~~June~~September 30, 2023

(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 ~~June~~September 30, 2023 and December 31, 2022.

Table 7.4 – Characteristics of Business Purpose Loans

June 30, 2023 BPL Term at Redwood
BPL Term at
CAFL(1)
BPL Bridge at Redwood BPL Bridge at CAFL
(Dollars in Thousands)
Number of loans 60 1,072 1,341 1,683
Unpaid principal balance $ 283,650 $ 3,101,083 $ 1,687,258 $ 491,909
Fair value of loans $ 269,886 $ 2,783,731 $ 1,676,752 $ 496,354
Weighted average coupon 6.96 % 5.20 % 10.74 % 10.93 %
Weighted average remaining loan term (years) 7 5 1 1
Market value of loans pledged as collateral under short-term debt facilities $ 196,538 N/A $ 587,094 N/A
Market value of loans pledged as collateral under long-term debt facilities $ 20,564 N/A $ 971,338 N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)
2 45 53 53
Unpaid principal balance of loans with 90+ day delinquencies $ 28,494 $ 99,198 $ 93,045 $ 12,196
Fair value of loans with 90+ day delinquencies (3)
$ 16,822 N/A $ 81,378 $ 10,489
Number of loans in foreclosure
2 7 52 50
Unpaid principal balance of loans in foreclosure $ 28,494 $ 8,183 $ 55,238 $ 10,016
Fair value of loans in foreclosure (3)
$ 16,822 N/A $ 48,306 $ 9,431
December 31, 2022 BPL Term at Redwood
BPL Term at
CAFL(1)
BPL Bridge at Redwood BPL Bridge at CAFL
(Dollars in Thousands)
Number of loans 91 1,131 1,601 1,875
Unpaid principal balance $ 389,846 $ 3,263,421 $ 1,518,427 $ 514,666
Fair value of loans $ 358,791 $ 2,944,984 $ 1,512,428 $ 516,383
Weighted average coupon 5.98 % 5.22 % 9.61 % 9.67 %
Weighted average remaining loan term (years) 10 6 2 1
Market value of loans pledged as collateral under short-term debt facilities $ 291,406 N/A $ 579,666 N/A
Market value of loans pledged as collateral under long-term debt facilities $ 66,567 N/A $ 897,782 N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)
1 16 49 48
Unpaid principal balance of loans with 90+ day delinquencies $ 536 $ 37,072 $ 34,264 $ 7,328
Fair value of loans with 90+ day delinquencies (3)
$ 536 N/A $ 29,663 $ 7,438
Number of loans in foreclosure 1 9 48 48
Unpaid principal balance of loans in foreclosure $ 536 $ 13,686 $ 34,039 $ 7,328
Fair value of loans in foreclosure (3)
$ 536 N/A $ 29,438 $ 7,438


September 30, 2023	BPL Term at Redwood			BPL Term at CAFL(1)			BPL Bridge at Redwood			BPL Bridge at CAFL
(Dollars in Thousands)
Number of loans	45			1,093			1,853			1,344
Unpaid principal balance	$	83,300		$	3,283,186		$	1,704,418		$	521,214
Fair value of loans	$	72,149		$	2,969,217		$	1,682,511		$	525,453
Weighted average coupon	6.98		%	5.35		%	10.46		%	10.79		%
Weighted average remaining loan term (years)	8			5			1			1
Market value of loans pledged as collateral under short-term debt facilities	$	789		N/A			$	91,561		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	46,915		N/A			$	1,497,589		N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)	2			43			45			56
Unpaid principal balance of loans with 90+ day delinquencies(2)	$	27,836		$	102,676		$	80,924		$	7,656
Fair value of loans with 90+ day delinquencies	$	16,822		N/A			$	71,277		$	7,656
Number of loans in foreclosure	2			6			42			49
Unpaid principal balance of loans in foreclosure	$	27,836		$	4,557		$	56,272		$	4,424
Fair value of loans in foreclosure	$	16,822		N/A			$	49,886		$	4,424


December 31, 2022	BPL Term at Redwood			BPL Term at CAFL(1)			BPL Bridge at Redwood			BPL Bridge at CAFL
(Dollars in Thousands)
Number of loans	91			1,131			1,601			1,875
Unpaid principal balance	$	389,846		$	3,263,421		$	1,518,427		$	514,666
Fair value of loans	$	358,791		$	2,944,984		$	1,512,428		$	516,383
Weighted average coupon	5.98		%	5.22		%	9.61		%	9.67		%
Weighted average remaining loan term (years)	10			6			2			1
Market value of loans pledged as collateral under short-term debt facilities	$	291,406		N/A			$	579,666		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	66,567		N/A			$	897,782		N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)	1			16			49			48
Unpaid principal balance of loans with 90+ day delinquencies(2)	$	536		$	37,072		$	34,264		$	7,328
Fair value of loans with 90+ day delinquencies	$	536		N/A			$	29,663		$	7,438
Number of loans in foreclosure	1			9			48			48
Unpaid principal balance of loans in foreclosure	$	536		$	13,686		$	34,039		$	7,328
Fair value of loans in foreclosure	$	536		N/A			$	29,438		$	7,438

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Footnotes to Table 7.4

(1)The fair value of the loans held by consolidated CAFL entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for CFEs. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2. Based on this methodology, we value the loans in each consolidated securitization on a pool basis and do not calculate separate fair values for loans that are 90+ days delinquent or in foreclosure.

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

~~(3)~~
~~May include~~

At September 30, 2023, in addition to bridge loans that ~~are less than~~were 90 or more days ~~delinquent.~~

delinquent, BPL bridge loans with a UPB of $216 million and a fair value of $203 million were on non-accrual status. Included in these amounts were bridge loans with $174 million of UPB that were modified during the third quarter of 2023 with first contractual payments under these modifications due in November 2023.

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 multifamily loans consolidated at Redwood at ~~June~~September 30, 2023 and December 31, 2022.

Table 8.1 – Characteristics of Consolidated Agency Multifamily Loans


(Dollars in Thousands)	(Dollars in Thousands)	June 30, 2023			December 31, 2022			(Dollars in Thousands)	September 30, 2023			December 31, 2022
Number of loans	Number of loans	28			28			Number of loans	28			28
Unpaid principal balance	Unpaid principal balance	$	443,049		$	447,193		Unpaid principal balance	$	440,996		$	447,193
Fair value of loans	Fair value of loans	$	420,096		$	424,551		Fair value of loans	$	420,554		$	424,551
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)	2			3			Weighted average remaining loan term (years)	2			3

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 ~~June~~September 30, 2023 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 ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	$	(4,471)	$	(6,748)	$	(311)	$	(26,429)	Net market valuation gains (losses) recorded (1)	$	2,512	$	(13,691)	$	2,200	$	(40,120)

(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. 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

~~June~~September 30, 2023

(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 ~~June~~September 30, 2023 and December 31, 2022.

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Trading	Trading	$	69,323	$	108,329	Trading	$	48,041	$	108,329
Available-for-sale	Available-for-sale	97,496		132,146		Available-for-sale	81,404		132,146
Total Real Estate Securities	Total Real Estate Securities	$	166,819	$	240,475	Total Real Estate Securities	$	129,445	$	240,475

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.

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 ~~June~~September 30, 2023 and December 31, 2022.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Senior	Senior					Senior
Interest-only securities (1)	Interest-only securities (1)	$	38,064	$	28,867	Interest-only securities (1)	$	41,169	$	28,867

Total Senior	Total Senior	38,064		28,867		Total Senior	41,169		28,867

Subordinate	Subordinate					Subordinate
RPL securities	RPL securities	11,884		29,002		RPL securities	—		29,002
Multifamily securities	Multifamily securities	4,993		5,027		Multifamily securities	5,239		5,027
Other third-party residential securities	Other third-party residential securities	14,382		45,433		Other third-party residential securities	1,633		45,433
Total Subordinate	Total Subordinate	31,259		79,462		Total Subordinate	6,872		79,462
Total Trading Securities	Total Trading Securities	$	69,323	$	108,329	Total Trading Securities	$	48,041	$	108,329

(1)Includes $29 million and $26 million of Sequoia certificated mortgage servicing rights at ~~both June~~September 30, 2023 and December 31, ~~2022.~~2022, respectively.

The following table presents the unpaid principal balance of trading securities by position and collateral type at ~~June~~September 30, 2023 and December 31, 2022.

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Senior (1)	Senior (1)	$	—	$	—	Senior (1)	$	—	$	—

Subordinate	Subordinate	76,512		215,592		Subordinate	19,354		215,592
Total Trading Securities	Total Trading Securities	$	76,512	$	215,592	Total Trading Securities	$	19,354	$	215,592

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table provides the activity of trading securities during the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 9.4 – Trading Securities Activity


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
Fair value of securities acquired	Fair value of securities acquired	$	6,183	$	—	$	7,883	$	5,006	Fair value of securities acquired	$	—	$	—	$	7,883	$	5,006
Fair value of securities sold	Fair value of securities sold	51,578		23,329		55,087		23,329		Fair value of securities sold	27,183		4,142		82,270		27,471
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	6,495		(16,042)		8,456		(17,498)		Net market valuation gains (losses) recorded (1)	5,967		(12,521)		14,423		(30,019)

(1)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.

AFS Securities

The following table presents the fair value of our available-for-sale ("AFS") securities by position and collateral type at ~~June~~September 30, 2023 and December 31, 2022.

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


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022

Subordinate	Subordinate					Subordinate
Sequoia securities	Sequoia securities	$	77,047	$	74,367	Sequoia securities	$	73,160	$	74,367
Multifamily securities	Multifamily securities	7,749		7,647		Multifamily securities	4,448		7,647
Other third-party residential securities	Other third-party residential securities	12,700		50,132		Other third-party residential securities	3,796		50,132
Total Subordinate	Total Subordinate	97,496		132,146		Total Subordinate	81,404		132,146
Total AFS Securities	Total AFS Securities	$	97,496	$	132,146	Total AFS Securities	$	81,404	$	132,146

The following table provides the activity of available-for-sale securities during the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 9.6 – Available-for-Sale Securities Activity


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
Fair value of securities acquired	Fair value of securities acquired	$	1,979	$	—	$	1,979	$	10,000	Fair value of securities acquired	$	—	$	—	$	1,979	$	10,000
Fair value of securities sold	Fair value of securities sold	40,574		—		43,252		—		Fair value of securities sold	12,590		—		55,842		—
Principal balance of securities called	Principal balance of securities called	—		—		—		14,486		Principal balance of securities called	—		—		—		14,486
Net unrealized gains (losses) on AFS securities (1)	Net unrealized gains (losses) on AFS securities (1)	(688)		(33,409)		4,319		(51,282)		Net unrealized gains (losses) on AFS securities (1)	(3,921)		(8,731)		398		(60,013)

(1)Net unrealized gains (losses) 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, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

At ~~June~~September 30, 2023, we had $4 million of AFS securities with contractual maturities less than five years, $4 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2023~~

~~(Unaudited)~~

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

The following table presents the components of carrying value (which equals fair value) of AFS securities at ~~June~~September 30, 2023 and December 31, 2022.

Table 9.7 – Carrying Value of AFS Securities


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Principal balance	Principal balance	$	164,576	$	221,933	Principal balance	$	149,991	$	221,933
Credit reserve	Credit reserve	(25,615)		(28,739)		Credit reserve	(23,890)		(28,739)
Unamortized discount, net	Unamortized discount, net	(46,948)		(61,650)		Unamortized discount, net	(46,603)		(61,650)
Amortized cost	Amortized cost	92,013		131,544		Amortized cost	79,498		131,544
Gross unrealized gains	Gross unrealized gains	15,397		16,269		Gross unrealized gains	13,463		16,269
Gross unrealized losses	Gross unrealized losses	(7,275)		(13,127)		Gross unrealized losses	(8,984)		(13,127)
CECL allowance	CECL allowance	(2,639)		(2,540)		CECL allowance	(2,573)		(2,540)
Carrying Value	Carrying Value	$	97,496	$	132,146	Carrying Value	$	81,404	$	132,146

The following table presents the changes for the three and ~~six~~nine months ended ~~June~~September 30, 2023, 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 June 30, 2023							Six Months Ended June 30, 2023									Three Months Ended September 30, 2023						Nine Months Ended September 30, 2023
		Credit Reserve				Unamortized Discount, Net			Credit Reserve				Unamortized Discount, Net					Credit Reserve				Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net
(In Thousands)	(In Thousands)							(In Thousands)
Beginning balance	Beginning balance			$	28,208						$	59,334				$	28,739			$	61,650		Beginning balance	$	25,615	$	46,948	$	28,739	$	61,650
Amortization of net discount	Amortization of net discount	—				(387)			—				(650)		Amortization of net discount			—				(296)		—		(946)
Realized credit recoveries (losses), net	Realized credit recoveries (losses), net	53				—			5				—		Realized credit recoveries (losses), net			101				—		106		—
Acquisitions	Acquisitions	1,106				754			1,106				754		Acquisitions			—				—		1,106		754
Sales, calls, other	Sales, calls, other	(3,918)				(12,587)			(4,124)				(14,917)		Sales, calls, other			(1,207)				(668)		(5,331)		(15,585)

Transfers to (release of) credit reserves, net	Transfers to (release of) credit reserves, net	166				(166)			(111)				111		Transfers to (release of) credit reserves, net			(619)				619		(730)		730
Ending Balance	Ending Balance	$	25,615			$	46,948		$	25,615			$	46,948	Ending Balance			$	23,890			$	46,603	$	23,890	$	46,603

AFS Securities with Unrealized Losses

The following table presents the total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at ~~June~~September 30, 2023 and December 31, 2022.

Table 9.9 – AFS Securities in Gross Unrealized Loss Position by Holding Periods


		Less Than 12 Consecutive Months						12 Consecutive Months or Longer					Less Than 12 Consecutive Months						12 Consecutive Months or Longer
		Fair Value			Unrealized Losses				Fair Value			Unrealized Losses							Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
(In Thousands)	(In Thousands)									(In Thousands)				Fair Value								Fair Value
June 30, 2023			$	15,150		$	(699)			$	22,002				$	(6,576)
September 30, 2023																	September 30, 2023		$	9,459					$	(585)			$	28,630			$	(8,399)
December 31, 2022	December 31, 2022	72,679			(12,940)				1,414			(186)						December 31, 2022			72,679			(12,940)				1,414				(186)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

At ~~June~~September 30, 2023, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 7266 AFS securities, of which 2829 were in an unrealized loss position and 1623 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2022, our consolidated balance sheet included 79 AFS securities, of which 38 were in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2023~~

~~(Unaudited)~~

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

Evaluating AFS Securities for Credit Losses

Gross unrealized losses on our AFS securities were $7$9 million at ~~June~~September 30, 2023. 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 ~~June~~September 30, 2023, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

At ~~June~~September 30, 2023, our current expected credit loss ("CECL") allowance related to our AFS securities was $2.6 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit-related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at ~~June~~September 30, 2023.

Table 9.10 – Significant Credit Quality Indicators

~~June~~September 30, 2023

Subordinate Securities

Default rate

~~0.9%~~0.8%

Loss severity

20%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 ~~six~~nine months ended ~~June~~September 30, 2023.

Table 9.11 – Rollforward of Allowance for Credit Losses


		Three Months Ended June 30, 2023				Six Months Ended June 30, 2023					Three Months Ended September 30, 2023		Nine Months Ended September 30, 2023
(In Thousands)	(In Thousands)			(In Thousands)
Beginning balance allowance for credit losses	Beginning balance allowance for credit losses			$	2,568				$	2,540		Beginning balance allowance for credit losses	$	2,639	$	2,540

Additions to allowance for credit losses on securities for which credit losses were not previously recorded	Additions to allowance for credit losses on securities for which credit losses were not previously recorded	131				230		Additions to allowance for credit losses on securities for which credit losses were not previously recorded			48		278
Additional increases (or decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	Additional increases (or decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	117				46		Additional increases (or decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period			17		63

Reduction to allowance for securities sold during the period	Reduction to allowance for securities sold during the period	(177)				(177)		Reduction to allowance for securities sold during the period			(131)		(308)

Ending balance of allowance for credit losses	Ending balance of allowance for credit losses	$	2,639			$	2,639	Ending balance of allowance for credit losses			$	2,573	$	2,573

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
Gross realized gains - sales	Gross realized gains - sales	$	3,287	$	—	$	3,814	$	—	Gross realized gains - sales	$	103	$	—	$	3,917	$	—
Gross realized gains - calls	Gross realized gains - calls	—		—		—		1,914		Gross realized gains - calls	—		—		—		1,914
Gross realized losses - sales	Gross realized losses - sales	(2,338)		—		(2,338)		—		Gross realized losses - sales	(77)		—		(2,415)		—
Gross realized losses - calls	Gross realized losses - calls	—		—		—		—		Gross realized losses - calls	—		—		—		—
Total Realized Gains on Sales and Calls of AFS Securities, net	Total Realized Gains on Sales and Calls of AFS Securities, net	$	949	$	—	$	1,476	$	1,914	Total Realized Gains on Sales and Calls of AFS Securities, net	$	26	$	—	$	1,502	$	1,914

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 10. Home Equity Investments (HEI)

From time to time, we may purchase home equity investment contracts from third party originators under flow purchase agreements. Additionally, in the third quarter of 2023, we began to originate HEI. 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 recording a security instrument (e.g., deed of trust) with respect to the property. Our investments in HEI expose us to both home price appreciation and depreciation of the associated property.

The following table presents our home equity investments at ~~June~~September 30, 2023 and December 31, 2022.

Table 10.1 – Home Equity Investments


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
HEI at Redwood	HEI at Redwood	$	298,043	$	270,835	HEI at Redwood	$	302,122	$	270,835
HEI held at consolidated HEI securitization entity	HEI held at consolidated HEI securitization entity	129,264		132,627		HEI held at consolidated HEI securitization entity	129,150		132,627
Total Home Equity Investments	Total Home Equity Investments	$	427,307	$	403,462	Total Home Equity Investments	$	431,272	$	403,462

We consolidate the HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. As such, market valuation changes for the securitized HEI are based on the estimated fair value of the associated ABS issued by the entity, including the securities we own in the entity.

The following table details our HEI activity during the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 10.2 – Activity of HEI

Three Months Ended June 30, 2023 Three Months Ended June 30, 2022
(In Thousands) HEI at Redwood Securitized HEI HEI at Redwood Securitized HEI
Fair value of HEI purchased $ 8,954 $ — $ 57,248 $ —
Net market valuation gains recorded (1)
8,468 3,138 1,596 3,580


	Three Months Ended September 30, 2023				Three Months Ended September 30, 2022
(In Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI
Fair value of HEI purchased and originated	$	113	$	—	$	79,050	$	—

Net market valuation gains (losses) recorded (1)	9,290		4,212		(4,774)		(724)

Six Months Ended
June 30, 2023 Six Months Ended
June 30, 2022
(In Thousands) HEI at Redwood Securitized HEI HEI at Redwood Securitized HEI
Fair value of HEI purchased $ 25,513 $ — $ 97,389 $ —
Net market valuation gains recorded (1)
12,308 4,206 2,788 9,311


	Nine Months Ended September 30, 2023				Nine Months Ended September 30, 2022
(In Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI
Fair value of HEI purchased and originated	$	25,626	$	—	$	176,439	$	—

Net market valuation gains (losses) recorded (1)	21,598		8,418		(1,986)		8,587

(1)We account for HEI at Redwood under the fair value option and record net market valuation changes through Investment fair value changes, net on our Consolidated statements of income. We account for Securitized HEI under the CFE election and net market valuation gains (losses) for these investments are recorded through Investment fair value changes, net on our Consolidated statements of income. 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

~~June~~September 30, 2023

(Unaudited)

Note 10. Home Equity Investments (HEI) - (continued)

The following tables summarizes the characteristics of our HEI at ~~June~~September 30, 2023 and December 31, 2022.

Table 10.3 – HEI Characteristics


		June 30, 2023				December 31, 2022					September 30, 2023				December 31, 2022
(Dollars in Thousands)	(Dollars in Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI		(Dollars in Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI
Number of HEI contracts	Number of HEI contracts	2,701		955		2,599		1,007		Number of HEI contracts	2,644		929		2,599		1,007
Average initial amount of contract	Average initial amount of contract	$	103	$	95	$	101	$	94	Average initial amount of contract	$	103	$	95	$	101	$	94

Note 11. Other Investments

Other investments at ~~June~~September 30, 2023 and December 31, 2022 are summarized in the following table.

Table 11.1 – Components of Other Investments


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Servicer advance investments	Servicer advance investments	$	234,304	$	269,259	Servicer advance investments	$	219,813	$	269,259
Strategic investments	Strategic investments	54,867		56,518		Strategic investments	55,854		56,518
Excess MSRs	Excess MSRs	39,877		39,035		Excess MSRs	38,427		39,035
Mortgage servicing rights	Mortgage servicing rights	26,242		25,421		Mortgage servicing rights	26,033		25,421

Other	Other	247		705		Other	234		705
Total Other Investments	Total Other Investments	$	355,537	$	390,938	Total Other Investments	$	340,361	$	390,938

Servicer advance investments

We and a third-party co-investor, through two partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to portfolios of legacy residential mortgage-backed securitizations serviced by the co-investor. Refer to Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding the transactions.

At ~~June~~September 30, 2023, our servicer advance investments had a carrying value of ~~$234~~$220 million and were associated with specified pools of residential mortgage loans with an unpaid principal balance of ~~$10.74~~$10.45 billion. The outstanding servicer advance receivables associated with ~~this investment~~these investments were ~~$203~~$185 million at ~~June~~September 30, 2023, which were financed with short-term non-recourse securitization debt. See Note 14 for additional detail on this debt. The servicer advance receivables were comprised of the following types of advances at ~~June~~September 30, 2023 and December 31, 2022.

Table 11.2 – Components of Servicer Advance Receivables


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Principal and interest advances	Principal and interest advances	$	65,737	$	81,447	Principal and interest advances	$	65,365	$	81,447
Escrow advances (taxes and insurance advances)	Escrow advances (taxes and insurance advances)	101,114		123,541		Escrow advances (taxes and insurance advances)	86,980		123,541
Corporate advances	Corporate advances	36,246		35,377		Corporate advances	32,191		35,377
Total Servicer Advance Receivables	Total Servicer Advance Receivables	$	203,097	$	240,365	Total Servicer Advance Receivables	$	184,536	$	240,365

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 11. Other Investments - (continued)

We account for our servicer advance investments at fair value and during the three and ~~six~~nine months ended ~~June~~September 30, 2023, we recorded $5 million and ~~$10~~$16 million, respectively, of interest income, through Other interest income, and recorded a net market valuation gain of $4 million and a gain of $2$6 million, respectively, through Investment fair value changes, net in our consolidated statements of income.

Strategic Investments

Strategic investments represent investments we made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At ~~June~~September 30, 2023, we had made a total of 3335 investments in companies through RWT Horizons with a total carrying value of $23 million, as well as ~~six~~seven corporate-level investments. For ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, 2023, we recognized a net mark-to-market valuation gain of $0.1 million and a loss of $3 million, respectively, on our strategic investments. ~~For both~~During the three and ~~six~~nine months ended ~~June~~September 30, 2022, we recognized a net mark-to-market valuation gain of ~~$10~~$1 million and $11 million, respectively, on our strategic investments. Market valuation changes on our strategic investments are recorded in Investment fair value changes, net on our consolidated statements of income.

During ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, 2023, we recorded losses from our strategic investments of $1$2 million and $3 million, respectively, in Other income, net on our consolidated statements of income. During the three and ~~six~~nine months ended ~~June~~September 30, 2022, we recorded losses from our strategic investments of $0.3 million and ~~$0.2~~$0.4 million, respectively, in Other income, net on our consolidated statements of income.

In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. During the three months ended September 30, 2023, we sold $29 million of BPL bridge loans to the joint venture and at September 30, 2023, the carrying value of our investment in the joint venture was $1.6 million. We account for our investment in the joint venture under the equity method of accounting as we have a 20% non-controlling interest, but are deemed to be able to exert significant influence over the affairs of the joint venture. We adjust the carrying value of our equity method investment for our share of earnings or losses, dividends or return of capital on a quarterly basis.

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 ~~six~~nine months ended ~~June~~September 30, 2023, we recognized $4$3 million and $7$11 million, respectively, of interest income through Other interest income and for both the three and nine months ended September 30, 2023, we recorded net market valuation ~~gains~~losses of $1 million ~~and gains of $1 million, respectively,~~ through Investment fair value changes, net on our consolidated statements of income.

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. For both the three and ~~six~~nine months ended ~~June~~September 30, 2023, we retained zero MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At ~~June~~September 30, 2023 and December 31, 2022, our MSRs had a fair value of $26 million and $25 million, respectively, and were associated with loans with an aggregate principal balance of ~~$2.11~~$2.07 billion and $2.19 billion, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2023, including net market valuation gains and losses on our MSRs, we recorded net income related to our MSRs of $3$2 million and $4$6 million, respectively, through Other income on our consolidated statements of income.

~~BPL Bridge Loan Joint Venture~~

During the three months ended June 30, 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. We did not contribute any capital or sell any loans into the joint venture during the three months ended June 30, 2023. In accordance with the terms of the joint venture, we have committed to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices and for pre-established ongoing fees. We expect to account for our investment in the joint venture under the equity method of accounting and will present this investment in the “Other investments” line item of our consolidated balance sheets.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 12. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at ~~June~~September 30, 2023 and December 31, 2022.

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


		June 30, 2023					December 31, 2022					September 30, 2023				December 31, 2022
		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	$	10,125	$	190,000		$	14,625	$	285,000	Interest rate swaps	$	13,819	$	190,000	$	14,625	$	285,000
TBAs	TBAs	3,536		665,000			1,893		220,000		TBAs	16,613		1,560,000		1,893		220,000
Interest rate futures	Interest rate futures	3,333		193,000			3,976		350,600		Interest rate futures	2,187		136,200		3,976		350,600

Assets - Other Derivatives	Assets - Other Derivatives										Assets - Other Derivatives
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	3,442		127,560			336		8,166		Loan purchase and interest rate lock commitments	5,067		288,637		336		8,166

Total Assets	Total Assets	$	20,436	$	1,175,560		$	20,830	$	863,766	Total Assets	$	37,686	$	2,174,837	$	20,830	$	863,766

Liabilities - Risk Management Derivatives	Liabilities - Risk Management Derivatives										Liabilities - Risk Management Derivatives

TBAs	TBAs	$	(920)	$	275,000		$	(16,784)	$	845,000	TBAs	$	(5,495)	$	425,000	$	(16,784)	$	845,000
Interest rate futures	Interest rate futures	—		—			(57)		60,000		Interest rate futures	(199)		67,700		(57)		60,000
Liabilities - Other Derivatives	Liabilities - Other Derivatives										Liabilities - Other Derivatives
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	(1,396)		223,809			(14)		3,532		Loan purchase and interest rate lock commitments	(3,087)		606,170		(14)		3,532

Total Liabilities	Total Liabilities	$	(2,316)	$	498,809		$	(16,855)	$	908,532	Total Liabilities	$	(8,781)	$	1,098,870	$	(16,855)	$	908,532
Total Derivative Financial Instruments, Net	Total Derivative Financial Instruments, Net	$	18,120	$	1,674,369		$	3,975	$	1,772,298	Total Derivative Financial Instruments, Net	$	28,905	$	3,273,707	$	3,975	$	1,772,298

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 ~~June~~September 30, 2023, we were party to swaps and swaptions with an aggregate notional amount of $190 million, TBA agreements with an aggregate notional amount of ~~$940 million,~~$2 billion, and interest rate futures contracts with an aggregate notional amount of ~~$193~~$204 million. At December 31, 2022, we were party to swaps and swaptions with an aggregate notional amount of $285 million, futures with an aggregate notional amount of $411 million and TBA agreements with an aggregate notional amount of $1.07 billion.

For the three and ~~six~~nine months ended ~~June~~September 30, 2023, risk management derivatives had net market valuation gains of ~~$13~~$23 million and ~~losses~~gains of $4$18 million, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2022, risk management derivatives had net market valuation gains of ~~$30~~$76 million and gains of ~~$122~~$198 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net and Investment fair value changes, net ~~and Other income~~ on our consolidated statements of income.

Loan Purchase and Interest Rate Lock Commitments

Loan purchase commitments ("LPCs") and interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. For the three and ~~six~~nine months ended ~~June~~September 30, 2023, LPCs and IRLCs had net market valuation gains of $2$6 million and gains of $2$8 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income. For the three and ~~six~~nine months ended ~~June~~September 30, 2022, LPCs and IRLCs had net market valuation losses of $9$3 million and losses of ~~$51~~$54 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 12. Derivative Financial Instruments - (continued)

Derivatives Designated as Cash Flow Hedges

For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive loss was ~~$70~~$69 million and $72 million at ~~June~~September 30, 2023 and December 31, 2022, respectively. We are amortizing this loss into interest expense over the remaining term of our trust preferred securities and subordinated notes. For each of the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, we reclassified $1 million and $2$3 million, respectively, of realized net losses from Accumulated other comprehensive loss into Interest expense. As of ~~June~~September 30, 2023, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At ~~June~~September 30, 2023, we assessed this risk as remote and did not record an associated specific valuation adjustment. At ~~June~~September 30, 2023, we were in compliance with our derivative counterparty ISDA agreements.

Note 13. Other Assets and Liabilities

Other assets at ~~June~~September 30, 2023 and December 31, 2022 are summarized in the following table.

Table 13.1 – Components of Other Assets


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Accrued interest receivable	Accrued interest receivable	$	63,659	$	60,893	Accrued interest receivable	$	60,762	$	60,893
REO						REO	54,123		6,455
Deferred tax asset						Deferred tax asset	41,931		41,931
Investment receivable	Investment receivable	47,176		36,623		Investment receivable	36,816		36,623
Deferred tax asset		41,931		41,931
REO		15,458		6,455
Operating lease right-of-use assets	Operating lease right-of-use assets	14,337		16,177		Operating lease right-of-use assets	13,367		16,177
Margin receivable						Margin receivable	10,536		13,802
Fixed assets and leasehold improvements (1)	Fixed assets and leasehold improvements (1)	8,994		12,616		Fixed assets and leasehold improvements (1)	8,453		12,616
Income tax receivables	Income tax receivables	3,147		3,399		Income tax receivables	1,654		3,399
Margin receivable		2,043		13,802

Other	Other	22,280		19,344		Other	22,845		19,344
Total Other Assets	Total Other Assets	$	219,025	$	211,240	Total Other Assets	$	250,487	$	211,240

(1)Fixed assets and leasehold improvements had a basis of ~~$18~~$17 million and accumulated depreciation of $9 million at ~~June~~September 30, 2023.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 13. Other Assets and Liabilities - (continued)

Accrued expenses and other liabilities at ~~June~~September 30, 2023 and December 31, 2022 are summarized in the following table.

Table 13.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Accrued interest payable	Accrued interest payable	$	48,320	$	46,612	Accrued interest payable	$	51,849	$	46,612
Payable to noncontrolling interests	Payable to noncontrolling interests	47,149		44,859		Payable to noncontrolling interests	48,496		44,859
Unsettled trades		43,063		—
Margin payable						Margin payable	25,210		5,944
Accrued compensation	Accrued compensation	21,717		30,929		Accrued compensation	23,249		30,929
Operating lease liabilities	Operating lease liabilities	16,670		18,563		Operating lease liabilities	15,630		18,563
Margin payable		7,512		5,944
Unsettled trades						Unsettled trades	6,110		—
Accrued operating expenses						Accrued operating expenses	6,063		5,740
Guarantee obligations	Guarantee obligations	6,079		6,344		Guarantee obligations	5,913		6,344
Accrued operating expenses		6,072		5,740
Residential loan and MSR repurchase reserve	Residential loan and MSR repurchase reserve	4,564		7,051		Residential loan and MSR repurchase reserve	4,611		7,051
Current accounts payable	Current accounts payable	2,892		4,234		Current accounts payable	4,588		4,234
Bridge loan holdbacks	Bridge loan holdbacks	2,791		3,301		Bridge loan holdbacks	1,973		3,301
Preferred stock dividends payable	Preferred stock dividends payable	1,478		—		Preferred stock dividends payable	1,478		—
Other	Other	19,807		6,626		Other	13,124		6,626
Total Accrued Expenses and Other Liabilities	Total Accrued Expenses and Other Liabilities	$	228,114	$	180,203	Total Accrued Expenses and Other Liabilities	$	208,294	$	180,203

Investment Receivable

Investment receivable primarily consists of amounts receivable from third-party servicers related to principal and interest receivable from business purpose loans and fees receivable from servicer advance investments.

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. We met all margin calls due through ~~June~~September 30, 2023.

Operating Lease Right-of-Use Assets and Operating Lease Liabilities

See Note 17 for additional information on leases.

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 ~~six~~nine months ended ~~June~~September 30, 2023.

Table 13.3 – REO Activity


		Six Months Ended June 30, 2023											Nine Months Ended September 30, 2023
(In Thousands)	(In Thousands)	BPL Bridge		Legacy Sequoia		Freddie Mac SLST		BPL Term at CAFL		Total		(In Thousands)	BPL Bridge		Legacy Sequoia		Freddie Mac SLST		BPL Term at CAFL		Total
Balance at beginning of period	Balance at beginning of period	$	3,012	$	544	$	2,899	$	—	$	6,455	Balance at beginning of period	$	3,012	$	544	$	2,899	$	—	$	6,455
Transfers to REO	Transfers to REO	10,736		18		1,120		—		11,874		Transfers to REO	48,864		18		2,340		2,684		53,906
Liquidations (1)	Liquidations (1)	—		(562)		(2,017)		—		(2,579)		Liquidations (1)	(2,310)		(562)		(2,754)		—		(5,626)
Changes in fair value, net	Changes in fair value, net	(662)		—		370		—		(292)		Changes in fair value, net	(992)		—		380		—		(612)
Balance at End of Period	Balance at End of Period	$	13,086	$	—	$	2,372	$	—	$	15,458	Balance at End of Period	$	48,574	$	—	$	2,865	$	2,684	$	54,123

(1)For the ~~six~~nine months ended ~~June~~September 30, 2023, REO liquidations resulted in ~~$0.3~~$0.6 million of realized losses, which were recorded in Investment fair value changes, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 13. Other Assets and Liabilities - (continued)

The following table provides detail on the numbers of REO assets at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL entities at ~~June~~September 30, 2023 and December 31, 2022.

Table 13.4 – REO Assets


Number of REO assets	Number of REO assets	Redwood Bridge	Legacy Sequoia	Freddie Mac SLST	BPL Term at CAFL	Total	Number of REO assets	Redwood Bridge	Legacy Sequoia	Freddie Mac SLST	BPL Term at CAFL	Total
At June 30, 2023		7	—	23	—	30
At September 30, 2023							At September 30, 2023	9	—	25	1	35
At December 31, 2022	At December 31, 2022	2	2	24	—	28	At December 31, 2022	2	2	24	—	28

Legal and Repurchase Reserves

See Note 17 for additional information on legal and repurchase reserves.

Payable to Non-Controlling Interests

In 2018, Redwood and a third-party co-investor, through two partnership entities consolidated by Redwood, purchased servicer advances and excess MSRs related to a portfolio of residential mortgage loans serviced by the co-investor (see Note 4 and Note 11 for additional information on the partnership entities and associated investments). We account for the co-investor’s interests in the entities as liabilities, and at ~~June~~September 30, 2023, the carrying value of their interests was $23 million, representing their current economic interest in the entities. Earnings from the partnership entities are allocated to the co-investors on a proportional basis and during ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, 2023, we allocated $2 million and $4 million, respectively, of income to the co-investors, recorded in Other expenses on our consolidated statements of income.

In 2021, Redwood and a third-party investor co-sponsored the transfer and securitization of HEI through the HEI securitization entity and other third-party investors retained subordinate securities issued by the securitization entity alongside Redwood. See Note 10 for a further discussion of the HEI securitization. We account for the co-investors' interests in the HEI securitization entity as a liability, and at ~~June~~September 30, 2023, the carrying value of their interests was ~~$24~~$26 million, representing the fair value of their economic interests in the HEI entity. During the three and ~~six~~nine months ended ~~June~~September 30, 2023, the investors' share of earnings (loss), net from their retained interests was $1$2 million and $2$3 million, respectively, recorded through Investment fair value changes, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 14. Short-Term Debt

We enter into repurchase agreements ("repo"), loan warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At ~~June~~September 30, 2023, 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 ~~June~~September 30, 2023 and December 31, 2022.

Table 14.1 – Short-Term Debt


		June 30, 2023										September 30, 2023
(Dollars in Thousands)	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity (2)	Weighted Average Days Until Maturity	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity (2)	Weighted Average Days Until Maturity
Facilities	Facilities										Facilities
Residential loan warehouse	Residential loan warehouse	5	$	176,592	$	1,250,000	7.26	%	8/2023-5/2024	175	Residential loan warehouse	4	$	548,334	$	1,050,000	7.28	%	10/2023-5/2024	132

Business purpose loan warehouse	Business purpose loan warehouse	4	603,196		1,355,000		7.68	%	7/2023-6/2024	93	Business purpose loan warehouse	2	70,424		455,000		8.12	%	5/2024-6/2024	259
Real estate securities repo	Real estate securities repo	5	253,365		—		6.59	%	7/2023-9/2023	33	Real estate securities repo	5	237,835		—		6.99	%	10/2023-1/2024	54
Residential MSR warehouse											Residential MSR warehouse	1	48,470		50,000		8.57	%	10/2023	30
HEI warehouse	HEI warehouse	1	130,008		150,000		9.76	%	11/2023	125	HEI warehouse	1	126,803		150,000		9.92	%	8/2024	306
Total Short-Term Debt Facilities	Total Short-Term Debt Facilities	15	1,163,161								Total Short-Term Debt Facilities	13	1,031,866
Servicer advance financing	Servicer advance financing	1	162,981		270,000		7.44	%	11/2023	124	Servicer advance financing	1	154,127		240,000		7.67	%	11/2023	32
Subordinate securities financing											Subordinate securities financing	1	126,506		—		5.71	%	9/2024	358
Promissory notes	Promissory notes	N/A	18,483		—		6.89	%	N/A	N/A	Promissory notes	N/A	16,518		—		6.94	%	N/A	N/A
Convertible notes, net	Convertible notes, net	N/A	112,497		—		4.75	%	8/2023	46	Convertible notes, net	N/A	147,637		—		5.63	%	7/2024	289
Total Short-Term Debt	Total Short-Term Debt		$	1,457,122							Total Short-Term Debt		$	1,476,654


	December 31, 2022
(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	$	703,406	$	2,550,000	6.16	%	3/2023 - 12/2023	267

Business purpose loan warehouse	4	680,100		1,650,000		6.93	%	3/2023 - 9/2023	179
Real estate securities repo	7	124,909		—		5.22	%	1/2023 - 3/2023	27
HEI warehouse	1	111,681		150,000		8.54	%	11/2023	306
Total Short-Term Debt Facilities	19	1,620,096
Servicer advance financing	1	206,510		290,000		6.67	%	11/2023	305
Promissory notes	N/A	27,058		—		6.64	%	N/A	N/A
Convertible notes, net	N/A	176,015		—		4.75	%	8/2023	227
Total Short-Term Debt		$	2,029,679

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

(2)Promissory notes payable on demand to lender with 90-day notice.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 14. Short-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our short-term debt at ~~June~~September 30, 2023 and December 31, 2022.

Table 14.2 – Collateral for Short-Term Debt


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Collateral Type	Collateral Type					Collateral Type
Held-for-sale residential loans	Held-for-sale residential loans	$	192,910	$	775,545	Held-for-sale residential loans	$	608,649	$	775,545
MSRs (1)						MSRs (1)	79,809		—
Business purpose loans	Business purpose loans	783,632		871,072		Business purpose loans	92,350		871,072
HEI	HEI	229,625		191,278		HEI	229,625		191,278
Real estate securities	Real estate securities					Real estate securities
On balance sheet	On balance sheet	17,205		72,133		On balance sheet	4,448		72,133
Sequoia securitizations (1)		67,455		74,170
Freddie Mac SLST securitizations (1)		231,313		—
Freddie Mac K-Series securitization (1)		32,514		31,767
CAFL securitizations (1)		8,750		—
Sequoia securitizations (2)						Sequoia securitizations (2)	51,542		74,170
Freddie Mac SLST securitizations (2)						Freddie Mac SLST securitizations (2)	214,443		—
Freddie Mac K-Series securitization (2)						Freddie Mac K-Series securitization (2)	32,904		31,767
CAFL securitizations (2)						CAFL securitizations (2)	32,317		—
Total real estate securities owned	Total real estate securities owned	357,237		178,070		Total real estate securities owned	335,654		178,070
Restricted cash and other assets	Restricted cash and other assets	1,541		1,097		Restricted cash and other assets	4,128		1,097
Total Collateral for Short-Term Debt Facilities	Total Collateral for Short-Term Debt Facilities	1,564,945		2,017,062		Total Collateral for Short-Term Debt Facilities	1,350,215		2,017,062
Cash	Cash	18,073		12,713		Cash	15,162		12,713

Subordinate securities financing						Subordinate securities financing	169,565		—
Servicer advances	Servicer advances	234,304		269,259		Servicer advances	219,813		269,259
Total Collateral for Servicer Advance Financing		252,377		281,972
Total Collateral for Short-Term Debt	Total Collateral for Short-Term Debt	$	1,817,322	$	2,299,034	Total Collateral for Short-Term Debt	$	1,754,755	$	2,299,034

(1)Includes certificated mortgage servicing rights classified as securities on our consolidated balance sheets.

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

For the three and ~~six~~nine months ended ~~June~~September 30, 2023, the average balance of our short-term debt facilities was ~~$1.12~~$1.02 billion and ~~$1.21~~$1.14 billion, respectively. At ~~June~~September 30, 2023 and December 31, 2022, accrued interest payable on our short-term debt facilities was $7$5 million.

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 June~~

In 2019, a subsidiary of Redwood entered into a repurchase agreement providing 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) recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia securitizations ("Subordinate securities financing" in Table 14.1 above). The financing is fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through September 2022, which increased to 5.71% from October 2022 through September 2023, and will increase to 7.21% from October 2023 through September 2024. The financing facility has a final maturity in September 2024. During the three months ended September 30, 2023, we reclassified this facility from long-term to short-term debt as the ~~accrued interest payable balance~~maturity date on this ~~financing was $0.4 million and the unamortized capitalized commitment costs were $0.3 million.~~facility is within one year.

In connection with our acquisition of Riverbend, we assumed promissory notes that 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 and six months ended June 30, 2023, we repurchased $31 million and $64 million, respectively, of convertible debt due in 2023, and recorded a $0.1 million gain and a $0.2 million gain on extinguishment, respectively. At June 30, 2023 the outstanding principal balance of our convertible debt due in August 2023 was $113 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 14. Short-Term Debt - (continued)

During the three and nine months ended September 30, 2023, we repurchased $2 million and $66 million, respectively, of convertible debt due in 2023 and 2024, and recorded a $0.02 million gain and a $0.2 million gain on extinguishment, respectively. At September 30, 2023 the outstanding principal balance of our convertible debt due in July 2024 was $148 million.

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 ~~June~~September 30, 2023.

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


		June 30, 2023									September 30, 2023
(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	$	—	$	4,267	$	172,325	$	176,592	Held-for-sale residential loans	$	46,844	$	314,269	$	187,221	$	548,334
Business purpose loans	Business purpose loans	316,881		187,588		98,727		603,196		Business purpose loans	—		—		70,424		70,424
Real estate securities	Real estate securities	200,529		52,836		—		253,365		Real estate securities	38,786		182,275		143,280		364,341
HEI warehouse		—		—		130,008		130,008
Total Secured Short-Term Debt		517,410		244,691		401,060		1,163,161
Servicer advance financing		—		—		162,981		162,981
Promissory notes		—		18,483		—		18,483
Convertible notes, net		—		112,497		—		112,497
MSRs										MSRs	48,470		—		—		48,470
HEI										HEI	—		—		126,803		126,803
Servicer advances										Servicer advances	—		154,127		—		154,127
Total Secured Short-Term Debt Facilities										Total Secured Short-Term Debt Facilities	134,100		650,671		527,728		1,312,499
Promissory notes (unsecured)										Promissory notes (unsecured)	—		16,518		—		16,518
Convertible notes, net (unsecured)										Convertible notes, net (unsecured)	—		—		147,637		147,637
Total Short-Term Debt	Total Short-Term Debt	$	517,410	$	375,671	$	564,041	$	1,457,122	Total Short-Term Debt	$	134,100	$	667,189	$	675,365	$	1,476,654

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 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 ~~June~~September 30, 2023 and December 31, 2022, along with other selected information, are summarized in the following table.

Table 15.1 – Asset-Backed Securities Issued


		June 30, 2023																											September 30, 2023
		Legacy Sequoia				Sequoia		CAFL (1)				Freddie Mac SLST				Freddie Mac K-Series			HEI					Total					Legacy Sequoia				Sequoia				CAFL (1)		Freddie Mac SLST		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Certificates with principal balance	Certificates with principal balance			$	171,068					$	4,125,715			$	3,161,740							$	1,184,425				$	406,581			$	104,171			$	9,153,700		Certificates with principal balance	$	159,990	$	4,384,081		$	3,330,287		$	1,165,093	$	404,528	$	100,753	$	9,544,732
Interest-only certificates	Interest-only certificates	162				49,192		103,935				14,413				6,019			—					173,721		Interest-only certificates			127				50,992				105,883		13,905		5,300			—			176,207
Market valuation adjustments	Market valuation adjustments	(9,181)				(689,517)		(310,155)				(101,866)				(25,019)			(8,513)					(1,144,251)		Market valuation adjustments			(10,915)				(866,568)				(301,241)		(120,007)		(22,178)			(7,980)			(1,328,889)

ABS Issued, Net	ABS Issued, Net	$	162,049			$	3,485,390	$	2,955,520			$	1,096,972			$	387,581		$	95,658				$	8,183,170	ABS Issued, Net			$	149,202			$	3,568,505			$	3,134,929	$	1,058,991	$	387,650		$	92,773		$	8,392,050
Range of weighted average interest rates, by series(3)	Range of weighted average interest rates, by series(3)	0% to 7.02%				2.63% to 5.01%		2.34% to 6.19%				3.50%				3.41		%	3.82		%					Range of weighted average interest rates, by series(3)			3.73% to 7.26%				2.67% to 6.01%				2.34% to 6.18%		3.50%		3.41		%	3.83		%
Stated maturities(3)	Stated maturities(3)	2024-2036				2047-2053		2027-2032				2028-2029				2025			2052							Stated maturities(3)			2024-2036				2047-2053				2027-2033		2028-2029		2025			2052
Number of series	Number of series	20				19		19				2				1			1							Number of series			20				20				20		2		1			1


	December 31, 2022
	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST (2)		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)
Certificates with principal balance	$	200,047	$	3,595,715	$	3,322,250	$	1,306,652	$	410,725		$	108,962		$	8,944,351
Interest-only certificates	180		57,871		124,928		15,328		7,379			—			205,686
Market valuation adjustments	(16,036)		(682,477)		(331,371)		(99,830)		(25,319)			(8,252)			(1,163,285)


ABS Issued, Net	$	184,191	$	2,971,109	$	3,115,807	$	1,222,150	$	392,785		$	100,710		$	7,986,752
Range of weighted average interest rates, by series(3)	2.69% to 5.19%		2.57% to 6.13%		2.34% to 5.92%		3.50% to 4.75%		3.41		%	3.78		%
Stated maturities(3)	2024 - 2036		2047-2052		2027-2032		2028-2059		2025			2052
Number of series	20		17		19		3		1			1

(1)Includes $485 million (principal balance) of ABS issued by two CAFL bridge securitization trusts sponsored by Redwood and accounted for at amortized cost at both ~~June~~September 30, 2023 and December 31, 2022.

(2)Includes $86 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at December 31, 2022.

(3)Certain ABS issued by CAFL and HEI securitization entities are subject to early redemption and interest rate step-ups as described below.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(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 BPL 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 ~~June~~September 30, 2023, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $4$3 million in total, for a net carrying value of ~~$211~~$212 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 ~~$207~~$237 million of BPL bridge loans and ~~$45~~$17 million of restricted cash and other assets at ~~June~~September 30, 2023. 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 BPL 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 $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 ~~June~~September 30, 2023, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $1 million, for a net carrying value of $269 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 by assets including ~~$290~~$288 million of BPL bridge loans ~~$7 million of other assets,~~ and ~~$16~~$29 million of restricted cash and other assets at ~~June~~September 30, 2023. 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 an HEI ~~securitization~~ entity formed in connection with the securitization of ~~HEIs,~~HEI, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income. The ABS issued by the HEI securitization entity are subject to an optional redemption in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.

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. During the first quarter of 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 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 the stated maturity. At ~~June~~September 30, 2023, 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 ~~June~~September 30, 2023 and December 31, 2022. Interest due on consolidated ABS issued is payable monthly.

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


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Legacy Sequoia	Legacy Sequoia	$	317	$	282	Legacy Sequoia	$	310	$	282
Sequoia	Sequoia	11,222		8,880		Sequoia	12,695		8,880
CAFL	CAFL	10,286		10,918		CAFL	11,181		10,918
Freddie Mac SLST (1)	Freddie Mac SLST (1)	3,455		3,561		Freddie Mac SLST (1)	3,398		3,561
Freddie Mac K-Series	Freddie Mac K-Series	1,155		1,167		Freddie Mac K-Series	1,150		1,167
Total Accrued Interest Payable on ABS Issued	Total Accrued Interest Payable on ABS Issued	$	26,435	$	24,808	Total Accrued Interest Payable on ABS Issued	$	28,734	$	24,808

(1)Includes accrued interest payable on ABS issued by a re-securitization trust sponsored by ~~Redwood.~~Redwood at December 31, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 16. Long-Term Debt

The tables below summarize our long-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest ~~rate,~~rates, and the maturity information at ~~June~~September 30, 2023 and December 31, 2022.

Table 16.1 – Long-Term Debt


		June 30, 2023												September 30, 2023
(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
Facility A		$	128,287	$	—	$	128,287	N/A		5.71	%	9/2024
Facility B	Facility B	101,465		—		101,465		N/A		5.71	%	2/2025	Facility B	$	101,247	$	—	$	101,247	N/A		5.71	%	2/2025
Facility C	Facility C	63,309		—		63,309		N/A		4.75	%	6/2026	Facility C	60,657		—		60,657		N/A		4.75	%	6/2026
Non-Recourse BPL Financing	Non-Recourse BPL Financing												Non-Recourse BPL Financing
Facility D	Facility D	504,735		(543)		504,192		$	750,000	SOFR + 2.87%		N/A	Facility D	486,099		(596)		485,503		$	750,000	SOFR + 2.89%		N/A
Facility E	Facility E	283,144		(938)		282,206		335,000		SOFR + 3.25%		12/2025	Facility E	225,865		(844)		225,021		335,000		SOFR + 3.25%		12/2025
Recourse BPL Financing	Recourse BPL Financing												Recourse BPL Financing
Facility F	Facility F	17,615		(11)		17,604		500,000		SOFR + 2.35%-2.60%		9/2024	Facility F	21,293		(9)		21,284		500,000		SOFR + 2.35%-2.60%		9/2025
Recourse MSR Financing
Facility G		47,169		—		47,169		50,000		SOFR + 3.25%		9/2024
Facility H													Facility H	234,014		—		234,014		450,000		SOFR + 2.40%-2.60%		7/2025
Facility I													Facility I	193,007		—		193,007		450,000		SOFR + 2.25%-2.77%		3/2025
Total Long-Term Debt Facilities	Total Long-Term Debt Facilities	1,145,724		(1,492)		1,144,232							Total Long-Term Debt Facilities	1,322,182		(1,449)		1,320,733
Convertible notes	Convertible notes												Convertible notes
5.625% convertible senior notes		150,200		(868)		149,332		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	5.75% exchangeable senior notes	162,092		(2,002)		160,090		N/A		5.75	%	10/2025	5.75% exchangeable senior notes	162,092		(1,793)		160,299		N/A		5.75	%	10/2025
7.75% convertible senior notes	7.75% convertible senior notes	215,000		(5,570)		209,430		N/A		7.75	%	6/2027	7.75% convertible senior notes	215,000		(5,274)		209,726		N/A		7.75	%	6/2027
Trust preferred securities and subordinated notes	Trust preferred securities and subordinated notes	139,500		(710)		138,790		N/A		L + 2.25%		7/2037	Trust preferred securities and subordinated notes	139,500		(698)		138,802		N/A		SOFR + 2.51%		7/2037
Total Long-Term Debt	Total Long-Term Debt	$	1,812,516	$	(10,642)	$	1,801,874						Total Long-Term Debt	$	1,838,774	$	(9,214)	$	1,829,560

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 16. Long-Term Debt - (continued)


	December 31, 2022
(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	$	130,408	$	—	$	130,408	N/A		5.71	%	9/2024
Facility B	101,706		(50)		101,656		N/A		4.21	%	2/2025
Facility C	68,995		(125)		68,870		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility D	404,622		(667)		403,955		$	750,000	SOFR + 2.87%		N/A
Facility E	308,933		(838)		308,095		335,000		SOFR + 3.25%		12/2025
Recourse BPL Financing
Facility F	64,689		(473)		64,216		500,000		SOFR + 2.25%-2.50%		9/2024
Total Long-Term Debt Facilities	1,079,353		(2,153)		1,077,200
Convertible notes
5.625% convertible senior notes	150,200		(1,282)		148,918		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	162,092		(2,410)		159,682		N/A		5.75	%	10/2025
7.75% convertible senior notes	215,000		(6,142)		208,858		N/A		7.75	%	6/2027
Trust preferred securities and subordinated notes	139,500		(733)		138,767		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,746,145	$	(12,720)	$	1,733,425

(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table above) or SOFR, plus an applicable spread. As ~~described above within Note 3, 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~~converted to SOFR upon the cessation of LIBOR in 2023.

During the three months ended September 30, 2023, we reclassified Facility H and Facility I in Table 16.1 above from short-term debt to long-term debt as the maturity dates for these facilities were extended to July 2025 and March 2025, respectively. Additionally, during the three months ended September 30, 2023, we reclassified the 5.625% convertible senior notes presented in Table 16.1 above at December 31, 2022, to short-term debt, as the maturity of these notes was less than one year at September 30, 2023.

Refer to Note 16 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for a full description of our long-term debt.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 16. Long-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at ~~June~~September 30, 2023 and December 31, 2022.

Table 16.2 – Collateral for Long-Term Debt


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Collateral Type	Collateral Type					Collateral Type
BPL bridge loans	BPL bridge loans	$	971,338	$	897,782	BPL bridge loans	$	1,497,589	$	897,782
BPL term loans	BPL term loans	20,564		66,567		BPL term loans	46,915		66,567
Mortgage servicing rights (including certificated MSRs)		75,284		—

Real estate securities	Real estate securities					Real estate securities
Sequoia securitizations (1)	Sequoia securitizations (1)	178,680		178,439		Sequoia securitizations (1)	—		178,439
CAFL securitizations (1)	CAFL securitizations (1)	234,196		237,068		CAFL securitizations (1)	231,473		237,068

Total Collateral for Long-Term Debt	Total Collateral for Long-Term Debt	$	1,480,062	$	1,379,856	Total Collateral for Long-Term Debt	$	1,775,977	$	1,379,856

(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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2023~~

~~(Unaudited)~~

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

The following table summarizes the accrued interest payable on long-term debt at ~~June~~September 30, 2023 and December 31, 2022.

Table 16.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Long-term debt facilities	Long-term debt facilities	$	4,569	$	3,364	Long-term debt facilities	$	5,535	$	3,364
Convertible notes	Convertible notes					Convertible notes

5.625% convertible senior notes		3,896		3,896
5.625% exchangeable senior notes						5.625% exchangeable senior notes	—		3,896
5.75% exchangeable senior notes	5.75% exchangeable senior notes	2,328		2,332		5.75% exchangeable senior notes	4,659		2,332
7.75% convertible senior notes	7.75% convertible senior notes	741		741		7.75% convertible senior notes	4,906		741
Trust preferred securities and subordinated notes	Trust preferred securities and subordinated notes	1,814		1,633		Trust preferred securities and subordinated notes	1,924		1,633
Total Accrued Interest Payable on Long-Term Debt	Total Accrued Interest Payable on Long-Term Debt	$	13,348	$	11,966	Total Accrued Interest Payable on Long-Term Debt	$	17,024	$	11,966

Recourse Subordinate Securities Financing Facilities

In ~~2019, a subsidiary~~the first quarter of Redwood entered into a repurchase agreement providing non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral) recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia securitizations (Facility A in Table 16.1 above). The financing is fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through September 2022, which increased to 5.71% from October 2022 through September 2023, and will increase to 7.21% from October 2023 through September 2024. The financing facility has a final maturity in September 2024.

In 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations (Facility B in Table 16.1 above). The financing is fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through February 2023, which increased to 5.71% from March 2023 through February 2024, and will increase to 7.21% from March 2024 through February 2025. The financing facility may be terminated at our option and has a final maturity in February 2025.

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 (Facility C in Table 16.1 above). The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024, increasing to 6.25% from July 2024 through June 2025, and to 7.75% from July 2025 to June 2026. The financing facility may be terminated at our option and has a final maturity in June 2026.

~~Recourse MSR Financing Facility~~

InDuring the ~~first quarter of~~three months ended September 30, 2023, we reclassified a ~~subsidiary of Redwood entered into a secured revolving debt~~recourse subordinate securities financing facility ~~agreement collateralized by MSRs and certificated mortgage servicing rights~~ (Facility GA in Table 16.1 ~~above). Borrowings under this facility accrue interest~~above at ~~a per annum rate equal~~December 31, 2022) to ~~one-month SOFR plus 3.25% through~~short-term debt as the maturity of ~~the~~this facility inwas less than a year at September ~~2024. This facility has an aggregate maximum borrowing capacity~~30, 2023. See Note 14 for a further description of ~~$50 million.~~

this facility.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 17. Commitments and Contingencies

Lease Commitments

At ~~June~~September 30, 2023, we were obligated under ten non-cancelable operating leases with expiration dates through 2031 for ~~$19~~$18 million of cumulative lease payments. For both the ~~six-month~~nine-month periods ended ~~June~~September 30, 2023 and 2022 our operating lease expense was ~~$3 million and $2 million, respectively.~~$4 million.

The following table presents our future lease commitments at ~~June~~September 30, 2023.

Table 17.1 – Future Lease Commitments by Year


(In Thousands)	(In Thousands)	June 30, 2023		(In Thousands)	September 30, 2023
2023 (6 months)		$	2,506
2023 (3 months)				2023 (3 months)	$	1,253
2024	2024	4,554		2024	4,554
2025	2025	3,629		2025	3,629
2026	2026	3,520		2026	3,520
2027	2027	2,588		2027	2,588
2028 and thereafter	2028 and thereafter	1,991		2028 and thereafter	1,991
Total Lease Commitments	Total Lease Commitments	18,788		Total Lease Commitments	17,535
Less: Imputed interest	Less: Imputed interest	(2,118)		Less: Imputed interest	(1,905)
Operating Lease Liabilities	Operating Lease Liabilities	$	16,670	Operating Lease Liabilities	$	15,630

During the ~~six~~nine months ended ~~June~~September 30, 2023, we entered into one new office lease. At ~~June~~September 30, 2023, our operating lease liabilities were ~~$17~~$16 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were ~~$14~~$13 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 lease commencement date. At ~~June~~September 30, 2023, the weighted-average remaining lease term and weighted-average discount rate for our leases was 54 years and 5.2%, respectively.

Commitment to Fund BPL Bridge Loans

As of ~~June~~September 30, 2023, we had commitments to fund up to ~~$755~~$623 million of additional advances on existing BPL 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 ~~June~~September 30, 2023, we carried a $1 million contingent liability related to these commitments to fund construction advances. During the three and ~~six~~nine months ended ~~June~~September 30, 2023, we recorded a net market valuation loss of $0.4 million and gain of ~~$6 thousand and loss of $3 thousand,~~$0.3 million, respectively, related to this liability through Mortgage banking activities and Investment of fair value changes, net on our consolidated statements of income.

Commitment to Fund Partnerships

In 2018, we invested in two partnerships created to acquire and manage certain mortgage servicing related assets. See Note 11 for additional detail on these investments. In connection with these investments, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 17. Commitments and Contingencies - (continued)

Commitments to Fund Strategic Investments

In the first quarter of 2022, we entered into a $25 million commitment to an investment fund with the mission of providing quality workforce housing opportunities in several California urban communities, including the San Francisco Bay Area. At ~~June~~September 30, 2023, we had funded $15 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

In 2021, we entered into a commitment to fund a $5 million RWT Horizons investment. At ~~June~~September 30, 2023, we had funded $2 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

Commitment to Fund Oaktree Joint Venture

In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. In accordance with the terms of the joint venture, we have committed to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices. Additionally, we have committed to contribute up to $50 million to the joint venture to fund the joint venture's purchase of BPL bridge loans. At September 30, 2023, we had contributed $1 million of capital to the joint venture.

Riverbend Contingent Consideration

As part of the consideration for our acquisition of Riverbend, we may make earnout payments payable in cash, based on generating specified revenues over a threshold amount during the two-year period ending July 1, 2024, up to a maximum potential amount payable of $25.3 million. These contingent earnout payments are classified as a contingent consideration liability on our consolidated balance sheets and carried at fair value. At ~~June~~September 30, 2023, our estimated fair value of this 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 ~~June~~September 30, 2023, 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 ~~June~~September 30, 2023, we had incurred less than $100 thousand of cumulative losses under these arrangements. For the three and ~~six~~nine months ended ~~June~~September 30, 2023, other income related to these arrangements was $0.2 million and ~~$0.3~~$0.5 million, respectively.

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at ~~June~~September 30, 2023, the loans had an unpaid principal balance of ~~$418~~$406 million, a weighted average FICO score of 761 (at origination), and LTV ratio of 74% (at origination). At ~~June~~September 30, 2023, $5$7 million of the loans were 90 or more days delinquent, of which ~~four~~three loans with an unpaid principal balance of $1 million were in foreclosure. At ~~June~~September 30, 2023, the carrying value of our guarantee obligation was $6 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 June~~September 30, 2023 and December 31, 2022, assets of such SPEs totaled $28 million and $30 million, respectively, and at both September 30, 2023 and December 31, 2022 liabilities of such SPEs totaled $6 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 17. Commitments and Contingencies - (continued)

Loss Contingencies — Repurchase Reserves

We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to loans we have sold. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation.

At ~~June~~September 30, 2023 and December 31, 2022, our repurchase reserve associated with our residential loans and MSRs was $5 million and $6 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. During the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, we received one and ~~three~~seven repurchase request(s), respectively, and repurchased five and ~~zero~~one loan(s), respectively. During the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, we recorded reversals of repurchase provision expenses of $1 million and $4 million, respectively, in Mortgage banking activities, net, on our consolidated statements of income.

At ~~June~~September 30, 2023 and December 31, 2022, our repurchase reserve associated with business purpose loans sold to third-parties was zero and $1 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. During the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, we received ~~three~~six and zero repurchase requests, respectively, for business purpose loans sold to third parties, and repurchased twelve and zero business purpose loans, respectively, that had been sold to third parties. The business purpose loans repurchased in the first quarter of 2023 resolved the open repurchase requests related to loans sold to third-parties that were outstanding as of December 31, 2022, for which the $1 million reserve was previously established. No ~~incremental~~ repurchase provision was recorded induring the first ~~half~~nine months of 2023 and, at ~~June~~September 30, 2023, noone open repurchase ~~requests were~~request was outstanding for business purpose loans sold to third parties.

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 17 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Loss Contingencies - Litigation, Claims and Demands.” At ~~June~~September 30, 2023, 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, 2022 were $2 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 18. Equity

The following table provides a summary of changes to Accumulated other comprehensive income (loss) by component for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

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


		Three Months Ended June 30, 2023				Three Months Ended June 30, 2022					Three Months Ended September 30, 2023				Three Months Ended September 30, 2022
(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	$	8,249	$	(71,285)	$	48,938	$	(75,412)	Balance at beginning of period	$	8,165	$	(70,256)	$	16,595	$	(74,383)
Other comprehensive loss before reclassifications	Other comprehensive loss before reclassifications	(688)		—		(33,409)		—		Other comprehensive loss before reclassifications	(3,921)		—		(8,731)		—
Amounts reclassified from other accumulated comprehensive income (loss)	Amounts reclassified from other accumulated comprehensive income (loss)	604		1,029		1,066		1,029		Amounts reclassified from other accumulated comprehensive income (loss)	234		1,040		544		1,040
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	(84)		1,029		(32,343)		1,029		Net current-period other comprehensive income (loss)	(3,687)		1,040		(8,187)		1,040
Balance at End of Period	Balance at End of Period	$	8,165	$	(70,256)	$	16,595	$	(74,383)	Balance at End of Period	$	4,478	$	(69,216)	$	8,408	$	(73,343)


		Six Months Ended June 30, 2023				Six Months Ended June 30, 2022					Nine Months Ended September 30, 2023				Nine Months Ended September 30, 2022
(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	$	3,435	$	(72,303)	$	67,503	$	(76,430)	Balance at beginning of period	$	3,435	$	(72,303)	$	67,503	$	(76,430)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	4,319		—		(51,282)		—		Other comprehensive income (loss) before reclassifications	398		—		(60,013)		—
Amounts reclassified from other accumulated comprehensive income (loss)	Amounts reclassified from other accumulated comprehensive income (loss)	411		2,047		374		2,047		Amounts reclassified from other accumulated comprehensive income (loss)	645		3,087		918		3,087
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	4,730		2,047		(50,908)		2,047		Net current-period other comprehensive income (loss)	1,043		3,087		(59,095)		3,087
Balance at End of Period	Balance at End of Period	$	8,165	$	(70,256)	$	16,595	$	(74,383)	Balance at End of Period	$	4,478	$	(69,216)	$	8,408	$	(73,343)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 18. Equity - (continued)

The following table provides a summary of reclassifications out of Accumulated other comprehensive income (loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

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


			Amount Reclassified From Accumulated Other Comprehensive (Loss)						Amount Reclassified From Accumulated Other Comprehensive (Loss)
		Affected Line Item in the	Three Months Ended June 30,					Affected Line Item in the	Three Months Ended September 30,
(In Thousands)	(In Thousands)	Income Statement	2023		2022		(In Thousands)	Income Statement	2023		2022
Net Realized Loss on AFS Securities	Net Realized Loss on AFS Securities						Net Realized Loss on AFS Securities
Increase in allowance for credit losses on AFS securities		Investment fair value changes, net	$	71	$	1,066
(Decrease) increase in allowance for credit losses on AFS securities							(Decrease) increase in allowance for credit losses on AFS securities	Investment fair value changes, net	$	(66)	$	544
Loss on sale of AFS securities	Loss on sale of AFS securities	Realized gains, net	533		—		Loss on sale of AFS securities	Realized gains, net	300		—

			$	604	$	1,066			$	234	$	544
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	$	1,029	$	1,029	Amortization of deferred loss	Interest expense	$	1,040	$	1,040
			$	1,029	$	1,029			$	1,040	$	1,040


			Amount Reclassified From Accumulated Other Comprehensive (Loss)						Amount Reclassified From Accumulated Other Comprehensive (Loss)
		Affected Line Item in the	Six Months Ended June 30,					Affected Line Item in the	Nine Months Ended September 30,
(In Thousands)	(In Thousands)	Income Statement	2023		2022		(In Thousands)	Income Statement	2023		2022
Net Realized (Gain) Loss on AFS Securities	Net Realized (Gain) Loss on AFS Securities						Net Realized (Gain) Loss on AFS Securities
Increase in allowance for credit losses on AFS securities	Increase in allowance for credit losses on AFS securities	Investment fair value changes, net	$	99	$	1,771	Increase in allowance for credit losses on AFS securities	Investment fair value changes, net	$	33	$	2,315
Loss (gain) on sale of AFS securities	Loss (gain) on sale of AFS securities	Realized gains, net	312		(1,397)		Loss (gain) on sale of AFS securities	Realized gains, net	612		(1,397)

			$	411	$	374			$	645	$	918
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	$	2,047	$	2,047	Amortization of deferred loss	Interest expense	$	3,087	$	3,087
			$	2,047	$	2,047			$	3,087	$	3,087

Issuance of Common Stock

We have an established program to sell common stock from time to time in at-the-market ("ATM") offerings. During the ~~six~~three and nine months ended ~~June~~September 30, 2023, we ~~did not issue any~~issued 4,243,982 shares of common ~~shares~~stock for proceeds of $33 million under this program. At ~~June~~September 30, 2023, the share issuance capacity under this program was ~~$175~~$141 million.

Issuance of Preferred Stock

In January 2023, Redwood issued 2,800,000 shares of 10.00% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") for gross proceeds of $70 million and net proceeds of approximately $67 million after deducting the underwriting discount and other estimated expenses. The Series A Preferred Stock will pay quarterly cumulative cash dividends beginning April 15, 2023 to January 15, 2028 at a fixed annual rate of 10%, based on the stated liquidation preference of $25.00 per share, in arrears, when authorized by Redwood's Board of Directors and declared by the Company. Starting April 15, 2028, the annual dividend rate will reset to the five-year U.S. Treasury Rate plus a spread of 6.278%. The Series A Preferred Stock ranks senior to Redwood's common stock with respect to rights to the payment of dividends and the distribution of assets upon any liquidation,

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 18. Equity - (continued)

dissolution or winding up of the Company. During the three and ~~six~~nine months ended ~~June~~September 30, 2023, the Company declared preferred stock dividends of $0.625 and ~~$1.22917~~$1.85417 per share, respectively. At ~~June~~September 30, 2023, preferred dividends payable totaling $1 million for the ~~second~~third quarter 2023 dividend were included in Accrued expenses and other liabilities and were payable on ~~July 17,~~October 16, 2023 to stockholders of record on ~~June~~September 30, 2023.

Direct Stock Purchase and Dividend Reinvestment Plan

During the ~~six~~nine months ended ~~June~~September 30, 2023, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At ~~June~~September 30, 2023, approximately 6 million shares remained outstanding for future offerings under this plan.

Earnings per Common Share

The following table provides the basic and diluted earnings per common share computations for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, except Share Data)	(In Thousands, except Share Data)	2023		2022		2023		2022		(In Thousands, except Share Data)	2023		2022		2023		2022
Basic Earnings per Common Share:
Net income available to common stockholders		$	1,115	$	(99,966)	$	4,316	$	(69,051)
Basic Loss per Common Share:										Basic Loss per Common Share:
Net loss related to common stockholders										Net loss related to common stockholders	$	(32,560)	$	(50,411)	$	(28,244)	$	(119,462)
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(876)		(1,159)		(2,280)		(2,286)		Less: Dividends and undistributed earnings allocated to participating securities	(792)		(1,158)		(3,072)		(3,445)
Net income allocated to common stockholders		$	239	$	(101,125)	$	2,036	$	(71,337)
Net loss related to to common stockholders										Net loss related to to common stockholders	$	(33,352)	$	(51,569)	$	(31,316)	$	(122,907)
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	114,051,017		119,660,173		113,830,347		119,771,554		Basic weighted average common shares outstanding	115,465,977		116,087,890		114,381,548		118,530,172
Basic Earnings per Common Share		$	—	$	(0.85)	$	0.02	$	(0.60)
Diluted Earnings per Common Share:
Net income available to common stockholders		$	1,115	$	(99,966)	$	4,316	$	(69,051)
Basic Loss per Common Share										Basic Loss per Common Share	$	(0.29)	$	(0.44)	$	(0.27)	$	(1.04)
Diluted Loss per Common Share:										Diluted Loss per Common Share:
Net loss related to common stockholders										Net loss related to common stockholders	$	(32,560)	$	(50,411)	$	(28,244)	$	(119,462)
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(876)		(1,159)		(2,280)		(2,286)		Less: Dividends and undistributed earnings allocated to participating securities	(792)		(1,158)		(3,072)		(3,445)
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	—		—		—		—		Add back: Interest expense on convertible notes for the period, net of tax	—		—		—		—
Net income allocated to common stockholders		$	239	$	(101,125)	$	2,036	$	(71,337)
Net loss related to common stockholders										Net loss related to common stockholders	$	(33,352)	$	(51,569)	$	(31,316)	$	(122,907)
Weighted average common shares outstanding	Weighted average common shares outstanding	114,051,017		119,660,173		113,830,347		119,771,554		Weighted average common shares outstanding	115,465,977		116,087,890		114,381,548		118,530,172
Net effect of dilutive equity awards	Net effect of dilutive equity awards	394,245		—		424,945		—		Net effect of dilutive equity awards	—		—		—		—
Net effect of assumed convertible notes conversion to common shares	Net effect of assumed convertible notes conversion to common shares	—		—		—		—		Net effect of assumed convertible notes conversion to common shares	—		—		—		—
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	114,445,262		119,660,173		114,255,292		119,771,554		Diluted weighted average common shares outstanding	115,465,977		116,087,890		114,381,548		118,530,172
Diluted Earnings per Common Share		$	—	$	(0.85)	$	0.02	$	(0.60)
Diluted Loss per Common Share										Diluted Loss per Common Share	$	(0.29)	$	(0.44)	$	(0.27)	$	(1.04)

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 ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, none of our convertible notes were determined to be dilutive and were not 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)~~converted) are included in the denominator.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 18. Equity - (continued)

For the three and ~~six~~nine months ended ~~June~~September 30, 2023, ~~44,712,499~~40,763,478 and ~~45,509,857~~43,910,345 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 ~~six~~nine months ended ~~June~~September 30, 2022, ~~33,992,377~~49,137,808 and ~~31,294,614~~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 ~~six~~nine months ended ~~June~~September 30, 2023, the number of outstanding equity awards that were antidilutive totaled ~~27,408~~24,539 and ~~55,882,~~81,267, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2022, the number of outstanding equity awards that were antidilutive totaled ~~249,224~~249,178 and ~~278,604,~~268,737, respectively.

Stock Repurchases

In July 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. This authorization has no expiration date and does not obligate us to acquire any specific number of shares or securities. During the three months ended ~~June~~September 30, 2023, we did not repurchase any shares of our common stock under this program. At ~~June~~September 30, 2023, $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.

Note 19. Equity Compensation Plans

During the ~~three months ended June 30,~~second quarter of 2023, Redwood shareholders approved an additional 9,650,000 shares of common stock for grant under our Incentive Plan. At ~~June~~September 30, 2023 and December 31, 2022, ~~12,202,334~~12,268,074 and 2,896,604 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 ~~$36~~$30 million at ~~June~~September 30, 2023, as shown in the following table.

Table 19.1 – Activities of Equity Compensation Costs by Award Type


		Six Months Ended June 30, 2023											Nine Months Ended September 30, 2023
(In Thousands)	(In Thousands)	Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total		(In Thousands)	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	$	5,068	$	19,849	$	15,271	$	—	$	40,188	Unrecognized compensation cost at beginning of period	$	5,068	$	19,849	$	15,271	$	—	$	40,188
Equity grants	Equity grants	1,992		6,825		—		422		9,239		Equity grants	2,092		6,865		—		422		9,379
Performance-based valuation adjustment	Performance-based valuation adjustment	—		—		(1,719)		—		(1,719)		Performance-based valuation adjustment	—		—		(3,205)		—		(3,205)
Equity grant forfeitures	Equity grant forfeitures	(288)		(519)		—		—		(807)		Equity grant forfeitures	(1,088)		(719)		—		—		(1,807)
Equity compensation expense	Equity compensation expense	(2,100)		(6,554)		(2,394)		(212)		(11,260)		Equity compensation expense	(2,411)		(8,911)		(2,895)		(318)		(14,535)
Unrecognized Compensation Cost at End of Period	Unrecognized Compensation Cost at End of Period	$	4,672	$	19,601	$	11,158	$	210	$	35,641	Unrecognized Compensation Cost at End of Period	$	3,661	$	17,084	$	9,171	$	104	$	30,020

At ~~June~~September 30, 2023, the weighted average amortization period remaining for all of our equity awards was less than two years.

Restricted Stock Units ("RSUs")

At ~~June~~September 30, 2023 and December 31, 2022, there were ~~677,297~~585,284 and 806,119 RSUs outstanding, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2023, there were ~~250,852~~263,590 RSUs granted, ~~351,099~~354,813 RSUs distributed, and ~~28,575~~129,612 RSUs forfeited. Unvested RSUs at ~~June~~September 30, 2023 vest through 2027.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 19. Equity Compensation Plans - (continued)

Deferred Stock Units (“DSUs”)

At ~~June~~September 30, 2023 and December 31, 2022, there were ~~4,999,106~~4,896,376 and 4,831,338 DSUs outstanding, respectively, of which ~~2,640,535~~2,700,517 and 2,495,787, respectively, had vested. During the ~~six~~nine months ended ~~June~~September 30, 2023, there were ~~912,128~~936,206 DSUs granted, ~~726,392~~821,046 DSUs distributed, and ~~17,968~~50,122 DSUs forfeited. Unvested DSUs at ~~June~~September 30, 2023 vest through 2027.

Performance Stock Units (“PSUs”)

At ~~June~~September 30, 2023 and December 31, 2022, the target number of PSUs that were unvested was 2,078,171 and 2,354,002, respectively. Vesting for PSUs generally occurs three years from their respective grant dates based on various total shareholder return performance calculations, as discussed in Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

For 275,831 target PSU awards that were granted in December 2019, the performance vesting period ended on January 1, 2023. These 2019 PSU awards failed to reach a threshold level under their performance-based vesting criteria and resulted in the vesting of no shares of our common stock underlying these PSUs. During the ~~three~~nine months ended ~~June~~September 30, 2023, for PSUs granted in 2021 and 2020, we adjusted the cumulative expected amortization expense down by $2$3 million to reflect our revised vesting estimate regarding the vesting of these awards in relation to the book value TSR performance condition for the second-year vesting tranche of the 2021 PSU grant and the third-year vesting tranche of the 2020 PSU grant.

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 ~~June~~September 30, 2023 and December 31, 2022, ~~713,659~~739,404 and 657,777 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at ~~June~~September 30, 2023.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 20. Mortgage Banking Activities, Net

The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 20.1 – Mortgage Banking Activities


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
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)	$	1,335	$	(33,414)	$	8,090	$	(102,236)	Residential loans, at fair value (1)	$	(2,819)	$	(22,776)	$	5,272	$	(125,012)
Trading securities (2)	Trading securities (2)	1,923		1,315		1,923		4,101		Trading securities (2)	(482)		148		2,188		4,249
Risk management derivatives (3)	Risk management derivatives (3)	2,469		9,900		(902)		83,254		Risk management derivatives (3)	12,158		24,319		10,508		107,573
Other income, net (4)	Other income, net (4)	1,334		4,412		1,315		5,029		Other income, net (4)	107		467		1,422		5,496
Total residential mortgage banking activities, net	Total residential mortgage banking activities, net	7,061		(17,787)		10,426		(9,852)		Total residential mortgage banking activities, net	8,964		2,158		19,390		(7,694)

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:
BPL term loans, at fair value (1)	BPL term loans, at fair value (1)	(1,132)		(39,994)		11,534		(65,187)		BPL term loans, at fair value (1)	1,600		(19,306)		13,214		(84,493)
BPL bridge loans, at fair value	BPL bridge loans, at fair value	2,297		116		3,450		2,251		BPL bridge loans, at fair value	1,438		(9)		4,808		2,242
Risk management derivatives (3)	Risk management derivatives (3)	2,957		15,487		(2,139)		32,520		Risk management derivatives (3)	3,434		24,044		1,295		56,564
Other income, net (5)	Other income, net (5)	5,369		12,161		9,952		26,566		Other income, net (5)	4,004		9,648		13,956		36,214
Total business purpose mortgage banking activities, net	Total business purpose mortgage banking activities, net	9,491		(12,230)		22,797		(3,850)		Total business purpose mortgage banking activities, net	10,476		14,377		33,273		10,527
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net	$	16,552	$	(30,017)	$	33,223	$	(13,702)	Mortgage Banking Activities, Net	$	19,440	$	16,535	$	52,663	$	2,833

(1)For residential loans, includes changes in fair value for associated loan purchase commitments. For BPL term loans, includes changes in fair value for associated interest rate lock commitments.

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

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 21. Other Income, Net

The following table presents the components of Other income recorded in our consolidated statements of income for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 21.1 – Other Income, Net


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
MSR income, net (1)	MSR income, net (1)	$	3,349	$	5,376	$	4,426	$	9,679	MSR income, net (1)	$	1,747	$	2,890	$	6,173	$	12,569
Bridge loan fees(2)	Bridge loan fees(2)	1,160		1,473		2,752		2,463		Bridge loan fees(2)	1,895		1,489		6,757		3,952
Other(3)	Other(3)	(351)		157		1,536		847		Other(3)	(1,296)		(352)		(1,870)		495
Other Income, Net	Other Income, Net	$	4,158	$	7,006	$	8,714	$	12,989	Other Income, Net	$	2,346	$	4,027	$	11,060	$	17,016

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

(2)Includes asset management fees, extension fees, default interest and other fees.

(3)Includes earnings (losses) from equity method investments.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 22. Components of Operating Expenses

Components of our general and administrative expenses, loan acquisition costs, and other expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 are presented in the following table.

Table 22.1 – Components of Operating Expenses


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		2023		2022		(In Thousands)	2023		2022		2023		2022
General and Administrative Expenses	General and Administrative Expenses									General and Administrative Expenses
Fixed compensation expense (1)	Fixed compensation expense (1)	$	12,786	$	12,110	$	28,145	$	26,738	Fixed compensation expense (1)	$	12,579	$	18,626	$	40,724	$	45,364
Annual variable compensation expense	Annual variable compensation expense	3,187		1,811		7,192		5,168		Annual variable compensation expense	3,383		3,521		10,575		8,689
Long-term incentive award expense (1) (2)	Long-term incentive award expense (1) (2)	6,237		5,532		14,179		11,192		Long-term incentive award expense (1) (2)	5,013		4,998		19,192		16,190
Systems and consulting	Systems and consulting	2,854		3,703		5,966		6,887		Systems and consulting	3,108		3,909		9,074		10,796
Office costs	Office costs	2,289		2,083		4,329		4,108		Office costs	2,131		2,381		6,460		6,489
Accounting and legal	Accounting and legal	1,176		1,576		2,095		3,251		Accounting and legal	1,307		1,775		3,402		5,026
Corporate costs	Corporate costs	957		1,000		1,886		1,864		Corporate costs	959		928		2,845		2,792
Other	Other	1,319		2,384		2,568		4,267		Other	1,217		2,106		3,785		6,373
Total General and Administrative Expenses	Total General and Administrative Expenses	30,805		30,199		66,360		63,475		Total General and Administrative Expenses	29,697		38,244		96,057		101,719

Portfolio Management Costs	Portfolio Management Costs	3,100		1,767		6,610		3,345		Portfolio Management Costs	3,661		1,863		10,271		5,208

Loan Acquisition Costs	Loan Acquisition Costs	1,444		3,480		2,733		7,945		Loan Acquisition Costs	1,880		2,426		4,613		10,371

Other Expenses	Other Expenses									Other Expenses

Amortization of purchase-related intangible assets	Amortization of purchase-related intangible assets	3,107		3,306		6,214		6,840		Amortization of purchase-related intangible assets	3,107		3,891		9,321		10,731

Other	Other	1,868		162		2,445		713		Other	1,526		370		3,971		1,083
Total Other Expenses	Total Other Expenses	4,975		3,468		8,659		7,553		Total Other Expenses	4,633		4,261		13,292		11,814
Total Operating Expenses	Total Operating Expenses	$	40,324	$	38,914	$	84,362	$	82,318	Total Operating Expenses	$	39,871	$	46,794	$	124,233	$	129,112

(1)Includes ~~$1 million and~~ $2 million of severance and transition-related expenses for the ~~three and six~~nine months ended ~~June~~September 30, ~~2023, respectively.~~2023.

(2)For the three months ended ~~June~~September 30, 2023 and 2022, long-term incentive award expense included $4$3 million and $5 million of expense, respectively, for awards settleable in shares of our common stock, and $1$2 million and ~~$0.4~~$0.1 million of expense, respectively, for awards settleable in cash. For ~~both~~ the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, long-term incentive award expense included ~~$10~~$14 million and $15 million, respectively, of expense for awards settleable in shares of our common stock, and $3$5 million and $1 million of expense, respectively, for awards settleable in cash.

Long-Term Cash-Based Awards

During the ~~six~~three and nine months ended ~~June~~September 30, 2023, there were no$1 million of long-term cash-based retention awards granted to employees. Cash-based retention awards were granted to certain executive and non-executive employees inbetween 2020 ~~2021~~ and ~~2022~~2023 that ~~each~~ vest overone- to three-year periods, and are subject to continued employment through the vesting periods through 2025. At ~~June~~September 30, 2023, the liability associated with these awards was $3$1 million and the unamortized compensation cost of long-term cash-based awards was $1$2 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 22. Components of Operating Expenses - (continued)

Cash Settled Deferred Stock Units

During the ~~six~~nine months ended ~~June~~September 30, 2023, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020, 2021 and 2022, ~~and~~ each vest over four-year periods and are subject to continued employment through the vesting periods through 2026. At ~~June~~September 30, 2023, the liability associated with these awards was $2$3 million, and the unamortized compensation cost was $4 million. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of our common stock at the end of each reporting period.

Refer to Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

Cash Settled Performance Stock Units

During the ~~six~~nine months ended ~~June~~September 30, 2023, $6 million of cash-settled performance stock units ("csPSUs") were granted to certain executive and non-executive employees which vest over approximately three years through January 1, 2026. The target number of csPSUs that were granted totaled 663,499 units based on a per unit grant-date fair value of $9.75. The equivalent number of underlying shares of common stock that vest and that the recipient becomes entitled to receive at the time of vesting will generally range from 0% to 250% of the target number of csPSUs granted, with the target number of csPSUs granted being adjusted to reflect the value of any dividends declared on our common stock during the vesting period. Upon vesting, the recipient will receive the settlement of the vested shares in cash based on the closing market price of our common stock on the final vesting date. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of the csPSUs at the end of each reporting period. At ~~June~~September 30, 2023, the liability associated with these awards was $1 million, and unamortized compensation cost of the csPSUs was $5 million.

The grant date fair value of these csPSUs of $9.75 per unit was determined through Monte-Carlo simulations using the following assumptions: the common stock closing price at the grant date for Redwood and each member of the comparator group, the average closing price of the common stock price for the 60 trading days beginning January 1, 2023 for Redwood and each member of the comparator group, and the range of performance-based vesting based on absolute TSR over three years from the grant date. For this csPSU grant, an implied volatility assumption of 71% (based on historical volatility), a risk-free rate of 4.23% (the three-year Treasury rate on the grant date), and a 0% dividend yield (the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs) were used.

With respect to the csPSU awards granted during the ~~six~~nine months ended ~~June~~September 30, 2023:

•First, vesting would range from 0% - 250% of two-thirds of the Target csPSUs granted based on the level of book value total shareholder return ("bvTSR") attained over the three-year vesting period, with 100% of this two-thirds of the Target csPSUs vesting if three-year bvTSR is 25%. bvTSR is defined as the percentage by which our book value "per share price" has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.

•Second, vesting would range from 0% - 250% of one-third of the Target csPSUs granted based on Redwood’s relative total shareholder return (“rTSR”) against a comparator group of companies measured over the three-year vesting period, with 100% of this one-third of the Target csPSUs vesting if three-year rTSR corresponds to 55th percentile rTSR.

•Third, if the aggregate vesting level after steps one and two is greater than 100% of the Target csPSUs, but the Company's absolute total shareholder return ("TSR") is negative over the three-year performance period, vesting would be capped at 100% of Target csPSUs. TSR is defined as the percentage by which our common stock “per share price” has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 23. Taxes

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

For the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, we recognized a ~~benefit from~~provision for income taxes of $1 million and ~~$12~~a benefit from income taxes of $10 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at ~~June~~September 30, 2023 and 2022.

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


		June 30, 2023		June 30, 2022			September 30, 2023		September 30, 2022
Federal statutory rate	Federal statutory rate	21.0	%	21.0	%	Federal statutory rate	21.0	%	21.0	%
State taxes, net of Federal tax effect, as applicable	State taxes, net of Federal tax effect, as applicable	(0.2)	%	0.6	%	State taxes, net of Federal tax effect, as applicable	(1.0)	%	0.5	%
Differences in taxable (loss) income from GAAP income	Differences in taxable (loss) income from GAAP income	(4.9)	%	1.5	%	Differences in taxable (loss) income from GAAP income	(0.6)	%	—	%
Change in valuation allowance	Change in valuation allowance	—	%	—	%	Change in valuation allowance	—	%	—	%
REIT GAAP income or loss not subject to federal income tax	REIT GAAP income or loss not subject to federal income tax	(32.3)	%	(8.4)	%	REIT GAAP income or loss not subject to federal income tax	(22.2)	%	(13.4)	%
Effective Tax Rate	Effective Tax Rate	(16.4)	%	14.7	%	Effective Tax Rate	(2.8)	%	8.1	%

We assessed our tax positions for all open tax years (i.e., Federal, 2019 to ~~2022,~~2023, and State, 2018 to ~~2022)~~2023) at ~~June~~September 30, 2023 and December 31, 2022, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 24. Segment Information

Redwood operates in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and 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, 2022.

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 three 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.

The following tables present financial information by segment for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 24.1 – Business Segment Financial Information


		Three Months Ended June 30, 2023											Three Months Ended September 30, 2023
(In Thousands)	(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total		(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	Interest income	$	2,434	$	4,397	$	166,603	$	5,547	$	178,981	Interest income	$	6,063	$	4,618	$	162,251	$	4,142	$	177,074
Interest expense	Interest expense	(1,700)		(3,673)		(129,855)		(17,657)		(152,885)		Interest expense	(4,826)		(3,888)		(131,303)		(16,706)		(156,723)
Net interest income (expense)	Net interest income (expense)	734		724		36,748		(12,110)		26,096		Net interest income (expense)	1,237		730		30,948		(12,564)		20,351
Non-interest income (loss)	Non-interest income (loss)											Non-interest income (loss)
Mortgage banking activities, net	Mortgage banking activities, net	7,061		9,491		—		—		16,552		Mortgage banking activities, net	8,964		10,476		—		—		19,440
Investment fair value changes, net	Investment fair value changes, net	—		—		(1,837)		(2,759)		(4,596)		Investment fair value changes, net	—		—		(31,315)		(115)		(31,430)
Other income, net	Other income, net	—		1,076		4,013		(931)		4,158		Other income, net	—		1,278		2,622		(1,554)		2,346
Realized gains, net	Realized gains, net	—		—		949		107		1,056		Realized gains, net	—		—		26		24		50
Total non-interest income (loss), net	Total non-interest income (loss), net	7,061		10,567		3,125		(3,583)		17,170		Total non-interest income (loss), net	8,964		11,754		(28,667)		(1,645)		(9,594)
General and administrative expenses	General and administrative expenses	(3,738)		(11,638)		(1,241)		(14,188)		(30,805)		General and administrative expenses	(4,521)		(9,402)		(1,340)		(14,434)		(29,697)
Portfolio management costs	Portfolio management costs	—		—		(3,087)		(13)		(3,100)		Portfolio management costs	—		—		(3,636)		(25)		(3,661)
Loan acquisition costs	Loan acquisition costs	(149)		(1,295)		—		—		(1,444)		Loan acquisition costs	(395)		(1,485)		—		—		(1,880)
Other expenses	Other expenses	—		(3,107)		(1,868)		—		(4,975)		Other expenses	—		(3,108)		(1,525)		—		(4,633)
(Provision for) Benefit from income taxes	(Provision for) Benefit from income taxes	(707)		1,406		(1,465)		697		(69)		(Provision for) Benefit from income taxes	(813)		318		(1,457)		256		(1,696)
Segment Contribution	Segment Contribution	$	3,201	$	(3,343)	$	32,212	$	(29,197)			Segment Contribution	$	4,472	$	(1,193)	$	(5,677)	$	(28,412)
Net income										$	2,873
Net (Loss)												Net (Loss)									$	(30,810)
Non-cash amortization (expense), net	Non-cash amortization (expense), net	$	(292)	$	(3,333)	$	(1,857)	$	(2,086)	$	(7,568)	Non-cash amortization (expense), net	$	(266)	$	(3,294)	$	(1,687)	$	(2,099)	$	(7,346)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 24. Segment Information - (continued)


		Six Months Ended June 30, 2023											Nine Months Ended September 30, 2023
(In Thousands)	(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total		(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	Interest income	$	7,944	$	8,891	$	330,263	$	10,399	$	357,497	Interest income	$	14,007	$	13,509	$	492,514	$	14,541	$	534,571
Interest expense	Interest expense	(8,566)		(7,711)		(253,307)		(35,380)		(304,964)		Interest expense	(13,392)		(11,599)		(384,610)		(52,086)		(461,687)
Net interest income (expense)	Net interest income (expense)	(622)		1,180		76,956		(24,981)		52,533		Net interest income (expense)	615		1,910		107,904		(37,545)		72,884
Non-interest income (loss)	Non-interest income (loss)											Non-interest income (loss)
Mortgage banking activities, net	Mortgage banking activities, net	10,426		22,797		—		—		33,223		Mortgage banking activities, net	19,390		33,273		—		—		52,663
Investment fair value changes, net	Investment fair value changes, net	1,076		—		(2,851)		(2,948)		(4,723)		Investment fair value changes, net	1,076		—		(34,166)		(3,063)		(36,153)
Other income, net	Other income, net	—		3,484		6,181		(951)		8,714		Other income, net	—		4,762		8,803		(2,505)		11,060
Realized gains, net	Realized gains, net	—		—		832		222		1,054		Realized gains, net	—		—		858		246		1,104
Total non-interest income (loss), net	Total non-interest income (loss), net	11,502		26,281		4,162		(3,677)		38,268		Total non-interest income (loss), net	20,466		38,035		(24,505)		(5,322)		28,674
General and administrative expenses	General and administrative expenses	(8,544)		(25,316)		(2,650)		(29,850)		(66,360)		General and administrative expenses	(13,065)		(34,718)		(3,990)		(44,284)		(96,057)
Portfolio management costs	Portfolio management costs	—		—		(6,597)		(13)		(6,610)		Portfolio management costs	—		—		(10,233)		(38)		(10,271)
Loan acquisition costs	Loan acquisition costs	(324)		(2,409)		—		—		(2,733)		Loan acquisition costs	(719)		(3,894)		—		—		(4,613)
Other expenses	Other expenses	—		(6,215)		(2,444)		—		(8,659)		Other expenses	—		(9,323)		(3,969)		—		(13,292)
(Provision for) Benefit from income taxes	(Provision for) Benefit from income taxes	(74)		2,109		(1,678)		697		1,054		(Provision for) Benefit from income taxes	(887)		2,427		(3,135)		953		(642)
Segment Contribution	Segment Contribution	$	1,938	$	(4,370)	$	67,749	$	(57,824)			Segment Contribution	$	6,410	$	(5,563)	$	62,072	$	(86,236)
Net Income										$	7,493
Net (Loss)												Net (Loss)									$	(23,317)
Non-cash amortization (expense), net	Non-cash amortization (expense), net	$	(547)	$	(7,035)	$	(4,690)	$	(4,193)	$	(16,465)	Non-cash amortization (expense), net	$	(813)	$	(10,291)	$	(6,167)	$	(6,292)	$	(23,563)


		Three Months Ended June 30, 2022											Three Months Ended September 30, 2022
(In Thousands)	(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total		(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	Interest income	$	13,199	$	8,586	$	144,478	$	1,192	$	167,455	Interest income	$	9,882	$	9,082	$	156,882	$	1,816	$	177,662
Interest expense	Interest expense	(8,297)		(4,258)		(102,589)		(11,823)		(126,967)		Interest expense	(8,083)		(5,971)		(111,876)		(16,797)		(142,727)
Net interest income (expense)	Net interest income (expense)	4,902		4,328		41,889		(10,631)		40,488		Net interest income (expense)	1,799		3,111		45,006		(14,981)		34,935
Non-interest income (loss)	Non-interest income (loss)											Non-interest income (loss)
Mortgage banking activities, net	Mortgage banking activities, net	(17,787)		(12,230)		—		—		(30,017)		Mortgage banking activities, net	2,158		14,377		—		—		16,535
Investment fair value changes, net	Investment fair value changes, net	—		—		(98,111)		10,139		(87,972)		Investment fair value changes, net	—		—		(61,780)		4,083		(57,697)
Other income, net	Other income, net	—		1,054		6,235		(283)		7,006		Other income, net	—		399		3,906		(278)		4,027
Realized gains, net	Realized gains, net	—		—		—		—		—		Realized gains, net	—		—		—		—		—
Total non-interest income (loss), net	Total non-interest income (loss), net	(17,787)		(11,176)		(91,876)		9,856		(110,983)		Total non-interest income (loss), net	2,158		14,776		(57,874)		3,805		(37,135)
General and administrative expenses	General and administrative expenses	(6,082)		(11,069)		(1,274)		(11,774)		(30,199)		General and administrative expenses	(5,735)		(18,535)		(1,639)		(12,335)		(38,244)
Portfolio management costs	Portfolio management costs	—		—		(1,767)		—		(1,767)		Portfolio management costs	—		—		(1,863)		—		(1,863)
Loan acquisition costs	Loan acquisition costs	(881)		(2,599)		—		—		(3,480)		Loan acquisition costs	(550)		(1,876)		—		—		(2,426)
Other expenses	Other expenses	74		(3,306)		(236)		—		(3,468)		Other expenses	—		(3,891)		(370)		—		(4,261)
Benefit from income taxes	Benefit from income taxes	5,588		3,169		686		—		9,443		Benefit from income taxes	1,688		2,559		(5,664)		—		(1,417)
Segment Contribution	Segment Contribution	$	(14,186)	$	(20,653)	$	(52,578)	$	(12,549)			Segment Contribution	$	(640)	$	(3,856)	$	(22,404)	$	(23,511)
Net (Loss)	Net (Loss)									$	(99,966)	Net (Loss)									$	(50,411)
Non-cash amortization (expense), net	Non-cash amortization (expense), net	$	(760)	$	(3,480)	$	(1,450)	$	(2,137)	$	(7,827)	Non-cash amortization (expense), net	$	(185)	$	(3,609)	$	(3,658)	$	(2,843)	$	(10,295)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 24. Segment Information - (continued)


		Six Months Ended June 30, 2022											Nine Months Ended September 30, 2022
(In Thousands)	(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total		(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	Interest income	$	26,166	$	13,427	$	315,050	$	2,212	$	356,855	Interest income	$	36,048	$	22,509	$	471,932	$	4,028	$	534,517
Interest expense	Interest expense	(15,233)		(6,826)		(219,171)		(22,035)		(263,265)		Interest expense	(23,316)		(12,797)		(331,047)		(38,832)		(405,992)
Net interest income (expense)	Net interest income (expense)	10,933		6,601		95,879		(19,823)		93,590		Net interest income (expense)	12,732		9,712		140,885		(34,804)		128,525
Non-interest income (loss)	Non-interest income (loss)											Non-interest income (loss)
Mortgage banking activities, net	Mortgage banking activities, net	(9,852)		(3,850)		—		—		(13,702)		Mortgage banking activities, net	(7,694)		10,527		—		—		2,833
Investment fair value changes, net	Investment fair value changes, net	—		—		(103,517)		9,425		(94,092)		Investment fair value changes, net	—		—		(165,297)		13,508		(151,789)
Other income, net	Other income, net	—		1,629		11,517		(157)		12,989		Other income, net	—		2,028		15,423		(435)		17,016
Realized gains, net	Realized gains, net	—		—		2,581		—		2,581		Realized gains, net	—		—		2,581		—		2,581
Total non-interest income (loss), net	Total non-interest income (loss), net	(9,852)		(2,221)		(89,419)		9,268		(92,224)		Total non-interest income (loss), net	(7,694)		12,555		(147,293)		13,073		(129,359)
General and administrative expenses	General and administrative expenses	(12,183)		(21,541)		(2,829)		(26,922)		(63,475)		General and administrative expenses	(17,918)		(40,076)		(4,468)		(39,257)		(101,719)
Portfolio management costs	Portfolio management costs	—		—		(3,345)		—		(3,345)		Portfolio management costs	—		—		(5,208)		—		(5,208)
Loan acquisition costs	Loan acquisition costs	(2,298)		(5,647)		—		—		(7,945)		Loan acquisition costs	(2,848)		(7,523)		—		—		(10,371)
Other expenses	Other expenses	74		(6,840)		(787)		—		(7,553)		Other expenses	74		(10,731)		(1,157)		—		(11,814)
Benefit from (provision for) income taxes	Benefit from (provision for) income taxes	6,595		6,450		(1,144)		—		11,901		Benefit from (provision for) income taxes	8,283		9,009		(6,808)		—		10,484
Segment Contribution	Segment Contribution	$	(6,731)	$	(23,198)	$	(1,645)	$	(37,477)			Segment Contribution	$	(7,371)	$	(27,054)	$	(24,049)	$	(60,988)
Net (Loss)	Net (Loss)									$	(69,051)	Net (Loss)									$	(119,462)
Non-cash amortization (expense), net	Non-cash amortization (expense), net	$	(298)	$	(7,370)	$	(9,644)	$	(4,170)	$	(21,482)	Non-cash amortization (expense), net	$	(699)	$	(11,563)	$	4,385	$	(6,428)	$	(14,305)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2023

(Unaudited)

Note 24. Segment Information - (continued)

The following table presents the components of Corporate/Other for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 24.2 – Components of Corporate/Other


		Three Months Ended June 30,													Three Months Ended September 30,
		2023						2022							2023						2022
(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	$	2,740	$	2,807	$	5,547	$	1,108	$	84	$	1,192	Interest income	$	2,596	$	1,546	$	4,142	$	1,473	$	343	$	1,816
Interest expense	Interest expense	(2,659)		(14,998)		(17,657)		(967)		(10,856)		(11,823)		Interest expense	(2,487)		(14,219)		(16,706)		(1,486)		(15,311)		(16,797)
Net interest income (expense)	Net interest income (expense)	81		(12,191)		(12,110)		141		(10,772)		(10,631)		Net interest income (expense)	109		(12,673)		(12,564)		(13)		(14,968)		(14,981)
Non-interest income (loss)	Non-interest income (loss)													Non-interest income (loss)

Investment fair value changes, net	Investment fair value changes, net	(10)		(2,749)		(2,759)		(336)		10,475		10,139		Investment fair value changes, net	(215)		100		(115)		(329)		4,412		4,083
Other income, net	Other income, net	—		(931)		(931)		—		(283)		(283)		Other income, net	—		(1,554)		(1,554)		—		(278)		(278)
Realized gains, net	Realized gains, net	—		107		107		—		—		—		Realized gains, net	—		24		24		—		—		—
Total non-interest income (loss), net	Total non-interest income (loss), net	(10)		(3,573)		(3,583)		(336)		10,192		9,856		Total non-interest income (loss), net	(215)		(1,430)		(1,645)		(329)		4,134		3,805
General and administrative expenses	General and administrative expenses	—		(14,188)		(14,188)		—		(11,774)		(11,774)		General and administrative expenses	—		(14,434)		(14,434)		—		(12,335)		(12,335)
Portfolio management costs	Portfolio management costs	—		(13)		(13)		—		—		—		Portfolio management costs	—		(25)		(25)		—		—		—

Benefit from income taxes	Benefit from income taxes	—		697		697		—		—		—		Benefit from income taxes	—		256		256		—		—		—

Total	Total	$	71	$	(29,268)	$	(29,197)	$	(195)	$	(12,354)	$	(12,549)	Total	$	(106)	$	(28,306)	$	(28,412)	$	(342)	$	(23,169)	$	(23,511)


		Six Months Ended June 30,													Nine Months Ended September 30,
		2023						2022							2023						2022
(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	$	5,283	$	5,116	$	10,399	$	2,120	$	92	$	2,212	Interest income	$	7,879	$	6,662	$	14,541	$	3,593	$	435	$	4,028
Interest expense	Interest expense	(5,163)		(30,217)		(35,380)		(1,668)		(20,367)		(22,035)		Interest expense	(7,650)		(44,436)		(52,086)		(3,154)		(35,678)		(38,832)
Net interest income (expense)	Net interest income (expense)	120		(25,101)		(24,981)		452		(20,275)		(19,823)		Net interest income (expense)	229		(37,774)		(37,545)		439		(35,243)		(34,804)
Non-interest income (loss)	Non-interest income (loss)													Non-interest income (loss)

Investment fair value changes, net	Investment fair value changes, net	(104)		(2,844)		(2,948)		(1,050)		10,475		9,425		Investment fair value changes, net	(319)		(2,744)		(3,063)		(1,379)		14,887		13,508
Other income, net	Other income, net	—		(951)		(951)		—		(157)		(157)		Other income, net	—		(2,505)		(2,505)		—		(435)		(435)
Realized gains, net	Realized gains, net	—		222		222		—		—		—		Realized gains, net	—		246		246		—		—		—
Total non-interest income, net	Total non-interest income, net	(104)		(3,573)		(3,677)		(1,050)		10,318		9,268		Total non-interest income, net	(319)		(5,003)		(5,322)		(1,379)		14,452		13,073
General and administrative expenses	General and administrative expenses	—		(29,850)		(29,850)		—		(26,922)		(26,922)		General and administrative expenses	—		(44,284)		(44,284)		—		(39,257)		(39,257)
Portfolio management costs	Portfolio management costs	—		(13)		(13)		—		—		—		Portfolio management costs	—		(38)		(38)		—		—		—
Benefit from income taxes	Benefit from income taxes	—		697		697		—		—		—		Benefit from income taxes	—		953		953		—		—		—
Total	Total	$	16	$	(57,840)	$	(57,824)	$	(598)	$	(36,879)	$	(37,477)	Total	$	(90)	$	(86,146)	$	(86,236)	$	(940)	$	(60,048)	$	(60,988)

(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

~~June~~September 30, 2023

(Unaudited)

Note 24. Segment Information - (continued)

The following table presents supplemental information by segment at ~~June~~September 30, 2023 and December 31, 2022.

Table 24.3 – Supplemental Segment Information


(In Thousands)	(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total		(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
June 30, 2023
September 30, 2023												September 30, 2023
Residential loans	Residential loans	$	196,737	$	—	$	5,095,940	$	163,222	$	5,455,899	Residential loans	$	610,946	$	—	$	5,086,239	$	150,152	$	5,847,337
Business purpose loans	Business purpose loans	—		282,836		4,943,887		—		5,226,723		Business purpose loans	—		102,777		5,146,553		—		5,249,330
Consolidated Agency multifamily loans	Consolidated Agency multifamily loans	—		—		420,096		—		420,096		Consolidated Agency multifamily loans	—		—		420,554		—		420,554
Real estate securities	Real estate securities	9,752		—		157,067		—		166,819		Real estate securities	9,054		—		120,391		—		129,445
Home equity investments	Home equity investments	—		—		427,307		—		427,307		Home equity investments	—		—		431,159		113		431,272
Other investments	Other investments	—		—		300,670		54,867		355,537		Other investments	—		—		284,507		55,854		340,361
Goodwill	Goodwill	—		23,373		—		—		23,373		Goodwill	—		23,373		—		—		23,373
Intangible assets	Intangible assets	—		34,677		—		—		34,677		Intangible assets	—		31,570		—		—		31,570
Total assets	Total assets	221,282		380,404		11,559,826		635,222		12,796,734		Total assets	659,520		197,974		11,701,939		461,705		13,021,138

December 31, 2022	December 31, 2022											December 31, 2022
Residential loans	Residential loans	$	628,160	$	—	$	4,800,096	$	184,932	$	5,613,188	Residential loans	$	628,160	$	—	$	4,800,096	$	184,932	$	5,613,188
Business purpose loans	Business purpose loans	—		364,073		4,968,513		—		5,332,586		Business purpose loans	—		364,073		4,968,513		—		5,332,586
Consolidated Agency multifamily loans	Consolidated Agency multifamily loans	—		—		424,551		—		424,551		Consolidated Agency multifamily loans	—		—		424,551		—		424,551
Real estate securities	Real estate securities	—		—		240,475		—		240,475		Real estate securities	—		—		240,475		—		240,475
Home equity investments	Home equity investments	—		—		403,462		—		403,462		Home equity investments	—		—		403,462		—		403,462
Other investments	Other investments	—		—		334,420		56,518		390,938		Other investments	—		—		334,420		56,518		390,938
Goodwill	Goodwill	—		23,373		—		—		23,373		Goodwill	—		23,373		—		—		23,373
Intangible assets	Intangible assets	—		40,892		—		—		40,892		Intangible assets	—		40,892		—		—		40,892
Total assets	Total assets	660,916		487,159		11,303,991		578,833		13,030,899		Total assets	660,916		487,159		11,303,991		578,833		13,030,899

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 five main sections:

• Overview

• Results of Operations

–Consolidated Results of Operations

–Results of Operations by Segment

–Income Taxes

• Liquidity and Capital Resources

• Critical Accounting Estimates

• 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 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 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. 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 securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential and business purpose ~~and multifamily~~housing credit 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 Mortgage Banking, Business Purpose Mortgage Banking, and 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, 2022.

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, opportunities, 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, 2022, 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); (ii) statements related to our financial outlook and expectations for 2023 and future years, including statements regarding the economic impacts of inflation, monetary policy, volatility and potential regulatory changes in the banking sector, and shifting sources of liquidity in the residential mortgage market; (iii) statements regarding our progress in developing private capital partnerships that we expect to enhance our liquidity, operating and distribution capabilities going forward; (iv) statements related to our investment portfolio, including that there remains potential upside in our portfolio through market discount, and that at ~~June~~September 30, 2023, our securities portfolio had approximately ~~$390 million~~$3.26 per share of net discount to par, ~~(approximately $3.43 per share),~~our expectations to continue de-emphasizing third-party investments and ~~that~~reducing our exposure to this portion of our investment portfolio ~~has a projected forward loss-adjusted yield of 16% at June 30, 2023;~~to optimize overall returns, and our expectations regarding our ability to finance, renew or extend financing for, and expand financing capacity for, our securities, bridge loan, and HEI investments; (v) statements related to opportunities we see for our residential and BPL platforms, ~~and~~ our positioning to capture market ~~share;~~share, and opportunities to help scale and institutionalize HEI; (vi) 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 ~~second~~third quarter of 2023 and at ~~June~~September 30, 2023, expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase, total net jumbo loan exposure at ~~June~~September 30, 2023, and residential mortgage loans subject to forward sale commitments; (vii) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2023; and (viii) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.

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

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

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

•the impact of the COVID-19 pandemic;

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

•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 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

~~As investors continue to grapple with~~Following the ~~impact~~release by the Board of ~~regional~~Governors of the Federal Reserve of proposed risk-based capital rules for the U.S. banking system early in the third quarter of 2023, we expected that while the final rules would likely evolve, bank ~~vulnerability and~~management teams would follow early adoption, driving a ~~mortgage market still impaired by rising benchmark interest rates, the foundational shifts that we believe will drive the next cycle of growth for Redwood have already begun. We are observing changes~~fundamental shift in how ~~many~~ financial assets are ~~owned, particularly mortgages. The latest era~~funded. Three months later, those expectations appear to have been validated thus far and our operating businesses continue to make forward progress, largely ahead of ~~accommodative monetary policy that allowed~~plan. This progress has been concurrent with the emergence of fresh demand for our organically created assets from pockets of capital complementary to our traditional distribution channels.

Our relationships with banks have deepened in the last few months as banking business models are reconciled with a future of higher capital requirements and more expensive interest rate risk management. And banks' response to ~~hold vast amounts~~these forthcoming regulatory changes reflects the urgency of ~~30-year, fixed-rate mortgages by funding them~~the moment. Since March, our Residential team has engaged with ~~low-cost deposits is~~depositories from coast to coast, securing and onboarding new partners. We now ~~over. The impact~~have active relationships with 185 active loan sellers, including over 70 banks, many of ~~this change~~which have commenced lock activity with us in recent weeks. This includes a group of the nation’s largest regional banks and large financial institutions, a significant number with assets greater than $200 billion and extensive mortgage origination footprints. As we always have, Redwood offers these partners the ability to sustain operating activities without diluting the overall customer relationship.

Our total Residential Mortgage Banking lock volume for the third quarter of 2023 was $1.6 billion, up 189% from the second quarter of 2023 despite significantly higher mortgage rates and an overall decline in residential mortgage loan originations. Our purchase volume was $814 million, up 344% from the second quarter of 2023. Bank sellers accounted for 50% of our total quarterly purchase activity, up from just 10% in the second quarter of 2023 and a de minimis amount in the first quarter of 2023. Of note, bulk pool activity was a key driver of third quarter purchase volume, much of it seasoned loans acquired at a significant discount to par. Notwithstanding the persistent rise in interest rates, we continue to evaluate bulk pools of residential mortgage loans coming to market, more evidence of the transition in process for many banks seeking to balance pressures on capital, liquidity and net interest margin.

Headwinds to near-term growth, including mortgage rates at 20-year highs and very low overall transaction activity in housing, have us focused on leading indicators over the intermediate term as we position our Residential Mortgage Banking business ~~models is likely~~ to ~~influence investment across various asset classes. For many banks, continuing~~further scale volume when market conditions begin to offer competitive mortgage products to retain clients (both consumer and, to an extent, commercial) will be imperative, and will likely require liquidity from outside capital providers. In this regard,turn more favorable. Those indicators include the ~~mortgage purchase programs Redwood offers to depositories are especially relevant.~~

~~Recent re-engagement with many banks has affirmed our strategic positioning. In recent weeks, we have established~~quality of new ~~jumbo~~ loan seller relationships and a deeper "wallet share" with ~~lenders holding approximately~~ ~~$2 trillion~~existing loan sellers. While many of ~~assets~~ our competitors have scaled back from the prime jumbo mortgage business, we completed our third Sequoia securitization of 2023 in the ~~aggregate~~third quarter, followed closely by our fourth Sequoia securitization early in the fourth quarter. Both transactions generated strong margins and were distributed to a broad base of investors. In a market that is defined by so much volatility, we ~~currently have relationships~~managed to execute these transactions within our target gain on sale range. Consistent with ~~lenders representing a significant percentage of jumbo mortgage origination market share.(1)~~ ~~Our recent lock volumes exceeded~~the momentum we see for the business, we nearly doubled our ~~total jumbo loan purchases over the past two quarters combined, driving second quarter returns for~~capital allocation to Residential Mortgage Banking to their highest level in over a year. With proposed bank capital rules suggesting a sweeping overhaul of capital requirements, including higher charges for large lenders’ residential mortgages that go beyond international standards, we plan for Redwood to emerge as an essential liquidity provider to these institutions.

Through match-funding of non-Agency mortgages through securitizations and other related structures, similar to how lenders distribute conforming loans to Fannie Mae and Freddie Mac, Redwood has created a customized outlet for jumbo loan sellers that allows them to focus on their customers and other fee-generating consumer businesses. Time has proven that positioning ourselves as this outlet is a significant competitive advantage for Redwood.

Since our founding, we have completed over 140 securitizations across our platforms, sourcing assets from experienced operators who specialize in jumbo, non-QM, and other mortgage products. This institutional knowledge is a requisite for guiding banks through the process of originating and selling loans efficiently into the private capital markets.

As such, becoming a capital and liquidity provider requires foundational work. For banks especially, investing in such relationships entails workflow changes, underwriting guide implementations, loan officer training, systems integration and onboarding, regulatory compliance protocols, cash and collateral management, and other infrastructure enhancements necessary to distribute whole loans without noticeable impact to the consumer experience. Partnering with Redwood allows this work to be applied across a variety of mortgage purchase programs that we offer lenders to meet their diverse needs, with speed to close and reliable execution acting as meaningful differentiators. But perhaps our biggest differentiator is that while we enable our loan sellers to serve their customers, we do not seek to serve those customers directly in other ways, eliminating an inherent conflict of interest that often exists with our competition.

In light of these factors, we are excited about the growth potential of our Residential business. The leading indicators we use to assess our progress, including the strategic onboarding of new loan sellers and the depth of their origination channels, are encouraging and suggest a significant opportunity in the ~~coming quarters. Our prudent~~third quarter and ~~decisive actions~~expect that allocation to grow further in recent quarters, entering the second quarter with a streamlined pipeline, have enabled us to be competitively positioned today to capitalize on the opportunity. We remained focused throughout the last 12 months on efficiently completing purchase and sales transactions to mitigate risk on our balance sheet, a discipline reinforced by the fact that we mark substantially all of our assets to market quarterly.2024.

Our ~~conservative posture~~business-purpose lending (“BPL”) business is beginning to observe broader changes in the market as well. Borrowers that have historically sought funding from banks are now covered regularly in our pipeline discussions, and emphasis on capital preservation remain top priorities. Our second quarter earnings reflected the reality that the markets overall remain volatile. Though widening market yields in certain parts of our investment portfolio had a non-cash, mark-to-market impact on GAAP earnings,while the overall credit ~~performance across most of our portfolio has remained strong. With a weighted average quarter-end carrying value of 64 cents to face value,~~environment calls for continued caution and a projected forward loss-adjusted yield of 16%, we estimate our Investment Portfolio had approximately $390 million (or $3.43 per share) of net discount to par at quarter end, offering a compelling value proposition to shareholders.

We continue to closely monitor the path of interest rates, with recent economic data points and forecasts supporting the thesis that we are nearing the end of this rate hike cycle. Though short-term rates will likely remain higher for longer, the inverted yield curve continues to imply lower future rates and should result in a better overall lending environment for housing, where credit has remained resilient due to stable prices, low turnover and tight inventories.

~~As we plan for volatility for the remainder of 2023, we place a continued premium on reliable funding sources for our operations. Premier~~selectivity, demand from capital partners remains strong for well-underwritten BPL loans to high quality sponsors. While this transition is moving more slowly than in our Residential business, the ~~private credit markets~~early indicators are eager to work with us in this regard. During the second quarter, we announced a strategic joint venture with Oaktree Capital Management, L.P. (“Oaktree”) to support CoreVest’s bridge lending platform. As previously announced in June, the joint venture is expected to have loan purchase capacity of approximately $1 billion inclusive of secured financing. In joining with Oaktree, we gain a highly respected investor who is both familiar with our platform and eager to support the expansion of our bridge lending business. Through this partnership, Redwood will earn upfront and recurring fee-based income streams for originating the assets and administering the joint venture. The overall structure focuses exclusively on investing alongside each other (80% Oaktree, 20% Redwood), with Redwood maintaining the relationship with our customers.

While trends in the housing market have continued to support demand for investor loan products, transaction activity for the industry has slowed given the significant rise in mortgage rates and associated effects on debt service coverage and the total proceeds lenders can underwrite. Our business purpose lending (“BPL”) volumes were down modestly compared to the prior quarter (driven by a decline in origination of fixed-rate term loans) and with benchmark rates once again higher, including the 10-year Treasury rate back above 4%, we expect some project sponsors to remain on the sidelines. Others may seek products that lock in a fixed rate but offer more prepayment flexibility.unmistakable. We have ~~seen these trends before and have products~~been engaged in dialogue with several banks on partnership opportunities that ~~we believe will fit sponsor needs and~~would allow us to ~~originate profitably, especially~~access their existing pipelines with ~~more sponsors pivoting away from their local bank lender either by choice or necessity. Additionally, our single-asset~~the objective of achieving mutually beneficial outcomes. With a life-cycle lending platform that offers both bridge ~~channel, strengthened by our acquisition of Riverbend Lending just over a year ago, had a strong second quarter with a building pipeline~~ and ~~a growing set of distribution opportunities.~~

Asstabilized term financing, we ~~work~~are well-positioned to ~~grow our BPL business we remain mindful of the macroeconomic credit environment, particularly the impacts of significantly higher borrowing costs~~capture incremental market share that will continue shifting to ~~impact project sponsors, notwithstanding continued strength~~private lenders. Our capital markets expertise allowed us to complete an accretive term loan securitization and bulk whole loan sale in the third quarter.

The BPL sector overall ~~leasing trends. As such, we saw delinquencies in our BPL portfolio increase during~~continues to manage through macro crosswinds that have impacted sponsor sentiment and reduced transaction volumes across the second quarter. Delinquency levels are still within our modeled expectations, with the underlying equity positions facilitating constructive loss mitigation discussions and providing an important buffer to ultimate loss severity.industry. Our ~~asset management~~ team ~~remains focused on proactive surveillance,~~has been proactively working ~~closely~~ with borrowers in advance of loan maturities to assess project plans and ensure management towards successful completions. While 90+ day delinquencies across our bridge and term portfolios declined slightly to 4.0% at September 30, 2023, we continue to manage through instances of borrower/sponsor stress, particularly in our bridge portfolio, where certain sponsors have required loan modifications or ~~take other action where appropriate.~~an infusion of fresh equity from existing or new sponsorship. Though bridge lending continues to be one of our strongest drivers of net interest income, the lumpiness of the portfolio and intermittent nature of workout and modification activity has contributed to recent volatility in our quarterly GAAP earnings.

~~The~~

Overall, we funded $411 million of BPL loans in the third quarter, a slight increase from second quarter ~~also brought meaningful strategic progress in~~of 2023 volumes. Within Bridge, our ~~newly-formed home equity business, which expands upon~~build-for-rent (“BFR”) aggregation product has seen increased demand from borrowers and carries a favorable risk profile given the turnkey nature of the homes being financed. Origination of loans secured by multifamily properties continues to be light as more limited capital flows into these types of projects. While we expect volumes for our ~~holistic approach~~fixed-rate term loans to remain influenced by benchmark interest rates, our bridge portfolio remains a source for refinances into term loans.

In the ~~non-Agency housing finance market. Our~~third quarter, we formally launched Aspire, our internal home equity investment (“HEI”) ~~platform, branded as Aspire, launched~~platform. After years of investing in ~~June~~ and ~~will be originating~~financing HEI, this development was a natural next step in the progression of our support for this nascent but growing sector. Since 2019, Redwood has been a participant in the HEI market, purchasing approximately $350 million in assets, co-sponsoring the first-ever securitization backed entirely by HEI, and subsequently procuring a dedicated financing facility for the asset class. With our track record of supporting housing accessibility, we believe we have a unique opportunity to help scale and institutionalize HEI in ~~coordination with our related third-party investment initiatives.~~a way that will benefit consumers. We ~~have begun discussing this business with potential capital partners, which could allow us~~believe the opportunity to ~~significantly expand our product offerings for what may be~~help homeowners access the equity in their homes remains the largest addressable market in housing finance. Through Aspire, we can now directly serve this market by offering HEI to customers of our nationwide correspondent network of loan officers, a significant advantage over more traditional, high-cost marketing campaigns.

As we think more holistically about the ~~world~~overall Redwood enterprise and the significant market opportunities we see ahead, evolving our capital structure and procuring long-term private capital partnerships will be a top priority. We continue to observe a secular transition occurring in our markets, with ~~approximately $28 trillion~~the roles of ~~accessible home equity~~banks, private credit institutions, and specialty finance companies such as Redwood rapidly evolving. In particular, regulatory crosscurrents are redefining the most efficient holders of real estate-related assets, as well as those who finance and service them. As evidenced by our previously announced Oaktree BPL bridge joint venture, the value proposition that platforms like ours offer institutional private credit investors has become more visible over the past several years. These types of investors include pension funds, life insurance companies, sovereign wealth funds, and others who have accretive capital and a strong demand for our loan products but lack the origination or sourcing capabilities that our platform possesses. Recently, we have engaged with a handful of large private credit investors who are deeply familiar with our company and track record who have shown interest in forging strategic partnerships that we believe could be beneficial to our shareholders.

In keeping with these trends, our long-term strategic focus will be to position our mortgage banking businesses to meet this market opportunity, with ample working capital and access to a deep set of products. Our investment strategy will evolve in kind, with a continued focus on deployment alongside capital partners, in lieu of traditional direct investing. As we did in the ~~United States. HEI, combined~~third quarter, we also expect to continue de-emphasizing third-party investments and further reduce our exposure to this lower-yielding portion of our investment portfolio to further optimize overall returns.

As we progress towards year-end, we are already starting to see a diminution of market activity consistent with ~~traditional second mortgage products, will allow our loan seller network~~a year ago when market participants, from homebuyers to ~~offer~~bond investors, took stock of a ~~compelling suite of options~~volatile environment and decided to ~~their existing clients currently enjoying low rate first-lien mortgages. The critical element~~save investment capital for ~~consumers~~the year ahead. If anything, the market is one of choice, and our customer acquisition funnel will center around our mortgage originator network that allows us to customize our pipeline with low marketing spend. Unlike traditional second-lien mortgages, our HEI products represent equity-sharing relationships, where investor return is generated by participationin a more challenging position today than it was then, factoring in the ~~appreciation upside~~possibility of a U.S government shutdown, along with a geopolitical backdrop that has deteriorated significantly. The additional volatility from geopolitical events will likely continue to pressure our near-term GAAP results, particularly the market valuations of our investment portfolio assets. And while the resiliency of the ~~property,~~U.S. economy has surprised even the most ardent optimists, the prospect of an interest rate-driven recession in 2024 still remains a likelihood, in our view. As such, we will continue to prioritize liquidity and exercise caution as ~~compared~~we work to ~~a traditional monthly loan payment. With second mortgage rates~~ensure our franchise is positioned for ~~even prime consumers still elevated,~~ the ~~use cases for HEI are vast for a cohort of homeowners for whom an additional monthly payment is either impractical or undesirable.~~

~~With significant changes afoot throughout the non-Agency sector,~~opportunity we see a centralized role for Redwood in an evolving housing finance ecosystem. Success in this new chapter will require operational skill, structural savvy and flexible access to capital. We are implementing a clear strategy to further advance our market presence as regulators move towards eliminating the recent arbitrages that enabled banks to write below market-rate mortgages and fund them with deposits. We believe this will result in a compelling fresh take on what has for many years been a reliable roadmap for our enterprise.ahead.

~~Footnotes to Business Update~~

1.Estimated jumbo loan seller network market share is based on aggregate jumbo loan origination volume from January 2021 through March 2023 by current and potential Redwood loan sellers, divided by industry-wide jumbo loan origination volume for the same period. Source: Company data; Inside Mortgage Finance.

~~Second~~Third Quarter ~~Overview~~Key Financial Results and Metrics

The following table presents key financial metrics for the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Table 1 – Key Financial Results and Metrics


		Three Months Ended			Six Months Ended				Three Months Ended			Nine Months Ended
(In Thousands, except per Share Data)	(In Thousands, except per Share Data)	June 30, 2023			June 30, 2023			(In Thousands, except per Share Data)	September 30, 2023			September 30, 2023
Net income per diluted common share		$	—		$	0.02
Net income (loss) per diluted common share								Net income (loss) per diluted common share	$	(0.29)		$	(0.27)
Annualized GAAP return on common stockholders' equity	Annualized GAAP return on common stockholders' equity	0.4		%	0.8		%	Annualized GAAP return on common stockholders' equity	(12.3)		%	(3.5)		%
Dividends per share	Dividends per share	$	0.16		$	0.39		Dividends per share	$	0.16		$	0.55
Book value per share	Book value per share	$	9.26		$	9.26		Book value per share	$	8.77		$	8.77
Economic return on book value (1)	Economic return on book value (1)	0.2%			1.0%			Economic return on book value (1)	(3.6)%			(2.4)%

(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. It does not represent an annualized figure.

Third Quarter Operational Highlights

Residential Mortgage Banking

•Locked $1.6 billion(1) of jumbo loans, up from $567 million in the second quarter 2023, and purchased $815 million of jumbo loans, up from $184 million in the second quarter 2023

◦50% of purchase volume in the third quarter 2023 was from depository institutions, up from 10% in the second quarter 2023

◦Achieved gross margins of 80bps during the quarter, within our historical 75bps to 100bps range

•Significantly grew jumbo loan seller network, including over 50 new or re-established relationships with depository institutions

•Distributed $391 million of jumbo loans through securitization ($338 million) and whole loan sales ($54 million)

•Increased capital allocated to Residential Mortgage Banking segment to $150 million at September 30, 2023, from $80 million at June 30, 2023

Business ~~Highlights~~Purpose Mortgage Banking

•Funded $411 million of business purpose lending ("BPL") loans in the third quarter 2023 (74% Bridge and 26% Term), up from $406 million in the second quarter 2023

•Distributed $340 million of BPL loans through securitization ($278 million) and whole loan sales ($62 million)

•Began selling BPL bridge loans into previously announced joint venture ("JV") with Oaktree Capital Management, L.P. ("Oaktree") and established new dedicated financing line for the JV

Investment Portfolio

•Deployed approximately ~~$50~~$70 million of capital into internally sourced investments, while generating incremental capital from sales of non-strategic third-party assets

•~~Underlying credit remained stable in the aggregate, and within our modeled expectations~~

◦RPL and jumbo securities saw continued declines in 90 day+ delinquencies

◦ to 8.6% and 0.9%, respectively; 90 day+ ~~delinquency rates across~~delinquencies for our combined CAFL securities and bridge loan ~~portfolios of 4.2%~~portfolio declined to 4.0%, ~~compared~~aided in part by successful loss mitigation resolutions completed during the quarter, and accompanied by an increase in loans transferred to ~~2.0% in the prior quarter~~ ~~(1)~~

•~~Secured recourse leverage ratio of 1.0x at June 30, 2023~~REO(2)

~~Business Purpose Mortgage Banking~~

•~~Established joint venture ("JV") with Oaktree to invest in CoreVest-originated bridge loans, creating recurring fee-based revenue~~

◦~~JV expected to have total purchasing power of up to $1 billion inclusive of secured financing~~

•~~Funded $406 million of business purpose loans; 68% Bridge and 32% Term~~

•~~Sold $200 million of business purpose loans to third parties~~

~~Residential Mortgage Banking~~

•~~Established new forward flow relationships with depository institutions; Redwood's loan seller network represents a significant percentage of jumbo mortgage origination market share(3)~~

•~~Locked $567 million(4)~~ ~~and purchased $184 million of jumbo loans~~

◦~~Purchase activity included three bulk pools from depositories; most of the underlying loans were seasoned and acquired at attractive discounts~~

•~~Increased capital allocated to Residential Mortgage Banking from $15 million at March 31, 2023, to $80 million at June 30, 2023~~

Financing Highlights

•Unrestricted cash and cash equivalents of ~~$357 million (representing 114% of outstanding marginable debt)(5)~~ ~~and unencumbered assets of $206~~$204 million at ~~June~~September 30, 2023

•Successfully renewed two maturing loan warehouse financing facilities with key counterparties ~~and extinguished under-utilized facilities~~

•~~$2.6~~Maintained $2.2 billion of excess financing capacity across warehouse facilities at ~~June~~September 30, 2023

~~Capital Markets Highlights~~

•Repurchased $31 million of Redwood's convertible debt due August 2023, reducing the outstanding balance to approximately $113 million, which will be fully repaid at maturity in August utilizing existing cash on hand

~~RWT Horizons Highlights~~

•~~Completed two investments in the second quarter, including one follow-on investment in an existing RWT Horizons portfolio company~~

•~~Since inception, RWT Horizons has completed 33 technology venture investments in 27 companies, with over $27 million of investment commitments~~

~~Q3 2023 Corporate Highlights To Date~~

•~~DBRS Morningstar confirmed CoreVest's special servicer ranking, acknowledging CoreVest's successful performance in loan management~~

•~~Continued to add new forward flow jumbo loan relationships which we expect to positively contribute to volumes in the third quarter of 2023 and beyond(6)~~

Footnotes to Business Highlights

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

2.Calculated as ~~business purpose lending ("BPL")~~BPL loans in our consolidated CAFL securitizations, bridge loans held for investment, and bridge and term loans held-for-sale with a delinquent payment greater than 90 days divided by the total notional balance of consolidated CAFL securitizations, bridge loans held for investment, and bridge and term loans held for sale.

2.~~Secured recourse leverage ratio for our Investment Portfolio is defined as secured recourse debt financing our investment portfolio assets divided by capital allocated to our investment portfolio.~~

3.Estimated jumbo loan seller network market share is based on aggregate jumbo loan origination volume from January 2021 through March 2023 by current and potential Redwood loan sellers, divided by industry-wide jumbo loan origination volume for the same period. Source: Company data; Inside Mortgage Finance.

4.~~Lock volume does not account for potential fallout from pipeline that typically occurs through the lending process.~~

5.Non-marginable debt and marginable debt refers to whether such debt is subject to margin calls based solely on the lender’s determination, in its discretion, of the market value of underlying collateral that is non-delinquent. Non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of loans, or a change in the interest rate of a specified reference security relative to a base interest rate amount, among other reasons.

6.~~Based on management's estimates and actual results may vary materially.~~

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RESULTS OF OPERATIONS

Within this Results of Operations section, we provide commentary that compares results year-over-year for 2023 and 2022. Most tables include a "change" column that shows the amount by which the results from 2023 are greater or less than the results from the respective period in 2022. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the ~~second~~third quarter of 2023, compared to the ~~second~~third quarter of 2022, and increases or decreases during the ~~"six-month~~"nine-month periods" refer to the change in results for the first ~~six~~nine months of 2023, compared to the first ~~six~~nine months of 2022.

Consolidated Results of Operations

The following table presents the components of our net income for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 2 – Net Income (Loss)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands, except per Share Data)	(In Thousands, except per Share Data)	2023		2022		Change		2023		2022		Change		(In Thousands, except per Share Data)	2023		2022		Change		2023		2022		Change
Net Interest Income	Net Interest Income	$	26,096	$	40,488	$	(14,392)	$	52,533	$	93,590	$	(41,057)	Net Interest Income	$	20,351	$	34,935	$	(14,584)	$	72,884	$	128,525	$	(55,641)
Non-interest Income (Loss)	Non-interest Income (Loss)													Non-interest Income (Loss)
Mortgage banking activities, net	Mortgage banking activities, net	16,552		(30,017)		46,569		33,223		(13,702)		46,925		Mortgage banking activities, net	19,440		16,535		2,905		52,663		2,833		49,830
Investment fair value changes, net	Investment fair value changes, net	(4,596)		(87,972)		83,376		(4,723)		(94,092)		89,369		Investment fair value changes, net	(31,430)		(57,697)		26,267		(36,153)		(151,789)		115,636
Other income, net	Other income, net	4,158		7,006		(2,848)		8,714		12,989		(4,275)		Other income, net	2,346		4,027		(1,681)		11,060		17,016		(5,956)
Realized gains, net	Realized gains, net	1,056		—		1,056		1,054		2,581		(1,527)		Realized gains, net	50		—		50		1,104		2,581		(1,477)
Total non-interest income (loss), net	Total non-interest income (loss), net	17,170		(110,983)		128,153		38,268		(92,224)		130,492		Total non-interest income (loss), net	(9,594)		(37,135)		27,541		28,674		(129,359)		158,033
General and administrative expenses	General and administrative expenses	(30,805)		(30,199)		(606)		(66,360)		(63,475)		(2,885)		General and administrative expenses	(29,697)		(38,244)		8,547		(96,057)		(101,719)		5,662
Portfolio management costs	Portfolio management costs	(3,100)		(1,767)		(1,333)		(6,610)		(3,345)		(3,265)		Portfolio management costs	(3,661)		(1,863)		(1,798)		(10,271)		(5,208)		(5,063)
Loan acquisition costs	Loan acquisition costs	(1,444)		(3,480)		2,036		(2,733)		(7,945)		5,212		Loan acquisition costs	(1,880)		(2,426)		546		(4,613)		(10,371)		5,758
Other expenses	Other expenses	(4,975)		(3,468)		(1,507)		(8,659)		(7,553)		(1,106)		Other expenses	(4,633)		(4,261)		(372)		(13,292)		(11,814)		(1,478)
Net income (loss) before income taxes		2,942		(109,409)		112,351		6,439		(80,952)		87,391
Net Income (Loss) Before Income Taxes														Net Income (Loss) Before Income Taxes	(29,114)		(48,994)		19,880		(22,675)		(129,946)		107,271
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(69)		9,443		(9,512)		1,054		11,901		(10,847)		(Provision for) benefit from income taxes	(1,696)		(1,417)		(279)		(642)		10,484		(11,126)
Net Income (loss)		2,873		(99,966)		102,839		7,493		(69,051)		76,544
Net Income (Loss)														Net Income (Loss)	(30,810)		(50,411)		19,601		(23,317)		(119,462)		96,145
Other comprehensive income (loss), net	Other comprehensive income (loss), net	945		(31,314)		32,259		6,777		(48,861)		55,638		Other comprehensive income (loss), net	(2,647)		(7,147)		4,500		4,130		(56,008)		60,138
Preferred dividends	Preferred dividends	(1,758)		—		(1,758)		$	(3,177)	$	—	(3,177)		Preferred dividends	(1,750)		—		(1,750)		(4,927)		—		(4,927)
Total Comprehensive Income Available to Common Stockholders		$	2,060	$	(131,280)	$	133,340	$	11,093	$	(117,912)	$	129,005
Total Comprehensive Loss Related to Common Stockholders														Total Comprehensive Loss Related to Common Stockholders	$	(35,207)	$	(57,558)	$	22,351	$	(24,114)	$	(175,470)	$	151,356

Net Interest Income

Net interest income from our investment portfolio decreased by $5$14 million and ~~$19~~$33 million during the three and ~~six-month~~nine-month periods, respectively, ascontributing to the majority of the overall declines in 2023. During the three and nine months ended September 30, 2023, $10 million and $16 million, respectively, of interest income was either reversed (from prior periods) or not recognized (for current periods) for our BPL bridge loans on non-accrual status. Additionally, the benefit of higher average asset balances in 2023 from continued deployment into ~~bridge loans~~internally-generated assets during the prior twelve months was more than offset by lower yield maintenance income on our BPL term securities, lower accretion income on our AFS securities, and higher financing ~~costs.~~costs in 2023. Yield maintenance income decreased $3 million and ~~$10~~$13 million during the three- and ~~six-month~~nine-month periods, respectively, as the sharp rise in interest rates throughout 2022 and 2023 diminished incentives for borrowers to refinance. Accretion income on AFS securities decreased $1 million and $9$10 million during the three- and ~~six-month~~nine-month periods, respectively, as rising interest rates slowed prepayment speeds and changed our expected timing of calls of our available-for-sale securities, which ~~had elevated~~reduced accretion income inafter the first quarter of 2022. Additionally, steady deployment of capital into HEI throughout the last ~~twelve~~18 months, which does not generate net interest income but is partially financed with debt, resulted in a $4 million and $7$10 million increase in interest expense during the three- and ~~six-month~~nine-month periods, respectively.

8584

Net interest income from Residential and Business Purpose Mortgage Banking operations ~~each~~ decreased by $4$1 million and $2 million, respectively, during the three-month periods, and decreased by $12 million and $5$8 million, respectively, during the ~~six-month~~nine-month periods. These declines were the result of lower average balances of loan inventory and higher financing costs given the rise in benchmark interest rates during the past 12 months. Volume in the residential business was intentionally reduced during 2022 and into the first quarter of 2023, driving the inventory of loans from over $1 billion at March 31, 2022 to $27 million at March 31, 2023. Given improving market conditions and new opportunities, we ~~began increasing~~increased our residential loan acquisitions and ~~residential loan~~ inventory in the second ~~quarter~~and third quarters of 2023, and see opportunities to further grow acquisitions ~~during~~in the ~~remainder of the year~~coming quarters in our residential mortgage banking business.

Corporate net interest expense ~~increased $1~~decreased $2 million and $5increased $3 million during the three and ~~six-month~~nine-month periods, ~~respectively, primarily from higher corporate~~respectively. In both periods, interest expense ~~resulting from the issuance of new convertible debt in June 2022 and from~~increased for our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates over the past twelve months. For the three-month periods, this increase was more than offset by a decline in interest expense related to our convertible debt, as we repurchased some of our outstanding convertible debt over the past twelve months and repaid one series of our convertible debt that matured in August 2023. Additionally, we earned higher interest income on our cash and cash equivalents during 2023 for both periods, resulting from higher interest rates earned on these balances.

We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. However, over the past year, continued increases in benchmark interest rates and borrowing spreads negatively impacted our net interest income. Further increases in the federal funds rate or widening of borrowing spreads could result in lower net interest income. 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. ~~As we demonstrated during the first half of 2023, to~~To the extent we add incremental leverage to our investment portfolio, particularly for non-interest earnings assets such as HEI, net interest income could temporarily decrease until proceeds from those financings are redeployed into other investments.

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

Mortgage Banking Activities, Net

Income from Residential Mortgage ~~banking~~Banking activities ~~improved significantly~~increased $7 million and $27 million during the three and ~~six-month~~nine-month periods, ~~including $25 million and $20 million increases, respectively, from Residential Mortgage Banking operations, and $22 million and $27 million increases, respectively,~~respectively. Income from Business Purpose Mortgage Banking ~~operations.~~operations decreased $4 million and increased $23 million, during the three and nine-month periods respectively. For both mortgage banking businesses, while volumes were much higher during the first ~~half~~nine months of 2022 as compared to the ~~first half of~~same period in 2023, margins were negative ~~during~~for the first nine months of 2022 ~~periods,~~overall, as rapidly rising interest rates and widening spreads impacted valuations of our loan inventory.

For the residential ~~business, as the market~~business, volumes began to ~~stabilize and volumes picked~~ramp up in the second quarter of 2023 and increased significantly into the third quarter and, as margins improved, ~~and resulted in~~production was profitable ~~production~~ for ~~the first half of 2023.~~these periods. While margins in the second quarter of 2023 increased well above 150 basis points, ~~looking forward we expect them to normalize back~~they normalized within their historical range of 75 to 100 basis points ~~for~~in the ~~remainder of the year.~~third quarter.

At the BPL business, higher margins ~~improved~~from improving execution on term securitizations and sales during 2023 drove the improvement in mortgage banking income during the ~~first half of 2023,~~three and nine-month periods, as term spreads tightened more significantly in the first quarter, then stabilized in the second ~~quarter.~~and third quarters of 2023. The benefit tofrom higher margins ~~from tighter spreads during the first half of 2023~~ was partially offset by lower funding volumes in 2023, particularly for the nine-month periods, as rising interest rates decreased demand for loans. Going forward, we expect higher benchmark interest rates will continue to pressure origination ~~fees, resulting from a decrease in funding volume year-over-year.~~volumes, while we continue to see opportunities to refinance our bridge borrowers with term products.

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 their associated interest rate hedges. During the three and ~~six~~nine months ended ~~June~~September 30, 2023, negative investment fair value changes were primarily ~~reflected credit spread widening on a portion~~driven by reductions in the value of our ~~assets, including~~investments in reperforming loan ~~("RPL")~~ securities (our investments in consolidated Freddie Mac SLST entities), which were negatively impacted primarily by rising interest rates, as well as ~~increased impairments on~~reductions in the fair value of our overall BPL bridge loan portfolio, including certain non-performing and modified BPL bridge loans, and for the nine months ended September 30, 2023, losses on certain delinquent term ~~loans underlying our CAFL bonds.~~loans. The negative fair value changes were partially offset by fair value increases for HEI, ~~assets, as well as~~ servicing investments, ~~and~~ IO securities and interest rate hedges, which ~~benefited~~benefited from rising benchmark interest ~~rates.~~rates and home price appreciation. Fundamental performance of our residential assets within our Investment Portfolio continues to be driven by strong employment data, embedded equity protection associated with loan seasoning and borrowers motivated to stay current on their low-coupon mortgages.

During the three and ~~six~~nine months ended ~~June~~September 30, 2022, negative investment fair value changes reflected extreme levels of credit spread widening across many of our longer-duration, fixed-rate investments (re-performing loan securities, residential securities and called loans), partially offset by fair value increases in our ~~HEIs,~~ IO securities and interest rate hedges, which benefited from rising benchmark interest ~~rates and steady home price appreciation.~~rates.

Additional detail on our investment fair value changes during 2023 is included in the “Results of Operations by Segment” section that follows as well as Table 5.6 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Other Income

The decrease in other income for the three and ~~six-month~~nine-month periods primarily resulted from $2$1 million and 5$6 million, respectively, of lower income on our MSR investments. MSR income was nominally impacted by fair value changes in ~~the first half of~~ 2023 given the ~~relative stability of~~MSR's reduced sensitivity to rising interest rates during that period, while itMSRs benefited significantly in ~~the first half of~~ 2022 as the sharp rise in interest rates caused a slowdown in prepayment ~~speeds.~~speeds and was more impactful to valuations.

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 ~~six~~nine months ended ~~June~~September 30, 2023, we realized $1$2 million of gains from the sale of ~~$42~~$54 million of AFS securities, which was partially offset by $0.4 million of net losses on early extinguishment of debt, primarily associated with the early extinguishment of securitization debt financing our reperforming loan securities, as well as from the repurchase of ~~$64~~$66 million of our convertible debt. During the three and ~~six~~nine months ended ~~June~~September 30, 2022, we realized gains of $0zero and $3 million, respectively, primarily resulting from ~~the calls of securities.~~securities that were called.

General and Administrative Expenses

~~During~~Beginning in the ~~past three quarters~~fourth quarter of 2022, we implemented firm-wide initiatives to rationalize headcount and reduce non-compensation costs, resulting in a net headcount reduction of ~~26%~~28% during ~~that period,~~the last twelve months and ~~reducing~~reductions to fixed compensation expense of $6 million and $5 million, respectively, for the three and nine-month periods ended September 30, 2023. Additionally, non-compensation expenses were reduced by $2 million and $4$6 million, respectively, for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2023. ~~Fixed compensation costs for~~During the ~~three- and six-month~~nine-month periods, ~~ended June 30, 2022 included a $2 million payroll tax credit, benefiting those periods and contributing to an increase~~these decreases in ~~overall compensation~~ expenses ~~during the three and six-month periods ended June 30, 2023. Additionally, general and administrative~~were partially offset by higher expenses for ~~the three~~annual variable compensation and ~~six months ended June 30, 2023 included $1 million and $2 million, respectively, of employee severance and related transition~~long-term incentive award expenses.

Additional detail on our General and administrative expenses is presented in Table 22.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Portfolio Management Costs

The increase in portfolio management costs for the three and ~~six-month~~nine-month periods resulted from growth in our investment portfolio over the past twelve months. These costs are primarily associated with the management of our BPL bridge loans and also include loan sub-servicing costs.

Loan Acquisition Costs

~~Loan~~The decreases in loan acquisition costs for our mortgage banking operations ~~decreased $2 million and $5 million~~ for the three and ~~six-month~~nine-month periods ~~respectively, as a result of~~resulted primarily from lower loan origination and acquisition volumes in ~~both of~~ our mortgage banking businesses in the ~~first half of~~ 2023 periods, compared to the ~~first half~~same periods of 2022.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries ("TRS"), which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. The ~~decrease in~~tax provision for the three and nine months ended September 30, 2023 reflect GAAP income earned at our TRS during those periods, resulting primarily from improved mortgage banking results. The tax benefit for the ~~six-month periods~~nine months ended September 30, 2022 was primarily the result of ~~smaller~~ GAAP losses atfrom our ~~TRS during the first half of 2023 versus the same period in 2022. The tax provision in the second quarter of 2023 resulted from GAAP income~~mortgage banking operations at our TRS during that ~~period, resulting from improved mortgage banking results.~~period.

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

Other Comprehensive Income (Loss), Net

Other comprehensive ~~income~~loss for the three ~~and six-months~~months ended ~~June~~September 30, 2023 ~~was primarily related to positive fair value changes~~resulted from unrealized losses on our available-for-sale securities, ~~which benefited~~primarily resulting from ~~spread tightening during~~rising interest rates. For the ~~second quarter~~nine-months ended September 30, 2023, these losses were more than offset by cumulative gains on our available for sale securities, as well as the reclassification of ~~2023.~~unrealized loss on interest rate agreements into net income (loss). Other comprehensive income for three and ~~six-months~~nine-months ended ~~June~~September 30, 2022, was primarily related to negative fair value changes on our available-for-sale securities, due to spread ~~widening during the first half of 2023.~~widening.

Preferred Dividends

We issued preferred stock in January ~~2023. The amount of the total preferred~~2023 and began to declare and pay dividends ~~increased from the first to second quarters of 2023, as~~on that stock in the first quarter ~~reflected a partial quarter accrual.~~of 2023.

Net Interest Income

The following table presents the components of net interest income for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 3 – Net Interest Income


		Three Months Ended June 30,													Three Months Ended September 30,
		2023						2022							2023						2022
(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	$	1,263	$	75,054	6.7	%	$	15,463	$	1,507,928	4.1	%	Residential loans, held-for-sale	$	4,673	$	295,050	6.3	%	$	11,844	$	984,365	4.8	%

Residential loans - HFI at Legacy Sequoia (2)	Residential loans - HFI at Legacy Sequoia (2)	2,737		160,850		6.8	%	1,108		213,793		2.1	%	Residential loans - HFI at Legacy Sequoia (2)	2,594		154,710		6.7	%	1,473		199,264		3.0	%
Residential loans - HFI at Sequoia (2)	Residential loans - HFI at Sequoia (2)	37,478		3,741,810		4.0	%	31,923		3,778,552		3.4	%	Residential loans - HFI at Sequoia (2)	40,180		3,742,871		4.3	%	31,587		3,468,730		3.6	%
Residential loans - HFI at Freddie Mac SLST (2)	Residential loans - HFI at Freddie Mac SLST (2)	15,273		1,441,776		4.2	%	16,553		1,725,030		3.8	%	Residential loans - HFI at Freddie Mac SLST (2)	15,065		1,370,770		4.4	%	16,098		1,600,215		4.0	%
BPL loans - HFS	BPL loans - HFS	3,440		252,916		5.4	%	8,715		602,597		5.8	%	BPL loans - HFS	4,546		296,131		6.1	%	9,070		535,017		6.8	%
BPL loans - HFI	BPL loans - HFI	40,241		1,634,615		9.8	%	15,611		978,086		6.4	%	BPL loans - HFI	35,534		1,673,626		8.5	%	24,688		1,257,222		7.9	%
BPL term loans - HFI at CAFL (2)	BPL term loans - HFI at CAFL (2)	42,080		2,856,689		5.9	%	49,878		2,976,988		6.7	%	BPL term loans - HFI at CAFL (2)	40,564		2,780,552		5.8	%	50,959		2,960,614		6.9	%
BPL bridge loans - HFI at CAFL (2)	BPL bridge loans - HFI at CAFL (2)	12,503		493,907		10.1	%	6,730		416,288		6.5	%	BPL bridge loans - HFI at CAFL (2)	12,376		499,674		9.9	%	10,480		529,993		7.9	%
Multifamily loans - HFI at Freddie Mac K-Series(2)	Multifamily loans - HFI at Freddie Mac K-Series(2)	4,697		424,733		4.4	%	4,732		448,002		4.2	%	Multifamily loans - HFI at Freddie Mac K-Series(2)	4,677		419,867		4.5	%	4,762		439,966		4.3	%
Trading securities(3)	Trading securities(3)	3,548		89,607		15.8	%	4,327		155,168		11.2	%	Trading securities(3)	3,276		50,826		25.8	%	3,924		131,626		11.9	%
Available-for-sale securities	Available-for-sale securities	2,675		117,845		9.1	%	3,501		137,179		10.2	%	Available-for-sale securities	1,835		84,796		8.7	%	3,065		136,203		9.0	%
Other interest income	Other interest income	13,046		1,105,138		4.7	%	8,914		870,538		4.1	%	Other interest income	11,754		962,736		4.9	%	9,712		898,111		4.3	%
Total interest income	Total interest income	178,981		12,394,940		5.8	%	167,455		13,810,149		4.9	%	Total interest income	177,074		12,331,609		5.7	%	177,662		13,141,326		5.4	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(22,881)		1,120,645		(8.2)	%	(11,819)		1,598,593		(3.0)	%	Short-term debt facilities	(20,915)		1,021,941		(8.2)	%	(19,436)		1,561,146		(5.0)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(3,796)		189,128		(8.0)	%	(1,842)		232,942		(3.2)	%	Short-term debt - servicer advance financing	(3,410)		159,993		(8.5)	%	(2,606)		225,002		(4.6)	%
Promissory notes	Promissory notes	(336)		19,660		(6.8)	%	—		—		—	%	Promissory notes	(308)		17,865		(6.9)	%	(572)		33,302		(6.9)	%
Short-term debt - convertible notes, net	Short-term debt - convertible notes, net	(1,698)		128,215		(5.3)	%	—		—		—	%	Short-term debt - convertible notes, net	(2,690)		181,663		(5.9)	%	(1,330)		100,895		(5.3)	%
ABS issued - Legacy Sequoia (2)	ABS issued - Legacy Sequoia (2)	(2,659)		159,685		(6.7)	%	(967)		212,033		(1.8)	%	ABS issued - Legacy Sequoia (2)	(2,487)		153,588		(6.5)	%	(1,486)		198,166		(3.0)	%
ABS issued - Sequoia (2)	ABS issued - Sequoia (2)	(33,994)		3,509,939		(3.9)	%	(28,329)		3,536,911		(3.2)	%	ABS issued - Sequoia (2)	(35,810)		3,613,898		(4.0)	%	(27,541)		3,233,716		(3.4)	%
ABS issued - Freddie Mac SLST (2)	ABS issued - Freddie Mac SLST (2)	(10,650)		1,130,963		(3.8)	%	(13,372)		1,419,538		(3.8)	%	ABS issued - Freddie Mac SLST (2)	(10,523)		1,084,889		(3.9)	%	(12,829)		1,325,930		(3.9)	%
ABS issued - Freddie Mac K-Series(2)	ABS issued - Freddie Mac K-Series(2)	(4,311)		392,474		(4.4)	%	(4,351)		416,148		(4.2)	%	ABS issued - Freddie Mac K-Series(2)	(4,290)		387,263		(4.4)	%	(4,377)		408,164		(4.3)	%
ABS issued - CAFL		(38,479)		3,025,530		(5.1)	%	(41,840)		2,984,375		(5.6)	%
ABS issued - CAFL Term (2)														ABS issued - CAFL Term (2)	(32,964)		2,500,163		(5.3)	%	(39,401)		2,599,746		(6.1)	%
ABS issued - CAFL Bridge (2)														ABS issued - CAFL Bridge (2)	(5,249)		481,246		(4.4)	%	(5,276)		475,805		(4.4)	%
Long-term debt facilities	Long-term debt facilities	(21,118)		1,114,947		(7.6)	%	(13,592)		1,405,431		(3.9)	%	Long-term debt facilities	(26,855)		1,342,870		(8.0)	%	(14,464)		1,148,700		(5.0)	%
Long-term debt - corporate	Long-term debt - corporate	(12,963)		657,403		(7.9)	%	(10,855)		703,810		(6.2)	%	Long-term debt - corporate	(11,222)		531,376		(8.4)	%	(13,409)		761,712		(7.0)	%
Total interest expense	Total interest expense	(152,885)		11,448,589		(5.3)	%	(126,967)		12,509,781		(4.1)	%	Total interest expense	(156,723)		11,476,755		(5.5)	%	(142,727)		12,072,284		(4.7)	%
Net Interest Income	Net Interest Income	$	26,096					$	40,488					Net Interest Income	$	20,351					$	34,935


		Six Months Ended June 30,													Nine Months Ended September 30,
		2023						2022							2023						2022
(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	$	6,460	$	222,123	5.8	%	$	30,356	$	1,620,642	3.7	%	Residential loans, held-for-sale	$	11,133	$	246,699	6.0	%	$	42,201	$	1,406,219	4.0	%

Residential loans - HFI at Legacy Sequoia (2)	Residential loans - HFI at Legacy Sequoia (2)	5,277		167,727		6.3	%	2,120		218,032		1.9	%	Residential loans - HFI at Legacy Sequoia (2)	7,871		163,340		6.4	%	3,592		211,707		2.3	%
Residential loans - HFI at Sequoia (2)	Residential loans - HFI at Sequoia (2)	72,122		3,594,324		4.0	%	64,021		3,865,980		3.3	%	Residential loans - HFI at Sequoia (2)	112,302		3,644,384		4.1	%	95,608		3,732,108		3.4	%
Residential loans - HFI at Freddie Mac SLST (2)	Residential loans - HFI at Freddie Mac SLST (2)	30,766		1,442,751		4.3	%	33,753		1,777,180		3.8	%	Residential loans - HFI at Freddie Mac SLST (2)	45,831		1,418,494		4.3	%	49,851		1,717,544		3.9	%
BPL loans - HFS	BPL loans - HFS	7,845		262,035		6.0	%	13,753		537,053		5.1	%	BPL loans - HFS	12,392		273,526		6.0	%	22,823		536,366		5.7	%
BPL loans - HFI	BPL loans - HFI	78,695		1,592,536		9.9	%	27,538		844,682		6.5	%	BPL loans - HFI	114,229		1,619,863		9.4	%	52,226		1,003,673		6.9	%
BPL term loans - HFI at CAFL (2)	BPL term loans - HFI at CAFL (2)	83,889		2,879,585		5.8	%	122,671		3,127,065		7.8	%	BPL term loans - HFI at CAFL (2)	124,453		2,846,211		5.8	%	173,630		3,070,972		7.5	%
BPL bridge loans - HFI at CAFL (2)	BPL bridge loans - HFI at CAFL (2)	25,131		500,691		10.0	%	11,271		353,181		6.4	%	BPL bridge loans - HFI at CAFL (2)	37,506		500,348		10.0	%	21,751		412,766		7.0	%
Multifamily loans at Freddie Mac K-Series (2)		9,315		423,933		4.4	%	9,485		457,750		4.1	%
Multifamily loans - HFI at Freddie Mac K-Series (2)														Multifamily loans - HFI at Freddie Mac K-Series (2)	13,992		422,563		4.4	%	14,247		451,757		4.2	%
Trading securities(3)	Trading securities(3)	7,094		98,579		14.4	%	9,596		162,202		11.8	%	Trading securities(3)	10,371		82,486		16.8	%	13,520		151,898		11.9	%
Available-for-sale securities	Available-for-sale securities	5,557		123,910		9.0	%	14,187		137,608		20.6	%	Available-for-sale securities	7,391		110,729		8.9	%	17,252		137,134		16.8	%
Other interest income	Other interest income	25,346		1,094,723		4.6	%	18,104		928,072		3.9	%	Other interest income	37,100		1,050,244		4.7	%	27,816		917,975		4.0	%
Total interest income	Total interest income	357,497		12,402,917		5.8	%	356,855		14,029,447		5.1	%	Total interest income	534,571		12,378,887		5.8	%	534,517		13,750,119		5.2	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(48,387)		1,206,386		(8.0)	%	(21,645)		1,662,458		(2.6)	%	Short-term debt facilities	(69,302)		1,144,228		(8.1)	%	(41,081)		1,628,316		(3.4)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(7,644)		197,783		(7.7)	%	(3,504)		250,009		(2.8)	%	Short-term debt - servicer advance financing	(11,054)		185,048		(8.0)	%	(6,110)		241,582		(3.4)	%
Promissory notes	Promissory notes	(734)		21,815		(6.7)	%	—		—		—	%	Promissory notes	(1,042)		20,484		(6.8)	%	(572)		11,223		(6.8)	%
Short-term debt - convertible notes, net	Short-term debt - convertible notes, net	(3,774)		142,379		(5.3)	%	—		—		—	%	Short-term debt - convertible notes, net	(6,464)		155,618		(5.5)	%	(1,330)		34,001		(5.2)	%
ABS issued - Legacy Sequoia (2)	ABS issued - Legacy Sequoia (2)	(5,163)		166,801		(6.2)	%	(1,668)		215,911		(1.5)	%	ABS issued - Legacy Sequoia (2)	(7,650)		162,348		(6.3)	%	(3,154)		209,931		(2.0)	%
ABS issued - Sequoia (2)	ABS issued - Sequoia (2)	(64,049)		3,364,498		(3.8)	%	(56,500)		3,622,067		(3.1)	%	ABS issued - Sequoia (2)	(99,859)		3,448,545		(3.9)	%	(84,041)		3,491,194		(3.2)	%
ABS issued - Freddie Mac SLST (2)	ABS issued - Freddie Mac SLST (2)	(21,868)		1,140,899		(3.8)	%	(27,457)		1,473,896		(3.7)	%	ABS issued - Freddie Mac SLST (2)	(32,392)		1,122,024		(3.8)	%	(40,287)		1,424,032		(3.8)	%
ABS issued - Freddie Mac K-Series (2)	ABS issued - Freddie Mac K-Series (2)	(8,552)		391,854		(4.4)	%	(8,722)		425,946		(4.1)	%	ABS issued - Freddie Mac K-Series (2)	(12,842)		390,307		(4.4)	%	(13,099)		419,954		(4.2)	%
ABS issued - CAFL (2)		(77,926)		3,039,879		(5.1)	%	(100,207)		3,120,553		(6.4)	%
ABS issued - CAFL Term (2)														ABS issued - CAFL Term (2)	(100,324)		2,540,276		(5.3)	%	(134,244)		2,734,937		(6.5)	%
ABS issued - CAFL Bridge (2)														ABS issued - CAFL Bridge (2)	(15,814)		479,899		(4.4)	%	(10,639)		370,450		(3.8)	%
Long-term debt facilities	Long-term debt facilities	(41,174)		1,095,904		(7.5)	%	(23,200)		1,272,918		(3.6)	%	Long-term debt facilities	(68,029)		1,179,131		(7.7)	%	(37,664)		1,231,057		(4.1)	%
Long-term debt - corporate	Long-term debt - corporate	(25,693)		657,050		(7.8)	%	(20,362)		678,442		(6.0)	%	Long-term debt - corporate	(36,915)		614,698		(8.0)	%	(33,771)		706,504		(6.4)	%
Total interest expense	Total interest expense	(304,964)		11,425,248		(5.3)	%	(263,265)		12,722,200		(4.1)	%	Total interest expense	(461,687)		11,442,606		(5.4)	%	(405,992)		12,503,181		(4.3)	%
Net Interest Income	Net Interest Income	$	52,533					$	93,590					Net Interest Income	$	72,884					$	128,525

(1)Average balances for residential loans held-for-sale and held-for-investment, business purpose loans held-for-sale and held-for-investment, 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, short-term debt, long-term debt and certain ABS issued are calculated based upon amortized historical cost. Average balances for ABS carried at fair value are calculated based upon fair value.

(2)Interest income ~~from residential loans - HFI at Legacy Sequoia~~ and ~~the~~ interest expense ~~from ABS issued - Legacy Sequoia represent~~at "Legacy Sequoia", "Sequoia", "Freddie Mac SLST", "Freddie Mac K-Series", "CAFL Term", and "CAFL Bridge" reflect activity from consolidated variable interest entities. While we consolidate these entities for GAAP reporting purposes, economically, we earn interest income from the securities we own in these entities, which is represented by the net interest income (interest income less interest expense) from these consolidated entities presented in the table above.

(3)We sold nearly all of our subordinate trading securities over the course of 2023 and our remaining trading securities at September 30, 2023 were interest-only securities, which generate a higher cash interest yield. This interest income is generally offset by a decline in fair value (recognized through investment fair value changes, net on our consolidated ~~Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia and~~statements of income) related to 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.receipt of cash flows each period, resulting in a lower overall economic yield for these investments.

Results of Operations by Segment

We report on our business using three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio. For additional information on our segments, refer to Note 24 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 4 – Segment Results Summary


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		Change		2023		2022		Change		(In Thousands)	2023		2022		Change		2023		2022		Change
Segment Contribution from:	Segment Contribution from:													Segment Contribution from:
Residential Mortgage Banking	Residential Mortgage Banking	$	3,201	$	(14,186)	$	17,387	$	1,938	$	(6,731)	$	8,669	Residential Mortgage Banking	$	4,472	$	(640)	$	5,112	$	6,410	$	(7,371)	$	13,781
Business Purpose Mortgage Banking	Business Purpose Mortgage Banking	(3,343)		(20,653)		17,310		(4,370)		(23,198)		18,828		Business Purpose Mortgage Banking	(1,193)		(3,856)		2,663		(5,563)		(27,054)		21,491
Investment Portfolio	Investment Portfolio	32,212		(52,578)		84,790		67,749		(1,645)		69,394		Investment Portfolio	(5,677)		(22,404)		16,727		62,072		(24,049)		86,121
Corporate/Other	Corporate/Other	(29,197)		(12,549)		(16,648)		(57,824)		(37,477)		(20,347)		Corporate/Other	(28,412)		(23,511)		(4,901)		(86,236)		(60,988)		(25,248)
Net Income (Loss)	Net Income (Loss)	$	2,873	$	(99,966)	$	102,839	$	7,493	$	(69,051)	$	76,544	Net Income (Loss)	$	(30,810)	$	(50,411)	$	19,601	$	(23,317)	$	(119,462)	$	96,145

The sections that follow provide further detail on our three business segments and their results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Corporate/Other

The increase in net expense from Corporate/~~Oth~~erOther for both the three and ~~six-month~~nine-month periods was primarily due to the issuance of new convertible debt in June 2022 and from our trust preferred securities, which are variable rate and were impacted by ~~higher~~rising benchmark interest rates ~~over the past twelve months.~~throughout 2022 and 2023. These increases were partially offset by higher interest income earned on cash and cash equivalents during ~~2023.~~2023, resulting from higher interest rates earned on these balances.

Residential Mortgage Banking Segment

This 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 SEMT® (Sequoia) private-label securitization program, or transfer into our investment portfolio. 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. 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.

The following table provides the activity of residential loans held in inventory for sale at our ~~residential mortgage banking~~Residential Mortgage Banking business during the three and ~~six~~nine months ended ~~June~~September 30, 2023.

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


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2023				(In Thousands)	September 30, 2023
Balance at beginning of period	Balance at beginning of period	$	26,975	$	628,160	Balance at beginning of period	$	196,737	$	628,160
Acquisitions	Acquisitions	183,664		235,402		Acquisitions	814,964		1,050,366
Sales	Sales	(9,106)		(37,876)		Sales	(53,845)		(91,721)
Transfers between segments (1)	Transfers between segments (1)	—		(617,689)		Transfers between segments (1)	(334,417)		(952,106)
Principal repayments	Principal repayments	(3,710)		(19,443)		Principal repayments	(5,210)		(24,653)
Changes in fair value, net	Changes in fair value, net	(1,086)		8,183		Changes in fair value, net	(7,283)		900
Balance at End of Period	Balance at End of Period	$	196,737	$	196,737	Balance at End of Period	$	610,946	$	610,946

(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 ~~six~~nine months ended ~~June~~September 30, 2023, our residential mortgage loan conduit locked ~~$567 million~~$1.6 billion and ~~$684 million~~$2.3 billion of loans ($~~437 million~~1.3 billion and ~~$506 million~~$1.8 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), ~~including $556~~and purchased $815 million and ~~$661 million of Select loans and $11 million and $23 million of Choice loans, and purchased $184 million and $235 million~~$1.05 billion of loans, respectively. During the three and ~~six~~nine months ended ~~June 30, 2023, approximately 78% and 76% of locked loans were purchase-money loans and 22% and 24% were refinancings, respectively. During the three and six months ended June~~September 30, 2023, we distributed $9$54 million and ~~$38~~$92 million (unpaid principal balance), respectively, through whole loan sales ~~respectively. During~~and during the ~~six~~nine months ended ~~June~~September 30, 2023, we completed ~~two~~three securitizations backed by ~~$657~~$995 million of loans (unpaid principal balance).

, including one during the third quarter. At ~~June~~September 30, 2023, ~~we had total net jumbo~~our residential loan ~~exposure~~pipeline was comprised of ~~$528 million, with an average gross mortgage rate of 6.68%. This balance included $197~~$659 million (principal value) of loans in inventory on our balance sheet and ~~$351~~$895 million of loans identified for purchase (locked loans, unadjusted for fallout)~~, less $21 million of forward sale agreements for loans. During~~.

The significant increase in lock and purchase volumes from the second to third quarter of 2023 ~~we grew~~was driven by the onboarding of new depository loan sellers and an increased market share of independent mortgage banks within our ~~loan~~ seller network, ~~through a number~~and included increased bulk purchases from certain of ~~new or re-established relationships.~~these loan sellers. We increased our capital allocation to this segment to $150 million at September 30, 2023, from $80 million at June 30, 2023, ~~from $15 million at March 31, 2023,~~and could increase it further to accommodate the ~~significant~~ growth in ~~volume during the second quarter, which was driven by the growing loan seller base and more favorable securitization market.~~our flow purchase relationships. As discussed in the business update section of this MD&A, we are continuing to pursue new relationships for purchasing jumbo loans on a flow and/or bulk basis, which could positively contribute to volumes ~~in the third quarter of 2023 and beyond.~~moving forward.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At ~~June~~September 30, 2023, we had residential warehouse facilities outstanding with ~~five~~four different counterparties, with ~~$1.25~~$1.05 billion of total capacity and ~~$1.07 billion~~$502 million 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 ~~$700~~$500 million of total capacity and marginable facilities with $550 million of total capacity.

The following table presents key earnings and operating metrics for our Residential Mortgage Banking segment during the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Table 6 – Residential Mortgage Banking Earnings Summary and Operating Metrics


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		Change		2023		2022		Change		(In Thousands)	2023		2022		Change		2023		2022		Change
Mortgage banking income (loss)	Mortgage banking income (loss)	$	7,795	$	(12,885)	$	20,680	$	10,880	$	1,081	$	9,799	Mortgage banking income (loss)	$	10,201	$	3,957	$	6,244	$	21,081	$	5,038	$	16,043
Operating expenses	Operating expenses	(3,887)		(6,889)		3,002		(8,868)		(14,407)		5,539		Operating expenses	(4,916)		(6,285)		1,369		(13,784)		(20,692)		6,908
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(707)		5,588		(6,295)		(74)		6,595		(6,669)		(Provision for) benefit from income taxes	(813)		1,688		(2,501)		(887)		8,283		(9,170)
Segment Contribution	Segment Contribution	$	3,201	$	(14,186)	$	17,387	$	1,938	$	(6,731)	$	8,669	Segment Contribution	$	4,472	$	(640)	$	5,112	$	6,410	$	(7,371)	$	13,781
Loan purchase commitments (loan locks, adjusted for expected fallout)	Loan purchase commitments (loan locks, adjusted for expected fallout)	$	436,891	$	537,925	$	(101,034)	$	505,729	$	2,493,866	$	(1,988,137)	Loan purchase commitments (loan locks, adjusted for expected fallout)	$	1,272,190	$	256,044	$	1,016,146	$	1,777,919	$	2,749,910	$	(971,991)

Residential mortgage banking income presented in the table above is comprised of net interest income from residential loans held-for-sale in inventory and non-interest income, net from this segment (see Note 20 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities, net). Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.

The increase in contribution from our residential mortgage banking operations during the three and ~~six-month~~nine-month periods was attributable to higher mortgage banking activities income resulting from positive margins in 2023, compared to negative margins in 2022, which was partially offset by lower ~~(negative)~~ net interest margin in ~~the first half~~ 2023, given the inverted yield curve, each as discussed in the preceding Consolidated Results of Operations section of this MD&A. Additionally, the net segment contribution in both the ~~first half of 2023,~~three and nine-month periods benefited from lower operating expenses, as we decreased headcount in this segment over the past ~~three quarters to align with current market conditions,~~year, as well as lower loan acquisition costs, given the decrease in volume year-over-year.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The provision for income taxes for the first ~~half~~nine months of 2023 resulted from GAAP income from these operations at our TRS during that period. The benefit from income taxes for the first ~~half~~nine months of 2022 resulted from GAAP losses from these operations at our TRS during that period.

Business Purpose Mortgage Banking Segment

This segment consists of a platform that originates and acquires business purpose lending ("BPL") loans for subsequent securitization, sale, or transfer into our investment portfolio. Business purpose loans are loans to investors in single-family rental and multifamily properties, which we classify as either "term" loans (which include loans with maturities that generally range from 3 to 30 years) or "bridge" loans (which include loans with maturities that generally range between 12 and 36 months). Term loans are mortgage loans secured by residential real estate (primarily 1-4 unit detached or multifamily) that the borrower owns as an investment property and rents to residential tenants. BPL bridge loans are mortgage loans which are generally secured by unoccupied (or in the case of certain multifamily properties, partially occupied) residential or multifamily real estate that the borrower owns as an investment and that is being renovated, rehabilitated or constructed. We typically distribute most of our term loans through our CAFL® private-label securitization program, or through whole loan sales, and typically transfer our BPL bridge loans to our Investment Portfolio, where they will either be retained for investment or securitized, or ~~will sell them~~sold as whole loans. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of loans held-for-sale. This segment’s main sources of mortgage banking income are net interest income earned on loans while they are held in inventory, origination and other fees on loans, mark-to-market adjustments on loans from the time loans are originated or purchased to when they are sold, securitized or transferred into our investment portfolio, and gains/losses from associated hedges. Direct operating expenses and tax expenses associated with these activities are also included in this segment.

~~During~~In the ~~three months ended June 30,~~second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. ~~We did not contribute any capital or~~During the third quarter of 2023, we began to sell ~~any~~ loans into the joint ~~venture during the three months ended June 30, 2023.~~venture. In accordance with the terms of the joint venture, we have committed to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices and will administer the joint venture for ongoing fees. ~~The joint venture is expected to have purchasing power of up to $1 billion, inclusive of secured financing, and we~~We expect we will sell a portion of our BPL bridge loans to the joint venture while continuing to retain a portion in our investment portfolio (including for inclusion in existing or future revolving bridge loan securitizations) or for sale to other third-party investors.

The following table provides business purpose loan origination activity at Redwood during the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Table 7 – Business Purpose Loans — Funding Activity


		Three Months Ended June 30, 2023						Six Months Ended June 30, 2023							Three Months Ended September 30, 2023						Nine Months Ended September 30, 2023
(In Thousands)	(In Thousands)	BPL Term		BPL Bridge (1)		Total		BPL Term		BPL Bridge (1)		Total		(In Thousands)	BPL Term		BPL Bridge (1)		Total		BPL Term		BPL Bridge (1)		Total
Fair value at beginning of period	Fair value at beginning of period	$	354,166	$	17,219	$	371,385	$	358,791	$	5,282	$	364,073	Fair value at beginning of period	$	269,886	$	12,950	$	282,836	$	358,791	$	5,282	$	364,073
Fundings	Fundings	128,622		277,862		406,484		302,700		542,099		844,799		Fundings	105,777		305,104		410,881		408,477		847,203		1,255,680

Sales	Sales	(185,395)		(19,260)		(204,655)		(377,982)		(31,807)		(409,789)		Sales	(27,714)		(31,523)		(59,237)		(405,696)		(63,330)		(469,026)
Transfers between segments/other (2)	Transfers between segments/other (2)	1,777		(262,581)		(260,804)		4,571		(503,091)		(498,520)		Transfers between segments/other (2)	(278,523)		(256,653)		(535,176)		(273,952)		(759,744)		(1,033,696)
Principal repayments	Principal repayments	(14,573)		(1,832)		(16,405)		(16,183)		(2,203)		(18,386)		Principal repayments	(792)		(505)		(1,297)		(16,975)		(2,708)		(19,683)

Changes in fair value, net	Changes in fair value, net	(14,711)		1,542		(13,169)		(2,011)		2,670		659		Changes in fair value, net	3,515		1,255		4,770		1,504		3,925		5,429
Fair Value at End of Period	Fair Value at End of Period	$	269,886	$	12,950	$	282,836	$	269,886	$	12,950	$	282,836	Fair Value at End of Period	$	72,149	$	30,628	$	102,777	$	72,149	$	30,628	$	102,777

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

(2)For BPL term loans, amounts primarily represent ~~repurchased loans.~~loans transferred into a consolidated securitization reflected within our Investment Portfolio Segment. BPL 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.

~~Overall~~While volumes ~~declined slightly from~~were down year-over-year due primarily to rising interest rates and lower industry-wide demand, volumes during the first ~~to second quarter~~three quarters of 2023 asremained relatively steady overall, with a reduction in term loan volume offset by an increase in bridge ~~fundings remained steady while term fundings were lower due to reduced overall transaction activity in the term market.~~loan volume. Looking ahead, we expect sustained demand from sponsors seeking fixed-rate bridge loans or term loans with more prepayment ~~flexibility.~~flexibility, and will continue to assess our bridge loan portfolio for opportunities to refinance borrowers into term loans.

We utilize a combination of capital and loan warehouse facilities to manage our inventory of business purpose loans that we hold for sale. At ~~June~~September 30, 2023, we had business purpose warehouse facilities outstanding with ~~five~~seven different counterparties, with $2.94 billion of total capacity (used for both SFR and bridge loans) and ~~$1.53~~$1.71 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 segment for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 8 – Business Purpose Mortgage Banking Earnings Summary


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		Change		2023		2022		Change		(In Thousands)	2023		2022		Change		2023		2022		Change
Mortgage banking income (loss)	Mortgage banking income (loss)	$	11,291	$	(6,848)	$	18,139	$	27,461	$	4,380	$	23,081	Mortgage banking income (loss)	$	12,484	$	17,887	$	(5,403)	$	39,945	$	22,267	$	17,678
Operating expenses	Operating expenses	(16,040)		(16,974)		934		(33,940)		(34,028)		88		Operating expenses	(13,995)		(24,302)		10,307		(47,935)		(58,330)		10,395
Benefit from income taxes	Benefit from income taxes	1,406		3,169		(1,763)		2,109		6,450		(4,341)		Benefit from income taxes	318		2,559		(2,241)		2,427		9,009		(6,582)
Segment Contribution	Segment Contribution	$	(3,343)	$	(20,653)	$	17,310	$	(4,370)	$	(23,198)	$	18,828	Segment Contribution	$	(1,193)	$	(3,856)	$	2,663	$	(5,563)	$	(27,054)	$	21,491

Business purpose mortgage banking income presented in the table above is comprised of net interest income from our loans held-for-sale in inventory, mortgage banking activities, net (see Note 20 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities), and other income, net for this segment. Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses (including amortization of purchase intangibles) for this segment.

The improvement in segment ~~contribution~~contribution from our business purpose mortgage banking operations during the ~~three and six-month periods~~nine-month period was primarily attributable to higher mortgage banking income, ~~during the first half of 2023,~~ as discussed in the preceding Consolidated Results of Operations section of this MD&A, as well as lower general and administrative costs, given a reduction in headcount year-over-year, and lower loan acquisition costs, given the decrease in volume year-over-year. While General and administrative expenses increased slightly during the three- and six-month periods, the run rate quarterly expense decreased 37% from the third quarter of 2022, as a result of reductions in headcount and other cost saving initiatives implemented over the last three quarters.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit from income taxes during each of the three- and ~~six-~~nine- month periods was due to ~~overall~~ GAAP losses ~~incurred at our TRS during~~generated by this segment's operations in those periods.

Investment Portfolio Segment

This segment consists of organic investments sourced through our residential and business purpose mortgage banking operations, including primarily securities retained from our residential and business purpose securitization activities (some of which we consolidate for GAAP purposes) and BPL 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 reperforming loan securitizations (both of which we consolidate for GAAP purposes), servicer advance investments, home equity investments ("~~HEIs"~~HEI"), and other housing-related investments and associated hedges. 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 Investment Portfolio at ~~June~~September 30, 2023 and December 31, 2022 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 9 – Investment Portfolio - Detail of Economic Interests


(In Thousands)	(In Thousands)	June 30, 2023		December 31, 2022		(In Thousands)	September 30, 2023		December 31, 2022
Organic Residential Investments	Organic Residential Investments					Organic Residential Investments
Residential loans at Redwood (1)	Residential loans at Redwood (1)	$	—	$	152,621	Residential loans at Redwood (1)	$	—	$	152,621
Residential securities at Redwood	Residential securities at Redwood	105,294		103,089		Residential securities at Redwood	105,275		103,089
Residential securities at consolidated Sequoia entities (2)	Residential securities at consolidated Sequoia entities (2)	215,065		219,299		Residential securities at consolidated Sequoia entities (2)	201,004		219,299
Other investments (3)	Other investments (3)	50,084		48,972		Other investments (3)	48,285		48,972
Organic Business Purpose Investments	Organic Business Purpose Investments					Organic Business Purpose Investments
BPL bridge loans	BPL bridge loans	2,160,156		2,023,529		BPL bridge loans	2,177,336		2,023,529
BPL term loan securities at consolidated CAFL Term entities (4)	BPL term loan securities at consolidated CAFL Term entities (4)	305,794		303,897		BPL term loan securities at consolidated CAFL Term entities (4)	315,932		303,897
Other investments	Other investments	—		705		Other investments	—		705
Third-Party Investments	Third-Party Investments					Third-Party Investments
Residential securities at Redwood	Residential securities at Redwood	38,966		124,567		Residential securities at Redwood	5,429		124,567
Residential securities at consolidated Freddie Mac SLST entities (5)	Residential securities at consolidated Freddie Mac SLST entities (5)	297,587		322,803		Residential securities at consolidated Freddie Mac SLST entities (5)	256,023		322,803
Multifamily securities at Redwood	Multifamily securities at Redwood	12,742		12,674		Multifamily securities at Redwood	9,687		12,674
Multifamily securities at consolidated Freddie Mac K-Series entities (6)	Multifamily securities at consolidated Freddie Mac K-Series entities (6)	32,515		31,767		Multifamily securities at consolidated Freddie Mac K-Series entities (6)	32,904		31,767
Servicing investments (7)	Servicing investments (7)	93,005		90,120		Servicing investments (7)	91,478		90,120
HEIs (8)		311,928		283,897
HEI (8)						HEI (8)	316,824		283,897
Other investments	Other investments	6,277		7,081		Other investments	5,824		7,081
Total Segment Investments	Total Segment Investments	$	3,629,413	$	3,725,021	Total Segment Investments	$	3,566,001	$	3,725,021

(1)Balance comprised of loans called from Sequoia securitizations.

(2)Represents our retained economic investment in securities issued by consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated ~~$3.70~~$3.77 billion of loans and ~~$3.49~~$3.57 billion of ABS issued associated with these investments at ~~June~~September 30, 2023. We consolidated $3.19 billion of loans and $2.97 billion of ABS issued associated with these investments at December 31, 2022.

(3)Organic residential other investments at ~~June~~September 30, 2023 includes net risk share investments of ~~$24~~$22 million, representing ~~$30~~$28 million of restricted cash and other assets, net of other liabilities of $6 million.

(4)Represents our retained economic investment in securities issued by consolidated CAFL Term securitization VIEs. For GAAP purposes, we consolidated ~~$2.78~~$2.97 billion of loans and ~~$2.48~~$2.65 billion of ABS issued associated with these investments at ~~June~~September 30, 2023. We consolidated $3.49 billion of loans and $3.21 billion of ABS issued associated with these investments at December 31, 2022.

(5)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated ~~$1.39~~$1.31 billion of loans and ~~$1.10~~$1.06 billion of ABS issued associated with these investments at ~~June~~September 30, 2023. We consolidated $1.46 billion of loans and $1.14 billion of ABS issued associated with these investments at December 31, 2022.

(6)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated ~~$420~~$421 million of loans and $388 million of ABS issued associated with these investments at ~~June~~September 30, 2023. We consolidated $425 million of loans and $393 million of ABS issued associated with these investments at December 31, 2022.

(7)Represents our economic investment in consolidated Servicing Investment variable interest entities. At ~~June~~September 30, 2023, for GAAP purposes, we consolidated ~~$268~~$253 million of servicing investments and ~~$163~~$154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2022, for GAAP purposes, we consolidated $301 million of servicing investments and $207 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.

(8)At ~~June~~September 30, 2023 and December 31, 2022, represents ~~HEIs~~HEI owned at Redwood of ~~$298~~$302 million and $271 million, respectively, as well as our retained economic investment in securities issued by the consolidated HEI securitization entity of ~~$14~~$15 million. At ~~June~~September 30, 2023, for GAAP purposes, we consolidated $129 million of ~~HEIs~~HEI and ~~$96~~$93 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity. At December 31, 2022, for GAAP purposes, we consolidated $133 million of ~~HEIs~~HEI and $101 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity.

~~Our~~The size of our Investment Portfolio ~~shrank~~decreased slightly during the first ~~half~~nine months of 2023, as ~~a reduction from~~ sales of non-strategic third-party securities and residential loans was ~~mostly~~partially offset by ~~an increase in Sequoia securities we retained from the two securitization transactions we executed, as well as from~~ incremental investments in BPL bridge loans and ~~HEIs.~~ HEI. See the Investments Detail and Activity section that follows for additional detail on our portfolio investments and their associated borrowings.

The following table presents an earnings summary for our Investment Portfolio segment for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Table 10 – Investment Portfolio Earnings Summary


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2023		2022		Change		2023		2022		Change		(In Thousands)	2023		2022		Change		2023		2022		Change
Net interest income	Net interest income	$36,748		$41,889		$	(5,141)	$	76,956	$	95,879	$	(18,923)	Net interest income	$30,948		$45,006		$	(14,058)	$	107,904	$	140,885	$	(32,981)
Investment fair value changes, net	Investment fair value changes, net	(1,837)		(98,111)		96,274		(2,851)		(103,517)		100,666		Investment fair value changes, net	(31,315)		(61,780)		30,465		(34,166)		(165,297)		131,131
Other income, net	Other income, net	4,013		6,235		(2,222)		6,181		11,517		(5,336)		Other income, net	2,622		3,906		(1,284)		8,803		15,423		(6,620)
Realized gains, net	Realized gains, net	949		—		949		832		2,581		(1,749)		Realized gains, net	26		—		26		858		2,581		(1,723)
Operating expenses	Operating expenses	(6,196)		(3,277)		(2,919)		(11,691)		(6,961)		(4,730)		Operating expenses	(6,501)		(3,872)		(2,629)		(18,192)		(10,833)		(7,359)
(Provision for) Benefit from income taxes	(Provision for) Benefit from income taxes	(1,465)		686		(2,151)		(1,678)		(1,144)		(534)		(Provision for) Benefit from income taxes	(1,457)		(5,664)		4,207		(3,135)		(6,808)		3,673
Segment Contribution	Segment Contribution	$	32,212	$	(52,578)	$	84,790	$	67,749	$	(1,645)	$	69,394	Segment Contribution	$	(5,677)	$	(22,404)	$	16,727	$	62,072	$	(24,049)	$	86,121

The increase in contribution from the Investment Portfolio during the three and ~~six-month~~nine-month periods was primarily attributable to smaller negative investment fair value changes in the 2023 periods, as discussed in the Consolidated Results of Operations section of this MD&A. These improvements were partially offset by lower net interest income and lower other income, as discussed in the preceding Consolidated Results of Operations section of this MD&A.

Investment fair value changes, net is primarily comprised of the change in fair value (both realized and unrealized) of our portfolio investments accounted for under the fair value option and hedges associated with these investments. See Table 5.6 in Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of investment fair value changes (the difference in amounts in the table above and in Table 5.6 in the notes to our consolidated financial statements relates to fair value changes for investments held at corporate/other). ~~From~~

Despite challenging market technicals, fundamental performance across most of our Investment Portfolio continues to be driven by strong employment data, embedded equity protection via loan seasoning and borrowers motivated to stay current on their low-coupon mortgages. However, the ~~first~~BPL sector overall continues to ~~second quarter~~manage through macro crosswinds that have impacted sponsor sentiment and reduced transaction volumes across the industry. We remain focused on the impact that higher short-term interest rates have on sponsors, notwithstanding overall strength in leasing trends. In anticipation of ~~2023, underlying credit for~~this impact, our ~~investment portfolio remained stable~~team has continued to work with borrowers well in ~~the aggregate~~advance of their loan maturities to assess project plans and ~~within our modeled expectations, as reperforming loan and jumbo loan securities saw continued declines in~~ensure they manage towards successful completions. While 90 ~~day+ delinquencies, while our 90 day+~~days+ delinquencies across our ~~combined CAFL securities~~bridge and term books declined slightly in the third quarter to 4%, REO balances in the BPL bridge ~~loan portfolios~~portfolio increased, and we continue to ~~4.2% at June 30, 2023, from 2.0% at March 31, 2023.~~manage through pockets of stress, largely with a handful of sponsor relationships where a combination of rate modifications and fresh equity has been utilized.

Other income, net within this segment is primarily comprised of income from our MSR investments, bridge loan extension fees, and risk share investment income. Details on the composition of Other income, net are included in Note 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 2023.

Operating expenses at this segment are primarily attributable to portfolio management costs, which increased $1$2 million and $3$5 million during the three and ~~six-month~~nine-month periods, ~~in-line with~~attributable to both an increase in portfolio investments under management ~~year-over-year.~~year-over-year and higher asset management costs for our bridge loan portfolio. We hold certain of our investments, primarily our MSRs, at our taxable REIT subsidiary. Our ~~Provision~~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 ~~2023,~~the three and nine-month periods, reflects positive net income earned from investment portfolio activities at our taxable REIT subsidiary.

Investments Detail and Activity

This section presents additional details on our investments (both within our Investment Portfolio segment and held at a corporate level) and their activity during the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Real Estate Securities Portfolio

The following table sets forth our real estate securities activity by collateral type for the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Table 11 – Real Estate Securities Activity by Collateral Type (1)


Three Months Ended June 30, 2023		Residential		Multifamily		Total
Three Months Ended September 30, 2023									Three Months Ended September 30, 2023			Residential					Multifamily			Total
(In Thousands)	(In Thousands)	Senior		Subordinate				Total	Subordinate				(In Thousands)			Senior					Subordinate		Subordinate
Beginning fair value	Beginning fair value	$	31,297	$	199,400				$	243,346	Beginning fair value			$	38,064			$	116,013		$	12,742	$	166,819

Acquisitions	Acquisitions	6,183		1,979		—			8,162		Acquisitions			—				—			—		—
Sales	Sales	—		(92,152)		—			(92,152)		Sales			(1,026)				(35,223)			(3,524)		(39,773)
Gains on sales and calls, net	Gains on sales and calls, net	—		949		—			949		Gains on sales and calls, net			—				103			(77)		26
Effect of principal payments (2)	Effect of principal payments (2)	(6)		(261)		—			(267)		Effect of principal payments (2)			—				(163)			—		(163)
Change in fair value, net	Change in fair value, net	590		6,098		93			6,781		Change in fair value, net			4,131				(2,141)			546		2,536
Ending Fair Value (3)	Ending Fair Value (3)	$	38,064	$	116,013	$	12,742		$	166,819	Ending Fair Value (3)			$	41,169			$	78,589		$	9,687	$	129,445


Six Months Ended June 30, 2023		Residential		Multifamily		Total
Nine Months Ended September 30, 2023									Nine Months Ended September 30, 2023			Residential					Multifamily			Total
(In Thousands)	(In Thousands)	Senior		Subordinate				Total	Subordinate				(In Thousands)			Senior					Subordinate		Subordinate
Beginning fair value	Beginning fair value	$	28,867	$	198,934				$	240,475	Beginning fair value			$	28,867			$	198,934		$	12,674	$	240,475

Acquisitions	Acquisitions	7,883		1,979		—			9,862		Acquisitions			7,883				1,979			—		9,862
Sales	Sales	—		(98,338)		—			(98,338)		Sales			(1,026)				(133,561)			(3,524)		(138,111)
Gains on sales and calls, net	Gains on sales and calls, net	—		1,476		—			1,476		Gains on sales and calls, net			—				1,579			(77)		1,502
Effect of principal payments (2)	Effect of principal payments (2)	(6)		(440)		—			(446)		Effect of principal payments (2)			(6)				(603)			—		(609)
Change in fair value, net	Change in fair value, net	1,320		12,402		68			13,790		Change in fair value, net			5,451				10,261			614		16,326
Ending Fair Value (3)	Ending Fair Value (3)	$	38,064	$	116,013	$	12,742		$	166,819	Ending Fair Value (3)			$	41,169			$	78,589		$	9,687	$	129,445

(1)Amounts presented in this table include securities reported on our balance sheet and do not include securities we own in consolidated entities. See the following table for a presentation of all securities we own, including those in consolidated entities.

(2)Effect of principal 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.

(3)At ~~June~~September 30, 2023, ~~$10~~$9 million of Senior Securities were used as hedges for our Residential Mortgage Banking operations. These Real estate securities are included in our Residential Mortgage Banking segment.

At ~~June~~September 30, 2023, our securities at Redwood (exclusive of securities owned in consolidated entities) consisted of fixed-rate assets ~~(85%~~(89%), adjustable-rate assets ~~(14%~~(10%), and hybrid assets that reset within the next year (1%).

The following table sets forth activity in our real estate securities portfolio for the three and ~~six~~nine months ended ~~June~~September 30, 2023, 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 interests in securities we own in securitizations we consolidate in accordance with GAAP. Additionally, this table includes securities held both in our Investment Portfolio segment and our Residential Mortgage Banking segment.

Table 12 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities


Three Months Ended June 30, 2023		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
Three Months Ended September 30, 2023													Three Months Ended September 30, 2023					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						$	106,915				$			218,357		$			305,794			$	297,587				$	32,515								$	59,904						$	1,021,072
Acquisitions	Acquisitions	—					—				—				—					—			8,162			Acquisitions			—				3,911					13,938					—				—					—				17,849
Sales	Sales	—			(40,753)			—			—				—					(92,152)			(132,905)		Sales		(926)				(8,962)				—						—				—					(38,847)				(48,735)
Gains on sales and calls, net	Gains on sales and calls, net	—			—			—			—				—					949			949		Gains on sales and calls, net		—				—				—						—				—					26				26
Effect of principal payments (1)	Effect of principal payments (1)	(124)			(2,568)			—			(8,999)				—					(143)			(11,834)		Effect of principal payments (1)		(116)				(2,460)				—					(8,738)				—					(47)				(11,361)
Change in fair value, net	Change in fair value, net	(1,883)			745			10,707			(16,879)				385					8,664			1,739		Change in fair value, net		58				(5,265)				(3,800)					(32,826)				389					2,478				(38,966)
Ending Fair Value (2)	Ending Fair Value (2)	$	106,915		$	218,357		$	305,794		$	297,587			$	32,515				$	59,904		$	1,021,072	Ending Fair Value (2)		$	105,931			$	205,581			$		315,932				$	256,023			$	32,904				$	23,514			$	939,885


Six Months Ended June 30, 2023		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
Nine Months Ended September 30, 2023													Nine Months Ended September 30, 2023					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						$	103,089				$			219,299		$			303,897			$	322,803				$	31,767								$	137,386						$	1,118,241
Acquisitions	Acquisitions	1,700					40,694				—				—					—			8,162			Acquisitions			1,700				44,605					13,938					—				—					8,162				68,405
Sales	Sales	—			(40,753)			—			—				—					(98,338)			(139,091)		Sales		(926)				(49,715)				—						—				—					(137,185)				(187,826)
Gains on sales and calls, net	Gains on sales and calls, net	—			—			—			—				—					1,476			1,476		Gains on sales and calls, net		—				—				—						—				—					1,502				1,502
Effect of principal payments (1)	Effect of principal payments (1)	(197)			(3,897)			—			(16,954)				—					(249)			(21,297)		Effect of principal payments (1)		(313)				(6,357)				—					(25,692)				—					(296)				(32,658)
Change in fair value, net	Change in fair value, net	2,323			3,014			1,897			(8,262)				748					11,467			11,187		Change in fair value, net		2,381				(2,251)				(1,903)					(41,088)				1,137					13,945				(27,779)
Ending Fair Value (2)	Ending Fair Value (2)	$	106,915		$	218,357		$	305,794		$	297,587			$	32,515				$	59,904		$	1,021,072	Ending Fair Value (2)		$	105,931			$	205,581			$		315,932				$	256,023			$	32,904				$	23,514			$	939,885

(1)Effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.

(2)At ~~June~~September 30, 2023, $2$5 million of Sequoia Securities and $8 million of Other Third-Party Securities ~~each on balance sheet,~~ were used as hedges for our Residential Mortgage Banking operations, and were included in our Residential Mortgage Banking segment.

At ~~June~~September 30, 2023, 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 (2%) 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 recourse term debt and marginable debt in the form of repurchase (or “repo”) financing. At ~~June~~September 30, 2023, real estate securities with a fair value of ~~$413~~$401 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with ~~$293~~$127 million of short-term, non-marginable recourse debt and $162 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities, and real estate securities with a fair value of ~~$357~~$336 million (including securities owned in consolidated securitization entities) were financed with ~~$253~~$238 million of short-term debt incurred through repurchase facilities with five different counterparties, and ~~$49~~$54 million of securities were financed with a ~~long-term~~short-term financing facility. The remaining ~~$202~~$149 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 ~~June~~September 30, 2023. This table includes both our securities held on balance sheet and our economic interests in securities we own in securitizations we consolidate in accordance with GAAP.

Table 13 – Credit Statistics of Real Estate Securities Owned at Redwood and in Consolidated Entities


June 30, 2023											Weighted Average Values
		Market Value - IO Securities			Market Value - Non-IO Securities			Principal Balance - Non-IO Securities			Gross Weighted Average Coupon				90 Day+ Delinquency			3-Month Prepayment Rate			Investment Thickness(1)
September 30, 2023													September 30, 2023													Weighted Average Values
																									Market Value - IO Securities				Market Value - Non-IO Securities				Principal Balance - Non-IO Securities				Gross Weighted Average Coupon					90 Day+ 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						Gross Weighted Average Coupon							90 Day+ 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					$	32,771		$		73,160			$	139,694				3.8	%			0.2	%					6		%					7	%
Consolidated Sequoia securities	Consolidated Sequoia securities	30,106					188,251				241,892				4.7	%		1.1	%		5	%			41	%		Consolidated Sequoia securities				33,462				172,119				232,896					4.7	%			1.2	%		8	%	39	%
Total Sequoia Securities	Total Sequoia Securities	59,974			265,298			381,713			4.4	%			0.9	%		5	%		30	%	Total Sequoia Securities			66,233				245,279				372,590				4.4		%			0.9		%		7		%		28	%
Consolidated Freddie Mac SLST securities	Consolidated Freddie Mac SLST securities	17,133			280,454			470,772			4.5	%			9.1	%		5	%		28	%	Consolidated Freddie Mac SLST securities			16,849				239,174				461,596				4.5		%			8.6		%		5		%		28	%
RPL securities on balance sheet	RPL securities on balance sheet	64			11,884			44,112			4.4	%			3.2	%		6	%		2	%	RPL securities on balance sheet			—				—				—				—		%			—		%		—		%		—	%
Total RPL Securities	Total RPL Securities	17,197			292,338			514,884			4.5	%			8.9	%		5	%		27	%	Total RPL Securities			16,849				239,174				461,596				4.5		%			8.6		%		5		%		28	%
Consolidated Freddie Mac K-Series securities	Consolidated Freddie Mac K-Series securities	—			32,515			36,468			4.3	%			—	%		—	%		10	%	Consolidated Freddie Mac K-Series securities			—				32,904				36,468				4.3		%			—		%		—		%		8	%
Multifamily securities on balance sheet	Multifamily securities on balance sheet	20			12,722			13,778			4.9	%			0.1	%		—	%		8	%	Multifamily securities on balance sheet			12				9,675				10,178				5.2		%			—		%		46		%		14	%
Total Multifamily Securities	Total Multifamily Securities	20			45,237			50,246			4.4	%			—	%		—	%		10	%	Total Multifamily Securities			12				42,579				46,646				4.5		%			—		%		10		%		9	%
Consolidated CAFL securities	Consolidated CAFL securities	26,624			279,170			421,582			5.3	%			3.7	%		8	%		19	%	Consolidated CAFL securities			24,244				291,688				437,838				5.4		%			3.7		%		7		%		19	%
Other third-party securities	Other third-party securities	8,144			27,070			43,377			4.2	%			0.2	%		10	%		2	%	Other third-party securities			8,409				5,418				19,473				5.9		%			0.3		%		13		%		5	%
Total Securities (2)	Total Securities (2)	$	111,959		$	909,113		$	1,411,802														Total Securities (2)			$	115,747			$	824,138			$	1,338,143

(1)Investment thickness represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. We generally own first loss positions in Sequoia, RPL and CAFL securities. We own both first loss and mezzanine positions (positions credit enhanced by subordinate securities) in multifamily and other third-party securities.

We primarily target investments that have a sensitivity to housing credit risk, typically sourced through our operating businesses where we control the underwriting and review of underlying collateral. During the ~~second~~third quarter of 2023, our ~~investment~~overall securities portfolio continued to demonstrate stable fundamentals, driven by underlying loan seasoning, low 90+ day delinquencies and embedded growth in home prices and rents. Given the seasoned nature of our investments (particularly within our RPL securities and Sequoia securities), many of ~~these~~our residential investments are supported by substantial home price appreciation and borrower equity in the underlying homes.

~~The~~ While the level of 90 day+ delinquencies for the BPL term loans underlying our consolidated CAFL securities ~~increased~~remained stable from the ~~first~~second to ~~second~~third quarter of ~~2023. Over~~2023, 60 days+ delinquencies since June 30, 2023 increased modestly, which if not resolved, could negatively impact the last three quarters we have experienced elevated levels of 30+ and 60+ day delinquencies. While we continue to work with borrowers to resolve issues and modify loans as appropriate, these trends could lead to an increase in serious delinquencies that could ultimately result in increased credit losses and a decrease in the fair value of these securities. With a weighted average quarter-end carrying value of 62 cents to face value, we estimate our ~~CAFL securities.~~Investment Portfolio had approximately $3.26 per share of net discount to par at quarter end. We believe continued credit performance in our underlying securities portfolio could contribute to our ability to realize potential upside in book value over time.

BPL Bridge Loans Held-for-Investment

The following table provides the activity of BPL bridge loans held-for-investment during the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Table 14 – BPL Bridge Loans Held-for-Investment - Activity


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2023		June 30, 2023		(In Thousands)	September 30, 2023		September 30, 2023
Fair value at beginning of period	Fair value at beginning of period	$	2,102,221	$	2,023,529	Fair value at beginning of period	$	2,160,156	$	2,023,529

Sales						Sales	(2,310)		(2,310)
Transfers between portfolios (1)	Transfers between portfolios (1)	263,296		503,581		Transfers between portfolios (1)	256,654		760,235
Transfers to REO	Transfers to REO	(3,121)		(10,511)		Transfers to REO	(38,128)		(48,639)
Principal repayments	Principal repayments	(195,155)		(350,365)		Principal repayments	(182,687)		(533,052)
Changes in fair value, net	Changes in fair value, net	(7,085)		(6,078)		Changes in fair value, net	(16,349)		(22,427)
Fair Value at End of Period	Fair Value at End of Period	$	2,160,156	$	2,160,156	Fair Value at End of Period	$	2,177,336	$	2,177,336

(1)We originate BPL bridge loans at our TRS and transfer a portion of them to our REIT that we intend to hold for investment. 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. 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. For BPL bridge loans held at our REIT that are transferred into our CAFL bridge securitizations, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income. 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.

Our ~~$2.16~~$2.18 billion of BPL bridge loans held-for-investment at ~~June~~September 30, 2023 were comprised of first-lien, interest-only loans with a weighted average coupon of ~~10.78%~~10.54% and original maturities of six to 36 months. At origination, the weighted average FICO score of borrowers backing these loans was ~~743~~745 and the weighted average LTV ratio of these loans was ~~65%~~64%. At ~~June~~September 30, 2023, of the ~~3,024~~3,197 loans in this portfolio, ~~102~~91 of these loans with an aggregate fair value of ~~$58~~$54 million and an aggregate unpaid principal balance of ~~$65~~$61 million were in foreclosure and ~~106~~101 loans with an aggregate fair value of ~~$92~~$79 million and an unpaid principal balance of ~~$105~~$89 million were 90-or-more days delinquent (certain loans in foreclosure were also at least 90 days delinquent). Additionally, REO associated with bridge loans increased to $49 million at September 30, 2023, from $13 million at June 30, 2023 and $3 million at December 31, 2022.

Changes in the fair value of bridge loans held-for-investment during the ~~six~~nine months ended ~~June~~September 30, 2023, primarily reflect ~~increased impairments~~reductions in values for non-accrual bridge loans and bridge loans that were modified during the third quarter of 2023. During the third quarter of 2023, BPL bridge loans with a cumulative unpaid principal balance of $307 million were subject to modifications of certain terms, including reductions in interest rates (including, in certain cases, deferrals of interest) combined with infusions of fresh capital from either the existing sponsor or third-party sources. The modifications resulted in a weighted average reduction in contractual interest rate on ~~non-performing bridge loans.~~these loans of approximately 2.5%. In addition to loans for which we completed these types of modifications, during the third quarter of 2023, we extended the maturities of loans with approximately $187 million of unpaid principal balance. While we continue to work proactively with certain borrowers to ~~resolve~~address the impacts of rising interest rates, elongated project timelines, or other issues, ~~and amend loans as appropriate,~~ further increases in ~~serious~~ delinquencies or modifications within our BPL bridge loan portfolio could ultimately result in ~~increased credit losses and a decrease~~further decreases in the fair value of our bridge loans held for ~~investment.~~investment, and further instances of borrower/sponsor stress could lead to realized credit losses. Additionally, an increase in maturity extensions in the BPL bridge portfolio would increase the expected time to repayment with a potential impact on fair values and credit losses. However, given the short duration nature of our bridge loans, maturity extensions have been an expected part of the business, even before market conditions became more challenging. Over the past six months, maturity extensions of BPL bridge loans averaged less than six months.

We generally value delinquent BPL loans at a dollar price that is informed by various market data, including the estimated fair value of the collateral securing a loan, for which we typically receive third-party appraisals, as well as estimated holding costs and sales costs. The amounts we may ultimately recover through the foreclosure of loans and the sale of the underlying collateral or through alternative strategies, such as through loans sales or discounted payoffs, could vary materially from our estimates and could have a material impact on our earnings in future periods.

100

We finance our BPL bridge loans with a combination of recourse, non-marginable warehouse facilities, non-recourse, non-marginable warehouse facilities, and non-recourse securitization debt. At ~~June~~September 30, 2023, we had: ~~$494~~$70 million of debt incurred through short-term warehouse facilities with ~~three~~two counterparties, which was secured by ~~$587~~$92 million of business purpose bridge loans; ~~$810 million~~$1.12 billion of debt incurred through long-term facilities with ~~two~~three different counterparties, which was secured by ~~$971 million~~$1.50 billion of business purpose bridge loans; and $485 million of securitization debt secured by ~~$496~~$525 million of business purpose bridge loans and ~~$55~~$24 million of restricted cash.

The following table provides the composition of BPL bridge loans held-for-investment by product type as of ~~June~~September 30, 2023 and December 31, 2022.

Table 15 – BPL Bridge Loans Held-for-Investment - By Product Type

(In Thousands) June 30, 2023 December 31, 2022
Multifamily $ 1,061,272 $ 1,055,533
Renovate / Build to rent 875,405 736,368
Fix and Flip 86,998 105,157
Other 136,481 126,471
Fair Value at End of Period $ 2,160,156 $ 2,023,529

~~100~~


(In Thousands)	September 30, 2023		December 31, 2022
Multifamily	$	993,983	$	1,055,533



Renovate / Build to rent	942,869		736,368
Fix and Flip	91,861		105,157
Other	148,623		126,471
Fair Value at End of Period	$	2,177,336	$	2,023,529

Residential Loans

The following table provides the activity of residential loans held at our investment portfolio during the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Table 16 – Investment Portfolio Residential Loans - Activity


	Three Months Ended		~~Six~~Nine Months Ended
(In Thousands)	~~June~~September 30, 2023		~~June~~September 30, 2023
Fair value at beginning of period	$	—	$	152,621
Acquisitions	—		—

Sales	—		(134,848)
Transfers between portfolios	—		(17,330)

Principal repayments	—		(992)
Changes in fair value, net	—		549
Fair Value at End of Period	$	—	$	—

During the first quarter of 2023, we sold the majority of our remaining residential loans in our Investment Portfolio (which were from ~~called~~ Sequoia securitizations), and the remaining $17 million were transferred to our Residential Mortgage Banking segment.

101

Home Equity Investments

The following table provides the activity of HEI held at our investment portfolio during the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Table 17 – HEI at Investment Portfolio Segment - Activity


Home Equity Investments(1)	Home Equity Investments(1)		Three Months Ended			Six Months Ended				Home Equity Investments(1)	Three Months Ended			Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2023	June 30, 2023		(In Thousands)			September 30, 2023	September 30, 2023
Balance at beginning of period	Balance at beginning of period		$	416,783		$	403,462			Balance at beginning of period	$	427,307		$	403,462
New/additional investments	New/additional investments		8,954		8,954	25,513				New/additional investments	113		113	25,626
Sales/distribution	Sales/distribution		—			—				Sales/distribution	—			—
Repayments	Repayments		(9,277)			(17,031)				Repayments	(9,122)			(26,153)
Changes in fair value, net	Changes in fair value, net		10,847			15,363				Changes in fair value, net	12,974			28,337

Balance at End of Period	Balance at End of Period		$	427,307		$	427,307			Balance at End of Period	$	431,272		$	431,272

(1)Our home equity investments presented in this table as of ~~June~~September 30, 2023, include ~~$129~~$129 million of ~~HEIs~~HEI owned in our consolidated HEI securitization entity and ~~$298~~$302 million of ~~HEIs~~HEI owned directly at Redwood.

Additional details on our ~~HEIs~~HEI are included in Note 10 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. During the three and ~~six~~nine months ended ~~June~~September 30, 2023, positive investment fair value changes primarily reflected improvements in actual and forecasted home price appreciation, relative to previously modeled amounts.

~~101~~

Other Investments

The following table sets forth our other investments activity at our Investment Portfolio segment by significant asset type for the three and ~~six~~nine months ended ~~June~~September 30, 2023.

Table 18 – Other Investments – Activity(1)


Three Months Ended June 30, 2023		Servicing Investments(2)			Strategic Investments			MSRs and Excess Servicing			Other			Total
Three Months Ended September 30, 2023							Three Months Ended September 30, 2023										Servicing Investments(2)									Strategic Investments			MSRs and Excess Servicing				Other				Total
(In Thousands)	(In Thousands)			Servicing Investments(2)	Strategic Investments		MSRs and Excess Servicing			Other			Total			(In Thousands)						Servicing Investments(2)																	Strategic Investments		MSRs and Excess Servicing
Balance at beginning of period	Balance at beginning of period							$	381,690										$	234,304				$	54,867	$	66,119		$	247			$	355,537
New/additional investments	New/additional investments	—			1,150			—			—			1,150				New/additional investments					—								2,441				—			—				2,441
Sales/distribution/repayments	Sales/distribution/repayments	—			—			—			(30)			(30)			Sales/distribution/repayments				—							—				—				(13)				(13)
Servicer advances (repayments), net	Servicer advances (repayments), net	(29,739)			—			—			—			(29,739)			Servicer advances (repayments), net				(18,560)							—				—				—				(18,560)
Changes in fair value, net	Changes in fair value, net	3,665			(3,680)			2,481			—			2,466			Changes in fair value, net				4,069							(1,454)				(1,659)				—				956
Other	Other	—			—			—			—			—			Other				—							—				—				—				—
Balance at End of Period	Balance at End of Period	$	234,304		$	54,867		$	66,119		$	247		$	355,537		Balance at End of Period				$	219,813						$	55,854			$	64,460			$	234			$	340,361


Six Months Ended June 30, 2023		Servicing Investments(2)			Strategic Investments			MSRs and Excess Servicing			Other			Total
Nine Months Ended September 30, 2023							Nine Months Ended September 30, 2023										Servicing Investments(2)									Strategic Investments			MSRs and Excess Servicing				Other				Total
(In Thousands)	(In Thousands)			Servicing Investments(2)	Strategic Investments		MSRs and Excess Servicing			Other			Total			(In Thousands)						Servicing Investments(2)																	Strategic Investments		MSRs and Excess Servicing
Balance at beginning of period	Balance at beginning of period							$	390,938										$	269,259				$	56,518	$	64,456		$	705			$	390,938
New/additional investments	New/additional investments	—			2,050			—			—			2,050				New/additional investments					—								4,491				—			—				4,491
Sales/distribution/repayments	Sales/distribution/repayments	—			—			—			(372)			(372)			Sales/distribution/repayments				—							—				—				(385)				(385)
Servicer advances (repayments), net	Servicer advances (repayments), net	(37,268)			—			—			—			(37,268)			Servicer advances (repayments), net				(55,828)							—				—				—				(55,828)
Changes in fair value, net	Changes in fair value, net	2,313			(3,701)			1,663			(86)			189			Changes in fair value, net				6,382							(5,155)				4				(86)				1,145
Other	Other	—			—			—			—			—			Other				—							—				—				—				—
Balance at End of Period	Balance at End of Period	$	234,304		$	54,867		$	66,119		$	247		$	355,537		Balance at End of Period				$	219,813						$	55,854			$	64,460			$	234			$	340,361

102

Footnotes to Table 18 on prior page

(1)Tables include all "Other investments" as presented on our consolidated balance sheets. Strategic Investments presented above are held at Corporate/Other, and the remaining other investments are held in our Investment Portfolio segment.

(2)Our servicing investments are owned through our consolidated Servicing Investment entities. At ~~June~~September 30, 2023, our economic investment in these entities was ~~$93~~$91 million (for GAAP purposes, we consolidated ~~$268~~$253 million of servicing investments, ~~$163~~$154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities).

Changes in fair value, net for MSRs and Excess Servicing for the three months ended June 30, 2023 primarily represent increases in fair value to lower actual and forecasted prepayment speeds relative to those modeled at the beginning of the year. These increases were partially offset by a reduction in basis from the regular receipt of scheduled cash flows.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.

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.

~~102~~

In ~~June~~September 2023, our Board of Directors declared regular dividends of $0.16 per common share and $0.625 per Series A preferred share for the ~~second~~third quarter of 2023,, which were paid on ~~June 30,~~September 29, 2023 and ~~July 17,~~October 16, 2023, respectively. As of ~~June~~September 30, 2023, we expect our ~~year-to-date~~full-year dividend distributions ~~exceeded~~to exceed our annual minimum distribution requirements and we believe that we ~~have met~~will meet 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 2023 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.

While the exact amount is uncertain at this time, we currently expect a significant portion of our 2023 common stock 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. We currently expect all of our 2023 preferred stock dividend distributions to be taxable as ordinary income for federal income tax purposes. Under the federal income tax rules applicable to REITs, none of Redwood’s 2023 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 ~~2022~~2023 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 ~~six~~nine months ended ~~June~~September 30, 2023, we recorded a tax ~~provision~~provisions of ~~$0.1~~$2 million and ~~a benefit of~~ $1 million, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2022, we recorded a tax ~~benefits~~provision of $9$1 million and ~~$12~~a benefit from income taxes of $10 million, respectively. Our tax provision is primarily derived from the activities at our TRS, as we do not book a material tax provision associated with income generated at our REIT. The ~~decrease in the~~switch to a tax provision from a benefit from income taxes year-over-year was primarily the result of ~~a smaller~~ GAAP ~~loss~~income earned at our TRS in 2023 compared to a GAAP loss in 2022.

103

Realization of our deferred tax assets ("DTAs") is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards (where applicable) and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of our DTAs is not ~~assured~~“more likely than not” and establish a valuation allowance accordingly. At December 31, 2022, we reported net federal ordinary and capital DTAs with no material valuation allowance recorded against them. As we experienced GAAP losses in 2022 and earned minimal GAAP income during the ~~six~~nine months ended ~~June~~September 30, 2023 at our TRS, we closely analyzed the realizability of our net deferred tax assets in whole and in part. We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering, among other things, all available positive and negative evidence, historical operating results and cumulative earnings analysis, forecasts of future profitability, and the duration of statutory carryforward periods. Based on this analysis, we continue to believe it is more likely than not that we will realize our federal deferred tax assets in future periods as income is earned at our TRS; therefore, there continues to be no material valuation allowance recorded against our net federal DTAs. This evaluation requires significant judgment in assessing the possible need for a valuation allowance and changes to our assumptions could result in a material change in the valuation allowance with a corresponding impact on the provision for income taxes in the period including such change.

If in a future period, based on available evidence, we conclude that it is not more likely than not that our DTAs will be realized, then a valuation allowance would be established with a corresponding charge to GAAP earnings, which would reduce our book value. Such charges could cause a material reduction, up to the full value of our net DTAs for which a valuation allowance has not previously been established, to our GAAP earnings and book value per share for the quarterly and annual periods in which they are established and could have a material and adverse effect on our business, financial results, or liquidity.

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.

~~103~~

104

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 portfolio assets, proceeds from the sale of investment portfolio assets, and cash generated from our mortgage banking operating ~~activities.~~activities, such as securitization. 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 ~~June~~September 30, 2023, our total capital was ~~$1.92~~$1.79 billion, consisting of (i) ~~$1.12~~$1.11 billion of equity capital, (ii) ~~$779~~$665 million of convertible notes and long-term debt on our consolidated balance sheet ($~~113 million of convertible debt due in August 2023, $150~~148 million of convertible debt due in 2024, $162 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), and (iii) ~~$18~~$17 million of promissory notes included in short-term debt.

As of ~~June~~September 30, 2023, our unrestricted cash and cash equivalents were ~~$357~~$204 million. 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 margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional mortgage loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of loans, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or following the occurrence of a triggering credit event impacting the financed mortgage loan based on a decline in the market value of the financed mortgage loan (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 (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 ~~June~~September 30, 2023, in aggregate, we had ~~$2.32~~$2.45 billion of recourse debt outstanding, of which ~~$313~~$520 million was marginable and ~~$1.21~~$1.93 billion was non-marginable.

We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under 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."

Repurchase Authorization

In July 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. This authorization has no expiration date and does not obligate us to acquire any specific number of shares or securities. During the ~~three and six~~nine months ended ~~June~~September 30, 2023, we did not repurchase any shares of our common stock under this program, and repurchased ~~$31~~$66 million ~~and $64 million, respectively,~~ of Redwood's convertible ~~debt due in August 2023.~~debt. At ~~June~~September 30, 2023, $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.

~~104~~105

Cash Flows and Liquidity for the ~~Six~~Nine Months Ended ~~June~~September 30, 2023

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

During the ~~six~~nine months ended ~~June~~September 30, 2023, our net cash ~~provided by~~used in operating activities was ~~$24~~$867 million. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination, purchase 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. During the first ~~six~~nine months of 2023, 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 $1$896 million of net cash ~~inflows)~~outflows), cash flows from operating activities were positive ~~$22~~$28 million.

Cash Flows from Investing Activities

During the ~~six~~nine months ended ~~June~~September 30, 2023, our net cash provided by investing activities was ~~$386~~$639 million and primarily resulted from proceeds from principal payments on loans held-for-investment and proceeds from sales of securities, in excess of cash deployed into these investments. Because many of our investment securities, loans and HEI 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 and HEI 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 ~~six~~nine months ended ~~June~~September 30, 2023, we transferred loans between held-for-sale and held-for-investment classification, which represent significant non-cash transactions that were not included in cash flows from investing activities.

Cash Flows from Financing Activities

During the ~~six~~nine months ended ~~June~~September 30, 2023, our net cash ~~used in~~provided by financing activities was ~~$292~~$159 million. This primarily resulted from ~~$560 million of net repayments of short-term debt borrowings, partially offset by $189~~$582 million of net borrowings under ABS issued (resulting from the issuance of ~~two~~three Sequoia securitizations ~~which included a combined $657 million of residential loans)~~and one CAFL term securitization), ~~and $65~~partially offset by $437 million of net repayments of short-term debt borrowings, and $11 million of net repayments under long-term debt facilities. Additionally, ~~during the six months ended June 30, 2023, we paid regular quarterly dividends on our common stock of $47 million, and~~ in the first quarter of 2023 we raised $67 million of net proceeds from the issuance of preferred ~~stock.~~stock, and in the third quarter of 2023 we raised $33 million through sales of Redwood common stock under our ATM program.

During the ~~six~~nine months ended ~~June~~September 30, 2023, we declared and paid dividends on our common stock of ~~$0.39~~$0.55 per common share (totaling $66 million) and declared dividends of ~~$1.22917~~$1.85417 per share and paid dividends of ~~$0.60417~~$1.22917 per share (totaling $3 million) on our preferred stock. On ~~June 13,~~September 12, 2023, the Board of Directors declared a regular dividend of $0.16 per share for the ~~second~~third quarter of 2023, which was paid on ~~June 30,~~September 29, 2023 to shareholders of record on ~~June 23,~~September 22, 2023. Additionally, on ~~June 13,~~September 12, 2023, the Board of Directors declared a regular quarterly dividend of $0.625 per share of preferred stock, payable on ~~July 17,~~October 16, 2023 to stockholders of record on ~~June 30,~~September 29, 2023.

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.

~~105~~106

Material Cash Requirements

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.

Our material cash requirements from known contractual and other obligations during the twelve months following ~~June~~September 30, 2023, include maturing short-term debt, interest payments on ~~short-term~~debt and ~~long-term debt,~~ABS issued, payments on operating leases, funding commitments for BPL bridge loans and other current payables. Our material cash requirements from known contractual and other obligations beyond the twelve months following ~~June~~September 30, 2023, include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for BPL bridge loans, and payments under ABS issued (as described further below under Liquidity Needs for our Investment Portfolio).

At ~~June~~September 30, 2023, we had commitments to fund up to ~~$755~~$623 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 (for example, funding is dependent on actual progress on a project and we retain the right to conduct due diligence with respect to each draw request to confirm conditions have been met). ~~Approximately 70%~~A majority of the commitments are for longer-term renovate/build-for-rent loans (which generally have funding caps below their full commitment amount) and are expected to fund over the next ~~nine~~several quarters. Additionally, at ~~June~~September 30, 2023, we had ~~$1.53~~$1.71 billion of available warehouse capacity for business purpose loans and ~~we have an average of approximately $200 million of quarterly~~scheduled bridge loan maturities ~~over the next nine quarters, which will~~are expected to provide an additional source of cash that can be used to fund our commitments.

For additional information regarding our material cash requirements, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 under the caption Contractual Obligations. For additional information on commitments and contingencies as of ~~June~~September 30, 2023 that could impact our liquidity and capital resources, see Note 17 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which supplements the disclosures included in Note 17 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

~~Several~~Most of our loan warehouse facilities and our servicer advance financing 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 ~~some~~several of these facilities during the first ~~six~~nine months of 2023, extinguished others we deemed under-utilized, and have other such facilities with scheduled maturities during the next twelve months. In October of 2023, we successfully extended our residential MSR warehouse facility and servicer advance financing, each for an additional year. While there is no assurance of our ability to renew ~~these~~our other facilities maturing in the next year, given current market conditions we expect to extend these in the normal course of business.

~~Two~~One of our subordinate securities financing facilities matures in September of 2024. This recourse term borrowing is secured by certain securities we retained from Sequoia securitizations we sponsored. While we will continue to evaluate our alternatives with respect to this maturity, we expect we will be able to finance these securities utilizing securities repo financing. However, if market interest rates remain elevated, the cost of this financing would increase our borrowing costs for these assets.

Additionally, one series of our convertible notes ~~are~~is maturing during the ~~13-month~~12-month period following ~~June~~September 30, 2023. Historically, we have issued new convertible debt in part to refinance convertible debt that was maturing. However, given current market rates for unsecured corporate capital, which we find to be economically unattractive, we currently expect to repay our convertible notes maturing in August 2023 with cash on hand. To the extent we ~~do not choose to or~~ cannot issue new ~~unsecured~~ corporate capital (for example, convertible notes, preferred equity or common equity) on favorable terms, or at all, due to adverse market conditions, ~~going forward,~~ we will need to utilize capital from other sources, including cash on hand, to repay our convertible debt that is maturing, which will reduce the amount of cash that can be deployed into our business and could reduce the earnings potential of our business. Further, if market rates for ~~unsecured~~ corporate capital remain elevated and we choose to issue new ~~unsecured~~ corporate capital, it could negatively impact our profitability.

We expect to meet our obligations coming due in less than one year from ~~June~~September 30, 2023, 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.~~arrangements, or through the issuance of equity or debt capital. As of ~~June~~September 30, 2023, we had approximately ~~$206~~$340 million of unencumbered assets. Our unencumbered assets consist primarily of bridge loans, HEI, and retained securities from our securitization activities. We are actively engaged in seeking new financing lines or expanded financing capacity for bridge loans and HEI and expect to have demonstrated further progress on these initiatives in the fourth quarter of 2023.

During the first ~~six~~nine months of 2023, the highest balance of our short-term debt outstanding was $2.03 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 16 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our long-term debt.

~~106~~107

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 ~~June~~September 30, 2023, we had residential warehouse facilities outstanding with ~~five~~four different counterparties, with ~~$1.25~~$1.05 billion of total capacity and ~~$1.07 billion~~$502 million of available capacity. These included non-marginable facilities with ~~$700~~$500 million of total capacity and marginable facilities with $550 million of total capacity. At ~~June~~September 30, 2023, we had business purpose warehouse facilities outstanding with ~~seven~~five different counterparties, with $2.94 billion of total capacity and ~~$1.53~~$1.71 billion of available capacity. All of these BPL financing facilities are non-marginable. We note that several of these facilities used to finance our business purpose mortgage banking loan inventory are also used to finance bridge loans held in our investment portfolio.

All of these facilities have variable interest rates based on SOFR or other commonly used benchmarks and recent policy statements from the Federal Reserve indicate the potential for 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 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.

Our ABS issued is non-recourse and 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. See Notes 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.

Additionally, we have non-recourse debt in the form of non-marginable warehouse 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. In addition, in connection with our BPL bridge loan joint venture, we established a new, dedicated warehouse facility for the joint venture. This warehouse facility is an obligation of the joint venture, not of Redwood, and it is non-recourse to Redwood (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"). See Notes 11 and 17 in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information regarding our BPL bridge loan joint venture.

The remainder of the debt we use to finance our investments is recourse debt, including our long-term subordinate securities financing facilities, BPL financing ~~facility~~facilities and MSR financing facility, as well as our short-term securities repo borrowings and HEI warehouse facility. For securities we have financed, our ~~long-term~~subordinate securities financing facilities are non-marginable and our repo debt facilities and MSR facility (which also finances certificated ~~MSRs) is~~MSRs we classify as securities) are marginable. Our BPL financing facilities and HEI warehouse facility are non-marginable.

108

Delinquencies on BPL bridge loans that are financed through a warehouse ~~facility~~facilities increased in the ~~second quarter~~first nine months of 2023, and have and are expected to continue to be a required use of our liquidity to the extent the terms of the applicable warehouse facility apply reduced financing advance rates to these loans (“advance rate step-downs”) or these loans become ineligible for financing under the terms of the warehouse facility. At ~~June~~September 30, 2023, we had approximately ~~$45~~$35 million of borrowings on warehouse facilities collateralized by BPL bridge loans that were ~~greater than 60~~between 30 and 89 days delinquent, certain of which have already, or may, during or subsequent to the third quarter of 2023, become subject to advance rate step downs or repurchase requirements.

~~107~~

Additionally, our liquidity may be impacted to the extent delinquencies on loans financed through CAFL bridge securitizations were elevated above established thresholds for an extended period, which could trigger adverse changes to certain structural terms of these transactions (such as terms relating to the amortization of the issued securities and the revolving availability of financing under these transactions).

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 potential 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. Further, each of our three recourse subordinate securities financing facilities have interest rate step-up provisions, under which if we do not repay the facilities by certain specified dates, the interest rates on those facilities will increase (seeNote 14 and Note 16 in in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on these provisions).

Corporate Debt

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 and promissory notes. See Notes 14 and 16 in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 8 of our Annual Report on Form 10-K, for additional information on our short-term and long-term debt.

Risks Relating to Debt Incurred Under Short- and Long-Term Borrowing Facilities

As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and/or origination of residential and business purpose mortgage loans (including those we acquire or originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our capital 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 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, under the caption(s) “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities,” and “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements.”

Our sources of debt financing include secured borrowings under residential and business purpose mortgage loan warehouse facilities (including recourse and non-recourse warehouse facilities), short-term securities repurchase facilities, a HEI warehouse facility, 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, 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

109

assets or cash in an amount at least equal to the decline in value. We refer to borrowing facilities with margin call provisions based solely on the lender's determination, in its discretion, of changes in the market value of transferred or pledged assets, as marginable debt. Borrowing facilities that we refer to as non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender), in which case the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S.

~~108~~

Treasury obligations (in certain cases), or additional mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at ~~June~~September 30, 2023, only our short-term securities repurchase facilities (with ~~$253~~$238 million of borrowings outstanding at ~~June~~September 30, 2023), ~~and~~ two of our residential mortgage loan warehouse facilities (with ~~$12~~a combined $234 million of borrowings outstanding at ~~June~~September 30, 2023) and a certificated MSR facility (with $48 million of borrowings outstanding at September 30, 2023) retain market-value based margin call provisions based solely on the lender's determination of market value and, as such, are considered marginable.

Margin call provisions under these facilities are further described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 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 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”

Because many of these borrowing facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 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, 2022 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, 2022 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, 2022 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 ~~June~~September 30, 2023, 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 ~~June~~September 30, 2023 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 ~~June~~September 30, 2023 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur more than $4 billion in additional recourse indebtedness.

~~109~~110

CRITICAL ACCOUNTING 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.

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 ~~June~~September 30, 2023, 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, 2022, incorporated herein by reference, for the same information on these assets and liabilities as of December 31, 2022. Periodic fluctuations in the values of these assets and liabilities are inherently volatile and thus can lead to significant period-to-period GAAP earnings volatility.

Additional detail on our critical accounting estimates is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, under the heading "Critical Accounting Estimates."

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, 2022.

In addition to the market 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, 2022.

~~110~~111

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, 2022, 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, 2022.

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 ~~second~~third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~111~~112

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information on our legal proceedings, see Note 17 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 17 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 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, 2022.

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

During the three months ended ~~June~~September 30, 2023, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended ~~June~~September 30, 2023.


	Total Number of Shares Purchased or Acquired	Average Price per Share Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)
~~April~~July 1, 2023 - ~~April 30, 2023~~	—	$	—	—	$	—
~~May 1, 2023 - May~~July 31, 2023	—	$	—	—	$	—
~~June~~August 1, 2023 - ~~June~~August 31, 2023	—	$	—	—	$	—
September 1, 2023 - September 30, 2023	—	$	—	—	$	—
Total	—	$	—	—	$	101,265

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures (Not Applicable)

Item 5. Other Information

During the three months ended ~~June~~September 30, 2023, no director or ~~officer~~"officer" (as defined in 17 CFR § 240.16a-1(f)) of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.

~~112~~113

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)
3.1.13						Articles Supplementary of the Registrant, effective January 13, 2023 (incorporated by reference to the Registrant's Form 8-A, Exhibit 3.2, filed on January 13, 2023) (No. 001-13759)
3.2						Amended and Restated Bylaws of the Registrant, as adopted on November 2, 2022 (incorporated by reference to the Registrant's Annual Report on Form 10-K, Exhibit 3.2, filed on March 1, 2023)
10.1*						Fourth Amendment to Redwood Trust, Inc. Amended and Restated Executive Deferred Compensation Plan (filed herewith)
10.2*						Eighth Amended and Restated Employment Agreement, dated as of November 3, 2023, by and between Christopher J. Abate and the Registrant (filed herewith)
10.3*						Sixth Amended and Restated Employment Agreement, dated as of November 3, 2023, by and between Dashiell I. Robinson and the Registrant (filed herewith)
10.4*						Third Amended and Restated Employment Agreement, dated as of November 3, 2023, by and between Brooke E. Carillo and the Registrant (filed herewith)
10.5*						Eighth Amended and Restated Employment Agreement, dated as of November 3, 2023, by and between Andrew P. Stone and the Registrant (filed herewith)
10.6*						Third Amended and Restated Employment Agreement, dated as of November 3, 2023, by and between Sasha G. Macomber and the Registrant (filed herewith)
10.7*						Second Amended and Restated ~~2014 Incentive Award Plan~~ ~~(incorporated~~Employment Agreement, dated as of November 3, 2023, by ~~reference to~~and between Fred J. Matera and the ~~Registrant's Current Report on Form 8-K, Exhibit 10.1, filed on May 26, 2023)~~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

114


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 ~~June~~September 30, 2023, is filed in inline XBRL-formatted interactive data files: (i) Consolidated Balance Sheets at ~~June~~September 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022; (iii) Statements of Consolidated Comprehensive Income for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022; (v) Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022; 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 or arrangements.

~~113~~115

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		REDWOOD TRUST, INC.

Date:	~~August 7,~~November 6, 2023	By:	/s/ Christopher J. Abate
			Christopher J. Abate
			Chief Executive Officer
			(Principal Executive Officer)

Date:	~~August 7,~~November 6, 2023	By:	/s/ Brooke E. Carillo
			Brooke E. Carillo
			Chief Financial Officer
			(Principal Financial Officer)

Date:	~~August 7,~~November 6, 2023	By:	/s/ Collin L. Cochrane
			Collin L. Cochrane
			Chief Accounting Officer
			(Principal Accounting Officer)

~~114~~116