~~0000930236rwt:ServicerAdvanceFinancingMember2020-04-012020-06-30~~false2020Q3000093023612/31P5YP7YP6Mus-gaap:OtherAssetsus-gaap:AccountsPayableAndAccruedLiabilitiesCurrentAndNoncurrent0000930236rwt:RepreformingLoansSecuritiesMemberrwt:RealEstateSecuritiesPrimeMezzanineMember2019-12-31

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, 2020


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

For the Transition Period from _______________ to _______________.

Commission File Number 1-13759

REDWOOD TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

One Belvedere Place, Suite 300

Mill Valley,

California

94941

(Address of Principal Executive Offices)

(Zip Code)

(415) 389-7373

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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


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

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


Common Stock, $0.01 par value per share						~~114,944,552~~111,928,020			shares outstanding as of ~~August 4,~~November 2, 2020

REDWOOD TRUST, INC.

2020 FORM 10-Q REPORT

TABLE OF CONTENTS

Page

PART I —

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets at ~~June~~Se ptember 3 0 , 2020 (Unaudited) and December 31, 2019

Consolidated Statements of Income (Loss) for the Three and ~~Six~~Nine Months Ended ~~June~~September 3 0 , 2020 and 2019 (Unaudited)

Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Six~~Nine Months Ended ~~June~~September 3 0 , 2020 and 2019 (Unaudited)

Consolidated Statements of Changes in Stockholders' Equity for the Three and ~~Six~~Nine Months Ended J ~~une~~September 3 0 , 2020 and 2019 (Unaudited)

Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 3 0 , 2020 and 2019 (Unaudited)

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Organization

Note 2. Basis of Presentation

Note 3. Summary of Significant Accounting Policies

Note 4. Principles of Consolidation

Note 5. Fair Value of Financial Instruments

2324

Note 6. Residential Loans

3233

Note 7. Business Purpose Residential Loans

3435

Note 8. Multifamily Loans

3738

Note 9. Real Estate Securities

3739

Note 10. Other Investments

4243

Note 11. Derivative Financial Instruments

4446

Note 12. Other Assets and Liabilities

4648

Note 13. Short-Term Debt

4749

Note 14. Asset-Backed Securities Issued

4951

Note 15. Long-Term Debt

5052

Note 16. Commitments and Contingencies

5254

Note 17. Equity

5659

Note 18. Equity Compensation Plans

5962

Note 19. Mortgage Banking Activities, Net

6164

Note 20. Other Income

6265

Note 21. General and Administrative Expenses , L oan Acquisition Costs, and Other Expenses

6366

Note 22. Taxes

6467

Note 23. Segment Information

6468

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

6973

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

98104

Item 4.

Controls and Procedures

98104

PART II —

OTHER INFORMATION

Item 1.

Legal Proceedings

99105

Item 1A.

Risk Factors

~~101~~106

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~101~~107

Item 3.

Defaults Upon Senior Securities

~~101~~107

Item 4.

Mine Safety Disclosures (Not Applicable)

~~101~~107

Item 5.

Other Information

~~101~~107

Item 6.

Exhibits

~~105~~108

Signatures

~~107~~110

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, 2020		December 31, 2019		(In Thousands, except Share Data) (Unaudited)	September 30, 2020		December 31, 2019
ASSETS⁽¹⁾	ASSETS⁽¹⁾					ASSETS (1)
Residential loans, held-for-sale, at fair value	Residential loans, held-for-sale, at fair value	$	20,199	$	536,385	Residential loans, held-for-sale, at fair value	$	105,128	$	536,385
Residential loans, held-for-investment, at fair value	Residential loans, held-for-investment, at fair value	4,514,131		7,178,465		Residential loans, held-for-investment, at fair value	4,389,808		7,178,465
Business purpose residential loans, held-for-sale, at fair value	Business purpose residential loans, held-for-sale, at fair value	379,795		331,565		Business purpose residential loans, held-for-sale, at fair value	285,549		331,565
Business purpose residential loans, held-for-investment, at fair value	Business purpose residential loans, held-for-investment, at fair value	3,402,405		3,175,178		Business purpose residential loans, held-for-investment, at fair value	3,670,552		3,175,178
Multifamily loans, held-for-investment, at fair value	Multifamily loans, held-for-investment, at fair value	489,075		4,408,524		Multifamily loans, held-for-investment, at fair value	491,415		4,408,524
Real estate securities, at fair value	Real estate securities, at fair value	316,436		1,099,874		Real estate securities, at fair value	351,335		1,099,874
Other investments	Other investments	429,840		358,130		Other investments	384,628		358,130
Cash and cash equivalents	Cash and cash equivalents	528,612		196,966		Cash and cash equivalents	450,684		196,966
Restricted cash	Restricted cash	44,496		93,867		Restricted cash	73,594		93,867
Goodwill and intangible assets	Goodwill and intangible assets	64,610		161,464		Goodwill and intangible assets	60,737		161,464

Derivative assets	Derivative assets	357		35,701		Derivative assets	14,709		35,701
Other assets	Other assets	171,586		419,321		Other assets	124,273		419,321
Total Assets	Total Assets	$	10,361,542	$	17,995,440	Total Assets	$	10,402,412	$	17,995,440

LIABILITIES AND EQUITY ⁽¹⁾	LIABILITIES AND EQUITY ⁽¹⁾					LIABILITIES AND EQUITY (1)
Liabilities	Liabilities					Liabilities
Short-term debt, net	Short-term debt, net	$	662,807	$	2,329,145	Short-term debt, net	$	482,761	$	2,329,145

Derivative liabilities	Derivative liabilities	1,932		163,424		Derivative liabilities	1,612		163,424
Accrued expenses and other liabilities	Accrued expenses and other liabilities	166,013		206,893		Accrued expenses and other liabilities	155,989		206,893

Asset-backed securities issued, at fair value		6,856,086		10,515,475
Asset-backed securities issued (includes $6,969,376 and $10,515,475 at fair value), net						Asset-backed securities issued (includes $6,969,376 and $10,515,475 at fair value), net	7,172,398		10,515,475
Long-term debt, net	Long-term debt, net	1,738,128		2,953,272		Long-term debt, net	1,536,188		2,953,272
Total liabilities	Total liabilities	9,424,966		16,168,209		Total liabilities	9,348,948		16,168,209
Commitments and Contingencies (see Note 16)	Commitments and Contingencies (see Note 16)					Commitments and Contingencies (see Note 16)
Equity	Equity					Equity
Common stock, par value $0.01 per share, 395,000,000 and 270,000,000 shares authorized; 114,940,197 and 114,353,036 issued and outstanding		1,149		1,144
Common stock, par value $0.01 per share, 395,000,000 and 270,000,000 shares authorized; 111,904,322 and 114,353,036 issued and outstanding						Common stock, par value $0.01 per share, 395,000,000 and 270,000,000 shares authorized; 111,904,322 and 114,353,036 issued and outstanding	1,119		1,144
Additional paid-in capital	Additional paid-in capital	2,279,625		2,269,617		Additional paid-in capital	2,261,911		2,269,617
Accumulated other comprehensive (loss) income	Accumulated other comprehensive (loss) income	(29,391)		41,513		Accumulated other comprehensive (loss) income	(20,560)		41,513
Cumulative earnings	Cumulative earnings	801,170		1,579,124		Cumulative earnings	942,982		1,579,124
Cumulative distributions to stockholders	Cumulative distributions to stockholders	(2,115,977)		(2,064,167)		Cumulative distributions to stockholders	(2,131,988)		(2,064,167)
Total equity	Total equity	936,576		1,827,231		Total equity	1,053,464		1,827,231
Total Liabilities and Equity	Total Liabilities and Equity	$	10,361,542	$	17,995,440	Total Liabilities and Equity	$	10,402,412	$	17,995,440

——————

(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, 2020 and December 31, 2019, assets of consolidated VIEs totaled ~~$7,984,618~~$8,197,095 and $11,931,869, respectively. At ~~June~~September 30, 2020 and December 31, 2019, liabilities of consolidated VIEs totaled ~~$7,140,221~~$7,238,047 and $10,717,072, 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)	2020		2019		2020		2019		(Unaudited)	2020		2019		2020		2019
Interest Income	Interest Income									Interest Income
Residential loans	Residential loans	$	54,974	$	77,288	$	134,410	$	153,238	Residential loans	$	44,921	$	77,070	$	179,331	$	230,308
Business purpose residential loans	Business purpose residential loans	53,419		3,996		106,073		6,785		Business purpose residential loans	55,637		5,446		161,710		12,231
Multifamily loans	Multifamily loans	4,870		35,917		45,042		57,305		Multifamily loans	4,918		36,829		49,960		94,134
Real estate securities	Real estate securities	10,027		25,017		28,336		49,467		Real estate securities	10,135		23,047		38,471		72,514
Other interest income	Other interest income	6,656		6,324		14,166		12,788		Other interest income	6,371		7,725		20,537		20,513
Total interest income	Total interest income	129,946		148,542		328,027		279,583		Total interest income	121,982		150,117		450,009		429,700
Interest Expense	Interest Expense									Interest Expense
Short-term debt	Short-term debt	(16,907)		(24,275)		(39,974)		(46,493)		Short-term debt	(5,145)		(24,239)		(45,119)		(70,732)
Asset-backed securities issued	Asset-backed securities issued	(65,304)		(70,113)		(165,802)		(125,408)		Asset-backed securities issued	(66,514)		(71,065)		(232,316)		(196,473)
Long-term debt	Long-term debt	(20,455)		(21,832)		(43,561)		(43,595)		Long-term debt	(28,752)		(21,300)		(72,313)		(64,895)
Total interest expense	Total interest expense	(102,666)		(116,220)		(249,337)		(215,496)		Total interest expense	(100,411)		(116,604)		(349,748)		(332,100)
Net Interest Income	Net Interest Income	27,280		32,322		78,690		64,087		Net Interest Income	21,571		33,513		100,261		97,600
Non-interest Income (Loss)	Non-interest Income (Loss)									Non-interest Income (Loss)
Mortgage banking activities, net	Mortgage banking activities, net	(5,772)		19,160		(34,183)		31,469		Mortgage banking activities, net	59,395		9,515		24,511		40,984
Investment fair value changes, net	Investment fair value changes, net	152,228		3,138		(718,604)		23,297		Investment fair value changes, net	107,047		11,444		(611,557)		34,741
Other income, net	Other income, net	955		4,859		3,392		9,484		Other income, net	(114)		4,356		3,979		13,840
Realized gains, net	Realized gains, net	25,965		2,827		29,817		13,513		Realized gains, net	602		4,714		30,419		18,227
Total non-interest income (loss), net	Total non-interest income (loss), net	173,376		29,984		(719,578)		77,763		Total non-interest income (loss), net	166,930		30,029		(552,648)		107,792
General and administrative expenses	General and administrative expenses	(30,092)		(26,255)		(62,760)		(49,414)		General and administrative expenses	(27,630)		(24,899)		(84,832)		(70,722)
Loan acquisition costs										Loan acquisition costs	(2,158)		(1,916)		(7,716)		(5,507)
Other expenses	Other expenses	(5,083)		(2,452)		(96,498)		(3,490)		Other expenses	(7,788)		(2,531)		(104,286)		(6,021)
Net Income (Loss) before (Provision for) Benefit from Income Taxes	Net Income (Loss) before (Provision for) Benefit from Income Taxes	165,481		33,599		(800,146)		88,946		Net Income (Loss) before (Provision for) Benefit from Income Taxes	150,925		34,196		(649,221)		123,142
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(37)		(2,333)		22,192		(3,216)		(Provision for) benefit from income taxes	(9,113)		114		13,079		(3,102)
Net Income (Loss)	Net Income (Loss)	$	165,444	$	31,266	$	(777,954)	$	85,730	Net Income (Loss)	$	141,812	$	34,310	$	(636,142)	$	120,040

Basic earnings (loss) per common share	Basic earnings (loss) per common share	$	1.41	$	0.31	$	(6.82)	$	0.88	Basic earnings (loss) per common share	$	1.21	$	0.33	$	(5.60)	$	1.20
Diluted earnings (loss) per common share	Diluted earnings (loss) per common share	$	1.00	$	0.30	$	(6.82)	$	0.78	Diluted earnings (loss) per common share	$	1.02	$	0.31	$	(5.60)	$	1.09
Basic weighted average shares outstanding	Basic weighted average shares outstanding	114,383,289		96,983,764		114,229,928		94,846,431		Basic weighted average shares outstanding	113,403,102		101,872,126		113,952,308		97,214,064
Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	147,099,079		130,696,954		114,229,928		128,499,431		Diluted weighted average shares outstanding	141,969,977		136,522,709		113,952,308		131,202,689

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(In Thousands)	(In Thousands)	Three Months Ended June 30,						Six Months Ended June 30,						(In Thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited)	(Unaudited)	2020		2019		2020		2019		(Unaudited)	2020		2019		2020		2019
Net Income (Loss)	Net Income (Loss)	$	165,444	$	31,266	$	(777,954)	$	85,730	Net Income (Loss)	$	141,812	$	34,310	$	(636,142)	$	120,040
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities	Net unrealized gain (loss) on available-for-sale securities	52,393		8,562		(28,126)		15,280		Net unrealized gain (loss) on available-for-sale securities	8,236		4,484		(19,890)		19,764
Reclassification of unrealized loss (gain) on available-for-sale securities to net income		2,718		(2,822)		(11,080)		(12,315)
Reclassification of unrealized gain on available-for-sale securities to net income										Reclassification of unrealized gain on available-for-sale securities to net income	(445)		(3,492)		(11,525)		(15,807)
Net unrealized loss on interest rate agreements	Net unrealized loss on interest rate agreements	—		(9,501)		(32,806)		(15,339)		Net unrealized loss on interest rate agreements	0		(11,791)		(32,806)		(27,130)
Reclassification of unrealized loss on interest rate agreements to net income	Reclassification of unrealized loss on interest rate agreements to net income	1,029		—		1,108		—		Reclassification of unrealized loss on interest rate agreements to net income	1,040		0		2,148		0
Total other comprehensive income (loss)	Total other comprehensive income (loss)	56,140		(3,761)		(70,904)		(12,374)		Total other comprehensive income (loss)	8,831		(10,799)		(62,073)		(23,173)
Total Comprehensive Income (Loss)	Total Comprehensive Income (Loss)	$	221,584	$	27,505	$	(848,858)	$	73,356	Total Comprehensive Income (Loss)	$	150,643	$	23,511	$	(698,215)	$	96,867

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, 2020


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders			Total		(In Thousands, except Share Data)	Common Stock						Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Cumulative Earnings				Cumulative Distributions to Stockholders				Total
(Unaudited)	(Unaudited)	Shares	Amount																		(Unaudited)			Shares			Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)				Cumulative Earnings			Cumulative Distributions to Stockholders	Total
March 31, 2020		114,837,533	$	1,148	$	2,275,808	$	(85,531)	$	635,726	$	(2,101,949)	$	725,202
June 30, 2020															June 30, 2020		114,940,197		$	1,149		$	2,279,625		$	(29,391)		$	801,170				$	(2,115,977)			$	936,576
Net income	Net income	—	—		—		—		165,444		—		165,444		Net income		—		—			—			—			141,812			—				141,812
Other comprehensive income	Other comprehensive income	—	—		—		56,140		—		—		56,140		Other comprehensive income		—		—			—			8,831			—			—				8,831

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	102,664	1		(235)		—		—		—		(234)		Employee stock purchase and incentive plans		11,460		0			9			—			—			—				9
Non-cash equity award compensation	Non-cash equity award compensation	—	—		4,052		—		—		—		4,052		Non-cash equity award compensation		—		—			3,906			—			—			—				3,906

Common dividends declared ($0.125 per share)		—	—		—		—		—		(14,028)		(14,028)
June 30, 2020		114,940,197	$	1,149	$	2,279,625	$	(29,391)	$	801,170	$	(2,115,977)	$	936,576
Share repurchases															Share repurchases		(3,047,335)		(30)			(21,629)			—			—			—				(21,659)
Common dividends declared ($0.14 per share)															Common dividends declared ($0.14 per share)		—		—			—			—			—			(16,011)				(16,011)
September 30, 2020															September 30, 2020		111,904,322		$	1,119		$	2,261,911		$	(20,560)		$	942,982		$	(2,131,988)			$	1,053,464

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


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders			Total		(In Thousands, except Share Data)	Common Stock						Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Cumulative Earnings			Cumulative Distributions to Stockholders			Total
(Unaudited)	(Unaudited)	Shares	Amount																		(Unaudited)			Shares			Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Cumulative Earnings		Cumulative Distributions to Stockholders	Total
December 31, 2019	December 31, 2019	114,353,036	$	1,144	$	2,269,617	$	41,513	$	1,579,124	$	(2,064,167)	$	1,827,231	December 31, 2019		114,353,036		$	1,144		$	2,269,617		$	41,513		$	1,579,124		$	(2,064,167)		$	1,827,231
Net loss	Net loss	—	—		—		—		(777,954)		—		(777,954)		Net loss		—		—			—			—			(636,142)			—			(636,142)
Other comprehensive loss	Other comprehensive loss	—	—		—		(70,904)		—		—		(70,904)		Other comprehensive loss		—		—			—			(62,073)			—			—			(62,073)
Issuance of common stock	Issuance of common stock	350,088	3		5,544		—		—		—		5,547		Issuance of common stock		350,088		3			5,544			—			—			—			5,547

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	237,073	2		(2,776)		—		—		—		(2,774)		Employee stock purchase and incentive plans		248,533		2			(2,767)			—			—			—			(2,765)
Non-cash equity award compensation	Non-cash equity award compensation	—	—		7,240		—		—		—		7,240		Non-cash equity award compensation		—		—			11,146			—			—			—			11,146

Common dividends declared ($0.445 per share)		—	—		—		—		—		(51,810)		(51,810)
June 30, 2020		114,940,197	$	1,149	$	2,279,625	$	(29,391)	$	801,170	$	(2,115,977)	$	936,576
Share repurchases															Share repurchases		(3,047,335)		(30)			(21,629)			—			—			—			(21,659)
Common dividends declared ($0.585 per share)															Common dividends declared ($0.585 per share)		—		—			—			—			—			(67,821)			(67,821)
September 30, 2020															September 30, 2020		111,904,322		$	1,119		$	2,261,911		$	(20,560)		$	942,982		$	(2,131,988)		$	1,053,464

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


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders			Total		(In Thousands, except Share Data)	Common Stock						Additional Paid-In Capital			Accumulated Other Comprehensive Income			Cumulative Earnings				Cumulative Distributions to Stockholders				Total
(Unaudited)	(Unaudited)	Shares	Amount																		(Unaudited)			Shares			Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Income				Cumulative Earnings			Cumulative Distributions to Stockholders	Total
March 31, 2019		96,866,464	$	969	$	1,996,358	$	52,684	$	1,464,405	$	(1,964,489)	$	1,549,927
June 30, 2019															June 30, 2019		97,715,021		$	977		$	2,013,044		$	48,923		$	1,495,671				$	(1,994,583)			$	1,564,032
Net income	Net income	—	—		—		—		31,266		—		31,266		Net income		—		—			—			—			34,310			—				34,310
Other comprehensive loss	Other comprehensive loss	—	—		—		(3,761)		—		—		(3,761)		Other comprehensive loss		—		—			—			(10,799)			—			—				(10,799)
Issuance of common stock	Issuance of common stock	791,191	8		12,503		—		—		—		12,511		Issuance of common stock		14,375,000		144			228,339			—			—			—				228,483

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	57,366	—		18		—		—		—		18		Employee stock purchase and incentive plans		11,710		—			154			—			—			—				154
Non-cash equity award compensation	Non-cash equity award compensation	—	—		4,165		—		—		—		4,165		Non-cash equity award compensation		—		—			3,297			—			—			—				3,297

Common dividends declared ($0.30 per share)	Common dividends declared ($0.30 per share)	—	—		—		—		—		(30,094)		(30,094)		Common dividends declared ($0.30 per share)		—		—			—			—			—			(34,418)				(34,418)
June 30, 2019		97,715,021	$	977	$	2,013,044	$	48,923	$	1,495,671	$	(1,994,583)	$	1,564,032
September 30, 2019															September 30, 2019		112,101,731		$	1,121		$	2,244,834		$	38,124		$	1,529,981		$	(2,029,001)			$	1,785,059

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)

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


(In Thousands, except Share Data)	(In Thousands, except Share Data)	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders			Total		(In Thousands, except Share Data)	Common Stock						Additional Paid-In Capital			Accumulated Other Comprehensive Income			Cumulative Earnings			Cumulative Distributions to Stockholders			Total
(Unaudited)	(Unaudited)	Shares	Amount																		(Unaudited)			Shares			Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Income			Cumulative Earnings		Cumulative Distributions to Stockholders	Total
December 31, 2018	December 31, 2018	84,884,344	$	849	$	1,811,422	$	61,297	$	1,409,941	$	(1,934,715)	$	1,348,794	December 31, 2018		84,884,344		$	849		$	1,811,422		$	61,297		$	1,409,941		$	(1,934,715)		$	1,348,794
Net income	Net income	—	—		—		—		85,730		—		85,730		Net income		—		—			—			—			120,040			—			120,040
Other comprehensive loss	Other comprehensive loss	—	—		—		(12,374)		—		—		(12,374)		Other comprehensive loss		—		—			—			(23,173)			—			—			(23,173)
Issuance of common stock	Issuance of common stock	12,291,191	123		189,985		—		—		—		190,108		Issuance of common stock		26,666,191		267			418,324			—			—			—			418,591
Direct stock purchase and dividend reinvestment plan	Direct stock purchase and dividend reinvestment plan	399,838	4		6,303		—		—		—		6,307		Direct stock purchase and dividend reinvestment plan		399,838		4			6,303			—			—			—			6,307
Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	139,648	1		(1,921)		—		—		—		(1,920)		Employee stock purchase and incentive plans		151,358		1			(1,767)			—			—			—			(1,766)
Non-cash equity award compensation	Non-cash equity award compensation	—	—		7,255		—		—		—		7,255		Non-cash equity award compensation		—		—			10,552			—			—			—			10,552

Common dividends declared ($0.60 per share)		—	—		—		—		—		(59,868)		(59,868)
June 30, 2019		97,715,021	$	977	$	2,013,044	$	48,923	$	1,495,671	$	(1,994,583)	$	1,564,032
Common dividends declared ($0.90 per share)															Common dividends declared ($0.90 per share)		—		—			—			—			—			(94,286)			(94,286)
September 30, 2019															September 30, 2019		112,101,731		$	1,121		$	2,244,834		$	38,124		$	1,529,981		$	(2,029,001)		$	1,785,059

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,
				2020			2019	(In Thousands) (Unaudited)			2020			2019
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:						Cash Flows From Operating Activities:
Net (loss) income	Net (loss) income	$	(777,954)		$	85,730	Net (loss) income		$	(636,142)		$	120,040
Adjustments to reconcile net (loss) income to net cash used in operating activities:	Adjustments to reconcile net (loss) income to net cash used in operating activities:						Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	Amortization of premiums, discounts, and securities issuance costs, net	4,083			144		Amortization of premiums, discounts, and securities issuance costs, net		6,213			(3,486)
Depreciation and amortization of non-financial assets	Depreciation and amortization of non-financial assets	8,962			696		Depreciation and amortization of non-financial assets		13,166			5,673
Originations of held-for-sale loans	Originations of held-for-sale loans	(457,510)			(84,924)		Originations of held-for-sale loans		(654,820)			(124,392)
Purchases of held-for-sale loans	Purchases of held-for-sale loans	(2,720,245)			(2,534,886)		Purchases of held-for-sale loans		(2,893,246)			(4,002,509)
Proceeds from sales of held-for-sale loans	Proceeds from sales of held-for-sale loans	3,126,860			2,123,794		Proceeds from sales of held-for-sale loans		3,224,526			2,971,811
Principal payments on held-for-sale loans	Principal payments on held-for-sale loans	48,901			49,894		Principal payments on held-for-sale loans		53,677			77,100
Net settlements of derivatives	Net settlements of derivatives	(183,373)			(25,751)		Net settlements of derivatives		(187,130)			(32,902)

Non-cash equity award compensation expense	Non-cash equity award compensation expense	7,240			7,255		Non-cash equity award compensation expense		11,146			10,552
Goodwill impairment expense	Goodwill impairment expense	88,675			—		Goodwill impairment expense		88,675			0
Market valuation adjustments	Market valuation adjustments	765,647			(48,172)		Market valuation adjustments		606,764			(62,720)
Realized gains, net	Realized gains, net	(29,817)			(13,513)		Realized gains, net		(30,419)			(18,227)
Net change in:	Net change in:						Net change in:
Accrued interest receivable and other assets	Accrued interest receivable and other assets	254,368			(108,985)		Accrued interest receivable and other assets		304,147			(141,197)
Accrued interest payable and accrued expenses and other liabilities	Accrued interest payable and accrued expenses and other liabilities	(80,219)			(9,744)		Accrued interest payable and accrued expenses and other liabilities		(82,489)			(1,049)
Net cash provided by (used in) operating activities		55,618			(558,462)
Net cash used in operating activities							Net cash used in operating activities		(175,932)			(1,201,306)
Cash Flows From Investing Activities:	Cash Flows From Investing Activities:						Cash Flows From Investing Activities:
Originations of loan investments	Originations of loan investments	(263,544)			(84,638)		Originations of loan investments		(327,494)			(171,915)
Purchases of loan investment	Purchases of loan investment	—			(49,489)		Purchases of loan investment		0			(49,489)
Proceeds from sales of loan investments	Proceeds from sales of loan investments	1,574,160			2,780		Proceeds from sales of loan investments		1,574,160			9,422
Principal payments on loan investments	Principal payments on loan investments	1,136,000			619,085		Principal payments on loan investments		1,652,418			1,091,652
Purchases of real estate securities	Purchases of real estate securities	(52,260)			(242,970)		Purchases of real estate securities		(106,422)			(309,839)

Purchases of residential securities held in consolidated securitization trust							Purchases of residential securities held in consolidated securitization trust		0			(193,212)
Purchases of multifamily securities held in consolidated securitization trusts	Purchases of multifamily securities held in consolidated securitization trusts	—			(68,601)		Purchases of multifamily securities held in consolidated securitization trusts		0			(68,601)
Sales of multifamily securities held in consolidated securitization trusts	Sales of multifamily securities held in consolidated securitization trusts	142,990			—		Sales of multifamily securities held in consolidated securitization trusts		142,990			0
Proceeds from sales of real estate securities	Proceeds from sales of real estate securities	621,730			241,217		Proceeds from sales of real estate securities		634,709			487,469
Principal payments on real estate securities	Principal payments on real estate securities	16,405			39,041		Principal payments on real estate securities		19,446			62,711
Purchases of servicer advance investments	Purchases of servicer advance investments	(179,419)			(68,976)		Purchases of servicer advance investments		(179,419)			(69,610)
Principal repayments from servicer advance investments	Principal repayments from servicer advance investments	75,478			111,662		Principal repayments from servicer advance investments		83,124			150,512

Acquisition of 5 Arches, net of cash acquired	Acquisition of 5 Arches, net of cash acquired	—			(3,714)		Acquisition of 5 Arches, net of cash acquired		0			(3,714)
Net investment in participation in loan warehouse facility	Net investment in participation in loan warehouse facility	—			38,209		Net investment in participation in loan warehouse facility		0			38,209
Net investment in multifamily loan fund	Net investment in multifamily loan fund	10,203			(28,673)		Net investment in multifamily loan fund		40,898			(33,090)
Other investing activities, net	Other investing activities, net	(21,342)			(7,616)		Other investing activities, net		(19,865)			(24,989)
Net cash provided by investing activities	Net cash provided by investing activities	3,060,401			497,317		Net cash provided by investing activities		3,514,545			915,516
Cash Flows From Financing Activities:	Cash Flows From Financing Activities:						Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	Proceeds from borrowings on short-term debt	3,655,530			2,731,731		Proceeds from borrowings on short-term debt		3,981,572			4,009,083
Repayments on short-term debt	Repayments on short-term debt	(5,322,519)			(2,675,308)		Repayments on short-term debt		(5,828,972)			(4,435,823)
Proceeds from issuance of asset-backed securities	Proceeds from issuance of asset-backed securities	827,644			330,534		Proceeds from issuance of asset-backed securities		1,343,845			1,020,136
Repayments on asset-backed securities issued	Repayments on asset-backed securities issued	(673,323)			(416,789)		Repayments on asset-backed securities issued		(1,037,546)			(720,651)

Proceeds from issuance of long-term debt	Proceeds from issuance of long-term debt	944,282			—		Proceeds from issuance of long-term debt		1,251,850			387,053
Deferred long-term debt issuance costs paid	Deferred long-term debt issuance costs paid	(7,830)			—		Deferred long-term debt issuance costs paid		(9,526)			(7,023)
Repayments on long-term debt	Repayments on long-term debt	(2,128,805)			—		Repayments on long-term debt		(2,640,007)			0
Net settlements of derivatives	Net settlements of derivatives	(84,336)			—		Net settlements of derivatives		(84,336)			0
Net proceeds from issuance of common stock	Net proceeds from issuance of common stock	5,707			198,333		Net proceeds from issuance of common stock		5,791			426,970

Net payments on repurchase of common stock							Net payments on repurchase of common stock		(21,659)			0
Taxes paid on equity award distributions	Taxes paid on equity award distributions	(2,934)			—		Taxes paid on equity award distributions		(3,009)			0
Dividends paid	Dividends paid	(51,810)			(59,868)		Dividends paid		(67,821)			(94,286)
Other financing activities, net	Other financing activities, net	4,650			(467)		Other financing activities, net		4,650			1,400
Net cash (used in) provided by financing activities	Net cash (used in) provided by financing activities	(2,833,744)			108,166		Net cash (used in) provided by financing activities		(3,105,168)			586,859
Net increase in cash, cash equivalents and restricted cash	Net increase in cash, cash equivalents and restricted cash	282,275			47,021		Net increase in cash, cash equivalents and restricted cash		233,445			301,069
Cash, cash equivalents and restricted cash at beginning of period ⁽¹⁾	Cash, cash equivalents and restricted cash at beginning of period ⁽¹⁾	290,833			205,077		Cash, cash equivalents and restricted cash at beginning of period (1)		290,833			205,077
Cash, cash equivalents and restricted cash at end of period ⁽¹⁾	Cash, cash equivalents and restricted cash at end of period ⁽¹⁾	$	573,108		$	252,098	Cash, cash equivalents and restricted cash at end of period (1)		$	524,278		$	506,146

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,
				2020			2019	(In Thousands) (Unaudited)			2020			2019

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	$	267,787		$	203,086	Interest		$	364,875		$	319,036
Taxes	Taxes	209			4,158		Taxes		218			6,977
Supplemental Noncash Information:	Supplemental Noncash Information:						Supplemental Noncash Information:
Real estate securities retained from loan securitizations	Real estate securities retained from loan securitizations	$	46,560		$	5,462	Real estate securities retained from loan securitizations		$	46,560		$	7,759
Retention of mortgage servicing rights from loan securitizations and sales	Retention of mortgage servicing rights from loan securitizations and sales	—			868		Retention of mortgage servicing rights from loan securitizations and sales		0			868

Consolidation of residential loans held in securitization trusts							Consolidation of residential loans held in securitization trusts		0			1,190,995
Consolidation of residential ABS							Consolidation of residential ABS		0			997,783
(Deconsolidation) consolidation of multifamily loans held in securitization trusts	(Deconsolidation) consolidation of multifamily loans held in securitization trusts	(3,849,779)			1,481,554		(Deconsolidation) consolidation of multifamily loans held in securitization trusts		(3,849,779)			1,481,554
(Deconsolidation) consolidation of multifamily ABS	(Deconsolidation) consolidation of multifamily ABS	(3,706,789)			1,408,002		(Deconsolidation) consolidation of multifamily ABS		(3,706,789)			1,408,002
Transfers from loans held-for-sale to loans held-for-investment	Transfers from loans held-for-sale to loans held-for-investment	706,775			518,521		Transfers from loans held-for-sale to loans held-for-investment		770,754			1,361,015

Transfers from residential loans to real estate owned	Transfers from residential loans to real estate owned	9,645			5,098		Transfers from residential loans to real estate owned		12,547			5,280

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

(1) Cash, cash equivalents, and restricted cash at ~~June~~September 30, 2020 includes cash and cash equivalents of ~~$529~~$451 million and restricted cash of ~~$44~~$74 million, and at December 31, 2019 includes cash and cash equivalents of $197 million and restricted cash of $94 million.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on making credit-sensitive investments in single-family residential and multifamily mortgages and related assets and engaging in mortgage banking activities. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, as well as through capital appreciation. We operate our business in 3 segments: Residential Lending, Business Purpose Lending, and Third-Party Investments.

Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income consists of the interest income we earn on investments less the interest expense we incur on borrowed funds and other liabilities. Income from mortgage banking activities is generated through the origination and acquisition of loans, and their subsequent sale, securitization, or transfer to our investment portfolios.

Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our taxable REIT subsidiaries” or “TRS.”

Redwood was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. On March 1, 2019, Redwood completed the acquisition of 5 Arches, LLC ("5 Arches"), at which time 5 Arches became a wholly-owned subsidiary of Redwood. On October 15, 2019, Redwood acquired CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), at which time CoreVest became wholly owned by Redwood. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at ~~June~~September 30, 2020 and December 31, 2019, and for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the company at ~~June~~September 30, 2020 and results of operations for all periods presented have been made. The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2020 should not be construed as indicative of the results to be expected for the full year.

Principles of Consolidation

In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 where we maintain an ongoing involvement ("Legacy Sequoia"), as well as entities formed in connection with the securitization of Redwood Choice expanded-prime loans ("Sequoia Choice"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations we invested in. Finally, we consolidated the assets and liabilities of certain CoreVest American Finance Lender ("CAFL") securitizations beginning in the fourth quarter of 2019, in connection with our acquisition of CoreVest. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for the consolidated Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 2. Basis of Presentation - (continued)

For financial reporting purposes, the underlying loans owned at the consolidated Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment at fair value, the underlying loans at the consolidated Freddie Mac K-Series are shown under Multifamily loans held-for-investment at fair value, and the underlying single-family rental loans at the consolidated CAFL entities are shown under Business purpose residential loans held-for-investment at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income (loss), we recorded interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as other income and expenses associated with these entities' activities. See Note 14 for further discussion on ABS issued.

During the first quarter of 2020, we sold subordinate securities issued by four of these Freddie Mac K-Series securitization trusts and determined that we should derecognize the associated assets and liabilities of each of these entities for financial reporting purposes. We deconsolidated $3.86 billion of multifamily loans and other assets and $3.72 billion of multifamily ABS issued and other liabilities, for which we realized market valuation losses of $72 million, which were recorded through Investment fair value changes, net on our consolidated statements of income (loss) for the three months ended March 31, 2020.

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

Beginning in the first quarter of 2019, we consolidated 5 Arches, LLC ("5 Arches"), an originator of business purpose residential loans, pursuant to the exercise of our purchase option and the acquisition of the remaining equity in the company. In the fourth quarter of 2019, we acquired and consolidated CoreVest, an originator and portfolio manager of business purpose residential loans.

See Note 4 for further discussion on principles of consolidation.

Use of Estimates

The preparation of financial statements requires us to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.

Acquisitions

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 2. Basis of Presentation - (continued)

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

Table 2.1 – Intangible Assets – Activity


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

Borrower network	Borrower network	$	43,952	$	—	$	(3,236)	$	40,716	7	Borrower network	$	43,952	$	0		$	(4,854)				$	39,098		7
Broker network	Broker network	15,083		—		(1,810)		13,273		4	Broker network	15,083		0			(2,715)			12,368				5
Non-compete agreements	Non-compete agreements	8,236		—		(1,583)		6,653		3	Non-compete agreements	8,236		0			(2,375)			5,861				3
Tradenames	Tradenames	3,472		—		(667)		2,805		3	Tradenames	3,472		0			(1,000)			2,472				3
Developed technology	Developed technology	1,613		—		(450)		1,163		2	Developed technology	1,613		0			(675)			938				2
Loan administration fees on existing loan assets	Loan administration fees on existing loan assets	433		—		(433)		—		—	Loan administration fees on existing loan assets	433		0			(433)			0				1
Total	Total	$	72,789	$	—	$	(8,179)	$	64,610	6	Total	$	72,789	$	0		$	(12,052)		$	60,737			6

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

Table 2.2 – Intangible Asset Amortization Expense by Year


(In Thousands)	(In Thousands)	June 30, 2020		(In Thousands)	September 30, 2020
2020 (6 months)		$	7,746
2020 (3 months)				2020 (3 months)	$	3,873
2021	2021	15,304		2021	15,304
2022	2022	12,800		2022	12,800
2023	2023	10,091		2023	10,091
2024	2024	7,073		2024	7,073
2025 and thereafter	2025 and thereafter	11,596		2025 and thereafter	11,596
Total Future Intangible Asset Amortization	Total Future Intangible Asset Amortization	$	64,610	Total Future Intangible Asset Amortization	$	60,737

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 2. Basis of Presentation - (continued)

During the first quarter of 2020, as a result of the deterioration in economic conditions caused by the spread of the COVID-19 pandemic (the "pandemic"), and its impact on our business, including a significant decline in the market price of our common stock, we determined that it was more likely than not that the fair value of our Business Purpose Lending reporting unit was lower than its carrying amount, including goodwill. Based on this analysis, we determined that an interim goodwill impairment test should be performed as of March 31, 2020 and prepared updated cash flow projections for the reporting unit, resulting in a reduction in the long-term forecasts of profitability for our Business Purpose Lending reporting unit as compared to the prior year forecasts. Using these projections, we concluded that the fair value of our Business Purpose Lending reporting unit was less than its carrying value, including goodwill. As a result of this evaluation, we recorded a non-cash $89 million goodwill impairment expense through Other expenses on our consolidated statements of income (loss) during the three months ended March 31, 2020. In conjunction with our assessment of goodwill, we also assessed our intangible assets for impairment at March 31, 2020 and determined they were 0t impaired. On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted.

The liability resulting from the contingent consideration arrangement with 5 Arches was recorded at its acquisition-date fair value of $25 million as part of total consideration for the acquisition of 5 Arches. These contingent earn-out payments were classified as a contingent consideration liability and carried at fair value prior to March 31, 2020. During the three months ended March 31, 2020, we made a cash payment of $11 million and granted $3 million of Redwood common stock in connection with the first anniversary of the purchase date. Additionally, as a result of an amendment to the agreement, we reclassified the contingent liability to a deferred liability, as the remaining payments became payable on a set timetable without any remaining contingencies. At ~~June~~September 30, 2020, the carrying value of this deferred liability was ~~$15~~$14 million and was recorded as a component of Accrued expenses and other liabilities on our consolidated balance sheets. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded $0.1 million and ~~$0.4~~$0.6 million of contingent consideration expense, respectively, through Other expenses on our consolidated statements of income (loss). See Note 16 for additional information on our contingent consideration liability.

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

Table 2.3 – Unaudited Pro Forma Financial Information


		Three Months Ended June 30, 2019		Six Months Ended June 30, 2019				Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
(In Thousands)	(In Thousands)						(In Thousands)				Nine Months Ended September 30, 2019
Supplementary pro forma information:	Supplementary pro forma information:					Supplementary pro forma information:
Net interest income	Net interest income	$	44,353	$	87,743	Net interest income		$	45,702		$	133,446
Non-interest income	Non-interest income	35,495		78,471		Non-interest income		38,177		116,649
Net income	Net income	44,218		100,246		Net income		46,609		140,790

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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

Available-for-Sale Securities

Upon adoption of ASU 2016-13, "Financial Instruments - Credit Losses" in the first quarter of 2020, we modified our policy for recording impairments on available-for-sale securities. This new guidance requires that credit impairments on our available-for-sale securities be recorded in earnings using an allowance for credit losses, with the allowance limited to the amount by which the security's fair value is less than its amortized cost basis. The allowance for credit losses is calculated using a discounted cash flow approach and is measured as the difference between the beneficial interest’s amortized cost and the estimate of cash flows expected to be collected, discounted at the effective interest rate used to accrete the beneficial interest. Any allowance for credit losses in excess of the unrealized losses on the beneficial interests are accounted for as a prospective reduction of the effective interest rate. No allowance is recorded for beneficial interests in an unrealized gain position. Favorable changes in the discounted cash flows will result in a reduction in the allowance for credit losses, if any. Any reduction in allowance for credit losses is recorded in earnings. If the allowance for credit losses has been reduced to zero, the remaining favorable changes are reflected as a prospective increase to the effective interest rate. If we intend to sell or it is more likely than not that we will be required to sell the security before it recovers in value, the entire impairment amount will be recognized in earnings with a corresponding adjustment to the security's amortized cost basis.

Goodwill

Pursuant to our adoption of ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" in the first quarter of 2020, we modified our goodwill impairment testing policy. We first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If, based on that assessment, we believe it is more likely than not that the fair value of the reporting unit is less than its carrying value, we measure the fair value of reporting unit and record a goodwill impairment charge for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. Any such impairment charges would be recorded through Other expenses on our consolidated statements of income (loss).

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This new guidance amends previous guidance by removing and modifying certain existing fair value disclosure requirements, while adding other new disclosure requirements. This new guidance is effective for fiscal years beginning after December 15, 2019. We adopted this new guidance, as required, in the first quarter of 2020, which did not have a material impact on our consolidated financial statements but impacted certain of our fair value footnote disclosures.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This new guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This new guidance is effective for fiscal years beginning after December 15, 2019. We adopted this new guidance, as required, in the first quarter of 2020, 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, 2020

(Unaudited)

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

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

Other Recent Accounting Pronouncements

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

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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

Balance Sheet Netting

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

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

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~~

~~June 30, 2020 (In Thousands)~~

~~Financial Instruments~~

~~Cash Collateral (Received) Pledged~~

~~Liabilities~~⁽²⁾

~~Loan warehouse debt~~

~~(449,560)~~

—

~~(449,560)~~

~~449,560~~

—

~~Security repurchase agreements~~

~~(311,888)~~

—

~~(311,888)~~

~~311,888~~

—

~~Total Liabilities~~

~~(761,448)~~

—

~~(761,448)~~

~~761,448~~

—


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

TBAs	402		0		402		0		(263)		139
Futures	63		0		63		0		0		63
Total Assets	$	3,936	$	—	$	3,936	$	(15)	$	(1,503)	$	2,418

Liabilities (2)
Interest rate agreements	$	(15)	$	0	$	(15)	$	15	$	0	$	0
TBAs	(263)		$	0	(263)		0		263		0

Loan warehouse debt	(81,898)		$	0	(81,898)		81,898		0		—
Security repurchase agreements	(75,054)		0		(75,054)		75,054		0		0
Total Liabilities	$	(157,230)	$	0	$	(157,230)	$	156,967	$	263	$	0

~~Gross Amounts of Recognized Assets (Liabilities)~~

~~Gross Amounts Offset in Consolidated Balance Sheet~~

~~Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet~~

~~Gross Amounts Not Offset in Consolidated  Balance Sheet~~ ⁽¹⁾

~~Net Amount~~

~~December 31, 2019 (In Thousands)~~

~~Financial Instruments~~

~~Cash Collateral (Received) Pledged~~

~~Assets~~ ⁽²⁾

~~Interest rate agreements~~

~~19,020~~

—

~~19,020~~

~~(14,178)~~

~~(915)~~

~~3,927~~

~~TBAs~~

~~5,755~~

—

~~5,755~~

~~(5,755)~~

—

~~Futures~~

~~137~~

—

~~137~~

—

~~137~~

~~Total Assets~~

~~24,912~~

—

~~24,912~~

~~(19,933)~~

~~(915)~~

~~4,064~~

~~Liabilities~~⁽²⁾

~~Interest rate agreements~~

~~(148,765)~~

—

~~(148,765)~~

~~14,178~~

~~134,587~~

—

~~TBAs~~

~~(13,359)~~

—

~~(13,359)~~

~~5,755~~

~~6,673~~

~~(931)~~

~~Loan warehouse debt~~

~~(432,126)~~

—

~~(432,126)~~

~~432,126~~

—

~~Security repurchase agreements~~

~~(1,096,578)~~

—

~~(1,096,578)~~

~~1,096,578~~

—

~~Total Liabilities~~

~~(1,690,828)~~

—

~~(1,690,828)~~

~~1,548,637~~

~~141,260~~

~~(931)~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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


	Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet		Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount
December 31, 2019 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	19,020	$	0	$	19,020	$	(14,178)	$	(915)	$	3,927

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

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

Loan warehouse debt	(432,126)		0		(432,126)		432,126		0		0
Security repurchase agreements	(1,096,578)		0		(1,096,578)		1,096,578		0		0
Total Liabilities	$	(1,690,828)	$	0	$	(1,690,828)	$	1,548,637	$	141,260	$	(931)

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

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

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

Note 4. Principles of Consolidation

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Analysis of Consolidated VIEs

At ~~June~~September 30, 2020, we consolidated Legacy Sequoia, Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series and CAFL securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for the consolidated Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. At ~~June~~September 30, 2020, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series and CAFL entities was $6$5 million, ~~$204~~$211 million, ~~$336~~$418 million, ~~$25~~$27 million, and ~~$206~~$232 million, respectively.

Beginning in 2018, we consolidated 2 Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At ~~June~~September 30, 2020, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s interest. Additionally, beginning in 2018, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing. At ~~June~~September 30, 2020, the estimated fair value of our investment in the Servicing Investment entities was ~~$68~~$65 million.

1617

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Table 4.1 – Assets and Liabilities of Consolidated VIEs Accounted for as Collateralized Financing Entities


June 30, 2020		Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series			CAFL				Servicing Investment					Total Consolidated VIEs
September 30, 2020													September 30, 2020				Legacy Sequoia									Sequoia Choice					Freddie Mac SLST					Freddie Mac K-Series					CAFL				Servicing Investment			Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)			Legacy Sequoia						Sequoia Choice			Freddie Mac SLST					Freddie Mac K-Series					CAFL											Servicing Investment									Total Consolidated VIEs											(Dollars in Thousands)		Legacy Sequoia	Sequoia Choice		Freddie Mac SLST	Freddie Mac K-Series	CAFL	Servicing Investment	Total Consolidated VIEs
Residential loans, held-for-investment	Residential loans, held-for-investment										Residential loans, held-for-investment			$	296,765						$	1,836,361						$	2,256,682							$	0	$	0		$	0			$	4,389,808
Business purpose residential loans, held-for-investment	Business purpose residential loans, held-for-investment	—					—				—					—				2,615,038					—					2,615,038			Business purpose residential loans, held-for-investment				0					0				0			0			2,969,692			0			2,969,692
Multifamily loans, held-for-investment	Multifamily loans, held-for-investment	—			—			—			489,075			—						—					489,075		Multifamily loans, held-for-investment					0					0					0				491,415			0			0			491,415

Other investments	Other investments	—			—			—			—			—				290,805					290,805			Other investments				0					0					0				0			0			278,487			278,487
Cash and cash equivalents	Cash and cash equivalents	—			—			—			—			—				2,773					2,773			Cash and cash equivalents				0					0					0				0			0			10,425			10,425
Restricted cash	Restricted cash	145			9			—			—			—				30,416					30,570			Restricted cash				146					0					0				0			0			20,649			20,795
Accrued interest receivable	Accrued interest receivable	529			8,236			6,627			1,342			11,087				6,725					34,546			Accrued interest receivable				402					7,292					6,928				1,342			12,071			2,609			30,644
Other assets	Other assets	916			—			940			—			5,824				—					7,680			Other assets				784					0					887				0			4,158			0			5,829
Total Assets	Total Assets	$	306,222		$	2,072,633		$	2,152,678		$	490,417		$	2,631,949			$	330,719				$	7,984,618		Total Assets				$	298,097				$	1,843,653				$	2,264,497			$	492,757		$	2,985,921		$	312,170		$	8,197,095
Short-term debt	Short-term debt	$	—		$	—		$	—		$	—		$	—			$	244,437				$	244,437		Short-term debt				$	0				$	0				$	0			$	0		$	0		$	228,998		$	228,998
Accrued interest payable	Accrued interest payable	230			6,474			5,149			1,182			8,458				134					21,627			Accrued interest payable				180					5,652					5,009				1,182			9,337			137			21,497
Accrued expenses and other liabilities	Accrued expenses and other liabilities	—			9			—			—			—				18,062					18,071			Accrued expenses and other liabilities				0					47					0				0			0			18,129			18,176
Asset-backed securities issued	Asset-backed securities issued	300,357			1,861,777			1,812,008			464,691			2,417,253				—					6,856,086			Asset-backed securities issued				292,484					1,626,564					1,841,313				464,865			2,744,150			0			6,969,376
Total Liabilities	Total Liabilities	$	300,587		$	1,868,260		$	1,817,157		$	465,873		$	2,425,711			$	262,633				$	7,140,221		Total Liabilities				$	292,664				$	1,632,263				$	1,846,322			$	466,047		$	2,753,487		$	247,264		$	7,238,047

Number of VIEs	Number of VIEs	20			10			2			1			12				3					48			Number of VIEs				20					10					2				1			13			3			49


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

Other investments	Other investments	—		—		—		—		—		184,802		184,802		Other investments	0		0		0			0			0			184,802			184,802
Cash and cash equivalents	Cash and cash equivalents	—		—		—		—		—		9,015		9,015		Cash and cash equivalents	0		0		0			0			0			9,015			9,015
Restricted cash	Restricted cash	143		27		—		—		—		21,766		21,936		Restricted cash	143		27		0			0			0			21,766			21,936
Accrued interest receivable	Accrued interest receivable	655		9,824		7,313		13,539		9,572		4,869		45,772		Accrued interest receivable	655		9,824		7,313			13,539			9,572			4,869			45,772
Other assets	Other assets	460		—		445		—		1,795		—		2,700		Other assets	460		0		445			0			1,795			0			2,700
Total Assets	Total Assets	$	409,148	$	2,301,314	$	2,374,973	$	4,422,063	$	2,203,919	$	220,452	$	11,931,869	Total Assets	$	409,148	$	2,301,314	$	2,374,973		$	4,422,063		$	2,203,919		$	220,452		$	11,931,869
Short-term debt	Short-term debt	$	—	$	—	$	—	$	—	$	—	$	152,554	$	152,554	Short-term debt	$	0	$	0	$	0		$	0		$	0		$	152,554		$	152,554
Accrued interest payable	Accrued interest payable	395		7,732		5,374		12,887		7,485		187		34,060		Accrued interest payable	395		7,732		5,374			12,887			7,485			187			34,060
Accrued expenses and other liabilities	Accrued expenses and other liabilities	—		27		—		—		—		14,956		14,983		Accrued expenses and other liabilities	0		27		0			0			0			14,956			14,983
Asset-backed securities issued	Asset-backed securities issued	402,465		2,037,198		1,918,322		4,156,239		2,001,251		—		10,515,475		Asset-backed securities issued	402,465		2,037,198		1,918,322			4,156,239			2,001,251			0			10,515,475
Total Liabilities	Total Liabilities	$	402,860	$	2,044,957	$	1,923,696	$	4,169,126	$	2,008,736	$	167,697	$	10,717,072	Total Liabilities	$	402,860	$	2,044,957	$	1,923,696		$	4,169,126		$	2,008,736		$	167,697		$	10,717,072

Number of VIEs	Number of VIEs	20		9		2		5		10		3		49		Number of VIEs	20		9		2			5			10			3			49

1718

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

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


		Three Months Ended June 30, 2020																															Three Months Ended September 30, 2020
		Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs			Legacy Sequoia		Sequoia Choice		Freddie Mac SLST			Freddie Mac K-Series			CAFL			Servicing Investment			Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)																						(Dollars in Thousands)			Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series	CAFL	Servicing Investment	Total Consolidated VIEs
Interest income	Interest income	$	2,686	$	22,565	$	21,187	$	4,870	$	32,978	$	4,540	$	88,826	Interest income	$	1,795	$	20,919	$	21,696		$	4,918		$	36,181		$	4,403		$	89,912
Interest expense	Interest expense	(1,518)		(19,117)		(15,845)		(4,378)		(24,446)		(1,797)		(67,101)		Interest expense	(1,058)		(17,828)		(15,473)			(4,426)			(27,499)			(1,587)			(67,871)
Net interest income	Net interest income	1,168		3,448		5,342		492		8,532		2,743		21,725		Net interest income	737		3,091		6,223			492			8,682			2,816			22,041
Non-interest income	Non-interest income															Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(230)		39,753		26,867		1,599		16,313		3,292		87,594		Investment fair value changes, net	(81)		7,851		82,214			2,166			9,692			(422)			101,420

Total non-interest income, net	Total non-interest income, net	(230)		39,753		26,867		1,599		16,313		3,292		87,594		Total non-interest income, net	(81)		7,851		82,214			2,166			9,692			(422)			101,420
General and administrative expenses	General and administrative expenses	—		—		—		—		—		(712)		(712)		General and administrative expenses	0		0		0			0			0			(41)			(41)
Other expenses	Other expenses	—		—		—		—		—		(1,065)		(1,065)		Other expenses	0		0		0			0			0			(471)			(471)

Income from Consolidated VIEs	Income from Consolidated VIEs	$	938	$	43,201	$	32,209	$	2,091	$	24,845	$	4,258	$	107,542	Income from Consolidated VIEs	$	656	$	10,942	$	88,437		$	2,658		$	18,374		$	1,882		$	122,949


		Six Months Ended June 30, 2020																															Nine Months Ended September 30, 2020
		Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs			Legacy Sequoia		Sequoia Choice		Freddie Mac SLST			Freddie Mac K-Series			CAFL			Servicing Investment			Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)																						(Dollars in Thousands)			Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series	CAFL	Servicing Investment	Total Consolidated VIEs
Interest income	Interest income	$	5,880	$	47,647	$	43,173	$	45,042	$	62,988	$	8,623	$	213,353	Interest income	$	7,675	$	68,566	$	64,869		$	49,960		$	99,169		$	13,026		$	303,265
Interest expense	Interest expense	(4,040)		(40,627)		(32,022)		(42,728)		(48,101)		(3,374)		(170,892)		Interest expense	(5,098)		(58,455)		(47,495)			(47,154)			(75,600)			(4,961)			(238,763)
Net interest income	Net interest income	1,840		7,020��		11,151		2,314		14,887		5,249		42,461		Net interest income	2,577		10,111		17,374			2,806			23,569			8,065			64,502
Non-interest income	Non-interest income															Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(621)		(29,916)		(115,295)		(84,910)		(51,533)		(8,593)		(290,868)		Investment fair value changes, net	(702)		(22,065)		(33,081)			(82,744)			(41,841)			(9,015)			(189,448)

Total non-interest income, net	Total non-interest income, net	(621)		(29,916)		(115,295)		(84,910)		(51,533)		(8,593)		(290,868)		Total non-interest income, net	(702)		(22,065)		(33,081)			(82,744)			(41,841)			(9,015)			(189,448)
General and administrative expenses	General and administrative expenses	—		—		—		—		—		(743)		(743)		General and administrative expenses	0		0		0			0			0			(784)			(784)
Other expenses	Other expenses	—		—		—		—		—		817		817		Other expenses	0		0		0			0			0			346			346

Income (Loss) from Consolidated VIEs	Income (Loss) from Consolidated VIEs	$	1,219	$	(22,896)	$	(104,144)	$	(82,596)	$	(36,646)	$	(3,270)	$	(248,333)	Income (Loss) from Consolidated VIEs	$	1,875	$	(11,954)	$	(15,707)		$	(79,938)		$	(18,272)		$	(1,388)		$	(125,384)


		Three Months Ended June 30, 2019																															Three Months Ended September 30, 2019
		Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs			Legacy Sequoia		Sequoia Choice		Freddie Mac SLST			Freddie Mac K-Series			CAFL			Servicing Investment			Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)																						(Dollars in Thousands)			Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series	CAFL	Servicing Investment	Total Consolidated VIEs
Interest income	Interest income	$	4,776	$	26,828	$	11,597	$	35,917	$	—	$	3,579	$	82,697	Interest income	$	4,295	$	27,555	$	11,830		$	36,829		$	0		$	3,922		$	84,431
Interest expense	Interest expense	(3,981)		(23,134)		(8,557)		(34,441)		—		(3,401)		(73,514)		Interest expense	(3,452)		(23,576)		(8,709)			(35,328)			0			(2,891)			(73,956)
Net interest income	Net interest income	795		3,694		3,040		1,476		—		178		9,183		Net interest income	843		3,979		3,121			1,501			0			1,031			10,475
Non-interest income	Non-interest income															Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(123)		2,879		8,037		3,246		—		1,069		15,108		Investment fair value changes, net	(407)		2,722		17,300			7,445			0			963			28,023

Total non-interest income, net	Total non-interest income, net	(123)		2,879		8,037		3,246		—		1,069		15,108		Total non-interest income, net	(407)		2,722		17,300			7,445			0			963			28,023
General and administrative expenses	General and administrative expenses	—		—		—		—		—		(41)		(41)		General and administrative expenses	0		0		0			0			0			(16)			(16)
Other expenses	Other expenses	—		—		—		—		—		(242)		(242)		Other expenses	0		0		0			0			0			(395)			(395)

Income from Consolidated VIEs	Income from Consolidated VIEs	$	672	$	6,573	$	11,077	$	4,722	$	—	$	964	$	24,008	Income from Consolidated VIEs	$	436	$	6,701	$	20,421		$	8,946		$	0		$	1,583		$	38,087

1819

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)


		Six Months Ended June 30, 2019																															Nine Months Ended September 30, 2019
		Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs			Legacy Sequoia		Sequoia Choice		Freddie Mac SLST			Freddie Mac K-Series			CAFL			Servicing Investment			Total Consolidated VIEs
(Dollars in Thousands)	(Dollars in Thousands)																						(Dollars in Thousands)			Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series	CAFL	Servicing Investment	Total Consolidated VIEs
Interest income	Interest income	$	9,629	$	52,490	$	23,391	$	57,305	$	—	$	6,926	$	149,741	Interest income	$	13,924	$	80,045	$	35,221		$	94,134		$	0		$	10,847		$	234,171
Interest expense	Interest expense	(8,096)		(45,247)		(17,304)		(54,760)		—		(7,014)		(132,421)		Interest expense	(11,548)		(68,823)		(26,013)			(90,089)			0			(9,905)			(206,378)
Net interest income	Net interest income	1,533		7,243		6,087		2,545		—		(88)		17,320		Net interest income	2,376		11,222		9,208			4,045			0			942			27,793
Non-interest income	Non-interest income															Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(497)		6,144		14,402		6,365		—		2,499		28,913		Investment fair value changes, net	(904)		8,866		31,702			13,810			0			3,462			56,936

Total non-interest income, net	Total non-interest income, net	(497)		6,144		14,402		6,365		—		2,499		28,913		Total non-interest income, net	(904)		8,866		31,702			13,810			0			3,462			56,936
General and administrative expenses	General and administrative expenses	—		—		—		—		—		(70)		(70)		General and administrative expenses	0		0		0			0			0			(87)			(87)
Other expenses	Other expenses	—		—		—		—		—		(468)		(468)		Other expenses	0		0		0			0			0			(864)			(864)

Income from Consolidated VIEs	Income from Consolidated VIEs	$	1,036	$	13,387	$	20,489	$	8,910	$	—	$	1,873	$	45,695	Income from Consolidated VIEs	$	1,472	$	20,088	$	40,910		$	17,855		$	0		$	3,453		$	83,778

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

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

During the third quarter of 2020, we re-securitized subordinate securities we owned in our consolidated Freddie Mac SLST securitization trusts, through the transfer of these financial assets to a re-securitization trust that we sponsored. We retain a subordinate investment in the re-securitization trust and maintain certain discretionary rights associated with the ownership of this investment that we determined reflected a controlling financial interest in the entity, as we have both the power to direct the activities that most significantly impact the performance of the VIE and the right to receive benefits of and the obligation to absorb losses from the VIE that could potentially be significant to the VIE. At securitization, we issued $210 million of ABS and have elected to account for the ABS issued at amortized cost.

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 51 Sequoia securitization entities sponsored by us that are still outstanding as of ~~June~~September 30, 2020, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.

1920

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Table 4.3 – Securitization Activity 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)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
Principal balance of loans transferred	Principal balance of loans transferred	$	—	$	400,836	$	1,573,703	$	749,093	Principal balance of loans transferred	$	0	$	366,999	$	1,573,703	$	1,116,092
Trading securities retained, at fair value	Trading securities retained, at fair value	—		1,792		43,362		3,508		Trading securities retained, at fair value	0		1,228		43,362		4,736
AFS securities retained, at fair value	AFS securities retained, at fair value	—		1,069		3,198		1,954		AFS securities retained, at fair value	0		1,069		3,198		3,023

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

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
Proceeds from new transfers	Proceeds from new transfers	$	—	$	410,281	$	1,610,761	$	762,652	Proceeds from new transfers	$	0	$	376,126	$	1,610,761	$	1,138,778
MSR fees received	MSR fees received	2,475		3,105		5,165		6,165		MSR fees received	2,280		2,919		7,445		9,084
Funding of compensating interest, net	Funding of compensating interest, net	(205)		(47)		(297)		(137)		Funding of compensating interest, net	4		(76)		(293)		(213)
Cash flows received on retained securities	Cash flows received on retained securities	6,788		6,743		13,369		14,289		Cash flows received on retained securities	5,873		6,603		19,242		20,892

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

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


		Three Months Ended June 30, 2020				Three Months Ended June 30, 2019					Three Months Ended September 30, 2020					Three Months Ended September 30, 2019
At Date of Securitization	At Date of Securitization	Senior IO Securities	Subordinate Securities	Senior IO Securities		Subordinate Securities		At Date of Securitization	Senior IO Securities	Subordinate Securities		Senior IO Securities		Subordinate Securities
Prepayment rates	Prepayment rates	N/A	N/A	16	%	15	%	Prepayment rates	N/A	N/A		37	%	15	%
Discount rates	Discount rates	N/A	N/A	14	%	7	%	Discount rates	N/A	N/A		14	%	7	%
Credit loss assumptions	Credit loss assumptions	N/A	N/A	0.20	%	0.20	%	Credit loss assumptions	N/A	N/A		0.20	%	0.20	%


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

2021

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
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	$	25,038	$	88,425	Interest-only, senior and subordinate securities, classified as trading	$	19,878	$	88,425
Subordinate securities, classified as AFS	Subordinate securities, classified as AFS	117,675		140,649		Subordinate securities, classified as AFS	124,132		140,649
Mortgage servicing rights	Mortgage servicing rights	18,727		40,254		Mortgage servicing rights	14,240		40,254
Maximum loss exposure ⁽¹⁾	Maximum loss exposure ⁽¹⁾	$	161,440	$	269,328	Maximum loss exposure (1)	$	158,250	$	269,328
Assets transferred:	Assets transferred:					Assets transferred:
Principal balance of loans outstanding	Principal balance of loans outstanding	$	9,918,493	$	10,299,442	Principal balance of loans outstanding	$	8,571,916	$	10,299,442
Principal balance of loans 30+ days delinquent	Principal balance of loans 30+ days delinquent	291,191		41,809		Principal balance of loans 30+ days delinquent	200,910		41,809

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

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

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


June 30, 2020		MSRs				Senior Securities ⁽¹⁾				Subordinate Securities
September 30, 2020									September 30, 2020				MSRs					Senior Securities (1)					Subordinate Securities
(Dollars in Thousands)	(Dollars in Thousands)				MSRs				Senior Securities ⁽¹⁾						Subordinate Securities													(Dollars in Thousands)		MSRs			Senior Securities (1)		Subordinate Securities
Fair value at June 30, 2020
Fair value at September 30, 2020														Fair value at September 30, 2020						$	14,240				$	16,226					$	127,783
Expected life (in years)⁽²⁾	Expected life (in years)⁽²⁾	4								3						12			Expected life (in years) (2)				3					3						10
Prepayment speed assumption (annual CPR)⁽²⁾	Prepayment speed assumption (annual CPR)⁽²⁾	21		%		28		%		24		%	Prepayment speed assumption (annual CPR) (2)				26		%			30		%			27		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% adverse change	10% adverse change	$	1,477			$	1,855			$	1,361		10% adverse change				$	1,105				$	1,622				$	1,075
25% adverse change	25% adverse change	3,435				4,489				4,246			25% adverse change				2,678					3,675					3,735
Discount rate assumption⁽²⁾	Discount rate assumption⁽²⁾	12		%		14		%		6		%	Discount rate assumption (2)				12		%			17		%			6		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
100 basis point increase	100 basis point increase	$	548			$	196			$	10,543		100 basis point increase				$	383				$	327				$	10,219
200 basis point increase	200 basis point increase	1,061				652				19,824			200 basis point increase				746					638					19,348
Credit loss assumption ⁽²⁾	Credit loss assumption ⁽²⁾	N/A				0.22		%		0.22		%	Credit loss assumption (2)				N/A					0.38		%			0.38		%
Decrease in fair value from:	Decrease in fair value from:												Decrease in fair value from:
10% higher losses	10% higher losses	N/A				$	—			$	1,888		10% higher losses				N/A					$	0				$	2,274
25% higher losses	25% higher losses	N/A				—				4,706			25% higher losses				N/A					0					5,500

2122

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2019	December 31, 2019	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities			December 31, 2019	MSRs				Senior Securities (1)				Subordinate Securities
(Dollars in Thousands)	(Dollars in Thousands)														(Dollars in Thousands)				MSRs				Senior Securities (1)	Subordinate Securities
Fair value at December 31, 2019	Fair value at December 31, 2019	$	40,254		$	48,765		$	180,309		Fair value at December 31, 2019	$	40,254			$	48,765			$	180,309
Expected life (in years)⁽²⁾	Expected life (in years)⁽²⁾	6			6			14			Expected life (in years) (2)	6				6				14
Prepayment speed assumption (annual CPR)⁽²⁾	Prepayment speed assumption (annual CPR)⁽²⁾	11		%	14		%	16		%	Prepayment speed assumption (annual CPR) (2)	11		%		14		%		16		%
Decrease in fair value from:	Decrease in fair value from:										Decrease in fair value from:
10% adverse change	10% adverse change	$	1,643		$	1,908		$	205		10% adverse change	$	1,643			$	1,908			$	205
25% adverse change	25% adverse change	3,913			5,086			1,434			25% adverse change	3,913				5,086				1,434
Discount rate assumption⁽²⁾	Discount rate assumption⁽²⁾	11		%	12		%	5		%	Discount rate assumption (2)	11		%		12		%		5		%
Decrease in fair value from:	Decrease in fair value from:										Decrease in fair value from:
100 basis point increase	100 basis point increase	$	1,447		$	1,079		$	18,127		100 basis point increase	$	1,447			$	1,079			$	18,127
200 basis point increase	200 basis point increase	2,795			2,482			33,630			200 basis point increase	2,795				2,482				33,630
Credit loss assumption ⁽²⁾	Credit loss assumption ⁽²⁾	N/A			0.21		%	0.21		%	Credit loss assumption (2)	N/A				0.21		%		0.21		%
Decrease in fair value from:	Decrease in fair value from:										Decrease in fair value from:
10% higher losses	10% higher losses	N/A			$	—		$	1,804		10% higher losses	N/A				$	0			$	1,804
25% higher losses	25% higher losses	N/A			—			4,520			25% higher losses	N/A				0				4,520

(1)Senior securities included ~~$22~~$16 million and $49 million of interest-only securities at ~~June~~September 30, 2020 and December 31, 2019, respectively.

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

Analysis of Unconsolidated Third-Party VIEs

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

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Mortgage-Backed Securities	Mortgage-Backed Securities					Mortgage-Backed Securities
Senior	Senior	$	11,336	$	127,094	Senior	$	11,865	$	127,094
Mezzanine	Mezzanine	—		508,195		Mezzanine	2,016		508,195
Subordinate	Subordinate	162,387		235,510		Subordinate	193,445		235,510
Total Mortgage-Backed Securities	Total Mortgage-Backed Securities	173,723		870,799		Total Mortgage-Backed Securities	207,326		870,799
Excess MSR	Excess MSR	15,883		16,216		Excess MSR	15,205		16,216
Total Investments in Third-Party Sponsored VIEs	Total Investments in Third-Party Sponsored VIEs	$	189,606	$	887,015	Total Investments in Third-Party Sponsored VIEs	$	222,531	$	887,015

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 5. Fair Value of Financial Instruments

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

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

2324

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(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, 2020 and December 31, 2019.

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


		June 30, 2020						December 31, 2019							September 30, 2020					December 31, 2019
		Carrying Value		Fair Value		Carrying Value		Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)	(In Thousands)																		Carrying Value		Fair Value
Assets	Assets									Assets
Residential loans, held-for-sale at fair value	Residential loans, held-for-sale at fair value	$	20,098	$	20,098	$	536,385	$	536,509	Residential loans, held-for-sale at fair value	$	105,091	$	105,091	$	536,385	$	536,509
Residential loans, held-for-investment	Residential loans, held-for-investment	4,514,131		4,514,131		7,178,465		7,178,465		Residential loans, held-for-investment	4,389,808		4,389,808		7,178,465		7,178,465
Business purpose residential loans, held-for-sale	Business purpose residential loans, held-for-sale	379,795		379,795		331,565		331,565		Business purpose residential loans, held-for-sale	285,549		285,549		331,565		331,565
Business purpose residential loans, held-for-investment	Business purpose residential loans, held-for-investment	3,402,405		3,402,405		3,175,178		3,175,178		Business purpose residential loans, held-for-investment	3,670,552		3,670,552		3,175,178		3,175,178
Multifamily loans	Multifamily loans	489,075		489,075		4,408,524		4,408,524		Multifamily loans	491,415		491,415		4,408,524		4,408,524
Real estate securities										Real estate securities	351,335		351,335		1,099,874		1,099,874

Trading securities		142,699		142,699		860,540		860,540
Available-for-sale securities		173,737		173,737		239,334		239,334
Servicer advance investments ⁽¹⁾	Servicer advance investments ⁽¹⁾	266,948		266,948		169,204		169,204		Servicer advance investments (1)	258,621		258,621		169,204		169,204
MSRs ⁽¹⁾	MSRs ⁽¹⁾	19,661		19,661		42,224		42,224		MSRs (1)	14,878		14,878		42,224		42,224

Excess MSRs ⁽¹⁾	Excess MSRs ⁽¹⁾	36,197		36,197		31,814		31,814		Excess MSRs (1)	35,070		35,070		31,814		31,814
Shared home appreciation options⁽¹⁾	Shared home appreciation options⁽¹⁾	40,851		40,851		45,085		45,085		Shared home appreciation options (1)	41,758		41,758		45,085		45,085
Cash and cash equivalents	Cash and cash equivalents	528,612		528,612		196,966		196,966		Cash and cash equivalents	450,684		450,684		196,966		196,966
Restricted cash	Restricted cash	44,496		44,496		93,867		93,867		Restricted cash	73,594		73,594		93,867		93,867
Accrued interest receivable		44,134		44,134		71,058		71,058

Derivative assets	Derivative assets	357		357		35,701		35,701		Derivative assets	14,709		14,709		35,701		35,701
REO ⁽²⁾	REO ⁽²⁾	9,780		10,014		9,462		10,389		REO (2)	8,535		9,654		9,462		10,389
Margin receivable⁽²⁾	Margin receivable⁽²⁾	2,746		2,746		209,776		209,776		Margin receivable (2)	3,809		3,809		209,776		209,776
FHLBC stock ⁽²⁾	FHLBC stock ⁽²⁾	5,000		5,000		43,393		43,393		FHLBC stock (2)	5,000		5,000		43,393		43,393
Guarantee asset⁽²⁾	Guarantee asset⁽²⁾	770		770		1,686		1,686		Guarantee asset (2)	579		579		1,686		1,686

Pledged collateral⁽²⁾	Pledged collateral⁽²⁾	33,105		33,105		32,945		32,945		Pledged collateral (2)	8,172		8,172		32,945		32,945
Liabilities	Liabilities									Liabilities
Short-term debt facilities		$	418,370	$	418,370	$	2,176,591	$	2,176,591
Short-term debt - servicer advance financing		244,437		244,437		152,554		152,554
Accrued interest payable		37,024		37,024		60,655		60,655
Short-term debt										Short-term debt	$	482,761	$	482,761	$	2,329,145	$	2,329,145

Margin payable ⁽³⁾	Margin payable ⁽³⁾	—		—		1,700		1,700		Margin payable (3)	0		0		1,700		1,700
Guarantee obligation ⁽³⁾	Guarantee obligation ⁽³⁾	12,350		10,995		14,009		13,754		Guarantee obligation (3)	11,264		10,185		14,009		13,754
Contingent consideration ⁽³⁾	Contingent consideration ⁽³⁾	14,953		14,953		28,484		28,484		Contingent consideration (3)	0		0		28,484		28,484
Derivative liabilities	Derivative liabilities	1,932		1,932		163,424		163,424		Derivative liabilities	1,612		1,612		163,424		163,424
ABS issued at fair value		6,856,086		6,856,086		10,515,475		10,515,475
ABS issued, net										ABS issued, net
Fair value										Fair value	6,969,376		6,969,376		10,515,475		10,515,475
Amortized cost										Amortized cost	203,022		207,812		0		0
FHLBC long-term borrowings	FHLBC long-term borrowings	1,000		1,000		1,999,999		1,999,999		FHLBC long-term borrowings	1,000		1,000		1,999,999		1,999,999
Other long-term debt, net	Other long-term debt, net	1,088,609		1,082,327		183,520		184,666		Other long-term debt, net	886,054		885,172		183,520		184,666
Convertible notes, net	Convertible notes, net	509,868		469,360		631,125		661,985		Convertible notes, net	510,472		476,071		631,125		661,985
Trust preferred securities and subordinated notes, net	Trust preferred securities and subordinated notes, net	138,651		55,800		138,628		99,045		Trust preferred securities and subordinated notes, net	138,663		73,238		138,628		99,045

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

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

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we elected the fair value option for ~~$10~~$18 million and ~~$78~~$96 million of securities, respectively, ~~$58~~$172 million and ~~$2.69~~$2.86 billion of residential loans (principal balance), respectively, ~~$230~~$260 million and ~~$696~~$956 million of business purpose residential loans (principal balance), respectively, ~~$21 million~~0 and $179 million of servicer advance investments, respectively, ~~$2 million~~0 and $11 million of excess MSRs, respectively, and 0 and $4 million of shared home appreciation options, respectively. We anticipate electing the fair value option for all future purchases of residential and business purpose residential loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(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, 2020 and December 31, 2019, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

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


June 30, 2020		Carrying Value			Fair Value Measurements Using
September 30, 2020									September 30, 2020			Carrying Value			Fair Value Measurements Using
(In Thousands)	(In Thousands)			Carrying Value			Level 1		Level 2				Level 3		(In Thousands)	Carrying Value				Level 1				Level 2				Level 3
Assets	Assets										Assets
Residential loans	Residential loans	$	4,534,229		$	—	$	—	$	4,534,229	Residential loans		$	4,494,899				$	0			$	0			$	4,494,899
Business purpose residential loans	Business purpose residential loans	3,782,200			—		—		3,782,200		Business purpose residential loans		3,956,101				0				0				3,956,101
Multifamily loans	Multifamily loans	489,075			—		—		489,075		Multifamily loans		491,415				0				0				491,415
Trading securities		142,699			—		—		142,699
Available-for-sale securities		173,737			—		—		173,737
Real estate securities											Real estate securities		351,335				0				0				351,335

Servicer advance investments	Servicer advance investments	266,948			—		—		266,948		Servicer advance investments		258,621				0				0				258,621
MSRs	MSRs	19,661			—		—		19,661		MSRs		14,878				0				0				14,878
Excess MSRs	Excess MSRs	36,197			—		—		36,197		Excess MSRs		35,070				0				0				35,070
Shared home appreciation options	Shared home appreciation options	40,851			—		—		40,851		Shared home appreciation options		41,758				0				0				41,758
Derivative assets	Derivative assets	357			—		—		357		Derivative assets		14,709				464				3,472				10,773
Pledged collateral	Pledged collateral	33,105			33,105		—		—		Pledged collateral		8,172				8,172				0				0
FHLBC stock	FHLBC stock	5,000			—		5,000		—		FHLBC stock		5,000				0				5,000				0
Guarantee asset	Guarantee asset	770			—		—		770		Guarantee asset		579				0				0				579

Liabilities	Liabilities										Liabilities

Derivative liabilities	Derivative liabilities	$	1,932		$	—	$	—	$	1,932	Derivative liabilities		$	1,612			$	263			$	15			$	1,334

ABS issued	ABS issued	6,856,086			—		—		6,856,086		ABS issued		6,969,376				0				0				6,969,376

2526

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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


December 31, 2019	December 31, 2019	Carrying Value		Fair Value Measurements Using														December 31, 2019			Carrying Value				Fair Value Measurements Using
(In Thousands)	(In Thousands)					Level 1			Level 2			Level 3	(In Thousands)			Carrying Value			Level 1				Level 2				Level 3
Assets	Assets											Assets
Residential loans	Residential loans	$	7,714,745	$	—		$	—		$	7,714,745	Residential loans		$	7,714,745				$	0			$	0			$	7,714,745
Business purpose residential loans	Business purpose residential loans	3,506,743		—			—			3,506,743		Business purpose residential loans		3,506,743			0				0				3,506,743
Multifamily loans	Multifamily loans	4,408,524		—			—			4,408,524		Multifamily loans		4,408,524			0				0				4,408,524
Trading securities		860,540		—			—			860,540
Available-for-sale securities		239,334		—			—			239,334
Real estate securities												Real estate securities		1,099,874			0				0				1,099,874

Servicer advance investments	Servicer advance investments	169,204		—			—			169,204		Servicer advance investments		169,204			0				0				169,204
MSRs	MSRs	42,224		—			—			42,224		MSRs		42,224			0				0				42,224
Excess MSRs	Excess MSRs	31,814		—			—			31,814		Excess MSRs		31,814			0				0				31,814
Shared home appreciation options	Shared home appreciation options	45,085		—			—			45,085		Shared home appreciation options		45,085			0				0				45,085
Derivative assets	Derivative assets	35,701		6,531			19,020			10,150		Derivative assets		35,701			6,531				19,020				10,150
Pledged collateral	Pledged collateral	32,945		32,945			—			—		Pledged collateral		32,945			32,945				0				0
FHLBC stock	FHLBC stock	43,393		—			43,393			—		FHLBC stock		43,393			0				43,393				0
Guarantee asset	Guarantee asset	1,686		—			—			1,686		Guarantee asset		1,686			0				0				1,686

Liabilities	Liabilities											Liabilities
Contingent consideration	Contingent consideration	$	28,484	$	—		$	—		$	28,484	Contingent consideration		$	28,484		$	0			$	0			$	28,484
Derivative liabilities	Derivative liabilities	163,424		13,368			148,766			1,290		Derivative liabilities		163,424			13,368				148,766				1,290

ABS issued	ABS issued	10,515,475		—			—			10,515,475		ABS issued		10,515,475			0				0				10,515,475

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

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


		Assets																																																				Assets
		Residential Loans		Business Purpose Residential Loans		Multifamily Loans		Trading Securities		AFS Securities		Servicer Advance Investments		MSRs		Excess MSRs		Shared Home Appreciation Options						Residential Loans				Business Purpose Residential Loans				Multifamily Loans				Trading Securities			AFS Securities				Servicer Advance Investments			MSRs				Excess MSRs				Shared Home Appreciation Options
(In Thousands)	(In Thousands)																																		(In Thousands)			Residential Loans				Business Purpose Residential Loans			Multifamily Loans				Trading Securities				AFS Securities					Servicer Advance Investments			MSRs	Excess MSRs	Shared Home Appreciation Options
Beginning balance - December 31, 2019	Beginning balance - December 31, 2019	$	7,714,745	$	3,506,743	$	4,408,524	$	860,540	$	239,334	$	169,204	$	42,224	$	31,814	$	45,085		Beginning balance - December 31, 2019			$	7,714,745			$	3,506,743					$	4,408,524				$	860,540						$	239,334			$	169,204			$	42,224	$	31,814		$	45,085

Acquisitions	Acquisitions	2,751,590		—		—		77,889		31,181		179,419		—		10,906		3,517			Acquisitions			2,927,697				0				0				96,318			56,664				179,419			0				10,906				3,517
Originations	Originations	—		721,054		—		—		—		—		—		—		—			Originations			0				982,315				0				0			0				0			0				0				0
Sales	Sales	(4,695,048)		(44,172)		—		(566,537)		(55,193)		—		—		—		—			Sales			(4,783,682)				(53,434)				0				(579,466)			(55,193)				0			0				0				0
Principal paydowns	Principal paydowns	(907,360)		(272,052)		(5,830)		(8,114)		(8,293)		(75,477)		—		—		(1,080)			Principal paydowns			(1,210,117)				(489,243)				(5,830)				(8,502)			(10,345)				(83,124)			0				0				(2,558)
Deconsolidations	Deconsolidations	—		—		(3,849,779)		—		—		—		—		—		—			Deconsolidations			0				0				(3,849,779)				0			0				0			0				0				0
Gains (losses) in net income (loss), net	Gains (losses) in net income (loss), net	(328,313)		(121,961)		(63,840)		(221,079)		(33,292)		(6,198)		(22,563)		(6,523)		(6,671)			Gains (losses) in net income (loss), net			(152,145)				16,246				(61,500)				(224,728)			(23,287)				(6,878)			(27,346)				(7,650)				(4,286)

Other settlements, net ⁽¹⁾	Other settlements, net ⁽¹⁾	(1,385)		(7,412)		—		—		—		—		—		—		—			Other settlements, net (1)			(1,599)				(6,526)				0				0			0				0			0				0				0
Ending balance - June 30, 2020		$	4,534,229	$	3,782,200	$	489,075	$	142,699	$	173,737	$	266,948	$	19,661	$	36,197	$	40,851
Ending balance - September 30, 2020																				Ending balance - September 30, 2020		$	4,494,899			$	3,956,101			$	491,415		$	144,162			$	207,173			$	258,621		$	14,878			$	35,070			$	41,758

2627

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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

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


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

Acquisitions	Acquisitions	—		—		—			827,645		Acquisitions						0				0				0				1,137,656

Principal paydowns	Principal paydowns	—		—		(13,353)			(673,324)		Principal paydowns						0				0				(13,353)				(1,035,359)
Deconsolidations	Deconsolidations	—		—		—			(3,706,789)		Deconsolidations						0				0				0				(3,706,789)
Gains (losses) in net income (loss), net	Gains (losses) in net income (loss), net	(916)		20,643		(446)			(106,921)		Gains (losses) in net income (loss), net						(1,107)				34,620				(446)				58,393

Other settlements, net ⁽¹⁾	Other settlements, net ⁽¹⁾	—		(31,078)		(14,685)			—		Other settlements, net (1)						0				(34,041)				(14,685)				0
Ending balance - June 30, 2020		$	770	$	(1,575)	$	—		$	6,856,086
Ending balance - September 30, 2020								Ending balance - September 30, 2020							$	579			$	9,439			$	0			$	6,969,376

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

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

2728

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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

The following table presents the portion of gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at ~~June~~September 30, 2020 and 2019. 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, 2020 and 2019 are not included in this presentation.

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


		Included in Net Income															Included in Net Income
		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
Assets	Assets									Assets
Residential loans at Redwood	Residential loans at Redwood	$	(359)	$	48,575	$	(746)	$	80,615	Residential loans at Redwood	$	(107)	$	17,771	$	(865)	$	82,408
Business purpose residential loans	Business purpose residential loans	31,187		3,038		(21,026)		4,032		Business purpose residential loans	21,155		584		17,901		4,069
Net investments in consolidated Sequoia entities ⁽¹⁾	Net investments in consolidated Sequoia entities ⁽¹⁾	39,558		2,487		(30,502)		5,191		Net investments in consolidated Sequoia entities (1)	7,700		1,860		(22,802)		7,051
Net investments in consolidated Freddie Mac SLST entities ⁽¹⁾	Net investments in consolidated Freddie Mac SLST entities ⁽¹⁾	26,867		8,037		(115,295)		14,402		Net investments in consolidated Freddie Mac SLST entities (1)	82,209		17,300		(33,087)		31,702
Net investments in consolidated Freddie Mac K-Series entities ⁽¹⁾	Net investments in consolidated Freddie Mac K-Series entities ⁽¹⁾	1,599		3,246		(13,180)		6,365		Net investments in consolidated Freddie Mac K-Series entities (1)	2,165		7,445		(11,014)		13,810
Net investments in consolidated CAFL entities ⁽¹⁾	Net investments in consolidated CAFL entities ⁽¹⁾	17,125		—		(50,721)		—		Net investments in consolidated CAFL entities (1)	9,673		0		(41,048)		0
Trading securities	Trading securities	30,647		17,771		(79,633)		38,658		Trading securities	(3,549)		11,206		(80,358)		33,196

Servicer advance investments	Servicer advance investments	(136)		432		(6,198)		1,440		Servicer advance investments	25		1,585		(6,172)		3,025
MSRs	MSRs	(1,591)		(7,334)		(16,507)		(11,518)		MSRs	(2,376)		(5,892)		(16,798)		(16,971)
Excess MSRs	Excess MSRs	2,971		(66)		(6,523)		(502)		Excess MSRs	(1,127)		(1,634)		(7,650)		(2,137)
Shared home appreciation options	Shared home appreciation options	884		—		(6,670)		—		Shared home appreciation options	2,384		29		(4,286)		29
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	357		5,534		357		5,567		Loan purchase and interest rate lock commitments	10,791		4,678		10,773		4,757

Other assets - Guarantee asset	Other assets - Guarantee asset	(135)		(277)		(916)		(196)		Other assets - Guarantee asset	(191)		(216)		(1,107)		(834)

Liabilities	Liabilities									Liabilities
Loan purchase commitments	Loan purchase commitments	$	2,137	$	(756)	$	(1,634)	$	(772)	Loan purchase commitments	$	420	$	(1,668)	$	(1,334)	$	(1,669)

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

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

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


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

REO	REO	$	1,712		$	—	$	—	$	1,712	$	(36)	$	(31)	REO			$	3,523				$	0		$	0		$	3,523			$	(805)				$	(840)

2829

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(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, 2020 and 2019.

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)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net									Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	Residential loans held-for-sale, at fair value	$	(2,014)	$	3,379	$	(15,494)	$	6,912	Residential loans held-for-sale, at fair value	$	(478)	$	(6,623)	$	(15,972)	$	289
Residential loan purchase and forward sale commitments	Residential loan purchase and forward sale commitments	621		16,888		22,056		28,199		Residential loan purchase and forward sale commitments	13,067		12,943		35,123		41,142
Single-family rental loans held-for-sale, at fair value	Single-family rental loans held-for-sale, at fair value	1,210		1,313		12,677		2,917		Single-family rental loans held-for-sale, at fair value	43,191		1,283		55,868		4,200
Single-family rental loan purchase and interest rate lock commitments	Single-family rental loan purchase and interest rate lock commitments	—		569		341		709		Single-family rental loan purchase and interest rate lock commitments	0		564		341		1,273
Residential bridge loans	Residential bridge loans	(1,260)		1,012		(5,194)		1,098		Residential bridge loans	938		1,010		(4,256)		2,108
Risk management derivatives, net	Risk management derivatives, net	—		(7,431)		(52,832)		(12,415)		Risk management derivatives, net	(99)		(2,972)		(52,931)		(15,387)
Total mortgage banking activities, net ⁽¹⁾	Total mortgage banking activities, net ⁽¹⁾	$	(1,443)	$	15,730	$	(38,446)	$	27,420	Total mortgage banking activities, net (1)	$	56,619	$	6,205	$	18,173	$	33,625
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net									Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood	Residential loans held-for-investment, at Redwood	$	104	$	35,548	$	(93,532)	$	63,656	Residential loans held-for-investment, at Redwood	$	218	$	7,667	$	(93,314)	$	71,323
Single-family rental loans held-for-investment	Single-family rental loans held-for-investment	2,222		—		(20,806)		—		Single-family rental loans held-for-investment	0		22		(20,806)		22
Residential bridge loans held-for-investment	Residential bridge loans held-for-investment	21,774		(318)		(16,828)		(621)		Residential bridge loans held-for-investment	6,812		(742)		(10,016)		(1,363)
Trading securities	Trading securities	42,246		18,442		(221,079)		40,302		Trading securities	(3,600)		15,275		(224,679)		55,577
Servicer advance investments	Servicer advance investments	(136)		432		(6,198)		1,440		Servicer advance investments	26		1,585		(6,172)		3,025
Excess MSRs	Excess MSRs	2,971		(65)		(6,523)		(502)		Excess MSRs	(1,127)		(1,635)		(7,650)		(2,137)

Net investments in Legacy Sequoia entities ⁽²⁾	Net investments in Legacy Sequoia entities ⁽²⁾	(230)		(123)		(621)		(497)		Net investments in Legacy Sequoia entities (2)	(81)		(407)		(702)		(904)
Net investments in Sequoia Choice entities ⁽²⁾	Net investments in Sequoia Choice entities ⁽²⁾	39,753		2,879		(29,916)		6,144		Net investments in Sequoia Choice entities (2)	7,851		2,722		(22,065)		8,866
Net investments in Freddie Mac SLST entities ⁽²⁾	Net investments in Freddie Mac SLST entities ⁽²⁾	26,867		8,037		(115,295)		14,402		Net investments in Freddie Mac SLST entities (2)	82,214		17,300		(33,081)		31,702
Net investments in Freddie Mac K-Series entities ⁽²⁾	Net investments in Freddie Mac K-Series entities ⁽²⁾	1,599		3,246		(84,910)		6,365		Net investments in Freddie Mac K-Series entities (2)	2,166		7,445		(82,744)		13,810
Net investments in CAFL entities ⁽²⁾	Net investments in CAFL entities ⁽²⁾	17,125		—		(50,721)		—		Net investments in CAFL entities (2)	9,673		0		(41,048)		0
Other investments	Other investments	(2,121)		(200)		(11,562)		(277)		Other investments	2,451		(355)		(9,111)		(632)
Risk management derivatives, net	Risk management derivatives, net	—		(64,740)		(59,142)		(107,115)		Risk management derivatives, net	0		(37,433)		(59,142)		(144,548)

Credit recoveries (losses) on AFS securities	Credit recoveries (losses) on AFS securities	54		—		(1,471)		—		Credit recoveries (losses) on AFS securities	444		0		(1,027)		0
Total investment fair value changes, net	Total investment fair value changes, net	$	152,228	$	3,138	$	(718,604)	$	23,297	Total investment fair value changes, net	$	107,047	$	11,444	$	(611,557)	$	34,741
Other Income	Other Income									Other Income
MSRs	MSRs	$	(3,955)	$	(8,653)	$	(22,563)	$	(13,753)	MSRs	$	(4,783)	$	(7,489)	$	(27,346)	$	(21,243)
Risk management derivatives, net	Risk management derivatives, net	—		6,517		13,966		8,768		Risk management derivatives, net	0		4,389		13,966		13,157
Gain on re-measurement of 5 Arches investment	Gain on re-measurement of 5 Arches investment	—		—		—		2,440		Gain on re-measurement of 5 Arches investment	0		0		0		2,440
Total other income ⁽³⁾	Total other income ⁽³⁾	$	(3,955)	$	(2,136)	$	(8,597)	$	(2,545)	Total other income (3)	$	(4,783)	$	(3,100)	$	(13,380)	$	(5,646)
Total Market Valuation Gains (Losses), Net	Total Market Valuation Gains (Losses), Net	$	146,830	$	16,732	$	(765,647)	$	48,172	Total Market Valuation Gains (Losses), Net	$	158,883	$	14,549	$	(606,764)	$	62,720

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

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

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

2930

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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

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

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments


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

Jumbo fixed-rate loans															Jumbo fixed-rate loans		$	6,312	Prepayment rate (annual CPR)			20		-	20		%		20		%

																			Whole loan spread to swap rate			350		-	350		bps		350		bps

Jumbo loans committed to sell	Jumbo loans committed to sell	$	20,199		Whole loan committed sales price	$	101.00	-	$	101.00		$	101.00		Jumbo loans committed to sell		98,779		Whole loan committed sales price			$	101.61	-	$	103.40			$	103.23

Loans held by Legacy Sequoia ⁽¹⁾⁽²⁾	Loans held by Legacy Sequoia ⁽¹⁾⁽²⁾	304,632			Liability price				N/A			N/A			Loans held by Legacy Sequoia ⁽¹⁾⁽²⁾		296,765		Liability price						N/A				N/A

Loans held by Sequoia Choice ⁽¹⁾⁽²⁾	Loans held by Sequoia Choice ⁽¹⁾⁽²⁾	2,064,388			Liability price				N/A			N/A			Loans held by Sequoia Choice ⁽¹⁾⁽²⁾		1,836,361		Liability price						N/A				N/A

Loans held by Freddie Mac SLST ⁽¹⁾⁽²⁾	Loans held by Freddie Mac SLST ⁽¹⁾⁽²⁾	2,145,111			Liability price				N/A			N/A			Loans held by Freddie Mac SLST ⁽¹⁾⁽²⁾		2,256,682		Liability price						N/A				N/A

Business purpose residential loans:	Business purpose residential loans:														Business purpose residential loans:
Single-family rental loans	Single-family rental loans	379,795			Senior credit spread	230		-	230		bps	230		bps	Single-family rental loans		285,549		Senior credit spread			130		-	130		bps		130		bps
					Subordinate credit spread	300		-	2,450		bps	772		bps					Subordinate credit spread			200		-	1,600		bps		551		bps
					Senior credit support	31		-	36		%	34		%					Senior credit support			30		-	32		%		31		%
					IO discount rate	10		-	10		%	10		%					IO discount rate			8		-	9		%		9		%
					Prepayment rate (annual CPR)	3		-	3		%	3		%					Prepayment rate (annual CPR)			0		-	3		%		3		%
																			Non-securitizable loan dollar price			$	101	-	$	101			$	101

Single-family rental loans held by CAFL	Single-family rental loans held by CAFL	2,615,038			Liability price				N/A			N/A			Single-family rental loans held by CAFL		2,969,692		Liability price						N/A				N/A

Residential bridge loans	Residential bridge loans	787,367			Discount rate	8		-	17		%	11		%	Residential bridge loans		700,860		Discount rate			6		-	12		%		8		%
																			Non-performing loan dollar price			$	3	-	$	100			$	89
Multifamily loans held by Freddie Mac K-Series ⁽¹⁾		489,075			Liability price				N/A			N/A

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

Trading and AFS securities	Trading and AFS securities	316,436			Discount rate	4		-	21		%	10		%	Trading and AFS securities		351,335		Discount rate			3		-	34		%		9		%
																			Prepayment rate (annual CPR)			7		-	65		%		24		%
					Prepayment rate (annual CPR)	6		-	65		%	17		%					Default rate			0		-	26		%		1		%
					Default rate	—		-	15		%	1		%					Loss severity			0		-	50		%		19		%
					Loss severity	—		-	50		%	16		%					CRT dollar price			$	49	-	$	103			$	84

Servicer advance investments	Servicer advance investments	266,948			Discount rate	5		-	5		%	5		%	Servicer advance investments		258,621		Discount rate			3		-	4		%		4		%
					Prepayment rate (annual CPR)	8		-	14		%	14		%					Prepayment rate (annual CPR)			8		-	14		%		13		%
					Expected remaining life ⁽²⁾	2		-	2		years	2		years					Expected remaining life (3)			1		-	2		years		2		years
					Mortgage servicing income	8		-	13		bps	10		bps					Mortgage servicing income			6		-	16		bps		8		bps

MSRs	MSRs	19,661			Discount rate	12		-	12		%	12		%	MSRs		14,878		Discount rate			12		-	12		%		12		%
					Prepayment rate (annual CPR)	8		-	62		%	21		%					Prepayment rate (annual CPR)			8		-	97		%		26		%
					Per loan annual cost to service	$	95	-	$	95		$	95						Per loan annual cost to service			$	95	-	$	95			$	95

Excess MSRs	Excess MSRs	36,197			Discount rate	15		-	20		%	18		%	Excess MSRs		35,070		Discount rate			15		-	21		%		18		%
					Prepayment rate (annual CPR)	10		-	14		%	12		%					Prepayment rate (annual CPR)			10		-	13		%		11		%
					Excess mortgage servicing income	9		-	17		bps	12		bps					Excess mortgage servicing income			9		-	17		bps		12		bps

3031

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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

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


June 30, 2020		Fair Value				Input Values
September 30, 2020														September 30, 2020		Fair Value					Input Values
(Dollars in Thousands, except Input Values)	(Dollars in Thousands, except Input Values)			Fair Value		Unobservable Input			Range									Weighted Average ⁽⁴⁾		(Dollars in Thousands, except Input Values)		Fair Value			Unobservable Input			Range				Weighted Average (1)
Assets (continued)	Assets (continued)														Assets (continued)

Shared home appreciation options	Shared home appreciation options	$	40,851		Discount rate	17		-	17		%	17		%	Shared home appreciation options		$	41,758	Discount rate			16		-	16		%		16		%
					Prepayment rate (annual CPR)	8		-	28		%	21		%					Prepayment rate (annual CPR)			8		-	26		%		19		%
					Home price appreciation	1		-	3		%	3		%					Home price appreciation			2		-	3		%		3		%

Guarantee asset	Guarantee asset	781			Discount rate	13		-	13		%	13		%	Guarantee asset		579		Discount rate			12		-	12		%		12		%
					Prepayment rate (annual CPR)	37		-	37		%	37		%					Prepayment rate (annual CPR)			42		-	42		%		42		%

REO	REO	1,712			Loss severity	3		-	86		%	19		%	REO		3,523		Loss severity			3		-	63		%		23		%

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

Liabilities	Liabilities														Liabilities
Residential loan purchase commitments, net		177			Committed sales price	$	96.10	-	$	101.28		$	100.11

					Pull-through rate	100		-	100		%	100		%

ABS issued ⁽¹⁾:
ABS issued (2):															ABS issued (2):
At consolidated Sequoia entities	At consolidated Sequoia entities	2,162,134			Discount rate	2		-	25		%	4		%	At consolidated Sequoia entities		1,919,048		Discount rate			2		-	30		%		3		%
					Prepayment rate (annual CPR)	10		-	50		%	24		%					Prepayment rate (annual CPR)			5		-	53		%		27		%
					Default rate	—		-	40		%	1		%					Default rate			0		-	40		%		2		%
					Loss severity	—		-	50		%	32		%					Loss severity			0		-	50		%		31		%

At consolidated Freddie Mac SLST entities	At consolidated Freddie Mac SLST entities	1,812,008			Discount rate	2		-	14		%	4		%	At consolidated Freddie Mac SLST entities		1,841,313		Dollar price			$	1	-	$	108			$	99

					Prepayment rate (annual CPR)	6		-	6		%	6		%
					Default rate	17		-	18		%	17		%
					Loss severity	30		-	30		%	30		%

At consolidated Freddie Mac K-Series entities ⁽³⁾⁽⁴⁾	At consolidated Freddie Mac K-Series entities ⁽³⁾⁽⁴⁾	464,691			Discount rate	1		-	19		%	2		%	At consolidated Freddie Mac K-Series entities ⁽³⁾⁽⁴⁾		464,865		Discount rate			1		-	18		%		2		%
					Non-IO prepayment rate (annual CPR)	—		-	—		%	—		%
					IO prepayment rate (annual CPY/CPP)	100		-	100		%	100		%

At consolidated CAFL entities ⁽³⁾⁽⁴⁾	At consolidated CAFL entities ⁽³⁾⁽⁴⁾	2,417,253			Discount rate	1		-	74		%	4		%	At consolidated CAFL entities ⁽³⁾⁽⁴⁾		2,744,150		Discount rate			0.2		-	40		%		3		%
					Prepayment rate (annual CPR)	—		-	3		%	—		%					Prepayment rate (annual CPR)			0		-	3		%		0		%
																			Default rate			0		-	18		%		11		%
																			Loss severity			30		-	30		%		30		%

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

(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. At ~~June~~September 30, 2020, the fair value of securities we owned at the consolidated Sequoia, Freddie Mac SLST, Freddie Mac K-Series, and CAFL entities was ~~$208~~$215 million, ~~$334~~$416 million, ~~$24~~$27 million, and ~~$203~~$229 million, respectively.

~~(2)~~(3)Represents the estimated average duration of outstanding servicer advances at a given point in time (not taking into account new advances made with respect to the pool).

~~(3)~~(4)As a market convention, certain securities are priced to a no-loss yield and therefore do not include default and loss severity assumptions.

~~(4)The weighted average input values for all loan types are based on the unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.~~

Determination of Fair Value

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

3132

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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

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

Note 6. Residential Loans

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

Table 6.1 – Classifications and Carrying Values of Residential Loans


June 30, 2020				Legacy		Sequoia		Freddie Mac
September 30, 2020												September 30, 2020			Legacy		Sequoia		Freddie Mac
(In Thousands)	(In Thousands)	Redwood		Sequoia		Choice		SLST		Total		(In Thousands)	Redwood		Sequoia		Choice		SLST		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	20,200	$	—	$	—	$	—	$	20,200	Held-for-sale at fair value	$	105,128	$	0	$	0	$	0	$	105,128
Held-for-investment at fair value	Held-for-investment at fair value	—		304,632		2,064,388		2,145,111		4,514,131		Held-for-investment at fair value	0		296,765		1,836,361		2,256,682		4,389,808
Total Residential Loans	Total Residential Loans	$	20,200	$	304,632	$	2,064,388	$	2,145,111	$	4,534,331	Total Residential Loans	$	105,128	$	296,765	$	1,836,361	$	2,256,682	$	4,494,936


December 31, 2019	December 31, 2019			Legacy		Sequoia		Freddie Mac				December 31, 2019			Legacy		Sequoia		Freddie Mac
(In Thousands)	(In Thousands)	Redwood		Sequoia		Choice		SLST		Total		(In Thousands)	Redwood		Sequoia		Choice		SLST		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	536,385	$	—	$	—	$	—	$	536,385	Held-for-sale at fair value	$	536,385	$	0	$	0	$	0	$	536,385
Held-for-investment at fair value	Held-for-investment at fair value	2,111,897		407,890		2,291,463		2,367,215		7,178,465		Held-for-investment at fair value	2,111,897		407,890		2,291,463		2,367,215		7,178,465
Total Residential Loans	Total Residential Loans	$	2,648,282	$	407,890	$	2,291,463	$	2,367,215	$	7,714,850	Total Residential Loans	$	2,648,282	$	407,890	$	2,291,463	$	2,367,215	$	7,714,850

At ~~June~~September 30, 2020, we owned mortgage servicing rights associated with ~~$20~~$103 million (principal balance) of ~~consolidated~~ 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.

Residential Loans Held-for-Sale

At Fair Value

~~At June 30, 2020, we owned 29~~The following table summarizes the characteristics of residential loans held-for-sale at fair value with an aggregate unpaid principal balance of $21 million and a fair value of $20 million, compared to 669 loans with an aggregate unpaid principal balance of $525 million and a fair value of $536 million at December 31, 2019. At June 30, 2020, 3 of these loans with an aggregate fair value of $2 million and unpaid principal balance of $3 million were greater than 90 days delinquent and 1 of these loans with a fair value of $0.4 million and an unpaid principal balance of $1 million was in foreclosure. At December 31, 2019, 1 of these loans with a fair value and unpaid principal balance of $1 million was greater than 90 days delinquent and 0ne of these loans were in foreclosure.

During the three and six months ended June 30, 2020, we purchased $58 million and $2.69 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $2.28 billion and $4.94 billion (principal balance) of loans, respectively, for which we recorded net market valuation losses of $2 million and $15 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). At June 30, 2020, loans held-for-sale with a market value of $15 million were pledged as collateral under short-term borrowing agreements.

During the three and six months ended June 30, 2019, we purchased $1.53 billion and $2.49 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $1.23 billion and $2.39 billion (principal balance) of loans, respectively, for which we recorded net market valuation gains of $3 million and $7 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

~~Note 6. Residential Loans - (continued)~~

~~Residential Loans Held-for-Investment at Fair Value~~

~~At Redwood~~

At June 30, 2020, we did 0t own any held-for-investment loans at Redwood. At December 31, 2019, we owned 2,940 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.05 billion and a fair value of $2.11 billion. At December 31, 2019, 2 of these loans with an aggregate fair value of $1 million and an unpaid principal balance of $2 million were greater than 90 days delinquent and 0ne of these loans were in foreclosure.

During the three and six months ended June 30, 2020, we transferred loans with a fair value of 0 and $13 million, respectively, from held-for-sale to held-for-investment. During the three and six months ended June 30, 2020, we transferred loans with a fair value of 0 and $1.87 billion, respectively, from held-for-investment to held-for-sale. During the three and six months ended June 30, 2020, we recorded net market valuation losses of 0 and $94 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss).

During the three and six months ended June 30, 2019, we purchased 0 and $39 million (principal balance) of loans, respectively, for which we elected the fair value option, and did 0t sell any loans. During the three and six months ended June 30, 2019, we transferred loans with a fair value of $30 million and $69 million, respectively, from held-for-sale to held-for-investment. During the three and six months ended June 30, 2019, we transferred loans with a fair value of 0 and $23 million, respectively, from held-for-investment to held-for-sale. During the three and six months ended June 30, 2019, we recorded net market valuation gains of $36 million and $64 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss).

~~At Consolidated Legacy Sequoia Entities~~

At June 30, 2020, we consolidated 2,063 held-for-investment loans at consolidated Legacy Sequoia entities, with an aggregate unpaid principal balance of $382 million and a fair value of $305 million, as compared to 2,198 loans at December 31, 2019, with an aggregate unpaid principal balance of $425 million and a fair value of $408 million. At origination, the weighted average FICO score of borrowers backing these loans was 727, the weighted average LTV ratio of these loans was 65%, and the loans were nearly all first lien and prime-quality.

~~At June~~September 30, 2020 and December 31, ~~2019, the aggregate unpaid principal balance~~2019.

Table 6.2 – Characteristics of loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $12 million and $10 million, respectively, of which the aggregate unpaid principal balance of loans in foreclosure was $3 million and $4 million, respectively. During the three and six months ended June 30, 2020, we recorded a net market valuation gain of $8 million and a net market valuation loss of $61 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2019, we recorded net market valuation gains of $1 million and $5 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the associated ABS issued. The net impact to our income statement associated with our retained economic investment in the Legacy Sequoia securitization entities is presented in ~~Note 5.~~Residential Loans Held-for-Sale

~~At Consolidated Sequoia Choice Entities~~

At June 30, 2020, we consolidated 2,861 held-for-investment loans at the consolidated Sequoia Choice entities, with an aggregate unpaid principal balance of $2.03 billion and a fair value of $2.06 billion, as compared to~~3,156~~ ~~loans at~~ December 31, 2019 with an aggregate unpaid principal balance of $2.24 billion and a fair value of $2.29 billion. At origination, the weighted average FICO score of borrowers backing these loans was 743, the weighted average LTV ratio of these loans was 74%, and the loans were all first lien and prime-quality. At June 30, 2020, 22 of these loans with an aggregate unpaid principal balance of $16 million were greater than 90 days delinquent and 5 of these loans with an aggregate unpaid principal balance of $3 million was in foreclosure. At December 31, 2019, 9 of these loans with an aggregate unpaid principal balance of $7 million were greater than 90 days delinquent and 3 of these loans with an aggregate unpaid principal balance of $2 million were in foreclosure.


(Dollars in Thousands)	September 30, 2020		December 31, 2019
Number of loans	118		669
Unpaid principal balance	$	102,921	$	524,928
Fair value of loans	$	105,128	$	536,280
Number of loans with 90+ day delinquencies	2		1
Unpaid principal balance of loans with 90+ day delinquencies	$	2,356	$	747
Fair value of loans with 90+ day delinquencies	$	1,767	$	616
Number of loans in foreclosure	0		0


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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 6. Residential Loans - (continued)

~~During both~~The following table provides the activity of residential loans held-for-sale during the three and ~~six~~nine months ended ~~June~~September 30, 2020 ~~we transferred $271 million~~and 2019.

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


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

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

Residential Loans Held-for-Investment at Fair Value

The following tables summarize the characteristics of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at September 30, 2020 and December 31, 2019.

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


September 30, 2020			Legacy		Sequoia		Freddie Mac
(Dollars in Thousands)	Redwood		Sequoia		Choice		SLST
Number of loans	0		1,976		2,546		13,893
Unpaid principal balance	$	0	$	352,392	$	1,811,967	$	2,304,047
Fair value of loans	$	0	$	296,765	$	1,836,361	$	2,256,683


Number of loans with 90+ day delinquencies (1)	0		49		132		1,772
Unpaid principal balance of loans with 90+ day delinquencies	$	0	$	16,076	$	102,693	$	339,537
Fair value of loans with 90+ day delinquencies (2)	$	0	N/A		N/A		N/A
Number of loans in foreclosure	0		21		3		175
Unpaid principal balance of loans in foreclosure	$	0	$	4,820	$	1,814	$	28,380


December 31, 2019			Legacy		Sequoia		Freddie Mac
(Dollars in Thousands)	Redwood		Sequoia		Choice		SLST
Number of loans	2,940		2,198		3,156		14,502
Unpaid principal balance	$	2,052,778	$	424,829	$	2,240,679	$	2,428,035
Fair value of loans	$	2,111,897	$	407,890	$	2,291,463	$	2,367,215


Number of loans with 90+ day delinquencies (1)	2		39		9		587
Unpaid principal balance of loans with 90+ day delinquencies	$	1,585	$	9,803	$	6,755	$	134,680
Fair value of loans with 90+ day delinquencies (2)	$	1,424	N/A		N/A		N/A
Number of loans in foreclosure	0		16		3		208
Unpaid principal balance of loans in foreclosure	$	0	$	3,673	$	2,290	$	33,042

(1)For loans held at consolidated entities, the number of loans ~~from held-for-sale to~~greater than 90 days delinquent includes loans in foreclosure.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 6. Residential Loans - (continued)

The following table provides the activity of residential loans held-for-investment ~~associated with Choice securitizations. During~~at Redwood during the three and ~~six~~nine months ended June 30, 2019, we transferred loans with a fair value of 0 and $350 million, respectively, from held-for-sale to held-for-investment associated with Choice securitizations. During the three and six months ended JuneSeptember 30, 2020 ~~we recorded a net~~and 2019.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Principal balance of loans acquired	$	0	$	0	$	0	$	39,194
Principal balance of loans sold	0		0		0		0
Fair value of loans transferred from HFS to HFI	0		0		13,258		68,703
Fair value of loans transferred from HFI to HFS	0		0		1,870,986		22,814
Net market valuation gains (losses) recorded (1)	218		7,667		(93,314)		71,323

(1)Net market valuation ~~gain of $94 million and a net market valuation~~ ~~loss~~ ~~of $17 million, respectively,~~gains (losses) on ~~these~~residential loans held-for-investment at Redwood are recorded through Investment fair value changes, net on our consolidated statements of income (loss). ~~Pursuant~~

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

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


	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
	Legacy		Sequoia		Freddie Mac		Legacy		Sequoia		Freddie Mac
(In Thousands)	Sequoia		Choice		SLST		Sequoia		Choice		SLST
Fair value of loans transferred from HFS to HFI (1)	N/A		$	0	N/A		N/A		$	270,506	N/A

Net market valuation gains (losses) recorded (2)	$	21,938	$	(5,175)	$	159,687	$	(38,996)	$	(21,727)	$	15,254


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	Legacy		Sequoia		Freddie Mac		Legacy		Sequoia		Freddie Mac
(In Thousands)	Sequoia		Choice		SLST		Sequoia		Choice		SLST
Fair value of loans transferred from HFS to HFI (1)	N/A		$	727,088	N/A		N/A		$	1,076,671	N/A

Net market valuation gains (losses) recorded (2)	$	(103)	$	(11,029)	$	39,783	$	5,271	$	4,841	$	94,788

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

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

~~At Consolidated Freddie Mac SLST Entities~~

Beginning in 2018, we invested in subordinate securities issued by certain Freddie Mac SLST securitization trusts and were required to consolidate the underlying seasoned re-performing and non-performing residential loans owned at these entities for financial reporting purposes in accordance with GAAP. At securitization, each of these mortgage loans was a fully amortizing, fixed- or step-rate, first-lien loan that had been modified. At June 30, 2020, we consolidated 14,143 held-for-investment loans at the consolidated Freddie Mac SLST entities, with an aggregate unpaid principal balance of $2.35 billion and a fair value of $2.15 billion, as compared to 14,502 loans at December 31, 2019 with an aggregate unpaid principal balance of $2.43 billion and a fair value of $2.37 billion. At securitization, the weighted average FICO score of borrowers backing these loans was 600 and the weighted average LTV ratio of these loans was 73%. At June 30, 2020, 1,409 of these loans with an aggregate unpaid principal balance of $258 million were greater than 90 days delinquent, of which 236 of these loans with an aggregate unpaid principal balance of $38 million were in foreclosure. At December 31, 2019, 587 of these loans with an aggregate unpaid principal balance of $135 million were greater than 90 days delinquent and 208 of these loans with an aggregate unpaid principal balance of $33 million were in foreclosure.

During the three and six months ended June 30, 2020, we recorded a net market valuation gain of $49 million and a net market valuation loss of $144 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2019, we recorded net market valuation gains of $31 million and $55 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity ~~guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with the Freddie Mac SLST securitizations~~. guidelines. The net impact to our income statement associated with our economic ~~investment~~investments in ~~the Freddie Mac SLST~~these securitization entities is presented in Note 5.

Note 7. Business Purpose Residential Loans

We originate business purpose residential loans, including single-family rental loans and residential bridge loans. This origination activity commenced in connection with our acquisitions of 5 Arches and CoreVest in 2019.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 7. Business Purpose Residential Loans - (continued)

Business Purpose Residential Loan Originations

During the three months ended ~~June~~September 30, 2020, we funded ~~$234~~$261 million of business purpose residential loans ~~of which~~and sold $2 million of residential bridge loans and 0$2 million of single-family rental loans ~~were sold~~ to third parties. The remaining business purpose residential loans were transferred to our investment portfolio (residential bridge loans), or retained in our mortgage banking business (single-family rental loans) for future securitizations. Prior to the transfer of residential bridge loans to our investment portfolio, we recorded a net market valuation ~~loss~~gain of $3less than $0.1 million on these loans through Mortgage banking activities, net on our consolidated statements of income (loss) for the three months ended ~~June~~September 30, 2020. Market valuation adjustments on our single-family rental loans are also recorded in Mortgage banking activities, net on our consolidated statements of income (loss) prior to their sale or ~~transfer to our investment portfolio.~~securitization. Additionally, during the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded loan origination fee income associated with business purpose residential loans of $2$3 million and ~~$11~~$13 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

The following table summarizes the classifications and carrying values of the business purpose residential loans owned at Redwood at ~~June~~September 30, 2020 and December 31, 2019.

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


June 30, 2020		Single-Family Rental						Residential
September 30, 2020										September 30, 2020	Single-Family Rental				Residential
(In Thousands)	(In Thousands)	Redwood		CAFL		Bridge		Total		(In Thousands)	Redwood		CAFL		Bridge		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	379,795	—		$	—	$	379,795	Held-for-sale at fair value	$	285,549	0		$	0	$	285,549
Held-for-investment at fair value	Held-for-investment at fair value	—		2,615,038		787,367		3,402,405		Held-for-investment at fair value	0		2,969,692		700,860		3,670,552
Total Business Purpose Residential Loans	Total Business Purpose Residential Loans	$	379,795	$	2,615,038	$	787,367	$	3,782,200	Total Business Purpose Residential Loans	$	285,549	$	2,969,692	$	700,860	$	3,956,101


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

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

Table 7.2 – Characteristics of Business Purpose Residential Loans

~~At June~~


September 30, 2020	Single-Family Rental at Redwood			Single-Family Rental at CAFL			Residential Bridge
(Dollars in Thousands)
Number of loans	140			1,027			2,262
Unpaid principal balance	$	272,492		$	2,815,045		$	708,555
Fair value of loans	$	285,549		$	2,969,692		$	700,860

Weighted average coupon	5.26		%	5.50		%	8.02		%
Weighted average remaining loan term (years)	7			6			1


Number of loans with 90+ day delinquencies (1)	6			26			24
Unpaid principal balance of loans with 90+ day delinquencies	$	3,018		$	70,949		$	38,437
Fair value of loans with 90+ day delinquencies (2)	$	2,954		N/A			$	33,464
Number of loans in foreclosure	0			9			24
Unpaid principal balance of loans in foreclosure	$	0		$	14,032		$	39,755
Fair value of loans in foreclosure (2)	$	0		N/A			$	34,489

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020 ~~we owned 199 single-family rental~~

(Unaudited)

Note 7. Business Purpose Residential Loans - (continued)


December 31, 2019	Single-Family Rental at Redwood			Single-Family Rental at CAFL			Residential Bridge
(Dollars in Thousands)
Number of loans	308			783			2,653
Unpaid principal balance	$	552,848		$	2,078,214		$	742,528
Fair value of loans	$	569,185		$	2,192,552		$	745,006

Weighted average coupon	4.96		%	5.70		%	8.11		%
Weighted average remaining loan term (years)	9			7			2


Number of loans with 90+ day delinquencies (1)	2			18			31
Unpaid principal balance of loans with 90+ day delinquencies	$	1,688		$	29,039		$	14,186
Fair value of loans with 90+ day delinquencies (2)	$	1,818		N/A			$	12,111
Number of loans in foreclosure	1			5			15
Unpaid principal balance of loans in foreclosure	$	130		$	9,169		$	8,987
Fair value of loans in foreclosure (2)	$	130		N/A			$	6,917

(1)The number of loans with an aggregate unpaid principal balance and fair value of $380 million, as compared to 308 loans at December 31, 2019 with an aggregate unpaid principal balance of $553 million and a fair value of $569 million. At June 30, 2020, 3 of these loans with an aggregate unpaid principal balance and fair value of $3 million were in foreclosure, of which 2 of these loans with an aggregate unpaid principal balance and fair value of $2 million were greater than 90 days delinquent. At December 31, 2019, 2 of these loans with an aggregate unpaid principal balance and fair value of $2 million were greater than 90 days delinquent ~~of which 1 of these~~includes loans ~~with an unpaid principal balance of $0.1 million was~~ in foreclosure.

Single-Family Rental Loans

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we originated ~~$176~~$196 million and ~~$436~~$632 million of single-family rental loans, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2020, we transferred ~~$599~~$925 million of single-family rental loans from held-for-sale to held-for-investment associated with 23 CAFL securitizations and sold ~~$26~~$34 million to third parties. Additionally, at March 31, 2020, we transferred all held-for-investment single-family rental loans to held-for-sale. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded a net market valuation ~~gain~~gains of $3$43 million and ~~a net market valuation loss of $9~~$34 million, respectively, on single-family rental loans. ~~Of the $3~~The $43 million of net market valuation gains recorded during the three months ended ~~June~~September 30, 2020 ~~$1 million of net market valuation gains~~ were recorded through Mortgage banking activities, ~~net and $2 million of net market valuation gains were recorded through Investment fair value changes,~~ net on our consolidated statements of income (loss). Of the $9$34 million of net market valuation ~~losses~~gains recorded during the ~~six~~nine months ended ~~June~~September 30, 2020, ~~$12~~$55 million of net market valuation gains were recorded through Mortgage banking activities, net and $21 million of net market valuation losses were recorded through Investment fair value changes, net on our consolidated statements of income (loss). During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recorded net market valuation gains of $1 million and $2$3 million, respectively, on single-family rental loans through Mortgage banking activities, net on our consolidated statements of income (loss).

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

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

In conjunction with our acquisition of CoreVest in the fourth quarter of 2019, we consolidated the single-family rental loans owned at certain CAFL securitization entities. At June 30, 2020, we consolidated 967 held-for-investment single-family rental loans at the consolidated CAFL entities, with an aggregate unpaid principal balance of $2.58 billion and a fair value of $2.62 billion, as compared to 783 loans at December 31, 2019 with an aggregate unpaid principal balance of $2.08 billion and a fair value of $2.19 billion. The outstanding single-family rental loans held-for-investment at CAFL at ~~June~~September 30, 2020 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years. At June 30, 2020, the weighted average coupon of our single-family rental loans was 5.52% and the weighted average remaining loan term was six years. At origination, the weighted average LTV ratio of these loans was 69% and the weighted average DSCR was 1.37 times. At June 30, 2020, 19 of these loans with an aggregate unpaid principal balance of $29 million were greater than 90 days delinquent and 8 of these loans with an aggregate unpaid principal balance of $14 million were in foreclosure. At December 31, 2019, 18 of these loans with an aggregate unpaid principal balance of $29 million were greater than 90 days delinquent and 5 of these loans with an aggregate unpaid principal balance of $9 million were in foreclosure.

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded a net market valuation gain of ~~$169~~$88 million and a net market valuation loss of ~~$103~~$14 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with CAFL securitizations. The net impact to our income statement associated with our retained economic investment in the CAFL securitization entities is presented in Note 5.

Residential Bridge Loans Held-for-Investment

~~At June 30, 2020, we owned 2,847~~The outstanding residential bridge loans held-for-investment ~~with an aggregate unpaid principal balance of $803 million and a fair value of $787 million, as compared to 2,653 loans~~ at ~~December 31, 2019 with an aggregate unpaid principal balance of $743 million and a fair value of $745 million.~~

~~As part of our credit risk management practices, our residential bridge loans are subject to individual risk assessment using an internal borrower and collateral quality evaluation framework. At June~~September 30, 2020 13were first lien, fixed-rate, interest-only loans with ~~an aggregate fair value~~original maturities of $30 million and an unpaid principal balance of $35 million were greater than 90 days delinquent, of which 9 of these loans with an aggregate fair value of $28 million and an unpaid principal balance of $32 million were in foreclosure. At December 31, 2019, 31 loans with an aggregate fair value of $12 million and an unpaid principal balance of $14 million were in foreclosure, of which 15 of these loans with an aggregate fair value of $7 million and an unpaid principal balance of $9 million were greater than 90 days delinquent.six to 24 months. During the ~~six~~nine months ended ~~June~~September 30, 2020, we transferred 34 loans with a fair value of $2$5 million to REO, which is included in Other assets on our consolidated balance sheets.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 7. Business Purpose Residential Loans - (continued)

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, ~~$54~~$64 million and ~~$260~~$324 million of newly originated residential bridge loans, respectively, were transferred to our investment portfolio. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded a net market valuation gain of ~~$22~~$7 million and a net market valuation loss of ~~$17~~$10 million, respectively, on residential bridge loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss). During both the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recorded net market valuation losses of ~~$0.3~~$1 million ~~and $0.6 million, respectively,~~ on residential bridge loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss).

~~The outstanding residential bridge loans held-for-investment at June 30, 2020 were first lien, fixed-rate, interest-only loans with a weighted average coupon of 7.96% and original maturities of~~ ~~six~~ ~~to 24 months.~~ At ~~origination, the weighted average FICO score of borrowers backing these loans was 720 and the weighted average LTV ratio of these loans was 69%.~~

~~At June~~September 30, 2020, we had a ~~$167~~$225 million commitment to fund residential bridge loans. See Note 16 for additional information on this commitment.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

Note 8. Multifamily Loans

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

~~At June~~The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at September 30, 2020 ~~we consolidated 28 held-for-investment multifamily loans, with an aggregate unpaid principal balance of $465 million~~ and ~~a fair value of $489 million, as compared to 279 loans at~~ December 31, ~~2019 with an aggregate unpaid principal balance~~2019.

Table 8.1 – Characteristics of ~~$4.20 billion and a fair value of $4.41 billion.~~ Multifamily Loans


(Dollars in Thousands)	September 30, 2020			December 31, 2019
Number of loans	28			279
Unpaid principal balance	$	464,680		$	4,195,000
Fair value of loans	$	491,415		$	4,408,524

Weighted average coupon	4.25		%	4.13		%
Weighted average remaining loan term (years)	5			6
Number of loans with 90+ day delinquencies	0			0


Number of loans in foreclosure	0			0

The outstanding multifamily loans held-for-investment at the Freddie Mac K-Series entities at ~~June~~September 30, 2020 were first-lien, fixed-rate loans that were originated in 2015 and had original loan terms of ten ~~years and an original weighted average LTV ratio~~years. The following table provides the activity of ~~67%. At June 30, 2020, the weighted average coupon of these~~ multifamily loans ~~was 4.25%~~held-for-investment during the three and ~~the weighted average remaining loan term was five years. At both June~~nine months ended September 30, 2020 and ~~December 31, 2019, NaN~~2019.

Table 8.2 – Quarterly Activity of ~~these loans were greater than 90 days delinquent or in foreclosure.~~Multifamily Loans Held-for-Investment


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Net market valuation gains (losses) recorded (1)	$	2,340	$	47,353	$	(61,500)	$	178,374

~~During the three and six months ended June 30, 2020, we recorded a net~~(1)Net market valuation ~~gain of $19 million and a net market valuation loss of $64 million, respectively,~~gains (losses) on ~~these~~multifamily loans held-for-investment are recorded through Investment fair value changes, net on our consolidated statements of income (loss). ~~During the three and six months ended June 30, 2019, we recorded net market valuation gains of $97 million and $131 million, respectively, on these~~For loans ~~through Investment fair value changes, net on~~held at our consolidated ~~statements of income (loss). Pursuant to the collateralized financing entity guidelines, the~~Freddie Mac K-Series entities, market ~~valuation~~value changes ~~of these loans~~ are based on the estimated fair value of the associated ABS issued, ~~associated with the securitizations~~. pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investment in ~~the securities of the Freddie Mac K-Series~~these securitization entities is presented in Note 5.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 9. Real Estate Securities

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

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Trading	Trading	$	142,699	$	860,540	Trading	$	144,162	$	860,540
Available-for-sale	Available-for-sale	173,737		239,334		Available-for-sale	207,173		239,334
Total Real Estate Securities	Total Real Estate Securities	$	316,436	$	1,099,874	Total Real Estate Securities	$	351,335	$	1,099,874

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

Trading Securities

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

Table 9.2 – Trading Securities by Position


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Senior	Senior	$	32,860	$	150,067	Senior	$	28,091	$	150,067
Mezzanine	Mezzanine	3,514		538,489		Mezzanine	3,651		538,489
Subordinate	Subordinate	106,325		171,984		Subordinate	112,420		171,984

Total Trading Securities	Total Trading Securities	$	142,699	$	860,540	Total Trading Securities	$	144,162	$	860,540

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). At ~~June~~September 30, 2020 and December 31, 2019, our senior trading securities included ~~$33~~$28 million and $64 million of interest-only securities, respectively, for which there is no principal balance, and the unpaid principal balance of our remaining senior trading securities was 0 and $84 million, respectively. Our interest-only securities included ~~$14~~$12 million and $36 million of certificated mortgage servicing rights at ~~June~~September 30, 2020 and December 31, 2019, respectively, which are securities we retained from certain of our Sequoia securitizations that represent certificated servicing strips. At ~~June~~September 30, 2020 and December 31, 2019, our ~~senior~~ trading securities included ~~$11~~$60 million and ~~$55~~$161 million of RPL securities, respectively.

At ~~June~~September 30, 2020 and December 31, 2019, our mezzanine trading securities had an unpaid principal balance of $4 million and $537 million, respectively. At ~~June~~September 30, 2020 and December 31, 2019, the fair value of our mezzanine securities was $4 million and $538 million, respectively, and included $4 million and $39 million of Sequoia securities, respectively, 0 and $395 million of multifamily securities, respectively, and 0 and $104 million of other third-party residential securities, respectively, including 0 and $30 million of RPL securities, respectively.

At ~~June~~September 30, 2020 and December 31, 2019, our subordinate trading securities had an unpaid principal balance of ~~$272~~$266 million and $302 million, respectively. At ~~June~~September 30, 2020 and December 31, 2019, the fair value of our subordinate securities was ~~$106~~$112 million and $172 million, respectively, and included $50 million and $90 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, ~~$52~~and $55 million and $82 million, respectively, of other third-party residential securities, including ~~$49~~$51 million and $76 million of RPL securities, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 9. Real Estate Securities - (continued)

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we acquired ~~$10~~$11 million and ~~$67~~$78 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold ~~$86~~$16 million and ~~$705~~$721 million, respectively, of such securities. During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we acquired ~~$115~~$66 million and ~~$269~~$335 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold ~~$132~~$236 million and ~~$161~~$397 million, respectively, of such securities.

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded a net market valuation ~~gain~~losses of ~~$42~~$4 million and ~~a net market valuation loss of $221~~$225 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income (loss). During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recorded net market valuation gains of ~~$18~~$15 million and ~~$40~~$56 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income (loss).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

AFS Securities

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

Table 9.3 – Available-for-Sale Securities by Position


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Senior	Senior	$	—	$	25,792	Senior	$	0	$	25,792
Mezzanine	Mezzanine	—		13,687		Mezzanine	2,016		13,687
Subordinate	Subordinate	173,737		199,855		Subordinate	205,157		199,855

Total AFS Securities	Total AFS Securities	$	173,737	$	239,334	Total AFS Securities	$	207,173	$	239,334

At ~~June~~September 30, 2020 and December 31, 2019, our available-for-sale securities were comprised of ~~$150~~$160 million and $230 million of residential mortgage-backed securities, respectively, and ~~$23~~$48 million and $9 million of multifamily mortgage-backed securities, respectively. At ~~June~~September 30, 2020 and December 31, 2019, our residential available-for-sale securities were comprised of ~~$118~~$124 million and $141 million of residential mortgage-backed securities we retained from our Sequoia securitizations, respectively, and ~~$33~~$35 million and $90 million of other third-party residential securities, respectively.

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we purchased 0$25 million and ~~$31~~$57 million of AFS securities, respectively, and sold ~~$9 million~~0 and $55 million of AFS securities, respectively, which resulted in net realized gains of ~~$1 million~~0 and $5 million, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we purchased $4$12 million and $9$21 million of AFS securities, respectively, and sold ~~$25~~$15 million and ~~$67~~$82 million of AFS securities, respectively, which resulted in net realized gains of $3$4 million and $9$13 million, respectively.

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

At ~~June~~September 30, 2020, we had ~~$21~~$45 million of AFS securities with contractual maturities less than five years, $2$3 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(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, 2020 and December 31, 2019.

Table 9.4 – Carrying Value of AFS Securities


June 30, 2020
September 30, 2020										September 30, 2020
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Total		(In Thousands)	Senior		Mezzanine		Subordinate		Total
Principal balance	Principal balance	$	—	$	—	$	264,100	$	264,100	Principal balance	$	0	$	2,000	$	287,659	$	289,659
Credit reserve	Credit reserve	—		—		(37,785)		(37,785)		Credit reserve	0		0		(43,186)		(43,186)
Unamortized discount, net	Unamortized discount, net	—		—		(104,260)		(104,260)		Unamortized discount, net	0		0		(99,221)		(99,221)
Amortized cost	Amortized cost	—		—		122,055		122,055		Amortized cost	0		2,000		145,252		147,252
Gross unrealized gains	Gross unrealized gains	—		—		56,999		56,999		Gross unrealized gains	0		16		63,439		63,455
Gross unrealized losses	Gross unrealized losses	—		—		(3,846)		(3,846)		Gross unrealized losses	0		0		(2,507)		(2,507)
Allowance for credit losses	Allowance for credit losses	—		—		(1,471)		(1,471)		Allowance for credit losses	0		0		(1,027)		(1,027)
Carrying Value	Carrying Value	$	—	$	—	$	173,737	$	173,737	Carrying Value	$	0	$	2,016	$	205,157	$	207,173

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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


December 31, 2019	December 31, 2019											December 31, 2019
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Total		(In Thousands)	Senior		Mezzanine		Subordinate		Total
Principal balance	Principal balance	$	26,331	$	13,512	$	264,234	$	304,077	Principal balance	$	26,331	$	13,512	$	264,234	$	304,077
Credit reserve	Credit reserve	(533)		—		(32,407)		(32,940)		Credit reserve	(533)		0		(32,407)		(32,940)
Unamortized discount, net	Unamortized discount, net	(10,427)		(527)		(113,301)		(124,255)		Unamortized discount, net	(10,427)		(527)		(113,301)		(124,255)
Amortized cost	Amortized cost	15,371		12,985		118,526		146,882		Amortized cost	15,371		12,985		118,526		146,882
Gross unrealized gains	Gross unrealized gains	10,450		702		81,329		92,481		Gross unrealized gains	10,450		702		81,329		92,481
Gross unrealized losses	Gross unrealized losses	(29)		—		—		(29)		Gross unrealized losses	(29)		0		0		(29)
Carrying Value	Carrying Value	$	25,792	$	13,687	$	199,855	$	239,334	Carrying Value	$	25,792	$	13,687	$	199,855	$	239,334

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

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


		Three Months Ended June 30, 2020						Six Months Ended June 30, 2020							Three Months Ended September 30, 2020							Nine Months Ended September 30, 2020
		Credit Reserve		Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net			Credit Reserve		Unamortized Discount, Net		Credit Reserve				Unamortized Discount, Net
(In Thousands)	(In Thousands)																				Credit Reserve			Unamortized Discount, Net
Beginning balance	Beginning balance	$	37,717	$	109,538	$	32,940	$	124,255	Beginning balance	$	37,785	$	104,260			$	32,940				$	124,255
Amortization of net discount	Amortization of net discount	—		(1,087)		—		(2,841)		Amortization of net discount	0		(1,766)		0				(4,607)
Realized credit losses	Realized credit losses	(184)		—		(703)		—		Realized credit losses	(194)		0		(897)				0
Acquisitions	Acquisitions	—		—		5,184		777		Acquisitions	1,303		1,019		6,487				1,796
Sales, calls, other	Sales, calls, other	(520)		(3,419)		(726)		(16,841)		Sales, calls, other	0		0		(726)				(16,841)

(Release of) transfers to credit reserves, net	(Release of) transfers to credit reserves, net	772		(772)		1,090		(1,090)		(Release of) transfers to credit reserves, net	4,292		(4,292)		5,382				(5,382)
Ending Balance	Ending Balance	$	37,785	$	104,260	$	37,785	$	104,260	Ending Balance	$	43,186	$	99,221	$	43,186			$	99,221

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses

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

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


		Less Than 12 Consecutive Months										12 Consecutive Months or Longer												Less Than 12 Consecutive Months								12 Consecutive Months or Longer
		Amortized Cost		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Losses		Fair Value			Amortized Cost		Unrealized Losses		Fair Value		Amortized Cost			Unrealized Losses		Fair Value
(In Thousands)	(In Thousands)																								Amortized Cost				Unrealized Losses			Fair Value
June 30, 2020		$	37,751	$	(3,846)	$	32,433	$	—	$	—	$	—
September 30, 2020														September 30, 2020	$	32,890	$	(2,507)	$	30,330		$	0				$	0		$	0
December 31, 2019	December 31, 2019	—		—		—		5,830		(29)		5,801		December 31, 2019	0		0		0		5,830			(29)		5,801

At ~~June~~September 30, 2020, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 9496 AFS securities, of which 137 were in an unrealized loss position and 0 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2019, our consolidated balance sheet included 107 AFS securities, of which 1 was in an unrealized loss position and 1 was in a continuous unrealized loss position for 12 consecutive months or longer.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

Evaluating AFS Securities for Credit Losses

Gross unrealized losses on our AFS securities were $4$3 million at ~~June~~September 30, 2020. Pursuant to our adoption of ASU 2016-13, "Financial Instruments - Credit Losses" in the first quarter of 2020, we evaluate all securities in an unrealized loss position to determine if the impairment is 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, 2020, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses 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, 2020, our allowance for credit losses related to our AFS securities was $1 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related 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, 2020.

Table 9.7 – Significant Credit Quality Indicators

~~June~~September 30, 2020

Subordinate Securities

Default rate

0.5%

Loss severity

20%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 9. Real Estate Securities - (continued)

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

Table 9.8 – Rollforward of Allowance for Credit Losses

Three Months Ended Six Months Ended
(In Thousands) June 30, 2020 June 30, 2020
Beginning balance allowance for credit losses $ 1,525 $ —
Transition impact from adoption of new standard — —
Additions to allowance for credit losses on securities for which credit losses were not previously recorded — 1,525
Allowance on purchased financial assets with credit deterioration — —
Reduction to allowance for securities sold during the period — —
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell — —
Write-offs charged against allowance — —
Recoveries of amounts previously written off (54) (54)
Ending balance of allowance for credit losses $ 1,471 $ 1,471

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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


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

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

Table 9.9 – 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)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
Gross realized gains - sales	Gross realized gains - sales	$	1,074	$	2,827	$	8,779	$	9,487	Gross realized gains - sales	$	0	$	3,656	$	8,779	$	13,143
Gross realized gains - calls	Gross realized gains - calls	—		—		—		4,026		Gross realized gains - calls	0		1,058		0		5,084
Gross realized losses - sales	Gross realized losses - sales	(291)		—		(4,144)		—		Gross realized losses - sales	0		0		(4,144)		0

Total Realized Gains on Sales and Calls of AFS Securities, net	Total Realized Gains on Sales and Calls of AFS Securities, net	$	783	$	2,827	$	4,635	$	13,513	Total Realized Gains on Sales and Calls of AFS Securities, net	$	0	$	4,714	$	4,635	$	18,227

Note 10. Other Investments

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

Table 10.1 – Components of Other Investments


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Servicer advance investments	Servicer advance investments	$	266,948	$	169,204	Servicer advance investments	$	258,621	$	169,204
Shared home appreciation options	Shared home appreciation options	40,851		45,085		Shared home appreciation options	41,758		45,085
Excess MSRs	Excess MSRs	36,197		31,814		Excess MSRs	35,070		31,814
Mortgage servicing rights	Mortgage servicing rights	19,661		42,224		Mortgage servicing rights	14,878		42,224
Investment in multifamily loan fund	Investment in multifamily loan fund	30,370		39,802		Investment in multifamily loan fund	(323)		39,802
Other	Other	35,813		30,001		Other	34,624		30,001

Total Other Investments	Total Other Investments	$	429,840	$	358,130	Total Other Investments	$	384,628	$	358,130

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 10. Other Investments - (continued)

Servicer advance investments

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

At ~~June~~September 30, 2020, our servicer advance investments had a carrying value of ~~$267~~$259 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of ~~$10.26~~$9.71 billion. The outstanding servicer advance receivables associated with this investment were ~~$250~~$242 million at ~~June~~September 30, 2020, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at ~~June~~September 30, 2020 and December 31, 2019.

Table 10.2 – Components of Servicer Advance Receivables


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Principal and interest advances	Principal and interest advances	$	82,719	$	15,081	Principal and interest advances	$	88,370	$	15,081
Escrow advances (taxes and insurance advances)	Escrow advances (taxes and insurance advances)	118,260		96,732		Escrow advances (taxes and insurance advances)	115,352		96,732
Corporate advances	Corporate advances	48,726		39,769		Corporate advances	38,337		39,769
Total Servicer Advance Receivables	Total Servicer Advance Receivables	$	249,705	$	151,582	Total Servicer Advance Receivables	$	242,059	$	151,582

We account for our servicer advance investments at fair value and during the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded $3$3 million and $6$8 million, respectively, of interest income associated with these investments, and recorded net market valuation ~~losses~~gain of less than $0.1 million and a net market valuation loss of $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss). During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recorded $3 million and $5$9 million, respectively, of interest income associated with these investments for each of these periods, and recorded net market valuation gains of ~~$0.4~~$2 million and $1$3 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).

Mortgage Servicing Rights

We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The majority of our investments in MSRs were made through the retention of servicing rights associated with the residential jumbo mortgage loans that we acquired and subsequently transferred to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At ~~June~~September 30, 2020 and December 31, 2019, our MSRs had a fair value of ~~$20~~$15 million and $42 million, respectively, and were associated with loans with an aggregate principal balance of ~~$3.63~~$3.14 billion and $4.35 billion, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded net losses of $1$2 million and $3$6 million, respectively, through Other income on our consolidated statements of income (loss). During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recognized $0.4 million and $2 million of income, net, ~~for both periods~~respectively, through Other income on our consolidated statements of income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 10. Other Investments - (continued)

Excess MSRs

In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recognized $3 million and $6$9 million of interest income, respectively, through Other interest income, and recorded a net market valuation ~~gain~~losses of $3$1 million and ~~a net market valuation loss of $7~~$8 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recognized $2 million and $4$6 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of ~~$0.1~~$2 million ~~and $0.5 million, respectively,~~for both periods through Investment fair value changes, net on our consolidated statements of income (loss).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

Investment in Multifamily Loan Fund

In January 2019, we invested in a limited partnership created to acquire floating rate, light-renovation multifamily loans from Freddie Mac. We committed to fund an aggregate of $78 million to the partnership, and have funded approximately $70 million at June 30, 2020. During the three months ended March 31, 2020, we acquired $28 million of securities from the partnership's first securitization transaction. At ~~June~~September 30, 2020, the carrying amount of our investment in the partnership was ~~$30 million.~~0 and we had 0 remaining funding obligations to the partnership. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we acquired $28 million and $56 million of securities, respectively, from the partnership's securitization transactions. During the three and nine months ended September 30, 2020, we recorded ~~losses~~income of $1$0.3 million and ~~income of $0.3~~$0.6 million, respectively, associated with this investment in Other income on our consolidated statements of income (loss). During ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recorded ~~$0.1~~$1 million and $0.5 million of ~~losses~~income, respectively, associated with this investment in Other income on our consolidated statements of income (loss).

Shared Home Appreciation Options

In the third quarter of 2019, we entered into a flow purchase agreement to acquire shared home appreciation options. At ~~June~~September 30, 2020, we had acquired $47 million of shared home appreciation options under this flow purchase agreement and had an outstanding commitment to fund up to an additional $3 million under this agreement. We account for these investments under the fair value option and during the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded a net market valuation gain of $1$2 million and a net market valuation loss of $7$4 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 11. Derivative Financial Instruments

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

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


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

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

Assets - Other Derivatives	Assets - Other Derivatives									Assets - Other Derivatives
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	357		24,871		10,149		1,537,162		Loan purchase and interest rate lock commitments	10,773		1,724,207		10,149		1,537,162

Total Assets	Total Assets	$	357	$	24,871	$	35,701	$	6,659,862	Total Assets	$	14,709	$	2,214,207	$	35,701	$	6,659,862

Liabilities - Cash Flow Hedges	Liabilities - Cash Flow Hedges									Liabilities - Cash Flow Hedges
Interest rate swaps	Interest rate swaps	$	—	$	—	$	(51,530)	$	139,500	Interest rate swaps	$	0	$	0	$	(51,530)	$	139,500
Liabilities - Risk Management Derivatives	Liabilities - Risk Management Derivatives									Liabilities - Risk Management Derivatives
Interest rate swaps	Interest rate swaps	—		—		(97,235)		2,314,300		Interest rate swaps	(15)		25,000		(97,235)		2,314,300
TBAs	TBAs	—		—		(13,359)		4,160,000		TBAs	(263)		105,000		(13,359)		4,160,000
Interest rate futures	Interest rate futures	—		—		(10)		12,300		Interest rate futures	0		0		(10)		12,300
Liabilities - Other Derivatives	Liabilities - Other Derivatives									Liabilities - Other Derivatives
Loan purchase commitments	Loan purchase commitments	(1,932)		199,932		(1,290)		303,394		Loan purchase commitments	(1,334)		231,651		(1,290)		303,394

Total Liabilities	Total Liabilities	$	(1,932)	$	199,932	$	(163,424)	$	6,929,494	Total Liabilities	$	(1,612)	$	361,651	$	(163,424)	$	6,929,494
Total Derivative Financial Instruments, Net	Total Derivative Financial Instruments, Net	$	(1,575)	$	224,803	$	(127,723)	$	13,589,356	Total Derivative Financial Instruments, Net	$	13,097	$	2,575,858	$	(127,723)	$	13,589,356

4446

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At ~~June~~September 30, 2020, we were 0t party to ~~any derivative contracts.~~swaps and swaptions with an aggregate notional amount of $335 million, TBA agreements sold with an aggregate notional amount of $245 million, and interest rate futures contracts with an aggregate notional amount of $40 million. At December 31, 2019, we were party to swaps and swaptions with an aggregate notional amount of $4.78 billion, TBA agreements sold with an aggregate notional amount of $6.61 billion, and interest rate futures contracts with an aggregate notional amount of $226 million.

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, risk management derivatives had net market valuation losses of 0 and $98 million, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2019, risk management derivatives had net market valuation losses of ~~$66~~$36 million and ~~$111~~$147 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income on our consolidated statements of income (loss). During the three months ended March 31, 2020, we settled substantially all of our outstanding derivative contracts as we determined that they were no longer effectively managing the risks associated with certain assets and liabilities.

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, LPCs and IRLCs had net market valuation gains of $3$14 million and ~~$21~~$35 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For the three and ~~six~~nine months ended ~~June~~September 30, 2019, LPCs and IRLCs had net market valuation gains of ~~$17~~$14 million and ~~$29~~$42 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).

Derivatives Designated as Cash Flow Hedges

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

During the first quarter of 2020, we terminated and settled all of our outstanding derivatives that had been designated as cash flow hedges for our long-term debt, with a payment of $84 million. For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was ~~$83~~$82 million and $51 million at ~~June~~September 30, 2020 and December 31, 2019, respectively. We will amortize this loss into interest expense over the remaining term of the trust preferred securities and subordinated notes. As of ~~June~~September 30, 2020, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

For the three and ~~six~~nine months ended ~~June~~September 30, 2020, changes in the values of designated cash flow hedges were 0 and negative $33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, changes in the values of designated cash flow hedges were negative ~~$10~~$12 million and negative ~~$15~~$27 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.

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

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
Net interest expense on cash flows hedges	Net interest expense on cash flows hedges	$	—	$	(640)	$	(860)	$	(1,277)	Net interest expense on cash flows hedges	$	0	$	(727)	$	(860)	$	(2,004)

Realized net losses reclassified from other comprehensive income	Realized net losses reclassified from other comprehensive income	(1,029)		—		(1,108)		—		Realized net losses reclassified from other comprehensive income	(1,040)		0		(2,148)		0
Total Interest Expense	Total Interest Expense	$	(1,029)	$	(640)	$	(1,968)	$	(1,277)	Total Interest Expense	$	(1,040)	$	(727)	$	(3,008)	$	(2,004)

4547

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

Derivative Counterparty Credit Risk

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

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

Note 12. Other Assets and Liabilities

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

Table 12.1 – Components of Other Assets


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Accrued interest receivable	Accrued interest receivable	$	44,134	$	71,058	Accrued interest receivable	$	39,330	$	71,058
Pledged collateral		33,105		32,945
Investment receivable	Investment receivable	29,916		23,330		Investment receivable	25,767		23,330
Income tax receivables		17,255		36
Right-of-use asset	Right-of-use asset	15,561		11,866		Right-of-use asset	13,487		11,866
REO	REO	9,780		9,462		REO	8,535		9,462
Pledged collateral						Pledged collateral	8,172		32,945
Income tax receivables						Income tax receivables	8,148		36
FHLBC stock	FHLBC stock	5,000		43,393		FHLBC stock	5,000		43,393
Fixed assets and leasehold improvements⁽¹⁾	Fixed assets and leasehold improvements⁽¹⁾	4,590		4,901		Fixed assets and leasehold improvements (1)	4,408		4,901
Margin receivable	Margin receivable	2,746		209,776		Margin receivable	3,809		209,776

Other	Other	9,499		12,554		Other	7,617		12,554
Total Other Assets	Total Other Assets	$	171,586	$	419,321	Total Other Assets	$	124,273	$	419,321

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

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

Table 12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Accrued interest payable	Accrued interest payable	$	37,024	$	60,655	Accrued interest payable	$	34,225	$	60,655

Payable to minority partner						Payable to minority partner	17,492		13,189
Accrued compensation						Accrued compensation	17,127		33,888
Lease liability	Lease liability	17,348		13,443		Lease liability	15,123		13,443
Payable to minority partner		17,021		13,189
Contingent consideration		14,953		28,484
Deferred consideration						Deferred consideration	14,442		0
Guarantee obligations	Guarantee obligations	12,350		14,009		Guarantee obligations	11,264		14,009
Accrued compensation		10,677		33,888

Current accounts payable						Current accounts payable	8,717		5,468
Residential loan and MSR repurchase reserve	Residential loan and MSR repurchase reserve	8,295		4,268		Residential loan and MSR repurchase reserve	8,565		4,268
Residential bridge loan holdbacks	Residential bridge loan holdbacks	7,348		10,682		Residential bridge loan holdbacks	6,350		10,682
Deferred tax liabilities	Deferred tax liabilities	5,152		5,152		Deferred tax liabilities	5,152		5,152

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

Other	Other	35,845		23,123		Other	13,610		13,297
Total Accrued Expenses and Other Liabilities	Total Accrued Expenses and Other Liabilities	$	166,013	$	206,893	Total Accrued Expenses and Other Liabilities	$	155,989	$	206,893

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for additional descriptions of our other assets and liabilities.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

Margin Receivable and Payable

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

REO

The carrying value of REO at ~~June~~September 30, 2020 was ~~$10~~$9 million, which included $2$3 million of REO from our residential bridge loan portfolio, $1 million ~~of REO~~ from our consolidated Legacy Sequoia entities, $1 million from our consolidated Freddie Mac SLST entities, and $5$4 million from consolidated CAFL entities. At ~~June~~September 30, 2020, there were 32 residential bridge loan REO assets, 53 REO assets at our Legacy Sequoia entities, 109 REO assets at our Freddie Mac SLST entities, and 43 REO assets at our CAFL entities recorded on our consolidated balance sheets. During the ~~six~~nine months ended ~~June~~September 30, 2020, transfers into REO included a $2$5 million residential bridge loan, $1 million from Legacy Sequoia entities, $1 million from Freddie Mac SLST entities, and $6 million from CAFL entities. During the ~~six~~nine months ended ~~June~~September 30, 2020, there were REO liquidations of $8$13 million, resulting in $1$0.3 million of unrealized losses which were recorded in Investment fair value changes, net, on our consolidated statements of income (loss). At December 31, 2019, there were 4 residential bridge loan REO assets, 4 REO assets at our Legacy Sequoia entities, 3 REO assets at our Freddie Mac SLST entities, and 2 REO assets at our CAFL entities recorded on our consolidated balance sheets.

Note 13. Short-Term Debt

We enter into repurchase agreements, bank warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and investment banking firms. At ~~June~~September 30, 2020, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants.

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

Table 13.1 – Short-Term Debt


		June 30, 2020																		September 30, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate		Maturity	Weighted Average Days Until Maturity	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate		Maturity	Weighted Average Days Until Maturity
Facilities	Facilities										Facilities
Residential loan warehouse ⁽¹⁾	Residential loan warehouse ⁽¹⁾	3	$	13,581	$	700,000	3.14	%	2/2021	241	Residential loan warehouse (1)	4	$	81,898	$	600,000	2.90	%	10/2020-8/2021	203

Business purpose residential loan warehouse ⁽²⁾	Business purpose residential loan warehouse ⁽²⁾	2	92,901		500,000		3.41	%	6/2021-5/2022	536	Business purpose residential loan warehouse (2)	2	96,811		500,000		3.28	%	6/2021-5/2022	437
Real estate securities repo⁽¹⁾	Real estate securities repo⁽¹⁾	4	311,888		—		4.21	%	7/2020-11/2020	39	Real estate securities repo (1)	3	75,054		0		2.87	%	10/2020-12/2020	38

Total Short-Term Debt Facilities	Total Short-Term Debt Facilities	9	418,370								Total Short-Term Debt Facilities	9	253,763
Servicer advance financing	Servicer advance financing	1	244,437		400,000		1.99	%	11/2020	153	Servicer advance financing	1	228,998		400,000		1.96	%	11/2020	61

Total Short-Term Debt	Total Short-Term Debt		$	662,807							Total Short-Term Debt		$	482,761

4749

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 13. Short-Term Debt - (continued)


		December 31, 2019																		December 31, 2019
(Dollars in Thousands)	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate		Maturity	Weighted Average Days Until Maturity	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate		Maturity	Weighted Average Days Until Maturity
Facilities	Facilities										Facilities
Residential loan warehouse ⁽¹⁾	Residential loan warehouse ⁽¹⁾	4	$	185,894	$	1,425,000	3.23	%	1/2020-10/2020	69	Residential loan warehouse (1)	4	$	185,894	$	1,425,000	3.23	%	1/2020-10/2020	69

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

Total Short-Term Debt	Total Short-Term Debt		$	2,329,145							Total Short-Term Debt		$	2,329,145

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

(2)Due to the revolving nature of the borrowings under these facilities, we have classified these facilities as short-term debt at ~~June~~September 30, 2020. Borrowings under these facilities will be repaid as the underlying loans mature or are sold to third parties or transferred to securitizations.

The following table below presents the value of loans, securities, and other assets pledged as collateral under our short-term debt facilities at ~~June~~September 30, 2020 and December 31, 2019.

Table 13.2 – Collateral for Short-Term Debt Facilities


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Collateral Type	Collateral Type					Collateral Type
Held-for-sale residential loans	Held-for-sale residential loans	$	15,241	$	201,949	Held-for-sale residential loans	$	95,023	$	201,949
Business purpose residential loans	Business purpose residential loans	116,701		988,179		Business purpose residential loans	110,505		988,179
Real estate securities	Real estate securities					Real estate securities
On balance sheet	On balance sheet	24,442		618,881		On balance sheet	24,670		618,881
Sequoia Choice securitizations ⁽¹⁾	Sequoia Choice securitizations ⁽¹⁾	59,543		111,341		Sequoia Choice securitizations (1)	63,088		111,341
Freddie Mac SLST securitizations ⁽¹⁾	Freddie Mac SLST securitizations ⁽¹⁾	334,043		381,640		Freddie Mac SLST securitizations (1)	0		381,640
Freddie Mac K-Series securitizations ⁽¹⁾	Freddie Mac K-Series securitizations ⁽¹⁾	24,384		252,284		Freddie Mac K-Series securitizations (1)	26,550		252,284
CAFL securitizations ⁽¹⁾	CAFL securitizations ⁽¹⁾	—		127,840		CAFL securitizations (1)	0		127,840
Total real estate securities owned	Total real estate securities owned	442,412		1,491,986		Total real estate securities owned	114,308		1,491,986
Other assets ⁽²⁾	Other assets ⁽²⁾	2,696		16,252		Other assets ⁽²⁾	0		16,252
Total Collateral for Short-Term Debt Facilities	Total Collateral for Short-Term Debt Facilities	$	577,050	$	2,698,366	Total Collateral for Short-Term Debt Facilities	$	319,836	$	2,698,366

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

~~(2)In addition to securities that serve as collateral for our securities repo borrowings, we had posted $3 million of cash collateral as margin with our borrowing counterparties.~~

For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the average balances of our short-term debt facilities were ~~$1.30 billion~~$313 million and ~~$1.97~~$1.42 billion, respectively. At ~~June~~September 30, 2020 and December 31, 2019, accrued interest payable on our short-term debt facilities was $3$1 million and $6 million, respectively.

4850

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 13. Short-Term Debt - (continued)

Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. At ~~June~~September 30, 2020, the fair value of servicer advances, cash and restricted cash collateralizing the securitization financing was ~~$283~~$270 million. At ~~June~~September 30, 2020, the accrued interest payable balance on this financing was $0.1 million and the unamortized capitalized commitment costs were $1$0.2 million.

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

Remaining Maturities of Short-Term Debt

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

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


		June 30, 2020															September 30, 2020
(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	$	—	$	—	$	13,581	$	13,581	Held-for-sale residential loans	$	1,217	$	0	$	80,681	$	81,898
Business purpose residential loans	Business purpose residential loans	—		—		92,901		92,901		Business purpose residential loans	0		0		96,811		96,811
Real estate securities	Real estate securities	150,774		140,682		20,432		311,888		Real estate securities	37,217		37,837		0		75,054

Total Secured Short-Term Debt	Total Secured Short-Term Debt	150,774		140,682		126,914		418,370		Total Secured Short-Term Debt	38,434		37,837		177,492		253,763
Servicer advance financing	Servicer advance financing	—		—		244,437		244,437		Servicer advance financing	0		228,998		0		228,998

Total Short-Term Debt	Total Short-Term Debt	$	150,774	$	140,682	$	371,351	$	662,807	Total Short-Term Debt	$	38,434	$	266,835	$	177,492	$	482,761

Note 14. Asset-Backed Securities Issued

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

Table 14.1 – Asset-Backed Securities Issued


June 30, 2020		Legacy Sequoia			Sequoia Choice			Freddie Mac SLST				Freddie Mac K-Series					CAFL				Total
September 30, 2020											September 30, 2020				Legacy Sequoia								Sequoia Choice				Freddie Mac SLST (1)				Freddie Mac K-Series				CAFL			Total
(Dollars in Thousands)	(Dollars in Thousands)			Legacy Sequoia							Sequoia Choice						Freddie Mac SLST				Freddie Mac K-Series								CAFL							Total										Freddie Mac K-Series	CAFL	Total
Certificates with principal balance	Certificates with principal balance											Certificates with principal balance				$			347,985				$	1,571,714			$	1,925,144				$	418,212					$	2,528,974		$	6,792,029
Interest-only certificates	Interest-only certificates	1,410					9,005				24,434					13,874				95,324					144,047		Interest-only certificates			1,268				6,805			24,053			13,122			137,064		182,312
Market valuation adjustments	Market valuation adjustments	(79,140)			58,871			22,069				32,605					(1,546)					32,859		Market valuation adjustments			(56,769)				48,045				95,138			33,531			78,112			198,057

ABS Issued, Net	ABS Issued, Net	$	300,357		$	1,861,777		$	1,812,008			$	464,691				$	2,417,253			$	6,856,086	ABS Issued, Net			$	292,484			$	1,626,564			$	2,044,335		$	464,865		$	2,744,150		$	7,172,398
Range of weighted average interest rates, by series	Range of weighted average interest rates, by series	0.39% to 2.60%			2.22% to 5.04%			3.50		%		3.39		%			3.19% to 5.18%						Range of weighted average interest rates, by series			0.35% to 1.96%				2.23% to 5.02%				3.50% to 4.75%			3.39		%	3.18% to 5.53%
Stated maturities	Stated maturities	2024 - 2036			2047 - 2050			2028 - 2029				2025					2022 - 2048						Stated maturities			2024 - 2036				2047 - 2050				2028 - 2059			2025			2022 - 2048
Number of series	Number of series	20			10			2				1					12						Number of series			20				10				3			1			13

4951

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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


December 31, 2019	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST			Freddie Mac K-Series		CAFL		Total
(Dollars in Thousands)
Certificates with principal balance	$	420,056	$	1,979,719	$	1,842,682		$	3,844,789	$	1,875,007	$	9,962,253
Interest-only certificates	1,282		16,514		30,291			217,891		90,134		356,112
Market valuation adjustments	(18,873)		40,965		45,349			93,559		36,110		197,110


ABS Issued, Net	$	402,465	$	2,037,198	$	1,918,322		$	4,156,239	$	2,001,251	$	10,515,475
Range of weighted average interest rates, by series	1.94% to 3.26%		4.40% to 5.05%		3.50		%	3.35% to 4.35%		3.25% to 5.36%
Stated maturities	2024 - 2036		2047 - 2049		2028 - 2029			2025 - 2049		2022 - 2048
Number of series	20		9		2			5		10

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

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

The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than its stated maturity. At ~~June~~September 30, 2020, 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, 2020 and December 31, 2019. Interest due on consolidated ABS issued is payable monthly.

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


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Legacy Sequoia	Legacy Sequoia	$	230	$	395	Legacy Sequoia	$	180	$	395
Sequoia Choice	Sequoia Choice	6,474		7,732		Sequoia Choice	5,652		7,732
Freddie Mac SLST(1)	Freddie Mac SLST(1)	5,149		5,374		Freddie Mac SLST(1)	5,831		5,374
Freddie Mac K-Series	Freddie Mac K-Series	1,182		12,887		Freddie Mac K-Series	1,182		12,887
CAFL	CAFL	8,300		7,298		CAFL	9,180		7,298
Total Accrued Interest Payable on ABS Issued	Total Accrued Interest Payable on ABS Issued	$	21,335	$	33,686	Total Accrued Interest Payable on ABS Issued	$	22,025	$	33,686

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

Note 15. Long-Term Debt

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 15. Long-Term Debt - (continued)

FHLBC Borrowings

At ~~June~~September 30, 2020, $1 million of advances were outstanding under our FHLBC borrowing agreement, with a weighted average interest rate of ~~0.38%~~0.35%. These borrowings mature in 2026. At December 31, 2019, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 1.88% and a weighted average maturity of six years. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we repaid ~~$1.37 billion~~0 and $2.00 billion, respectively, of our FHLBC borrowings. At ~~June~~September 30, 2020, total advances under this agreement were secured by $1 million of restricted cash. We do not expect to increase borrowings under our FHLBC borrowing agreement above the existing $1 million of advances outstanding. This agreement also requires our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. At ~~June~~September 30, 2020, our subsidiary held $5 million of FHLBC stock that is included in Other assets in our consolidated balance sheets.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

Recourse Subordinate Securities Financing Facilities

In 2019, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable (e.g., not subject to margin calls ~~due to collateral~~based on the market value ~~changes)~~of the underlying collateral) recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia Choice securitizations. The financing is fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through September 2022. The financing facility may be terminated, at our option, in September 2022, and has a final maturity in September 2024, provided that the interest rate on amounts outstanding under the facility increases between October 2022 and September 2024. At ~~June~~September 30, 2020, we had borrowings under this facility totaling ~~$182~~$180 million and $1 million of unamortized deferred issuance costs, for a net carrying value of ~~$181~~$179 million. At ~~June~~September 30, 2020, the fair value of real estate securities pledged as collateral under this long-term debt facility was ~~$223~~$232 million and included Sequoia securities and securities retained from our Sequoia Choice securitizations.

In the first quarter of 2020, a subsidiary of Redwood entered into a second repurchase agreement with similar terms to provide non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations. The financing is fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through February 2023. The financing facility may be terminated, at our option, in February 2023, and has a final maturity in February 2025, provided that the interest rate on amounts outstanding under the facility increases between March 2023 and February 2025. At ~~June~~September 30, 2020, we had borrowings under this facility totaling $103 million and $1 million of unamortized deferred issuance costs, for a net carrying value of ~~$103~~$102 million. At ~~June~~September 30, 2020, the fair value of real estate securities pledged as collateral under this long-term debt facility was ~~$110~~$112 million and included securities retained from our consolidated CAFL securitizations.

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

In the third quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable, non-recourse financing primarily for business purpose bridge loans. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 3.85% (with a 0.50% LIBOR floor), through July 2022. We do not have the ability to increase borrowings under this borrowing facility above the existing amounts outstanding. At September 30, 2020, we had borrowings under this facility totaling $158 million and $1 million of unamortized deferred issuance costs, for a net carrying value of $157 million. At September 30, 2020, $216 million of bridge loans were pledged as collateral under this facility.

In the second quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable, non-recourse financing primarily for business purpose bridge loans. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 7.50% (with a 1.50% LIBOR floor), through June 2022 (facility is fully callable in June 2021). This facility has an aggregate maximum borrowing capacity of $530 million, which consists of a term facility of $355 million and a revolving facility of $175 million. The revolving period ends in June 2021, and amounts borrowed under the term and revolving facilities are due in full in June 2022. At ~~June~~September 30, 2020, we had borrowings under this facility totaling ~~$355~~$302 million and $6$4 million of unamortized deferred issuance costs, for a net carrying value of ~~$350~~$298 million. At ~~June~~September 30, 2020, ~~$442~~$369 million of bridge loans and $8$25 million of other BPL investments were pledged as collateral under this facility.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 15. Long-Term Debt - (continued)

Recourse Business Purpose Loan Financing ~~Facility~~Facilities

In the third quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable financing for business purpose bridge loans and single-family rental loans. Borrowings under this facility accrue interest at a per annum rate equal to three-month LIBOR plus 3.00% through September 2023 and are recourse to Redwood. This facility has an aggregate maximum borrowing capacity of $250 million. At September 30, 2020, we had 0 borrowings outstanding under this facility.

In the second quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable financing for business purpose bridge loans and single-family rental loans. Borrowings under this facility accrue interest at a per annum rate equal to three-month LIBOR plus 3.50% to ~~4.50%~~4.00% (with a 1.00% LIBOR floor) through May 2022 and are recourse to Redwood. This facility has an aggregate maximum borrowing capacity of ~~$500~~$350 million. At ~~June~~September 30, 2020, we had borrowings under this facility totaling ~~$436~~$150 million and $1 million of unamortized deferred issuance costs, for a net carrying value of ~~$435~~$150 million. At ~~June~~September 30, 2020, ~~$280~~$18 million of bridge loans and ~~$302~~$194 million of single-family rental loans were pledged as collateral under this facility.

Recourse Revolving Debt Facility

In the first quarter of 2020, a subsidiary of Redwood entered into a secured revolving debt facility agreement collateralized by MSRs and certificated mortgage servicing rights. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 2.75% through January 2021, with an increase in rate between February 2021 and the maturity of the facility in January 2022. This facility has an aggregate maximum borrowing capacity of $50 million. ~~Borrowings~~We had 0 borrowings outstanding under this facility ~~totaled $20 million~~ at ~~June~~September 30, 2020. At ~~June~~September 30, 2020, ~~$40~~$33 million of MSRs and certificated servicing rights were pledged as collateral under this facility.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

Convertible Notes

At ~~June~~September 30, 2020, we had $172 million principal amount outstanding of 5.75% exchangeable senior notes due 2025. During the second quarter of 2020, we repurchased $29 million par value of these notes at a discount and recorded a gain on extinguishment of $6 million in Realized gains, net on our consolidated statements of income (loss). At ~~June~~September 30, 2020, the accrued interest payable balance on this debt was $2$5 million and the unamortized deferred issuance costs were $5$4 million.

At ~~June~~September 30, 2020, we had $150 million principal amount outstanding of 5.625% convertible senior notes due 2024. During the second quarter of 2020, we repurchased $50 million par value of these notes at a discount and recorded a gain on extinguishment of $9 million in Realized gains, net on our consolidated statements of income (loss). At ~~June~~September 30, 2020, the accrued interest payable on this debt was $4$2 million, the unamortized deferred issuance costs were $3$2 million, and the debt discount was $1 million.

At ~~June~~September 30, 2020, we had $199 million principal amount outstanding of 4.75% convertible senior notes due 2023. During the second quarter of 2020, we repurchased $46 million par value of these notes at a discount and recorded a gain on extinguishment of $10 million in Realized gains, net on our consolidated statements of income (loss). At ~~June~~September 30, 2020, the accrued interest payable balance on this debt was $4$1 million and the unamortized deferred issuance costs were $3 million.

Trust Preferred Securities and Subordinated Notes

At ~~June~~September 30, 2020, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively. At both ~~June~~September 30, 2020 and December 31, 2019, the accrued interest payable balance on our trust preferred securities and subordinated notes was $1 million.

Note 16. Commitments and Contingencies

Lease Commitments

At ~~June~~September 30, 2020, we were obligated under 7 non-cancelable operating leases with expiration dates through 2031 for ~~$21~~$18 million of cumulative lease payments. Our operating lease expense was $2$3 million and $1$2 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

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

Table 16.1 – Future Lease Commitments by Year


(In Thousands)	(In Thousands)	June 30, 2020		(In Thousands)	September 30, 2020
2020 (6 months)		$	1,860
2020 (3 months)				2020 (3 months)	$	930
2021	2021	3,104		2021	2,949
2022	2022	2,597		2022	2,427
2023	2023	2,087		2023	1,913
2024	2024	2,095		2024	1,917
2025	2025	9,214		2025	8,039
Total Lease Commitments	Total Lease Commitments	20,957		Total Lease Commitments	18,175
Less: Imputed interest	Less: Imputed interest	(3,609)		Less: Imputed interest	(3,052)
Lease Liability	Lease Liability	$	17,348	Lease Liability	$	15,123

During the ~~six~~nine months ended ~~June~~September 30, 2020, we entered into 3 ~~new~~ office leases and determined that each of these leases qualified as operating leases. At ~~June~~September 30, 2020, our lease liability was ~~$17~~$15 million, which was a component of Accrued expenses and other liabilities, and our right-of-use asset was ~~$16~~$13 million, which was a component of Other assets.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At ~~June~~September 30, 2020, the weighted-average remaining lease term and weighted-average discount rate for our leases was 87 years and 5.0%, respectively.

Commitment to Fund Residential Bridge Loans

As of ~~June~~September 30, 2020, we had commitments to fund up to ~~$167~~$225 million of additional advances on existing residential bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the customer and other terms regarding advances that must be met before we fund the commitment. At ~~June~~September 30, 2020, we recorded a $2$1 million derivative liability related to these commitments to fund construction advances (see Note 7 for additional detail). We may also advance funds related to loans sold under a separate loan sale agreement that are generally repaid immediately by the loan purchaser and do not generally expose us to loss. The outstanding commitments related to these loans that we may temporarily fund totaled approximately ~~$20~~$15 million at ~~June~~September 30, 2020.

Commitment to Fund Partnerships

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

~~In the first quarter of 2019, we invested in a partnership created to acquire floating rate, light-renovation multifamily loans from Freddie Mac (see~~ ~~Note 10~~ for additional detail). At June 30, 2020, we had an outstanding commitment to fund an additional $8 million to the partnership. Additionally, in connection with this transaction, we have made a guarantee to Freddie Mac in the event of losses incurred on the loans that exceed the equity available in the partnership to absorb such losses. At June 30, 2020, the carrying value of this guarantee was $0.1 million. We believe the likelihood of performance under the guarantee is remote. Our maximum loss exposure from this guarantee arrangement is $135 million less the value of securities collateralizing our partner's portion of the partnership's guarantee obligations.

5 Arches Contingent Consideration

As part of the consideration for our acquisition of 5 Arches, we were committed to make earn-out payments up to $29 million, payable in a mix of cash and Redwood common stock. These contingent earn-out payments were classified as a contingent consideration liability and carried at fair value prior to March 31, 2020. During the first quarter of 2020, we made a cash payment of $11 million and granted $3 million of Redwood common stock in connection with the first anniversary of the purchase date. Additionally, as a result of an amendment to the agreement, we reclassified the contingent liability to a deferred liability, as the remaining payments became payable on a set timetable without any remaining contingencies. At ~~June~~September 30, 2020, the balance of this liability was ~~$15~~$14 million, which will be paid in a mix of cash and common stock in March 2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Commitment to Fund Shared Home Appreciation Options

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

Loss Contingencies — Risk-Sharing

During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At ~~June~~September 30, 2020, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was fully collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At ~~June~~September 30, 2020, we had not incurred any losses under these arrangements. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, other income related to these arrangements was $1 million and $3 million, respectively, and net market valuation losses related to these investments were $0.3 million and $0.9 million, respectively. For the three and nine months ended September 30, 2019, other income related to these arrangements was $1 million and $2 million, respectively, and net market valuation losses related to these investments were $0.1 million and $0.2 million, ~~and $0.7 million,~~ respectively. For the three and six months ended June 30, 2019, other income related to these arrangements was $1 million for both periods, and net market valuation losses related to these investments were $0.1 million for both periods.

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at ~~June~~September 30, 2020, the loans had an unpaid principal balance of ~~$1.30~~$1.12 billion and a weighted average FICO score of 758 (at origination) and LTV ratio of ~~76%~~75% (at origination). At ~~June~~September 30, 2020, ~~$17~~$42 million of the loans were 90 days or more delinquent, and 0ne of these loans were in foreclosure. At ~~June~~September 30, 2020, the carrying value of our guarantee obligation was ~~$12~~$11 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to Redwood Trust, Inc. or its affiliates. At ~~June~~September 30, 2020 and December 31, 2019, assets of such SPEs totaled $47 million and $48 million, respectively, and liabilities of such SPEs totaled ~~$12~~$11 million and $14 million, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Loss Contingencies — Residential Repurchase Reserve

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

At ~~June~~September 30, 2020 and December 31, 2019, our repurchase reserve associated with our residential loans and MSRs was $8$9 million and $4 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. ~~The increase in the repurchase reserve during the second quarter of 2020 was related to potential repurchase obligations related to EPDs arising from loans we sold during the last several months.~~

We received 58 and 710 repurchase requests during the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively, and did 0t repurchase any loans during either of these periods. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, we recorded repurchase provisions of $4 million and reversals of repurchase provisions of ~~$0.4~~$0.2 million, respectively, that were recorded in Mortgage banking activities, ~~net~~net; Investment fair value changes, net; and Other income on our consolidated statements of income (loss).

Loss Contingencies — Litigation, Claims and Demands

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

In addition to those matters, as previously disclosed, in connection with the impact of the effects of the pandemic on the non-Agency mortgage finance market and on our business and operations, a ~~small~~ number of the counterparties that have regularly sold residential mortgage loans to us believe that we breached perceived obligations to them, and requested or demanded that we purchase loans from them and/or compensate them for perceived damages resulting from our decisions earlier in 2020 not to purchase certain loans from them (“Residential Loan Seller Demands”). As previously disclosed, one such counterparty filed a breach of contract lawsuit against us alleging that it has suffered in excess of $2 million of losses as a result of our alleged failure to purchase residential mortgage loans from it.

We believe that these Residential Loan Seller Demands are without merit or subject to defenses and we intend to defend vigorously any such allegations and any related demand or claim to which we are or become a party. Despite our beliefs about the legal merits of these allegations, because our ordinary course of business is to seek to continue to regularly engage in mutually beneficial transactions with these counterparties, in some cases we have been willing to engage in discussions with these counterparties with the intention of reaching resolution, ~~and~~including through structuring arrangements that incentivize both the counterparty and us to continue to engage in residential loan purchase and sale transactions in the future.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

With respect to certain of the Residential Loan Seller Demands, these resolution discussions have been successful in resolving, or establishing a framework that we believe will be the basis for successfully resolving, the demands of these counterparties, including through forward-looking joint business undertakings and structured arrangements that incentivize both the counterparty and us to continue to engage in residential loan purchase and sale transactions in the future. With respect to these counterparties, we have incurred or expect to incur certain costs in connection with finalizing these arrangements (including costs that are contingent on the successful completion of future residential loan purchase and sale transactions with these counterparties that we expect to generate future revenue for the Company) and have recorded any such actual costs incurred through ~~June~~September 30, 2020, as well as an accrual for the estimated costs associated with counterparties where a resolution or go-forward framework has been agreed to or has been discussed but not finalized, a portion of which was recorded through Other expense and a portion of which was recorded through Mortgage ~~Banking Activities,~~banking activities, net inon our ~~Residential Lending segment.~~consolidated income statement. In accordance with GAAP, the accrual for estimated costs is based on the opinion of management, that it is probable that these resolutions and forward-looking joint business undertakings and structured arrangements will result in an expense and the amount of expense can be reasonably estimated. In addition, as previously disclosed, one such counterparty filed a breach of contract lawsuit against us in May 2020 alleging that it had suffered in excess of $2 million of losses as a result of our alleged failure to purchase residential mortgage loans from it; and in October 2020 we and the plaintiff agreed to settle the lawsuit on mutually satisfactory terms.

During the three and nine months ended September 30, 2020, we recorded $4 million and $9 million of expenses, respectively, in association with Residential Loan Seller Demands. At ~~June~~September 30, 2020, the aggregate amount of ~~these actual costs, together with the~~our accrual for estimated costs associated with Residential Loan Seller Demands was $5$6.5 million, a ~~significant~~ portion of which would be contingent on the successful completion of future residential loan purchase and sale transactions with ~~these~~certain counterparties, with the expectation of generating future revenue for the Company.

With respect to ~~the remaining~~ Residential Loan Seller Demands that have not been resolved or been accrued for, our beliefs about the legal merits of these allegations and our discussions with these counterparties have resulted in us determining that a significant loss from these matters is not probable. With respect to these remaining Residential Loan Seller Demands, based on the foregoing, we have concluded that we can estimate an aggregate range of reasonably possible losses with respect to these Residential Loan Seller Demands of between 0 and $1.5 million.

Future developments (including receipt of additional information and documents relating to these matters, new or additional resolution or settlement communications relating to these matters, resolutions of similar claims against other industry participants in similar circumstances, or receipt of additional Residential Loan Seller Demands) could result in our concluding in the future to establish additional accruals or reserves or modify our aggregate range of reasonably possible losses with respect to these Residential Loan Seller Demand matters. Our actual losses, and any accruals or reserves we may establish in the future relating to these matters, may be materially higher than the accruals, reserves and the aggregate range of reasonably possible losses we have estimated above, respectively, including in the event that any of these matters proceed to trial and result in a judgment against us. We cannot be certain that any of these matters that are not already formally resolved will be resolved through a resolution or settlement ~~prior to trial~~ and we cannot be certain that the resolution of these matters, whether through ~~trial,~~litigation, settlement, or otherwise, will not have a material adverse effect on our financial condition or results of operations in any future period.

In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

In the ordinary course of any litigation matter, including certain of the above-referenced matters, we have engaged and may continue to engage in formal or informal settlement communications with the plaintiffs or co-defendants. Settlement communications we have engaged in relating to certain of the above-referenced litigation matters are one of the factors that have resulted in our determination to establish the loss contingency reserves described above. We cannot be certain that any of these matters will be resolved through a settlement prior to ~~trial~~litigation and we cannot be certain that the resolution of these matters, whether through trial or settlement, will not have a material adverse effect on our financial condition or results of operations in any future period.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

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

Note 17. Equity

The following table provides a summary of changes to accumulated other comprehensive income by component for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recognized net unrealized gains (losses) on our Level 3 AFS securities which we owned as of ~~June~~September 30, 2020 of ~~$52~~$8 million and negative ~~$24~~$16 million, respectively.

Table 17.1 – Changes in Accumulated Other Comprehensive Income by Component


		Three Months Ended June 30, 2020						Three Months Ended June 30, 2019							Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
(In Thousands)	(In Thousands)	Net Unrealized Gains (Losses) on Available-for-Sale Securities		Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges		Net Unrealized Gains on Available-for-Sale Securities		Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges		(In Thousands)	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	$	(1,865)	$	(83,666)	$	92,567	$	(39,883)	Balance at beginning of period	$	53,246	$	(82,637)	$	98,307	$	(49,384)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	52,393		—		8,562		(9,501)		Other comprehensive income (loss) before reclassifications	8,236		0		4,484		(11,791)
Amounts reclassified from other accumulated comprehensive income	Amounts reclassified from other accumulated comprehensive income	2,718		1,029		(2,822)		—		Amounts reclassified from other accumulated comprehensive income	(445)		1,040		(3,492)		0
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	55,111		1,029		5,740		(9,501)		Net current-period other comprehensive income (loss)	7,791		1,040		992		(11,791)
Balance at End of Period	Balance at End of Period	$	53,246	$	(82,637)	$	98,307	$	(49,384)	Balance at End of Period	$	61,037	$	(81,597)	$	99,299	$	(61,175)

5659

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 17. Equity - (continued)


		Six Months Ended June 30, 2020						Six Months Ended June 30, 2019							Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
(In Thousands)	(In Thousands)	Net Unrealized Gains on Available-for-Sale Securities		Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges		Net Unrealized Gains on Available-for-Sale Securities		Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges		(In Thousands)	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	$	92,452	$	(50,939)	$	95,342	$	(34,045)	Balance at beginning of period	$	92,452	$	(50,939)	$	95,342	$	(34,045)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	(28,126)		(32,806)		15,280		(15,339)		Other comprehensive income (loss) before reclassifications	(19,890)		(32,806)		19,764		(27,130)
Amounts reclassified from other accumulated comprehensive income	Amounts reclassified from other accumulated comprehensive income	(11,080)		1,108		(12,315)		—		Amounts reclassified from other accumulated comprehensive income	(11,525)		2,148		(15,807)		0
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	(39,206)		(31,698)		2,965		(15,339)		Net current-period other comprehensive income (loss)	(31,415)		(30,658)		3,957		(27,130)
Balance at End of Period	Balance at End of Period	$	53,246	$	(82,637)	$	98,307	$	(49,384)	Balance at End of Period	$	61,037	$	(81,597)	$	99,299	$	(61,175)

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

Table 17.2 – Reclassifications Out of Accumulated Other Comprehensive Income


			Amount Reclassified From Accumulated Other Comprehensive Income								Amount Reclassified From Accumulated Other Comprehensive Income
		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	2020		2019		(In Thousands)	Income Statement	2020		2019
Net Realized (Gain) Loss on AFS Securities	Net Realized (Gain) Loss on AFS Securities						Net Realized (Gain) Loss on AFS Securities
Credit loss recovery on AFS securities	Credit loss recovery on AFS securities	Investment fair value changes, net	$	(54)	$	—	Credit loss recovery on AFS securities	Investment fair value changes, net	$	(444)	$	0
Gain on sale of AFS securities	Gain on sale of AFS securities	Realized gains, net	2,772		(2,822)		Gain on sale of AFS securities	Realized gains, net	0		(3,492)

			$	2,718	$	(2,822)			$	(444)	$	(3,492)
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	$	—	Amortization of deferred loss	Interest expense	$	1,040	$	0
			$	1,029	$	—			$	1,040	$	0


			Amount Reclassified From Accumulated Other Comprehensive Income								Amount Reclassified From Accumulated Other Comprehensive Income
		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	2020		2019		(In Thousands)	Income Statement	2020		2019
Net Realized (Gain) Loss on AFS Securities	Net Realized (Gain) Loss on AFS Securities						Net Realized (Gain) Loss on AFS Securities
Credit loss expense on AFS securities	Credit loss expense on AFS securities	Investment fair value changes, net	$	1,471	$	—	Credit loss expense on AFS securities	Investment fair value changes, net	$	1,027	$	0
Gain on sale of AFS securities	Gain on sale of AFS securities	Realized gains, net	(12,551)		(12,315)		Gain on sale of AFS securities	Realized gains, net	(12,552)		(15,807)

			$	(11,080)	$	(12,315)			$	(11,525)	$	(15,807)
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	$	1,108	$	—	Amortization of deferred loss	Interest expense	$	2,148	$	0
			$	1,108	$	—			$	2,148	$	0

5760

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 17. Equity - (continued)

Issuance of Common Stock

In 2018, we established a program to sell up to an aggregate of $150 million of common stock from time to time in at-the-market ("ATM") offerings. In March 2020, we increased the maximum aggregate amount of common stock offered under the ATM program to $175 million. During the ~~six~~nine months ended ~~June~~September 30, 2020, we issued 129,500 common shares for net proceeds of approximately $2 million through ATM offerings. At ~~June~~September 30, 2020, approximately ~~$85~~$110 million remained outstanding for future offerings under this program.

Direct Stock Purchase and Dividend Reinvestment Plan

During the ~~three~~nine months ended ~~June~~September 30, 2020, we did 0t issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. During the ~~six~~nine months ended ~~June~~September 30, 2019, we issued 399,838 shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan, resulting in net proceeds of approximately $6 million.

Earnings (Loss) per Common Share

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

Table 17.3 – 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)	2020		2019		2020		2019		(In Thousands, except Share Data)	2020		2019		2020		2019
Basic Earnings (Loss) per Common Share:	Basic Earnings (Loss) per Common Share:									Basic Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood	Net income (loss) attributable to Redwood	$	165,444	$	31,266	$	(777,954)	$	85,730	Net income (loss) attributable to Redwood	$	141,812	$	34,310	$	(636,142)	$	120,040
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(4,528)		(877)		(1,011)		(2,417)		Less: Dividends and undistributed earnings allocated to participating securities	(4,067)		(856)		(1,427)		(3,260)
Net income (loss) allocated to common shareholders	Net income (loss) allocated to common shareholders	$	160,916	$	30,389	$	(778,965)	$	83,313	Net income (loss) allocated to common shareholders	$	137,745	$	33,454	$	(637,569)	$	116,780
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	114,383,289		96,983,764		114,229,928		94,846,431		Basic weighted average common shares outstanding	113,403,102		101,872,126		113,952,308		97,214,064
Basic Earnings (Loss) per Common Share	Basic Earnings (Loss) per Common Share	$	1.41	$	0.31	$	(6.82)	$	0.88	Basic Earnings (Loss) per Common Share	$	1.21	$	0.33	$	(5.60)	$	1.20
Diluted Earnings (Loss) per Common Share:	Diluted Earnings (Loss) per Common Share:									Diluted Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood	Net income (loss) attributable to Redwood	$	165,444	$	31,266	$	(777,954)	$	85,730	Net income (loss) attributable to Redwood	$	141,812	$	34,310	$	(636,142)	$	120,040
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(3,116)		(1,053)		(1,011)		(2,595)		Less: Dividends and undistributed earnings allocated to participating securities	(3,512)		(1,036)		(1,427)		(3,625)
Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax	Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax	(15,835)		8,698		—		17,385		Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax	6,990		8,887		0		26,271
Net income (loss) allocated to common shareholders	Net income (loss) allocated to common shareholders	$	146,493	$	38,911	$	(778,965)	$	100,520	Net income (loss) allocated to common shareholders	$	145,290	$	42,161	$	(637,569)	$	142,686
Weighted average common shares outstanding	Weighted average common shares outstanding	114,383,289		96,983,764		114,229,928		94,846,431		Weighted average common shares outstanding	113,403,102		101,872,126		113,952,308		97,214,064
Net effect of dilutive equity awards	Net effect of dilutive equity awards	—		270,550		—		210,360		Net effect of dilutive equity awards	0		362,743		0		261,155
Net effect of assumed convertible notes conversion to common shares	Net effect of assumed convertible notes conversion to common shares	32,715,790		33,442,640		—		33,442,640		Net effect of assumed convertible notes conversion to common shares	28,566,875		34,287,840		0		33,727,470
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	147,099,079		130,696,954		114,229,928		128,499,431		Diluted weighted average common shares outstanding	141,969,977		136,522,709		113,952,308		131,202,689
Diluted Earnings (Loss) per Common Share	Diluted Earnings (Loss) per Common Share	$	1.00	$	0.30	$	(6.82)	$	0.78	Diluted Earnings (Loss) per Common Share	$	1.02	$	0.31	$	(5.60)	$	1.09

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 17. Equity - (continued)

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

For the ~~six~~nine months ended ~~June~~September 30, 2020, ~~34,075,404~~32,225,825 of common shares related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the number of outstanding equity awards that were antidilutive totaled ~~11,561~~13,560 and ~~16,405,~~15,457, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, the number of outstanding equity awards that were antidilutive totaled ~~8,996~~11,710 and ~~8,186,~~9,361, respectively.

Stock Repurchases

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. ~~At June~~During the three months ended September 30, 2020, ~~$100~~we repurchased 3,047,335 shares of our common stock pursuant to this authorization for $22 million. At September 30, 2020, $78 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

Note 18. Equity Compensation Plans

At ~~June~~September 30, 2020 and December 31, 2019, ~~8,615,077~~8,629,455 and 3,637,480 shares of common stock, respectively, were available for grant under our Incentive Plan. During the ~~three months ended June 30,~~second quarter of 2020, Redwood shareholders approved for grant an additional 5 million shares of common stock under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan and purchases under the Employee Stock Purchase Plan totaled ~~$23~~$20 million at ~~June~~September 30, 2020, as shown in the following table.

Table 18.1 – Activities of Equity Compensation Costs by Award Type


		Six Months Ended June 30, 2020																							Nine Months Ended September 30, 2020
(In Thousands)	(In Thousands)	Restricted Stock Awards		Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total		(In Thousands)	Restricted Stock Awards		Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total
Unrecognized compensation cost at beginning of period	Unrecognized compensation cost at beginning of period	$	1,990	$	3,534	$	17,858	$	8,946	$	—	$	32,328	Unrecognized compensation cost at beginning of period	$	1,990	$	3,534	$	17,858	$	8,946	$	0	$	32,328
Equity grants	Equity grants	70		3,431		6,593		—		160		10,254		Equity grants	108		3,581		6,780		0		160		10,629
Performance-based valuation adjustment	Performance-based valuation adjustment	—		—		—		(7,352)		—		(7,352)		Performance-based valuation adjustment	0		0		0		(7,352)		0		(7,352)
Equity grant forfeitures	Equity grant forfeitures	(349)		(1,266)		(4,733)		(648)		—		(6,996)		Equity grant forfeitures	(529)		(2,161)		(4,733)		(648)		0		(8,071)
Equity compensation expense	Equity compensation expense	(614)		(772)		(4,511)		720		(80)		(5,257)		Equity compensation expense	(807)		(1,067)		(6,268)		326		(80)		(7,896)
Unrecognized Compensation Cost at End of Period	Unrecognized Compensation Cost at End of Period	$	1,097	$	4,927	$	15,207	$	1,666	$	80	$	22,977	Unrecognized Compensation Cost at End of Period	$	762	$	3,887	$	13,637	$	1,272	$	80	$	19,638

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 18. Equity Compensation Plans - (continued)

Restricted Stock Awards ("RSAs")

At ~~June~~September 30, 2020 and December 31, 2019, there were ~~92,440~~80,550 and 216,470 shares, respectively, of RSAs outstanding. Restrictions on these shares lapse through 2022. During the ~~six~~nine months ended ~~June~~September 30, 2020, there were 0 RSAs granted, restrictions on 101,063 RSAs lapsed and those shares were distributed, and ~~22,967~~34,857 RSAs were forfeited.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

Restricted Stock Units ("RSUs")

At ~~June~~September 30, 2020 and December 31, 2019, there were ~~333,869~~294,986 and 275,173 shares, respectively, of RSUs outstanding. Restrictions on these shares lapse through 2024. During the ~~six~~nine months ended ~~June~~September 30, 2020, there were ~~190,624~~205,482 RSUs granted, 55,514 RSUs distributed, and ~~76,414~~130,155 RSUs forfeited.

Deferred Stock Units (“DSUs”)

At ~~June~~September 30, 2020 and December 31, 2019, there were ~~2,395,786~~2,420,737 and 2,630,805 DSUs, respectively, outstanding of which ~~1,318,200~~1,406,190 and 1,286,063, respectively, had vested. During the ~~six~~nine months ended ~~June~~September 30, 2020, there were ~~449,092~~494,719 DSUs granted, ~~392,858~~413,533 DSUs distributed, and 291,253 DSUs forfeited. Unvested DSUs at ~~June~~September 30, 2020 vest through 2024.

Performance Stock Units (“PSUs”)

At ~~June~~September 30, 2020 and December 31, 2019, the target number of PSUs that were unvested was 739,895 and 839,070, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2020, 99,175 PSUs were forfeited. Vesting for all PSUs will generally occur at the end of three years from their grant date based on various ~~TSR~~Total Shareholder Return ("TSR") performance calculations, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2019. During the first quarter of 2020, for PSUs granted in 2018 and 2019, we adjusted our vesting estimate to assume that none of these awards will meet the minimum performance thresholds for vesting. This adjustment resulted in a reversal of $1 million of stock-based compensation expense recorded in the first quarter of 2020.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of 600,000 shares of common stock to be purchased in aggregate for all employees. As of ~~June~~September 30, 2020 and December 31, 2019, ~~463,582~~477,142 and 430,772 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at ~~June~~September 30, 2020.

6063

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 19. Mortgage Banking Activities, Net

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

Table 19.1 – 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)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
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⁾	$	(1,393)	$	20,267	$	6,562	$	35,111	Residential loans, at fair value (1)	$	12,589	$	6,320	$	19,151	$	41,431
Risk management derivatives ⁽²⁾	Risk management derivatives ⁽²⁾	—		(5,760)		(31,294)		(9,898)		Risk management derivatives (2)	(10)		(1,710)		(31,304)		(11,608)
Other income (expense), net ⁽³⁾	Other income (expense), net ⁽³⁾	(6,612)		852		(6,354)		973		Other income (expense), net (3)	(715)		407		(7,069)		1,380
Total residential mortgage banking activities, net	Total residential mortgage banking activities, net	(8,005)		15,359		(31,086)		26,186		Total residential mortgage banking activities, net	11,864		5,017		(19,222)		31,203

Business Purpose Mortgage Banking Activities, Net:	Business Purpose Mortgage Banking Activities, Net:									Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:	Changes in fair value of:									Changes in fair value of:
Single-family rental loans, at fair value ⁽¹⁾	Single-family rental loans, at fair value ⁽¹⁾	1,210		1,882		13,018		3,626		Single-family rental loans, at fair value (1)	43,191		1,847		56,209		5,473
Risk management derivatives⁽²⁾	Risk management derivatives⁽²⁾	—		(1,671)		(21,538)		(2,517)		Risk management derivatives (2)	(89)		(1,262)		(21,627)		(3,779)
Residential bridge loans, at fair value	Residential bridge loans, at fair value	(1,260)		1,012		(5,194)		1,098		Residential bridge loans, at fair value	938		1,010		(4,256)		2,108
Other income, net ⁽⁴⁾	Other income, net ⁽⁴⁾	2,283		2,578		10,617		3,076		Other income, net (4)	3,491		2,903		13,407		5,979
Total business purpose mortgage banking activities, net	Total business purpose mortgage banking activities, net	2,233		3,801		(3,097)		5,283		Total business purpose mortgage banking activities, net	47,531		4,498		43,733		9,781
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net	$	(5,772)	$	19,160	$	(34,183)	$	31,469	Mortgage Banking Activities, Net	$	59,395	$	9,515	$	24,511	$	40,984

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

(2)Represents market valuation changes of derivatives that were used to manage risks associated with our accumulation of loans.

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

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

6164

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 20. Other Income

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

Table 20.1 – Other Income


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
MSR (loss) income, net	MSR (loss) income, net	$	(1,424)	$	1,654	$	(3,233)	$	1,911	MSR (loss) income, net	$	(2,362)	$	431	$	(5,595)	$	2,342
Risk share income	Risk share income	1,181		800		1,946		1,446		Risk share income	1,200		905		3,146		2,351
FHLBC capital stock dividend	FHLBC capital stock dividend	538		535		1,085		1,082		FHLBC capital stock dividend	116		541		1,201		1,623
Equity investment (loss) income		(574)		(96)		274		172
Equity investment income										Equity investment income	341		560		615		732
5 Arches loan administration fee income	5 Arches loan administration fee income	648		1,488		1,518		1,954		5 Arches loan administration fee income	688		1,344		2,206		3,298
Gain on re-measurement of investment in 5 Arches	Gain on re-measurement of investment in 5 Arches	—		—		—		2,441		Gain on re-measurement of investment in 5 Arches	0		0		0		2,441
Other	Other	586		478		1,802		478		Other	(97)		575		2,406		1,053
Other Income		$	955	$	4,859	$	3,392	$	9,484
Other (Loss) Income										Other (Loss) Income	$	(114)	$	4,356	$	3,979	$	13,840

6265

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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

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

Table 21.1 – Components of General and Administrative Expenses, Loan Acquisition Costs, and Other 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)	2020		2019		2020		2019		(In Thousands)	2020		2019		2020		2019
General and Administrative Expenses	General and Administrative Expenses									General and Administrative Expenses
Fixed compensation expense	Fixed compensation expense	$	11,818	$	9,252	$	26,502	$	17,349	Fixed compensation expense	$	10,103	$	9,391	$	36,605	$	26,740
Variable compensation expense	Variable compensation expense	3,278		4,021		3,289		8,423		Variable compensation expense	5,882		3,489		9,171		11,356
Equity compensation expense	Equity compensation expense	3,262		4,024		5,257		6,977		Equity compensation expense	2,639		3,155		7,896		10,132
Acquisition-related equity compensation expense ⁽¹⁾	Acquisition-related equity compensation expense ⁽¹⁾	1,212		—		2,424		—		Acquisition-related equity compensation expense (1)	1,212		0		3,636		0
Systems and consulting	Systems and consulting	2,395		2,536		5,607		4,364		Systems and consulting	2,145		3,230		7,752		7,594
Loan acquisition costs ⁽²⁾		2,152		1,516		6,878		3,101
Office costs	Office costs	1,887		1,585		3,995		2,889		Office costs	1,859		1,517		5,854		4,406
Accounting and legal	Accounting and legal	2,788		960		5,004		2,085		Accounting and legal	1,601		1,767		6,605		3,852
Corporate costs	Corporate costs	626		545		1,297		1,219		Corporate costs	831		482		2,128		1,701
Other operating expenses	Other operating expenses	674		1,816		2,507		3,007		Other operating expenses	1,358		1,868		5,185		4,941
Total General and Administrative Expenses	Total General and Administrative Expenses	30,092		26,255		62,760		49,414		Total General and Administrative Expenses	27,630		24,899		84,832		70,722

Loan Acquisition Costs										Loan Acquisition Costs
Commissions										Commissions	879		659		3,027		1,432
Underwriting costs										Underwriting costs	771		1,074		3,289		3,184
Transfer and holding costs										Transfer and holding costs	508		183		1,400		891

Total Loan Acquisition Costs										Total Loan Acquisition Costs	2,158		1,916		7,716		5,507

Other Expenses	Other Expenses									Other Expenses
Goodwill impairment expense	Goodwill impairment expense	—		—		88,675		—		Goodwill impairment expense	0		0		88,675		0
Amortization of purchase-related intangible assets	Amortization of purchase-related intangible assets	3,873		1,900		8,179		2,711		Amortization of purchase-related intangible assets	3,873		1,897		12,052		4,608
Contingent consideration expense ⁽³⁾		134		311		446		311
Contingent consideration expense (2)										Contingent consideration expense (2)	135		236		581		547
Other	Other	1,076		241		(802)		468		Other	3,780		398		2,978		866
Total Other Expenses	Total Other Expenses	5,083		2,452		96,498		3,490		Total Other Expenses	7,788		2,531		104,286		6,021
Total General and Administrative Expenses and Other Expenses		$	35,175	$	28,707	$	159,258	$	52,904
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses										Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	37,576	$	29,346	$	196,834	$	82,250

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

(2)Loan acquisition costs primarily includes underwriting and due diligence costs related to the acquisition of residential loans held-for-sale at fair value as well as employee commissions related to our business purpose loan originations.

~~(3)~~Contingent consideration expense relates to the acquisition of 5 Arches during 2019. Refer to Note 2 for additional detail.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

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

Variable Compensation Expense

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

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

Note 22. Taxes

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

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


		June 30, 2020		June 30, 2019			September 30, 2020		September 30, 2019
Federal statutory rate	Federal statutory rate	21.0	%	21.0	%	Federal statutory rate	21.0	%	21.0	%
State statutory rate, net of Federal tax effect	State statutory rate, net of Federal tax effect	8.6	%	8.6	%	State statutory rate, net of Federal tax effect	8.6	%	8.6	%
Differences in taxable (loss) income from GAAP income	Differences in taxable (loss) income from GAAP income	(23.6)	%	(4.7)	%	Differences in taxable (loss) income from GAAP income	(23.6)	%	(2.5)	%
Change in valuation allowance	Change in valuation allowance	(3.2)	%	(3.6)	%	Change in valuation allowance	(4.0)	%	(2.5)	%
Dividends paid deduction ⁽¹⁾	Dividends paid deduction ⁽¹⁾	—	%	(17.7)	%	Dividends paid deduction (1)	0	%	(22.1)	%
Effective Tax Rate	Effective Tax Rate	2.8	%	3.6	%	Effective Tax Rate	2.0	%	2.5	%

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

We assessed our tax positions for all open tax years (i.e., Federal, ~~2016~~2017 to 2020, and State, ~~2015~~2016 to 2020) at ~~June~~September 30, 2020 and December 31, 2019, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 23. Segment Information

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

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2020~~

~~(Unaudited)~~

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

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

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

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

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

~~Table 23.1 – Business Segment Financial Information~~

Three Months Ended June 30, 2020
(In Thousands) Residential Lending Business Purpose Lending Third-Party Investments Corporate/
Other Total
Interest income $ 36,653 $ 53,742 $ 36,811 $ 2,740 $ 129,946
Interest expense (30,169) (38,837) (27,869) (5,791) (102,666)
Net interest income 6,484 14,905 8,942 (3,051) 27,280
Non-interest income
Mortgage banking activities, net (8,005) 2,233 — — (5,772)
Investment fair value changes, net 35,085 40,401 76,972 (230) 152,228
Other income, net 230 476 (509) 758 955
Realized gains, net 205 — 578 25,182 25,965
Total non-interest income, net 27,515 43,110 77,041 25,710 173,376
General and administrative expenses (3,875) (10,293) (2,106) (13,818) (30,092)
Other expenses — (3,884) (1,065) (134) (5,083)
Benefit from (provision for) income taxes 3,323 2,439 (5,799) — (37)
Segment Contribution $ 33,447 $ 46,277 $ 77,013 $ 8,707
Net Income $ 165,444
Non-cash amortization (expense) income, net $ (1,265) $ (6,391) $ 312 $ (1,619) $ (8,963)

6568

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 23. Segment Information - (continued)

Six Months Ended June 30, 2020
(In Thousands) Residential Lending Business Purpose Lending Third-Party Investments Corporate/
Other Total
Interest income $ 97,284 $ 106,802 $ 118,007 $ 5,934 $ 328,027
Interest expense (71,571) (73,827) (95,626) (8,313) (249,337)
Net interest income 25,713 32,975 22,381 (2,379) 78,690
Non-interest income
Mortgage banking activities, net (31,086) (3,097) — — (34,183)
Investment fair value changes, net (161,550) (101,729) (454,586) (739) (718,604)
Other income, net (267) 2,169 732 758 3,392
Realized gains, net 2,001 — 2,634 25,182 29,817
Total non-interest income, net (190,902) (102,657) (451,220) 25,201 (719,578)
General and administrative expenses (9,507) (24,626) (3,894) (24,733) (62,760)
Other expenses — (96,869) 817 (446) (96,498)
Benefit from income taxes 8,653 9,021 4,518 — 22,192
Segment Contribution $ (166,043) $ (182,156) $ (427,398) $ (2,357)
Net Loss $ (777,954)
Non-cash amortization (expense) income, net $ (1,053) $ (11,316) $ 1,053 $ (1,728) $ (13,044)
Other significant non-cash expense: goodwill impairment $ — $ (88,675) $ — $ — $ (88,675)
The following tables present financial information by segment for the three and nine months ended September 30, 2020 and 2019.

Table 23.1 – Business Segment Financial Information


		Three Months Ended June 30, 2019																	Three Months Ended September 30, 2020
(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	Interest income	$	67,611	$	4,131	$	72,024	$	4,776	$	148,542	Interest income	$	26,672	$	55,930	$	37,576	$	1,804	$	121,982
Interest expense	Interest expense	(49,321)		(2,238)		(60,680)		(3,981)		(116,220)		Interest expense	(22,541)		(46,027)		(27,534)		(4,309)		(100,411)
Net interest income	Net interest income	18,290		1,893		11,344		795		32,322		Net interest income	4,131		9,903		10,042		(2,505)		21,571
Non-interest income	Non-interest income											Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	15,359		3,801		—		—		19,160		Mortgage banking activities, net	11,864		47,531		0		0		59,395
Investment fair value changes, net	Investment fair value changes, net	(8,102)		(457)		11,856		(159)		3,138		Investment fair value changes, net	2,443		16,892		87,890		(178)		107,047
Other income, net	Other income, net	2,990		1,829		40		—		4,859		Other income, net	(2,011)		623		340		934		(114)
Realized gains, net	Realized gains, net	2,791		—		36		—		2,827		Realized gains, net	0		0		602		0		602
Total non-interest income, net	Total non-interest income, net	13,038		5,173		11,932		(159)		29,984		Total non-interest income, net	12,296		65,046		88,832		756		166,930
General and administrative expenses	General and administrative expenses	(6,799)		(6,120)		(900)		(12,436)		(26,255)		General and administrative expenses	(4,602)		(9,321)		(709)		(12,998)		(27,630)
Loan acquisition costs												Loan acquisition costs	(304)		(1,660)		(194)		0		(2,158)
Other expenses	Other expenses	—		(1,899)		(242)		(311)		(2,452)		Other expenses	(3,309)		(3,874)		(470)		(135)		(7,788)
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(1,484)		38		(887)		—		(2,333)		(Provision for) benefit from income taxes	(826)		(8,544)		257		0		(9,113)
Segment Contribution	Segment Contribution	$	23,045	$	(915)	$	21,247	$	(12,111)			Segment Contribution	$	7,386	$	51,550	$	97,758	$	(14,882)
Net Income	Net Income									$	31,266	Net Income									$	141,812
Non-cash amortization income (expense), net		$	2,268	$	(2,068)	$	(417)	$	(300)	$	(517)
Non-cash amortization (expense) income, net												Non-cash amortization (expense) income, net	$	1,785	$	(6,719)	$	117	$	(1,516)	$	(6,333)


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

6669

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 23. Segment Information - (continued)


		Six Months Ended June 30, 2019																	Three Months Ended September 30, 2019
(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	Interest income	$	134,450	$	7,068	$	128,436	$	9,629	$	279,583	Interest income	$	69,586	$	5,527	$	70,709	$	4,295	$	150,117
Interest expense	Interest expense	(96,997)		(3,777)		(106,626)		(8,096)		(215,496)		Interest expense	(48,798)		(2,813)		(61,541)		(3,452)		(116,604)
Net interest income	Net interest income	37,453		3,291		21,810		1,533		64,087		Net interest income	20,788		2,714		9,168		843		33,513
Non-interest income	Non-interest income											Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	26,186		5,283		—		—		31,469		Mortgage banking activities, net	5,016		4,499		0		0		9,515
Investment fair value changes, net	Investment fair value changes, net	(9,822)		(760)		34,435		(556)		23,297		Investment fair value changes, net	(11,088)		(1,073)		24,057		(452)		11,444
Other income, net	Other income, net	4,439		2,295		40		2,710		9,484		Other income, net	1,878		1,918		560		0		4,356
Realized gains, net	Realized gains, net	7,728		—		5,785		—		13,513		Realized gains, net	0		0		4,714		0		4,714
Total non-interest income, net	Total non-interest income, net	28,531		6,818		40,260		2,154		77,763		Total non-interest income, net	(4,194)		5,344		29,331		(452)		30,029
General and administrative expenses	General and administrative expenses	(14,002)		(8,685)		(1,886)		(24,841)		(49,414)		General and administrative expenses	(5,581)		(6,028)		(676)		(12,614)		(24,899)
Loan acquisition costs												Loan acquisition costs	(867)		(756)		(180)		(113)		(1,916)
Other expenses	Other expenses	—		(2,532)		(469)		(489)		(3,490)		Other expenses	0		(1,900)		(395)		(236)		(2,531)
(Provision for) benefit from income taxes		(1,985)		33		(1,264)		—		(3,216)
Benefit from (provision for) income taxes												Benefit from (provision for) income taxes	228		(8)		(106)		0		114
Segment Contribution	Segment Contribution	$	49,997	$	(1,075)	$	58,451	$	(21,643)			Segment Contribution	$	10,374	$	(634)	$	37,142	$	(12,572)
Net Income	Net Income									$	85,730	Net Income									$	34,310
Non-cash amortization income (expense), net	Non-cash amortization income (expense), net	$	4,243	$	(2,800)	$	(688)	$	(791)	$	(36)	Non-cash amortization income (expense), net	$	2,537	$	(2,107)	$	0	$	(1,148)	$	(718)

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



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

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

Three Months Ended June 30,
2020 2019
(In Thousands)
Legacy Consolidated VIEs ⁽¹⁾
Other Total
Legacy Consolidated VIEs ⁽¹⁾
Other Total
Interest income $ 2,686 $ 54 $ 2,740 $ 4,776 $ — $ 4,776
Interest expense (1,518) (4,273) (5,791) (3,981) — (3,981)
Net interest income 1,168 (4,219) (3,051) 795 — 795
Non-interest income
Investment fair value changes, net (230) — (230) (123) (36) (159)
Other income — 758 758 — — —
Realized gains, net — 25,182 25,182 — — —
Total non-interest income, net (230) 25,940 25,710 (123) (36) (159)
General and administrative expenses — (13,818) (13,818) — (12,436) (12,436)
Other expenses — (134) (134) — (311) (311)
Total $ 938 $ 7,769 $ 8,707 $ 672 $ (12,783) $ (12,111)

6770

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 23. Segment Information - (continued)

Six Months Ended June 30,
2020 2019
(In Thousands)
Legacy Consolidated VIEs ⁽¹⁾
Other Total
Legacy Consolidated VIEs ⁽¹⁾
Other Total
Interest income $ 5,880 $ 54 $ 5,934 $ 9,629 $ — $ 9,629
Interest expense (4,040) (4,273) (8,313) (8,096) — (8,096)
Net interest income 1,840 (4,219) (2,379) 1,533 — 1,533
Non-interest income
Investment fair value changes, net (621) (118) (739) (497) (59) (556)
Other income — 758 758 — 2,710 2,710
Realized gains, net — 25,182 25,182 — — —
Total non-interest income, net (621) 25,822 25,201 (497) 2,651 2,154
General and administrative expenses — (24,733) (24,733) — (24,841) (24,841)
Other expenses — (446) (446) — (489) (489)
Total $ 1,219 $ (3,576) $ (2,357) $ 1,036 $ (22,679) $ (21,643)
The following table presents the components of Corporate/Other for the three and nine months ended September 30, 2020 and 2019.

Table 23.2 – Components of Corporate/Other


	Three Months Ended September 30,
	2020						2019
(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	$	1,795	$	9	$	1,804	$	4,295	$	0	$	4,295
Interest expense	(1,058)		(3,251)		(4,309)		(3,452)		0		(3,452)
Net interest income	737		(3,242)		(2,505)		843		0		843
Non-interest income

Investment fair value changes, net	(81)		(97)		(178)		(407)		(45)		(452)
Other income	0		934		934		0		0		0

Total non-interest income, net	(81)		837		756		(407)		(45)		(452)
General and administrative expenses	0		(12,998)		(12,998)		0		(12,614)		(12,614)
Loan acquisition costs	0		0		0		0		(113)		(113)
Other expenses	0		(135)		(135)		0		(236)		(236)

Total	$	656	$	(15,538)	$	(14,882)	$	436	$	(13,008)	$	(12,572)


	Nine Months Ended September 30,
	2020						2019
(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	$	7,675	$	63	$	7,738	$	13,924	$	0	$	13,924
Interest expense	(5,098)		(7,524)		(12,622)		(11,548)		0		(11,548)
Net interest income	2,577		(7,461)		(4,884)		2,376		0		2,376
Non-interest income

Investment fair value changes, net	(702)		(215)		(917)		(904)		(104)		(1,008)
Other income	0		1,692		1,692		0		2,710		2,710
Realized gains, net	0		25,182		25,182		0		0		0
Total non-interest income, net	(702)		26,659		25,957		(904)		2,606		1,702
General and administrative expenses	0		(37,724)		(37,724)		0		(37,440)		(37,440)
Loan acquisition costs	0		(7)		(7)		0		(128)		(128)
Other expenses	0		(581)		(581)		0		(725)		(725)

Total	$	1,875	$	(19,114)	$	(17,239)	$	1,472	$	(35,687)	$	(34,215)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 23. Segment Information - (continued)

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

Table 23.3 – Supplemental Segment Information


(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
June 30, 2020
September 30, 2020												September 30, 2020
Residential loans	Residential loans	$	2,084,587	$	—	$	2,145,111	$	304,632	$	4,534,330	Residential loans	$	1,941,489	$	0	$	2,256,682	$	296,765	$	4,494,936
Business purpose residential loans	Business purpose residential loans	—		3,782,200		—		—		3,782,200		Business purpose residential loans	0		3,956,101		0		0		3,956,101
Multifamily loans	Multifamily loans	—		—		489,075		—		489,075		Multifamily loans	0		0		491,415		0		491,415
Real estate securities	Real estate securities	142,713		—		173,723		—		316,436		Real estate securities	146,608		0		204,727		0		351,335
Other investments	Other investments	19,661		26,933		383,246		—		429,840		Other investments	14,878		25,713		344,037		0		384,628
Goodwill and intangible assets	Goodwill and intangible assets	—		64,610		—		—		64,610		Goodwill and intangible assets	0		60,737		0		0		60,737
Total assets	Total assets	2,303,320		4,009,371		3,211,030		837,821		10,361,542		Total assets	2,148,643		4,134,913		3,315,039		803,817		10,402,412

December 31, 2019	December 31, 2019											December 31, 2019
Residential loans	Residential loans	$	4,939,745	$	—	$	2,367,215	$	407,890	$	7,714,850	Residential loans	$	4,939,745	$	0	$	2,367,215	$	407,890	$	7,714,850
Business purpose residential loans	Business purpose residential loans	—		3,506,743		—		—		3,506,743		Business purpose residential loans	0		3,506,743		0		0		3,506,743
Multifamily loans	Multifamily loans	—		—		4,408,524		—		4,408,524		Multifamily loans	0		0		4,408,524		0		4,408,524
Real estate securities	Real estate securities	229,074		—		870,800		—		1,099,874		Real estate securities	229,074		0		870,800		0		1,099,874
Other investments	Other investments	42,224		21,002		294,904		—		358,130		Other investments	42,224		21,002		294,904		0		358,130
Goodwill and intangible assets	Goodwill and intangible assets	—		161,464		—		—		161,464		Goodwill and intangible assets	0		161,464		0		0		161,464
Total assets	Total assets	5,410,540		3,786,641		8,028,946		769,313		17,995,440		Total assets	5,410,540		3,786,641		8,028,946		769,313		17,995,440

6872

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six main sections:

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Off-Balance Sheet Arrangements and Contractual Obligations

• Critical Accounting Policies and Estimates

• New Accounting Standards

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part II, Item 8, Financial Statements and Supplementary Data in our most recent Annual Report on Form 10-K, as well as the sections entitled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as other cautionary statements and risks described elsewhere in this report and our most recent Annual Report on Form 10-K. The discussion in this MD&A contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, such as those discussed in the Cautionary Statement below.

References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. Financial information concerning our business is set forth in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes thereto, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

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

6973

Our Business

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on making credit-sensitive investments in single-family residential and multifamily mortgages and related assets and engaging in mortgage banking activities. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, as well as through capital appreciation. We operate our business in three segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For a full description of our segments, see Note 23 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Cautionary Statement

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, in each case under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects (including trends driving the flow of capital in the housing finance ~~markets,~~market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, our ability to pay dividends in the future, and the prospects for federal housing finance reform); (ii) statements related to our financial outlook and expectations for 2020 and future years, including our ~~positioning~~optimism that we will end 2020 on a high note, that excess liquidity will continue to ~~take advantage~~support higher prices for mortgage related investments and enhance their scarcity value, that our portfolio values still have room to recover value from unrealized losses incurred in the first quarter of ~~a significant recovery in~~2020, and our ~~business lines,~~belief that secular trends supporting our investment thesis are accelerating due to the COVID-19 pandemic; (iii) expectations with respect to activity in our Residential Lending segment, including our expectation that our expanded prime program will contribute more significantly to our 2021 loan acquisition volumes, and ~~strategic priorities~~the potential for ~~this segment,~~significantly increased industry-wide jumbo loan origination volumes and for interest rates on jumbo loans to continue to converge towards those for conforming borrowers; (iv) our expectations with respect to activity in our Business Purpose Lending segment, including with respect to investment demand for our SFR and bridge loans, and our belief that asset valuations in our investment portfolio possess significant upside to recover value from unrealized losses incurred during the first quarter 2020; (iii) statements related to ~~repurchases of long-term debt or common equity; (iv)~~opportunities to provide technology-enabled solutions to disrupt traditional private-sector workflows; (v) statements regarding our ~~expectations with respect to forbearance rates, loan performance~~capital available for ~~borrowers exiting forbearance periods, and Redwood's servicing advance obligations,~~investment, including our ~~estimate~~statement that ~~for every 5 percentage point increase in the principal balance of Sequoia securitized~~we have ample capital available to deploy into our operating businesses and to pursue opportunistic third-party investments; (vi) statements relating to acquiring residential mortgage loans in ~~a delinquent status (whether~~the future that we have identified for purchase or ~~not subject~~plan to ~~forbearance), our average monthly principal~~purchase, including the amount of such loans that we identified for purchase during the third quarter of 2020 and ~~interest servicing advance funding obligation would increase by approximately $3 million; (v) statements we make regarding estimated costs~~at September 30, 2020, and expected fallout and the ~~range~~corresponding volume of ~~reasonably possible losses with respect~~residential mortgage loans expected to be available for purchase, and expected residential mortgage loan ~~seller demands; (vi)~~sales in the fourth quarter, including through forward sales agreements we entered into during the third quarter; (vii) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2020; and ~~(vii)~~(viii) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.

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

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

•the impact of the current outbreak of COVID-19 or the future outbreak of any other highly infectious or contagious diseases on the U.S. and global economy, financial markets, and our business and operations;

•the ability and willingness of residential mortgage loan borrowers that have been negatively impacted by the pandemic to make payments of principal and interest relating to their mortgage loans;

•liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities;

•changes to our interest rate hedging strategy and our revised approach to addressing interest rate risk;

•the pace at which we redeploy our available capital into new investments and initiatives;

•our ability to scale our platform and systems, particularly with respect to our new initiatives;

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

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

•our ability to finance our investments in securities and our acquisition of residential mortgages with short-term debt;

•changes in the values of assets we own;

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

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

•state and/or local regulations related to rent control or rent stabilization impacting single-family rental and multifamily properties;

•strategic business and capital deployment decisions we make;

•our recent acquisitions of business purpose lending origination platforms;

•developments related to the fixed income and mortgage finance markets and the Federal Reserve’s statements regarding its future open market activity and monetary policy;

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

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

•our exposure to adjustable-rate mortgage loans;

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

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

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

•changes in liquidity in the market for real estate securities and loans;

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

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

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

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

•ongoing litigation against various trustees of RMBS transactions;

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

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

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

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

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

•exposure to environmental liabilities;

•our failure to comply with applicable laws and regulations;

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

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

•changes in accounting principles and tax rules;

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

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

•decisions about raising, managing, and distributing capital; and

•other factors not presently identified.

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

7175

OVERVIEW

Business Update

~~The COVID-19 pandemic continued to impact financial markets and~~In the ~~economy in the second~~third quarter ~~and our country experienced a significant increase in coronavirus cases during July. While the long-term impact~~ of ~~this crisis on Redwood’s business remains unclear,~~2020, we ~~made significant progress in response to the collapse of liquidity that the non-government mortgage sector experienced in March. We believe we are now~~ positioned ourselves to take advantage of ~~a significant recovery~~opportunities emerging in our ~~business lines – which is currently underway. There is still much to do, but~~markets. Though we ~~expect to look back on the second quarter~~remain wary of ~~2020 as one~~a volatile election season and rising rates of ~~meaningful strengthening for the Company.~~

During the second quarter, we recast most of our secured recourse debt. In aggregate, recourse debt declined from $4.6 billion at March 31, 2020 to $1.8 billion at June 30, 2020, reducing our recourse leverage ratio from 6.9x to 2.1x. Marginable debt, or that portion of recourse debt subject to daily, market-value-based margin calls, represents only about 21% of our recourse debt, or $375 million at June 30th. When comparing our $529 million of unrestricted cash to our marginable debt at the endCOVID-19 infections in many parts of the ~~second quarter,~~U.S., our ~~coverage ratio was approximately 1.4:1, leaving us with ample room above~~businesses are back to operating at full speed and we are optimistic that we will end 2020 on a ~~prudent risk capital level to allocate significant capital to our operating businesses, new investments and capital deployment opportunities.~~high note.

Importantly, the evolution of our capital structure has been managed organically, without raising dilutive equity capital. Not only did we not require outside capital in the second quarter, we repurchased $125 million of our convertible debt at discounted levels, generating $25 million of realized gains. These repurchases also provide the benefit of reduced debt service costs and leverage as we manage through the pandemic. We may continue to opportunistically repurchase our long-term debt or common stock to the extent we believe valuations remain significantly detached from fundamentals.

~~With our capital structure enhancements largely complete, we paid a second quarter dividend of $0.125 per share on June 29, 2020. The second quarter dividend aligned with the current size of~~After recasting our balance sheet and ~~reflected a sustainable level that we would hope~~positioning our businesses to build upon as the economy and our business cash flows stabilize. We remain committed to delivering an attractive dividend to shareholders while remaining well positioned to opportunistically deploy capital going forward.

When taking stock of the extreme market shocks brought about by COVID-19 and our future forward earnings potential, we believe it is still premature to look too far ahead, as the true impact to the U.S. economy and the mortgage industry is yet to be seen. From a macroeconomic perspective, the recovery in financial markets remains meaningfully detachedrelaunch from the continued, and in many areas accelerating, health pandemic. Record job losses and the associated economic contraction have significantly outpaced the Great Financial Crisis in both speed and severity. The spectacular resiliency of the financial markets appears to be buoyed by extreme monetary and fiscal stimulus, with the prospect that financial asset values can be supported, either directly or implicitly, by the Federal Reserve until a COVID-19 vaccine or effective treatments can be found.

~~Discomforted by the prospect of trying to predict and time the outcome of the pandemic, and with an election looming in November, we have put ourselves in~~ a position of strength, we are now conducting new business at a rapid pace and leveraging industry relationships forged over many business cycles. But after such a profoundly challenging period for our sector and country, we were compelled to ~~be patient and focused on~~think critically about the type of company we want to lead over the long-term ~~through what may be~~– including how we fit into a ~~volatile next several months. The virtue of patience has had meaningful ancillary benefits, as~~nation grappling with civil unrest, pandemic fatigue, and a depressed job market.

We emerged with great clarity on who we ~~have been able to focus on the strategic evolution of~~are and where we are headed. Our business continues moving towards where our ~~business model, and how our platforms will function~~capital is most impactful – in ~~a post-pandemic world.~~

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

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

In the third quarter, our residential mortgage lock volume was $2.12 billion, growing from nearly zero in the second quarter. It was also the highest quarterly volume sourced exclusively through our residential loan seller network in five years. Moreover, we achieved this through purchase activity with only about 40% of our loan sellers. We also have yet to formally relaunch our expanded prime program, Redwood Choice, which we expect to contribute more significantly ~~altered landscape. Myriad aspects of~~to our 2021 acquisition volumes. Additionally, the mortgage ~~process that historically took place~~finance industry remains focused on the refinancing opportunity for conforming mortgage loans. In our view, there is potential for significantly increased jumbo loan origination and acquisition volumes, driven by evolving consumer demand and the potential for interest rates on jumbo mortgage loans to continue converging towards those for conforming mortgage loans. Our recent efforts have positioned us to compete effectively in ~~person, such as appraisals and closings, are now often done remotely. Residential~~what may be a substantially larger market. The recent completion of our first Sequoia securitization backed largely by loans originated since the COVID-19 crisis began is an important affirmation of our progress.

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

As ~~of June 30, 2020, we received approximately 96% of payments due in June for residential loans underlying~~ our ~~Sequoia securitizations and we received approximately 96% of payments due for the single-family rental loans underlying~~operating strategies take shape, our ~~CoreVest securitizations. Forbearance rates for our Sequoia portfolio had stabilized in the 6.5% - 7.0% range of outstanding balances as of July 24, 2020. Importantly, we are now observing how~~investment portfolio’s asset values have continued to recover since incurring unrealized losses during the first ~~group of borrowers exiting forbearance periods will perform, and the early signs are encouraging. Along~~quarter. The significant upside we have seen in these ~~lines, it is important~~investments appears to ~~emphasize that Redwood’s servicer advancing obligations~~be a story unique to date have been immaterial to our operations, largely thanks to the fact that a significant percentage of underlying borrowers who have been granted forbearance periods have nonetheless continued to make their monthly mortgage payments. Over the longer-term, for borrowers who reach deeper stages of delinquency, “stop-advance” features incorporated intoRedwood – with many of our ~~Sequoia securitization transactions will also mitigate~~competitors exiting their non-agency portfolios in response to the pandemic. Though we can’t predict the pace or extent of a broad-based economic recovery, we believe our ~~advancing obligations.~~portfolio values still have room for further recovery, with the investment portfolio currently yielding in the low- to mid-double digits to our basis in those assets at September 30, 2020.

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

7276

While we are pleased with our market positioning and expectations for growth, navigating the Company through prolonged market volatility will remain a primary focus. The ~~rise~~high standards we have set for service to our customers are well-established, but it is critical for us to maintain an infrastructure that can preserve this standard while allowing us to scale profitably and safely. To accomplish this, we are committed to innovating and investing in past-due mortgages, thus far, does not appear to be weakening the single-family housing sector. Thanks to record low mortgage rates, in some cases below 3% for agency mortgages and trending lower, refinance activity has remained elevated and home purchases have seen a resurgence in demand. By way of shelter-in-place orders and broader (perhaps secular) trends in working remotely, the concept of “home” has taken on greater significance for most Americans. Many children are now learning “virtually” right down the hall from their working parents. Particularly strong demand for suburban housing has been observed in many states where families look to exit dense metropolitan areas, seeking some outdoor space to call their own and that critical extra room. This is a remarkable shift in consumer preference from even a few short months ago, and one that, on balance, is positive for both our ~~residential consumer and rental products, which are predominantly focused on single-family dwellings.~~technology.

Our ~~Residential Lending team entered the second half~~businesses recently completed an updated technology roadmap that identified significant opportunities to provide technology-enabled solutions to our network of the year primed for a relaunch with an idle period in the jumbo mortgage space slowly coming to an end. Since March, most lenders had significantly tightened their underwriting guidelines for newly originated loans due to the prospect of a severe recession and lack of Fed support to the non-agency sector. Additionally, constraints on the bandwidth of loan officers, who have remained largely focused on high margin refinance loans to agency-eligible borrowers, has weighed on jumbo origination activity. Based on our recent engagement with loan sellers and sponsors. We aim to disrupt traditional private-sector workflows and ideologies that have inhibited automation in the ~~gradual narrowing~~non-agency mortgage market.

Non-agency residential loan purchase workflows and timelines is one such opportunity. We recently announced the pilot launch of ~~the spread between agency and jumbo mortgage rates, we’ve begun~~Redwood “Rapid Funding”, a technology-enabled program that will permit qualifying originators to ~~see a pickup in lock activity and expect this to grow meaningfully as we head into the fall. Even~~transact with this narrowing, we continue to see substantial relative value in non-agency whole loans, a sentiment shared by our loan-buying counterparties, both current and prospective. Our near-term focus continues to be on recasting our programs and guidelines with loan sellers to reflect the economic environment in preparation for increased activity. Though our team’s efforts may not yet be reflected in our results, tremendous progress has been made and we’re excited about the resurgence underway.

To reach this point, we completed the difficult work of managing through our “pre-COVID” loan inventory, culminating with the sale of substantially all of those loans and the repayment of our associated secured debt facilities. As part of this process, our residential team completed our Sequoia “MC1” securitization in late June, a transaction that brought the sale of these loans to a close. The deal priced better than we expected and allowed us ~~to safely begin locking new loans in July.~~

~~As we move forward, our Residential team is focused~~ on a ~~few key strategic priorities. First, is~~significantly accelerated purchase timeline. Our delegated process allows originators to ~~reaffirm our commitment~~control their closing timelines; adding this feature will enable them to ~~technology by upgrading our loan systems~~free up capital more quickly and ~~transition toward the more automated underwriting and approval processes our sellers experience~~remove risk from their balance sheets. Our program will also create opportunities for conventional loans. Second, is to broaden our methods of loan distribution to complement traditional whole-loan sales and securitization – a key initiative as we closely manage our loan inventory levels going forward. Third, is to enhance our value-addfaster settlements to our loan ~~sellers by continuing~~buyer network – particularly depositories – that ultimately could lead to ~~refine how -~~better outcomes for borrowers.

At CoreVest, our business purpose lending subsidiary, technology and ~~how quickly - we can purchase loans in a safe and sound manner. Thanks to our deep and valuable banking relationships, we~~data architecture have ~~substantial warehouse capacity to fund new loans and now have access to non-marginable facilities that will help us manage our inventory going forward.~~

~~Transitioning to our Business Purpose Lending segment, the recovery was very much underway at the end~~long been hallmarks of the ~~second quarter,~~platform’s advantages in client acquisition and ~~we have much to be excited about going forward. Our BPL team originated $234 million~~retention. A culture of ~~loans~~consistent iteration of the technology suite – particularly in the ~~second quarter,~~proprietary use of leading cloud-based systems to automate workflow management – keeps the ~~majority in late May and June when we re-entered~~platform’s first-mover advantage fresh. This client-centric approach keeps customers coming back, as evidenced by our approximately 50% repeat borrower rate, but also positions us to capitalize as this area of the market ~~in earnest after securitizing a significant portion~~continues to grow.

Though our business platforms serve different parts of the ~~pre-COVID single-family rental loans on~~housing market, our ~~balance sheet. Our origination footprint has remained largely consistent for SFR loans, and our bridge origination strategy has sharpened its focus on sponsors whose strategy is~~core mission unifies them. We aim to ultimately hold and stabilize all or most of their portfolios. In addition to their institutional caliber, these sponsors often become accretive repeat customers for both SFR loans and fresh bridge financing to support new investments. Across our BPL products, we are commanding improved lending terms in both structure and coupon. As funding markets improve, we expect more competition to re-enter the space; however, we believe our operational advantage remains durable.

Our BPL business continued to make great progress in diversifying its outlets to distribute risk in the second quarter and through July. We completed two non-recourse financing arrangements for over 85% of our pre-COVID bridge portfolio, essentially match-funding a portfolio that has thus far displayed solid performance through the pandemic (as noted above, these arrangements did not come with equity-linked options for the lenders). Investment demand remains very robust for our SFR and bridge loans, including significant inquiry for both loan purchases and opportunities to co-invest or provide private financing. We expect these options to become a reliable complement to traditional securitization. The attractive risk-adjusted returns in the space have kept BPL assets in strong demand and we continue to receive strong indications from investors in our SFR securitizations.

As we take stock of the year so far and look towards the fall, we are reminded that we are living in truly historic times. We face a pandemic that has created global economic disruption, trade and technology wars are looming, the fight against racism and social injustice is hitting an inflection point at a global scale, and the U.S. presidential election is a mere three months away. This presents an opportunity for all of us to examine our values, reset priorities and pause while we rethink how we want our world to function. As the times evolve, our corporate mission remains the same - to help make quality housing accessible to all Americans, whether rented or owned. For example, we finance build-to-rent communities in the Midwest, workforce housing in the South, and high-balance residential mortgages on the coasts. Our mission also speaks to the role we play in our communities, and motivates us to advocate for and advance inclusion and diversity initiatives across our industry. By focusing on financing solutions for all consumers and investors not served by government-sponsored loan programs, we believe we can make a positive impact for our stakeholders – especially our shareholders, employees, and communities.

7377

~~Second~~Third Quarter Overview

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

Table 1 – Key Financial 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, 2020		June 30, 2020		(In Thousands, except per Share Data)	September 30, 2020		September 30, 2020
Net income (loss) per diluted common share	Net income (loss) per diluted common share	$	1.00	$	(6.82)	Net income (loss) per diluted common share	$	1.02	$	(5.60)

Book value per share	Book value per share	$	8.15	$	8.15	Book value per share	$	9.41	$	9.41
REIT taxable loss per share		$	(0.50)	$	(0.17)
REIT taxable income (loss) per share						REIT taxable income (loss) per share	$	0.07	$	(0.10)
Dividends per share	Dividends per share	$	0.125	$	0.445	Dividends per share	$	0.14	$	0.585

•Our ~~second~~third quarter 2020 results benefited from a rebound in asset prices, as the COVID-19 induced spread widening we experienced in the first quarter partially reversed, benefiting our investment portfolio. As a result of the substantial work we completed repositioning our secured debt, we were able to maintain strategic assetsrenewed momentum in our ~~portfolio~~operating businesses. Volumes grew significantly at our residential business, and ~~recover a meaningful portion of the unrealized losses recorded~~business purpose lending results benefited from strong securitization execution and improved valuations on loans held in ~~the first quarter of 2020.~~inventory.

•Our book value ~~per share~~ increased ~~$1.83~~$1.26 per share to ~~$8.15~~$9.41 per share during the ~~second~~third quarter of 2020, resulting primarily from positive investment fair value changes as well as from ~~gains on extinguishment of our convertible debt.~~improved mortgage banking results. During the second quarter, we recognized positive fair value changes of $1.78 per share on our investment assets, primarily driven by spread-tightening across our portfolios. While not uniform in magnitude, asset valuations were materially higher and still possess significant upside to the extent the economy continues to recover. Additionally, during the secondthird quarter of 2020, we repurchased ~~$125~~three million shares of ~~convertible debt,~~our common stock for $22 million, resulting in ~~net gains of $25 million and~~ a ~~$0.22~~$0.03 per share benefit to book value.

•During the ~~second~~third quarter of 2020, we ~~made significant progress repositioning our secured recourse~~entered into two separate non-recourse debt ~~structure including reducing~~transactions and closed two non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral) loan warehouse facilities. These transactions helped reduce our recourse debt from ~~$4.6 billion at March 31, 2020 to $1.8~~$1.82 billion at June 30, 2020 to $1.35 billion at September 30, 2020, and ~~reducing~~reduced our marginable debt from ~~$3.5 billion at March 31, 2020 to~~ $375 million at June 30, 2020 to $120 million at September 30, 2020. While our new non-marginable and non-recourse financing facilities have reduced our contingent liquidity risks, they generally have higher interest costs, which will marginally impact our net interest income in coming quarters. Additional details on these new financing agreements, including additional details regarding market value-based margin call provisions compared to asset value-based margin call provisions, are provided in the "Liquidity and Capital Resources" section that follows in this MD~~&A.~~&A under the heading “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities."

•~~During the second quarter of 2020,~~Residential jumbo loan purchase commitments were $1.20 billion, and we ~~completed the sale of nearly all of our residential loans previously held for investment and financed at our Federal Home Loan Bank of Chicago facility (our "FHLBC Facility") and repaid all but $1~~purchased $176 million of ~~borrowings under this facility. Additionally,~~residential jumbo loans during the ~~second quarter, we completed the sale of nearly all of our loan inventory held at the end of the first~~third quarter of 2020. ~~These sales benefited~~At September 30, 2020, our ~~cash position, recourse leverage and marginable debt ratios, but reduced net interest income in the second quarter.~~pipeline of jumbo residential loans identified for purchase was $1.79 billion.

•We reset operations in our mortgage banking businesses during the second quarter of 2020, increasing the pace of residential loan locks and business purpose loan originations in the second half of the second quarter. Our business purpose lending platform originated ~~$234~~$261 million of business purpose mortgage loans in the ~~second~~third quarter, including ~~$176~~$196 million of single-family rental loans and ~~$58~~$66 million of residential bridge loans. During the quarter, we also completed one $293 million securitization of single-family rental loans.

•During the ~~second~~third quarter of 2020, we sold ~~$29 million of securities from our residential lending investment portfolio, $53~~$13 million of third-party ~~residential investments (including $35~~securities, and retained $16 million of ~~recently issued subordinate securities), and $19 million of Agency CRT securities.~~single-family rental ("SFR") securities from a securitization we completed during the quarter.

•Our unrestricted cash position increased to $529 million at the end of the second quarter of 2020, after repurchasing $125 million of our convertible debt at a discount, and without issuing any equity or equity-linked securities.

7478

RESULTS OF OPERATIONS

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

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, 2020 and 2019.

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)	2020		2019		Change		2020		2019		Change		(In Thousands, except per Share Data)	2020		2019		Change		2020		2019		Change
Net Interest Income	Net Interest Income	$	27,280	$	32,322	$	(5,042)	$	78,690	$	64,087	$	14,603	Net Interest Income	$	21,571	$	33,513	$	(11,942)	$	100,261	$	97,600	$	2,661
Non-interest Income	Non-interest Income													Non-interest Income
Mortgage banking activities, net	Mortgage banking activities, net	(5,772)		19,160		(24,932)		(34,183)		31,469		(65,652)		Mortgage banking activities, net	59,395		9,515		49,880		24,511		40,984		(16,473)
Investment fair value changes, net	Investment fair value changes, net	152,228		3,138		149,090		(718,604)		23,297		(741,901)		Investment fair value changes, net	107,047		11,444		95,603		(611,557)		34,741		(646,298)
Other income	Other income	955		4,859		(3,904)		3,392		9,484		(6,092)		Other income	(114)		4,356		(4,470)		3,979		13,840		(9,861)
Realized gains, net	Realized gains, net	25,965		2,827		23,138		29,817		13,513		16,304		Realized gains, net	602		4,714		(4,112)		30,419		18,227		12,192
Total non-interest income (loss), net	Total non-interest income (loss), net	173,376		29,984		143,392		(719,578)		77,763		(797,341)		Total non-interest income (loss), net	166,930		30,029		136,901		(552,648)		107,792		(660,440)
General and administrative expenses	General and administrative expenses	(30,092)		(26,255)		(3,837)		(62,760)		(49,414)		(13,346)		General and administrative expenses	(27,630)		(24,899)		(2,731)		(84,832)		(70,722)		(14,110)
Loan acquisition costs														Loan acquisition costs	(2,158)		(1,916)		(242)		(7,716)		(5,507)		(2,209)
Other expenses	Other expenses	(5,083)		(2,452)		(2,631)		(96,498)		(3,490)		(93,008)		Other expenses	(7,788)		(2,531)		(5,257)		(104,286)		(6,021)		(98,265)
Net income (loss) before income taxes	Net income (loss) before income taxes	165,481		33,599		131,882		(800,146)		88,946		(889,092)		Net income (loss) before income taxes	150,925		34,196		116,729		(649,221)		123,142		(772,363)
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(37)		(2,333)		2,296		22,192		(3,216)		25,408		(Provision for) benefit from income taxes	(9,113)		114		(9,227)		13,079		(3,102)		16,181
Net Income (Loss)	Net Income (Loss)	$	165,444	$	31,266	$	134,178	$	(777,954)	$	85,730	$	(863,684)	Net Income (Loss)	$	141,812	$	34,310	$	107,502	$	(636,142)	$	120,040	$	(756,182)
Diluted earnings (loss) per common share	Diluted earnings (loss) per common share	$	1.00	$	0.30	$	0.70	$	(6.82)	$	0.78	$	(7.60)	Diluted earnings (loss) per common share	$	1.02	$	0.31	$	0.71	$	(5.60)	$	1.09	$	(6.69)

Net Interest Income

The decrease in net interest income during the three-month periods was primarily due to lower net interest income from residential loans, as we completed the sale of nearly all of our loans previously held-for-investment at the FHLBC, and our loan inventory held at the end of the first quarter of 2020.As a result of these sales, we expect our net interest income to decrease further inaverage asset balances during the third quarter of 2020 ~~and remain lower until we begin to re-deploy our available capital into interest earning investments and increase our inventory of loans held for sale~~resulting from portfolio repositioning in ~~our mortgage banking businesses. Additionally, during~~ the ~~second quarter~~first half of 2020 ~~we entered into several new financing agreements, which in general carry~~related to the COVID-19 pandemic, and higher ~~interest~~borrowing costs associated with non-marginable and non-recourse ~~features.~~debt facilities we entered into in the second and third quarters of 2020.

The increase in net interest income during the ~~six-month~~nine-month periods was primarily due to higher net interest income from bridge loans and loans held for investment at CAFL entities, which we consolidated beginning in the fourth quarter of 2019 following the acquisition of CoreVest. These increases were mostly offset by a ~~higher average balance~~reduction in net interest income resulting from sales of ~~invested capital during~~investments in the first ~~six months~~half of 2020 as ~~compared~~we repositioned our portfolio in response to the ~~first six months of 2019.~~COVID-19 pandemic.

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

Mortgage Banking Activities, Net

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

The decrease in income from mortgage banking activities during the ~~three- and six-month~~nine-month periods was predominantly due to a decrease in loan acquisition ~~and origination~~ volumes at our residential mortgage banking ~~businesses during the second quarter of 2020,~~business, as well as lower margins, in both cases due to pandemic-related market disruptions. ~~While we began to see volumes grow later in the second quarter, in the near-term we expect volumes and margins to continue to be below levels we experienced pre-pandemic.~~

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

Investment Fair Value Changes, Net

Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and, prior to the second quarter of 2020, interest rate hedges associated with these investments. During the three months ended ~~June~~September 30, 2020, investment fair value changes ~~increased significantly, as~~reflected further increases in the fair value of our investment assets, ~~recovered nearly one-third of~~as spreads continued to tighten during the ~~unrealized losses recognized in the first quarter of 2020.~~third quarter. During the ~~six~~nine months ended ~~June~~September 30, 2020, the negative investment fair value changes reflected significant declines in the value of our investments in the first quarter of 2020 resulting from market dislocations caused by the pandemic. Additional detail on our investment fair value changes is included in the “Results of Operations by Segment” section that follows.

Other Income

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

Realized Gains, Net

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we realized gains of ~~$26~~$1 million and $30 million, respectively, primarily resulting from the sale of zero and $55 million of AFS securities, respectively, and for the nine-month period, a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020. During the three and ~~six~~nine months ended ~~June~~September 30, 2019, we realized gains of $3$5 million and ~~$14~~$18 million, respectively, primarily from the sale of ~~$25~~$15 million and ~~$67~~$82 million of AFS securities, respectively, and the call of a seasoned Sequoia securitization. Of note, all of the gains from extinguishment of debt were excluded from our diluted earnings per share for the ~~three~~nine months ended ~~June~~September 30, 2020, in accordance with GAAP. See Note 17 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on this calculation.

General and Administrative Expenses

The increase in general and administrative expenses for the three- and ~~six-month~~nine-month periods primarily resulted from $4 million and ~~$16~~$19 million of additional expenses, respectively, from the consolidation of 5 Arches and CoreVest operations during 2019 after their respective acquisitions.

Loan Acquisition Costs

The increase in loan acquisition costs for the ~~six-month~~three- and nine-month periods ~~was partially offset by~~primarily resulted from an increase in origination activity at our business purpose mortgage banking operations, and also increased as a $5 million decrease in our variable compensation expense, which was impacted by our year-to-date performance in 2020. Additionally, in April 2020, we implemented a workforce reduction that reduced headcount by approximately 35% and fixed compensation costs by approximately 25%.result of the acquisition of CoreVest during the fourth quarter of 2019.

Other Expenses

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

Provision for Income Taxes

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

Net Interest Income

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

Table 3 – Net Interest Income


		Three Months Ended June 30,																							Three Months Ended September 30,
		2020										2019											2020				2019
(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	$	8,537	$	771,003	4.4	%	$	10,015	$	898,054	4.5	%	Residential loans, held-for-sale	$	434	$	53,297	3.3	%	$	10,583	$	973,917	4.3	%
Residential loans - HFI at Redwood ⁽²⁾	Residential loans - HFI at Redwood ⁽²⁾	—		—		—	%	24,090		2,399,670		4.0	%	Residential loans - HFI at Redwood (2)	77		—		—	%	22,809		2,325,304		3.9	%
Residential loans - HFI at Legacy Sequoia ⁽²⁾	Residential loans - HFI at Legacy Sequoia ⁽²⁾	2,685		305,160		3.5	%	4,773		468,062		4.1	%	Residential loans - HFI at Legacy Sequoia (2)	1,795		285,077		2.5	%	4,293		436,963		3.9	%
Residential loans - HFI at Sequoia Choice ⁽²⁾	Residential loans - HFI at Sequoia Choice ⁽²⁾	22,565		1,826,727		4.9	%	26,814		2,218,425		4.8	%	Residential loans - HFI at Sequoia Choice (2)	20,919		1,910,771		4.4	%	27,555		2,320,989		4.7	%
Residential loans - HFI at Freddie Mac SLST ⁽²⁾	Residential loans - HFI at Freddie Mac SLST ⁽²⁾	21,187		2,115,716		4.0	%	11,596		1,221,346		3.8	%	Residential loans - HFI at Freddie Mac SLST (2)	21,696		2,153,447		4.0	%	11,830		1,278,036		3.7	%
Business purpose residential loans	Business purpose residential loans	20,441		1,181,644		6.9	%	3,996		207,280		7.7	%	Business purpose residential loans	19,456		1,149,171		6.8	%	5,446		296,037		7.4	%
Single-family rental loans - HFI at CAFL	Single-family rental loans - HFI at CAFL	32,978		2,379,689		5.5	%	—		—		—	%	Single-family rental loans - HFI at CAFL	36,181		2,663,541		5.4	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series	Multifamily loans - HFI at Freddie Mac K-Series	4,870		470,896		4.1	%	35,917		3,644,683		3.9	%	Multifamily loans - HFI at Freddie Mac K-Series	4,918		489,736		4.0	%	36,829		3,767,847		3.9	%
Trading securities	Trading securities	6,587		127,506		20.7	%	19,548		1,235,965		6.3	%	Trading securities	6,539		140,892		18.6	%	17,877		1,168,952		6.1	%
Available-for-sale securities	Available-for-sale securities	3,440		128,486		10.7	%	5,469		181,253		12.1	%	Available-for-sale securities	3,596		135,942		10.6	%	5,170		174,530		11.8	%
Other interest income	Other interest income	6,656		848,105		3.1	%	6,324		555,514		4.6	%	Other interest income	6,371		859,808		3.0	%	7,725		612,554		5.0	%
Total interest income	Total interest income	129,946		10,154,932		5.1	%	148,542		13,030,252		4.6	%	Total interest income	121,982		9,841,682		5.0	%	150,117		13,355,129		4.5	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(15,110)		1,295,973		(4.7)	%	(17,740)		1,856,466		(3.8)	%	Short-term debt facilities	(3,558)		313,190		(4.5)	%	(18,209)		1,974,174		(3.7)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(1,797)		231,312		(3.1)	%	(3,401)		238,669		(5.7)	%	Short-term debt - servicer advance financing	(1,587)		218,885		(2.9)	%	(2,891)		212,988		(5.4)	%
Short-term debt - convertible notes, net	Short-term debt - convertible notes, net	—		—		—	%	(3,134)		200,132		(6.3)	%	Short-term debt - convertible notes, net	—		—		—	%	(3,139)		200,445		(6.3)	%
ABS issued - Legacy Sequoia⁽²⁾	ABS issued - Legacy Sequoia⁽²⁾	(1,518)		300,773		(2.0)	%	(3,981)		459,305		(3.5)	%	ABS issued - Legacy Sequoia (2)	(1,058)		280,954		(1.5)	%	(3,452)		428,101		(3.2)	%
ABS issued - Sequoia Choice ⁽²⁾	ABS issued - Sequoia Choice ⁽²⁾	(19,117)		1,673,361		(4.6)	%	(23,134)		2,002,552		(4.6)	%	ABS issued - Sequoia Choice (2)	(17,828)		1,708,687		(4.2)	%	(23,576)		2,085,622		(4.5)	%
ABS issued - Freddie Mac SLST ⁽²⁾	ABS issued - Freddie Mac SLST ⁽²⁾	(15,845)		1,801,798		(3.5)	%	(8,557)		984,150		(3.5)	%	ABS issued - Freddie Mac SLST (2)	(16,819)		1,892,967		(3.6)	%	(8,709)		1,023,046		(3.4)	%
ABS issued - Freddie Mac K-Series	ABS issued - Freddie Mac K-Series	(4,378)		447,886		(3.9)	%	(34,441)		3,442,411		(4.0)	%	ABS issued - Freddie Mac K-Series	(4,426)		464,693		(3.8)	%	(35,328)		3,559,970		(4.0)	%
ABS issued - CAFL	ABS issued - CAFL	(24,446)		2,213,900		(4.4)	%	—		—		—	%	ABS issued - CAFL	(26,383)		2,509,828		(4.2)	%	—		—		—	%
Long-term debt - FHLBC	Long-term debt - FHLBC	(1,635)		381,465		(1.7)	%	(13,235)		1,999,999		(2.6)	%	Long-term debt - FHLBC	(1)		1,000		(0.4)	%	(12,311)		1,999,999		(2.5)	%
Long-term debt - other	Long-term debt - other	(18,820)		1,297,504		(5.8)	%	(8,597)		573,003		(6.0)	%	Long-term debt - other	(28,751)		1,743,531		(6.6)	%	(8,989)		602,434		(6.0)	%
Total interest expense	Total interest expense	(102,666)		9,643,972		(4.3)	%	(116,220)		11,756,687		(4.0)	%	Total interest expense	(100,411)		9,133,735		(4.4)	%	(116,604)		12,086,779		(3.9)	%
Net Interest Income	Net Interest Income	$	27,280					$	32,322					Net Interest Income	$	21,571					$	33,513

7781


		Six Months Ended June 30,																							Nine Months Ended September 30,
		2020										2019											2020				2019
(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	$	16,787	$	875,767	3.8	%	$	19,473	$	842,673	4.6	%	Residential loans, held-for-sale	$	17,220	$	599,609	3.8	%	$	30,056	$	886,902	4.5	%
Residential loans - HFI at Redwood ⁽²⁾	Residential loans - HFI at Redwood ⁽²⁾	20,925		993,623		4.2	%	48,281		2,390,215		4.0	%	Residential loans - HFI at Redwood (2)	21,003		659,998		4.2	%	71,089		2,368,340		4.0	%
Residential loans - HFI at Legacy Sequoia ⁽²⁾	Residential loans - HFI at Legacy Sequoia ⁽²⁾	5,878		348,885		3.4	%	9,623		481,633		4.0	%	Residential loans - HFI at Legacy Sequoia (2)	7,673		327,460		3.1	%	13,916		466,580		4.0	%
Residential loans - HFI at Sequoia Choice ⁽²⁾	Residential loans - HFI at Sequoia Choice ⁽²⁾	47,647		1,981,097		4.8	%	52,470		2,180,091		4.8	%	Residential loans - HFI at Sequoia Choice (2)	68,566		1,957,484		4.7	%	80,026		2,227,573		4.8	%
Residential loans - HFI at Freddie Mac SLST ⁽²⁾	Residential loans - HFI at Freddie Mac SLST ⁽²⁾	43,173		2,229,068		3.9	%	23,391		1,218,153		3.8	%	Residential loans - HFI at Freddie Mac SLST (2)	64,869		2,203,677		3.9	%	35,221		1,238,334		3.8	%
Business purpose residential loans	Business purpose residential loans	43,085		1,325,798		6.5	%	6,785		180,042		7.5	%	Business purpose residential loans	62,541		1,266,493		6.6	%	12,231		219,132		7.4	%
Single-family rental loans - HFI at CAFL	Single-family rental loans - HFI at CAFL	62,988		2,283,812		5.5	%	—		—		—	%	Single-family rental loans - HFI at CAFL	99,169		2,411,312		5.5	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series	Multifamily loans - HFI at Freddie Mac K-Series	45,042		2,328,527		3.9	%	57,305		2,897,936		4.0	%	Multifamily loans - HFI at Freddie Mac K-Series	49,960		1,711,123		3.9	%	94,134		3,191,093		3.9	%
Trading securities	Trading securities	20,249		434,852		9.3	%	38,261		1,198,531		6.4	%	Trading securities	26,789		336,151		10.6	%	56,138		1,188,563		6.3	%
Available-for-sale securities	Available-for-sale securities	8,087		141,279		11.4	%	11,206		197,684		11.3	%	Available-for-sale securities	11,682		139,487		11.2	%	16,376		189,881		11.5	%
Other interest income	Other interest income	14,166		715,416		4.0	%	12,788		567,669		4.5	%	Other interest income	20,537		763,898		3.6	%	20,513		582,795		4.7	%
Total interest income	Total interest income	328,027		13,658,124		4.8	%	279,583		12,154,627		4.6	%	Total interest income	450,009		12,376,692		4.8	%	429,700		12,559,193		4.6	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(36,600)		1,973,427		(3.7)	%	(33,214)		1,732,720		(3.8)	%	Short-term debt facilities	(40,158)		1,415,975		(3.8)	%	(51,424)		1,814,088		(3.8)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(3,374)		189,726		(3.6)	%	(7,014)		252,550		(5.6)	%	Short-term debt - servicer advance financing	(4,961)		199,517		(3.3)	%	(9,905)		239,218		(5.5)	%
Short-term debt - convertible notes, net	Short-term debt - convertible notes, net	—		—		—	%	(6,265)		199,978		(6.3)	%	Short-term debt - convertible notes, net	—		—		—	%	(9,403)		200,135		(6.3)	%
ABS issued - Legacy Sequoia⁽²⁾	ABS issued - Legacy Sequoia⁽²⁾	(4,040)		343,997		(2.3)	%	(8,097)		473,458		(3.4)	%	ABS issued - Legacy Sequoia (2)	(5,099)		322,829		(2.1)	%	(11,548)		458,173		(3.4)	%
ABS issued - Sequoia Choice ⁽²⁾	ABS issued - Sequoia Choice ⁽²⁾	(40,627)		1,782,702		(4.6)	%	(45,247)		1,984,241		(4.6)	%	ABS issued - Sequoia Choice (2)	(58,455)		1,757,851		(4.4)	%	(68,823)		2,018,406		(4.5)	%
ABS issued - Freddie Mac SLST ⁽²⁾	ABS issued - Freddie Mac SLST ⁽²⁾	(32,022)		1,845,307		(3.5)	%	(17,304)		984,455		(3.5)	%	ABS issued - Freddie Mac SLST (2)	(48,840)		1,861,309		(3.5)	%	(26,014)		997,460		(3.5)	%
ABS issued - Freddie Mac K-Series	ABS issued - Freddie Mac K-Series	(42,728)		2,195,469		(3.9)	%	(54,760)		2,733,499		(4.0)	%	ABS issued - Freddie Mac K-Series	(47,154)		1,614,333		(3.9)	%	(90,088)		3,012,017		(4.0)	%
ABS issued - CAFL	ABS issued - CAFL	(46,385)		2,115,019		(4.4)	%	—		—		—	%	ABS issued - CAFL	(72,768)		2,247,583		(4.3)	%	—		—		—	%
Long-term debt - FHLBC	Long-term debt - FHLBC	(10,410)		1,184,002		(1.8)	%	(26,418)		1,999,999		(2.6)	%	Long-term debt - FHLBC	(10,411)		786,790		(1.8)	%	(38,728)		1,999,999		(2.6)	%
Long-term debt - other	Long-term debt - other	(33,151)		1,150,774		(5.8)	%	(17,177)		572,750		(6.0)	%	Long-term debt - other	(61,902)		1,349,802		(6.1)	%	(26,167)		582,753		(6.0)	%
Total interest expense	Total interest expense	(249,337)		12,780,423		(3.9)	%	(215,496)		10,933,650		(3.9)	%	Total interest expense	(349,748)		11,555,989		(4.0)	%	(332,100)		11,322,249		(3.9)	%
Net Interest Income	Net Interest Income	$	78,690					$	64,087					Net Interest Income	$	100,261					$	97,600

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

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

7882

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

Table 4 – Net Interest Income by Segment


		Three Months Ended June 30,								Six Months Ended June 30,									Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2020		2019		Change		2020		2019		Change		(In Thousands)	2020		2019		Change		2020		2019		Change
Net Interest Income by Segment	Net Interest Income by Segment													Net Interest Income by Segment
Residential Lending	Residential Lending	$	6,484	$	18,290	$	(11,806)	$	25,713	$	37,453	$	(11,740)	Residential Lending	$	4,131	$	20,788	$	(16,657)	$	29,844	$	58,241	$	(28,397)
Business Purpose Lending	Business Purpose Lending	14,905		1,893		13,012		32,975		3,291		29,684		Business Purpose Lending	9,903		2,714		7,189		42,878		6,005		36,873

Third-Party Investments	Third-Party Investments	8,942		11,344		(2,402)		22,381		21,810		571		Third-Party Investments	10,042		9,168		874		32,423		30,978		1,445
Corporate/Other	Corporate/Other	(3,051)		795		(3,846)		(2,379)		1,533		(3,912)		Corporate/Other	(2,505)		843		(3,348)		(4,884)		2,376		(7,260)
Net Interest Income	Net Interest Income	$	27,280	$	32,322	$	(5,042)	$	78,690	$	64,087	$	14,603	Net Interest Income	$	21,571	$	33,513	$	(11,942)	$	100,261	$	97,600	$	2,661

The Corporate/Other line item in the table above includes net interest income from consolidated Legacy Sequoia entities, and for the three and nine months ended ~~June~~September 30, 2020, also includes $4$3 million and $8 million, respectively, of interest expense on our convertible ~~debt.~~debt and trust-preferred securities. While our convertible debt and trust-preferred interest expense is generally allocated to our segments, given the large balance of undeployed capital (cash) held at a corporate level during the second ~~quarter~~and third quarters of 2020, a portion of the convertible debt expense was allocated against this capital.

Results of Operations by Segment

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

Table 5 – 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)	2020		2019		Change		2020		2019		Change		(In Thousands)	2020		2019		Change		2020		2019		Change
Segment Contribution from:	Segment Contribution from:													Segment Contribution from:
Residential Lending	Residential Lending	$	33,447	$	23,045	$	10,402	$	(166,043)	$	49,997	$	(216,040)	Residential Lending	$	7,386	$	10,374	$	(2,988)	$	(158,657)	$	60,371	$	(219,028)
Business Purpose Lending	Business Purpose Lending	46,277		(915)		47,192		(182,156)		(1,075)		(181,081)		Business Purpose Lending	51,550		(634)		52,184		(130,606)		(1,709)		(128,897)

Third-Party Investments	Third-Party Investments	77,013		21,247		55,766		(427,398)		58,451		(485,849)		Third-Party Investments	97,758		37,142		60,616		(329,640)		95,593		(425,233)
Corporate/Other	Corporate/Other	8,707		(12,111)		20,818		(2,357)		(21,643)		19,286		Corporate/Other	(14,882)		(12,572)		(2,310)		(17,239)		(34,215)		16,976
Net Income (Loss)	Net Income (Loss)	$	165,444	$	31,266	$	134,178	$	(777,954)	$	85,730	$	(863,684)	Net Income (Loss)	$	141,812	$	34,310	$	107,502	$	(636,142)	$	120,040	$	(756,182)

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

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

7983

Residential Lending Segment

Overview

Our Residential Lending segment generated $7 million of net income during the third quarter of 2020, driven primarily by $12 million of mortgage banking income and $6 million of net interest income from investments. Residential mortgage banking activities improved significantly during the third quarter of 2020, as loan purchase commitments increased to $1.20 billion and gross margins recovered to pre-pandemic levels.

Our Residential Lending segment generated $33 million of net income during the second quarter of 2020, driven primarily by $35 million of positive investment fair value changes. Mortgage banking income was negative for the second quarter of 2020 as we incurred incremental costs associated with the sale of our remaining loan inventory from the end of the first quarter and loan lock volumes were substantially reduced. During the second quarter, we resumed locking loans through our conduit operations, and purchased $56 million of loans during the quarter.

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

While our loan acquisition volumes began to ramp back up later in the second quarter, in the near-term we expect volumes and profitability at our residential mortgage banking businesses to continue to be impacted by the pandemic and remain below pre-pandemic levels. We are also exposed to the potential impact of pandemic-related payment delinquencies and forbearances with respect to loans securitized in Sequoia transactions, and loans we have sold where we maintain certain repurchase obligations tied to near-term delinquencies.

Investment Portfolio

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

Table 6 – Residential Lending Investments


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Residential loans at Redwood ⁽¹⁾	Residential loans at Redwood ⁽¹⁾	$	—	$	2,111,897	Residential loans at Redwood (1)	$	—	$	2,111,897
Residential securities at Redwood	Residential securities at Redwood	142,713		229,074		Residential securities at Redwood	146,608		229,074
Residential securities at consolidated Sequoia Choice entities ⁽²⁾	Residential securities at consolidated Sequoia Choice entities ⁽²⁾	202,611		254,265		Residential securities at consolidated Sequoia Choice entities (2)	209,797		254,265
Other investments	Other investments	19,661		42,224		Other investments	14,878		42,224
Total Segment Investments	Total Segment Investments	$	364,985	$	2,637,460	Total Segment Investments	$	371,283	$	2,637,460

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

(2)Represents our retained economic investment in the consolidated Sequoia Choice securitization VIEs. For GAAP purposes, we consolidated ~~$2.06~~$1.84 billion of loans and ~~$1.86~~$1.63 billion of ABS issued associated with these investments at ~~June~~September 30, 2020.

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

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

During the second quarter of 2020, we sold $29 million of securities from our residential lending investment portfolio and retained $20 million of investment securities from a $271 million Sequoia securitization we completed during the quarter. During the first quarter of 2020, we sold $83 million of securities from our residential lending investment portfolio.

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

8084

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

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


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2020		June 30, 2020		(In Thousands)	September 30, 2020		September 30, 2020
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net					Investment Fair Value Changes, Net
Changes in fair value of:	Changes in fair value of:					Changes in fair value of:
Residential loans held-for-investment, at Redwood	Residential loans held-for-investment, at Redwood	$	104	$	(93,532)	Residential loans held-for-investment, at Redwood	$	218	$	(93,314)
Trading securities	Trading securities	(2,229)		(45,488)		Trading securities	(5,145)		(50,633)
Net investments in Sequoia Choice entities ⁽¹⁾	Net investments in Sequoia Choice entities ⁽¹⁾	39,753		(29,916)		Net investments in Sequoia Choice entities (1)	7,851		(22,065)
Risk-sharing and other investments	Risk-sharing and other investments	(2,543)		(3,078)		Risk-sharing and other investments	(272)		(3,350)
Risk management derivatives, net	Risk management derivatives, net	—		10,735		Risk management derivatives, net	—		10,735
Impairments on AFS securities	Impairments on AFS securities	—		(271)		Impairments on AFS securities	(209)		(480)
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net	$	35,085	$	(161,550)	Investment Fair Value Changes, Net	$	2,443	$	(159,107)

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

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

Mortgage Banking

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

Table 8 – 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, 2020		June 30, 2020		(In Thousands)	September 30, 2020		September 30, 2020
Balance at beginning of period	Balance at beginning of period	$	894,154	$	536,385	Balance at beginning of period	$	20,233	$	536,385
Acquisitions	Acquisitions	55,744		2,751,594		Acquisitions	176,106		2,927,700
Sales	Sales	(710,920)		(3,440,081)		Sales	(88,634)		(3,528,715)
Transfers between portfolios ⁽¹⁾	Transfers between portfolios ⁽¹⁾	(158,918)		263,172		Transfers between portfolios (1)	—		263,172
Principal repayments	Principal repayments	(59,553)		(77,990)		Principal repayments	(2,317)		(80,307)
Changes in fair value, net	Changes in fair value, net	(274)		(12,847)		Changes in fair value, net	(260)		(13,107)
Balance at End of Period	Balance at End of Period	$	20,233	$	20,233	Balance at End of Period	$	105,128	$	105,128

(1)Represents the net transfers of loans from held-for-investment to held-for-sale within our Residential Lending investment portfolio.

The following table provides the fair value changes of our residential loan purchase and forward sale commitments during the three and nine months ended September 30, 2020.

Table 8a – Residential Loan Purchase and Forward Sale Commitments and Associated Gains


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2020			September 30, 2020
Loan purchase commitments entered into	$	2,117,808		$	5,475,334
Market valuation gains, net	$	13,067		$	35,123

Income from mortgage banking activities is comprised of mark-to-market adjustments on loans from the time they are purchased to when they are sold, mark-to-market adjustments on new and outstanding loan purchase commitments, gains/losses from associated hedges, and other miscellaneous income/expenses (see Note 19 of our Notes to Consolidated Financial Statements in Part I, Item I of this Quarterly Report on Form 10-Q).

During the three months ended ~~June~~September 30, 2020, our residential mortgage loan conduit entered into loan purchase commitments of $2.12 billion, purchased $176 million of prime residential jumbo loans and sold $89 million of loans to third parties. At September 30, 2020, we had identified $1.79 billion of loans for purchase (gross loan locks outstanding, unadjusted for fallout) and had outstanding forward sale agreements for $525 million of loans. This activity resulted in income from mortgage banking activities of $12 million for the third quarter of 2020.

During the second quarter of 2020, our residential mortgage loan conduit entered into loan purchase commitments of $112 million, purchased $56 million of ~~predominately~~ prime residential jumbo loans, and sold $711 million of ~~jumbo~~ loans to third parties. ~~During~~Additionally, during the second quarter of 2020, we transferred $271 million of ~~jumbo~~ loans to a Sequoia Choice securitization, of which $163 million were transferred from our inventory of residential loans held-for-sale. Additionally, at June 30, 2020, we had identified $57 million of loans for purchase, nearly all of which are scheduled to be delivered into forward sale agreements.securitization. This activity, along with $2 million of repurchase reserve accrual expense and $5 million of expenses associated with resolving residential loan seller demands, resulted in a loss from mortgage banking activities of $8 million for the second quarter of 2020.

During the first quarter of 2020, our residential mortgage loan conduit entered into loan purchase commitments of $3.25 billion, purchased $2.70 billion of ~~predominately~~ prime residential jumbo loans, ~~securitized~~transferred $1.62 billion of ~~jumbo~~loans to a Sequoia Select ~~loans~~securitization that were accounted for as sales, and sold $1.11 billion of jumbo loans to third parties. This activity resulted in a loss from mortgage banking activities of $23 million for the first quarter of 2020.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. ~~During the second quarter of~~At September 30, 2020, we ~~completed a non-marginable~~had residential warehouse ~~facility that we are utilizing to finance existing loan inventory, under which we had $14~~facilities outstanding with four different counterparties, with $600 million of ~~borrowings outstanding at June 30, 2020. Going forward, we expect~~total capacity and $518 million of available capacity. These included non-marginable (i.e., not subject to ~~finance our residential mortgage banking loan inventory substantially~~margin calls based on the market value of the underlying collateral) facilities with ~~non-marginable debt.~~$200 million of total capacity and marginable facilities with $400 million of total capacity.

Business Purpose Lending Segment

Overview

Our Business Purpose Lending segment generated $52 million of net income during the third quarter of 2020, driven primarily by $48 million of mortgage banking income and $17 million of positive investment fair value changes. Business purpose mortgage banking activities improved from the second quarter of 2020, as spreads tightened significantly on securitization execution, resulting in improved valuations on SFR loans.

Our Business Purpose Lending segment generated $46 million of net income during the second quarter of 2020, driven primarily by $40 million of positive investment fair value changes and $14 million of net interest income from investments. Business purpose mortgage banking activities improved from the first quarter of 2020, as origination volumes began to pick up in late May and securitization pricing in the market improved into quarter end.

During the first quarter of 2020, our Business Purpose Lending segment incurred a $228 million net loss, driven primarily by $142 million of negative investment fair value changes and a $12 million net loss from mortgage banking operations, exclusive of an $89 million charge related to the full impairment of this segment's goodwill. The declines in investment fair values were triggered by the pandemic. Mortgage banking income decreased due to decreased profitability on a securitization that settled later in the first quarter and from lower marks on loan inventory held at quarter-end, resulting from the pandemic-related market dislocation.

While our loan origination volumes began to ramp back up later in the second quarter, in the near-term we expect loan origination volumes and profitability at our business purpose mortgage banking businesses to continue to be impacted by the pandemic and remain below pre-pandemic levels.

Investment Portfolio

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

Table 9 – Business Purpose Lending Investments


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Single-family rental loans at Redwood⁽¹⁾	Single-family rental loans at Redwood⁽¹⁾	$	—	$	237,620	Single-family rental loans at Redwood (1)	$	—	$	237,620
Residential bridge loans at Redwood	Residential bridge loans at Redwood	787,367		745,006		Residential bridge loans at Redwood	700,860		745,006
Single-family rental securities at consolidated CAFL entities ⁽²⁾	Single-family rental securities at consolidated CAFL entities ⁽²⁾	203,230		191,301		Single-family rental securities at consolidated CAFL entities (2)	229,315		191,301
Other investments	Other investments	26,202		21,002		Other investments	25,713		21,002
Total Segment Investments	Total Segment Investments	$	1,016,799	$	1,194,929	Total Segment Investments	$	955,888	$	1,194,929

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

(2)Represents our economic investment in securities issued by consolidated CAFL securitization VIEs. For GAAP purposes, we consolidated ~~$2.62~~$2.97 billion of loans and ~~$2.42~~$2.74 billion of ABS issued associated with these investments at ~~June~~September 30, 2020.

During the third quarter of 2020, we funded $66 million of business purpose bridge loans and received principal payments of $155 million. In addition, we retained $16 million of securities from a $323 million (principal balance) single-family rental loan securitization we completed during the third quarter.

During the second quarter of 2020, we funded $54 million of business purpose bridge loans and received principal payments of $86 million of such loans. In addition, we retained $20 million of securities from a $221 million single-family rental loan securitization we completed during the second quarter.

During the first quarter of 2020, we funded $206 million of business purpose bridge loans and received principal payments of $114 million of such loans. In addition, we retained $42 million of securities from a single-family rental loan securitization we completed during the first quarter. During the first quarter of 2020, we reclassified our single-family rental loans financed at the FHLBC to held-for-sale and consider them as part of our mortgage banking loan inventory as we plan to securitize these loans.

See the "Investments" sections that follow for additional details on investments at this segment and their associated borrowings.

8287

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

Table 10 – Investment Fair Value Changes, Net from Business Purpose Lending


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2020		June 30, 2020		(In Thousands)	September 30, 2020		September 30, 2020
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net					Investment Fair Value Changes, Net
Changes in fair value of:	Changes in fair value of:					Changes in fair value of:
Single-family rental loans held-for-investment	Single-family rental loans held-for-investment	$	2,222	$	(20,806)	Single-family rental loans held-for-investment	$	—	$	(20,806)
Residential bridge loans held-for-investment	Residential bridge loans held-for-investment	21,774		(16,828)		Residential bridge loans held-for-investment	6,812		(10,016)
REO	REO	(265)		(763)		REO	407		(356)
Net investments in CAFL entities ⁽¹⁾	Net investments in CAFL entities ⁽¹⁾	17,125		(50,721)		Net investments in CAFL entities (1)	9,673		(41,048)
Other	Other	(455)		(1,011)		Other	—		(1,011)
Risk management derivatives, net	Risk management derivatives, net	—		(11,600)		Risk management derivatives, net	—		(11,600)
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net	$	40,401	$	(101,729)	Investment Fair Value Changes, Net	$	16,892	$	(84,837)

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

~~During~~Spreads generally continued to tighten during the ~~second~~third quarter of 2020, ~~we saw liquidity begin to return to the markets for business purpose loans and securities,~~ which ~~caused spreads to tighten on most of our investments, and~~ resulted in positive fair value changes for ~~the quarter,~~many of our investments, recovering a further portion of the negative fair value changes incurred during the first quarter of 2020 due to the pandemic. While spreads generally tightened on most of our CAFL securities investments, certain of our subordinate securities experienced negative fair value changes due to increased delinquencies and loss expectations. Additionally, while spreads generally tightened on most of our residential bridge loans, we also experienced an increase in non-performing residential bridge loans (see Investments section that follows for additional information on our residential bridge loans and associated delinquencies).

Mortgage Banking

The following table provides the business purpose residential loans origination activity at Redwood during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Table 11 – Business Purpose Residential Loans — Origination Activity


		Three Months Ended June 30, 2020										Six Months Ended June 30, 2020											Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
(In Thousands)	(In Thousands)	Single-Family Rental		Residential Bridge⁽¹⁾		Total		Single-Family Rental		Residential Bridge⁽¹⁾		Total		(In Thousands)	Single-Family Rental		Residential Bridge(1)		Total		Single-Family Rental		Residential Bridge(1)		Total
Fair value at beginning of period	Fair value at beginning of period	$	163,290	$	—	$	163,290	$	331,565	$	—	$	331,565	Fair value at beginning of period	$	379,795	$	—	$	379,795	$	331,565	$	—	$	331,565
Originations	Originations	176,063		58,468		234,531		436,192		285,836		722,028		Originations	195,744		65,517		261,261		631,936		351,353		983,289

Sales	Sales	—		(1,558)		(1,558)		(26,148)		(22,293)		(48,441)		Sales	(7,695)		(1,567)		(9,262)		(33,843)		(23,860)		(57,703)
Transfers between portfolios ⁽²⁾	Transfers between portfolios ⁽²⁾	32,835		(53,633)		(20,798)		(383,614)		(260,102)		(643,716)		Transfers between portfolios (2)	(322,829)		(63,979)		(386,808)		(706,443)		(324,081)		(1,030,524)
Principal repayments	Principal repayments	(915)		—		(915)		(2,270)		—		(2,270)		Principal repayments	(2,577)		—		(2,577)		(4,847)		—		(4,847)
Changes in fair value, net	Changes in fair value, net	8,522		(3,277)		5,245		24,070		(3,441)		20,629		Changes in fair value, net	43,111		29		43,140		67,181		(3,412)		63,769
Fair Value at End of Period	Fair Value at End of Period	$	379,795	$	—	$	379,795	$	379,795	$	—	$	379,795	Fair Value at End of Period	$	285,549	$	—	$	285,549	$	285,549	$	—	$	285,549

(1)Our residential bridge loans are generally originated at our TRS and the majority are transferred to our REIT and a smaller portion sold. Origination fees and any mark-to-market changes on these loans prior to transfer are recognized as mortgage banking income. The loans held at our REIT are classified as held-for-investment, with subsequent fair value changes recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our residential bridge loans held-for-investment, see the Investments section that follows.

(2)For single-family rental loans, amounts represent transfers of loans from held-for-sale to held-for-investment, including when loans are securitized (and consolidated for GAAP purposes) or transferred from our TRS to our REIT with the intent to hold for long-term investment. For residential bridge loans, represents the transfer of loans from our TRS to REIT as described in preceding footnote.

8388

During the three months ended September 30, 2020, we funded $196 million of single-family rental loans and sold $2 million of such loans to a third party. All of our outstanding SFR loans are held as inventory in our mortgage banking business and classified as held-for-sale. During the three months ended September 30, 2020, we funded $66 million of residential bridge loans, sold $2 million of loans to a third party and transferred $64 million of loans to our BPL investment portfolio. Additionally, we completed a single-family rental loan securitization, receiving gross proceeds of $323 million, backed by a combination of loans held in inventory at June 30, 2020 and newly-originated loans during the third quarter.

During the second quarter of 2020, we funded $176 million of single-family rental loans, all of which were retained in our mortgage banking portfolio and classified as held-for-sale. During the ~~three months ended June 30,~~second quarter of 2020, we funded $58 million of residential bridge loans, of which $2 million were sold to a third party and the remaining loans were transferred to our BPL investment portfolio. Additionally, we completed a $221 million single-family rental loan securitization, consisting of loans we held at the end of the first quarter of 2020.

During the ~~three months ended March 31,~~first quarter of 2020, we funded $260 million of single-family rental loans and $227 million of residential bridge loans, of which $21 million of bridge loans were sold to a third party and the remaining bridge loans were transferred to our BPL investment portfolio. Additionally, during the first quarter, we completed a $378 million single-family rental loan securitization in early March.

We utilize a combination of capital and loan warehouse facilities to manage our inventory of single-family rental loans that we hold for sale. ~~During the second quarter,~~At September 30, 2020, we ~~completed a non-marginable, recourse facility that will provide financing on new bridge loans and our single-family rental loan production. Going forward, we expect to finance our~~had business purpose ~~mortgage banking loan inventory substantially~~warehouse facilities outstanding with four different counterparties, with $1.10 billion of total capacity and $853 million of available capacity. All of these facilities are non-marginable ~~debt.~~(i.e., not subject to margin calls based on the market value of the underlying collateral).

Third-Party Investments Segment

Overview

As a result of asset sales during the first half of 2020 that were driven by the impact of the pandemic, the composition of our portfolio evolved ~~during~~and in the ~~last several months and~~second quarter of 2020 we combined our previously reported Multifamily Investments segment with our Third-Party Residential Investments segment into a new segment called Third-Party Investments.

Our Third-Party Investments ~~segment~~segment: generated $98 million of net income during the third quarter of 2020, driven primarily by $88 million of positive investment fair value changes and $10 million of net interest income; generated $77 million of net income during the second quarter of 2020, driven primarily by $77 million of positive investment fair value changes and $9 million of net interest ~~income. During the first quarter of 2020, our Third-Party Investments segment~~income; and incurred a net loss of $504 million during the first quarter of 2020, driven primarily by $532 million of negative investment fair value ~~changes. The declines in investment fair values~~changes that were triggered by the pandemic.

Investment Portfolio

The following table presents details of the investments in our Third-Party Investments segment at ~~June~~September 30, 2020 and December 31, 2019.

Table 12 – Third-Party Investments


(In Thousands)	(In Thousands)	June 30, 2020		December 31, 2019		(In Thousands)	September 30, 2020		December 31, 2019
Residential securities at Redwood	Residential securities at Redwood	$	146,562	$	466,672	Residential securities at Redwood	$	149,192	$	466,672
Residential securities at consolidated Freddie Mac SLST entities ⁽¹⁾	Residential securities at consolidated Freddie Mac SLST entities ⁽¹⁾	334,043		448,893		Residential securities at consolidated Freddie Mac SLST entities (1)	416,256		448,893
Multifamily securities at Redwood	Multifamily securities at Redwood	27,161		404,128		Multifamily securities at Redwood	55,535		404,128
Multifamily securities at consolidated Freddie Mac K-Series entities ⁽²⁾	Multifamily securities at consolidated Freddie Mac K-Series entities ⁽²⁾	24,384		252,285		Multifamily securities at consolidated Freddie Mac K-Series entities (2)	26,550		252,285
Other investments	Other investments	383,246		294,904		Other investments	344,037		294,904
Total Segment Investments	Total Segment Investments	$	915,396	$	1,866,882	Total Segment Investments	$	991,570	$	1,866,882

(1)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated ~~$2.15~~$2.26 billion of loans and ~~$1.81~~$1.84 billion of ABS issued associated with these investments at ~~June~~September 30, 2020.

(2)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated ~~$489~~$491 million of loans and $465 million of ABS issued associated with these investments at ~~June~~September 30, 2020.

During the ~~second~~third quarter, we ~~sold $53~~retained $28 million of ~~third-party investments, including $35 million of recently~~multifamily securities from a securitization issued ~~subordinate securities and $19~~through our multifamily joint venture, purchased $15 million of CRT ~~securities,~~ and ~~deployed $10~~third-party investments, and sold $13 million ~~into~~of CRT ~~securities.~~and third-party investments.

See the "Investments" section that follows for additional details on these investments.

The following table presents the components of investment fair value changes for our Third-Party Investments segment by investment type for the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Table 13 – Investment Fair Value Changes, Net from Third-Party Investments


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2020		June 30, 2020		(In Thousands)	September 30, 2020		September 30, 2020
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net					Investment Fair Value Changes, Net
Changes in fair value of:	Changes in fair value of:					Changes in fair value of:
Trading securities	Trading securities	$	44,475	$	(175,591)	Trading securities	$	1,544	$	(174,047)
Servicer advance investments	Servicer advance investments	(136)		(6,198)		Servicer advance investments	26		(6,172)
Excess MSRs	Excess MSRs	2,971		(6,523)		Excess MSRs	(1,127)		(7,650)
Shared home appreciation options	Shared home appreciation options	884		(6,670)		Shared home appreciation options	2,384		(4,286)
Net investments in Freddie Mac SLST entities ⁽¹⁾	Net investments in Freddie Mac SLST entities ⁽¹⁾	26,867		(115,295)		Net investments in Freddie Mac SLST entities (1)	82,214		(33,081)
Net investments in Freddie Mac K-Series entities⁽¹⁾	Net investments in Freddie Mac K-Series entities⁽¹⁾	1,599		(84,910)		Net investments in Freddie Mac K-Series entities (1)	2,166		(82,744)
Risk management derivatives, net	Risk management derivatives, net	—		(58,158)		Risk management derivatives, net	—		(58,158)
Other	Other	258		(41)		Other	30		(11)
Impairments on AFS securities	Impairments on AFS securities	54		(1,200)		Impairments on AFS securities	653		(547)
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net	$	76,972	$	(454,586)	Investment Fair Value Changes, Net	$	87,890	$	(366,696)

~~During~~Spreads generally continued to tighten during the ~~second~~third quarter of 2020, ~~we saw liquidity begin to return to the markets for residential and multifamily securities,~~ which ~~caused spreads to tighten on most of our investments, and~~ resulted in positive fair value changes for ~~the quarter,~~many of our investments, particularly our investments in consolidated Freddie Mac SLST securitizations, recovering a further portion of the negative fair value changes incurred during the first quarter of 2020 due to the pandemic. While spreads generally tightened on most of our third-party investments, certain of our subordinate securities experienced negative fair value changes due to increased delinquencies and loss expectations. Additionally, during the third quarter of 2020, most of our investment securities experienced increased prepayments, which generally benefited our subordinate securities, but negatively impacted our interest-only trading securities and excess MSR investments, and caused a net negative fair value change for excess MSRs.

Investments

This section presents additional details on our investment assets and their activity during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Residential Loans at Residential Lending Investment Portfolio

The following table provides the activity of residential loans at our Residential Lending investment portfolio during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Table 14 – Residential Loans at Residential Lending Investment Portfolio - Activity

Three Months Ended Six Months Ended
(In Thousands) June 30, 2020 June 30, 2020
Fair value at beginning of period $ 1,436,515 $ 2,111,897
Sales (1,254,935) (1,254,935)
Transfers between portfolios ⁽¹⁾
(111,522) (533,612)
Principal repayments (70,162) (229,818)
Changes in fair value, net 104 (93,532)
Fair Value at End of Period $ — $ —


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2020		September 30, 2020
Fair value at beginning of period	$	—	$	2,111,897

Sales	—		(1,254,935)
Transfers between portfolios (1)	—		(533,612)
Principal repayments	—		(229,818)
Changes in fair value, net	—		(93,532)
Fair Value at End of Period	$	—	$	—

(1)Represents the net transfers of loans into or out of our investment portfolio and their reclassification between held-for-sale and held-for-investment.

During the second quarter of 2020, we completed the sale of nearly all of our residential loans previously held for investment and financed at our FHLBC facility, and repaid all but $1 million of borrowings under this facility. The remaining loans were reclassified as held-for-sale and included as part of our residential mortgage banking loan inventory. We do not expect to increase borrowings under our FHLBC facility above the existing $1 million of borrowings outstanding.

Single-Family Rental Loans at Business Purpose Lending Investment Portfolio

The following table provides the activity of single-family rental loans at our Business Purpose Lending investment portfolio during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Table 15 –Single-Family Rental Loans at Business Purpose Lending Investment Portfolio - Activity

Three Months Ended Six Months Ended
(In Thousands) June 30, 2020 June 30, 2020
Fair value at beginning of period $ 252,043 $ 237,620
Transfers between portfolios (253,757) (215,417)
Principal repayments (508) (1,397)
Changes in fair value, net 2,222 (20,806)
Fair Value at End of Period $ — $ —


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2020		September 30, 2020
Fair value at beginning of period	$	—	$	237,620
Transfers between portfolios	—		(215,417)
Principal repayments	—		(1,397)
Changes in fair value, net	—		(20,806)
Fair Value at End of Period	$	—	$	—

During the second quarter, we transferred all of our single-family rental loans previously financed at the FHLBC and held for investment to newly established non-marginable warehouse facilities, repaid our associated FHLBC debt, and now classify these loans as held-for-sale as part of our business purpose mortgage banking loan inventory.

Residential Bridge Loans Held-for-Investment at Redwood Portfolio

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

Table 16 – Residential Bridge Loans Held-for-Investment at Redwood - Activity


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2020		June 30, 2020		(In Thousands)	September 30, 2020		September 30, 2020
Fair value at beginning of period	Fair value at beginning of period	$	799,744	$	745,006	Fair value at beginning of period	$	787,367	$	745,006

Transfers between portfolios ⁽¹⁾	Transfers between portfolios ⁽¹⁾	53,633		259,966		Transfers between portfolios (1)	63,979		323,945
Transfers to REO	Transfers to REO	(1,095)		(1,907)		Transfers to REO	(2,691)		(4,598)
Principal repayments	Principal repayments	(85,699)		(199,595)		Principal repayments	(154,572)		(354,167)
Changes in fair value, net	Changes in fair value, net	20,784		(16,103)		Changes in fair value, net	6,777		(9,326)
Fair Value at End of Period	Fair Value at End of Period	$	787,367	$	787,367	Fair Value at End of Period	$	700,860	$	700,860

(1)All of our residential bridge loans are originated at our TRS then transferred to our REIT. Origination fees and any mark-to-market changes on these loans prior to transfer are recognized as mortgage banking income. Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes recorded through Investment fair value changes, net on our consolidated statements of income (loss).

Our ~~$787~~$701 million of residential bridge loans held-for-investment at ~~June~~September 30, 2020 were comprised of first-lien, fixed-rate, interest-only loans with a weighted average coupon of ~~7.96%~~8.02% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was ~~720~~730 and the weighted average LTV ratio of these loans was ~~69%~~67%. At ~~June~~September 30, 2020, of the ~~2,847~~2,262 loans in this portfolio, 1324 of these loans with an aggregate fair value of ~~$30~~$33 million and an unpaid principal balance of ~~$35~~$38 million were greater than 90 days delinquent, of which ~~nine~~24 loans with an aggregate fair value of ~~$28~~$34 million and an unpaid principal balance of ~~$32~~$40 million were in foreclosure.

During the second ~~quarter, we~~ ~~entered into a non-recourse facility to finance $442 million of our bridge loan investments, with $355 million of borrowings. Subsequent to the end of the second quarter, in July~~and third quarters of 2020, we entered into ~~an additional~~new non-recourse ~~facility for our~~facilities to finance bridge loan investments financing $253 million of bridge loans with $189 million of non-recourse debt. Upon the completion of this transaction in July, over 85% of our bridge loan investments were financed with non-recourse debt. Additionally, during the second quarter of 2020,and we entered into a new non-marginable ~~warehouse facility we~~(i.e., not subject to margin calls based on the market value of the underlying collateral) recourse facilities that will be used to finance ~~a portion of our~~business purpose bridge ~~loans, and expect to amend our remaining facility to be non-marginable, such that all new bridge loans will be financed under non-marginable facilities in the future.~~ loans. While our new non-marginable and non-recourse financing facilities have reduced our contingent liquidity risks, they generally have higher interest costs, which will marginally impact our net interest income in coming quarters.

Real Estate Securities Portfolio

The following table sets forth our real estate securities activity by collateral type for the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Table 17 – Real Estate Securities Activity by Collateral Type


Three Months Ended June 30, 2020		Residential											Multifamily				Total
Three Months Ended September 30, 2020												Three Months Ended September 30, 2020		Residential									Multifamily				Total
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine				Total	(In Thousands)			Senior				Mezzanine				Subordinate				Mezzanine			Total
Beginning fair value	Beginning fair value	$	39,559	$	53,781	$	173,635	$	26,487	$	293,462			$	32,860			$	3,514		$	252,901			$	27,161			$	316,436

Acquisitions	Acquisitions											Acquisitions

Third-party securities	Third-party securities	—		—		10,250		—		10,250		Third-party securities		2,598				2,000			11,000				28,314			43,912
Sales	Sales											Sales
Sequoia securities		—		(27,429)		(1,412)		—		(28,841)

Third-party securities	Third-party securities	—		(27,122)		(26,184)		—		(53,306)		Third-party securities		—				—			(12,929)				—			(12,929)
Gains on sales and calls, net		—		3		780		—		783

Effect of principal payments ⁽¹⁾	Effect of principal payments ⁽¹⁾	—		(200)		(1,829)		—		(2,029)		Effect of principal payments (1)		—				(17)			(889)				(546)			(1,452)
Change in fair value, net	Change in fair value, net	(6,699)		4,481		97,661		674		96,117		Change in fair value, net		(7,367)				170			11,959				606			5,368
Ending Fair Value ⁽²⁾	Ending Fair Value ⁽²⁾	$	32,860	$	3,514	$	252,901	$	27,161	$	316,436	Ending Fair Value (2)		$	28,091			$	5,667		$	262,042			$	55,535		$	351,335

Six Months Ended June 30, 2020 Residential Multifamily Total
(In Thousands) Senior Mezzanine Subordinate Mezzanine
Beginning fair value $ 175,859 $ 151,797 $ 368,090 $ 404,128 $ 1,099,874
Acquisitions
Sequoia securities 43,363 — 3,198 — 46,561
Third-party securities 16,627 — 14,750 31,132 62,509
Sales
Sequoia securities (33,375) (31,334) (6,394) — (71,103)
Third-party securities (115,354) (93,728) (54,062) (287,483) (550,627)
Gains on sales and calls, net 3,357 400 2,482 (1,604) 4,635
Effect of principal payments ⁽¹⁾
(4,464) (974) (4,100) (4,015) (13,553)
Change in fair value, net (53,153) (22,647) (71,063) (114,997) (261,860)
Ending Fair Value ⁽²⁾
$ 32,860 $ 3,514 $ 252,901 $ 27,161 $ 316,436


Nine Months Ended September 30, 2020	Residential						Multifamily		Total
(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine
Beginning fair value	$	175,859	$	151,797	$	368,090	$	404,128	$	1,099,874

Acquisitions
Sequoia securities	43,363		—		3,198		—		46,561
Third-party securities	19,225		2,000		25,750		59,446		106,421
Sales
Sequoia securities	(33,375)		(31,334)		(6,394)		—		(71,103)
Third-party securities	(115,354)		(93,728)		(66,991)		(287,483)		(563,556)
Gains on sales and calls, net	3,357		400		2,482		(1,604)		4,635
Effect of principal payments (1)	(4,464)		(991)		(4,989)		(4,561)		(15,005)
Change in fair value, net	(60,520)		(22,477)		(59,104)		(114,391)		(256,492)
Ending Fair Value (2)	$	28,091	$	5,667	$	262,042	$	55,535	$	351,335

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

(2)At ~~June~~September 30, 2020, excludes ~~$203~~$210 million and ~~$203~~$229 million of securities retained from our consolidated Sequoia Choice and CAFL securitizations, respectively, as well as ~~$334~~$416 million and ~~$24~~$27 million of securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-Series securitizations, respectively.

During the three months ended September 30, 2020, we sold $13 million of securities and during the three months ended June 30, 2020, we sold $82 million of securities, ~~and during~~in our normal course of business. During the three months ended March 31, 2020, we sold $540 million of securities to reposition our portfolio and generate liquidity in response to the pandemic. At ~~June~~September 30, 2020, our securities consisted of fixed-rate assets ~~(89%~~(81%), adjustable-rate assets ~~(8%~~(16%), ~~and~~ hybrid assets that reset within the next year ~~(3%~~(2%), and hybrid assets that reset between 12 and 36 months (1%).

We directly finance our holdings of real estate securities with a combination of capital and collateralized debt in the form of repurchase (or “repo”) financing. The following table presents the fair value of our residential securities that were financed with repurchase debt at ~~June~~September 30, 2020.

Table 18 – Real Estate Securities Financed with Repurchase Debt


June 30, 2020		Real Estate Securities ⁽¹⁾			Margin Posted				Repurchase Debt				Allocated Capital				Weighted Average Price⁽²⁾		Financing Haircut⁽³⁾
September 30, 2020											September 30, 2020				Real Estate Securities (1)								Repurchase Debt					Allocated Capital			Weighted Average Price(2)			Financing Haircut(3)
(Dollars in Thousands, except Weighted Average Price)	(Dollars in Thousands, except Weighted Average Price)			Real Estate Securities ⁽¹⁾							Margin Posted						Repurchase Debt					Allocated Capital							Weighted Average Price⁽²⁾							Financing Haircut⁽³⁾										Allocated Capital	Weighted Average Price(2)	Financing Haircut(3)
Residential Securities	Residential Securities												Residential Securities

Mezzanine⁽⁴⁾	Mezzanine⁽⁴⁾	$	59,543				$	—			$	(42,265)				$		17,278		$	95			29		%	Mezzanine (4)		$	63,088						$	(44,459)		$	18,629		$	102	30	%
Re-performing ⁽⁵⁾		334,043			2,696				(241,749)				94,990				54		28		%

Total Residential Securities	Total Residential Securities	393,586			2,696				(284,014)				112,268				58		29		%	Total Residential Securities			63,088							(44,459)			18,629			102			30		%
Multifamily Securities ⁽⁶⁾⁽⁵⁾	Multifamily Securities ⁽⁶⁾⁽⁵⁾	48,826			—				(27,874)				20,952				64		43		%	Multifamily Securities ⁽⁶⁾⁽⁵⁾			51,220							(30,595)			20,625			69			40		%

Total	Total	$	442,412		$	2,696			$	(311,888)			$	133,220								Total			$	114,308						$	(75,054)		$	39,254

(1)Amounts represent carrying value of securities, which are held at GAAP fair value.

(2)GAAP fair value per $100 of principal.

(3)Allocated capital divided by GAAP fair value.

(4)Includes ~~$60~~$63 million of securities we owned that were issued by consolidated Sequoia Choice securitizations, which we consolidate in accordance with GAAP.

(5)Includes ~~$334 million of securities we owned that were issued by consolidated Freddie Mac SLST securitizations, which we consolidate in accordance with GAAP.~~

~~(6)Includes $24~~$27 million of securities we owned that were issued by consolidated Freddie Mac K-Series securitizations, which we consolidate in accordance with GAAP.

At ~~June~~September 30, 2020, we had short-term debt incurred through repurchase facilities of ~~$312~~$75 million, which was secured by ~~$442~~$114 million of real estate securities (including securities owned in consolidated securitization entities). Our repo borrowings were made under facilities with ~~four~~three different counterparties, and the weighted average cost of funds for these facilities during the ~~second~~third quarter of 2020 was approximately ~~3.80%~~3.57% per annum.

~~Additionally, at June~~

At September 30, 2020, real estate securities with a fair value of ~~$333~~$345 million (including securities owned in consolidated Sequoia Choice and CAFL securitization entities), were financed with long-term, non-mark-to-market recourse debt through our subordinate securities financing facilities. Additionally, at September 30, 2020, we had $416 million of re-performing loan securities financed with $208 million of non-recourse securitization debt. The remaining ~~$305~~$358 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

The following table presents our real estate securities at ~~June~~September 30, 2020, categorized by portfolio vintage (the years the securities were issued), and by priority of cash flows (senior, mezzanine, and subordinate). We have additionally separated securities issued through our Sequoia platform or by third parties, including the Agencies.

Table 19 – Real Estate Securities by Vintage and Type


June 30, 2020		Sequoia 2012-2020			Third Party 2013-2019			Agency CRT 2018-2020			Third Party <=2008					Total Residential Securities				Multifamily 2019-2020				Total Real Estate Securities
September 30, 2020										September 30, 2020				Sequoia 2012-2020														Third Party 2013-2020			Agency CRT 2018-2020				Third Party <=2008					Total Residential Securities					Multifamily 2019-2020					Total Real Estate Securities
(In Thousands)	(In Thousands)			Sequoia 2012-2020				Third Party 2013-2019					Agency CRT 2018-2020					Third Party <=2008				Total Residential Securities				Multifamily 2019-2020								Total Real Estate Securities																									(In Thousands)	Agency CRT 2018-2020	Third Party <=2008	Total Residential Securities	Multifamily 2019-2020	Total Real Estate Securities
Senior ⁽¹⁾	Senior ⁽¹⁾									Senior (1)					$	16,226				$	11,862										$	—						$	3				$	28,091				$	—				$	28,091
Mezzanine ⁽²⁾	Mezzanine ⁽²⁾	3,514					—			—				—					3,514				—				3,514		Mezzanine (2)			3,651				2,016					—					—					5,667				—			5,667
Subordinate ⁽¹⁾	Subordinate ⁽¹⁾	117,676			90,558			38,528			6,139					252,901				27,161				280,062		Subordinate (1)			124,132				82,168				49,761					5,981					262,042					55,535				317,577

Total Securities ⁽³⁾	Total Securities ⁽³⁾	$	142,714		$	101,891		$	38,528		$	6,142				$	289,275			$	27,161			$	316,436	Total Securities (3)			$	144,009			$	96,046			$	49,761				$	5,984				$	295,800				$	55,535			$	351,335

(1)At ~~June~~September 30, 2020, senior Sequoia and third-party securities included ~~$33~~$28 million of IO securities. At ~~June~~September 30, 2020, subordinate third-party securities included ~~$10~~$13 million of IO securities. Our interest-only securities included ~~$14~~$12 million of certificated mortgage servicing investments securities at ~~June~~September 30, 2020 that we retained from certain of our Sequoia securitizations. These securities represent certificated servicing strips and therefore may be negatively impacted by the operating and funding costs related to servicing the associated securitized mortgage loans.

(2)Mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later.

(3)At ~~June~~September 30, 2020, excluded ~~$203~~$210 million, ~~$334~~$416 million, ~~$24~~$27 million, and ~~$203~~$229 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series, and CAFL securitizations, respectively. For GAAP purposes we consolidated ~~$7.31~~$7.55 billion of ~~residential~~ loans and ~~$6.56~~$6.68 billion of non-recourse ABS debt associated with these retained securities.

The following tables present the components of the interest income we earned on AFS securities for the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Table 20 – Interest Income — AFS Securities


Three Months Ended June 30, 2020										Yield as a Result of
Three Months Ended September 30, 2020																Three Months Ended September 30, 2020											Yield as a Result of
		Interest Income		Discount (Premium) Amortization		Total Interest Income		Average Amortized Cost		Interest Income		Discount (Premium) Amortization		Total Interest Income			Interest Income		Discount (Premium) Amortization		Total Interest Income			Average Amortized Cost			Interest Income			Discount (Premium) Amortization			Total Interest Income
(Dollars in Thousands)	(Dollars in Thousands)																						(Dollars in Thousands)			Interest Income			Discount (Premium) Amortization			Total Interest Income			Average Amortized Cost	Interest Income	Discount (Premium) Amortization	Total Interest Income
Residential	Residential															Residential

Mezzanine																Mezzanine	$	6	$	—	$	6		$	782		3.07	%		—	%		3.07	%
Subordinate	Subordinate	$	2,353	$	1,087	$	3,440	$	128,486	7.33	%	3.38	%	10.71	%	Subordinate	1,824		1,766		3,590			135,160			5.40	%		5.23	%		10.63	%
Total AFS Securities	Total AFS Securities	$	2,353	$	1,087	$	3,440	$	128,486	7.33	%	3.38	%	10.71	%	Total AFS Securities	$	1,830	$	1,766	$	3,596		$	135,942		5.38	%		5.20	%		10.58	%


Six Months Ended June 30, 2020										Yield as a Result of
Nine Months Ended September 30, 2020																Nine Months Ended September 30, 2020											Yield as a Result of
		Interest Income		Discount (Premium) Amortization		Total Interest Income		Average Amortized Cost		Interest Income		Discount (Premium) Amortization		Total Interest Income			Interest Income		Discount (Premium) Amortization		Total Interest Income			Average Amortized Cost			Interest Income			Discount (Premium) Amortization			Total Interest Income
(Dollars in Thousands)	(Dollars in Thousands)																						(Dollars in Thousands)			Interest Income			Discount (Premium) Amortization			Total Interest Income			Average Amortized Cost			Interest Income	Discount (Premium) Amortization	Total Interest Income
Residential	Residential															Residential
Senior	Senior	$	221	$	529	$	750	$	6,746	6.55	%	15.68	%	22.23	%	Senior	$	221	$	529	$	750		$	4,481					6.58	%		15.74	%		22.32	%
Mezzanine	Mezzanine	97		14		111		4,498		4.31	%	0.62	%	4.93	%	Mezzanine	103		14		117			3,251			4.22	%		0.57	%		4.79	%
Subordinate	Subordinate	4,928		2,298		7,226		130,035		7.58	%	3.53	%	11.11	%	Subordinate	6,751		4,064		10,815			131,755			6.83	%		4.11	%		10.94	%
Total AFS Securities	Total AFS Securities	$	5,246	$	2,841	$	8,087	$	141,279	7.43	%	4.02	%	11.45	%	Total AFS Securities	$	7,075	$	4,607	$	11,682		$	139,487		6.77	%		4.40	%		11.17	%

Taxable Income and Tax Provision

Taxable Income

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

Table 21 – Taxable Income


		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)	2020 est. ⁽¹⁾		2019 est. ⁽¹⁾		2020 est. ⁽¹⁾		2019 est. ⁽¹⁾		(In Thousands, except per Share Data)	2020 est. (1)		2019		2020 est. (1)		2019
REIT taxable (loss) income	REIT taxable (loss) income	$	(57,905)	$	24,561	$	(20,378)	$	53,322	REIT taxable (loss) income	$	7,362	$	38,626	$	(13,016)	$	91,948
Taxable REIT subsidiary (loss) income		(19,496)		16,347		(66,985)		23,044
Taxable REIT subsidiary income										Taxable REIT subsidiary income	34,975		2,821		26,890		25,865
Total Taxable (Loss) Income	Total Taxable (Loss) Income	$	(77,401)	$	40,908	$	(87,363)	$	76,366	Total Taxable (Loss) Income	$	42,337	$	41,447	$	13,874	$	117,813

REIT taxable (loss) income per share	REIT taxable (loss) income per share	$	(0.50)	$	0.25	$	(0.17)	$	0.55	REIT taxable (loss) income per share	$	0.07	$	0.34	$	(0.10)	$	0.89
Total taxable (loss) income per share		$	(0.67)	$	0.42	$	(0.75)	$	0.79
Total taxable income per share										Total taxable income per share	$	0.38	$	0.37	$	0.14	$	1.16

Distributions to shareholders	Distributions to shareholders	$	14,366	$	29,306	$	51,107	$	58,304	Distributions to shareholders	$	15,701	$	33,627	$	66,808	$	91,931
Distributions to shareholders per share	Distributions to shareholders per share	$	0.125	$	0.30	$	0.445	$	0.60	Distributions to shareholders per share	$	0.14	$	0.30	$	0.585	$	0.90

(1)Our tax results for the three and ~~six~~nine months ended ~~June~~September 30, 2020 ~~and 2019~~ are estimates until we file tax returns for ~~these years.~~this year.

~~The REIT~~In accordance with Internal Revenue Code rules applicable to disaster losses, TRS taxable ~~loss generated~~income for the ~~three~~nine months ended ~~June~~September 30, 2020, was ~~due~~adjusted to ~~a deduction for closed hedges related to our FHLB debt.~~

recognize $59 million of losses incurred in the first quarter of 2020 into the fourth quarter of 2019.

Under normal circumstances, our minimum REIT dividend requirement would be 90% of our annual REIT taxable income. However, we currently maintain a $28 million federal net operating loss carry forward (NOL) at the REIT that affords us the option of retaining REIT taxable income up to the NOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of NOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our NOL and any remaining amount will carry forward into future years. If annual REIT taxable income, exclusive of the dividends paid deduction, is a taxable loss, the NOL carryforward will be increased by the taxable loss.

Our dividend characterization for 2020 will be determined based on our full-year taxable income and dividend distributions. We currently expect only a small portion, if any, of the distributions to shareholders in 2020 will be taxable as dividend income and the remainder will be a return of capital, which is generally nontaxable. Under the federal income tax rules applicable to REITs, none of our 2020 dividend distributions are currently expected to be characterized as long-term capital gains.

Tax Provision under GAAP

For the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded a tax provision of ~~$37 thousand~~$9 million and a tax benefit of ~~$22~~$13 million, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recorded a tax ~~provisions~~benefit of $2$0.1 million and a tax provision of $3 million, respectively. Our tax provision is primarily derived from the activities at our TRS as we do not book a material tax provision associated with income generated at our REIT. The switch to a benefit from income taxes from provision for income taxes year-over-year was primarily the result of GAAP losses being recorded at our TRS in 2020 versus TRS GAAP income in 2019. The benefit from income taxes ~~this period~~recorded in 2020 was partially offset by a valuation allowance being recorded against our federal net ordinary deferred tax assets. Our TRS effective tax rate in 2020 is expected to be significantly less than the federal statutory corporate tax rate, due to the valuation allowance and other permanent GAAP to tax differences. The income or loss generated at our TRS will not directly affect the tax characterization of our 2020 dividends.

Realization of our deferred tax assets ("DTAs") is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of our DTAs is not assured and establish a valuation allowance accordingly. At December 31, 2019, we reported net federal ordinary and capital deferred tax liabilities ("DTLs"), and, as such, had no associated valuation allowance.

As a result of GAAP losses at our TRS in 2020, we forecast that we will report net federal ordinary and capital DTAs at December 31, 2020 and consequently a valuation allowance was recorded against our net federal ordinary DTAs. However, no valuation allowance was recorded against our net federal capital DTAs as we currently expect to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years. Consistent with prior periods, we continued to maintain a valuation allowance against our net state DTAs. Our estimate of net deferred tax assets could change in future periods to the extent that actual or revised estimates of future taxable income during the carryforward periods change from current expectations.

Potential Taxable Income Volatility

We expect period-to-period volatility in our estimated taxable income. A description of the factors that can cause this volatility is described in the Taxable Income portion of the Results of Operations section in the MD&A included in Part II, Item 7, of our Annual Report on Form 10-K.

9096

LIQUIDITY AND CAPITAL RESOURCES

Summary

In addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash consist of borrowings under mortgage loan warehouse facilities, securities repurchase agreements, payments of principal and interest we receive from our investment portfolios, proceeds from the sale of portfolio assets, and cash generated from our operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations, to purchase investment securities and make other investments, to repay principal and interest on our debt, to meet margin calls associated with our debt and other obligations, to make dividend payments on our capital stock, and to fund our operations.

At ~~June~~September 30, 2020, our total capital was ~~$1.59~~$1.70 billion and included ~~$0.94~~$1.05 billion of equity capital and $0.65 billion of convertible notes and long-term debt on our consolidated balance sheet, including $199 million of convertible debt due in 2023, $150 million of convertible debt due in 2024, $172 million of exchangeable debt due in 2025, and $140 million of trust-preferred securities due in 2037.

As of ~~June~~September 30, 2020, our unrestricted cash was ~~$529~~$451 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.

We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential loan warehouse facilities, securities repurchase facilities, and other short- and long-term debt facilities and other risks relating to our use of derivatives. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."

Cash Flows and Liquidity for the ~~Six~~Nine Months Ended ~~June~~September 30, 2020

Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the timing and amount of ~~and~~ securities acquisitions, ~~and~~ sales and repayments, the profitability of mortgage banking activities, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.

During the first ~~six~~nine months of 2020, in response to the pandemic, we sold a significant amount of investments and repaid a significant amount of debt, which allowed us to reposition and de-lever our balance sheet and generate additional liquidity. Additionally, we entered into several new financing agreements that are non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral) and ~~in one case~~ non-recourse, and have longer dated maturities than agreements they replaced that were marginable and recourse to us. While the asset sales and pay-down of debt, along with these new financing agreements, strengthened our liquidity and capital position by removing sources of contingent liquidity risk (from potential market value-based margin calls), they have also reduced our overall amount of earning assets and increased our borrowing costs. In the near-term, while we maintain a higher balance of cash, this will reduce our cash flows from operations. However, given our significant cash position, we believe we are positioned well to meet our near-term liquidity needs.

Cash Flows from Operating Activities

Cash flows from operating activities were ~~positive $56~~negative $176 million during the ~~six~~nine months ended ~~June~~September 30, 2020. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were positive ~~$58~~$94 million and negative ~~$112~~$123 million during the first ~~six~~nine months of 2020 and 2019, respectively.

As a result of the pandemic, in late March we determined that our hedges were no longer effectively managing the risks associated with certain of our assets and liabilities and we settled nearly all of our outstanding derivative positions. As a result of these settlements and other hedging activity during the quarter, we made ~~$183~~$187 million of cash ~~payments, representing a significant outflow of~~payments. Additionally, during the six months ended June 30, 2020, our margin receivable (which was primarily associated with our hedges), decreased by $207 million, resulting in an increase to our cash ~~for~~flows from operations. These changes in operating cash flows resulted from actions taken in response to the ~~period~~pandemic that we would generally not expect to recur at such a magnitude in subsequent ~~periods, particularly while~~periods. Additionally, during the six months ended June 30, 2020, we ~~are not employing~~received $38 million in cash related to FHLBC stock that was transferred back to the ~~use~~FHLBC, upon the repayment of ~~derivatives.~~

~~Additionally, as discussed previously in this MD&A, in late March and continuing into May, we sold a significant amount~~substantially all of ~~loans and securities, and repaid associated debt. As a result, we expect~~our borrowings from the ~~cash provided from net interest income to decline in future periods.~~FHLBC.

9197

Cash Flows from Investing Activities

During the ~~six~~nine months ended ~~June~~September 30, 2020, our net cash provided by investing activities was ~~$3.06~~$3.51 billion and primarily resulted from proceeds from sales of loans and real estate securities, as well as principal payments on loans. 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. ~~While it is difficult to predict the timing~~ ~~and impact of future sales of investment securities, if any, given our current liquidity position, we expect the pace of our asset sales to decline from the first six months of 2020.~~

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

As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the ~~six~~nine months ended ~~June~~September 30, 2020, we transferred residential loans between held-for-sale and held-for-investment classification, retained securities from Sequoia and CAFL securitizations we sponsored, and deconsolidated certain multifamily residential securitization trusts, which represent significant non-cash transactions that were not included in cash flows from investing activities.

Cash Flows from Financing Activities

During the ~~six~~nine months ended ~~June~~September 30, 2020, our net cash used in financing activities was ~~$2.83~~$3.11 billion. This primarily resulted from ~~$1.67~~$1.85 billion of net repayments of short-term debt and ~~$2.13~~$2.64 billion of repayments of long-term debt, including repayments of $2.00 billion of FHLBC borrowings, which were associated with the sales of a significant amount of assets noted in the investing activities section above. Additionally, we paid $97 million to purchase and retire $125 million of our convertible debt in the second quarter of ~~2020.~~2020, and repurchased $22 million of stock in the third quarter. These outflows of cash were partially offset by ~~$154~~$306 million of net proceeds from the issuance and settlements of ABS issued. Additionally, during the ~~six~~nine months ended ~~June~~September 30, 2020, we had cash inflows of ~~$944 million~~$1.25 billion related to borrowings under ~~two~~three new non-marginable facilities that were generally used to repay existing borrowings from marginable facilities.

During the ~~six~~nine months ended ~~June~~September 30, 2020, we declared dividends of ~~$0.445~~$0.585 per common share. On ~~June~~September 11, 2020, the Board of Directors declared a regular dividend of ~~$0.125~~$0.14 per share for the ~~second~~third quarter of 2020, which was paid on ~~June~~September 29, 2020 to shareholders of record on ~~June~~September 22, 2020.

In accordance with the terms of our outstanding deferred stock units and restricted stock units, which are stock-based compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent payment in that same per share amount on each outstanding deferred stock unit and restricted stock unit.

Repurchase Authorization

Loan Warehouse Facilities

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

Short-Term Debt

In the ordinary course of our business, we use recourse debt through several different types of borrowing facilities and use cash borrowings under these facilities to, among other things, fund the acquisition of residential loans (including those we acquire and originate in anticipation of securitization), finance investments in securities and other investments, and otherwise fund our business and operations. At ~~June~~September 30, 2020, we had ~~$663~~$483 million of short-term debt outstanding. During the first ~~six~~nine months of 2020, the highest balance of our short-term debt outstanding was $3.23 billion.

During the second quarter of 2020, we reduced the number of credit facilities related to our business purpose loans to two facilities with borrowing capacity of $500 million at June 30, 2020, from six facilities with borrowing capacity of $1.41 billion at March 31, 2020. These short-term facilities were replaced with a long-term, non-recourse facility with a borrowing capacity of $530 million primarily for the financing of bridge loans, and a second long-term recourse facility with a borrowing capacity of $500 million primarily for the financing of single-family rental and bridge loans. These new long-term facilities are not subject to the collateral margin requirements of our prior short-term facilities.

During the second quarter of 2020, we additionally reduced our residential loan warehouse facilities to three facilities with an aggregate borrowing capacity of $700 million at June 30, 2020, from four facilities with total borrowing capacity of $1.53 billion at March 31, 2020. The reduction in these facilities was related to the decreased residential loan purchase volumes during the second quarter of 2020.

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

Long-Term Debt

The following discusses significant activity during the first ~~half~~nine months of 2020 and other information about our long-term debt. For further detail on our long-term debt, see Note 15 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Convertible Notes

During the second quarter of 2020, we repurchased $29 million par value of our 5.75% exchangeable senior notes due 2025 at a discount and recorded a gain on extinguishment of $6 million in Realized gains, net on our consolidated statements of income (loss).

During the second quarter of 2020, we repurchased $50 million par value of our 5.625% convertible senior notes due 2024 at a discount and recorded a gain on extinguishment of $9 million in Realized gains, net on our consolidated statements of income (loss).

During the second quarter of 2020, we repurchased $46 million par value of our 4.75% convertible senior notes at a discount and recorded a gain on extinguishment of $10 million in Realized gains, net on our consolidated statements of income (loss).

FHLBC Borrowings

As a result of the economic and financial market impacts of the pandemic, the terms of our borrowing facility with the Federal Home Loan Bank of Chicago (our "FHLBC Facility") evolved and we decided to significantly reduce the financing we obtain from the FHLBC. During the second quarter of 2020, we completed the sale of nearly all residential loans financed through this facility and repaid all but $1 million of borrowings under this facility. We do not expect to increase borrowings under our FHLBC Facility above the existing $1 million of borrowings outstanding.

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

In the third quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable, non-recourse financing primarily for business purpose bridge loans. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 3.85% (with a 0.50% LIBOR floor), through July 2022. At September 30, 2020, we had borrowings under this facility totaling $158 million and $1 million of unamortized deferred issuance costs, for a net carrying value of $157 million. At September 30, 2020, $216 million of bridge loans were pledged as collateral under this facility.

In the second quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable, non-recourse financing primarily for business purpose bridge loans. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 7.50% (with a 1.50% LIBOR floor), through June ~~2022 (facility is fully callable~~2022. Borrowings under this facility may be repaid in full at our option and the facility terminated without penalty beginning in June ~~2021).~~2021. This facility has an aggregate maximum borrowing capacity of $530 million, which consists of a term facility of $355 million and a revolving facility of $175 million. The revolving period ends in June 2021, and amounts borrowed under the term and revolving facilities are due in full in June 2022. At ~~June~~September 30, 2020, we had borrowings under this facility totaling ~~$355~~$302 million and $6$4 million of unamortized deferred issuance costs, for a net carrying value of ~~$350~~$298 million. At ~~June~~September 30, 2020, ~~$442~~$369 million of bridge loans and $8$25 million of other BPL investments were pledged as collateral under this facility.

Recourse Business Purpose Loan Financing ~~Facility~~Facilities

Recourse Subordinate Securities Financing Facility

In the first quarter of 2020, we entered into a repurchase agreement providing non-marginable recourse debt financing for ~~$110~~$112 million of securities retained from our consolidated CAFL securitizations. The financing is fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through February 2023. The financing facility may be terminated, at our option, in February 2023, and has a final maturity in February 2025, provided that the interest rate on amounts outstanding under the facility increases between March 2023 and February 2025.

Recourse Revolving Debt Facility

In the first quarter of 2020, a subsidiary of Redwood entered into a secured revolving debt facility agreement collateralized by MSRs and certificated mortgage servicing rights. Borrowings under this facility accrue interest at a per annum rate equal to one-month LIBOR plus 2.75% through January 2021, with an increase in rate between February 2021 and the maturity of the facility in January 2022. This facility has an aggregate maximum borrowing capacity of $50 million. ~~Borrowings~~We had no borrowings outstanding under this facility ~~totaled $20 million~~ at ~~June~~September 30, 2020. At ~~June~~September 30, 2020, ~~$40~~$33 million of MSRs and interest-only securities were pledged as collateral under this facility.

Asset-Backed Securities Issued

During the first quarter of 2020, we sold subordinate securities issued by four Freddie Mac K-Series securitization trusts we previously consolidated and determined that we should derecognize the associated assets and liabilities of each of these entities for financial reporting purposes. As a result, during the first quarter of 2020, we deconsolidated $3.86 billion of multifamily loans and other assets and $3.72 billion of multifamily ABS issued.

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we issued ~~$450~~$515 million and ~~$787 million~~$1.30 billion of ABS, respectively, through our consolidated securitization ~~entities, respectively.~~entities. This included ~~$201~~$310 million and ~~$537~~$847 million of CAFL ABS issued during the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively, and zero and $249 million of Sequoia Choice ABS issued during the three and nine months ended ~~June~~September 30, ~~2020.~~2020, respectively. Additionally, for the three months ended September 30, 2020, this includes $205 million of ABS issued through a re-securitization entity sponsored by us. For further detail on our Asset-backed Securities Issued, see Note 14 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other Commitments and Contingencies

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

100

COVID-19 Pandemic-Related Mortgage Payment Forbearances

In response to the personal financial impacts of the pandemic, many residential mortgage borrowers have sought, or are seeking, forbearance with respect to monthly mortgage payment obligations. We are exposed to the negative financial impact of COVID-19 related payment forbearances with respect to loans securitized in Sequoia transactions, loans held for investment or sale, and a variety of other investments, including third-party issued mortgage-backed securities, mortgage servicing rights and related cash flows, and re-performing residential mortgage loans. Business purpose mortgage loan borrowers may also seek payment forbearances. In addition, transactions we have entered into, including to finance loans with warehouse financing providers and to sell whole loans to third parties, may be negatively impacted by COVID-19 related payment forbearances, including by reducing our proceeds from these transactions or if we are required to repurchase impacted loans.

Mortgage Servicing AdvanceObligations

Redwood's liquidity exposure to advancing obligations associated with residential mortgage servicing rights (MSRs) is primarily related to our Sequoia private-label residential mortgage backed securities (RMBS). The residential mortgage loans backing our Sequoia securities were generally originated as prime quality residential mortgage loans with strong credit characteristics. These loans were sourced from our residential mortgage platform through our network of loan sellers, including banks and independent mortgage companies, and were acquired after undergoing our review and underwriting process.

We outsource our residential mortgage servicing activity to third-party sub-servicers and do not directly service residential mortgage loans. We carry out a servicing oversight function and, in some cases, are obligated to reimburse our sub-servicers when they fund advances of principal and interest (P&I), taxes and insurance (T&I), and certain other amounts related to securitized mortgage loans.

At June 30, 2020, mortgage loans in a delinquent status (whether or not subject to forbearance) accounted for approximately 4.0% of the aggregate principal (or notional) balance of Sequoia securitized loans for which we had servicing advance funding obligations, with respect to the monthly mortgage payment due at June 30, 2020 (compared to approximately 3.2% of principal balance that were in a delinquent status as of April 30, 2020). As of ~~June~~September 30, 2020, we had no servicing advances outstanding related to principal and interest on Sequoia securitized loans for which we had servicing advance funding obligations. We estimate that for every 5 percentage point increase in the principal balance of Sequoia securitized mortgage loans in a delinquent status (whether or not subject to forbearance), our average monthly principal and interest servicing advance funding obligation would increase by approximately $3 million. Other advance funding obligations, including with respect to T&I, are subject to variability and seasonality and are not included within this estimate.

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

As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the origination and acquisition of mortgage loans (including those we originate or acquire in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our common stock or outstanding debt securities. Debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2019, under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities,” and under the caption “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the "Q1 2020 10-Q"). Many of the risks described above materialized during the first quarter of 2020 as a result of the pandemic and its impact on the economy and financial markets, as described under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” within ~~the~~our Q1 2020 Quarterly Report on Form 10-Q.

Our sources of debt financing include secured borrowings under residential and business purpose mortgage loan warehouse facilities (including recourse and non-recourse warehouse facilities), short-term securities repurchase facilities, a $10 million committed line of short-term secured credit from a bank, short-term servicer advance financing, a secured, revolving debt facility collateralized by mortgage servicing rights, and subordinate securities financing facilities. During the second quarter of 2020, we repaid secured borrowings by our wholly-owned subsidiary, RWT Financial, LLC, under its borrowing facility with the FHLBC and at ~~June~~September 30, 2020, $1 million of advances remained outstanding. We do not expect to be able to increase borrowings under this borrowing facility above the existing $1 million of advances outstanding.

101

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

Under many of our mortgage loan warehouse facilities, our short-term securities repurchase facilities, and our secured, revolving debt facility collateralized by mortgage service rights, while transferred or pledged assets are financed under the facility, to the extent the value of the assets, or the collateral underlying those assets, declines, we are generally required to either immediately reacquire the assets or meet a margin requirement to transfer or pledge additional assets or cash in an amount at least equal to the decline in value. During the second quarter of 2020, we amended several of our mortgage loan warehouse facilities to revise these margin call provisions to remove obligations to make margin calls for changes in the market value of transferred or pledged ~~assets.~~assets, which determinations of market value were generally within the sole discretion of the lending counterparty. Under these revised agreements, if the estimated value of a property securing a financed mortgage loan declines, based on, for example, an appraisal or broker-price opinion, then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional residential mortgage loans) with a value equal to the amount of the decline. ~~At June 30, 2020, all of our residential mortgage loan warehouse facilities that retained market-value based margin call provisions had been repaid or suspended.~~ Of our active financing arrangements with outstanding balances at ~~June~~September 30, 2020, only our short-term securities repurchase facilities (with ~~$312~~$75 million of borrowings outstanding at ~~June~~September 30, 2020), and two of our ~~secured, revolving debt facility collateralized by~~residential mortgage ~~service rights~~loan warehouse facilities (with ~~$20~~$8 million of borrowings outstanding at ~~June 30, 2020), and one of our business purpose residential loan warehouse facilities (with $43 million of borrowings outstanding at June~~September 30, 2020) retain market-value based margin call provisions.

Margin call provisions under these facilities are further described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2019 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2019 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”

Because many of these borrowing facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Market Risks.” In addition, with respect to mortgage loans that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Market Risks,” if and when those loans or securities become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility. ~~Additionally, our access to financing under the borrowing facility with the FHLBC is subject to the risks described under the heading~~ “Risk Factors - Federal regulations may limit, eliminate, or reduce the attractiveness of our subsidiary’s ability to use borrowings from the Federal Home Loan Bank of Chicago to finance the mortgage loans and securities it holds and acquires, which could negatively impact our business and operating results” ~~in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.~~

At ~~June~~September 30, 2020, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. However, significant and widespread decreases in the fair values of our assets, including decreases of the magnitude that resulted from the impact of the pandemic during the first quarter of 2020, could cause us to breach the financial covenants under our borrowing facilities related to net worth and leverage. In particular, during the first and second quarters of 2020, we amended financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth, financial covenants that require us to maintain recourse indebtedness below a specified ratio, and financial covenants that require us to maintain a minimum dollar amount of liquidity in certain borrowing agreements on a permanent basis, and we repaid and suspended certain other borrowing facilities; however, we cannot be certain that we will be able to maintain compliance with such amended covenants. Such covenants, if breached, can result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements, and other risks described under the caption “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements” in Part II, Item 1A of our Q1 2020 10-Q.

96102

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

In the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, while others are off-balance sheet or recorded on the balance sheet in amounts different from the full contract or notional amount of the transaction.

For additional information on our contractual obligations, see the Off-Balance Sheet Arrangements and Contractual Obligations section in the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.

For additional information on our commitments and contingencies as of ~~June~~September 30, 2020, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part I, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019. Management discusses the ongoing development and selection of these critical accounting policies with the audit committee of the board of directors.

We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities, increases or decreases in earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates. Our critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements are included in the "Critical Accounting Policies and Estimates" section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.

In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets, has caused additional volatility impacting many of our estimates. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Continued volatility resulting from the pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility.

Market Risks

We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Other Risks

In addition to the market and other risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

NEW ACCOUNTING STANDARDS

A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

97103

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information concerning market risk is incorporated herein by reference to Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, 2019.

Item 4. Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

There have been no changes in our internal control over financial reporting during the ~~second~~third quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

98104

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There is no significant update regarding the litigation matters described in Part I, Item 3 in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Legal Proceedings.” At ~~June~~September 30, 2020, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described in our Annual Report on Form 10-K for the year ended December 31, 2019 was $2 million.

With respect to certain of the Residential Loan Seller Demands, these resolution discussions have been successful in resolving, or establishing a framework that we believe will be the basis for successfully resolving, the demands of these counterparties, including through forward-looking joint business undertakings and structured arrangements that incentivize both the counterparty and us to continue to engage in residential loan purchase and sale transactions in the future. With respect to these counterparties, we have incurred or expect to incur certain costs in connection with finalizing these arrangements (including costs that are contingent on the successful completion of future residential loan purchase and sale transactions with these counterparties that we expect to generate future revenue for the Company) and have recorded any such actual costs incurred through ~~June~~September 30, 2020, as well as an accrual for the estimated costs associated with counterparties where a resolution or go-forward framework has been agreed to or has been discussed but not ~~finalized, through Mortgage Banking Activities, net in our Residential Lending segment.~~finalized. In accordance with GAAP, the accrual for estimated costs is based on the opinion of management, that it is probable that these resolutions and forward-looking joint business undertakings and structured arrangements will result in an expense and the amount of expense can be reasonably estimated. At ~~June~~September 30, 2020, the aggregate amount of ~~these actual costs, together with the~~our accrual for estimated costs associated with Residential Loan Seller Demands was $5$6.5 million, a ~~significant~~ portion of which would be contingent on the successful completion of future residential loan purchase and sale transactions with these counterparties, with the expectation of generating future revenue for the ~~Company~~Company. In addition, as previously disclosed, one such counterparty filed a breach of contract lawsuit against us in May 2020 alleging that it had suffered in excess of $2 million of losses as a result of our alleged failure to purchase residential mortgage loans from it; and in October 2020 we and the plaintiff agreed to settle the lawsuit on mutually satisfactory terms.

With respect to ~~the remaining~~ Residential Loan Seller Demands that have not been resolved or accrued for, our beliefs about the legal merits of these allegations and our discussions with these counterparties have resulted in us determining that a significant loss from these matters is not probable. With respect to these remaining Residential Loan Seller Demands, based on the foregoing, we have concluded that we can estimate an aggregate range of reasonably possible losses with respect to these Residential Loan Seller Demands of between zero and $1.5 million.

99105

~~100~~

Item 1A. Risk Factors

Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

106

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

During the three months ended ~~June~~September 30, 2020, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. ~~At June~~During the three months ended September 30, 2020, ~~$100~~we repurchased 3,047,335 shares of our common stock pursuant to this authorization for $22 million. At September 30, 2020, $78 million of this current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended ~~June~~September 30, 2020.

~~Total Number of Shares Purchased or Acquired~~

Average
Price per
Share Paid

~~Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs~~

~~Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs~~

~~(In Thousands, except per Share Data)~~

~~April 1, 2020 - April 30, 2020~~

—

~~May 1, 2020 - May 31, 2020~~

—

~~June 1, 2020 - June 30, 2020~~

—

~~100,000~~

~~Total~~

—

~~100,000~~


	Total Number of Shares Purchased or Acquired	Average Price per Share Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)
July 1, 2020 - July 31, 2020	—	$	—	—	$	—
August 1, 2020 - August 31, 2020	1,980	$	7.07	1,980	$	85,998
September 1, 2020 - September 30, 2020	1,067	$	7.15	1,067	$	78,369
Total	3,047	$	7.10	3,047	$	78,369

Item 3. Defaults Upon Senior Securities

None.

Item 4. Not Applicable

Item 5. Other Information

~~Redwood’s~~On November 6, 2020, ~~annual proxy statement (filed~~Redwood amended and restated its employment agreements with each of Christopher J. Abate (Redwood’s CEO), Dashiell I. Robinson (Redwood’s President), and Andrew P. Stone (Redwood’s Executive Vice President, General Counsel, and Secretary). These agreements were amended and restated to, among other things, update or clarify certain defined terms and vesting-related provisions and to reflect previously disclosed compensation terms applicable to these officers. The three amended and restated employment agreements are filed as Exhibits 10.1, 10.2, and 10.3 to this Quarterly Report on Form 10-Q (collectively, the ~~SEC on April 27, 2020) included a discussion~~“Amended Employment Agreements”) and the description of the ~~process that the Compensation Committee of Redwood’s Board of Directors~~Amended Employment Agreements set forth in this Part II, Item 5 is ~~undertaking to assess~~qualified in its ~~executive compensation program and consider changes~~entirety by reference to the ~~program that may be appropriate in light~~full text of the impacts of the COVID-19 pandemic on Redwood and the markets and business environment it operates within. On August 5, 2020, the Compensation Committee completed an initial phase of this assessment and approved certain matters relating to 2020 executive compensation, as described below.

Although it has completed this initial phase, the Compensation Committee intends to continue its assessment of Redwood’s executive compensation program and to disclose, over the remainder of 2020, any further updates to the program. In addition, the Compensation Committee Chair is currently planning to engage with shareholders in late 2020 and/or early 2021 to discuss updates to the program designed to support Redwood’s ongoing financial, operational, and strategic objectives.

The Compensation Committee’s August 5, 2020 determinations were made after review and discussion of various considerations with management and with the Committee’s independent compensation consultant, F.W. Cook & Co. Key considerations included that:

•There has been a pronounced impact from the COVID-19 pandemic on Redwood’s financial condition, with significant realized and unrealized losses since December 31, 2020 and a marked decline in the market value of Redwood’s common stock since mid-March 2020;

~~101~~

•Redwood has historically delivered a significant portion of executive compensation in the form of long-term equity-based awards with three- or four-year performance measurement and/or vesting and holding periods; and, as a result of the impact of the pandemic, the value of multiple years of annual equity-based compensation has significantly declined (or, as a practical matter, become unlikely to be realized) based on the negative total return experience of Redwood’s stockholders since mid-March 2020;

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

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

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

•The impact of the pandemic on Redwood’s labor market has been significant; and competitors that focus on mortgage origination and government-supported sectors of the mortgage market have seen an increase in business activity (e.g., mortgage refinance activity), supported by Federal Reserve and other governmental actions, as well as other macroeconomic factors; and, as a result, competition for talent has increased, which prompted Redwood to take steps to at the end of the second quarter of 2020 to retain key non-executive employees.

~~After considering these factors, on August 5, 2020, the Compensation Committee made the following determinations and approvals:~~

•~~Ensure that pay-for-performance principles continue to govern 2020 annual bonuses for current executive officers by:~~

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

◦Continuing to provide each of these executive officers with an opportunity to earn a portion of 2020 target annual bonuses based on a year-end review of their individual contribution to recovering from the impacts of the pandemic and positioning Redwood for future growth and opportunities.

The following table details the components of the 2020 target annual bonus opportunity for these executive officers as approved in December 2019, and as adjusted by the Compensation Committee on August 5, 2020 as part of its initial response to the impact of the pandemic – i.e., illustrating the Committee’s reduction of 2020 target annual bonus opportunity for these executive officers to 33% of the level previously approved in December 2019.


	~~Previously approved~~	~~As adjusted~~
~~Component of 2020 target annual bonus opportunity:~~	~~in Dec. 2019~~	~~on Aug. 5, 2020~~

~~Company financial performance component (ROE-based):~~	~~75% of target~~	~~0% of target~~

~~Individual performance component:~~	~~25% of target~~	~~33% of target~~

~~Total 2020 target bonus opportunity:~~	~~100% of target~~	~~33% of target~~

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

~~102~~

~~A description of the terms of each of these long-term awards is set forth below.~~

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

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

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


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

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

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

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

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

~~103~~

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

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

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

~~104~~107

Item 6. Exhibits


Exhibit Number						Exhibit
3.1						Articles of Amendment and Restatement of the Registrant, effective July 6, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1, filed on August 6, 2008)
3.1.1						Articles Supplementary of the Registrant, effective August 10, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.1, filed on August 6, 2008)
3.1.2						Articles Supplementary of the Registrant, effective August 11, 1995 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.2, filed on August 6, 2008)
3.1.3						Articles Supplementary of the Registrant, effective August 9, 1996 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.3, filed on August 6, 2008)
3.1.4						Certificate of Amendment of the Registrant, effective June 30, 1998 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.4, filed on August 6, 2008)
3.1.5						Articles Supplementary of the Registrant, effective April 7, 2003 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.5, filed on August 6, 2008)
3.1.6						Articles of Amendment of the Registrant, effective June 12, 2008 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.6, filed on August 6, 2008)
3.1.7						Articles of Amendment of the Registrant, effective May 19, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2009)
3.1.8						Articles of Amendment of the Registrant, effective May 24, 2011 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 20, 2011)
3.1.9						Articles of Amendment of the Registrant, effective May 18, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2012)
3.1.10						Articles of Amendment of the Registrant, effective May 16, 2013 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2013)
3.1.11						Articles of Amendment of the Registrant, effective May 16, 2019 (incorporated by reference to the Registrant's Current Report on Form 8-K, Exhibit 3.1, filed on May 17, 2019)
3.1.12						Articles of Amendment of the Registrant, effective June 15, 2020 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on June 15, 2020)
3.2.1						Amended and Restated Bylaws of the Registrant, as adopted on March 5, 2008 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.1, filed on August 8, 2018)
3.2.2						First Amendment to Amended and Restated Bylaws of the Registrant, as adopted on May 17, 2012 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.2, filed on August 8, 2018)
3.2.3						Second Amendment to Amended and Restated Bylaws of the Registrant, as adopted on May 22, 2018 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.3, filed on August 8, 2018)
~~10.1~~10.1*						~~Amendment to Redwood Trust, Inc.~~Fifth Amended and Restated ~~2014 Incentive Award Plan (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 10.1, filed on June 15, 2020)~~
~~10.2~~						~~Fourth Amendment to Lease~~Employment Agreement, dated as of ~~April 20,~~November 6, 2020, by and between ~~ARTIS HRA Inverness Point, LP, as Landlord,~~Christopher J. Abate and the Registrant ~~as Tenant~~ (filed herewith)
~~10.3~~10.2*						~~Fifth Amendment to Lease~~Third Amended and Restated Employment Agreement, dated as of ~~July 23,~~November 6, 2020, by and between ~~ARTIS HRA Inverness Point, LP, as Landlord,~~Dashiell I. Robinson and the Registrant ~~as Tenant~~ (filed herewith)
~~10.4~~10.3*						~~Form~~Fifth Amended and Restated Employment Agreement, dated as of ~~Performance Award Agreement (Cash – Performance Vesting) under 2014 Incentive Plan (2020 Form)~~ ~~(filed herewith)~~
~~10.5~~						~~Form of Performance Award Agreement (Cash – Time Vesting) under 2014 Incentive Plan (2020 Form)~~November 6, 2020, by and between Andrew P. Stone and the Registrant (filed herewith)
31.1						Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1						Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2						Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~105~~


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, 2020, is filed in inline XBRL-formatted interactive data files: (i) Consolidated Balance Sheets at ~~June~~September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income (Loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019; (iii) Statements of Consolidated Comprehensive Income (Loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019; (v) Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019; and (vi) Notes to Consolidated Financial Statements.

108


Exhibit Number						Exhibit
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

______________________

* Indicates exhibits that include management contracts or compensatory plan arrangements.

~~106~~

109

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, 2020

By:

/s/ Christopher J. Abate

Christopher J. Abate

Chief Executive Officer

(Principal Executive Officer)

Date:

~~August 7,~~November 6, 2020

By:

/s/ Collin L. Cochrane

Collin L. Cochrane

Chief Financial Officer

(Principal Financial and Accounting Officer)

~~107~~110