0000930236rwt:~~SubordinateSecuritiesMember2021-01-012021-06-30~~BusinessPurposeBridgeLoansMember2020-12-31

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, 2021


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

For the Transition Period from _______________ to _______________.

Commission File Number 1-13759

REDWOOD TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)


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


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

(415) 389-7373

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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


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

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


Common Stock, $0.01 par value per share						~~113,055,422~~114,674,962			shares outstanding as of ~~August 2,~~November 1, 2021

REDWOOD TRUST, INC.

2021 FORM 10-Q REPORT

TABLE OF CONTENTS


		Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at ~~June~~September 30, 2021 (Unaudited) and December 31, 2020	2
	Consolidated Statements of Income (Loss) for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020 (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020 (Unaudited)	5
	Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	9
	Note 1. Organization	9
	Note 2. Basis of Presentation	9
	Note 3. Summary of Significant Accounting Policies	11
	Note 4. Principles of Consolidation	15
	Note 5. Fair Value of Financial Instruments	2324
	Note 6. Residential Loans	3134
	Note 7. Business Purpose Loans	3538
	Note 8. Multifamily Loans	3842
	Note 9. Real Estate Securities	3842
	Note 10. Other Investments	4348
	Note 11. Derivative Financial Instruments	4550
	Note 12. Other Assets and Liabilities	4752
	Note 13. Short-Term Debt	4954
	Note 14. Asset-Backed Securities Issued	5156
	Note 15. Long-Term Debt	5359
	Note 16. Commitments and Contingencies	5460
	Note 17. Equity	5763
	Note 18. Equity Compensation Plans	6066
	Note 19. Mortgage Banking Activities, Net	6167
	Note 20. Other Income	6268
	Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	6369
	Note 22. Taxes	6470
	Note 23. Segment Information	6470
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6975
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	95106
Item 4.	Controls and Procedures	95106

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	96107
Item 1A.	Risk Factors	96107
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96107
Item 3.	Defaults Upon Senior Securities	96107
Item 4.	Mine Safety Disclosures (Not Applicable)	96107
Item 5.	Other Information	97108
Item 6.	Exhibits	98109
Signatures		~~100~~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, 2021		December 31, 2020		(In Thousands, except Share Data) (Unaudited)	September 30, 2021		December 31, 2020
ASSETS (1)	ASSETS (1)					ASSETS (1)
Residential loans, held-for-sale, at fair value	Residential loans, held-for-sale, at fair value	$	1,160,548	$	176,641	Residential loans, held-for-sale, at fair value	$	1,495,079	$	176,641
Residential loans, held-for-investment, at fair value	Residential loans, held-for-investment, at fair value	4,582,052		4,072,410		Residential loans, held-for-investment, at fair value	4,721,389		4,072,410
Business purpose loans, held-for-sale, at fair value	Business purpose loans, held-for-sale, at fair value	418,442		245,394		Business purpose loans, held-for-sale, at fair value	466,346		245,394
Business purpose loans, held-for-investment, at fair value	Business purpose loans, held-for-investment, at fair value	3,990,447		3,890,959		Business purpose loans, held-for-investment, at fair value	4,227,209		3,890,959
Multifamily loans, held-for-investment, at fair value	Multifamily loans, held-for-investment, at fair value	485,157		492,221		Multifamily loans, held-for-investment, at fair value	482,791		492,221
Real estate securities, at fair value	Real estate securities, at fair value	354,886		344,125		Real estate securities, at fair value	353,286		344,125
Other investments	Other investments	308,732		348,175		Other investments	422,366		348,175
Cash and cash equivalents	Cash and cash equivalents	421,223		461,260		Cash and cash equivalents	556,989		461,260
Restricted cash	Restricted cash	55,048		83,190		Restricted cash	88,717		83,190
Intangible assets	Intangible assets	49,119		56,865		Intangible assets	45,246		56,865

Derivative assets	Derivative assets	34,305		53,238		Derivative assets	51,103		53,238
Other assets	Other assets	136,432		130,588		Other assets	162,193		130,588
Total Assets	Total Assets	$	11,996,391	$	10,355,066	Total Assets	$	13,072,714	$	10,355,066

LIABILITIES AND EQUITY (1)	LIABILITIES AND EQUITY (1)					LIABILITIES AND EQUITY (1)
Liabilities	Liabilities					Liabilities
Short-term debt, net	Short-term debt, net	$	1,484,999	$	522,609	Short-term debt, net	$	1,750,941	$	522,609

Derivative liabilities	Derivative liabilities	3,240		16,072		Derivative liabilities	10,972		16,072
Accrued expenses and other liabilities	Accrued expenses and other liabilities	191,705		179,340		Accrued expenses and other liabilities	251,576		179,340

Asset-backed securities issued (includes $7,360,766 and $6,900,362 at fair value), net		7,536,997		7,100,661
Asset-backed securities issued (includes $7,756,101 and $6,900,362 at fair value), net						Asset-backed securities issued (includes $7,756,101 and $6,900,362 at fair value), net	8,183,825		7,100,661
Long-term debt, net	Long-term debt, net	1,484,308		1,425,485		Long-term debt, net	1,499,577		1,425,485
Total liabilities	Total liabilities	10,701,249		9,244,167		Total liabilities	11,696,891		9,244,167
Commitments and Contingencies (see Note 16)	Commitments and Contingencies (see Note 16)	0		0		Commitments and Contingencies (see Note 16)	0		0
Equity	Equity					Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 113,052,780 and 112,090,006 issued and outstanding		1,131		1,121
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 114,661,762 and 112,090,006 issued and outstanding						Common stock, par value $0.01 per share, 395,000,000 shares authorized; 114,661,762 and 112,090,006 issued and outstanding	1,147		1,121
Additional paid-in capital	Additional paid-in capital	2,287,412		2,264,874		Additional paid-in capital	2,312,272		2,264,874
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	9,740		(4,221)		Accumulated other comprehensive income (loss)	1,923		(4,221)
Cumulative earnings	Cumulative earnings	1,184,559		997,277		Cumulative earnings	1,272,845		997,277
Cumulative distributions to stockholders	Cumulative distributions to stockholders	(2,187,700)		(2,148,152)		Cumulative distributions to stockholders	(2,212,364)		(2,148,152)
Total equity	Total equity	1,295,142		1,110,899		Total equity	1,375,823		1,110,899
Total Liabilities and Equity	Total Liabilities and Equity	$	11,996,391	$	10,355,066	Total Liabilities and Equity	$	13,072,714	$	10,355,066

——————

(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At ~~June~~September 30, 2021 and December 31, 2020, assets of consolidated VIEs totaled ~~$8,616,435~~$9,358,317 and $8,141,069, respectively. At ~~June~~September 30, 2021 and December 31, 2020, liabilities of consolidated VIEs totaled ~~$7,562,367~~$8,391,761 and ~~$7,148,414,~~$7,348,713, 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)	2021		2020		2021		2020		(Unaudited)	2021		2020		2021		2020
Interest Income	Interest Income									Interest Income
Residential loans	Residential loans	$	48,433	$	54,974	$	92,088	$	134,410	Residential loans	$	53,993	$	44,921	$	146,081	$	179,331
Business purpose loans	Business purpose loans	70,323		53,419		134,511		106,073		Business purpose loans	67,129		55,637		201,640		161,710
Multifamily loans	Multifamily loans	4,860		4,870		9,646		45,042		Multifamily loans	4,846		4,918		14,492		49,960
Real estate securities	Real estate securities	9,279		10,027		18,942		28,336		Real estate securities	14,242		10,135		33,184		38,471
Other interest income	Other interest income	5,800		6,656		11,813		14,166		Other interest income	5,512		6,371		17,325		20,537
Total interest income	Total interest income	138,695		129,946		267,000		328,027		Total interest income	145,722		121,982		412,722		450,009
Interest Expense	Interest Expense									Interest Expense
Short-term debt	Short-term debt	(11,195)		(16,907)		(18,968)		(39,974)		Short-term debt	(11,826)		(5,145)		(30,794)		(45,119)
Asset-backed securities issued	Asset-backed securities issued	(76,419)		(65,304)		(148,980)		(165,802)		Asset-backed securities issued	(73,732)		(66,514)		(222,712)		(232,316)
Long-term debt	Long-term debt	(20,451)		(20,455)		(42,669)		(43,561)		Long-term debt	(18,196)		(28,752)		(60,865)		(72,313)
Total interest expense	Total interest expense	(108,065)		(102,666)		(210,617)		(249,337)		Total interest expense	(103,754)		(100,411)		(314,371)		(349,748)
Net Interest Income	Net Interest Income	30,630		27,280		56,383		78,690		Net Interest Income	41,968		21,571		98,351		100,261
Non-interest Income (Loss)	Non-interest Income (Loss)									Non-interest Income (Loss)
Mortgage banking activities, net	Mortgage banking activities, net	54,419		(5,982)		137,026		(34,884)		Mortgage banking activities, net	63,163		59,395		200,189		24,511
Investment fair value changes, net	Investment fair value changes, net	49,480		152,228		94,567		(718,604)		Investment fair value changes, net	26,077		107,047		120,644		(611,557)
Other income, net	Other income, net	2,126		1,165		5,969		4,093		Other income, net	2,388		(114)		8,357		3,979
Realized gains, net	Realized gains, net	8,384		25,965		11,100		29,817		Realized gains, net	6,703		602		17,803		30,419
Total non-interest income (loss), net	Total non-interest income (loss), net	114,409		173,376		248,662		(719,578)		Total non-interest income (loss), net	98,331		166,930		346,993		(552,648)
General and administrative expenses	General and administrative expenses	(40,594)		(28,520)		(84,145)		(57,202)		General and administrative expenses	(47,692)		(27,630)		(131,837)		(84,832)
Loan acquisition costs	Loan acquisition costs	(3,748)		(1,572)		(7,307)		(5,558)		Loan acquisition costs	(4,621)		(2,158)		(11,928)		(7,716)
Other expenses	Other expenses	(3,985)		(5,083)		(8,081)		(96,498)		Other expenses	(4,023)		(7,788)		(12,104)		(104,286)
Net Income (Loss) before (Provision for) Benefit from Income Taxes	Net Income (Loss) before (Provision for) Benefit from Income Taxes	96,712		165,481		205,512		(800,146)		Net Income (Loss) before (Provision for) Benefit from Income Taxes	83,963		150,925		289,475		(649,221)
(Provision for) benefit from income taxes		(6,687)		(37)		(18,230)		22,192
Benefit from (provision for) income taxes										Benefit from (provision for) income taxes	4,323		(9,113)		(13,907)		13,079
Net Income (Loss)	Net Income (Loss)	$	90,025	$	165,444	$	187,282	$	(777,954)	Net Income (Loss)	$	88,286	$	141,812	$	275,568	$	(636,142)

Basic earnings (loss) per common share	Basic earnings (loss) per common share	$	0.77	$	1.41	$	1.61	$	(6.82)	Basic earnings (loss) per common share	$	0.75	$	1.21	$	2.36	$	(5.60)
Diluted earnings (loss) per common share	Diluted earnings (loss) per common share	$	0.66	$	1.00	$	1.38	$	(6.82)	Diluted earnings (loss) per common share	$	0.65	$	1.02	$	2.03	$	(5.60)
Basic weighted average shares outstanding	Basic weighted average shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928		Basic weighted average shares outstanding	112,995,847		113,403,102		112,754,691		113,952,308
Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	141,761,084		147,099,079		141,139,212		114,229,928		Diluted weighted average shares outstanding	141,855,471		141,969,977		141,575,385		113,952,308

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)	2021		2020		2021		2020		(Unaudited)	2021		2020		2021		2020
Net Income (Loss)	Net Income (Loss)	$	90,025	$	165,444	$	187,282	$	(777,954)	Net Income (Loss)	$	88,286	$	141,812	$	275,568	$	(636,142)
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities		11,224		52,393		22,210		(28,126)
Net unrealized (loss) gain on available-for-sale securities										Net unrealized (loss) gain on available-for-sale securities	(2,658)		8,236		19,552		(19,890)
Reclassification of unrealized (gain) loss on available-for-sale securities to net income	Reclassification of unrealized (gain) loss on available-for-sale securities to net income	(7,500)		2,718		(10,295)		(11,080)		Reclassification of unrealized (gain) loss on available-for-sale securities to net income	(6,200)		(445)		(16,495)		(11,525)
Net unrealized loss on interest rate agreements	Net unrealized loss on interest rate agreements	0		0		0		(32,806)		Net unrealized loss on interest rate agreements	—		—		—		(32,806)
Reclassification of unrealized loss on interest rate agreements to net income	Reclassification of unrealized loss on interest rate agreements to net income	1,028		1,029		2,046		1,108		Reclassification of unrealized loss on interest rate agreements to net income	1,041		1,040		3,087		2,148
Total other comprehensive income (loss)		4,752		56,140		13,961		(70,904)
Total other comprehensive (loss) income										Total other comprehensive (loss) income	(7,817)		8,831		6,144		(62,073)
Total Comprehensive Income (Loss)	Total Comprehensive Income (Loss)	$	94,777	$	221,584	$	201,243	$	(848,858)	Total Comprehensive Income (Loss)	$	80,469	$	150,643	$	281,712	$	(698,215)

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, 2021


(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
March 31, 2021		112,998,732	$	1,130			$	2,281,647			$	4,988				$	1,094,534			$	(2,166,724)		$	1,215,575
June 30, 2021																					June 30, 2021		113,052,780		$	1,131			$	2,287,412			$	9,740			$	1,184,559			$	(2,187,700)			$	1,295,142
Net income	Net income	—	—		—				—		90,025			—				90,025			Net income		—		—		—				—				88,286				—				88,286
Other comprehensive income		—	—		—				4,752		—			—				4,752

Other comprehensive loss																					Other comprehensive loss		—		—		—				(7,817)				—				—				(7,817)
Issuance of common stock																					Issuance of common stock		1,585,709		16		19,810				—				—				—				19,826

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	54,048	1		122				—		—			—				123			Employee stock purchase and incentive plans		23,273		—		153				—				—				—				153
Non-cash equity award compensation	Non-cash equity award compensation	—	—		5,643				—		—			—				5,643			Non-cash equity award compensation		—		—		4,897				—				—				—				4,897

Common dividends declared ($0.18 per share)		—	—		—				—		—			(20,976)				(20,976)
June 30, 2021		113,052,780	$	1,131	$	2,287,412			$	9,740	$	1,184,559		$	(2,187,700)			$	1,295,142
Common dividends declared ($0.21 per share)																					Common dividends declared ($0.21 per share)		—		—		—				—				—				(24,664)				(24,664)
September 30, 2021																					September 30, 2021		114,661,762		$	1,147	$	2,312,272			$	1,923			$	1,272,845			$	(2,212,364)			$	1,375,823

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


(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
December 31, 2020	December 31, 2020	112,090,006	$	1,121			$	2,264,874			$	(4,221)				$	997,277			$	(2,148,152)		$	1,110,899	December 31, 2020			112,090,006				$	1,121				$	2,264,874				$	(4,221)				$	997,277				$	(2,148,152)	$	1,110,899
Net income	Net income	—	—		—				—		187,282			—				187,282			Net income		—			—					—					—					275,568					—					275,568
Other comprehensive income	Other comprehensive income	—	—		—				13,961		—			—				13,961			Other comprehensive income		—			—			—					6,144					—					—					6,144
Issuance of common stock	Issuance of common stock	806,068	8		13,366				—		—			—				13,374			Issuance of common stock		2,391,777			24			33,176					—					—					—					33,200

Employee stock purchase and incentive plans	Employee stock purchase and incentive plans	156,706	2		(689)				—		—			—				(687)			Employee stock purchase and incentive plans		179,979			2			(536)					—					—					—					(534)
Non-cash equity award compensation	Non-cash equity award compensation	—	—		9,861				—		—			—				9,861			Non-cash equity award compensation		—			—			14,758					—					—					—					14,758

Common dividends declared ($0.34 per share)		—	—		—				—		—			(39,548)				(39,548)
June 30, 2021		113,052,780	$	1,131	$	2,287,412			$	9,740	$	1,184,559		$	(2,187,700)			$	1,295,142
Common dividends declared ($0.55 per share)																					Common dividends declared ($0.55 per share)		—			—			—					—					—					(64,212)					(64,212)
September 30, 2021																					September 30, 2021		114,661,762			$	1,147		$	2,312,272				$	1,923				$	1,272,845				$	(2,212,364)				$	1,375,823

For the Three Months Ended ~~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
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		—		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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

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
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

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,
		2021		2020			2021		2020
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					Cash Flows From Operating Activities:
Net income (loss)	Net income (loss)	$	187,282	$	(777,954)	Net income (loss)	$	275,568	$	(636,142)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Adjustments to reconcile net income (loss) to net cash used in operating activities:						Adjustments to reconcile net income (loss) 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	3,998		4,083		Amortization of premiums, discounts, and securities issuance costs, net	300		6,213
Depreciation and amortization of non-financial assets	Depreciation and amortization of non-financial assets	8,405		8,962		Depreciation and amortization of non-financial assets	12,674		13,166
Originations of held-for-sale loans	Originations of held-for-sale loans	(567,546)		(457,510)		Originations of held-for-sale loans	(960,419)		(654,820)
Purchases of held-for-sale loans	Purchases of held-for-sale loans	(6,682,864)		(2,720,245)		Purchases of held-for-sale loans	(9,902,028)		(2,893,246)
Proceeds from sales of held-for-sale loans	Proceeds from sales of held-for-sale loans	4,526,370		3,126,860		Proceeds from sales of held-for-sale loans	6,948,264		3,224,526
Principal payments on held-for-sale loans	Principal payments on held-for-sale loans	19,856		48,901		Principal payments on held-for-sale loans	49,619		53,677
Net settlements of derivatives	Net settlements of derivatives	39,697		(183,373)		Net settlements of derivatives	27,412		(187,130)

Non-cash equity award compensation expense	Non-cash equity award compensation expense	9,861		7,240		Non-cash equity award compensation expense	14,758		11,146
Goodwill impairment expense	Goodwill impairment expense	0		88,675		Goodwill impairment expense	—		88,675
Market valuation adjustments	Market valuation adjustments	(213,641)		765,647		Market valuation adjustments	(292,056)		606,764
Realized gains, net	Realized gains, net	(11,100)		(29,817)		Realized gains, net	(17,803)		(30,419)
Net change in:	Net change in:					Net change in:
Accrued interest receivable and other assets	Accrued interest receivable and other assets	10,260		254,368		Accrued interest receivable and other assets	(9,680)		304,147
Accrued interest payable and accrued expenses and other liabilities	Accrued interest payable and accrued expenses and other liabilities	17,327		(80,219)		Accrued interest payable and accrued expenses and other liabilities	73,120		(82,489)
Net cash (used in) provided by operating activities		(2,652,095)		55,618
Net cash used in operating activities						Net cash used in operating activities	(3,780,271)		(175,932)
Cash Flows From Investing Activities:	Cash Flows From Investing Activities:					Cash Flows From Investing Activities:
Originations of loan investments	Originations of loan investments	(348,389)		(263,544)		Originations of loan investments	(557,327)		(327,494)

Purchases of loan investments						Purchases of loan investments	(35,713)		—
Proceeds from sales of loan investments	Proceeds from sales of loan investments	9,231		1,574,160		Proceeds from sales of loan investments	9,484		1,574,160
Principal payments on loan investments	Principal payments on loan investments	1,312,064		1,136,000		Principal payments on loan investments	1,950,151		1,652,418
Purchases of real estate securities	Purchases of real estate securities	(18,593)		(52,260)		Purchases of real estate securities	(29,342)		(106,422)

Sales of securities held in consolidated securitization trusts	Sales of securities held in consolidated securitization trusts	8,197		142,990		Sales of securities held in consolidated securitization trusts	8,197		142,990
Proceeds from sales of real estate securities	Proceeds from sales of real estate securities	36,735		621,730		Proceeds from sales of real estate securities	37,500		634,709
Principal payments on real estate securities	Principal payments on real estate securities	29,786		16,405		Principal payments on real estate securities	46,904		19,446
Purchases of servicer advance investments	Purchases of servicer advance investments	0		(179,419)		Purchases of servicer advance investments	—		(179,419)
Principal repayments from servicer advance investments	Principal repayments from servicer advance investments	45,838		75,478		Principal repayments from servicer advance investments	58,248		83,124

Purchases of home equity investment contracts						Purchases of home equity investment contracts	(109,174)		(986)
Other investing activities, net	Other investing activities, net	(5,025)		(11,139)		Other investing activities, net	(15,915)		22,019
Net cash provided by investing activities	Net cash provided by investing activities	1,069,844		3,060,401		Net cash provided by investing activities	1,363,013		3,514,545
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	6,604,603		3,655,530		Proceeds from borrowings on short-term debt	9,847,178		3,981,572
Repayments on short-term debt	Repayments on short-term debt	(5,421,494)		(5,322,519)		Repayments on short-term debt	(8,443,664)		(5,828,972)
Proceeds from issuance of asset-backed securities	Proceeds from issuance of asset-backed securities	1,629,218		827,644		Proceeds from issuance of asset-backed securities	2,822,785		1,343,845
Repayments on asset-backed securities issued	Repayments on asset-backed securities issued	(1,088,809)		(673,323)		Repayments on asset-backed securities issued	(1,549,766)		(1,037,546)

Proceeds from borrowings on long-term debt	Proceeds from borrowings on long-term debt	487,975		944,282		Proceeds from borrowings on long-term debt	948,674		1,251,850

Repayments on long-term debt	Repayments on long-term debt	(654,893)		(2,128,805)		Repayments on long-term debt	(1,055,475)		(2,640,007)
Net settlements of derivatives	Net settlements of derivatives	0		(84,336)		Net settlements of derivatives	—		(84,336)
Net proceeds from issuance of common stock	Net proceeds from issuance of common stock	255		5,707		Net proceeds from issuance of common stock	20,248		5,791

Net payments on repurchase of common stock						Net payments on repurchase of common stock	—		(21,659)
Taxes paid on equity award distributions	Taxes paid on equity award distributions	(943)		(2,934)		Taxes paid on equity award distributions	(957)		(3,009)
Dividends paid	Dividends paid	(39,548)		(51,810)		Dividends paid	(64,212)		(67,821)
Other financing activities, net	Other financing activities, net	(2,292)		(3,180)		Other financing activities, net	(6,297)		(4,876)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	1,514,072		(2,833,744)		Net cash provided by (used in) financing activities	2,518,514		(3,105,168)
Net (decrease) increase in cash, cash equivalents and restricted cash		(68,179)		282,275
Net increase in cash, cash equivalents and restricted cash						Net increase in cash, cash equivalents and restricted cash	101,256		233,445
Cash, cash equivalents and restricted cash at beginning of period (1)	Cash, cash equivalents and restricted cash at beginning of period (1)	544,450		290,833		Cash, cash equivalents and restricted cash at beginning of period (1)	544,450��		290,833
Cash, cash equivalents and restricted cash at end of period (1)	Cash, cash equivalents and restricted cash at end of period (1)	$	476,271	$	573,108	Cash, cash equivalents and restricted cash at end of period (1)	$	645,706	$	524,278

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,
		2021		2020			2021		2020

Supplemental Cash Flow Information:	Supplemental Cash Flow Information:					Supplemental Cash Flow Information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	198,364	$	267,787	Interest	$	298,507	$	364,875
Taxes	Taxes	19,183		209		Taxes	28,092		218
Supplemental Noncash Information:	Supplemental Noncash Information:					Supplemental Noncash Information:
Real estate securities retained from loan securitizations	Real estate securities retained from loan securitizations	$	9,374	$	46,560	Real estate securities retained from loan securitizations	$	9,375	$	46,560

Retention of mortgage servicing rights from loan securitizations and sales						Retention of mortgage servicing rights from loan securitizations and sales	7,065		—

Deconsolidation of multifamily loans held in securitization trusts	Deconsolidation of multifamily loans held in securitization trusts	0		(3,849,779)		Deconsolidation of multifamily loans held in securitization trusts	—		(3,849,779)
Deconsolidation of multifamily ABS	Deconsolidation of multifamily ABS	0		(3,706,789)		Deconsolidation of multifamily ABS	—		(3,706,789)
Transfers from loans held-for-sale to loans held-for-investment	Transfers from loans held-for-sale to loans held-for-investment	1,998,535		706,775		Transfers from loans held-for-sale to loans held-for-investment	3,005,041		770,754
Transfers from loans held-for-investment to loans held-for-sale	Transfers from loans held-for-investment to loans held-for-sale	44,922		0		Transfers from loans held-for-investment to loans held-for-sale	44,922		—
Transfers from residential loans to real estate owned	Transfers from residential loans to real estate owned	15,827		9,645		Transfers from residential loans to real estate owned	21,655		12,547
Transfers from long-term debt to short-term debt	Transfers from long-term debt to short-term debt	47,994		0		Transfers from long-term debt to short-term debt	93,150		—
Right-of-use asset obtained in exchange for operating lease liability	Right-of-use asset obtained in exchange for operating lease liability	1,135		5,362		Right-of-use asset obtained in exchange for operating lease liability	1,135		5,362

Reduction in operating lease liability due to lease modification						Reduction in operating lease liability due to lease modification	—		1,466
Issuance of common stock for 5 Arches acquisition	Issuance of common stock for 5 Arches acquisition	13,375		3,375		Issuance of common stock for 5 Arches acquisition	13,375		3,375

(1) Cash, cash equivalents, and restricted cash at ~~June~~September 30, 2021 includes cash and cash equivalents of ~~$421~~$557 million and restricted cash of ~~$55~~$89 million, and at December 31, 2020 includes cash and cash equivalents of $461 million and restricted cash of $83 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, 2021

(Unaudited)

Note 1. Organization

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

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

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

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

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at ~~June~~September 30, 2021 and December 31, 2020, and for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2020. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the Company at ~~June~~September 30, 2021 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, 2021 should not be construed as indicative of the results to be expected for the full year.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 2. Basis of Presentation - (continued)

Principles of Consolidation

In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 ("Legacy Sequoia"), certain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans ~~and, beginning in the second quarter of 2021, Redwood Select loans~~ ("Sequoia"), ~~and~~ entities formed in connection with the securitization of CoreVest single-family rental and bridge loans ("CAFL"), and beginning in the third quarter of 2021, an entity ("Point HEI") formed in connection with the securitization of home equity investment contracts ("HEIs"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we have invested. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for ~~the consolidated Sequoia and CAFL~~certain entities we are exposed to ~~certain~~ financial risks associated with our role as a sponsor or co-sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

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

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.

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 2. Basis of Presentation - (continued)

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

Table 2.1 – Intangible Assets – Activity


		Intangible Assets at Acquisition				Accumulated Amortization at June 30, 2021			Carrying Value at June 30, 2021				Weighted Average Amortization Period (in years)				Intangible Assets at Acquisition			Accumulated Amortization at September 30, 2021		Carrying Value at September 30, 2021		Weighted Average Amortization Period (in years)
(Dollars in Thousands)	(Dollars in Thousands)							(Dollars in Thousands)
Borrower network	Borrower network			$	45,300						$	(11,055)			$	34,245			7		Borrower network	$	45,300	$	(12,672)	$	32,628	7
Broker network	Broker network	18,100				(8,447)			9,653				5	Broker network			18,100			(9,352)		8,748		5
Non-compete agreements	Non-compete agreements	9,500				(6,014)			3,486				3	Non-compete agreements			9,500			(6,806)		2,694		3
Tradenames	Tradenames	4,000				(2,528)			1,472				3	Tradenames			4,000			(2,861)		1,139		3
Developed technology	Developed technology	1,800				(1,537)			263				2	Developed technology			1,800			(1,763)		37		2
Loan administration fees on existing loan assets	Loan administration fees on existing loan assets	2,600				(2,600)			0				1	Loan administration fees on existing loan assets			2,600			(2,600)		—		1
Total	Total	$	81,300			$	(32,181)		$	49,119			6	Total			$	81,300		$	(36,054)	$	45,246	6

All of our intangible assets are amortized on a straight-line basis. For ~~each~~both of the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, we recorded intangible asset amortization expense of $8$12 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year


(In Thousands)	(In Thousands)	June 30, 2021		(In Thousands)	September 30, 2021
2021 (6 months)		$	7,558
2021 (3 months)				2021 (3 months)	$	3,685
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	11,597		2025 and thereafter	11,597
Total Future Intangible Asset Amortization	Total Future Intangible Asset Amortization	$	49,119	Total Future Intangible Asset Amortization	$	45,246

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

A liability resulting from the contingent consideration arrangement with 5 Arches was initially recorded in 2019 at its acquisition-date fair value as part of total consideration for the acquisition of 5 Arches. During the first quarter of 2021, we distributed 806,068 shares of Redwood common stock and paid $1 million in cash in full settlement of the remaining deferred consideration associated with this acquisition.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Included in Note 3 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2020 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, 2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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

Other Investments

Strategic Investments

We have made and may make additional strategic investments in companies through our RWT Horizons venture investment strategy or at a corporate level. These investments can take the form of equity or debt and often have conversion features. Depending on the terms of the investments, we may account for these investments under the fair value option or as non-marketable equity securities under the equity method of accounting or the measurement alternative (to the extent they do not have a “readily determinable fair value,” or are not traded in a verifiable public market or are restricted for sale in the public market by a restricted stock legend or otherwise).

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

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

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

In October 2020, the FASB issued ASU 2020-10, "Codification Improvements." This new guidance updates various codification topics by clarifying or improving disclosure requirements. This new guidance is effective for fiscal years ending after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

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

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance. This new guidance is effective for fiscal years beginning after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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

Other Recent Accounting Pronouncements

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

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

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~~September 30, 2021

(Unaudited)

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

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

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


		Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet			Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount			Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in Consolidated Balance Sheet			Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet				Gross Amounts Not Offset in Consolidated Balance Sheet (1)						Net Amount
June 30, 2021 (In Thousands)						Financial Instruments			Cash Collateral (Received) Pledged
September 30, 2021 (In Thousands)															September 30, 2021 (In Thousands)			Gross Amounts of Recognized Assets (Liabilities)				Gross Amounts Offset in Consolidated Balance Sheet				Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet			Financial Instruments			Cash Collateral (Received) Pledged			Net Amount
Assets (2)	Assets (2)																		Assets (2)
Interest rate agreements	Interest rate agreements	$	17,746	$	0		$	17,746	$	(957)	$	(11,238)	$	5,551	Interest rate agreements	$	33,628			$	—			$	33,628			$	(74)		$	(32,408)		$	1,146

TBAs	TBAs	2,064		0			2,064		(478)		(1,393)		193		TBAs	8,213			—				8,213				(4,278)			(3,117)			818
Futures		304		0			304		(194)		0		110

Total Assets	Total Assets	$	20,114	$	0		$	20,114	$	(1,629)	$	(12,631)	$	5,854	Total Assets	$	41,841		$	—		$	41,841			$	(4,352)		$	(35,525)		$	1,964

Liabilities (2)	Liabilities (2)														Liabilities (2)
Interest rate agreements	Interest rate agreements	$	(957)	$	0		$	(957)	$	957	$	0	$	0	Interest rate agreements	$	(74)		$	—		$	(74)			$	74		$	—		$	—
TBAs	TBAs	(1,367)		0			(1,367)		478		889		0		TBAs	(7,599)			—			(7,599)				4,278			3,321			—
Futures	Futures	(194)		0			(194)		194		0		0		Futures	(749)			—			(749)				—			749			—
Loan warehouse debt	Loan warehouse debt	(1,049,144)		0			(1,049,144)		1,049,144		0		0		Loan warehouse debt	(1,335,464)			—			(1,335,464)				1,335,464			—			—
Security repurchase agreements	Security repurchase agreements	(80,938)		0			(80,938)		80,938		0		0		Security repurchase agreements	(79,766)			—			(79,766)				79,766			—			—
Total Liabilities	Total Liabilities	$	(1,132,600)	$	0		$	(1,132,600)	$	1,131,711	$	889	$	0	Total Liabilities	$	(1,423,652)		$	—		$	(1,423,652)			$	1,419,582		$	4,070		$	—

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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


		Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet			Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount			Gross Amounts of Recognized Assets (Liabilities)				Gross Amounts Offset in Consolidated Balance Sheet		Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet			Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount
December 31, 2020 (In Thousands)	December 31, 2020 (In Thousands)					Financial Instruments			Cash Collateral (Received) Pledged		December 31, 2020 (In Thousands)							Financial Instruments						Cash Collateral (Received) Pledged
Assets (2)	Assets (2)																		Assets (2)
Interest rate agreements	Interest rate agreements	$	19,951	$	0		$	19,951	$	0	$	(7,769)	$	12,182	Interest rate agreements	$	19,951			$	—	$	19,951		$	—	$	(7,769)	$	12,182

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

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

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

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

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

(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column ("Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet") 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 loans, and security repurchase agreements are components of Short-term debt and Long-term debt on our consolidated balance sheets.

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

Note 4. Principles of Consolidation

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Analysis of Consolidated VIEs

At ~~June~~September 30, 2021, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, ~~and~~ Freddie Mac K-Series, and Point HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for ~~the consolidated Legacy Sequoia, Sequoia and CAFL entities~~certain securitizations, we are exposed to ~~certain~~ financial risks associated with our role as a sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. At June 30, 2021, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, and Freddie Mac K-Series entities was $4 million, $234 million, $272 million, $452 million, and $31 million, respectively.

We also consolidate 2 Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At ~~June~~September 30, 2021, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s non-controlling interest. Additionally, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing.

During the third quarter of 2021, we consolidated a Point securitization entity formed to invest in Point HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At ~~June~~September 30, 2021, we owned a portion of the ~~estimated~~subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 12 for additional information on non-controlling interests in the entity. We consolidate the Point securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

For certain of our consolidated VIEs, we have elected to account for the assets and liabilities of these entities as collateralized financing entities ("CFE"). A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of ~~our investment~~the financial assets or fair value of the financial liabilities. The net equity in an entity effectively represents the fair value of the beneficial interests we own in the ~~Servicing Investment entities was $62 million.~~

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

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


June 30, 2021		Legacy Sequoia			Sequoia			CAFL			Freddie Mac SLST			Freddie Mac K-Series				Servicing Investment					Total Consolidated VIEs
September 30, 2021													September 30, 2021				Legacy Sequoia									Sequoia					CAFL SFR					Freddie Mac SLST			Freddie Mac K-Series				Servicing Investment					Point HEI			Total Consolidated CFE VIEs
(Dollars in Thousands)	(Dollars in Thousands)			Legacy Sequoia						Sequoia			CAFL					Freddie Mac SLST					Freddie Mac K-Series											Servicing Investment							Total Consolidated VIEs				(Dollars in Thousands)
Residential loans, held-for-investment	Residential loans, held-for-investment										Residential loans, held-for-investment			$	242,234						$	2,479,750						$	—							$	1,999,405		$	—					$	—							$	—				$	4,721,389
Business purpose loans, held-for-investment	Business purpose loans, held-for-investment	0					0				3,263,878					0				0					0					3,263,878			Business purpose loans, held-for-investment				—			—				3,402,410					—			—					—					—	3,402,410
Multifamily loans, held-for-investment	Multifamily loans, held-for-investment	0			0			0			0			485,157						0					485,157		Multifamily loans, held-for-investment					—					—			—				—					482,791			—					—					482,791

Other investments	Other investments	0			0			0			0			0				202,369					202,369			Other investments				—					—			—				—					—			187,880					167,442					355,322
Cash and cash equivalents	Cash and cash equivalents	0			0			0			0			0				12,459					12,459			Cash and cash equivalents				—					—			—				—					—			12,977					—					12,977
Restricted cash	Restricted cash	148			0			0			0			0				19,028					19,176			Restricted cash				148					—			—				—					—			19,872					5,033					25,053
Accrued interest receivable	Accrued interest receivable	258			7,559			13,102			6,325			1,326				1,606					30,176			Accrued interest receivable				232					7,869			13,451				6,068					1,321			1,068					—					30,009
Other assets	Other assets	659			0			12,596			1,636			0				6,277					21,168			Other assets				275					—			13,172				1,958					—			6,283					50					21,738
Total Assets	Total Assets	$	261,940		$	2,230,112		$	3,289,576		$	2,106,585		$	486,483			$	241,739				$	8,616,435		Total Assets				$	242,889				$	2,487,619		$	3,429,033			$	2,007,431				$	484,112		$	228,080				$	172,525				$	9,051,689
Short-term debt	Short-term debt	$	0		$	0		$	0		$	0		$	0			$	163,629				$	163,629		Short-term debt				$	—				$	—		$	—			$	—				$	—		$	151,910				$	—				$	151,910
Accrued interest payable	Accrued interest payable	124			5,521			10,183			4,490			1,200				94					21,612			Accrued interest payable				108					5,918			10,691				4,279					1,195			97					—					22,288
Accrued expenses and other liabilities	Accrued expenses and other liabilities	0			0			0			0			0				16,360					16,360			Accrued expenses and other liabilities				—					—			224				—					—			15,835					16,740					32,799
Asset-backed securities issued	Asset-backed securities issued	258,211			1,990,548			3,007,596			1,650,087			454,324				0					7,360,766			Asset-backed securities issued				239,447					2,243,299			3,126,405				1,550,111					451,402			—					145,437					7,756,101
Total Liabilities	Total Liabilities	$	258,335		$	1,996,069		$	3,017,779		$	1,654,577		$	455,524			$	180,083				$	7,562,367		Total Liabilities				$	239,555				$	2,249,217		$	3,137,320			$	1,554,390				$	452,597		$	167,842				$	162,177				$	7,963,098

Fair value of our investments																										Fair value of our investments				$	3,062				$	236,451		$	287,813			$	451,252				$	31,389		$	60,238				$	10,348				$	1,080,553
Number of VIEs	Number of VIEs	20			12			14			3			1				3					53			Number of VIEs				20					13			15				3					1			3					1					56

1617

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)


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

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

Fair value of our investments																								Fair value of our investments			$	4,559	$	220,020		$	241,808			$	430,087			$	28,415			$	67,766			$	—			$	992,655
Number of VIEs	Number of VIEs	20				10		14				2				1		3				50		Number of VIEs			20		10			14				2				1				3				—				50

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

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


		Three Months Ended June 30, 2021																									Three Months Ended September 30, 2021
		Legacy Sequoia				Sequoia		CAFL				Freddie Mac SLST				Freddie Mac K-Series		Servicing Investment				Total Consolidated VIEs					Legacy Sequoia		Sequoia			CAFL SFR				Freddie Mac SLST				Freddie Mac K-Series				Servicing Investment				Point HEI				Total Consolidated CFE VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	1,169					$	14,492			$	54,849					$	19,506				$	4,860				$	4,041		$	98,917	Interest income			$	1,042			$	18,867			$	48,723			$	18,707			$	4,846	$	3,905	$	—	$	96,090
Interest expense	Interest expense	(755)				(11,374)		(43,201)				(13,927)				(4,478)		(1,110)				(74,845)		Interest expense			(641)		(15,368)			(37,415)				(13,303)				(4,460)				(1,018)				—				(72,205)
Net interest income	Net interest income	414				3,118		11,648				5,579				382		2,931				24,072		Net interest income			401		3,499			11,308				5,404				386				2,887				—				23,885
Non-interest income	Non-interest income																							Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(216)				4,906		3,697				36,316				1,855		(2,320)				44,238		Investment fair value changes, net			(247)		3,314			2,943				13,849				554				(2,080)				47				18,380

Other income																								Other income			—		—			10				—				—				—				—				10

Total non-interest income, net	Total non-interest income, net	(216)				4,906		3,697				36,316				1,855		(2,320)				44,238		Total non-interest income, net			(247)		3,314			2,953				13,849				554				(2,080)				47				18,390
General and administrative expenses	General and administrative expenses	0				0		0				0				0		(52)				(52)		General and administrative expenses			—		—			—				—				—				(60)				—				(60)
Other expenses	Other expenses	0				0		0				0				0		(112)				(112)		Other expenses			—		—			—				—				—				(149)				—				(149)

Income from Consolidated VIEs	Income from Consolidated VIEs	$	198			$	8,024	$	15,345			$	41,895			$	2,237	$	447			$	68,146	Income from Consolidated VIEs			$	154	$	6,813		$	14,261			$	19,253			$	940			$	598			$	47			$	42,066

1718

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)


		Six Months Ended June 30, 2021																									Nine Months Ended September 30, 2021
		Legacy Sequoia				Sequoia		CAFL				Freddie Mac SLST				Freddie Mac K-Series		Servicing Investment				Total Consolidated VIEs					Legacy Sequoia		Sequoia			CAFL SFR				Freddie Mac SLST				Freddie Mac K-Series				Servicing Investment				Point HEI				Total Consolidated CFE VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	2,517					$	29,975			$	103,722					$	39,665				$	9,646				$	8,263		$	193,788	Interest income			$	3,559			$	48,842			$	152,445			$	58,372			$	14,492	$	12,168	$	—	$	289,878
Interest expense	Interest expense	(1,630)				(23,480)		(81,054)				(28,395)				(8,834)		(2,396)				(145,789)		Interest expense			(2,271)		(38,848)			(118,469)				(41,698)				(13,294)				(3,414)				—				(217,994)
Net interest income	Net interest income	887				6,495		22,668				11,270				812		5,867				47,999		Net interest income			1,288		9,994			33,976				16,674				1,198				8,754				—				71,884
Non-interest income	Non-interest income																							Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(915)				9,804		3,411				40,433				10,776		(3,566)				59,943		Investment fair value changes, net			(1,162)		13,118			6,354				54,282				11,330				(5,646)				47				78,323

Other income																								Other income			—		—			10				—				—				—				—				10

Total non-interest income, net	Total non-interest income, net	(915)				9,804		3,411				40,433				10,776		(3,566)				59,943		Total non-interest income, net			(1,162)		13,118			6,364				54,282				11,330				(5,646)				47				78,333
General and administrative expenses	General and administrative expenses	0				0		0				0				0		(90)				(90)		General and administrative expenses			—		—			—				—				—				(150)				—				(150)
Other expenses	Other expenses	0				0		0				0				0		(442)				(442)		Other expenses			—		—			—				—				—				(591)				—				(591)

Income (Loss) from Consolidated VIEs		$	(28)			$	16,299	$	26,079			$	51,703			$	11,588	$	1,769			$	107,410
Income from Consolidated VIEs																								Income from Consolidated VIEs			$	126	$	23,112		$	40,340			$	70,956			$	12,528			$	2,367			$	47			$	149,476


		Three Months Ended June 30, 2020																									Three Months Ended September 30, 2020
		Legacy Sequoia				Sequoia		CAFL				Freddie Mac SLST				Freddie Mac K-Series		Servicing Investment				Total Consolidated VIEs					Legacy Sequoia		Sequoia			CAFL SFR				Freddie Mac SLST				Freddie Mac K-Series				Servicing Investment				Point HEI				Total Consolidated CFE VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	2,685					$	22,564			$	32,978					$	21,187				$	4,870				$	4,540		$	88,824	Interest income			$	1,795			$	20,919			$	36,181			$	21,696			$	4,918	$	4,403	$	—	$	89,912
Interest expense	Interest expense	(1,518)				(19,117)		(24,446)				(15,846)				(4,380)		(1,797)				(67,104)		Interest expense			(1,059)		(17,828)			(26,383)				(15,473)				(4,426)				(1,587)				—				(66,756)
Net interest income	Net interest income	1,167				3,447		8,532				5,341				490		2,743				21,720		Net interest income			736		3,091			9,798				6,223				492				2,816				—				23,156
Non-interest income	Non-interest income																							Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(230)				39,752		16,313				26,866				1,599		3,291				87,591		Investment fair value changes, net			(81)		7,851			9,692				82,214				2,166				(422)				—				101,420

Total non-interest income, net	Total non-interest income, net	(230)				39,752		16,313				26,866				1,599		3,291				87,591		Total non-interest income, net			(81)		7,851			9,692				82,214				2,166				(422)				—				101,420
General and administrative expenses	General and administrative expenses	0				0		0				0				0		(712)				(712)		General and administrative expenses			—		—			—				—				—				(41)				—				(41)
Other expenses	Other expenses	0				0		0				0				0		(1,065)				(1,065)		Other expenses			—		—			—				—				—				(471)				—				(471)

Income from Consolidated VIEs	Income from Consolidated VIEs	$	937			$	43,199	$	24,845			$	32,207			$	2,089	$	4,257			$	107,534	Income from Consolidated VIEs			$	655	$	10,942		$	19,490			$	88,437			$	2,658			$	1,882			$	—			$	124,064


		Six Months Ended June 30, 2020																									Nine Months Ended September 30, 2020
		Legacy Sequoia				Sequoia		CAFL				Freddie Mac SLST				Freddie Mac K-Series		Servicing Investment				Total Consolidated VIEs					Legacy Sequoia		Sequoia			CAFL SFR				Freddie Mac SLST				Freddie Mac K-Series				Servicing Investment				Point HEI				Total Consolidated CFE VIEs
(Dollars in Thousands)	(Dollars in Thousands)													(Dollars in Thousands)
Interest income	Interest income			$	5,879					$	47,647			$	62,988					$	43,173				$	45,042				$	8,623		$	213,352	Interest income			$	7,674			$	68,566			$	99,169			$	64,869			$	49,960	$	13,026	$	—	$	303,264
Interest expense	Interest expense	(4,040)				(40,627)		(46,385)				(32,022)				(42,728)		(3,374)				(169,176)		Interest expense			(5,099)		(58,455)			(72,768)				(47,495)				(47,154)				(4,961)				—				(235,932)
Net interest income	Net interest income	1,839				7,020		16,603				11,151				2,314		5,249				44,176		Net interest income			2,575		10,111			26,401				17,374				2,806				8,065				—				67,332
Non-interest income	Non-interest income																							Non-interest income

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

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

Income (Loss) from Consolidated VIEs	Income (Loss) from Consolidated VIEs	$	1,218			$	(22,896)	$	(34,930)			$	(104,144)			$	(82,596)	$	(3,270)			$	(246,618)	Income (Loss) from Consolidated VIEs			$	1,873	$	(11,954)		$	(15,440)			$	(15,707)			$	(79,938)			$	(1,388)			$	—			$	(122,554)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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

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

During the three months ended ~~June~~September 30, 2021, we did not call any of our consolidated CAFL entities. During the nine months ended September 30, 2021, we called ~~one~~1 of our consolidated CAFL entities and repaid the associated ABS issued. In association with this call, we transferred $45 million (unpaid principal balance) of loans from held-for-investment to held-for-sale.

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

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 5250 Sequoia securitization entities sponsored by us that are still outstanding as of ~~June~~September 30, 2021, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.

During the three months ended ~~June~~September 30, 2021, we called 32 of our unconsolidated Sequoia entities, and purchased ~~$83~~$66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $7$6 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the ~~six~~nine months ended ~~June~~September 30, 2021, we called 46 of our unconsolidated Sequoia entities, and purchased ~~$101~~$167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $9$15 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At ~~June~~September 30, 2021, we held ~~$97~~$151 million of loans for sale at fair value that were acquired following the calls.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

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

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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


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

The following table summarizes the cash flows during the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Proceeds from new transfers	Proceeds from new transfers	$	361,673	$	0	$	1,266,063	$	1,610,761	Proceeds from new transfers	$	—	$	—	$	1,266,063	$	1,610,761
MSR fees received	MSR fees received	1,336		2,475		2,943		5,165		MSR fees received	1,095		2,280		4,038		7,445
Funding of compensating interest, net	Funding of compensating interest, net	(70)		(205)		(170)		(297)		Funding of compensating interest, net	54		4		(116)		(293)
Cash flows received on retained securities	Cash flows received on retained securities	16,764		6,788		25,393		13,369		Cash flows received on retained securities	16,724		5,873		42,117		19,242

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

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

Three Months Ended June 30, 2021 Three Months Ended June 30, 2020
At Date of Securitization Senior IO Securities Subordinate Securities Senior IO Securities Subordinate Securities
Prepayment rates 8 % 8 % N/A N/A
Discount rates 15 % 7 % N/A N/A
Credit loss assumptions 0.25 % 0.25 % N/A N/A

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

Discount rates

N/A

Credit loss assumptions

N/A


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

2021

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
On-balance sheet assets, at fair value:	On-balance sheet assets, at fair value:					On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	Interest-only, senior and subordinate securities, classified as trading	$	20,527	$	20,982	Interest-only, senior and subordinate securities, classified as trading	$	18,380	$	20,982
Subordinate securities, classified as AFS	Subordinate securities, classified as AFS	140,321		136,475		Subordinate securities, classified as AFS	128,874		136,475
Mortgage servicing rights	Mortgage servicing rights	6,496		8,413		Mortgage servicing rights	6,068		8,413
Maximum loss exposure (1)	Maximum loss exposure (1)	$	167,344	$	165,870	Maximum loss exposure (1)	$	153,322	$	165,870
Assets transferred:	Assets transferred:					Assets transferred:
Principal balance of loans outstanding	Principal balance of loans outstanding	$	6,326,188	$	7,728,432	Principal balance of loans outstanding	$	5,542,244	$	7,728,432
Principal balance of loans 30+ days delinquent	Principal balance of loans 30+ days delinquent	58,362		138,029		Principal balance of loans 30+ days delinquent	32,422		138,029

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

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

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


June 30, 2021		MSRs			Senior Securities (1)				Subordinate Securities
September 30, 2021								September 30, 2021				MSRs					Senior Securities (1)					Subordinate Securities
(Dollars in Thousands)	(Dollars in Thousands)			MSRs				Senior Securities (1)						Subordinate Securities					(Dollars in Thousands)
Fair value at June 30, 2021
Fair value at September 30, 2021													Fair value at September 30, 2021						$	6,068				$	18,380				$	128,874
Expected life (in years) (2)	Expected life (in years) (2)	2							4						8			Expected life (in years) (2)				2					4				8
Prepayment speed assumption (annual CPR) (2)	Prepayment speed assumption (annual CPR) (2)	38 %			25		%		33 %			Prepayment speed assumption (annual CPR) (2)				36 %					25		%			32 %
Decrease in fair value from:	Decrease in fair value from:											Decrease in fair value from:
10% adverse change	10% adverse change	$	613		$	1,374			$	238		10% adverse change				$	502				$	1,173				$	57
25% adverse change	25% adverse change	1,422			3,120				440			25% adverse change				1,173					2,789					141
Discount rate assumption (2)	Discount rate assumption (2)	12 %			18		%		3.5		%	Discount rate assumption (2)				12 %					18		%			3.8 %
Decrease in fair value from:	Decrease in fair value from:											Decrease in fair value from:
100 basis point increase	100 basis point increase	$	139		$	462			$	10,058		100 basis point increase				$	134				$	417				$	9,353
200 basis point increase	200 basis point increase	271			900				19,174			200 basis point increase				261					812					17,829
Credit loss assumption (2)	Credit loss assumption (2)	N/A			0.39		%		0.39		%	Credit loss assumption (2)				N/A					0.34		%			0.34		%
Decrease in fair value from:	Decrease in fair value from:											Decrease in fair value from:
10% higher losses	10% higher losses	N/A			$	0			$	2,671		10% higher losses				N/A					$	—				$	2,190
25% higher losses	25% higher losses	N/A			0				6,384			25% higher losses				N/A					—					5,473

2122

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2020	December 31, 2020	MSRs					Senior Securities (1)					Subordinate Securities			December 31, 2020			MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)	(Dollars in Thousands)									(Dollars in Thousands)
Fair value at December 31, 2020	Fair value at December 31, 2020				$	8,413				$	17,333					$	140,124		Fair value at December 31, 2020		$	8,413		$	17,333		$	140,124
Expected life (in years) (2)	Expected life (in years) (2)	2					3					8			Expected life (in years) (2)			2			3			8
Prepayment speed assumption (annual CPR) (2)	Prepayment speed assumption (annual CPR) (2)	37		%			31		%			33		%	Prepayment speed assumption (annual CPR) (2)			37		%	31		%	33		%
Decrease in fair value from:	Decrease in fair value from:														Decrease in fair value from:
10% adverse change	10% adverse change	$	906				$	1,557				$	452		10% adverse change			$	906		$	1,557		$	452
25% adverse change	25% adverse change	2,058					3,754					2,298			25% adverse change			2,058			3,754			2,298
Discount rate assumption (2)	Discount rate assumption (2)	12		%			21		%			5		%	Discount rate assumption (2)			12		%	21		%	5		%
Decrease in fair value from:	Decrease in fair value from:														Decrease in fair value from:
100 basis point increase	100 basis point increase	$	196				$	337				$	9,769		100 basis point increase			$	196		$	337		$	9,769
200 basis point increase	200 basis point increase	380					659					18,650			200 basis point increase			380			659			18,650
Credit loss assumption (2)	Credit loss assumption (2)	N/A					0.41		%			0.41		%	Credit loss assumption (2)			N/A			0.41		%	0.41		%
Decrease in fair value from:	Decrease in fair value from:														Decrease in fair value from:
10% higher losses	10% higher losses	N/A					$	0				$	2,409		10% higher losses			N/A			$	—		$	2,409
25% higher losses	25% higher losses	N/A					0					5,915			25% higher losses			N/A			—			5,915

(1)Senior securities included ~~$21~~$18 million and $17 million of interest-only securities at ~~June~~September 30, 2021 and December 31, 2020, respectively.

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

Analysis of Unconsolidated Third-Party VIEs

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

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Mortgage-Backed Securities	Mortgage-Backed Securities					Mortgage-Backed Securities
Senior	Senior	$	4,740	$	11,131	Senior	$	4,114	$	11,131
Mezzanine	Mezzanine	0		2,014		Mezzanine	—		2,014
Subordinate	Subordinate	189,298		173,523		Subordinate	201,918		173,523
Total Mortgage-Backed Securities	Total Mortgage-Backed Securities	194,038		186,668		Total Mortgage-Backed Securities	206,032		186,668
Excess MSR	Excess MSR	12,170		14,133		Excess MSR	11,368		14,133
Total Investments in Third-Party Sponsored VIEs	Total Investments in Third-Party Sponsored VIEs	$	206,208	$	200,801	Total Investments in Third-Party Sponsored VIEs	$	217,400	$	200,801

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

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

2223

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 5. Fair Value of Financial Instruments

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

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

2324

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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

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

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


		June 30, 2021					December 31, 2020					September 30, 2021				December 31, 2020
		Carrying Value		Fair Value			Carrying Value		Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)	(In Thousands)					(In Thousands)
Assets	Assets														Assets
Residential loans, held-for-sale at fair value	Residential loans, held-for-sale at fair value	$	1,160,513	$	1,160,513		$	176,604	$	176,604	Residential loans, held-for-sale at fair value	$	1,495,044	$	1,495,044	$	176,604	$	176,604
Residential loans, held-for-investment	Residential loans, held-for-investment	4,582,052		4,582,052			4,072,410		4,072,410		Residential loans, held-for-investment	4,721,389		4,721,389		4,072,410		4,072,410
Business purpose loans, held-for-sale	Business purpose loans, held-for-sale	418,442		418,442			245,394		245,394		Business purpose loans, held-for-sale	466,346		466,346		245,394		245,394
Business purpose loans, held-for-investment	Business purpose loans, held-for-investment	3,990,447		3,990,447			3,890,959		3,890,959		Business purpose loans, held-for-investment	4,227,209		4,227,209		3,890,959		3,890,959
Multifamily loans	Multifamily loans	485,157		485,157			492,221		492,221		Multifamily loans	482,791		482,791		492,221		492,221
Real estate securities	Real estate securities	354,886		354,886			344,125		344,125		Real estate securities	353,286		353,286		344,125		344,125
Servicer advance investments (1)	Servicer advance investments (1)	184,551		184,551			231,489		231,489		Servicer advance investments (1)	170,062		170,062		231,489		231,489
MSRs (1)	MSRs (1)	8,721		8,721			8,815		8,815		MSRs (1)	12,389		12,389		8,815		8,815
Excess MSRs (1)	Excess MSRs (1)	29,988		29,988			34,418		34,418		Excess MSRs (1)	29,185		29,185		34,418		34,418
Shared home appreciation options (1)		44,319		44,319			42,440		42,440
Other financial instruments (2)		28,556		28,556			10,203		10,203
HEIs (1)											HEIs (1)	167,856		167,856		42,440		42,440
Other investments (2)											Other investments (2)	17,574		17,574		18,847		18,847
Cash and cash equivalents	Cash and cash equivalents	421,223		421,223			461,260		461,260		Cash and cash equivalents	556,989		556,989		461,260		461,260
Restricted cash	Restricted cash	55,048		55,048			83,190		83,190		Restricted cash	88,717		88,717		83,190		83,190
Derivative assets	Derivative assets	34,305		34,305			53,238		53,238		Derivative assets	51,103		51,103		53,238		53,238
REO (3)	REO (3)	15,489		17,718			8,413		9,229		REO (3)	18,863		21,657		8,413		9,229
Margin receivable (3)	Margin receivable (3)	10,269		10,269			4,758		4,758		Margin receivable (3)	16,503		16,503		4,758		4,758
FHLBC stock (3)	FHLBC stock (3)	10		10			5,000		5,000		FHLBC stock (3)	10		10		5,000		5,000
Pledged collateral (3)	Pledged collateral (3)	0		0			1,177		1,177		Pledged collateral (3)	—		—		1,177		1,177
Liabilities	Liabilities										Liabilities
Short-term debt	Short-term debt	$	1,484,999	$	1,484,999		$	522,609	$	522,609	Short-term debt	$	1,750,941	$	1,750,941	$	522,609	$	522,609
Margin payable (4)	Margin payable (4)	19,503		19,503			0		0		Margin payable (4)	48,298		48,298		—		—
Guarantee obligation (4)	Guarantee obligation (4)	8,446		5,932			10,039		7,843		Guarantee obligation (4)	7,902		5,263		10,039		7,843

Point HEI non-controlling interest											Point HEI non-controlling interest	16,722		16,722		—		—
Derivative liabilities	Derivative liabilities	3,240		3,240			16,072		16,072		Derivative liabilities	10,972		10,972		16,072		16,072
ABS issued, net	ABS issued, net										ABS issued, net
Fair value	Fair value	7,360,766		7,360,766			6,900,362		6,900,362		Fair value	7,756,101		7,756,101		6,900,362		6,900,362
Amortized cost	Amortized cost	176,231		180,080			200,299		204,892		Amortized cost	427,724		428,059		200,299		204,892

Other long-term debt, net (5)	Other long-term debt, net (5)	833,272		834,214			774,726		783,570		Other long-term debt, net (5)	847,889		848,929		774,726		783,570
Convertible notes, net (5)	Convertible notes, net (5)	512,339		531,473			511,085		499,865		Convertible notes, net (5)	512,979		539,067		511,085		499,865
Trust preferred securities and subordinated notes, net (5)	Trust preferred securities and subordinated notes, net (5)	138,697		87,188			138,674		80,910		Trust preferred securities and subordinated notes, net (5)	138,709		94,163		138,674		80,910

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

(2)~~Includes equity, debt, and loan investments~~Comprised of financial instruments included in Other investments on our consolidated balance sheets.

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

During the three and ~~six~~nine months ended ~~June~~September 30, 2021, we elected the fair value option for $4$11 million and ~~$26~~$37 million of securities, respectively, ~~$3.48~~$3.17 billion and ~~$6.58~~$9.75 billion of residential loans (principal balance), respectively, ~~and $527~~$637 million and ~~$914 million~~$1.55 billion of business purpose loans (principal balance), respectively, $5 million and $9 million of MSRs, respectively, and $11 million and $15 million of other financial instruments, respectively. Additionally, during the three months ended ~~June~~September 30, 2021, we elected the fair value option for $2$122 million of ~~MSRs and $2 million of other financial instruments.~~HEIs. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, for business purpose bridge loans, ~~we hold for investment, as well as for~~HEIs, MSRs retained from sales of residential loans, and for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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

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

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

June 30, 2021 Carrying
Value Fair Value Measurements Using
(In Thousands) Level 1 Level 2 Level 3
Assets
Residential loans $ 5,742,565 $ 0 $ 0 $ 5,742,565
Business purpose loans 4,408,889 0 0 4,408,889
Multifamily loans 485,157 0 0 485,157
Real estate securities 354,886 0 0 354,886
Servicer advance investments 184,551 0 0 184,551
MSRs 8,721 0 0 8,721
Excess MSRs 29,988 0 0 29,988
Shared home appreciation options 44,319 0 0 44,319
Derivative assets 34,305 2,368 17,746 14,191
Liabilities
Derivative liabilities $ 3,240 $ 1,561 $ 957 $ 722
ABS issued 7,360,766 0 0 7,360,766


December 31, 2020		Carrying Value			Fair Value Measurements Using
September 30, 2021											September 30, 2021			Carrying Value			Fair Value Measurements Using
(In Thousands)	(In Thousands)			Carrying Value			Level 1			Level 2			Level 3		(In Thousands)					Level 1			Level 2			Level 3
Assets	Assets												Assets
Residential loans	Residential loans	$	4,249,014		$	0		$	0		$	4,249,014	Residential loans		$	6,216,433		$	—		$	—		$	6,216,433
Business purpose loans	Business purpose loans	4,136,353			0			0			4,136,353		Business purpose loans		4,693,555			—			—			4,693,555
Multifamily loans	Multifamily loans	492,221			0			0			492,221		Multifamily loans		482,791			—			—			482,791
Real estate securities	Real estate securities	344,125			0			0			344,125		Real estate securities		353,286			—			—			353,286
Servicer advance investments	Servicer advance investments	231,489			0			0			231,489		Servicer advance investments		170,062			—			—			170,062
MSRs	MSRs	8,815			0			0			8,815		MSRs		12,389			—			—			12,389
Excess MSRs	Excess MSRs	34,418			0			0			34,418		Excess MSRs		29,185			—			—			29,185
Shared home appreciation options		42,440			0			0			42,440
HEIs													HEIs		167,856			—			—			167,856
Other investments													Other investments		17,574			—			—			17,574
Derivative assets	Derivative assets	53,238			18,260			19,951			15,027		Derivative assets		51,103			8,213			33,628			9,262
Pledged collateral		1,177			1,177			0			0
FHLBC stock		5,000			0			5,000			0

Liabilities	Liabilities												Liabilities
Non-controlling interest in consolidated Point HEI entity													Non-controlling interest in consolidated Point HEI entity		$	16,722		$	—		$	—		$	16,722
Derivative liabilities	Derivative liabilities	$	16,072		$	15,495		$	0		$	577	Derivative liabilities		10,972			8,348			74			2,550
ABS issued	ABS issued	6,900,362			0			0			6,900,362		ABS issued		7,756,101			—			—			7,756,101

2526

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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


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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The following table presents 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, 2021.

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


		Assets																																			Assets
		Residential Loans				Business Purpose Loans		Multifamily Loans				Trading Securities		AFS Securities		Servicer Advance Investments				MSRs			Excess MSRs			Shared Home Appreciation Options											Residential Loans				Business Purpose Loans			Multifamily Loans			Trading Securities				AFS Securities				Servicer Advance Investments				Excess MSRs				HEIs				Other
(In Thousands)	(In Thousands)																	(In Thousands)				Residential Loans
Beginning balance - December 31, 2020	Beginning balance - December 31, 2020			$	4,249,014					$	4,136,353			$	492,221			$	125,667				$	218,458					$	231,489	$	8,815		$	34,418			$	42,440								$	4,249,014			$	4,136,353			$	492,221			$	125,667			$	218,458			$	231,489		$	34,418	$	42,440	$	27,662

Acquisitions	Acquisitions	6,684,292				0		0				26,367		1,600		0				2,283					0			0								Acquisitions			9,926,335			38,176			—				37,117				1,600				—				—				122,373				14,615
Originations	Originations	0				913,704		0				0		0		0				0			0			0								Originations			—				1,515,262			—			—				—				—				—				—				—
Sales	Sales	(4,531,811)				(9,231)		0				(31,949)		(4,785)		0				0			0			0								Sales			(6,958,669)				(9,484)			—			(32,704)				(4,785)				—				—				—				—
Principal paydowns	Principal paydowns	(727,627)				(599,889)		(3,806)				(807)		(28,979)		(45,838)				0			0			(5,516)								Principal paydowns			(1,051,390)				(942,096)			(5,685)			(1,783)				(45,120)				(58,248)				—				(10,220)				(9,224)

Gains (losses) in net income (loss), net	Gains (losses) in net income (loss), net	70,184				(17,835)		(3,258)				23,147		14,172		(1,100)				(2,251)			(4,430)			7,395								Gains (losses) in net income (loss), net			53,549				(25,658)			(3,745)			24,713				26,998				(3,179)				(5,233)				13,263				(2,974)
Unrealized losses in OCI, net	Unrealized losses in OCI, net	0				0		0				0		11,995		0				0			0			0								Unrealized losses in OCI, net			—				—			—			—				3,125				—				—				—				—
Other settlements, net (1)	Other settlements, net (1)	(1,487)				(14,213)		0				0		0		0				(126)			0			0								Other settlements, net (1)			(2,406)				(18,998)			—			—				—				—				—				—				(116)
Ending balance - June 30, 2021		$	5,742,565			$	4,408,889	$	485,157			$	142,425	$	212,461	$	184,551			$	8,721		$	29,988		$	44,319
Ending balance - September 30, 2021																																	Ending balance - September 30, 2021		$	6,216,433			$	4,693,555		$	482,791		$	153,010			$	200,276			$	170,062			$	29,185			$	167,856			$	29,963

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


		Liabilities				Liabilities
									Derivatives (2)				ABS Issued										Derivatives (2)				Point HEI Non-Controlling Interest		ABS Issued
(In Thousands)	(In Thousands)		Derivatives (2)	ABS Issued	(In Thousands)											Derivatives (2)	Point HEI Non-Controlling Interest	ABS Issued
Beginning balance - December 31, 2020	Beginning balance - December 31, 2020						$	14,450			$	6,900,362			Beginning balance - December 31, 2020				$	14,450	$	—			$	6,900,362

Acquisitions	Acquisitions								0				1,629,218		Acquisitions								—				16,639		2,552,785

Principal paydowns	Principal paydowns								0				(1,055,541)		Principal paydowns								—				—		(1,500,357)

Gains (losses) in net income (loss), net	Gains (losses) in net income (loss), net								(197)				(113,273)		Gains (losses) in net income (loss), net								17,806				83		(196,689)

Other settlements, net (1)	Other settlements, net (1)								(784)				0		Other settlements, net (1)								(25,544)				—		—
Ending balance - June 30, 2021									$	13,469			$	7,360,766
Ending balance - September 30, 2021															Ending balance - September 30, 2021								$	6,712			$	16,722	$	7,756,101

(1) Other settlements, net for residential and business purpose loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans.

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

2628

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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

The following table presents the portion of gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at ~~June~~September 30, 2021 and 2020. 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, 2021 and 2020 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at ~~June~~September 30, 2021 and 2020 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)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Assets	Assets									Assets
Residential loans at Redwood	Residential loans at Redwood	$	14,130	$	(359)	$	10,481	$	(746)	Residential loans at Redwood	$	6,553	$	(107)	$	9,371	$	(865)
Business purpose loans	Business purpose loans	28,404		31,187		40,003		(21,026)		Business purpose loans	18,810		21,155		19,829		17,901
Net investments in consolidated Sequoia entities (1)	Net investments in consolidated Sequoia entities (1)	4,693		39,558		8,893		(30,502)		Net investments in consolidated Sequoia entities (1)	2,885		7,700		11,779		(22,802)
Net investments in consolidated Freddie Mac SLST entities (1)	Net investments in consolidated Freddie Mac SLST entities (1)	36,137		26,867		40,225		(115,295)		Net investments in consolidated Freddie Mac SLST entities (1)	13,781		82,209		54,006		(33,087)
Net investments in consolidated Freddie Mac K-Series entity (1)	Net investments in consolidated Freddie Mac K-Series entity (1)	1,855		1,599		10,776		(13,180)		Net investments in consolidated Freddie Mac K-Series entity (1)	555		2,165		11,330		(11,014)
Net investments in consolidated CAFL entities (1)		2,908		17,125		2,556		(50,721)
Net investments in consolidated CAFL SFR entities (1)										Net investments in consolidated CAFL SFR entities (1)	2,943		9,673		5,500		(41,048)
Net investment in consolidated Point HEI entity (1)										Net investment in consolidated Point HEI entity (1)	47		—		129		—
Trading securities	Trading securities	1,772		30,647		2,262		(79,633)		Trading securities	1,547		(3,549)		3,824		(80,358)

Servicer advance investments	Servicer advance investments	(940)		(136)		(1,100)		(6,198)		Servicer advance investments	(2,079)		25		(3,179)		(6,172)
MSRs	MSRs	(330)		(1,591)		273		(16,507)		MSRs	(235)		(2,376)		(49)		(16,798)
Excess MSRs	Excess MSRs	(2,477)		2,971		(4,430)		(6,523)		Excess MSRs	(803)		(1,127)		(5,233)		(7,650)
Shared home appreciation options		2,080		884		7,395		(6,670)
HEIs at Redwood										HEIs at Redwood	(41)		2,384		21		(4,286)
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	14,550		357		14,171		357		Loan purchase and interest rate lock commitments	9,021		10,791		9,261		10,773

Liabilities	Liabilities									Liabilities
Non-controlling interest in consolidated Point HEI entity										Non-controlling interest in consolidated Point HEI entity	$	(83)	$	—	$	(83)	$	—
Loan purchase commitments	Loan purchase commitments	$	(696)	$	2,137	$	(724)	$	(1,634)	Loan purchase commitments	(2,570)		420		(2,550)		(1,334)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

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

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


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

REO	REO	$	1,233		$	0		$	0		$	1,233		$	(3)		$	(7)	REO		$	622		$	—		$	—		$	622			$	(1)			$	(4)

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, 2021 and 2020.

2730

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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

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)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net									Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	Residential loans held-for-sale, at fair value	$	24,988	$	(2,014)	$	48,100	$	(15,494)	Residential loans held-for-sale, at fair value	$	9,045	$	(478)	$	57,145	$	(15,972)
Residential loan purchase and forward sale commitments		51,919		621		(466)		22,056
Residential loan purchase commitments										Residential loan purchase commitments	18,817		13,067		18,351		35,123
Single-family rental loans held-for-sale, at fair value	Single-family rental loans held-for-sale, at fair value	25,222		1,210		35,470		12,677		Single-family rental loans held-for-sale, at fair value	19,205		43,191		54,675		55,868
Single-family rental loan purchase and interest rate lock commitments		744		0		744		341
Single-family rental loan interest rate lock commitments										Single-family rental loan interest rate lock commitments	(744)		—		—		341
Bridge loans	Bridge loans	2,225		(1,260)		3,269		(5,194)		Bridge loans	3,433		938		6,702		(4,256)
Trading securities (1)	Trading securities (1)	(1,095)		0		(374)		0		Trading securities (1)	32		—		(342)		—
Risk management derivatives, net	Risk management derivatives, net	(58,244)		0		34,578		(52,832)		Risk management derivatives, net	3,539		(99)		38,117		(52,931)
Total mortgage banking activities, net (2)	Total mortgage banking activities, net (2)	$	45,759	$	(1,443)	$	121,321	$	(38,446)	Total mortgage banking activities, net (2)	$	53,327	$	56,619	$	174,648	$	18,173
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net									Investment Fair Value Changes, Net
Residential loans at Redwood	Residential loans at Redwood	$	1,290	$	104	$	1,607	$	(93,532)	Residential loans at Redwood	$	816	$	218	$	2,423	$	(93,314)
Single-family rental loans held-for-investment	Single-family rental loans held-for-investment	0		2,222		0		(20,806)		Single-family rental loans held-for-investment	—		—		—		(20,806)
Bridge loans held-for-investment	Bridge loans held-for-investment	(62)		21,774		3,242		(16,828)		Bridge loans held-for-investment	900		6,812		4,142		(10,016)
Trading securities	Trading securities	2,893		42,246		23,521		(221,079)		Trading securities	1,546		(3,600)		25,067		(224,679)
Servicer advance investments	Servicer advance investments	(940)		(136)		(1,100)		(6,198)		Servicer advance investments	(2,079)		26		(3,179)		(6,172)
Excess MSRs	Excess MSRs	(2,477)		2,971		(4,430)		(6,523)		Excess MSRs	(803)		(1,127)		(5,233)		(7,650)
Net investments in Legacy Sequoia entities (3)	Net investments in Legacy Sequoia entities (3)	(216)		(230)		(915)		(621)		Net investments in Legacy Sequoia entities (3)	(247)		(81)		(1,162)		(702)
Net investments in Sequoia entities (3)	Net investments in Sequoia entities (3)	4,906		39,753		9,804		(29,916)		Net investments in Sequoia entities (3)	3,314		7,851		13,118		(22,065)
Net investments in Freddie Mac SLST entities (3)	Net investments in Freddie Mac SLST entities (3)	36,316		26,867		40,433		(115,295)		Net investments in Freddie Mac SLST entities (3)	13,849		82,214		54,282		(33,081)
Net investment in Freddie Mac K-Series entity (3)	Net investment in Freddie Mac K-Series entity (3)	1,855		1,599		10,776		(84,910)		Net investment in Freddie Mac K-Series entity (3)	554		2,166		11,330		(82,744)
Net investments in CAFL entities (3)	Net investments in CAFL entities (3)	3,697		17,125		3,411		(50,721)		Net investments in CAFL entities (3)	2,943		9,673		6,354		(41,048)
Shared home appreciation options		2,080		884		7,395		(6,670)
Net investment in Point HEI entity (3)										Net investment in Point HEI entity (3)	47		—		47		—
HEIs at Redwood										HEIs at Redwood	5,622		2,384		13,017		(4,286)
Other investments	Other investments	125		(3,005)		435		(4,892)		Other investments	(385)		67		50		(4,825)
Risk management derivatives, net	Risk management derivatives, net	0		0		0		(59,142)		Risk management derivatives, net	—		—		—		(59,142)
Credit recoveries (losses) on AFS securities	Credit recoveries (losses) on AFS securities	13		54		388		(1,471)		Credit recoveries (losses) on AFS securities	—		444		388		(1,027)
Total investment fair value changes, net	Total investment fair value changes, net	$	49,480	$	152,228	$	94,567	$	(718,604)	Total investment fair value changes, net	$	26,077	$	107,047	$	120,644	$	(611,557)
Other Income	Other Income									Other Income
MSRs	MSRs	$	(1,381)	$	(3,955)	$	(2,247)	$	(22,563)	MSRs	$	(989)	$	(4,783)	$	(3,236)	$	(27,346)
Risk management derivatives, net	Risk management derivatives, net	0		0		0		13,966		Risk management derivatives, net	—		—		—		13,966

Total other income (4)	Total other income (4)	$	(1,381)	$	(3,955)	$	(2,247)	$	(8,597)	Total other income (4)	$	(989)	$	(4,783)	$	(3,236)	$	(13,380)
Total Market Valuation Gains (Losses), Net	Total Market Valuation Gains (Losses), Net	$	93,858	$	146,830	$	213,641	$	(765,647)	Total Market Valuation Gains (Losses), Net	$	78,415	$	158,883	$	292,056	$	(606,764)

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

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

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

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

2831

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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

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

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments


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

Jumbo fixed-rate loans	Jumbo fixed-rate loans	$	232,343		Prepayment rate (annual CPR)		20		-	20		%	20		%	Jumbo fixed-rate loans		$	624,477	Prepayment rate (annual CPR)			20			-	20		%	20			%
					Whole loan spread to TBA price		$	2.00	-	$	2.00		$	2.00						Whole loan spread to TBA price			$	3.00		-	$	3.00		$	3.00
					Whole loan spread to swap rate		215		-	215		bps	215		bps					Whole loan spread to swap rate			202			-	202		bps	202			bps

Jumbo loans committed to sell	Jumbo loans committed to sell	928,170			Whole loan committed sales price		$	100.88	-	$	103.03		$	102.38		Jumbo loans committed to sell		870,568		Whole loan committed sales price			$	101.90		-	$	103.32		$	102.46

Loans held by Legacy Sequoia (2)	Loans held by Legacy Sequoia (2)	260,875			Liability price					N/A			N/A			Loans held by Legacy Sequoia (2)		242,234		Liability price							N/A			N/A

Loans held by Sequoia (2)	Loans held by Sequoia (2)	2,222,553			Liability price					N/A			N/A			Loans held by Sequoia (2)		2,479,750		Liability price							N/A			N/A

Loans held by Freddie Mac SLST (2)	Loans held by Freddie Mac SLST (2)	2,098,624			Liability price					N/A			N/A			Loans held by Freddie Mac SLST (2)		1,999,405		Liability price							N/A			N/A

Business purpose loans:	Business purpose loans:															Business purpose loans:
Single-family rental loans	Single-family rental loans	418,442			Senior credit spread		70		-	70		bps	70		bps	Single-family rental loans		466,346		Senior credit spread			65			-	65		bps	65			bps
					Subordinate credit spread		105		-	1,531		bps	391		bps					Subordinate credit spread			110			-	1,523		bps	401			bps
					Senior credit support		34		-	34		%	34		%					Senior credit support			35			-	35		%	35			%
					IO discount rate		9		-	9		%	9		%					IO discount rate			9			-	9		%	9			%
					Prepayment rate (annual CPR)		3		-	3		%	3		%					Prepayment rate (annual CPR)			3			-	3		%	3			%
					Non-securitizable loan dollar price		$	82	-	$	102		$	99						Non-securitizable loan dollar price			$	76		-	$	111		$	101

Single-family rental loans held by CAFL(2)	Single-family rental loans held by CAFL(2)	3,263,878			Liability price					N/A			N/A			Single-family rental loans held by CAFL(2)		3,402,410		Liability price							N/A			N/A

Bridge loans	Bridge loans	726,569			Discount rate		6		-	15		%	8		%	Bridge loans		824,799		Discount rate			4			-	15		%	6			%

Multifamily loans held by Freddie Mac K-Series (2)	Multifamily loans held by Freddie Mac K-Series (2)	485,157			Liability price					N/A			N/A			Multifamily loans held by Freddie Mac K-Series (2)		482,791		Liability price							N/A			N/A

Trading and AFS securities	Trading and AFS securities	354,886			Discount rate		2		-	31		%	7		%	Trading and AFS securities		353,286		Discount rate			2			-	38		%	7			%
					Prepayment rate (annual CPR)		8		-	62		%	28		%					Prepayment rate (annual CPR)			8			-	58		%	27			%
					Default rate		0		-	25		%	4		%					Default rate			—			-	25		%	4			%
					Loss severity		0		-	50		%	22		%					Loss severity			—			-	50		%	24			%
					CRT dollar price		$	95	-	$	113		$	102						CRT dollar price			$	96		-	$	116		$	104

Servicer advance investments	Servicer advance investments	184,551			Discount rate		3		-	3		%	3		%	Servicer advance investments		170,062		Discount rate			2			-	3		%	2			%
					Prepayment rate (annual CPR)		20		-	30		%	21		%					Prepayment rate (annual CPR)			20			-	30		%	21			%
					Expected remaining life (3)		4		-	4		years	4		years					Expected remaining life (3)			5			-	5		years	5			years
					Mortgage servicing income		0		-	15		bps	9		bps					Mortgage servicing income			2			-	11		bps	9			bps

MSRs	MSRs	8,721			Discount rate		12		-	12		%	12		%	MSRs		12,389		Discount rate			12			-	15		%	13			%
					Prepayment rate (annual CPR)		7		-	84		%	36		%					Prepayment rate (annual CPR)			6			-	80		%	28			%
					Per loan annual cost to service		$	96	-	$	96		$	96						Per loan annual cost to service			$	95		-	$	95		$	95

Excess MSRs	Excess MSRs	29,988			Discount rate		13		-	16		%	15		%	Excess MSRs		29,185		Discount rate			13			-	16		%	15			%
					Prepayment rate (annual CPR)		21		-	30		%	24		%					Prepayment rate (annual CPR)			21			-	30		%	25			%
					Excess mortgage servicing income		8		-	17		bps	11		bps					Excess mortgage servicing income			8			-	17		bps	11			bps

2932

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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

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


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

Shared home appreciation options		$	44,319		Discount rate		13		-	13		%	13		%
HEIs at Redwood																HEIs at Redwood		$	414	Dollar Price			$	92		-	$	124		$	105
					Prepayment rate (annual CPR)		16		-	24		%	17		%
					Home price appreciation		3		-	4		%	3		%

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

REO	REO	1,233			Loss severity		4		-	40		%	23		%	REO		622		Loss severity			11			-	40		%	22			%

Residential loan purchase commitments, net	Residential loan purchase commitments, net	12,725			Committed sales price		$	102.00	-	$	103.03		$	102.64		Residential loan purchase commitments, net		6,712		Committed sales price			$	102.11		-	$	102.77		$	102.54
					Pull-through rate		21		-	100		%	72		%					Pull-through rate			4			-	100		%	71			%
					Whole loan spread to TBA price		$	2.00	-	$	2.00		$	2.00						Whole loan spread to TBA price			$	3.00		-	$	3.00		$	3.00
					Whole loan spread to swap rate		191		-	215		bps	201		bps					Whole loan spread to swap rate			185			-	202		bps	201			bps
					Prepayment rate (annual CPR)		20		-	20		%	20		%					Prepayment rate (annual CPR)			20			-	20		%	20			%

Single-family rental interest rate lock commitments		744			Senior credit spread		70		-	70		bps	70		bps

					Subordinate credit spread		105		-	1,531		bps	391		bps
					Senior credit support		34		-	34		%	34		%
					IO discount rate		10		-	11		%	10		%
					Prepayment rate (annual CPR)		3		-	3		%	3		%
					Pull-through rate		100		-	100		%	100		%

Liabilities	Liabilities															Liabilities
ABS issued (2):	ABS issued (2):															ABS issued (2):
At consolidated Sequoia entities	At consolidated Sequoia entities	2,248,759			Discount rate		1		-	18		%	3		%	At consolidated Sequoia entities		2,482,746		Discount rate			1			-	18		%	3			%
					Prepayment rate (annual CPR)		7		-	51		%	33		%					Prepayment rate (annual CPR)			7			-	55		%	33			%
					Default rate		0		-	39		%	2		%					Default rate			—			-	36		%	2			%
					Loss severity		25		-	50		%	32		%					Loss severity			25			-	50		%	32			%

At consolidated CAFL entities (4)		3,007,596			Discount rate		1		-	13		%	3		%
At consolidated CAFL SFR entities (4)																At consolidated CAFL SFR entities (4)		3,126,405		Discount rate			1			-	13		%	3			%
					Prepayment rate (annual CPR)		3		-	3		%	3		%					Prepayment rate (annual CPR)			3			-	3		%	3			%
					Default rate		3		-	18		%	9		%					Default rate			2			-	18		%	9			%
					Loss severity		30		-	30		%	30		%					Loss severity			30			-	30		%	30			%

At consolidated Freddie Mac SLST entities	At consolidated Freddie Mac SLST entities	1,650,087			Discount rate		2		-	7		%	3		%	At consolidated Freddie Mac SLST entities		1,550,111		Discount rate			2			-	7		%	3			%

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

At consolidated Freddie Mac K-Series entities (4)	At consolidated Freddie Mac K-Series entities (4)	454,324			Discount rate		1		-	9		%	2		%	At consolidated Freddie Mac K-Series entities (4)		451,402		Discount rate			1			-	8		%	2			%

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

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

(2)The fair value of the loans and HEIs held by consolidated entities was based on the fair value of the ABS issued by these entities ~~including~~and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At ~~June~~September 30, 2021, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, ~~and~~ Freddie Mac K-Series, and Point HEI entities was ~~$235~~$240 million, ~~$268~~$288 million, ~~$450~~$451 million, $31 million, and ~~$31~~$10 million, respectively.

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

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

3033

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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

Determination of Fair Value

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

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

In addition to the Level 3 financial instruments included in Table 5.7 above, certain of our Other investments (comprised of strategic investments in early-stage start-up companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We generally value these assets based on our original investment price until there is an observable price change in an orderly transaction for the identical or similar investment of the same issuer.

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, 2021 and December 31, 2020.

Table 6.1 – Classifications and Carrying Values of Residential Loans


June 30, 2021				Legacy				Freddie Mac
September 30, 2021												September 30, 2021			Legacy				Freddie Mac
(In Thousands)	(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total		(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	1,160,548	$	0	$	0	$	0	$	1,160,548	Held-for-sale at fair value	$	1,495,079	$	—	$	—	$	—	$	1,495,079
Held-for-investment at fair value	Held-for-investment at fair value	0		260,875		2,222,553		2,098,624		4,582,052		Held-for-investment at fair value	—		242,234		2,479,750		1,999,405		4,721,389
Total Residential Loans	Total Residential Loans	$	1,160,548	$	260,875	$	2,222,553	$	2,098,624	$	5,742,600	Total Residential Loans	$	1,495,079	$	242,234	$	2,479,750	$	1,999,405	$	6,216,468


December 31, 2020	December 31, 2020			Legacy				Freddie Mac				December 31, 2020			Legacy				Freddie Mac
(In Thousands)	(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total		(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	176,641	$	0	$	0	$	0	$	176,641	Held-for-sale at fair value	$	176,641	$	—	$	—	$	—	$	176,641
Held-for-investment at fair value	Held-for-investment at fair value	0		285,935		1,565,322		2,221,153		4,072,410		Held-for-investment at fair value	—		285,935		1,565,322		2,221,153		4,072,410
Total Residential Loans	Total Residential Loans	$	176,641	$	285,935	$	1,565,322	$	2,221,153	$	4,249,051	Total Residential Loans	$	176,641	$	285,935	$	1,565,322	$	2,221,153	$	4,249,051

At ~~June~~September 30, 2021, we owned mortgage servicing rights associated with ~~$1.10~~$1.40 billion (principal balance) of residential loans owned at Redwood that were purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

3134

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Sale

At Fair Value

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

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


(Dollars in Thousands)	(Dollars in Thousands)	June 30, 2021		December 31, 2020		(Dollars in Thousands)	September 30, 2021		December 31, 2020
Number of loans	Number of loans	1,316		198		Number of loans	1,958		198
Unpaid principal balance	Unpaid principal balance	$	1,135,356	$	172,748	Unpaid principal balance	$	1,464,767	$	172,748
Fair value of loans	Fair value of loans	$	1,160,548	$	176,641	Fair value of loans	$	1,495,079	$	176,641
Market value of loans pledged as collateral under short-term borrowing agreements	Market value of loans pledged as collateral under short-term borrowing agreements	$	1,152,267	$	156,355	Market value of loans pledged as collateral under short-term borrowing agreements	$	1,478,424	$	156,355

Delinquency information	Delinquency information					Delinquency information
Number of loans with 90+ day delinquencies	Number of loans with 90+ day delinquencies	2		1		Number of loans with 90+ day delinquencies	4		1
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	2,100	$	1,882	Unpaid principal balance of loans with 90+ day delinquencies	$	3,159	$	1,882
Fair value of loans with 90+ day delinquencies	Fair value of loans with 90+ day delinquencies	$	1,397	$	1,223	Fair value of loans with 90+ day delinquencies	$	2,490	$	1,223
Number of loans in foreclosure	Number of loans in foreclosure	0		0		Number of loans in foreclosure	—		—

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

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Principal balance of loans acquired	Principal balance of loans acquired	$	3,484,633	$	57,743	$	6,580,681	$	2,687,651	Principal balance of loans acquired	$	3,167,186	$	172,162	$	9,747,867	$	2,859,813
Principal balance of loans sold	Principal balance of loans sold	3,324,919		2,280,076		5,600,751		4,936,795		Principal balance of loans sold	2,360,862		87,868		6,787,490		4,750,615
Principal balance of loans transferred to HFI										Principal balance of loans transferred to HFI	448,878		—		1,623,000		274,048
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	26,278		(2,014)		49,707		(15,494)		Net market valuation gains (losses) recorded (1)	9,861		(478)		59,568		(15,972)

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

3235

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Investment at Fair Value

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

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


June 30, 2021		Legacy				Freddie Mac
September 30, 2021								September 30, 2021	Legacy				Freddie Mac
(Dollars in Thousands)	(Dollars in Thousands)	Sequoia		Sequoia		SLST		(Dollars in Thousands)	Sequoia		Sequoia		SLST
Number of loans	Number of loans	1,733		2,775		12,902		Number of loans	1,653		3,022		12,444
Unpaid principal balance	Unpaid principal balance	$	295,368	$	2,193,269	$	2,107,256	Unpaid principal balance	$	278,815	$	2,447,402	$	2,022,724
Fair value of loans	Fair value of loans	$	260,875	$	2,222,553	$	2,098,624	Fair value of loans	$	242,234	$	2,479,750	$	1,999,405

Delinquency information	Delinquency information							Delinquency information
Number of loans with 90+ day delinquencies (1)	Number of loans with 90+ day delinquencies (1)	43		48		1,446		Number of loans with 90+ day delinquencies (1)	40		30		1,168
Unpaid principal balance of loans with 90+ day delinquencies	Unpaid principal balance of loans with 90+ day delinquencies	$	14,878	$	38,502	$	261,504	Unpaid principal balance of loans with 90+ day delinquencies	$	14,038	$	24,438	$	209,913
Fair value of loans with 90+ day delinquencies (2)	Fair value of loans with 90+ day delinquencies (2)	N/A		N/A		N/A		Fair value of loans with 90+ day delinquencies (2)	N/A		N/A		N/A
Number of loans in foreclosure	Number of loans in foreclosure	18		3		308		Number of loans in foreclosure	18		4		305
Unpaid principal balance of loans in foreclosure	Unpaid principal balance of loans in foreclosure	$	3,830	$	2,257	$	51,191	Unpaid principal balance of loans in foreclosure	$	4,416	$	2,863	$	52,319


December 31, 2020	Legacy				Freddie Mac
(Dollars in Thousands)	Sequoia		Sequoia		SLST
Number of loans	1,908		2,177		13,605
Unpaid principal balance	$	333,474	$	1,550,454	$	2,247,771
Fair value of loans	$	285,935	$	1,565,322	$	2,221,153

Delinquency information
Number of loans with 90+ day delinquencies (1)	52		94		2,110
Unpaid principal balance of loans with 90+ day delinquencies	$	17,285	$	74,742	$	389,245
Fair value of loans with 90+ day delinquencies (2)	N/A		N/A		N/A
Number of loans in foreclosure	21		3		245
Unpaid principal balance of loans in foreclosure	$	4,939	$	2,251	$	38,610

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

(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.

3336

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 6. Residential Loans - (continued)

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

Table 6.5 – Activity of Residential Loans Held-for-Investment at 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)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020

Fair value of loans transferred from HFS to HFI	Fair value of loans transferred from HFS to HFI	$	0	$	0	$	0	$	13,258	Fair value of loans transferred from HFS to HFI	$	—	$	—	$	—	$	13,258
Fair value of loans transferred from HFI to HFS	Fair value of loans transferred from HFI to HFS	0		0		0		1,870,986		Fair value of loans transferred from HFI to HFS	—		—		—		1,870,986
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	0		104		0		(93,532)		Net market valuation gains (losses) recorded (1)	—		218		—		(93,314)

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

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

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

Three Months Ended June 30, 2021

Three Months Ended June 30, 2020

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

Legacy

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

1,205,494

N/A

270,506

N/A

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

N/A

464,189

N/A

—

N/A

Net market valuation gains (losses) recorded ~~(1)~~(2)

4,863

(12,835)

22,579

8,081

93,932

48,587

Net market valuation gains (losses) recorded ~~(1)~~(2)

(2,580)

(11,663)

(13,836)

21,938

(5,175)

159,687

Six Months Ended June 30, 2021

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

Legacy

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

1,205,494

N/A

270,506

N/A

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

N/A

1,669,683

N/A

270,506

N/A

Net market valuation gains (losses) recorded ~~(1)~~(2)

12,476

(15,413)

19,014

(60,933)

(16,553)

(144,433)

Net market valuation gains (losses) recorded ~~(1)~~(2)

9,896

(27,076)

5,177

(38,996)

(21,727)

15,254

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

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

3437

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans

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

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


June 30, 2021		Single-Family Rental				Residential
September 30, 2021										September 30, 2021	Single-Family Rental				Bridge
(In Thousands)	(In Thousands)	Redwood		CAFL		Bridge		Total		(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	Held-for-sale at fair value	$	418,442	0		$	0	$	418,442	Held-for-sale at fair value	$	466,346	—		$	—	$	—	$	466,346
Held-for-investment at fair value	Held-for-investment at fair value	0		3,263,878		726,569		3,990,447		Held-for-investment at fair value	—		3,402,410		548,445		276,354		4,227,209
Total Business Purpose Loans	Total Business Purpose Loans	$	418,442	$	3,263,878	$	726,569	$	4,408,889	Total Business Purpose Loans	$	466,346	$	3,402,410	$	548,445	$	276,354	$	4,693,555


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

Single-Family Rental Loans

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

Bridge Loans

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)

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

Table 7.2 – Activity of Business Purpose Loans at Redwood


		Three Months Ended June 30, 2021				Three Months Ended June 30, 2020					Three Months Ended September 30, 2021				Three Months Ended September 30, 2020
(In Thousands)	(In Thousands)	SFR at Redwood		Bridge		SFR at Redwood		Bridge		(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	Principal balance of loans originated	$	312,217	$	215,160	$	175,876	$	58,468	Principal balance of loans originated	$	392,620	$	208,938	$	195,744	$	65,517
Principal balance of loans acquired										Principal balance of loans acquired	2,463		35,713		—		—
Principal balance of loans sold to third parties	Principal balance of loans sold to third parties	0		354		0		1,558		Principal balance of loans sold to third parties	—		253		7,695		1,567
Fair value of loans transferred from HFS to HFI (1)	Fair value of loans transferred from HFS to HFI (1)	297,301		N/A		220,923		N/A		Fair value of loans transferred from HFS to HFI (1)	332,670		276,354		326,405		N/A
Fair value of loans transferred from HFI to HFS (2)	Fair value of loans transferred from HFI to HFS (2)	44,922		0		0		0		Fair value of loans transferred from HFI to HFS (2)	—		N/A		—		N/A
Mortgage banking activities income (loss) recorded (3)	Mortgage banking activities income (loss) recorded (3)	25,222		978		1,210		(3,277)		Mortgage banking activities income (loss) recorded (3)	19,205		3,691		43,191		29
Investment fair value changes recorded (4)	Investment fair value changes recorded (4)	0		(62)		2,222		21,774		Investment fair value changes recorded (4)	—		900		—		6,812

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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


		Six Months Ended June 30, 2021				Six Months Ended June 30, 2020					Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
(In Thousands)	(In Thousands)	SFR at Redwood		Bridge		SFR at Redwood		Bridge		(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	Principal balance of loans originated	$	565,315	$	348,389	$	436,005	$	285,836	Principal balance of loans originated	$	957,935	$	557,327	$	631,749	$	351,353
Principal balance of loans acquired										Principal balance of loans acquired	2,463		35,713		—		—
Principal balance of loans sold to third parties	Principal balance of loans sold to third parties	0		9,231		26,148		22,293		Principal balance of loans sold to third parties	—		9,484		33,843		23,860
Fair value of loans transferred from HFS to HFI (1)	Fair value of loans transferred from HFS to HFI (1)	466,705		N/A		599,032		N/A		Fair value of loans transferred from HFS to HFI (1)	799,375		276,354		925,437		N/A
Fair value of loans transferred from HFI to HFS (2)	Fair value of loans transferred from HFI to HFS (2)	44,922		0		0		0		Fair value of loans transferred from HFI to HFS (2)	44,922		N/A		—		N/A
Mortgage banking activities income (loss) recorded (3)	Mortgage banking activities income (loss) recorded (3)	35,470		1,521		11,540		(3,441)		Mortgage banking activities income (loss) recorded (3)	54,675		5,212		54,731		(3,412)
Investment fair value changes recorded (4)	Investment fair value changes recorded (4)	0		3,242		(20,806)		(16,828)		Investment fair value changes recorded (4)	—		4,142		(20,806)		(10,016)

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

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

(3)Represents net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three and ~~six~~nine months ended ~~June~~September 30, 2021, we recorded loan origination fee income of $7$9 million and ~~$13~~$22 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). For the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded loan origination fee income of $2$3 million and ~~$11~~$13 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

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

~~Bridge~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans ~~Held-for-Investment~~- (continued)

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

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

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. ~~The outstanding single-family rental loans held-for-investment at CAFL at June 30, 2021 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years.~~ During the ~~six~~nine months ended ~~June~~September 30, 2021, we transferred 23 CAFL loans with a fair value of $12 million to REO, which is included in Other assets on our consolidated balance sheets.

The following table provides the activity of ~~single-family rental~~business purpose loans held-for-investment at CAFL during the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30, 2021				Three Months Ended September 30, 2020
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	SFR at CAFL		Bridge at CAFL		SFR at CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	$	(1,230)	$	169,327	$	(62,132)	$	(102,590)	Net market valuation gains (losses) recorded (1)	$	(34,803)	$	—	$	88,271	$	—


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

(1)For loans held at our consolidated CAFL entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.

REO

See Note 12 for detail on BPL loans transferred to REO during 2021.

3640

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loan Characteristics

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

Table 7.4 – Characteristics of Business Purpose Loans

June 30, 2021 Single-Family Rental at Redwood Single-Family Rental at CAFL Bridge
(Dollars in Thousands)
Number of loans 112 1,121 2,471
Unpaid principal balance $ 399,900 $ 3,060,949 $ 729,149
Fair value of loans $ 418,442 $ 3,263,878 $ 726,569
Weighted average coupon 4.84 % 5.34 % 7.63 %
Weighted average remaining loan term (years) 7 5 1
Market value of loans pledged as collateral under short-term debt facilities $ 122,277 N/A $ 127,133
Market value of loans pledged as collateral under long-term debt facilities $ 246,903 N/A $ 555,791
Delinquency information
Number of loans with 90+ day delinquencies (1)
9 21 40
Unpaid principal balance of loans with 90+ day delinquencies $ 6,586 $ 59,841 $ 35,018
Fair value of loans with 90+ day delinquencies (2)
$ 5,369 N/A $ 31,512
Number of loans in foreclosure 7 10 43
Unpaid principal balance of loans in foreclosure $ 5,976 $ 24,212 $ 32,611
Fair value of loans in foreclosure (2)
$ 4,798 N/A $ 28,963
December 31, 2020 Single-Family Rental at Redwood Single-Family Rental at CAFL Bridge
(Dollars in Thousands)
Number of loans 65 1,094 1,725
Unpaid principal balance $ 234,475 $ 3,017,137 $ 649,532
Fair value of loans $ 245,394 $ 3,249,194 $ 641,765
Weighted average coupon 4.84 % 5.44 % 8.09 %
Weighted average remaining loan term (years) 8 5 1
Market value of loans pledged as collateral under short-term debt facilities $ 34,098 N/A $ 92,931
Market value of loans pledged as collateral under long-term debt facilities $ 154,774 N/A $ 544,151
Delinquency information
Number of loans with 90+ day delinquencies (1)
10 22 31
Unpaid principal balance of loans with 90+ day delinquencies $ 7,127 $ 61,440 $ 39,415
Fair value of loans with 90+ day delinquencies (2)
$ 6,143 N/A $ 33,605
Number of loans in foreclosure 0 10 25
Unpaid principal balance of loans in foreclosure $ 0 $ 24,745 $ 38,552
Fair value of loans in foreclosure (2)
$ 0 N/A $ 33,066


September 30, 2021	SFR at Redwood			SFR at CAFL			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	123			1,157			1,092			1,589
Unpaid principal balance	$	451,295		$	3,207,118		$	550,711		$	272,243
Fair value of loans	$	466,346		$	3,402,411		$	548,445		$	276,354
Weighted average coupon	4.57		%	5.27		%	7.48		%	7.19		%
Weighted average remaining loan term (years)	7			6			1			1
Market value of loans pledged as collateral under short-term debt facilities	$	127,930		N/A			$	126,725		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	298,014		N/A			$	373,597		N/A

Delinquency information
Number of loans with 90+ day delinquencies (1)	7			15			35			—
Unpaid principal balance of loans with 90+ day delinquencies	$	5,067		$	39,423		$	30,132		$	—
Fair value of loans with 90+ day delinquencies (2)	$	2,664		N/A			$	26,525		$	—
Number of loans in foreclosure	6			10			34			—
Unpaid principal balance of loans in foreclosure	$	4,978		$	22,004		$	26,177		$	—
Fair value of loans in foreclosure (2)	$	2,619		N/A			$	22,570		$	—


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

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

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

3741

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 8. Multifamily Loans

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

Table 8.1 – Characteristics of Multifamily Loans


(Dollars in Thousands)	(Dollars in Thousands)	June 30, 2021			December 31, 2020			(Dollars in Thousands)	September 30, 2021			December 31, 2020
Number of loans	Number of loans	28			28			Number of loans	28			28
Unpaid principal balance	Unpaid principal balance	$	459,002		$	462,808		Unpaid principal balance	$	457,123		$	462,808
Fair value of loans	Fair value of loans	$	485,157		$	492,221		Fair value of loans	$	482,791		$	492,221
Weighted average coupon	Weighted average coupon	4.25		%	4.25		%	Weighted average coupon	4.25		%	4.25		%
Weighted average remaining loan term (years)	Weighted average remaining loan term (years)	4			5			Weighted average remaining loan term (years)	4			5

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

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

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

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	$	(2,528)	$	18,591	$	(3,258)	$	(63,840)	Net market valuation gains (losses) recorded (1)	$	(487)	$	2,340	$	(3,745)	$	(61,500)

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

Note 9. Real Estate Securities

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

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Trading	Trading	$	142,425	$	125,667	Trading	$	153,010	$	125,667
Available-for-sale	Available-for-sale	212,461		218,458		Available-for-sale	200,276		218,458
Total Real Estate Securities	Total Real Estate Securities	$	354,886	$	344,125	Total Real Estate Securities	$	353,286	$	344,125

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

3842

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

Trading Securities

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

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Senior	Senior					Senior
Interest-only securities (1)	Interest-only securities (1)	$	25,267	$	28,464	Interest-only securities (1)	$	22,494	$	28,464

Total Senior	Total Senior	25,267		28,464		Total Senior	22,494		28,464
Mezzanine	Mezzanine					Mezzanine
Sequoia securities	Sequoia securities	0		3,649		Sequoia securities	—		3,649

Total Mezzanine	Total Mezzanine	0		3,649		Total Mezzanine	—		3,649
Subordinate	Subordinate					Subordinate
RPL securities	RPL securities	60,887		47,448		RPL securities	64,845		47,448
Multifamily securities	Multifamily securities	8,266		5,592		Multifamily securities	11,298		5,592
Other third-party residential securities	Other third-party residential securities	48,005		40,514		Other third-party residential securities	54,373		40,514
Total Subordinate	Total Subordinate	117,158		93,554		Total Subordinate	130,516		93,554
Total Trading Securities	Total Trading Securities	$	142,425	$	125,667	Total Trading Securities	$	153,010	$	125,667

(1)Includes ~~$17~~$15 million and $13 million of Sequoia certificated mortgage servicing rights at ~~June~~September 30, 2021 and December 31, 2020, respectively.

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

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Senior (1)	Senior (1)	$	0	$	0	Senior (1)	$	—	$	—
Mezzanine	Mezzanine	0		3,577		Mezzanine	—		3,577
Subordinate	Subordinate	208,381		242,278		Subordinate	216,771		242,278
Total Trading Securities	Total Trading Securities	$	208,381	$	245,855	Total Trading Securities	$	216,771	$	245,855

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

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

Table 9.4 – Trading Securities Activity


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Principal balance of securities acquired	Principal balance of securities acquired	$	1,750	$	10,250	$	17,630	$	66,721	Principal balance of securities acquired	$	10,750	$	11,000	$	28,380	$	77,721
Principal balance of securities sold	Principal balance of securities sold	18,068		85,747		52,811		704,614		Principal balance of securities sold	750		15,903		53,561		720,517
Net market valuation gains (losses) recorded (1)	Net market valuation gains (losses) recorded (1)	1,798		42,246		23,147		(221,079)		Net market valuation gains (losses) recorded (1)	1,578		(3,600)		24,725		(224,679)

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

3943

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(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, 2021 and December 31, 2020.

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


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

Mezzanine	Mezzanine					Mezzanine

Other third-party residential securities	Other third-party residential securities	$	0	$	2,014	Other third-party residential securities	$	—	$	2,014
Total Mezzanine	Total Mezzanine	0		2,014		Total Mezzanine	—		2,014
Subordinate	Subordinate					Subordinate
Sequoia securities	Sequoia securities	140,321		136,475		Sequoia securities	128,874		136,475
Multifamily securities	Multifamily securities	34,213		43,663		Multifamily securities	31,320		43,663
Other third-party residential securities	Other third-party residential securities	37,927		36,306		Other third-party residential securities	40,082		36,306
Total Subordinate	Total Subordinate	212,461		216,444		Total Subordinate	200,276		216,444
Total AFS Securities	Total AFS Securities	$	212,461	$	218,458	Total AFS Securities	$	200,276	$	218,458

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

Table 9.6 – Available-for-Sale Securities Activity

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

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


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

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, 2021, we had ~~$31~~$28 million of AFS securities with contractual maturities less than five years, $4 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

4044

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

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

Table 9.7 – Carrying Value of AFS Securities


June 30, 2021
September 30, 2021								September 30, 2021
(In Thousands)	(In Thousands)	Mezzanine		Subordinate		Total		(In Thousands)	Mezzanine		Subordinate		Total
Principal balance	Principal balance	$	0	$	254,784	$	254,784	Principal balance	$	—	$	238,459	$	238,459
Credit reserve	Credit reserve	0		(40,349)		(40,349)		Credit reserve	—		(29,448)		(29,448)
Unamortized discount, net	Unamortized discount, net	0		(90,216)		(90,216)		Unamortized discount, net	—		(88,108)		(88,108)
Amortized cost	Amortized cost	0		124,219		124,219		Amortized cost	—		120,903		120,903
Gross unrealized gains	Gross unrealized gains	0		88,321		88,321		Gross unrealized gains	—		79,406		79,406
Gross unrealized losses	Gross unrealized losses	0		(79)		(79)		Gross unrealized losses	—		(33)		(33)
CECL allowance	CECL allowance	0		0		0		CECL allowance	—		—		—
Carrying Value	Carrying Value	$	0	$	212,461	$	212,461	Carrying Value	$	—	$	200,276	$	200,276


December 31, 2020	December 31, 2020							December 31, 2020
(In Thousands)	(In Thousands)	Mezzanine		Subordinate		Total		(In Thousands)	Mezzanine		Subordinate		Total
Principal balance	Principal balance	$	2,000	$	281,284	$	283,284	Principal balance	$	2,000	$	281,284	$	283,284
Credit reserve	Credit reserve	0		(44,967)		(44,967)		Credit reserve	—		(44,967)		(44,967)
Unamortized discount, net	Unamortized discount, net	0		(95,718)		(95,718)		Unamortized discount, net	—		(95,718)		(95,718)
Amortized cost	Amortized cost	2,000		140,599		142,599		Amortized cost	2,000		140,599		142,599
Gross unrealized gains	Gross unrealized gains	14		77,280		77,294		Gross unrealized gains	14		77,280		77,294
Gross unrealized losses	Gross unrealized losses	0		(1,047)		(1,047)		Gross unrealized losses	—		(1,047)		(1,047)
CECL allowance	CECL allowance	0		(388)		(388)		CECL allowance	—		(388)		(388)
Carrying Value	Carrying Value	$	2,014	$	216,444	$	218,458	Carrying Value	$	2,014	$	216,444	$	218,458

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

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


		Three Months Ended June 30, 2021							Six Months Ended June 30, 2021									Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
		Credit Reserve				Unamortized Discount, Net			Credit Reserve				Unamortized Discount, Net					Credit Reserve				Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net
(In Thousands)	(In Thousands)							(In Thousands)
Beginning balance	Beginning balance			$	44,947						$	94,188				$	44,967			$	95,718		Beginning balance	$	40,349	$	90,216	$	44,967	$	95,718
Amortization of net discount	Amortization of net discount	0				(1,569)			0				(3,183)		Amortization of net discount			—				(6,437)		—		(9,620)
Realized credit losses	Realized credit losses	(112)				0			(249)				0		Realized credit losses			(184)				—		(433)		—
Acquisitions	Acquisitions	890				368			2,825				1,208		Acquisitions			—				—		2,825		1,208
Sales, calls, other	Sales, calls, other	(718)				(7,429)			(992)				(9,729)		Sales, calls, other			(320)				(6,068)		(1,312)		(15,797)

Transfers to (release of) credit reserves, net	Transfers to (release of) credit reserves, net	(4,658)				4,658			(6,202)				6,202		Transfers to (release of) credit reserves, net			(10,397)				10,397		(16,599)		16,599
Ending Balance	Ending Balance	$	40,349			$	90,216		$	40,349			$	90,216	Ending Balance			$	29,448			$	88,108	$	29,448	$	88,108

4145

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses

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

Table 9.9 – 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)						(In Thousands)
June 30, 2021			$	0			$	0			$	0			$	3,600			$	(79)			$	3,521
September 30, 2021														September 30, 2021			$	—			$	—			$	—	$	1,600	$	(33)	$	1,567
December 31, 2020	December 31, 2020	9,129			(1,047)	7,920			0	0			0	December 31, 2020			9,129				(1,047)				7,920		—		—		—

At ~~June~~September 30, 2021, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 8884 AFS securities, of which ~~2 were~~1 was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2020, our consolidated balance sheet included 96 AFS securities, of which 5 were in an unrealized loss position and 0zero were in a continuous unrealized loss position for 12 consecutive months or longer.

Evaluating AFS Securities for Credit Losses

Gross unrealized losses on our AFS securities were ~~$0.1 million~~$33 thousand at ~~June~~September 30, 2021. We evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At ~~June~~September 30, 2021, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

At ~~June~~September 30, 2021, our current expected credit loss ("CECL") allowance related to our AFS securities was 0.zero. 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, 2021.

Table 9.10 – Significant Credit Quality Indicators

~~June~~September 30, 2021

Subordinate Securities

Default rate

~~0.35%~~N/A

Loss severity

~~18%~~N/A

4246

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

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

Table 9.11 – Rollforward of Allowance for Credit Losses

Three Months Ended June 30, 2021 Six Months Ended June 30, 2021
(In Thousands)
Beginning balance allowance for credit losses $ 13 $ 388
Additions to allowance for credit losses on securities for which credit losses were not previously recorded 0 0
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period (13) (388)
Allowance on purchased financial assets with credit deterioration 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 $ 0 $ 0


	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021
(In Thousands)
Beginning balance allowance for credit losses	$	—	$	388

Additions to allowance for credit losses on securities for which credit losses were not previously recorded	—		—
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	—		(388)
Allowance on purchased financial assets with credit deterioration	—		—
Reduction to allowance for securities sold during the period	—		—
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell	—		—
Write-offs charged against allowance	—		—
Recoveries of amounts previously written off	—		—
Ending balance of allowance for credit losses	$	—	$	—

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, 2021 and 2020.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Gross realized gains - sales	Gross realized gains - sales	$	1,307	$	1,074	$	1,507	$	8,779	Gross realized gains - sales	$	—	$	—	$	1,507	$	8,779
Gross realized gains - calls	Gross realized gains - calls	6,687		0		9,095		0		Gross realized gains - calls	6,389		—		15,484		—
Gross realized losses - sales	Gross realized losses - sales	0		(291)		0		(4,144)		Gross realized losses - sales	—		—		—		(4,144)

Total Realized Gains on Sales and Calls of AFS Securities, net	Total Realized Gains on Sales and Calls of AFS Securities, net	$	7,994	$	783	$	10,602	$	4,635	Total Realized Gains on Sales and Calls of AFS Securities, net	$	6,389	$	—	$	16,991	$	4,635

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 10. Other Investments

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

Table 10.1 – Components of Other Investments

(In Thousands) June 30, 2021 December 31, 2020
Servicer advance investments $ 184,551 $ 231,489
Shared home appreciation options 44,319 42,440
Excess MSRs 29,988 34,418
Mortgage servicing rights 8,721 8,815
Other 41,153 31,013
Total Other Investments $ 308,732 $ 348,175

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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


(In Thousands)	September 30, 2021		December 31, 2020
Servicer advance investments	$	170,062	$	231,489
HEIs	167,856		42,440
Strategic investments	31,108		4,449
Excess MSRs	29,185		34,418
Mortgage servicing rights	12,389		8,815

Other	11,766		26,564
Total Other Investments	$	422,366	$	348,175

Servicer advance investments

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

At ~~June~~September 30, 2021, our servicer advance investments had a carrying value of ~~$185~~$170 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of ~~$8.03~~$7.53 billion. The outstanding servicer advance receivables associated with this investment were ~~$172~~$159 million at ~~June~~September 30, 2021, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at ~~June~~September 30, 2021 and December 31, 2020.

Table 10.2 – Components of Servicer Advance Receivables


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Principal and interest advances	Principal and interest advances	$	80,741	$	110,923	Principal and interest advances	$	77,116	$	110,923
Escrow advances (taxes and insurance advances)	Escrow advances (taxes and insurance advances)	68,534		79,279		Escrow advances (taxes and insurance advances)	62,117		79,279
Corporate advances	Corporate advances	22,543		27,454		Corporate advances	20,175		27,454
Total Servicer Advance Receivables	Total Servicer Advance Receivables	$	171,818	$	217,656	Total Servicer Advance Receivables	$	159,408	$	217,656

We account for our servicer advance investments at fair value and during the three and ~~six~~nine months ended ~~June~~September 30, 2021, we recorded $2 million and $5$7 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1$2 million ~~for both periods~~and $3 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, 2020, we recorded $3 million and $6$8 million of interest income, respectively, through Other interest income, and recorded a 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).

~~Shared Home Appreciation Options~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 10. Other Investments - (continued)

HEIs

In 2019, we entered into a flow purchase agreement to acquire ~~shared~~ home ~~appreciation options.~~equity investment contracts from Point Digital. At ~~June~~September 30, 2021, we had acquired $47 million of ~~shared home appreciation options~~HEIs under this flow purchase agreement. We account for these investments under the fair value option and during the three and ~~six~~nine months ended ~~June~~September 30, 2021, we recorded net market valuation gains of $2$6 million and $7$13 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss). 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).

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

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

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

Strategic Investments

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

Excess MSRs

In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and ~~six~~nine months ended ~~June~~September 30, 2021, we recognized $3 million and $6$9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2$1 million and $4$5 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, 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).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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

Mortgage Servicing Rights

We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The majority of our investments in MSRs were made through the retention of servicing rights associated with the residential jumbo mortgage loans that we acquired and subsequently sold to third parties. During ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, 2021, we retained $2$5 million and $9 million of MSRs, respectively, from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 10. Other Investments - (continued)

At ~~June~~September 30, 2021 and December 31, 2020, our MSRs had a fair value of $9$12 million and $9 million, respectively, and were associated with loans with an aggregate principal balance of ~~$1.97~~$2.29 billion and $2.59 billion, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2021, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded ~~a net loss of less than $0.1 million and~~ net income of $0.3 million and $1 million, respectively, through Other income on our consolidated statements of income (loss). During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded net losses of $1$2 million and $3$6 million, respectively, through Other income on our consolidated statements of income (loss).

Note 11. Derivative Financial Instruments

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

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


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

Assets - Risk Management Derivatives	Assets - Risk Management Derivatives														Assets - Risk Management Derivatives
Interest rate swaps	Interest rate swaps	$	264	$	133,000		$	224	$	42,000	Interest rate swaps	$	3,213	$	293,200	$	224	$	42,000
TBAs	TBAs	2,064		730,000			18,260		3,520,000		TBAs	8,213		2,205,000		18,260		3,520,000
Interest rate futures		304		81,500			0		0

Swaptions	Swaptions	17,482		2,100,000			19,727		1,585,000		Swaptions	30,415		1,335,000		19,727		1,585,000

Assets - Other Derivatives	Assets - Other Derivatives										Assets - Other Derivatives
Loan purchase and interest rate lock commitments	Loan purchase and interest rate lock commitments	14,191		2,332,511			15,027		2,617,254		Loan purchase and interest rate lock commitments	9,262		1,687,314		15,027		2,617,254

Total Assets	Total Assets	$	34,305	$	5,377,011		$	53,238	$	7,764,254	Total Assets	$	51,103	$	5,520,514	$	53,238	$	7,764,254

Liabilities - Risk Management Derivatives	Liabilities - Risk Management Derivatives										Liabilities - Risk Management Derivatives
Interest rate swaps	Interest rate swaps	$	(957)	$	87,500		$	0	$	0	Interest rate swaps	$	(74)	$	40,500	$	—	$	—
TBAs	TBAs	(1,367)		730,000			(15,495)		3,105,000		TBAs	(7,599)		2,190,000		(15,495)		3,105,000
Interest rate futures	Interest rate futures	(194)		140,000			0		0		Interest rate futures	(749)		133,200		—		—
Liabilities - Other Derivatives	Liabilities - Other Derivatives										Liabilities - Other Derivatives
Loan purchase commitments	Loan purchase commitments	(722)		164,971			(577)		477,153		Loan purchase commitments	(2,550)		1,084,579		(577)		477,153

Total Liabilities	Total Liabilities	$	(3,240)	$	1,122,471		$	(16,072)	$	3,582,153	Total Liabilities	$	(10,972)	$	3,448,279	$	(16,072)	$	3,582,153
Total Derivative Financial Instruments, Net	Total Derivative Financial Instruments, Net	$	31,065	$	6,499,482		$	37,166	$	11,346,407	Total Derivative Financial Instruments, Net	$	40,131	$	8,968,793	$	37,166	$	11,346,407

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At ~~June~~September 30, 2021, we were party to swaps and swaptions with an aggregate notional amount of ~~$2.32~~$1.67 billion, TBA agreements with an aggregate notional amount of ~~$1.46~~$4.40 billion, and interest rate futures contracts with an aggregate notional amount of ~~$222~~$133 million. At December 31, 2020, we were party to swaps and swaptions with an aggregate notional amount of $1.63 billion and TBA agreements with an aggregate notional amount of $6.63 billion.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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

During the three and ~~six~~nine months ended ~~June~~September 30, 2021, risk management derivatives had a net market valuation ~~loss~~gains of ~~$58~~$4 million and ~~a net market valuation gain of $35~~$38 million, respectively. 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. 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).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For both the three and ~~six~~nine months ended ~~June~~September 30, 2021, LPCs and IRLCs had net market valuation gains of ~~$53~~$18 million ~~and $0.3 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, 2020, LPCs and IRLCs had net market valuation gains of $1$13 million and ~~$22~~$35 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).

Derivatives Designated as Cash Flow Hedges

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

During the first quarter of 2020, we terminated and settled all of our outstanding derivatives that had been designated as cash flow hedges for our long-term debt, with a payment of $84 million. For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was ~~$79~~$77 million and $81 million at ~~June~~September 30, 2021 and December 31, 2020, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of ~~June~~September 30, 2021, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

For both the three and ~~six~~nine months ended ~~June~~September 30, 2021, we did 0tnot have any derivatives designated as cash flow hedges. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, changes in the values of designated cash flow hedges were 0zero and negative $33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.

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

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)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Net interest expense on cash flows hedges	Net interest expense on cash flows hedges	$	0	$	0	$	0	$	(860)	Net interest expense on cash flows hedges	$	—	$	—	$	—	$	(860)

Realized net losses reclassified from other comprehensive income	Realized net losses reclassified from other comprehensive income	(1,028)		(1,029)		(2,046)		(1,108)		Realized net losses reclassified from other comprehensive income	(1,041)		(1,040)		(3,086)		(2,148)
Total Interest Expense	Total Interest Expense	$	(1,028)	$	(1,029)	$	(2,046)	$	(1,968)	Total Interest Expense	$	(1,041)	$	(1,040)	$	(3,086)	$	(3,008)

Derivative Counterparty Credit Risk

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

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

4651

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 12. Other Assets and Liabilities

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

Table 12.1 – Components of Other Assets


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Accrued interest receivable	Accrued interest receivable	$	41,366	$	39,445	Accrued interest receivable	$	41,997	$	39,445
Investment receivable	Investment receivable	38,281		43,176		Investment receivable	32,420		43,176
Deferred tax asset						Deferred tax asset	20,153		871
REO	REO	15,489		8,413		REO	18,863		8,413
Margin receivable						Margin receivable	16,503		4,758
Operating lease right-of-use assets	Operating lease right-of-use assets	14,370		15,012		Operating lease right-of-use assets	13,659		15,012
Margin receivable		10,269		4,758
Fixed assets and leasehold improvements (1)	Fixed assets and leasehold improvements (1)	7,202		4,203		Fixed assets and leasehold improvements (1)	9,344		4,203

Pledged collateral	Pledged collateral	0		1,177		Pledged collateral	—		1,177

Other	Other	9,455		14,404		Other	9,254		13,533
Total Other Assets	Total Other Assets	$	136,432	$	130,588	Total Other Assets	$	162,193	$	130,588

(1)Fixed assets and leasehold improvements had a basis of ~~$14~~$17 million and accumulated depreciation of $7 million at ~~June~~September 30, 2021.

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

Table 12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Accrued compensation	Accrued compensation	$	42,737	$	24,393	Accrued compensation	$	64,354	$	24,393
Margin payable						Margin payable	48,298		14,728
Accrued interest payable	Accrued interest payable	35,615		34,858		Accrued interest payable	34,545		34,858
Margin payable		19,503		14,728
Payable to non-controlling interests (1)						Payable to non-controlling interests (1)	31,781		16,941
Operating lease liabilities	Operating lease liabilities	15,997		16,687		Operating lease liabilities	15,771		16,687

Payable to minority partner		15,414		16,941
Unsettled trades		13,952		0

Accrued income taxes payable						Accrued income taxes payable	11,336		5,614
Residential loan and MSR repurchase reserve	Residential loan and MSR repurchase reserve	8,709		8,631		Residential loan and MSR repurchase reserve	9,003		8,631
Guarantee obligations	Guarantee obligations	8,446		10,039		Guarantee obligations	7,902		10,039

Accrued income taxes payable		5,395		5,614
Accrued operating expenses						Accrued operating expenses	4,068		5,509
Bridge loan holdbacks	Bridge loan holdbacks	5,394		5,708		Bridge loan holdbacks	3,784		5,708

Accrued operating expenses		4,938		5,509

Deferred consideration	Deferred consideration	0		14,579		Deferred consideration	—		14,579
Other	Other	15,605		21,653		Other	20,734		21,653
Total Accrued Expenses and Other Liabilities	Total Accrued Expenses and Other Liabilities	$	191,705	$	179,340	Total Accrued Expenses and Other Liabilities	$	251,576	$	179,340

(1)Includes $11 million and $17 million of payables to non-controlling interest holders in our consolidated Servicing Investment and Point HEI entities, respectively, as September 30, 2021. Includes $17 million payable to a non-controlling interest holder in our consolidated Servicing Investment entities at December 31, 2020.

Deferred Consideration

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

4752

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

REO

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

Table 12.3 – REO Activity


		Six Months Ended June 30, 2021											Nine Months Ended September 30, 2021
(In Thousands)	(In Thousands)	Redwood Bridge		Legacy Sequoia		Freddie Mac SLST		CAFL		Total		(In Thousands)	Bridge(1)		Legacy Sequoia		Freddie Mac SLST		CAFL SFR		Total
Balance at beginning of period	Balance at beginning of period	$	4,600	$	638	$	646	$	2,529	$	8,413	Balance at beginning of period	$	4,600	$	638	$	646	$	2,529	$	8,413
Transfers to REO	Transfers to REO	2,289		65		1,548		11,924		15,826		Transfers to REO	7,074		65		2,591		11,924		21,654
Liquidations ~~(1)~~(2)	Liquidations ~~(1)~~(2)	(5,972)		(39)		(766)		(1,949)		(8,726)		Liquidations ~~(1)~~(2)	(7,387)		(607)		(1,555)		(1,990)		(11,539)
Changes in fair value, net	Changes in fair value, net	428		(5)		208		(655)		(24)		Changes in fair value, net	536		178		276		(655)		335
Balance at End of Period	Balance at End of Period	$	1,345	$	659	$	1,636	$	11,849	$	15,489	Balance at End of Period	$	4,823	$	274	$	1,958	$	11,808	$	18,863

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

(2)For the ~~six~~nine months ended ~~June~~September 30, 2021, REO liquidations resulted in ~~less than $0.1~~$0.3 million of realized losses, which were recorded in Investment fair value changes, net on our consolidated statements of income (loss).

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

Table 12.4 – REO Assets


Number of REO assets	Number of REO assets	Redwood Bridge	Legacy Sequoia	Freddie Mac SLST	CAFL	Total	Number of REO assets	Bridge	Legacy Sequoia	Freddie Mac SLST	CAFL SFR	Total
At June 30, 2021		3	3	18	2	26
At September 30, 2021							At September 30, 2021	5	2	20	2	29
At December 31, 2020	At December 31, 2020	3	3	9	2	17	At December 31, 2020	3	3	9	2	17

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

4853

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 13. Short-Term Debt

We enter into repurchase agreements ~~bank~~("repo"), loan warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At ~~June~~September 30, 2021, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants.

The table below summarizes our short-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at ~~June~~September 30, 2021 and December 31, 2020.

Table 13.1 – Short-Term Debt


		June 30, 2021										September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities	Facilities										Facilities
Residential loan warehouse	Residential loan warehouse	6	$	1,049,144	$	2,350,000	1.87	%	8/2021-3/2022	211	Residential loan warehouse	7	$	1,335,464	$	2,700,000	1.89	%	11/2021-8/2022	156

Business purpose loan warehouse	Business purpose loan warehouse	2	191,288		355,497		2.99	%	3/2022-5/2022	260	Business purpose loan warehouse	2	183,800		350,000		3.39	%	3/2022-7/2022	201
Real estate securities repo	Real estate securities repo	3	80,938		0		1.53	%	7/2021-9/2021	35	Real estate securities repo	3	79,766		—		1.23	%	10/2021-12/2021	34

Total Short-Term Debt Facilities	Total Short-Term Debt Facilities	11	1,321,370								Total Short-Term Debt Facilities	12	1,599,030
Servicer advance financing	Servicer advance financing	1	163,629		260,000		1.89	%	11/2021	153	Servicer advance financing	1	151,911		260,000		1.89	%	11/2021	61

Total Short-Term Debt	Total Short-Term Debt		$	1,484,999							Total Short-Term Debt		$	1,750,941


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

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

Total Short-Term Debt	Total Short-Term Debt		$	522,609							Total Short-Term Debt		$	522,609

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

4954

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 13. Short-Term Debt - (continued)

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

Table 13.2 – Collateral for Short-Term Debt


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Collateral Type	Collateral Type					Collateral Type
Held-for-sale residential loans	Held-for-sale residential loans	$	1,152,267	$	156,355	Held-for-sale residential loans	$	1,478,424	$	156,355
Business purpose loans	Business purpose loans	249,410		127,029		Business purpose loans	254,655		127,029
Real estate securities	Real estate securities					Real estate securities
On balance sheet	On balance sheet	16,435		23,193		On balance sheet	14,367		23,193
Sequoia securitizations (1)	Sequoia securitizations (1)	62,387		63,105		Sequoia securitizations (1)	62,075		63,105

Freddie Mac K-Series securitization (1)	Freddie Mac K-Series securitization (1)	30,834		28,255		Freddie Mac K-Series securitization (1)	31,388		28,255

Total real estate securities owned	Total real estate securities owned	109,656		114,553		Total real estate securities owned	107,830		114,553
Restricted cash and other assets	Restricted cash and other assets	1,709		315		Restricted cash and other assets	1,709		315
Total Collateral for Short-Term Debt Facilities	Total Collateral for Short-Term Debt Facilities	1,513,042		398,252		Total Collateral for Short-Term Debt Facilities	1,842,618		398,252
Cash	Cash	12,442		9,978		Cash	12,975		9,978
Restricted cash	Restricted cash	19,028		23,220		Restricted cash	19,872		23,220
Servicer advances	Servicer advances	171,818		217,656		Servicer advances	159,408		217,656
Total Collateral for Servicer Advance Financing	Total Collateral for Servicer Advance Financing	203,288		250,854		Total Collateral for Servicer Advance Financing	192,255		250,854
Total Collateral for Short-Term Debt	Total Collateral for Short-Term Debt	$	1,716,330	$	649,106	Total Collateral for Short-Term Debt	$	2,034,873	$	649,106

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

For the three and ~~six~~nine months ended ~~June~~September 30, 2021, the average balances of our short-term debt facilities were ~~$1.85~~$1.98 billion and ~~$1.42~~$1.61 billion, respectively. At ~~June~~September 30, 2021 and December 31, 2020, accrued interest payable on our short-term debt facilities was $2 million and $1 million, respectively.

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, 2021, the accrued interest payable balance on this financing was $0.1 million and the unamortized capitalized commitment costs were ~~$0.4~~$0.1 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 $2 million at ~~June~~September 30, 2021. At both ~~June~~September 30, 2021 and December 31, 2020, we had 0no outstanding borrowings on this facility.

5055

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 13. Short-Term Debt - (continued)

Remaining Maturities of Short-Term Debt

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

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


		June 30, 2021									September 30, 2021
(In Thousands)	(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total		(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total
Collateral Type	Collateral Type									Collateral Type
Held-for-sale residential loans	Held-for-sale residential loans	$	0	$	119,462	$	929,682	$	1,049,144	Held-for-sale residential loans	$	—	$	278,663	$	1,056,801	$	1,335,464
Business purpose loans	Business purpose loans	0		0		191,288		191,288		Business purpose loans	—		—		183,800		183,800
Real estate securities	Real estate securities	44,527		36,411		0		80,938		Real estate securities	43,800		35,966		—		79,766
Total Secured Short-Term Debt	Total Secured Short-Term Debt	44,527		155,873		1,120,970		1,321,370		Total Secured Short-Term Debt	43,800		314,629		1,240,601		1,599,030
Servicer advance financing	Servicer advance financing	0		0		163,629		163,629		Servicer advance financing	—		151,911		—		151,911

Total Short-Term Debt	Total Short-Term Debt	$	44,527	$	155,873	$	1,284,599	$	1,484,999	Total Short-Term Debt	$	43,800	$	466,540	$	1,240,601	$	1,750,941

Note 14. Asset-Backed Securities Issued

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

Table 14.1 – Asset-Backed Securities Issued


June 30, 2021		Legacy Sequoia			Sequoia			CAFL			Freddie Mac SLST (1)				Freddie Mac K-Series					Total
September 30, 2021										September 30, 2021			Legacy Sequoia									Sequoia				CAFL (1)				Freddie Mac SLST (2)				Freddie Mac K-Series			Point HEI				Total
(Dollars in Thousands)	(Dollars in Thousands)			Legacy Sequoia						Sequoia					CAFL					Freddie Mac SLST (1)								Freddie Mac K-Series							Total				(Dollars in Thousands)
Certificates with principal balance	Certificates with principal balance										Certificates with principal balance			$				273,957				$	2,199,488			$	3,134,946				$	1,630,252					$	420,654					$	145,320				$	7,804,617
Interest-only certificates	Interest-only certificates	788					15,282			167,460				21,455					11,627					216,612		Interest-only certificates			739				21,003			189,946				19,787					10,885					—		242,360
Market valuation adjustments	Market valuation adjustments	(33,660)			28,365			93,488			86,109				20,163						194,465		Market valuation adjustments			(35,249)				22,808				68,684			60,625				19,863					117					136,848

ABS Issued, Net	ABS Issued, Net	$	258,211		$	1,990,548		$	3,007,596		$	1,826,318			$	454,324				$	7,536,997	ABS Issued, Net			$	239,447			$	2,243,299			$	3,393,576		$	1,710,664			$	451,402				$	145,437				$	8,183,825
Range of weighted average interest rates, by series(3)	Range of weighted average interest rates, by series(3)	0.49% to 1.46%			2.31% to 5.10%			2.62% to 5.20%			3.50% to 4.75%				3.41		%					Range of weighted average interest rates, by series(3)			0.49% to 1.45%				2.34% to 5.07%				2.34% to 5.21%			3.50% to 4.75%				3.41		%			3.27		%
Stated maturities(3)	Stated maturities(3)	2024 - 2036			2047 - 2051			2021 - 2031			2028 - 2059				2025							Stated maturities(3)			2024 - 2036				2047 - 2051				2021 - 2031			2028 - 2059				2025					2052
Number of series	Number of series	20			12			14			3				1							Number of series			20				13				16			3				1					1

December 31, 2020 Legacy
Sequoia Sequoia CAFL
Freddie Mac SLST (1)
Freddie Mac K-Series Total
(Dollars in Thousands)
Certificates with principal balance $ 329,039 $ 1,309,957 $ 2,716,425 $ 1,866,145 $ 416,339 $ 6,637,905
Interest-only certificates 1,092 4,591 162,934 23,335 13,026 204,978
Market valuation adjustments (47,805) 32,809 133,734 104,439 34,601 257,778
ABS Issued, Net $ 282,326 $ 1,347,357 $ 3,013,093 $ 1,993,919 $ 463,966 $ 7,100,661
Range of weighted average interest rates, by series 0.35% to 1.55% 2.25% to 5.04% 2.68% to 5.42% 3.50% to 4.75% 3.39 %
Stated maturities 2024 - 2036 2047 - 2050 2021 - 2031 2028 - 2059 2025
Number of series 20 10 14 3 1

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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


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


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

(1)Includes ~~$179~~$270 million (principal balance) of ABS issued by a CAFL bridge securitization trust sponsored by Redwood and accounted for at amortized cost at September 30, 2021.

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

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

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June~~During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest bridge loans (presented within CAFL in table 14.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2021,

~~(Unaudited)~~ the principal balance of the ABS issued was $270 million, and the debt discount and deferred issuance costs were $3 million, for a net carrying value of $267 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).

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

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

in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.

During the third quarter of 2020, we transferred all of the subordinate securities we owned from two consolidated re-performing loan securitization VIEs sponsored by Freddie Mac SLST to a re-securitization trust, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. At ~~June~~September 30, 2021, the principal balance of the ABS issued was ~~$179~~$163 million, and the debt discount and deferred issuance costs were $3 million, for a carrying value of ~~$176~~$161 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 an optional redemption in July 2022 and in July 2023 the ABS interest rate ~~step-ups prior~~steps up to ~~the stated maturity according to the terms of the respective governing agreements.~~7.75%.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

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

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


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Legacy Sequoia	Legacy Sequoia	$	123	$	141	Legacy Sequoia	$	107	$	141
Sequoia	Sequoia	5,521		4,697		Sequoia	5,918		4,697
CAFL	CAFL	10,183		10,122		CAFL	10,760		10,122
Freddie Mac SLST (1)	Freddie Mac SLST (1)	5,200		5,656		Freddie Mac SLST (1)	4,925		5,656
Freddie Mac K-Series	Freddie Mac K-Series	1,200		1,177		Freddie Mac K-Series	1,195		1,177
Total Accrued Interest Payable on ABS Issued	Total Accrued Interest Payable on ABS Issued	$	22,227	$	21,793	Total Accrued Interest Payable on ABS Issued	$	22,905	$	21,793

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

5258

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 15. Long-Term Debt

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

Table 15.1 – Long-Term Debt


		June 30, 2021											September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit	Weighted Average Interest Rate (1)		Final Maturity	(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit	Weighted Average Interest Rate (1)		Final Maturity
Facilities	Facilities											Facilities
Recourse Subordinate Securities Financing	Recourse Subordinate Securities Financing											Recourse Subordinate Securities Financing
Sequoia	Sequoia	$	160,102	$	(521)	$	159,581	N/A	4.21	%	9/2024	Sequoia	$	147,182	$	(417)	$	146,765	N/A	4.21	%	9/2024
CAFL	CAFL	102,424		(505)		101,919		N/A	4.21	%	2/2025	CAFL
Non-Recourse BPL Financing
Facility A	Facility A	45,582		(444)		45,138		45,582	L + 3.85%		7/2022	Facility A	102,370		(429)		101,941		N/A	4.21	%	2/2025
Facility B	Facility B	57,616		(199)		57,417		250,000	L + 3.00%		N/A	Facility B	95,011		(439)		94,572		N/A	4.75	%	6/2026
Non-Recourse BPL Financing												Non-Recourse BPL Financing
Facility C												Facility C	105,961		(320)		105,641		250,000	L + 3.00%		N/A
Recourse BPL Financing	Recourse BPL Financing											Recourse BPL Financing
Facility C		269,100		0		269,100		450,000	L + 3.40%		6/2023
Facility D	Facility D	200,275		(158)		200,117		250,000	L + 3.00%		9/2023	Facility D	168,228		—		168,228		450,000	L + 3.10%		6/2023
Facility E												Facility E	230,883		(141)		230,742		250,000	L + 3.00%		9/2023
Total Long-Term Debt Facilities	Total Long-Term Debt Facilities	835,099		(1,827)		833,272						Total Long-Term Debt Facilities	849,635		(1,746)		847,889
Convertible notes	Convertible notes											Convertible notes
4.75% convertible senior notes	4.75% convertible senior notes	198,629		(2,356)		196,273		N/A	4.75	%	8/2023	4.75% convertible senior notes	198,629		(2,098)		196,531		N/A	4.75	%	8/2023
5.625% convertible senior notes	5.625% convertible senior notes	150,200		(2,450)		147,750		N/A	5.625	%	7/2024	5.625% convertible senior notes	150,200		(2,262)		147,938		N/A	5.625	%	7/2024
5.75% exchangeable senior notes	5.75% exchangeable senior notes	172,092		(3,776)		168,316		N/A	5.75	%	10/2025	5.75% exchangeable senior notes	172,092		(3,582)		168,510		N/A	5.75	%	10/2025
Trust preferred securities and subordinated notes	Trust preferred securities and subordinated notes	139,500		(803)		138,697		N/A	L + 2.25%		7/2037	Trust preferred securities and subordinated notes	139,500		(791)		138,709		N/A	L + 2.25%		7/2037
Total Long-Term Debt	Total Long-Term Debt	$	1,495,520	$	(11,212)	$	1,484,308					Total Long-Term Debt	$	1,510,056	$	(10,479)	$	1,499,577

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

Recourse Subordinate Securities Financing

In the third quarter of 2021, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023, and has a final maturity in June 2026, provided that the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026. See "Facility B" above for details on borrowings and securities pledged as collateral under this facility at September 30, 2021.

Non-Recourse BPL Financing Facilities

In the third quarter of 2021, we reclassified one of our non-recourse facilities from long-term to short-term debt as the maturity of this facility was less than one year at September 30, 2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 15. Long-Term Debt - (continued)

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

Recourse BPL Financing Facilities

In the second quarter of 2021, we reclassified one of our recourse facilities with a borrowing capacity of $450 million from short-term to long-term debt as we amended the terms of this facility, including an extension of its maturity (see details for "Facility C"D" above).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~June 30, 2021~~

~~(Unaudited)~~

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

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

Table 15.2 – Collateral for Long-Term Debt


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Collateral Type	Collateral Type					Collateral Type
Bridge loans	Bridge loans	$	555,791	$	544,151	Bridge loans	$	373,597	$	544,151
Single-family rental loans	Single-family rental loans	246,903		154,774		Single-family rental loans	298,014		154,774
Real estate securities	Real estate securities					Real estate securities
Sequoia securitizations (1)	Sequoia securitizations (1)	256,910		249,446		Sequoia securitizations (1)	246,892		249,446
CAFL securitizations (1)	CAFL securitizations (1)	112,207		114,044		CAFL securitizations (1)	256,976		114,044
Total real estate securities owned	Total real estate securities owned	369,117		363,490		Total real estate securities owned	503,868		363,490
Other BPL investments	Other BPL investments	0		21,414		Other BPL investments	—		21,414
Restricted cash	Restricted cash	0		1,100		Restricted cash	—		1,100
Total Collateral for Long-Term Debt	Total Collateral for Long-Term Debt	$	1,171,811	$	1,084,929	Total Collateral for Long-Term Debt	$	1,175,479	$	1,084,929

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

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

Table 15.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Long-term debt facilities	Long-term debt facilities	$	704	$	1,799	Long-term debt facilities	$	900	$	1,799
Convertible notes	Convertible notes					Convertible notes
4.75% convertible senior notes	4.75% convertible senior notes	3,564		3,564		4.75% convertible senior notes	1,206		3,564
5.625% convertible senior notes	5.625% convertible senior notes	3,896		3,896		5.625% convertible senior notes	1,784		3,896
5.75% exchangeable senior notes	5.75% exchangeable senior notes	2,474		2,474		5.75% exchangeable senior notes	4,948		2,474
Trust preferred securities and subordinated notes	Trust preferred securities and subordinated notes	585		669		Trust preferred securities and subordinated notes	572		669
Total Accrued Interest Payable on Long-Term Debt	Total Accrued Interest Payable on Long-Term Debt	$	11,223	$	12,402	Total Accrued Interest Payable on Long-Term Debt	$	9,410	$	12,402

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

Note 16. Commitments and Contingencies

Lease Commitments

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

5460

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

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

Table 16.1 – Future Lease Commitments by Year


(In Thousands)	(In Thousands)	June 30, 2021		(In Thousands)	September 30, 2021
2021 (6 months)		$	1,854
2021 (3 months)				2021 (3 months)	$	928
2022	2022	3,714		2022	3,714
2023	2023	3,235		2023	3,235
2024	2024	2,411		2024	2,411
2025	2025	1,983		2025	1,983
2026 and thereafter	2026 and thereafter	6,128		2026 and thereafter	6,128
Total Lease Commitments	Total Lease Commitments	19,325		Total Lease Commitments	18,399
Less: Imputed interest	Less: Imputed interest	(3,328)		Less: Imputed interest	(2,628)
Operating Lease Liabilities	Operating Lease Liabilities	$	15,997	Operating Lease Liabilities	$	15,771

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

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

Commitment to Fund Bridge Loans

As of ~~June~~September 30, 2021, we had commitments to fund up to ~~$374~~$426 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the ~~customer~~borrower and other terms regarding advances that must be met before we fund the commitment. At ~~June~~September 30, 2021, we carried a ~~$0.3~~$1 million contingent liability related to these commitments to fund construction advances. We may also advance funds related to loans sold under a separate loan sale agreement that are generally repaid immediately by the loan purchaser and do not generally expose us to loss. The outstanding commitments related to these loans that we may temporarily fund totaled approximately $0.3 million at June 30, 2021. During the three and ~~six~~nine months ended ~~June~~September 30, 2021, we recorded a net market valuation ~~gains~~loss of $1$0.3 million and $2a net market valuation gain of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss). During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recorded a net market valuation gain of $2$1 million and a net market valuation loss of $2$1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).

Commitment to Fund Partnerships

In 2018, we invested in 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.

5561

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Commitment to Acquire HEIs

In the third quarter of 2021, we amended an existing flow purchase agreement with Point Digital to acquire HEIs that Point Digital originates with homeowners. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property. At September 30, 2021, we had an outstanding commitment to fund up to $125 million under this agreement.

Loss Contingencies — Risk-Sharing

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

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at ~~June~~September 30, 2021, the loans had an unpaid principal balance of ~~$702~~$618 million and a weighted average FICO score of 756 (at origination) and LTV ratio of ~~75%~~74% (at origination). At ~~June~~September 30, 2021, ~~$29~~$21 million of the loans were 90 days or more delinquent, of which one of these loans with an unpaid principal balance of $0.2 million was in foreclosure. At ~~June~~September 30, 2021, the carrying value of our guarantee obligation was $8 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

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

Loss Contingencies — Residential Repurchase Reserve

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

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

~~We received 1 and 5 repurchase requests during~~During the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, we received 3 and 8 repurchase requests, respectively, and repurchased 1 and 0zero loans, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, we recorded repurchase provisions of ~~$0.3~~$0.6 million and $4 million, respectively, that were recorded in Mortgage banking activities, net; Investment fair value changes, net; and Other income on our consolidated statements of income (loss).

5662

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 16 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Loss Contingencies - Litigation.” At ~~June~~September 30, 2021, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million. At ~~June~~September 30, 2021, the aggregate amount of our accrual for estimated costs associated with the "Residential Loan Seller Demands" described in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million, a portion of which is contingent on the successful completion of future residential loan purchase and sale transactions with certain counterparties. We believe we have either resolved or adequately accrued for any unresolved Residential Loan Seller Demands and that there are no other Residential Loan Seller Demands that are reasonably possible to result in a material loss.

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, 2021 and 2020.

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


		Three Months Ended June 30, 2021				Three Months Ended June 30, 2020					Three Months Ended September 30, 2021				Three Months Ended September 30, 2020
(In Thousands)	(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	Balance at beginning of period	$	84,527	$	(79,539)	$	(1,865)	$	(83,666)	Balance at beginning of period	$	88,251	$	(78,511)	$	53,246	$	(82,637)
Other comprehensive income before reclassifications		11,224		0		52,393		0
Amounts reclassified from other accumulated comprehensive income		(7,500)		1,028		2,718		1,029
Net current-period other comprehensive income		3,724		1,028		55,111		1,029
Other comprehensive (loss) income before reclassifications										Other comprehensive (loss) income before reclassifications	(2,658)		—		8,236		—
Amounts reclassified from other accumulated comprehensive income (loss)										Amounts reclassified from other accumulated comprehensive income (loss)	(6,200)		1,041		(445)		1,040
Net current-period other comprehensive (loss) income										Net current-period other comprehensive (loss) income	(8,858)		1,041		7,791		1,040
Balance at End of Period	Balance at End of Period	$	88,251	$	(78,511)	$	53,246	$	(82,637)	Balance at End of Period	$	79,393	$	(77,470)	$	61,037	$	(81,597)


		Six Months Ended June 30, 2021				Six Months Ended June 30, 2020					Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
(In Thousands)	(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	Balance at beginning of period	$	76,336	$	(80,557)	$	92,452	$	(50,939)	Balance at beginning of period	$	76,336	$	(80,557)	$	92,452	$	(50,939)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	22,210		0		(28,126)		(32,806)		Other comprehensive income (loss) before reclassifications	19,552		—		(19,890)		(32,806)
Amounts reclassified from other accumulated comprehensive income (loss)	Amounts reclassified from other accumulated comprehensive income (loss)	(10,295)		2,046		(11,080)		1,108		Amounts reclassified from other accumulated comprehensive income (loss)	(16,495)		3,087		(11,525)		2,148
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	11,915		2,046		(39,206)		(31,698)		Net current-period other comprehensive income (loss)	3,057		3,087		(31,415)		(30,658)
Balance at End of Period	Balance at End of Period	$	88,251	$	(78,511)	$	53,246	$	(82,637)	Balance at End of Period	$	79,393	$	(77,470)	$	61,037	$	(81,597)

5763

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 17. Equity - (continued)

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, 2021 and 2020.

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


			Amount Reclassified From Accumulated Other Comprehensive Income						Amount Reclassified From Accumulated Other Comprehensive Income
		Affected Line Item in the	Three Months Ended June 30,					Affected Line Item in the	Three Months Ended September 30,
(In Thousands)	(In Thousands)	Income Statement	2021		2020		(In Thousands)	Income Statement	2021		2020
Net Realized (Gain) Loss on AFS Securities	Net Realized (Gain) Loss on AFS Securities						Net Realized (Gain) Loss on AFS Securities
Decrease in allowance for credit losses on AFS securities	Decrease in allowance for credit losses on AFS securities	Investment fair value changes, net	$	(13)	$	(54)	Decrease in allowance for credit losses on AFS securities	Investment fair value changes, net	$	—	$	(445)
Gain on sale of AFS securities	Gain on sale of AFS securities	Realized gains, net	(7,487)		2,772		Gain on sale of AFS securities	Realized gains, net	(6,200)		—

			$	(7,500)	$	2,718			$	(6,200)	$	(445)
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	$	1,028	$	1,029	Amortization of deferred loss	Interest expense	$	1,041	$	1,040
			$	1,028	$	1,029			$	1,041	$	1,040


			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	2021		2020		(In Thousands)	Income Statement	2021		2020
Net Realized (Gain) Loss on AFS Securities	Net Realized (Gain) Loss on AFS Securities						Net Realized (Gain) Loss on AFS Securities
(Decrease) increase in allowance for credit losses on AFS securities	(Decrease) increase in allowance for credit losses on AFS securities	Investment fair value changes, net	$	(388)	$	1,471	(Decrease) increase in allowance for credit losses on AFS securities	Investment fair value changes, net	$	(388)	$	1,026
Gain on sale of AFS securities	Gain on sale of AFS securities	Realized gains, net	(9,907)		(12,551)		Gain on sale of AFS securities	Realized gains, net	(16,107)		(12,552)

			$	(10,295)	$	(11,080)			$	(16,495)	$	(11,526)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges	Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges						Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Amortization of deferred loss	Interest expense	$	2,046	$	1,108	Amortization of deferred loss	Interest expense	$	3,087	$	2,148
			$	2,046	$	1,108			$	3,087	$	2,148

Issuance of Common Stock

We have an established program to sell up to an aggregate of $175 million of common stock from time to time in at-the-market ("ATM") ~~offerings, with $110 million of remaining capacity available at June 30, 2021.~~offerings. During the ~~six~~nine months ended ~~June~~September 30, 2021, we ~~did 0t issue any~~issued 1,466,669 common shares for net proceeds of $18 million under this program. At September 30, 2021, approximately $92 million remained outstanding for future offerings under this program.

Direct Stock Purchase and Dividend Reinvestment Plan

During ~~both~~ the ~~six~~nine months ended ~~June~~September 30, 2021, we issued 119,040 shares of common stock for net proceeds of $1 million through our Direct Stock Purchase and Dividend Reinvestment Plan. During the nine months ended September 30, 2020, we did 0tnot issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At September 30, 2021, approximately 6 million shares remained outstanding for future offerings under this plan.

5864

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 17. Equity - (continued)

Earnings (Loss) per Common Share

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

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)	2021		2020		2021		2020		(In Thousands, except Share Data)	2021		2020		2021		2020
Basic Earnings (Loss) per Common Share:	Basic Earnings (Loss) per Common Share:									Basic Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood	Net income (loss) attributable to Redwood	$	90,025	$	165,444	$	187,282	$	(777,954)	Net income (loss) attributable to Redwood	$	88,286	$	141,812	$	275,568	$	(636,142)
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(3,149)		(4,528)		(6,458)		(1,011)		Less: Dividends and undistributed earnings allocated to participating securities	(2,984)		(4,067)		(8,979)		(1,427)
Net income (loss) allocated to common shareholders	Net income (loss) allocated to common shareholders	$	86,876	$	160,916	$	180,824	$	(778,965)	Net income (loss) allocated to common shareholders	$	85,302	$	137,745	$	266,589	$	(637,569)
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928		Basic weighted average common shares outstanding	112,995,847		113,403,102		112,754,691		113,952,308
Basic Earnings (Loss) per Common Share	Basic Earnings (Loss) per Common Share	$	0.77	$	1.41	$	1.61	$	(6.82)	Basic Earnings (Loss) per Common Share	$	0.75	$	1.21	$	2.36	$	(5.60)
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	$	90,025	$	165,444	$	187,282	$	(777,954)	Net income (loss) attributable to Redwood	$	88,286	$	141,812	$	275,568	$	(636,142)
Less: Dividends and undistributed earnings allocated to participating securities	Less: Dividends and undistributed earnings allocated to participating securities	(2,869)		(3,116)		(5,829)		(1,011)		Less: Dividends and undistributed earnings allocated to participating securities	(2,747)		(3,512)		(8,151)		(1,427)
Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax		6,990		(15,835)		13,971		0
Add back: Interest expense on convertible notes for the period, net of tax										Add back: Interest expense on convertible notes for the period, net of tax	6,870		6,990		20,585		—
Net income (loss) allocated to common shareholders	Net income (loss) allocated to common shareholders	$	94,146	$	146,493	$	195,424	$	(778,965)	Net income (loss) allocated to common shareholders	$	92,409	$	145,290	$	288,002	$	(637,569)
Weighted average common shares outstanding	Weighted average common shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928		Weighted average common shares outstanding	112,995,847		113,403,102		112,754,691		113,952,308
Net effect of dilutive equity awards	Net effect of dilutive equity awards	273,139		0		234,353		0		Net effect of dilutive equity awards	292,749		—		253,819		—
Net effect of assumed convertible notes conversion to common shares	Net effect of assumed convertible notes conversion to common shares	28,566,875		32,715,790		28,566,875		0		Net effect of assumed convertible notes conversion to common shares	28,566,875		28,566,875		28,566,875		—
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	141,761,084		147,099,079		141,139,212		114,229,928		Diluted weighted average common shares outstanding	141,855,471		141,969,977		141,575,385		113,952,308
Diluted Earnings (Loss) per Common Share	Diluted Earnings (Loss) per Common Share	$	0.66	$	1.00	$	1.38	$	(6.82)	Diluted Earnings (Loss) per Common Share	$	0.65	$	1.02	$	2.03	$	(5.60)

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

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

For the ~~six~~nine months ended ~~June~~September 30, 2020, ~~34.1~~32.2 million of common shares related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and ~~six~~nine months ended ~~June~~September 30, 2021, the number of outstanding equity awards that were antidilutive totaled ~~18,645~~22,102 and ~~17,053,~~18,736, respectively. 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.

5965

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 17. Equity - (continued)

Stock Repurchases

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the ~~six~~nine months ended ~~June~~September 30, 2021, we did 0tnot repurchase any shares. At ~~June~~September 30, 2021, $78 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

Note 18. Equity Compensation Plans

At ~~June~~September 30, 2021 and December 31, 2020, ~~7,443,250~~7,273,676 and 7,957,891 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock and purchases under the Employee Stock Purchase Plan, totaled ~~$27~~$26 million at ~~June~~September 30, 2021, as shown in the following table.

Table 18.1 – Activities of Equity Compensation Costs by Award Type


		Six Months Ended June 30, 2021													Nine Months Ended September 30, 2021
(In Thousands)	(In Thousands)	Restricted Stock Awards		Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total		(In Thousands)	Restricted Stock Awards		Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total
Unrecognized compensation cost at beginning of period	Unrecognized compensation cost at beginning of period	$	564	$	3,540	$	17,766	$	5,794	$	0	$	27,664	Unrecognized compensation cost at beginning of period	$	564	$	3,540	$	17,766	$	5,794	$	—	$	27,664
Equity grants	Equity grants	0		2,370		3,141		0		259		5,770		Equity grants	—		2,370		5,766		—		335		8,471
Performance-based valuation adjustment	Performance-based valuation adjustment	0		0		0		1,072		0		1,072		Performance-based valuation adjustment	—		—		—		1,072		—		1,072
Equity grant forfeitures	Equity grant forfeitures	(2)		(610)		(550)		0		0		(1,162)		Equity grant forfeitures	(2)		(670)		(550)		—		—		(1,222)
Equity compensation expense	Equity compensation expense	(271)		(752)		(3,629)		(1,355)		(130)		(6,137)		Equity compensation expense	(375)		(1,188)		(5,681)		(2,002)		(251)		(9,497)
Unrecognized Compensation Cost at End of Period	Unrecognized Compensation Cost at End of Period	$	291	$	4,548	$	16,728	$	5,511	$	129	$	27,207	Unrecognized Compensation Cost at End of Period	$	187	$	4,052	$	17,301	$	4,864	$	84	$	26,488

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

Restricted Stock Awards ("RSAs")

At ~~June~~September 30, 2021 and December 31, 2020, there were 29,693 and 78,998 shares, respectively, of RSAs outstanding. Restrictions on these shares lapse through 2022. During the ~~six~~nine months ended ~~June~~September 30, 2021, there were 0no RSAs granted, restrictions on 49,305 RSAs lapsed and those shares were distributed, and 0no RSAs were forfeited.

Restricted Stock Units ("RSUs")

At ~~June~~September 30, 2021 and December 31, 2020, there were ~~453,811~~445,183 and 282,424 shares, respectively, of RSUs outstanding. ~~Restrictions on these shares lapse through 2025.~~ During the ~~six~~nine months ended ~~June~~September 30, 2021, there were 272,261 RSUs granted, ~~62,494~~64,759 RSUs distributed, and ~~38,380~~44,743 RSUs forfeited. Unvested RSUs at September 30, 2021 vest through 2025.

Deferred Stock Units (“DSUs”)

At ~~June~~September 30, 2021 and December 31, 2020, there were ~~3,081,201~~3,318,540 and 2,805,144 DSUs, respectively, outstanding of which ~~1,437,464~~1,546,724 and 1,206,125, respectively, had vested. During the ~~six~~nine months ended ~~June~~September 30, 2021, there were ~~463,213~~700,552 DSUs granted, 155,995 DSUs distributed, and 31,161 DSUs forfeited. Unvested DSUs at ~~June~~September 30, 2021 vest through 2025.

6066

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 18. Equity Compensation Plans - (continued)

Performance Stock Units (“PSUs”)

At ~~June~~September 30, 2021 and December 31, 2020, the target number of PSUs that were unvested was 955,710 and 978,735, respectively. Vesting for ~~all~~ PSUs ~~will~~ generally ~~occur~~occurs at the end of three years from their respective grant ~~date~~dates based on various ~~Total Shareholder Return ("TSR")~~total shareholder return performance calculations, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2020. With respect to PSUs granted in May 2018, the three-year performance period ended during the second quarter of 2021, resulting in the vesting of no shares of our common stock. During the second quarter of 2021, for PSUs granted in 2020, we adjusted the future amortization expense by $1 million to reflect our current estimate of the number of shares expected to vest in relation to the performance condition for the initial one-year vesting tranche.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of 850,000 shares of common stock to be purchased in aggregate for all employees. As of ~~June~~September 30, 2021 and December 31, 2020, ~~523,991~~546,093 and 489,886 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at ~~June~~September 30, 2021.

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, 2021 and 2020.

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)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
Residential Mortgage Banking Activities, Net	Residential Mortgage Banking Activities, Net									Residential Mortgage Banking Activities, Net
Changes in fair value of:	Changes in fair value of:									Changes in fair value of:
Residential loans, at fair value (1)	Residential loans, at fair value (1)	$	76,907	$	(1,393)	$	47,634	$	6,562	Residential loans, at fair value (1)	$	27,862	$	12,589	$	75,496	$	19,151
Trading securities (2)	Trading securities (2)	(1,095)		0		(374)		0		Trading securities (2)	32		—		(342)		—
Risk management derivatives (3)	Risk management derivatives (3)	(55,740)		0		33,224		(31,294)		Risk management derivatives (3)	3,963		(10)		37,187		(31,304)
Other income (expense), net (4)	Other income (expense), net (4)	1,193		(6,612)		2,216		(6,354)		Other income (expense), net (4)	1,089		(715)		3,305		(7,069)
Total residential mortgage banking activities, net	Total residential mortgage banking activities, net	21,265		(8,005)		82,700		(31,086)		Total residential mortgage banking activities, net	32,946		11,864		115,646		(19,222)

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)	25,966		1,210		36,214		13,018		Single-family rental loans, at fair value (1)	18,461		43,191		54,675		56,209
Risk management derivatives (3)	Risk management derivatives (3)	(2,504)		0		1,354		(21,538)		Risk management derivatives (3)	(424)		(89)		930		(21,627)
Bridge loans, at fair value	Bridge loans, at fair value	2,225		(1,260)		3,269		(5,194)		Bridge loans, at fair value	3,433		938		6,702		(4,256)
Other income, net (5)	Other income, net (5)	7,467		2,073		13,489		9,916		Other income, net (5)	8,747		3,491		22,236		13,407
Total business purpose mortgage banking activities, net	Total business purpose mortgage banking activities, net	33,154		2,023		54,326		(3,798)		Total business purpose mortgage banking activities, net	30,217		47,531		84,543		43,733
Mortgage Banking Activities, Net	Mortgage Banking Activities, Net	$	54,419	$	(5,982)	$	137,026	$	(34,884)	Mortgage Banking Activities, Net	$	63,163	$	59,395	$	200,189	$	24,511

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

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

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

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

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

6167

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 20. Other Income

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

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)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
MSR (loss) income, net(1)	MSR (loss) income, net(1)	$	(43)	$	(1,424)	$	654	$	(3,233)	MSR (loss) income, net(1)	$	295	$	(2,362)	$	949	$	(5,595)
Risk share income		861		1,181		1,743		1,946
Agency risk sharing agreement income										Agency risk sharing agreement income	575		1,200		2,318		3,146
FHLBC capital stock dividend	FHLBC capital stock dividend	25		538		50		1,085		FHLBC capital stock dividend	3		116		53		1,201

Bridge loan fees	Bridge loan fees	911		626		1,604		1,804		Bridge loan fees	1,131		716		2,735		2,520

Other	Other	372		244		1,918		2,491		Other	384		216		2,302		2,707
Other Income		$	2,126	$	1,165	$	5,969	$	4,093
Other Income, Net										Other Income, Net	$	2,388	$	(114)	$	8,357	$	3,979

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

6268

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

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

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

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		2021		2020		(In Thousands)	2021		2020		2021		2020
General and Administrative Expenses	General and Administrative Expenses									General and Administrative Expenses
Fixed compensation expense	Fixed compensation expense	$	11,269	$	11,818	$	23,074	$	26,502	Fixed compensation expense	$	11,285	$	10,103	$	34,359	$	36,605
Annual variable compensation	Annual variable compensation	12,508		3,278		31,177		3,289		Annual variable compensation	19,844		5,882		51,021		9,171
Long-term incentive award expense (1)	Long-term incentive award expense (1)	5,682		3,262		9,851		5,257		Long-term incentive award expense (1)	4,915		2,639		14,766		7,896
Acquisition-related equity compensation expense (2)	Acquisition-related equity compensation expense (2)	1,212		1,212		2,424		2,424		Acquisition-related equity compensation expense (2)	1,189		1,212		3,613		3,636
Systems and consulting	Systems and consulting	3,272		2,395		6,249		5,607		Systems and consulting	2,975		2,145		9,224		7,752
Office costs	Office costs	2,024		1,887		3,832		3,995		Office costs	2,197		1,859		6,029		5,854
Accounting and legal	Accounting and legal	1,221		2,788		1,935		5,004		Accounting and legal	1,197		1,601		3,132		6,605
Corporate costs	Corporate costs	873		626		1,564		1,297		Corporate costs	964		831		2,528		2,128
Other	Other	2,533		1,254		4,039		3,827		Other	3,126		1,358		7,165		5,185
Total General and Administrative Expenses	Total General and Administrative Expenses	40,594		28,520		84,145		57,202		Total General and Administrative Expenses	47,692		27,630		131,837		84,832

Loan Acquisition Costs	Loan Acquisition Costs									Loan Acquisition Costs
Commissions	Commissions	1,661		360		2,924		2,148		Commissions	1,906		879		4,830		3,027
Underwriting costs	Underwriting costs	1,836		856		3,521		2,518		Underwriting costs	2,351		771		5,872		3,289
Transfer and holding costs	Transfer and holding costs	251		356		862		892		Transfer and holding costs	364		508		1,226		1,400

Total Loan Acquisition Costs	Total Loan Acquisition Costs	3,748		1,572		7,307		5,558		Total Loan Acquisition Costs	4,621		2,158		11,928		7,716

Other Expenses	Other Expenses									Other Expenses
Goodwill impairment expense	Goodwill impairment expense	0		0		0		88,675		Goodwill impairment expense	—		—		—		88,675
Amortization of purchase-related intangible assets	Amortization of purchase-related intangible assets	3,873		3,873		7,746		8,182		Amortization of purchase-related intangible assets	3,873		3,873		11,619		12,052

Other	Other	112		1,210		335		(359)		Other	150		3,915		485		3,559
Total Other Expenses	Total Other Expenses	3,985		5,083		8,081		96,498		Total Other Expenses	4,023		7,788		12,104		104,286
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	48,327	$	35,175	$	99,533	$	159,258	Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	56,336	$	37,576	$	155,869	$	196,834

(1)For the three months ended ~~June~~September 30, 2021, long-term incentive award expense includes $4$3 million of expense for awards settleable in shares of our common stock and $1 million of expense for awards settleable in cash. For the ~~six~~nine months ended ~~June~~September 30, 2021, long-term incentive award expense includes $7$10 million of expense for awards settleable in shares of our common stock and $3$4 million of expense for awards settleable in cash.

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

6369

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 22. Taxes

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

For the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, we recognized a provision for income taxes of ~~$18~~$14 million and a benefit from income taxes of ~~$22~~$13 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at ~~June~~September 30, 2021 and 2020.

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


		June 30, 2021		June 30, 2020			September 30, 2021		September 30, 2020
Federal statutory rate	Federal statutory rate	21.0	%	21.0	%	Federal statutory rate	21.0	%	21.0	%
State statutory rate, net of Federal tax effect	State statutory rate, net of Federal tax effect	8.6	%	8.6	%	State statutory rate, net of Federal tax effect	8.6	%	8.6	%
Differences in taxable (loss) income from GAAP income	Differences in taxable (loss) income from GAAP income	(14.1)	%	(23.6)	%	Differences in taxable (loss) income from GAAP income	(13.1)	%	(23.6)	%
Change in valuation allowance	Change in valuation allowance	(3.3)	%	(3.2)	%	Change in valuation allowance	(6.8)	%	(4.0)	%
Dividends paid deduction (1)	Dividends paid deduction (1)	(3.3)	%	0	%	Dividends paid deduction (1)	(4.9)	%	—	%
Effective Tax Rate	Effective Tax Rate	8.9	%	2.8	%	Effective Tax Rate	4.8	%	2.0	%

(1)The dividends paid deduction in the effective tax rate reconciliation is generally representative of the amount of distributions to shareholders that reduce REIT taxable income. For the ~~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,~~because there was no REIT taxable income available to apply against the dividends paid. This was due to our REIT incurring a taxable loss during the period.

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

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

Note 23. Segment Information

Redwood operates in 3 segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For a full description of our segments, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

6470

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 23. Segment Information - (continued)

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

Table 23.1 – Business Segment Financial Information


		Three Months Ended June 30, 2021											Three Months Ended September 30, 2021
(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	Interest income	$	33,033	$	70,515	$	33,972	$	1,175	$	138,695	Interest income	$	44,220	$	67,235	$	33,218	$	1,049	$	145,722
Interest expense	Interest expense	(21,056)		(54,442)		(22,334)		(10,233)		(108,065)		Interest expense	(25,395)		(46,834)		(21,370)		(10,155)		(103,754)
Net interest income	Net interest income	11,977		16,073		11,638		(9,058)		30,630		Net interest income	18,825		20,401		11,848		(9,106)		41,968
Non-interest income	Non-interest income											Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	21,265		33,154		0		0		54,419		Mortgage banking activities, net	32,946		30,217		—		—		63,163
Investment fair value changes, net	Investment fair value changes, net	3,927		3,782		42,018		(247)		49,480		Investment fair value changes, net	2,285		3,470		20,569		(247)		26,077
Other income, net	Other income, net	839		1,017		5		265		2,126		Other income, net	874		1,184		—		330		2,388
Realized gains, net	Realized gains, net	6,687		390		1,307		0		8,384		Realized gains, net	6,389		314		—		—		6,703
Total non-interest income (loss), net	Total non-interest income (loss), net	32,718		38,343		43,330		18		114,409		Total non-interest income (loss), net	42,494		35,185		20,569		83		98,331
General and administrative expenses	General and administrative expenses	(7,793)		(13,688)		(930)		(18,183)		(40,594)		General and administrative expenses	(8,989)		(13,987)		(1,415)		(23,301)		(47,692)
Loan acquisition costs	Loan acquisition costs	(1,887)		(1,861)		0		0		(3,748)		Loan acquisition costs	(2,395)		(2,175)		(51)		—		(4,621)
Other expenses	Other expenses	0		(3,873)		(112)		0		(3,985)		Other expenses	—		(3,873)		(150)		—		(4,023)
Provision for income taxes		(4,171)		(2,182)		(334)		0		(6,687)
(Provision for) benefit from income taxes												(Provision for) benefit from income taxes	(11,139)		(3,485)		(335)		19,282		4,323
Segment Contribution	Segment Contribution	$	30,844	$	32,812	$	53,592	$	(27,223)			Segment Contribution	$	38,796	$	32,066	$	30,466	$	(13,042)
Net Income	Net Income									$	90,025	Net Income									$	88,286
Non-cash amortization (expense) income, net	Non-cash amortization (expense) income, net	$	1,339	$	(5,584)	$	185	$	(1,955)	$	(6,015)	Non-cash amortization (expense) income, net	$	5,862	$	(4,713)	$	276	$	(1,995)	$	(570)


		Six Months Ended June 30, 2021											Nine Months Ended September 30, 2021
(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	Interest income	$	60,581	$	134,920	$	68,962	$	2,537	$	267,000	Interest income	$	104,801	$	202,155	$	102,180	$	3,586	$	412,722
Interest expense	Interest expense	(40,093)		(104,517)		(45,513)		(20,494)		(210,617)		Interest expense	(65,488)		(151,351)		(66,883)		(30,649)		(314,371)
Net interest income	Net interest income	20,488		30,403		23,449		(17,957)		56,383		Net interest income	39,313		50,804		35,297		(27,063)		98,351
Non-interest income	Non-interest income											Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	82,700		54,326		0		0		137,026		Mortgage banking activities, net	115,646		84,543		—		—		200,189
Investment fair value changes, net	Investment fair value changes, net	6,673		7,081		81,734		(921)		94,567		Investment fair value changes, net	8,958		10,551		102,303		(1,168)		120,644
Other income, net	Other income, net	3,692		1,860		5		412		5,969		Other income, net	4,566		3,044		5		742		8,357
Realized gains, net	Realized gains, net	9,095		498		1,507		0		11,100		Realized gains, net	15,484		812		1,507		—		17,803
Total non-interest income, net	Total non-interest income, net	102,160		63,765		83,246		(509)		248,662		Total non-interest income, net	144,654		98,950		103,815		(426)		346,993
General and administrative expenses	General and administrative expenses	(21,550)		(24,847)		(2,061)		(35,687)		(84,145)		General and administrative expenses	(30,539)		(38,834)		(3,476)		(58,988)		(131,837)
Loan acquisition costs	Loan acquisition costs	(3,303)		(3,913)		(87)		(4)		(7,307)		Loan acquisition costs	(5,698)		(6,088)		(138)		(4)		(11,928)
Other expenses	Other expenses	(6)		(7,650)		(442)		17		(8,081)		Other expenses	(6)		(11,523)		(592)		17		(12,104)
Provision for income taxes		(14,150)		(3,503)		(577)		0		(18,230)
(Provision for) benefit from income taxes												(Provision for) benefit from income taxes	(25,289)		(6,988)		(912)		19,282		(13,907)
Segment Contribution	Segment Contribution	$	83,639	$	54,255	$	103,528	$	(54,140)			Segment Contribution	$	122,435	$	86,321	$	133,994	$	(67,182)
Net Income	Net Income									$	187,282	Net Income									$	275,568
Non-cash amortization (expense) income, net	Non-cash amortization (expense) income, net	$	3,005	$	(11,441)	$	41	$	(3,850)	$	(12,245)	Non-cash amortization (expense) income, net	$	8,867	$	(16,154)	$	317	$	(5,845)	$	(12,815)

6571

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 23. Segment Information - (continued)


		Three Months Ended June 30, 2020											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	$	36,653	$	53,742	$	36,811	$	2,740	$	129,946	Interest income	$	26,672	$	55,930	$	37,576	$	1,804	$	121,982
Interest expense	Interest expense	(28,762)		(36,631)		(24,927)		(12,346)		(102,666)		Interest expense	(21,401)		(44,159)		(24,238)		(10,613)		(100,411)
Net interest income	Net interest income	7,891		17,111		11,884		(9,606)		27,280		Net interest income	5,271		11,771		13,338		(8,809)		21,571
Non-interest income	Non-interest income											Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	(8,005)		2,023		0		0		(5,982)		Mortgage banking activities, net	11,864		47,531		—		—		59,395
Investment fair value changes, net	Investment fair value changes, net	35,085		40,401		76,972		(230)		152,228		Investment fair value changes, net	2,443		16,892		87,890		(178)		107,047
Other income, net	Other income, net	230		686		(509)		758		1,165		Other income, net	(2,011)		623		340		934		(114)
Realized gains, net	Realized gains, net	205		0		578		25,182		25,965		Realized gains, net	—		—		602		—		602
Total non-interest income, net	Total non-interest income, net	27,515		43,110		77,041		25,710		173,376		Total non-interest income, net	12,296		65,046		88,832		756		166,930
General and administrative expenses	General and administrative expenses	(3,700)		(9,016)		(1,986)		(13,818)		(28,520)		General and administrative expenses	(4,602)		(9,321)		(709)		(12,998)		(27,630)
Loan acquisition costs	Loan acquisition costs	(175)		(1,277)		(120)		0		(1,572)		Loan acquisition costs	(304)		(1,660)		(194)		—		(2,158)
Other expenses	Other expenses	0		(3,884)		(1,065)		(134)		(5,083)		Other expenses	(3,309)		(3,874)		(470)		(135)		(7,788)
Benefit from (provision for) income taxes		3,323		2,439		(5,799)		0		(37)
(Provision for) benefit from income taxes												(Provision for) benefit from income taxes	(826)		(8,544)		257		—		(9,113)
Segment Contribution	Segment Contribution	$	34,854	$	48,483	$	79,955	$	2,152			Segment Contribution	$	8,526	$	53,418	$	101,054	$	(21,186)
Net Income	Net Income									$	165,444	Net Income									$	141,812
Non-cash amortization income (expense), net	Non-cash amortization income (expense), net	$	(1,265)	$	(6,391)	$	312	$	(1,619)	$	(8,963)	Non-cash amortization income (expense), net	$	1,785	$	(6,719)	$	117	$	(1,516)	$	(6,333)


		Six Months Ended June 30, 2020											Nine 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	$	97,284	$	106,802	$	118,007	$	5,934	$	328,027	Interest income	$	123,956	$	162,732	$	155,583	$	7,738	$	450,009
Interest expense	Interest expense	(66,324)		(68,984)		(87,428)		(26,601)		(249,337)		Interest expense	(87,725)		(113,143)		(111,666)		(37,214)		(349,748)
Net interest income	Net interest income	30,960		37,818		30,579		(20,667)		78,690		Net interest income	36,231		49,589		43,917		(29,476)		100,261
Non-interest income	Non-interest income											Non-interest income
Mortgage banking activities, net	Mortgage banking activities, net	(31,086)		(3,798)		0		0		(34,884)		Mortgage banking activities, net	(19,222)		43,733		—		—		24,511
Investment fair value changes, net	Investment fair value changes, net	(161,550)		(101,729)		(454,586)		(739)		(718,604)		Investment fair value changes, net	(159,107)		(84,837)		(366,696)		(917)		(611,557)
Other income, net	Other income, net	(267)		2,870		732		758		4,093		Other income, net	(2,278)		3,493		1,072		1,692		3,979
Realized gains, net	Realized gains, net	2,001		0		2,634		25,182		29,817		Realized gains, net	2,001		—		3,236		25,182		30,419
Total non-interest income, net	Total non-interest income, net	(190,902)		(102,657)		(451,220)		25,201		(719,578)		Total non-interest income, net	(178,606)		(37,611)		(362,388)		25,957		(552,648)
General and administrative expenses	General and administrative expenses	(8,299)		(20,656)		(3,521)		(24,726)		(57,202)		General and administrative expenses	(12,901)		(29,977)		(4,230)		(37,724)		(84,832)
Loan acquisition costs	Loan acquisition costs	(1,208)		(3,970)		(373)		(7)		(5,558)		Loan acquisition costs	(1,512)		(5,630)		(567)		(7)		(7,716)
Other expenses	Other expenses	0		(96,869)		817		(446)		(96,498)		Other expenses	(3,309)		(100,743)		347		(581)		(104,286)
Benefit from income taxes	Benefit from income taxes	8,653		9,021		4,518		0		22,192		Benefit from income taxes	7,827		477		4,775		—		13,079
Segment Contribution	Segment Contribution	$	(160,796)	$	(177,313)	$	(419,200)	$	(20,645)			Segment Contribution	$	(152,270)	$	(123,895)	$	(318,146)	$	(41,831)
Net Loss	Net Loss									$	(777,954)	Net Loss									$	(636,142)
Non-cash amortization income (expense), net	Non-cash amortization income (expense), net	$	(1,053)	$	(11,316)	$	1,053	$	(1,728)	$	(13,044)	Non-cash amortization income (expense), net	$	732	$	(18,035)	$	1,170	$	(3,244)	$	(19,377)
Other significant non-cash expense: goodwill impairment	Other significant non-cash expense: goodwill impairment	$	0	$	(88,675)	$	0	$	0	$	(88,675)	Other significant non-cash expense: goodwill impairment	$	—	$	(88,675)	$	—	$	—	$	(88,675)

6672

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 23. Segment Information - (continued)

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

Table 23.2 – Components of Corporate/Other


		Three Months Ended June 30,													Three Months Ended September 30,
		2021						2020							2021						2020
(In Thousands)	(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total		(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	Interest income	$	1,169	$	6	$	1,175	$	2,685	$	55	$	2,740	Interest income	$	1,042	$	7	$	1,049	$	1,795	$	9	$	1,804
Interest expense	Interest expense	(755)		(9,478)		(10,233)		(1,518)		(10,828)		(12,346)		Interest expense	(641)		(9,514)		(10,155)		(1,059)		(9,554)		(10,613)
Net interest income	Net interest income	414		(9,472)		(9,058)		1,167		(10,773)		(9,606)		Net interest income	401		(9,507)		(9,106)		736		(9,545)		(8,809)
Non-interest income	Non-interest income													Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(216)		(31)		(247)		(230)		0		(230)		Investment fair value changes, net	(247)		—		(247)		(81)		(97)		(178)
Other income	Other income	0		265		265		0		758		758		Other income	—		330		330		—		934		934
Realized gains, net		0		0		0		0		25,182		25,182

Total non-interest income, net	Total non-interest income, net	(216)		234		18		(230)		25,940		25,710		Total non-interest income, net	(247)		330		83		(81)		837		756
General and administrative expenses	General and administrative expenses	0		(18,183)		(18,183)		0		(13,818)		(13,818)		General and administrative expenses	—		(23,301)		(23,301)		—		(12,998)		(12,998)

Other expenses	Other expenses	0		0		0		0		(134)		(134)		Other expenses	—		—		—		—		(135)		(135)

Provision for income taxes														Provision for income taxes	—		19,282		19,282		—		—		—
Total	Total	$	198	$	(27,421)	$	(27,223)	$	937	$	1,215	$	2,152	Total	$	154	$	(13,196)	$	(13,042)	$	655	$	(21,841)	$	(21,186)


		Six Months Ended June 30,													Nine Months Ended September 30,
		2021						2020							2021						2020
(In Thousands)	(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total		(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	Interest income	$	2,517	$	20	$	2,537	$	5,879	$	55	$	5,934	Interest income	$	3,559	$	27	$	3,586	$	7,674	$	64	$	7,738
Interest expense	Interest expense	(1,630)		(18,864)		(20,494)		(4,040)		(22,561)		(26,601)		Interest expense	(2,271)		(28,378)		(30,649)		(5,099)		(32,115)		(37,214)
Net interest income	Net interest income	887		(18,844)		(17,957)		1,839		(22,506)		(20,667)		Net interest income	1,288		(28,351)		(27,063)		2,575		(32,051)		(29,476)
Non-interest income	Non-interest income													Non-interest income

Investment fair value changes, net	Investment fair value changes, net	(915)		(6)		(921)		(621)		(118)		(739)		Investment fair value changes, net	(1,162)		(6)		(1,168)		(702)		(215)		(917)
Other income	Other income	0		412		412		0		758		758		Other income	—		742		742		—		1,692		1,692
Realized gains, net	Realized gains, net	0		0		0		0		25,182		25,182		Realized gains, net	—		—		—		—		25,182		25,182
Total non-interest income, net	Total non-interest income, net	(915)		406		(509)		(621)		25,822		25,201		Total non-interest income, net	(1,162)		736		(426)		(702)		26,659		25,957
General and administrative expenses	General and administrative expenses	0		(35,687)		(35,687)		0		(24,726)		(24,726)		General and administrative expenses	—		(58,988)		(58,988)		—		(37,724)		(37,724)
Loan acquisition costs	Loan acquisition costs	0		(4)		(4)		0		(7)		(7)		Loan acquisition costs	—		(4)		(4)		—		(7)		(7)
Other expenses	Other expenses	0		17		17		0		(446)		(446)		Other expenses	—		17		17		—		(581)		(581)

Provision for income taxes														Provision for income taxes	—		19,282		19,282		—		—		—
Total	Total	$	(28)	$	(54,112)	$	(54,140)	$	1,218	$	(21,863)	$	(20,645)	Total	$	126	$	(67,308)	$	(67,182)	$	1,873	$	(43,704)	$	(41,831)

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

6773

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2021

(Unaudited)

Note 23. Segment Information - (continued)

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

Table 23.3 – Supplemental Segment Information


(In Thousands)	(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total		(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
June 30, 2021
September 30, 2021												September 30, 2021
Residential loans	Residential loans	$	3,383,101	$	0	$	2,098,624	$	260,875	$	5,742,600	Residential loans	$	3,974,829	$	—	$	1,999,405	$	242,234	$	6,216,468
Business purpose loans	Business purpose loans	0		4,408,889		0		0		4,408,889		Business purpose loans	—		4,693,555		—		—		4,693,555
Multifamily loans	Multifamily loans	0		0		485,157		0		485,157		Multifamily loans	—		—		482,791		—		482,791
Real estate securities	Real estate securities	163,609		0		191,277		0		354,886		Real estate securities	150,368		—		202,918		—		353,286
Other investments	Other investments	8,721		13,168		267,851		18,992		308,732		Other investments	12,389		6,767		379,102		24,108		422,366
Intangible assets	Intangible assets	0		49,119		0		0		49,119		Intangible assets	—		45,246		—		—		45,246
Total assets	Total assets	3,615,860		4,576,139		3,063,094		741,298		11,996,391		Total assets	4,219,950		4,860,226		3,088,815		903,723		13,072,714

December 31, 2020	December 31, 2020											December 31, 2020
Residential loans	Residential loans	$	1,741,963	$	0	$	2,221,153	$	285,935	$	4,249,051	Residential loans	$	1,741,963	$	—	$	2,221,153	$	285,935	$	4,249,051
Business purpose loans	Business purpose loans	0		4,136,353		0		0		4,136,353		Business purpose loans	—		4,136,353		—		—		4,136,353
Multifamily loans	Multifamily loans	0		0		492,221		0		492,221		Multifamily loans	—		—		492,221		—		492,221
Real estate securities	Real estate securities	160,780		0		183,345		0		344,125		Real estate securities	160,780		—		183,345		—		344,125
Other investments	Other investments	8,815		21,627		317,282		451		348,175		Other investments	8,815		21,627		317,282		451		348,175
Intangible assets	Intangible assets	0		56,865		0		0		56,865		Intangible assets	—		56,865		—		—		56,865
Total assets	Total assets	1,989,802		4,323,040		3,232,415		809,809		10,355,066		Total assets	1,989,802		4,323,040		3,232,415		809,809		10,355,066

6874

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

INTRODUCTION

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

• Overview

• Results of Operations

–Consolidated Results of Operations

–Results of Operations by Segment

–Investments Detail

–~~Taxable~~ Income ~~and Tax Provision~~ Taxes

• 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.

6975

Our Business

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

Cautionary Statement

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

Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, our ability to pay dividends in the future, and the prospects for federal housing finance reform); (ii) statements related to our financial outlook and expectations for ~~2021;~~2021 and future years; (iii) statements related to our opportunities for growth, including by continuing to creatively expand distribution channels for our loans products; (iv) statements related to our investment portfolio, including that ~~our portfolio continues to offer significant~~there remains potential upside ~~as the economy recovers, and upside from the scarcity value and optionality embedded~~ in our portfolio through ~~both~~a combination of accretable market discount and call rights ~~on securitizations~~that we ~~have sponsored~~control, and ~~underlying business purpose loan refinance opportunities, as well as the recurring nature of this aspect of~~that we reinitiated our ~~portfolio~~flow purchase arrangement with Point, providing us with continuing HEI acquisition and ~~the potential upside inherent in each new~~ securitization ~~we sponsor through our platforms; (iv)~~opportunities; (v) statements related to our residential and business purpose lending platforms, including that we expect ~~our revenue mix between mortgage banking operations and our investment portfolio~~CoreVest to continue to ~~migrate towards mortgage banking, and the support this migration can provide for continued book value expansion over time through~~consider issuing bridge loan securitizations in conjunction with our ability to grow and retain earnings at our taxable REIT subsidiary; (v) statements related to regulatory changes in Washington, D.C., including expectations that regulatory changes for loans on second homes and investor properties has the potential to significantly increase volumes in our market in 2021 and beyond;traditional SFR loan securitizations; (vi) statements relating to our estimate of our available capital (including that we estimate our available capital at ~~June~~September 30, 2021 was approximately ~~$175~~$350 million); (vii) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the ~~second~~third quarter of 2021 and at ~~June~~September 30, 2021, and expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase; (viii) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2021; and (ix) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.

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

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

•the impact of the COVID-19 pandemic;

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

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

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

•our ability to compete successfully;

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

•strategic business and capital deployment decisions we make;

•our use of financial leverage;

•our exposure to a breach of our cybersecurity or data security;

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

•the concentration of the credit risks we are exposed to, including due to the structure of assets we hold, the geographical concentration of real estate underlying assets we own, and our exposure to environmental and climate-related risks;

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

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

•changes in mortgage prepayment rates;

•changes in interest rates;

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

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

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

•changes in the values of assets we own;

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

•our exposure to the discontinuation of LIBOR;

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

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

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

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

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

•our ability to successfully retain or attract key personnel;

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

•our exposure to a disruption of our technology infrastructure and systems;

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

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

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

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

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

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

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

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

•decisions about raising, managing, and distributing capital;

•our exposure to broad market fluctuations; and

•other factors not presently identified.

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

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OVERVIEW

Business Update

During the third quarter, we hosted Redwood’s third annual Investor Day. During our event we affirmed our commitment to our corporate mission to make quality housing, whether rented or owned, accessible to all American households, and discussed the Company's vision of being the leading operator and strategic capital provider driving sustainable innovation in housing finance.

We have significantly broadened our business within the housing market over the past several years. This includes expanding our mortgage banking platform and investment portfolio beyond the jumbo residential mortgage space, while maintaining the core competencies of the firm around our expertise in residential housing credit. Our ~~second~~expansion includes our acquisition of CoreVest in 2019 – which has now been part of our platform for two years – and investments in several other areas of housing finance. More recently, our approach to capital deployment has continued to evolve. Our progress this year growing our RWT Horizons initiative – investing in advanced technologies with the potential to transform our businesses – reflects an important step in that process. While our capital remains predominantly allocated to our operating businesses and investment portfolio, RWT Horizons reflects our belief in the strategic importance of innovation and partnership in driving profitable scale.

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

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

Our investment portfolio remained in step with this operating progress, appreciating in value by approximately 2% during the third quarter of 2021. We believe there remains potential upside in our securities portfolio from a combination of accretable market discount and call rights that we control.

These factors contributed to another strong quarter of financial results, with GAAP earnings of ~~$90 million ($0.66~~$0.65 per diluted ~~share), and~~share, a ~~6.5% increase in book value to $11.46 at June 30, 2021. On an~~27% annualized ~~basis, our first half GAAP~~ return on equity ~~was 31%~~for the third quarter of 2021. Book value increased 4.7% in the third quarter to $12.00 per share, contributing to an overall year-to-date increase of 21%. ~~Our total~~We declared a third quarter dividend of $0.21 per share and have now earned a 27% economic return year to ~~shareholders,~~date, which ~~includes~~represents growth in GAAP book value combined with dividends paid.

Additionally, we executed a series of strategic and ~~dividends paid, was 19%~~novel transactions across various disciplines within our firm that both positively contributed to earnings and provided indicators of our operating progress. Our Residential team completed a securitization leveraging blockchain technology for enhanced payment reporting for Sequoia investors. Historically, RMBS investors have needed to wait until well into the following month to see a month’s worth of remittance details on underlying loans. Liquid Mortgage – an early portfolio company of RWT Horizons – has coordinated with our sub-servicer to publish daily remittance information on a public blockchain. We believe this implementation is just the first ~~half of 2021.~~

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

For many residential mortgage originators, recent results were buoyed largely by direct Federal Reserve stimulus. However, with substantial progress in U.S. COVID-19 vaccinations, and a near-total economic reopening across the country, the Federal Reserve has begun reconsidering the size of its support to the Agency mortgage market. And, in fact, during the second quarter, the rise in mortgage rates and corresponding decline in refinancing demand by homeowners triggered an unceremonious contraction in margins across the industry. Nowhere was this more apparent than the residential wholesale mortgage channel, where lenders engaged in an all-out price war to preserve volumes, pushing their profit margins to near breakeven levels or worsestep in the ~~span~~application of ~~only a few months. Exaggerating the effects~~this type of strong competition was a surge in pro-cyclical inflationary rhetoric, and a volatile yield curve driving significant hedging and execution costs for those managing large mortgage loan pipelines – including for us. Against this backdrop,technology to our business.

Next, we completed CoreVest’s first securitization of bridge loans, which priced competitively against comparable transactions in the ~~second quarter we locked close~~market. This new form of distribution provides a valuable capital management tool with a 30-month reinvestment feature. We expect CoreVest to ~~$4 billion~~continue to consider issuing bridge loan securitizations in ~~jumbo residential loans at margins towards the high-end of~~conjunction with our ~~historical target range, underscoring the durability of our earnings power.~~

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

~~Our sustained performance through this challenging backdrop showcased our strategic foundation and is~~securitizations, having recently priced the essence of what makes Redwood unique. Our mortgage banking businesses offer highly complementary products that drive durable earnings streams at the corporate level. And our investment portfolio continues to offer significant upside as the economy recovers, well beyond what many industry observers had modeled after such a tumultuous pandemic period. Our credit discipline and ability to create our own assets remain key differentiators. The scarcity value and optionality embedded19th overall CAFL securitization in our portfolio - through both call rights on securitizations we have sponsored and underlying business purpose loan refinance opportunities – offer upside beyond the current discount to face value of the underlying assets. Notably, this attractive aspect of our portfolio is a potential upside inherent in each new securitization we sponsor through our platforms.

This foundation has facilitated returns that are significantly outpacing our growing dividends. Redwood's mortgage banking income significantly exceeded net interest income at our investment portfolio during the first half of 2021, and we expect this revenue mix will likely continue to migrate toward mortgage banking and by extension our taxable subsidiaries. This proportion is significantly higher than in recent years and casts a spotlight on a shift in business model that had in many ways been hiding in plain sight. It can also support continued book value expansion over time and an increased level of retained earnings, a zero-cost avenue for additional capital that reduces our marginal need for funding and stands in contrast to how others in the space manage their balance sheets.October 2021.

7278

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

~~We’re proud of the leadership we demonstrated~~participate in the ~~non-Agency market across both our platforms during the second quarter. For our Residential business, strong~~benefits of home price appreciation ~~across the country pushed homeowner equity~~without having to ~~the highest levels in at least a decade~~sell their homes or incur additional debt obligations. In parallel with this securitization, we renewed our flow purchase arrangement with Point, providing us with continuing HEI acquisition and naturally drove consumers to loans outside of the conforming balance limits of the GSEs. This has begun to diversify our geographic footprint, and we are now seeing a rising percentage of loan volume coming from parts of the country other than the coasts. We recently refocused our expanded credit product offerings in response to evolving homebuying trends and changes to the CFPB’s Qualified Mortgage (“QM”) regulations. We expect these changes will substantially reduce the frictional costs for a certain cohort of higher “debt-to-income” borrowers, whose financing options remain relatively limited. Volumes in Redwood Choice – our expanded-prime residential loan acquisition program – are once again building and represented close to 15% of our residential loan lock volume in the second quarter, up materially from 5% in the first quarter of 2021. As a reminder, Choice represented as much as 40% of our residential loan lock volume pre-pandemic.securitization opportunities.

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

Bywhile continuing to ~~re-invest~~analyze a broad array of opportunities in the pipeline, including several in the climate analytics area, which continues to be of interest as traditional methods of predicting how climate change can impact property valuation and insurability continue to evolve. With a direct relationship to our ~~infrastructure, both organically~~firmwide ESG work, we expect to continue dedicating focus to this type of opportunity through RWT Horizons.

As we approach the end of 2021, we are proceeding cautiously. We see several macro and ~~through partnerships,~~market risks ahead, including COVID-19 variants, rising inflation, central bank tapering (now officially signaled by the Federal Reserve) and Federal debt ceiling extension uncertainty, among others. More fundamentally, recent trends in unemployment claims data suggest that the economy is still in a recovery phase and the current economic situation is far from stable, notwithstanding consistent upward pressure on home prices and rents that has otherwise been favorable to our business results. Our interest rate, capital and broader risk management posture reflects this cautious view: while we ~~see a path to realizing transformative scale. Across our enterprise, we’ve cultivated a talented and inspired workforce and~~ have embraced technology to serve our customers more quickly than ever before. By combining enhanced systems and process improvements with the requisite amount of shoe leather, our teams have driven significant gains in output and efficiencygenerated strong earnings thus far in ~~2021. As~~2021, we ~~enter the third quarter~~have done so with record levels of ~~2021, the Federal Reserve has reiterated its support for the economy, supply chains have begun to adapt to~~cash on hand – including $557 million at September 30, 2021.

We are also focused on making a ~~post COVID-19 world, and interest rates have once again fallen. We’re optimistic that this presents a potential tailwind~~positive impact for our ~~businesses in~~people, our customers, our communities, and the ~~third quarter, to the extent the economic recovery builds and demand for housing remains robust. The uncertain outlook for interest rates and inflation underscores the balance of our~~overall society within which we operate. We believe this focus on a business model ~~through which we comprehensively serve both homeowners~~vision and ~~housing investors that would otherwise be inefficiently financed.~~

While we are excited about our performance during the second quarter and the growth potential ahead for shareholders, what ultimately differentiates our team is the quality of our people, and that our business provides meaningful benefits to our broadera set of core values can produce long-term and sustainable benefits for all our stakeholders. ~~The impact~~Going forward, we expect to continue operating to fulfill our ~~financing solutions have~~broadly-conceived mission, focusing on ~~local communities is palpable,~~the significant addressable markets in front of us, embracing the cusp of innovation, running a business grounded in fundamentals and sound analysis, and nurturing a diverse talent bench engaged and aligned with our experience and scale have enabled us to provide attractively priced debt to both owner-occupants and housing investors nationwide. But there remain cohorts of strong borrowers – particularly in underserved communities – who still don’t have access to financing at an attractive rate. Redwood’s mission is to offer solutions that can benefit all borrowers not well served by government loan programs, something our people are focused on and will hold ourselves accountable to in the months and years ahead.

values.

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~~Second~~Third Quarter Overview

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

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, 2021			June 30, 2021			(In Thousands, except per Share Data)	September 30, 2021			September 30, 2021
Net income per diluted common share	Net income per diluted common share	$	0.66		$	1.38		Net income per diluted common share	$	0.65		$	2.03
Annualized GAAP return on equity	Annualized GAAP return on equity	28.7		%	31.2		%	Annualized GAAP return on equity	26.7		%	29.6		%
Dividends per share	Dividends per share	$	0.18		$	0.34		Dividends per share	$	0.21		$	0.55
Book value per share	Book value per share	$	11.46		$	11.46		Book value per share	$	12.00		$	12.00
Economic return on book value (1)	Economic return on book value (1)	8.2		%	19.0		%	Economic return on book value (1)	6.5		%	26.6		%

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

•Our ~~second~~third quarter 2021 results ~~benefited from continued~~reflect ongoing strength inof our operating platforms ~~most notably increased business purpose mortgage banking revenues on~~with higher ~~volume~~volumes and strong ~~margins.~~margins driving increased revenues, improved returns in our investment portfolio from more efficient financing, and a tax benefit realized during the quarter. These results, along with an increase in the value of our securities portfolio attributable to continued positive fundamental trends, contributed to a ~~6.5%~~4.7% increase in our book value per share during the quarter.

•In ~~June~~September 2021, we announced a ~~13%~~17% increase in our quarterly dividend to ~~$0.18~~$0.21 per share for the ~~second~~third quarter of 2021.

•Our book value increased ~~$0.70~~$0.54 per share to ~~$11.46~~$12.00 per share during the ~~second~~third quarter of 2021, as basic earnings per share ~~and comprehensive income from investments~~ significantly exceeded our ~~second~~third quarter dividend of ~~$0.18~~$0.21 per share.

•Our business purpose lending platform ~~originated $527~~funded $639 million of business purpose mortgage loans in the ~~second~~third quarter, including ~~$312~~$394 million of single-family rental loans and ~~$215~~$245 million of residential bridge loans.

•~~Residential~~During the third quarter of 2021, we locked a record $4.74 billion of jumbo loans with over 125 discrete sellers, jumbo loan purchase commitments were ~~$2.74~~$3.29 billion, and we purchased $3.45 billion of residential jumbo loans during the second quarter of 2021. At June 30, 2021, our pipeline of residential jumbo loans identified for purchase was $2.47 billion. Additionally, at June 30, 2021, we had entered into forward sale agreements for $1.21$3.18 billion of residential jumbo loans.

•During the ~~second~~third quarter of 2021, we securitized ~~$1.81~~$1.03 billion of loans through ~~four~~three securitizations across Residential and Business Purpose Lending, and distributed ~~$1.82~~$2.43 billion of jumbo loans through whole loan sales.

•During the ~~second~~third quarter of 2021, we ~~settled call options on three Sequoia securitizations and one CAFL~~completed a securitization ~~acquiring $83~~backed entirely by residential home equity investment contracts ("HEIs"), issuing approximately $146 million of ~~seasoned residential jumbo loans at par and $45 million of seasoned single-family rental loans at par.~~securities through a transaction co-sponsored with Point Digital.

•During the ~~second~~third quarter of 2021, we funded six venture investments through our RWT Horizons venture investment initiative.

•During the third quarter of 2021, we added over ~~$750~~$350 million of financing capacity to support growth of our operating platforms ~~including~~and completed a ~~refinance of $242~~new $100 million ~~of debt~~non-marginable term financing collateralized by retained securities in our ~~bridge loans, reducing our cost of funds for our overall investments by over 100 basis points.~~

•During the second quarter of 2021, we retained $14 million of securities from a CoreVest securitization and $8 million of securities from Sequoia securitizations, purchased $2 million of other third-party securities, and sold $10 million of securities.investment portfolio.

•At ~~June~~September 30, 2021, our unrestricted cash was ~~$421~~$557 million, and our estimated available capital was ~~$175 million (which does not include approximately $100 million of available capital generated from a non-marginable secur~~ed ~~term financing we closed in early July 2021).~~$350 million.

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RESULTS OF OPERATIONS

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

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, 2021 and 2020.

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)	2021		2020		Change		2021		2020		Change		(In Thousands, except per Share Data)	2021		2020		Change		2021		2020		Change
Net Interest Income	Net Interest Income	$	30,630	$	27,280	$	3,350	$	56,383	$	78,690	$	(22,307)	Net Interest Income	$	41,968	$	21,571	$	20,397	$	98,351	$	100,261	$	(1,910)
Non-interest Income	Non-interest Income													Non-interest Income
Mortgage banking activities, net	Mortgage banking activities, net	54,419		(5,982)		60,401		137,026		(34,884)		171,910		Mortgage banking activities, net	63,163		59,395		3,768		200,189		24,511		175,678
Investment fair value changes, net	Investment fair value changes, net	49,480		152,228		(102,748)		94,567		(718,604)		813,171		Investment fair value changes, net	26,077		107,047		(80,970)		120,644		(611,557)		732,201
Other income	Other income	2,126		1,165		961		5,969		4,093		1,876		Other income	2,388		(114)		2,502		8,357		3,979		4,378
Realized gains, net	Realized gains, net	8,384		25,965		(17,581)		11,100		29,817		(18,717)		Realized gains, net	6,703		602		6,101		17,803		30,419		(12,616)
Total non-interest income (loss), net	Total non-interest income (loss), net	114,409		173,376		(58,967)		248,662		(719,578)		968,240		Total non-interest income (loss), net	98,331		166,930		(68,599)		346,993		(552,648)		899,641
General and administrative expenses	General and administrative expenses	(40,594)		(28,520)		(12,074)		(84,145)		(57,202)		(26,943)		General and administrative expenses	(47,692)		(27,630)		(20,062)		(131,837)		(84,832)		(47,005)
Loan acquisition costs	Loan acquisition costs	(3,748)		(1,572)		(2,176)		(7,307)		(5,558)		(1,749)		Loan acquisition costs	(4,621)		(2,158)		(2,463)		(11,928)		(7,716)		(4,212)
Other expenses	Other expenses	(3,985)		(5,083)		1,098		(8,081)		(96,498)		88,417		Other expenses	(4,023)		(7,788)		3,765		(12,104)		(104,286)		92,182
Net income (loss) before income taxes	Net income (loss) before income taxes	96,712		165,481		(68,769)		205,512		(800,146)		1,005,658		Net income (loss) before income taxes	83,963		150,925		(66,962)		289,475		(649,221)		938,696
(Provision for) benefit from income taxes		(6,687)		(37)		(6,650)		(18,230)		22,192		(40,422)
Benefit from (provision for) income taxes														Benefit from (provision for) income taxes	4,323		(9,113)		13,436		(13,907)		13,079		(26,986)
Net Income (Loss)	Net Income (Loss)	$	90,025	$	165,444	$	(75,419)	$	187,282	$	(777,954)	$	965,236	Net Income (Loss)	$	88,286	$	141,812	$	(53,526)	$	275,568	$	(636,142)	$	911,710
Diluted earnings (loss) per common share	Diluted earnings (loss) per common share	$	0.66	$	1.00	$	(0.34)	$	1.38	$	(6.82)	$	8.20	Diluted earnings (loss) per common share	$	0.65	$	1.02	$	(0.37)	$	2.03	$	(5.60)	$	7.63

Net Interest Income

The increase in net interest income during the ~~three-mont~~hthree-month periods was primarily due to higher average asset balances ~~of residential loans held for sale~~ during the ~~second~~third quarter of 2021, as ~~compared to~~well as a higher net interest margin, driven by the ~~second quarter~~combination of ~~2020, due to~~ a ~~slowdown in loan acquisitions in the first half~~lower average cost of ~~2020 related to the COVID-19 pandemic.~~ funds and higher discount accretion on our available-for-sale securities. For the ~~six-month~~nine-month periods, the decrease in net interest expense was primarily related to higher average asset balances during the first half of 2020, as we repositioned our portfolio during the second quarter of 2020, selling a significant amount of ~~assets and entering into new non-marginable and non-recourse borrowing facilities with higher interest rates.~~assets.

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- and ~~six-month~~nine-month periods was primarily due to an increase in loan acquisition and origination volumes at both our residential and business purpose mortgage banking businesses during 2021, ~~as well as higher margins, in both cases~~ due to pandemic-related disruptions in 2020, which adversely impacted our origination volumes in 2020.

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

7581

Investment Fair Value Changes, Net

Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and, prior to the second quarter of 2020, interest rate hedges associated with these investments. During the three and ~~six~~nine months ended ~~June~~September 30, 2021, positive investment fair value changes reflected continuing improvement in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained ~~Sequoia and~~ CAFL SFR securities. Additional detail on our investment fair value changes during 2021 is included in the “Results of Operations by Segment” section that follows.

During the three months ended ~~June~~September 30, 2020, investment fair value changes ~~increased significantly, as~~reflected increases in the fair value of our investment assets ~~recovered nearly one-third of the unrealized losses recognized in the first quarter of 2020.~~from improved credit performance and spread tightening. 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 ~~pandemic- and liquidity-related disruptions.~~market dislocations caused by the pandemic.

Other Income

The increase in other income for the three- and ~~six-month~~nine-month periods was primarily the result of an increase in income from our MSR investments, which generally benefited from a stabilization in prepayment speeds during 2021.

Realized Gains, Net

During the three and ~~six~~nine months ended ~~June~~September 30, 2021, we realized gains of $8$7 million and ~~$11~~$18 million, respectively, primarily resulting from the call of ~~one~~two and ~~four~~six seasoned Sequoia securitizations, ~~respectively, and the sale of $3 million and $5 million of AFS securities,~~ respectively. 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 AFS securities, and for the nine-month period, a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020.

General and Administrative Expenses

The increase in general and administrative expenses for the three- and ~~six-month~~nine-month periods primarily resulted from increased accruals of variable compensation expense associated with improved financial results in 2021 as compared to 2020, as well as long-term incentive award expense from awards granted in the second half of 2020. ~~This~~

Loan Acquisition Costs

The increase in loan acquisition costs for the three- and nine-month periods was ~~partially offset by a decrease in fixed compensation costs, legal and other costs~~primarily due to higher loan origination volumes throughout 2021 as ~~a result of cost savings measures implemented during~~compared to 2020.

Other Expenses

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

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. For the ~~three-~~three-month periods, our income tax provision decreased as we realized a $19 million benefit from the release of valuation allowance on a portion of our deferred tax assets. This decrease was partially offset by an increase in GAAP income recorded at our TRS and ~~six-month~~state taxes during 2021. For the nine-month periods, the ~~increase~~tax provision in ~~provision for income taxes was primarily~~2021 is reflective of the ~~result of~~ positive ~~GAAP~~ income earned at our ~~TRS in 2021,~~taxable subsidiaries, partially offset by the benefit from the release of valuation allowance and higher state taxes, as compared to a ~~significant~~tax benefit in 2020 reflective of a net loss incurred in ~~2020.~~ that period.

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

7682

Net Interest Income

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

Table 3 – Net Interest Income


		Three Months Ended June 30,													Three Months Ended September 30,
		2021						2020							2021						2020
(Dollars in Thousands)	(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield		(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income	Interest Income													Interest Income
Residential loans, held-for-sale	Residential loans, held-for-sale	$	13,266	$	1,825,086	2.9	%	$	8,537	$	771,003	4.4	%	Residential loans, held-for-sale	$	15,377	$	1,936,882	3.2	%	$	434	$	53,297	3.3	%

Residential loans - HFI at Redwood (2)														Residential loans - HFI at Redwood (2)	—		—		—	%	77		—		—	%
Residential loans - HFI at Legacy Sequoia (2)	Residential loans - HFI at Legacy Sequoia (2)	1,169		263,735		1.8	%	2,685		305,160		3.5	%	Residential loans - HFI at Legacy Sequoia (2)	1,042		248,791		1.7	%	1,795		285,077		2.5	%
Residential loans - HFI at Sequoia (2)	Residential loans - HFI at Sequoia (2)	14,492		1,444,831		4.0	%	22,565		1,826,727		4.9	%	Residential loans - HFI at Sequoia (2)	18,867		2,104,357		3.6	%	20,919		1,910,771		4.4	%
Residential loans - HFI at Freddie Mac SLST (2)	Residential loans - HFI at Freddie Mac SLST (2)	19,506		2,111,445		3.7	%	21,187		2,115,716		4.0	%	Residential loans - HFI at Freddie Mac SLST (2)	18,707		2,043,813		3.7	%	21,696		2,153,447		4.0	%
Business purpose loans		15,474		920,189		6.7	%	20,441		1,181,644		6.9	%
Business purpose loans at Redwood														Business purpose loans at Redwood	18,192		1,019,393		7.1	%	19,456		1,149,171		6.8	%
Single-family rental loans - HFI at CAFL	Single-family rental loans - HFI at CAFL	54,849		3,336,773		6.6	%	32,978		2,379,689		5.5	%	Single-family rental loans - HFI at CAFL	48,723		3,455,645		5.6	%	36,181		2,663,541		5.4	%
Bridge loans - HFI at CAFL														Bridge loans - HFI at CAFL	214		12,015		7.1	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series	Multifamily loans - HFI at Freddie Mac K-Series	4,860		488,715		4.0	%	4,870		470,896		4.1	%	Multifamily loans - HFI at Freddie Mac K-Series	4,846		483,930		4.0	%	4,918		489,736		4.0	%
Trading securities	Trading securities	5,527		140,115		15.8	%	6,587		127,506		20.7	%	Trading securities	5,710		147,925		15.4	%	6,539		140,892		18.6	%
Available-for-sale securities	Available-for-sale securities	3,752		128,413		11.7	%	3,440		128,486		10.7	%	Available-for-sale securities	8,532		120,183		28.4	%	3,596		135,942		10.6	%
Other interest income	Other interest income	5,800		779,236		3.0	%	6,656		848,105		3.1	%	Other interest income	5,512		769,308		2.9	%	6,371		859,808		3.0	%
Total interest income	Total interest income	138,695		11,438,538		4.9	%	129,946		10,154,932		5.1	%	Total interest income	145,722		12,342,242		4.7	%	121,982		9,841,682		5.0	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(10,085)		1,850,913		(2.2)	%	(15,110)		1,295,973		(4.7)	%	Short-term debt facilities	(10,808)		1,982,726		(2.2)	%	(3,558)		313,190		(4.5)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(1,110)		164,154		(2.7)	%	(1,797)		231,312		(3.1)	%	Short-term debt - servicer advance financing	(1,018)		149,450		(2.7)	%	(1,587)		218,885		(2.9)	%

ABS issued - Legacy Sequoia (2)	ABS issued - Legacy Sequoia (2)	(755)		260,857		(1.2)	%	(1,518)		300,773		(2.0)	%	ABS issued - Legacy Sequoia (2)	(641)		245,910		(1.0)	%	(1,058)		280,954		(1.5)	%
ABS issued - Sequoia (2)	ABS issued - Sequoia (2)	(11,374)		1,220,211		(3.7)	%	(19,117)		1,673,361		(4.6)	%	ABS issued - Sequoia (2)	(15,368)		1,872,636		(3.3)	%	(17,828)		1,708,687		(4.2)	%
ABS issued - Freddie Mac SLST (2)	ABS issued - Freddie Mac SLST (2)	(16,611)		1,864,842		(3.6)	%	(15,845)		1,801,798		(3.5)	%	ABS issued - Freddie Mac SLST (2)	(15,774)		1,765,465		(3.6)	%	(16,819)		1,892,967		(3.6)	%
ABS issued - Freddie Mac K-Series	ABS issued - Freddie Mac K-Series	(4,478)		459,344		(3.9)	%	(4,378)		447,886		(3.9)	%	ABS issued - Freddie Mac K-Series	(4,460)		453,031		(3.9)	%	(4,426)		464,693		(3.8)	%
ABS issued - CAFL	ABS issued - CAFL	(43,201)		3,087,741		(5.6)	%	(24,446)		2,213,900		(4.4)	%	ABS issued - CAFL	(37,489)		3,118,792		(4.8)	%	(26,383)		2,509,828		(4.2)	%
Long-term debt facilities	Long-term debt facilities	(10,972)		674,306		(6.5)	%	(7,995)		589,893		(5.4)	%	Long-term debt facilities	(8,715)		881,669		(4.0)	%	(19,198)		1,094,608		(7.0)	%
Long-term debt - FHLBC	Long-term debt - FHLBC	(1)		132		(3.0)	%	(1,635)		381,465		(1.7)	%	Long-term debt - FHLBC	—		—		—	%	(1)		1,000		(0.4)	%
Long-term debt - corporate	Long-term debt - corporate	(9,478)		650,821		(5.8)	%	(10,825)		707,611		(6.1)	%	Long-term debt - corporate	(9,481)		651,468		(5.8)	%	(9,553)		648,923		(5.9)	%
Total interest expense	Total interest expense	(108,065)		10,233,321		(4.2)	%	(102,666)		9,643,972		(4.3)	%	Total interest expense	(103,754)		11,121,147		(3.7)	%	(100,411)		9,133,735		(4.4)	%
Net Interest Income	Net Interest Income	$	30,630					$	27,280					Net Interest Income	$	41,968					$	21,571

7783


		Six Months Ended June 30,													Nine Months Ended September 30,
		2021						2020							2021						2020
(Dollars in Thousands)	(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield		(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income	Interest Income													Interest Income
Residential loans, held-for-sale	Residential loans, held-for-sale	$	19,931	$	1,381,960	2.9	%	$	16,787	$	875,767	3.8	%	Residential loans, held-for-sale	$	35,308	$	1,568,966	3.0	%	$	17,220	$	599,609	3.8	%
Residential loans - HFI at Redwood (2)	Residential loans - HFI at Redwood (2)	—		—		—	%	20,925		993,623		4.2	%	Residential loans - HFI at Redwood (2)	—		—		—	%	21,003		659,998		4.2	%
Residential loans - HFI at Legacy Sequoia (2)	Residential loans - HFI at Legacy Sequoia (2)	2,517		268,724		1.9	%	5,878		348,885		3.4	%	Residential loans - HFI at Legacy Sequoia (2)	3,559		262,007		1.8	%	7,673		327,460		3.1	%
Residential loans - HFI at Sequoia (2)	Residential loans - HFI at Sequoia (2)	29,975		1,414,397		4.2	%	47,647		1,981,097		4.8	%	Residential loans - HFI at Sequoia (2)	48,842		1,644,256		4.0	%	68,566		1,957,484		4.7	%
Residential loans - HFI at Freddie Mac SLST (2)	Residential loans - HFI at Freddie Mac SLST (2)	39,665		2,143,942		3.7	%	43,173		2,229,068		3.9	%	Residential loans - HFI at Freddie Mac SLST (2)	58,372		2,110,555		3.7	%	64,869		2,203,677		3.9	%
Business purpose loans	Business purpose loans	30,789		908,543		6.8	%	43,085		1,325,798		6.5	%	Business purpose loans	48,982		945,899		6.9	%	62,541		1,266,493		6.6	%
Single-family rental loans - HFI at CAFL	Single-family rental loans - HFI at CAFL	103,722		3,296,042		6.3	%	62,988		2,283,812		5.5	%	Single-family rental loans - HFI at CAFL	152,444		3,349,828		6.1	%	99,169		2,411,312		5.5	%
Bridge loans - HFI at CAFL														Bridge loans - HFI at CAFL	214		4,049		7.0	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series	Multifamily loans - HFI at Freddie Mac K-Series	9,646		491,282		3.9	%	45,042		2,328,527		3.9	%	Multifamily loans - HFI at Freddie Mac K-Series	14,492		488,804		4.0	%	49,960		1,711,123		3.9	%
Trading securities	Trading securities	11,423		136,336		16.8	%	20,249		434,852		9.3	%	Trading securities	17,133		140,241		16.3	%	26,789		336,151		10.6	%
Available-for-sale securities	Available-for-sale securities	7,519		132,823		11.3	%	8,087		141,279		11.4	%	Available-for-sale securities	16,051		128,564		16.6	%	11,682		139,487		11.2	%
Other interest income	Other interest income	11,813		801,270		2.9	%	14,166		715,416		4.0	%	Other interest income	17,325		790,499		2.9	%	20,537		763,898		3.6	%
Total interest income	Total interest income	267,000		10,975,319		4.9	%	328,027		13,658,124		4.8	%	Total interest income	412,722		11,433,668		4.8	%	450,009		12,376,692		4.8	%
Interest Expense	Interest Expense													Interest Expense
Short-term debt facilities	Short-term debt facilities	(16,572)		1,423,017		(2.3)	%	(36,600)		1,973,427		(3.7)	%	Short-term debt facilities	(27,380)		1,609,295		(2.3)	%	(40,158)		1,415,975		(3.8)	%
Short-term debt - servicer advance financing	Short-term debt - servicer advance financing	(2,396)		175,132		(2.7)	%	(3,374)		189,726		(3.6)	%	Short-term debt - servicer advance financing	(3,414)		166,605		(2.7)	%	(4,961)		199,517		(3.3)	%

ABS issued - Legacy Sequoia (2)	ABS issued - Legacy Sequoia (2)	(1,630)		265,430		(1.2)	%	(4,040)		343,997		(2.3)	%	ABS issued - Legacy Sequoia (2)	(2,271)		258,915		(1.2)	%	(5,099)		322,829		(2.1)	%
ABS issued - Sequoia (2)	ABS issued - Sequoia (2)	(23,480)		1,192,582		(3.9)	%	(40,627)		1,782,702		(4.6)	%	ABS issued - Sequoia (2)	(38,848)		1,419,153		(3.6)	%	(58,455)		1,757,851		(4.4)	%
ABS issued - Freddie Mac SLST (2)	ABS issued - Freddie Mac SLST (2)	(33,982)		1,906,613		(3.6)	%	(32,022)		1,845,307		(3.5)	%	ABS issued - Freddie Mac SLST (2)	(49,756)		1,859,559		(3.6)	%	(48,840)		1,861,309		(3.5)	%
ABS issued - Freddie Mac K-Series	ABS issued - Freddie Mac K-Series	(8,834)		462,962		(3.8)	%	(42,728)		2,195,469		(3.9)	%	ABS issued - Freddie Mac K-Series	(13,294)		459,648		(3.9)	%	(47,154)		1,614,333		(3.9)	%
ABS issued - CAFL	ABS issued - CAFL	(81,054)		3,046,141		(5.3)	%	(46,385)		2,115,019		(4.4)	%	ABS issued - CAFL	(118,543)		3,041,714		(5.2)	%	(72,768)		2,247,583		(4.3)	%
Long-term debt facilities	Long-term debt facilities	(23,804)		723,861		(6.6)	%	(10,593)		411,844		(5.1)	%	Long-term debt facilities	(32,518)		776,846		(5.6)	%	(29,789)		641,094		(6.2)	%
Long-term debt - FHLBC	Long-term debt - FHLBC	(2)		558		(0.7)	%	(10,410)		1,184,002		(1.8)	%	Long-term debt - FHLBC	(2)		374		(0.7)	%	(10,411)		786,790		(1.8)	%
Long-term debt - corporate	Long-term debt - corporate	(18,863)		650,508		(5.8)	%	(22,558)		738,930		(6.1)	%	Long-term debt - corporate	(28,345)		650,828		(5.8)	%	(32,113)		708,708		(6.0)	%
Total interest expense	Total interest expense	(210,617)		9,846,804		(4.3)	%	(249,337)		12,780,423		(3.9)	%	Total interest expense	(314,371)		10,242,937		(4.1)	%	(349,748)		11,555,989		(4.0)	%
Net Interest Income	Net Interest Income	$	56,383					$	78,690					Net Interest Income	$	98,351					$	100,261

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

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

7884

Results of Operations by Segment

We report on our business using three distinct segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For additional information on our segments, refer to Note 23 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.

Table 4 – Segment Results Summary


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		Change		2021		2020		Change		(In Thousands)	2021		2020		Change		2021		2020		Change
Segment Contribution from:	Segment Contribution from:													Segment Contribution from:
Residential Lending	Residential Lending	$	30,844	$	34,854	$	(4,010)	$	83,639	$	(160,796)	$	244,435	Residential Lending	$	38,796	$	8,526	$	30,270	$	122,435	$	(152,270)	$	274,705
Business Purpose Lending	Business Purpose Lending	32,812		48,483		(15,671)		54,255		(177,313)		231,568		Business Purpose Lending	32,066		53,418		(21,352)		86,321		(123,895)		210,216
Third-Party Investments	Third-Party Investments	53,592		79,955		(26,363)		103,528		(419,200)		522,728		Third-Party Investments	30,466		101,054		(70,588)		133,994		(318,146)		452,140
Corporate/Other	Corporate/Other	(27,223)		2,152		(29,375)		(54,140)		(20,645)		(33,495)		Corporate/Other	(13,042)		(21,186)		8,144		(67,182)		(41,831)		(25,351)
Net Income (Loss)	Net Income (Loss)	$	90,025	$	165,444	$	(75,419)	$	187,282	$	(777,954)	$	965,236	Net Income (Loss)	$	88,286	$	141,812	$	(53,526)	$	275,568	$	(636,142)	$	911,710

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, 2021.

The ~~increase~~decrease in net expense from Corporate/Other for the ~~three- and six-month~~three-month periods was primarily due to the reversal of $19 million of valuation allowance on our deferred tax assets in the third quarter of 2021. This decrease was partially offset by higher accruals of variable compensation expense associated with improved financial results in 2021. The increase in net expense for the 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.

Residential Lending Segment

Overview

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

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

Our Residential Lending segment generated $53 million of net income during the first quarter of 2021, driven primarily by $64 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income increased significantly during the quarter, as loan purchase commitments increased 41% from the fourth quarter of 2020 to $3.51 billion, and gross margins nearly doubled.

7985

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, 2021.

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


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2021		June 30, 2021		(In Thousands)	September 30, 2021		September 30, 2021
Balance at beginning of period	Balance at beginning of period	$	977,457	$	176,641	Balance at beginning of period	$	1,063,722	$	176,641
Acquisitions	Acquisitions	3,454,818		6,582,762		Acquisitions	3,176,004		9,758,766
Sales	Sales	(2,183,686)		(4,531,812)		Sales	(2,426,858)		(6,958,670)
Transfers between portfolios (1)	Transfers between portfolios (1)	(1,205,494)		(1,205,494)		Transfers between portfolios (1)	(464,189)		(1,669,683)
Principal repayments	Principal repayments	(8,761)		(10,875)		Principal repayments	(15,280)		(26,155)
Changes in fair value, net	Changes in fair value, net	29,388		52,500		Changes in fair value, net	10,630		63,130
Balance at End of Period	Balance at End of Period	$	1,063,722	$	1,063,722	Balance at End of Period	$	1,344,029	$	1,344,029

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

The following table presents our mortgage banking income and loan purchase commitments during the three and ~~six~~nine months ended ~~June~~September 30, 2021.

Table 6 – Mortgage Banking Income and Residential Loan Purchase Commitments


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
(In Thousands)	(In Thousands)	June 30, 2021		June 30, 2021		(In Thousands)	September 30, 2021		September 30, 2021
Mortgage banking income	Mortgage banking income	$	26,893	$	91,160	Mortgage banking income	$	40,121	$	131,281
Loan purchase commitments entered into	Loan purchase commitments entered into	$	2,743,105	$	6,253,397	Loan purchase commitments entered into	$	3,288,102	$	9,541,499

Mortgage banking income is comprised of net interest income from loans held-for-sale in inventory and mortgage banking activities. Income from mortgage banking activities is comprised of mark-to-market adjustments on loans from the time they are purchased to when they are sold, mark-to-market adjustments on new and outstanding loan purchase commitments, gains/losses from associated hedges, and other miscellaneous income/expenses (see Note 19 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail).

During the three months ended ~~June~~September 30, 2021, our residential mortgage loan conduit locked ~~$3.90~~$4.74 billion of loans ($~~2.74~~3.29 billion adjusted for expected pipeline fallout - i.e, loan purchase commitments), including ~~$3.33~~$4.21 billion of Select loans and ~~$0.57~~$0.53 billion of Choice loans, and purchased ~~$3.45~~$3.18 billion of loans. Approximately ~~60%~~59% of loans locked in the ~~second~~third quarter were purchase-money loans and ~~40%~~41% were refinancings. During the three months ended ~~June~~September 30, 2021, we distributed ~~$1.82~~$2.43 billion of loans through whole loan sales, and completed ~~three securitizations for a total~~one securitization backed by $449 million of ~~$1.53 billion.~~loans (unpaid principal balance).

At ~~June~~September 30, 2021, we had ~~$1.06~~$1.34 billion of loans in inventory on our balance sheet, our loan pipeline included ~~$2.47~~$2.77 billion of loans identified for purchase (locked loans, unadjusted for fallout), and we had entered into forward sale agreements for ~~$1.21 billion~~$662 million of loans.

Our gross margin (mortgage banking income earned in the period divided by loan purchase commitments entered into during the period) for the three months ended ~~June~~September 30, 2021 was 122 basis points, up from 98 basis points ~~down from 183 basis points in the first quarter of 2021. Gross margin~~ in the second quarter of ~~2021 was near the high end of our historical range, despite a challenging macroeconomic backdrop that impacted securitization execution and increased hedging costs relative to the first quarter.~~2021.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At ~~June~~September 30, 2021, we had residential warehouse facilities outstanding with ~~six~~seven different counterparties, with ~~$2.35~~$2.70 billion of total capacity and ~~$1.30~~$1.36 billion of available capacity. These included non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral that is non-delinquent) facilities with ~~$800 million~~$1.18 billion of total capacity and marginable facilities with ~~$1.55~~$1.53 billion of total capacity.

8086

Investment Portfolio

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

Table 7 – Residential Lending Investments


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Residential loans at Redwood (1)	Residential loans at Redwood (1)	$	96,826	$	—	Residential loans at Redwood (1)	$	151,050	$	—
Residential securities at Redwood (2)	Residential securities at Redwood (2)	158,703		155,501		Residential securities at Redwood (2)	145,430		155,501
Residential securities at consolidated Sequoia entities (3)	Residential securities at consolidated Sequoia entities (3)	232,005		217,965		Residential securities at consolidated Sequoia entities (3)	236,451		217,965
Other investments	Other investments	8,721		8,815		Other investments	12,389		8,815
Total Segment Investments	Total Segment Investments	$	496,255	$	382,281	Total Segment Investments	$	545,320	$	382,281

(1)Balance consists of loans called from Sequoia securitizations. Excludes Sequoia loans held at VIEs that we consolidated for GAAP purposes.

(2)Excludes $5 million of trading securities that are designated as hedges for our mortgage banking operations and are not considered part of our investment portfolio.

(3)Represents our retained economic investment in the consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated ~~$2.22~~$2.48 billion of loans and ~~$1.99~~$2.24 billion of ABS issued associated with these investments at ~~June~~September 30, 2021.

During the third quarter of 2021, we purchased $66 million of loans from Sequoia securitizations we called, and we retained $2 million of securities from one Sequoia securitization we completed during the quarter. During the second quarter of 2021, we purchased $83 million of loans from Sequoia securitizations we called, and we retained $8 million of securities from three Sequoia securitizations we completed during the quarter. During the first quarter of 2021, we sold $4 million of securities from our residential lending investment portfolio and retained $8 million of securities from two Sequoia securitizations we completed during the quarter. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.

During the ~~second~~third quarter of 2021, net interest income from our residential lending investment portfolio was $6$12 million, ~~consistent with~~which increased $5 million from the ~~first~~second quarter of 2021, and other income was $1 million in the third quarter of 2021, consistent with the second quarter of ~~2021~~2021. The increase in net interest income was primarily due to higher discount accretion income on our available-for-sale securities, driven by expectations for certain of our retained Sequoia securities to be called over the next several quarters, affecting our cash flow forecasts and ~~$3 million in the first quarter of 2021.~~effective yields for those investments.

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, 2021.

Table 8 – 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, 2021		June 30, 2021		(In Thousands)	September 30, 2021		September 30, 2021
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 at Redwood	Residential loans at Redwood	$	1,290	$	1,607	Residential loans at Redwood	$	816	$	2,423
Trading securities	Trading securities	(2,250)		(4,728)		Trading securities	(1,825)		(6,553)
Net investments in Sequoia entities (1)	Net investments in Sequoia entities (1)	4,906		9,804		Net investments in Sequoia entities (1)	3,314		13,118
Risk-sharing and other investments	Risk-sharing and other investments	(19)		(43)		Risk-sharing and other investments	(20)		(63)

Recoveries (impairments) on AFS securities	Recoveries (impairments) on AFS securities	—		33		Recoveries (impairments) on AFS securities	—		33
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net	$	3,927	$	6,673	Investment Fair Value Changes, Net	$	2,285	$	8,958

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

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

Business Purpose Lending Segment

Overview

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

Our Business Purpose Lending segment generated $33 million of net income during the second quarter of 2021, driven primarily by $35 million of mortgage banking income and $15 million of net interest income from investments. Business purpose mortgage banking income in the second quarter of 2021 benefited from a 37% increase in origination volume from the first quarter of 2021 and modest spread tightening on securitization execution during the second quarter. Our business purpose investments saw an increase in interest income in the second quarter from a higher average balance of investments compared to the first quarter of 2021 and increased positive fair value changes due to continued spread tightening.

Our Business Purpose Lending segment generated $21 million of net income during the first quarter of 2021, driven primarily by $22 million of mortgage banking income and $13 million of net interest income from investments. Business purpose mortgage banking income normalized in the first quarter of 2021, relative to the third and fourth quarters of 2020, as more modest spread tightening on securitization execution during the quarter had a reduced impact to the valuation of our loans held in inventory at the beginning of the quarter. Net interest income from BPL investments increased from the fourth quarter of 2020 due to higher yield maintenance income on our SFR securities resulting from faster prepayments, and reduced debt costs on our bridge loan portfolio resulting from a decrease in leverage on these assets.

Mortgage Banking

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

Table 9 – Business Purpose Loans — ~~Origination~~Funding Activity


		Three Months Ended June 30, 2021						Six Months Ended June 30, 2021							Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
(In Thousands)	(In Thousands)	Single-Family Rental		Bridge (1)		Total		Single-Family Rental		Bridge (1)		Total		(In Thousands)	Single-Family Rental		Bridge (1)		Total		Single-Family Rental		Bridge (1)		Total
Fair value at beginning of period	Fair value at beginning of period	$	333,110	$	—	$	333,110	$	245,394	$	—	$	245,394	Fair value at beginning of period	$	418,442	$	—	$	418,442	$	245,394	$	—	$	245,394
Originations		312,217		215,160		527,377		565,315		348,389		913,704
Fundings														Fundings	395,083		244,652		639,735		960,398		593,041		1,553,439

Sales	Sales	—		(354)		(354)		—		(2,231)		(2,231)		Sales	—		(253)		(253)		—		(2,484)		(2,484)
Transfers between portfolios (2)	Transfers between portfolios (2)	(252,379)		(215,784)		(468,163)		(421,783)		(347,678)		(769,461)		Transfers between portfolios (2)	(332,670)		(246,096)		(578,766)		(754,453)		(593,774)		(1,348,227)
Principal repayments	Principal repayments	(3,056)		—		(3,056)		(10,120)		—		(10,120)		Principal repayments	(36,970)		—		(36,970)		(47,090)		—		(47,090)
Changes in fair value, net	Changes in fair value, net	28,550		978		29,528		39,636		1,520		41,156		Changes in fair value, net	22,461		1,697		24,158		62,097		3,217		65,314
Fair Value at End of Period	Fair Value at End of Period	$	418,442	$	—	$	418,442	$	418,442	$	—	$	418,442	Fair Value at End of Period	$	466,346	$	—	$	466,346	$	466,346	$	—	$	466,346

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

(2)For single-family rental loans, amounts represent the fair value of transfers of loans from held-for-sale to held-for-investment, including when loans are securitized (and consolidated for GAAP purposes). For bridge loans, represents the transfer of loans ~~from~~originated at our TRS to our REIT as described in preceding footnote.

~~During~~Business purpose mortgage banking income was $23 million, $35 million and $32 million in the ~~three months ended June 30,~~first, second and third quarters of 2021, ~~we funded $312 million~~respectively. Mortgage banking income is comprised of net interest income from single-family rental loans held-for-sale in inventory and ~~$215 million of~~mortgage banking activities income from single family rental and bridge loans ~~representing increases~~ (see Note 19 of ~~23% and 61% from respective~~our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on mortgage banking activities).

Business purpose funding volumes increased steadily through the first ~~quarter 2021 volumes. Approximately 34%~~nine months of 2021. These growing volumes, along with improved SFR ~~origination volume~~securitization execution in the second ~~quarter~~and third quarters of 2021, ~~was generated from borrowers that previously had a bridge loan with CoreVest and 67%~~drove strong mortgage banking income results for those periods. Approximately 66% of total origination volumes in the third quarter were from repeat borrowers.

We utilize a combination of capital and loan warehouse facilities to manage our inventory of single-family rental loans that we hold for sale. At ~~June~~September 30, 2021, we had business purpose warehouse facilities outstanding with ~~five~~four different counterparties, with $1.30 billion of total capacity (used for both SFR and bridge loans) and ~~$587~~$663 million of available ~~capacity.~~capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral that is non-delinquent).

8289

Investment Portfolio

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

Table 10 – Business Purpose Lending Investments


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

Bridge loans at Redwood		$	726,569	$	641,765
Bridge loans						Bridge loans	$	824,799	$	641,765
Single-family rental securities at consolidated CAFL entities (1)	Single-family rental securities at consolidated CAFL entities (1)	268,131		238,630		Single-family rental securities at consolidated CAFL entities (1)	287,813		238,630

Other investments	Other investments	13,168		21,627		Other investments	6,767		21,627
Total Segment Investments	Total Segment Investments	$	1,007,868	$	902,022	Total Segment Investments	$	1,119,379	$	902,022

(1)Represents our economic investment in securities issued by consolidated CAFL securitization VIEs. For GAAP purposes, we consolidated ~~$3.26~~$3.40 billion of loans and ~~$3.01~~$3.13 billion of ABS issued associated with these investments at ~~June~~September 30, 2021.

~~During the second quarter of~~In September 2021, we ~~funded $215 million of business purpose bridge loans and received principal payments of $115 million. In addition, we retained $14 million of securities from~~completed a ~~$276~~CAFL securitization backed by $272 million (principal balance) ~~single-family rental loan securitization we completed during the second quarter.~~of bridge loans. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.

The following table presents the components of investment fair value changes for our Business Purpose Lending segment by investment type for the three and ~~six~~nine months ended ~~June~~September 30, 2021.

Table 11 – 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, 2021		June 30, 2021		(In Thousands)	September 30, 2021		September 30, 2021
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:

Bridge loans held-for-investment	Bridge loans held-for-investment	$	(62)	$	3,242	Bridge loans held-for-investment	$	900	$	4,142
REO	REO	147		428		REO	108		536
Net investments in CAFL entities (1)		3,697		3,411

Net investments in CAFL SFR entities (1)						Net investments in CAFL SFR entities (1)	2,943		6,354
Other						Other	(481)		(481)

Investment Fair Value Changes, Net	Investment Fair Value Changes, Net	$	3,782	$	7,081	Investment Fair Value Changes, Net	$	3,470	$	10,551

Spreads tightened ~~during the second quarter of~~throughout 2021 for our CAFL subordinate securities, with positive fair value changes for these assets more than offsetting the decline in the value of our CAFL interest-only securities from a reduction in their basis through the receipt of regular cash flows.

~~Spreads generally tightened during the first quarter of 2021 for our BPL investments overall, which resulted in positive fair value changes for bridge loans and subordinate CAFL securities.~~ We also had positive resolutions on several previously delinquent bridge loans during ~~the first quarter of~~ 2021, resulting in ~~over $2 million of~~ positive fair value changes for recoveries in excess of ~~our prior quarter-end~~ carrying values. Positive fair value changes for our CAFL subordinate securities were mostly offset by a decline in the value of our CAFL interest-only securities from a reduction in their basis through the receipt of regular cash flows.

Third-Party Investments Segment

Overview

Our Third-Party Investments segment generated $30 million of net income during the third quarter of 2021, driven primarily by $21 million of positive investment fair value changes and $12 million of net interest income. Our Third-Party Investments segment generated $54 million of net income during the second quarter of 2021, driven primarily by $42 million of positive investment fair value changes and $12 million of net interest income, and generated $50 million of net income during the first quarter of 2021, driven primarily by $40 million of positive investment fair value changes and $12 million of net interest income. Positive investment fair value changes in 2021 reflected continuing improvement in credit performance and spread tightening, particularly for our RPL and multifamily securities.

Investment Portfolio

The following table presents details of the investments in our Third-Party Investments segment at ~~June~~September 30, 2021 and December 31, 2020.

Table 12 – Third-Party Investments


(In Thousands)	(In Thousands)	June 30, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Residential securities at Redwood	Residential securities at Redwood	$	148,798	$	134,090	Residential securities at Redwood	$	160,300	$	134,090
Residential securities at consolidated Freddie Mac SLST entities (1)	Residential securities at consolidated Freddie Mac SLST entities (1)	450,173		428,179		Residential securities at consolidated Freddie Mac SLST entities (1)	451,252		428,179
Multifamily securities at Redwood	Multifamily securities at Redwood	42,479		49,255		Multifamily securities at Redwood	42,618		49,255
Multifamily securities at consolidated Freddie Mac K-Series entity (2)	Multifamily securities at consolidated Freddie Mac K-Series entity (2)	30,833		28,255		Multifamily securities at consolidated Freddie Mac K-Series entity (2)	31,389		28,255
Other investments (3)	Other investments (3)	127,138		135,590		Other investments (3)	379,102		317,282
Total Segment Investments	Total Segment Investments	$	799,421	$	775,369	Total Segment Investments	$	1,064,661	$	957,061

(1)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated ~~$2.10~~$2.00 billion of loans and ~~$1.65~~$1.55 billion of ABS issued associated with these investments at ~~June��~~September 30, 2021.

(2)Represents our economic investment in securities issued by a consolidated Freddie Mac K-Series securitization entity. For GAAP purposes, we consolidated ~~$485~~$483 million of loans and ~~$454~~$451 million of ABS issued associated with this investment at ~~June~~September 30, 2021.

(3)At September 30, 2021, Other investments ~~includes our servicer advance investments, which for purposes of~~presented in this table ~~are presented net~~includes $188 million of ~~$164~~servicing investments owned in our consolidated Servicing Investment entities. At September 30, 2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of servicing investments, $152 million of non-recourse short-term securitization debt, ~~secured by servicing advances~~as well as other assets and liabilities for these entities). Additionally, at September 30, 2021, Other investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for GAAP purposes, we consolidated $167 million of HEIs and $145 million of ABS issued, as well as other ~~servicing-related~~ assets ~~at June 30, 2021.~~and liabilities for this entity).

During the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization, then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity.

Additionally, during the third quarter of 2021, we purchased $11 million of other third-party investments. During the second quarter, we purchased $3 million of third-party investments and sold $11 million of third-party investments. During the first quarter, we purchased $16 million of third-party investments and sold $34 million of third-party investments.

See the "Investments Detail" section that follows for additional details on these investments and their associated borrowings.

The following table presents the components of investment fair value changes for our Third-Party Investments segment by investment type for the three and ~~six~~nine months ended ~~June~~September 30, 2021.

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, 2021		June 30, 2021		(In Thousands)	September 30, 2021		September 30, 2021
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 securities	Residential securities	$	5,143	$	28,249	Residential securities	$	3,371	$	31,620
Net investments in Freddie Mac SLST entities (1)	Net investments in Freddie Mac SLST entities (1)	36,316		40,433		Net investments in Freddie Mac SLST entities (1)	13,849		54,282
Net investment in Freddie Mac K-Series entity (1)	Net investment in Freddie Mac K-Series entity (1)	1,855		10,776		Net investment in Freddie Mac K-Series entity (1)	554		11,330
Net investment in Point HEI entity (1)						Net investment in Point HEI entity (1)	47		47
Servicer advance investments	Servicer advance investments	(940)		(1,100)		Servicer advance investments	(2,079)		(3,179)
Excess MSRs	Excess MSRs	(2,477)		(4,430)		Excess MSRs	(803)		(5,233)
Shared home appreciation options		2,080		7,395
HEIs at Redwood						HEIs at Redwood	5,622		13,017

Other	Other	28		57		Other	8		65
Recoveries (impairments) on AFS securities	Recoveries (impairments) on AFS securities	13		354		Recoveries (impairments) on AFS securities	—		354
Investment Fair Value Changes, Net	Investment Fair Value Changes, Net	$	42,018	$	81,734	Investment Fair Value Changes, Net	$	20,569	$	102,303

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

Continued strengthening of credit and elevated prepayment speeds helped drive credit spreads tighter on our third-party assets in ~~the first and second quarters of~~ 2021, in particular for our investments in ~~reperforming~~re-performing loan assets (primarily represented by our net investment in Freddie Mac SLST entities in the table above). HEI valuations benefited from our securitization of HEIs in the third quarter of 2021. The decline in value of our Servicer advance investments and excess MSRs is primarily attributable to a reduction in their basis through the receipt of regular cash flows.

8492

Investments Detail

This section presents additional details on ~~certain of~~ our investment assets and their activity during the three and ~~six~~nine months ended ~~June~~September 30, 2021.

Real Estate Securities Portfolio

The following table ~~sets forth~~presents activity of our real estate securities ~~activity~~on balance sheet by collateral type for the three and ~~six~~nine months ended ~~June~~September 30, 2021.

Table 14 – Activity of Real Estate Securities ~~Activity~~at Redwood by Collateral Type


Three Months Ended June 30, 2021		Residential						Multifamily		Total
Three Months Ended September 30, 2021												Three Months Ended September 30, 2021	Residential						Multifamily		Total
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine		Total		(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine
Beginning fair value	Beginning fair value	$	31,580	$	—	$	284,656	$	48,084			Beginning fair value	$	25,267	$	—	$	287,140	$	42,479	$	354,886

Transfers												Transfers	—		—		—		—		—
Acquisitions	Acquisitions											Acquisitions	—		—		6,750		4,000		10,750
Sequoia securities		1,226		—		522		—		1,748
Third-party securities		962		—		1,750		—		2,712
Sales	Sales											Sales	—		—		(755)		—		(755)

Third-party securities		—		—		(10,988)		—		(10,988)
Gains on sales and calls, net	Gains on sales and calls, net	—		—		7,994		—		7,994		Gains on sales and calls, net	—		—		6,389		—		6,389
Effect of principal payments (1)	Effect of principal payments (1)	—		—		(12,436)		(4,827)		(17,263)		Effect of principal payments (1)	—		—		(13,204)		(3,261)		(16,465)
Change in fair value, net	Change in fair value, net	(8,501)		—		15,642		(778)		6,363		Change in fair value, net	(2,773)		—		1,854		(600)		(1,519)
Ending Fair Value (2)		$	25,267	$	—	$	287,140	$	42,479	$	354,886
Ending Fair Value												Ending Fair Value	$	22,494	$	—	$	288,174	$	42,618	$	353,286


Six Months Ended June 30, 2021		Residential						Multifamily		Total
Nine Months Ended September 30, 2021												Nine Months Ended September 30, 2021	Residential						Multifamily		Total
(In Thousands)	(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine		Total		(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine
Beginning fair value	Beginning fair value	$	28,464	$	5,663	$	260,743	$	49,255			Beginning fair value	$	28,464	$	5,663	$	260,743	$	49,255	$	344,125

Acquisitions	Acquisitions											Acquisitions	8,737		—		21,050		8,930		38,717
Sequoia securities		7,775		—		1,600		—		9,375
Third-party securities		962		—		12,700		4,930		18,592
Sales	Sales											Sales	—		(5,724)		(31,765)		—		(37,489)
Sequoia securities		—		(3,664)		—		—		(3,664)
Third-party securities		—		(2,060)		(31,010)		—		(33,070)
Gains on sales and calls, net	Gains on sales and calls, net	—		60		10,542		—		10,602		Gains on sales and calls, net	—		60		16,931		—		16,991
Effect of principal payments (1)	Effect of principal payments (1)	—		(26)		(17,547)		(10,803)		(28,376)		Effect of principal payments (1)	—		(26)		(30,751)		(14,064)		(44,841)
Change in fair value, net	Change in fair value, net	(11,934)		27		50,112		(903)		37,302		Change in fair value, net	(14,707)		27		51,966		(1,503)		35,783
Ending Fair Value (2)		$	25,267	$	—	$	287,140	$	42,479	$	354,886
Ending Fair Value												Ending Fair Value	$	22,494	$	—	$	288,174	$	42,618	$	353,286

(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 30, 2021, excludes $232 million and $268 million of securities retained from our consolidated Sequoia and CAFL securitizations, respectively, as well as $450 million and $31 million of securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-Series securitizations, respectively.

~~At June~~September 30, 2021, our securities at Redwood (exclusive of securities owned in consolidated entities) consisted of fixed-rate assets (86%), adjustable-rate assets ~~(12%~~(11%), and hybrid assets that reset within the next year ~~(2%~~(3%).

The following table sets forth activity in our entire real estate securities portfolio by segment for the three and nine months ended September 30, 2021. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.

Table 15 – Activity of Real Estate Securities at Redwood and in Consolidated Entities by Segment


Three Months Ended September 30, 2021	Residential(1)				BPL		Third-Party Investments						Total
	Sequoia Securities on Balance Sheet		Consolidated Sequoia Securities		Consolidated CAFL Securities		Consolidated SLST Securities		Consolidated Multifamily Securities		Other Third-Party Securities(1)
(In Thousands)
Beginning fair value	$	160,847	$	232,005	$	268,131	$	450,173	$	30,834	$	194,039	$	1,336,029
Acquisitions	—		1,965		16,646		—		—		10,750		29,361
Sales	—		—		—		—		—		(755)		(755)
Gains on sales and calls, net	6,389		—		—		—		—		—		6,389
Effect of principal payments (2)	(12,212)		(832)		—		(12,769)		—		(4,253)		(30,066)
Change in fair value, net	(7,770)		3,313		2,943		13,849		554		6,251		19,140
Ending Fair Value	147,254		236,451		287,720		451,253		31,388		206,032		1,360,098


Nine Months Ended September 30, 2021	Residential				BPL		Third-Party Investments						Total
	Sequoia Securities on Balance Sheet		Consolidated Sequoia Securities		Consolidated CAFL Securities		Consolidated SLST Securities		Consolidated Multifamily Securities		Other Third-Party Securities
(In Thousands)
Beginning fair value	$	157,456	$	217,965	$	238,630	$	428,178	$	28,255	$	186,669	$	1,257,153
Acquisitions	9,375		7,746		53,846		—		—		29,342		100,309
Sales	(3,664)		—		—		—		(8,197)		(33,825)		(45,686)
Gains on sales and calls, net	15,484		—		—		—		—		1,507		16,991
Effect of principal payments (2)	(28,928)		(2,377)		(11,110)		(31,207)		—		(15,913)		(89,535)
Change in fair value, net	(2,469)		13,117		6,354		54,282		11,330		38,252		120,866
Ending Fair Value	147,254		236,451		287,720		451,253		31,388		206,032		1,360,098

(1)At September 30, 2021, $3 million of securities used as hedges for our residential mortgage banking operations are included within the "Other third-party securities" column of this table. These same securities are presented as a component of securities within our residential lending segment on our segment balance sheet.

(2)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.

The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at September 30, 2021. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.

Table 16 – Real Estate Securities Credit Statistics


September 30, 2021							Weighted Average Values for Non-IO Securities
	Market Value - IO Securities		Market Value - Non-IO Securities		Principal Balance - Non-IO Securities		Coupon		90+ Delinquency		3-Month Prepayment Rate		Investment Thickness(1)
(Dollars in Thousands)
Sequoia securities on balance sheet	$	18,380	$	128,874	$	153,388	3.7	%	0.66	%	42	%	7	%
Consolidated Sequoia securities	9,329		227,122		243,524		4.6	%	2.84	%	51	%	31	%
Total Sequoia Securities	27,709		355,996		396,912		4.3	%	2.05	%	48	%	22	%
Consolidated Freddie Mac SLST securities	17,714		433,539		547,393		3.1	%	10.98	%	14	%	28	%
RPL securities on balance sheet	998		64,845		143,877		3.6	%	5.11	%	16	%	7	%
Total RPL Securities	18,712		498,384		691,270		3.2	%	10.21	%	14	%	25	%
Consolidated Freddie Mac K-Series securities	—		31,388		36,468		4.1	%	—	%	—	%	20	%
Multifamily securities on balance sheet	2,039		40,579		41,241		3.2	%	0.02	%	15	%	8	%
Total Multifamily Securities	2,039		71,967		77,709		3.6	%	0.01	%	8	%	13	%
Consolidated CAFL securities	49,828		237,892		354,319		5.1	%	1.87	%	15	%	13	%
Other third-party securities	3,164		94,407		116,725		4.5	%	2.03	%	34	%	5	%
Total Securities	$	101,452	$	1,258,646	$	1,636,935

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

We directly finance our holdings of real estate securities with a combination of capital and collateralized debt in the form of repurchase (or “repo”) financing. At ~~June~~September 30, 2021, we had short-term debt incurred through repurchase facilities of ~~$81~~$80 million with three different counterparties, which was secured by ~~$110~~$108 million of real estate securities (including securities owned in consolidated securitization entities).

At ~~June~~September 30, 2021, real estate securities with a fair value of ~~$369~~$504 million (including securities owned in consolidated Sequoia and CAFL securitization entities), were financed with long-term, non-mark-to-market recourse debt through our subordinate securities financing facilities. Additionally, at ~~June~~September 30, 2021, we had ~~$450~~$451 million of re-performing loan securities financed with ~~$179~~$161 million of non-recourse securitization debt. The remaining ~~$407~~$297 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

Bridge Loans Held-for-Investment ~~at Redwood Portfolio~~

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

Table 1517 – 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, 2021		June 30, 2021		(In Thousands)	September 30, 2021		September 30, 2021
Fair value at beginning of period	Fair value at beginning of period	$	626,484	$	641,765	Fair value at beginning of period	$	726,569	$	641,765

Sales	Sales	—		(7,000)		Sales	—		(7,000)
Transfers between portfolios (1)	Transfers between portfolios (1)	215,785		347,679		Transfers between portfolios (1)	246,096		593,775
Transfers to REO	Transfers to REO	(806)		(2,289)		Transfers to REO	(4,785)		(7,074)
Principal repayments	Principal repayments	(114,748)		(256,726)		Principal repayments	(145,975)		(402,701)
Changes in fair value, net	Changes in fair value, net	(146)		3,140		Changes in fair value, net	2,894		6,034
Fair Value at End of Period	Fair Value at End of Period	$	726,569	$	726,569	Fair Value at End of Period	$	824,799	$	824,799

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

Our ~~$727~~$825 million of bridge loans held-for-investment at ~~June~~September 30, 2021 were comprised of first-lien, interest-only loans with a weighted average coupon of ~~7.63%~~7.48% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was ~~727~~741 and the weighted average LTV ratio of these loans was ~~65%~~68%. At ~~June~~September 30, 2021, of the ~~2,471~~1,092 loans in this portfolio, 4334 of these loans with an aggregate fair value of ~~$29~~$23 million and an aggregate unpaid principal balance of ~~$33~~$26 million were in foreclosure, of which 4035 loans with an aggregate fair value of ~~$32~~$27 million and an unpaid principal balance of ~~$35~~$30 million were greater than 90 days delinquent.

We finance our bridge loans with a combination of recourse, non-marginable warehouse facilities and non-recourse, non-marginable warehouse facilities. At ~~June~~September 30, 2021, we had ~~$99~~$83 million of debt incurred through short-term warehouse facilities with ~~two~~one different ~~counterparties,~~counterparty, which was secured by $127 million of loans, and ~~$384~~$279 million of debt incurred through long-term facilities with ~~four~~three different counterparties, which was secured by ~~$556~~$374 million of loans. Additionally, in the third quarter of 2021, we completed a securitization of CoreVest bridge loans. The ABS issued by this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).

8696

~~Taxable Income and Tax Provision~~

~~Taxable Income~~Other Investments

The following table ~~summarizes~~sets forth our other investments activity by segment for the three and nine months ended September 30, 2021.

Table 18 – Other Investments by Segment - Activity


Three Months Ended September 30, 2021	Residential		BPL		Third-Party Investments(1)		Corporate/Other		Total
(In Thousands)
Balance at beginning of period	$	8,721	$	13,168	$	267,850	$	18,992	$	308,731
New/additional investments	4,782		—		125,373		5,050		135,205

Reductions in investments	—		(6,959)		(17,116)		—		(24,075)
Changes in fair value, net	(1,047)		482		2,995		66		2,496
Other	(67)		76		—		—		9
Balance at End of Period	$	12,389	$	6,767	$	379,102	$	24,108	$	422,366


Nine Months Ended September 30, 2021	Residential		BPL		Third-Party Investments		Corporate/Other		Total
(In Thousands)
Balance at beginning of period	$	8,815	$	21,627	$	317,283	$	451	$	348,176
New/additional investments	7,065		—		125,373		23,550		155,988

Reductions in investments	—		(16,012)		(68,470)		—		(84,482)
Changes in fair value, net	(3,299)		1,076		4,916		106		2,799
Other	(192)		76		—		1		(115)
Balance at End of Period	$	12,389	$	6,767	$	379,102	$	24,108	$	422,366

(1)At September 30, 2021 (our "Balance at End of Period"), Third-party investments presented in this table includes $188 million of servicing investments owned in our consolidated Servicing Investment entities. At September 30, 2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of servicing investments, $152 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities). Additionally, At September 30, 2021, Third-party investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for GAAP purposes, we consolidated $167 million of HEIs and $145 million of ABS issued, as well as other assets and liabilities for this entity).

During the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization (included within "Third-Party Investments" in the table above), then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity.

During the first nine months of 2021, in addition to the HEIs acquired in the third quarter described above, other new/ additional investments included MSRs retained from whole loan sales at our Residential Segment and strategic investments through our RWT Horizons venture investment strategy within Corporate/Other.

During the first nine months of 2021, reductions in investments for Third-Party Investments was primarily attributable to the recovery of servicing advances within our consolidated servicing VIEs. Our economic investment in these entities was $60 million at September 30, 2021 and $68 million at December 31, 2020.

Income Taxes

Taxable Income, REIT Status and Dividend Characterization

As a REIT, under the Internal Revenue Code, Redwood is required to distribute to shareholders at least 90% of its annual REIT taxable income, excluding net capital gains, and meet certain other requirements that relate to, among other matters, the assets it holds, the income it generates, and the composition of its stockholders. To the extent Redwood retains REIT taxable income, including net capital gains, it is taxed at corporate tax rates. Redwood also earns taxable income at its taxable REIT subsidiaries (TRS), which it is not required to distribute under the Internal Revenue Code.

In September 2021, our Board of Directors declared a regular dividend of $0.21 per share for the third quarter of 2021, which was paid on September 30, 2021 to shareholders of record on September 23, 2021. As of September 30, 2021, our year-to-date dividend distributions of $0.55 per share exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and ~~distributions~~we would not be able to ~~shareholders~~elect to be taxed as a REIT for ~~the three and six months ended June 30, 2021 and 2020.~~four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.

~~Table 16 – Taxable Income (Loss)~~

Three Months Ended June 30,
Six Months Ended June 30, (1)
(In Thousands, except per Share Data)
2021 est. (2)
2020 est. (2)
2021 est. (2)
2020 est. (2)
REIT taxable income (loss) $ 12,497 $ (57,905) $ 22,779 $ (20,378)
Taxable REIT subsidiary income (loss) 30,671 (19,496) 83,732 (8,085)
Total Taxable Income (Loss) $ 43,168 $ (77,401) $ 106,511 $ (28,463)
REIT taxable income (loss) per share $ 0.11 $ (0.50) $ 0.20 $ (0.17)
Total taxable income (loss) per share $ 0.38 $ (0.67) $ 0.94 $ (0.24)
Distributions to shareholders $ 20,346 $ 14,366 $ 38,423 $ 51,107
Distributions to shareholders per share $ 0.18 $ 0.125 $ 0.34 $ 0.445

~~(1)~~In accordance with Internal Revenue Code rules applicable to disaster losses, TRS taxable income for the six months ended June 30, 2020, was adjusted to recognize $59 million of losses incurred in the first quarter of 2020 into the fourth quarter of 2019.

~~(2)Our tax results for the three and six months ended June 30, 2021 and 2020 are estimates until we file tax returns for these years.~~

Net capital gains realized in 2021 are not included in REIT taxable income as they are offset by a capital loss carryforward of $328 million which was generated in 2020. Any unused portion of the capital loss carryforward will expire at the end of 2025.

~~Under normal circumstances,~~While our minimum REIT dividend requirement ~~would be~~is generally 90% of our annual REIT taxable ~~income. However,~~income, we ~~currently maintain~~carried a ~~$36~~$37 million federal net operating loss carry forward (NOL) into 2021 at ~~the~~our REIT that affords us the ~~option of retaining~~ability to retain REIT taxable income up to the NOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of NOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our NOL and any remaining NOL amount will carry forward into future years. 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. Of the $36 million of NOLs, $29 million will expire after 2029, if not utilized by then, and $7 million have an indefinite carryover period. The $7 million of NOLs is available to offset 80% of taxable income in any given year.

We currently expect all or nearly all of our 2021 dividend distributions to be taxable as ordinary income for federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is nontaxable (provided it does not exceed a shareholder's tax basis in Redwood shares) and reduces a shareholder's basis in Redwood shares (but not below zero). To the extent such distributions exceed a shareholder's basis in Redwood shares, such excess amount would be taxable as capital gain. Under the federal income tax rules applicable to REITs, none of Redwood’s 2021 dividend distributions are currently expected to be characterized as long-term capital gain dividends. The income or loss generated at our TRS will not directly affect the tax characterization of our 2021 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.

Tax Provision under GAAP

For the three and ~~six~~nine months ended ~~June~~September 30, 2021, we recorded a tax ~~provisions~~benefit of $7$4 million and ~~$18~~a tax provision of $14 million, respectively. 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. 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~~For the nine-month periods, the switch to a tax provision ~~for income taxes~~ from a tax benefit ~~from income taxes~~ year-over-year was primarily the result of GAAP income being recorded at our TRS during this period in 2021 versus ~~TRS~~ GAAP losses being recorded at our TRS during this period in 2020. ~~Our~~For the three-month periods, the switch to a tax benefit from a tax provision year-over-year was due to the release of valuation allowance on a portion of our deferred tax assets, partially offset by an increase in state taxes. While our TRS effective tax rate in ~~2021 is expected to be slightly higher than~~the prior year approximated the federal statutory corporate tax rate (due to state NOL carryforwards), for 2021 and 2022 we expect it to increase (exclusive of the valuation allowance release) due to ~~a federal valuation allowance and other permanent GAAP to tax differences.~~

California’s temporary suspension of net operating loss carryforwards.

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, 2020, we reported net federal ordinary and capital DTAs with a full valuation allowance of $17 million recorded against our net federal ordinary DTAs based on our determination that their realization was not assured. However, no valuation allowance was recorded against our net federal capital DTAs as we currently expect to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years.

~~We forecast that we will report net federal ordinary DTAs at December 31, 2021 and, consequently, a valuation allowance remains recorded against our net federal ordinary DTAs.~~ At December 31, 2020, we reported a valuation allowance of $134 million recorded against our net state DTAs.

For the three months ended September 30, 2021, we reassessed the valuation allowance noting the increase in positive evidence related to our ability to utilize certain deferred tax assets. The positive evidence includes significant revenue growth and expectations regarding future profitability at our TRS. After assessing both the positive evidence and negative evidence, we determined it was more likely than not that we will realize all of our federal deferred tax assets. Therefore, we reversed our federal valuation allowance of $17 million as a discrete benefit in the third quarter of 2021. In addition to the federal valuation allowance release, we determined it was more likely than not that we will realize a portion of our state deferred assets and, as such, reversed $3 million of state valuation allowance as a discrete item in the third quarter of 2021. Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs ~~exist. As GAAP income at our TRS has been strong for the past several quarters,~~exist and we ~~are continuing to monitor our estimate of the realizability~~project most of our ~~net deferred tax assets and~~state DTAs will ~~reassess the need for a valuation allowance, in whole or in part, in future periods.~~

~~Potential Taxable Income Volatility~~

~~We expect period-to-period volatility in our estimated taxable income. A description of the factors that can cause this volatility is described in the Taxable Income portion of the~~ ~~Results of Operations~~ ~~section in the MD&A included in Part II, Item 7, of our Annual Report on Form 10-K.~~expire prior to their utilization.

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LIQUIDITY AND CAPITAL RESOURCES

Summary

In addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash consist of borrowings under mortgage loan warehouse facilities, securities repurchase agreements, payments of principal and interest we receive from our investment portfolios, proceeds from the sale of portfolio assets, and cash generated from our operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations, to purchase investment securities and make other investments, to repay principal and interest on our debt, to meet margin calls associated with our debt and other obligations, to make dividend payments on our capital stock, and to fund our operations.

At ~~June~~September 30, 2021, our total capital was ~~$1.95~~$2.03 billion and included ~~$1.30~~$1.38 billion of equity capital and ~~$651~~$652 million of convertible notes and long-term debt on our consolidated balance sheet, including $199 million of convertible debt due in 2023, $150 million of convertible debt due in 2024, $172 million of exchangeable debt due in 2025, and $140 million of trust-preferred securities due in 2037.

As of ~~June~~September 30, 2021, our unrestricted cash was ~~$421~~$557 million, and we estimate we had approximately ~~$175~~$350 million of available ~~capital (which does not include approximately $100 million of available capital generated from a non-marginable secured term financing we closed in early July).~~capital. While we believe our available cash is sufficient to fund our operations, we may raise equity or debt capital from time to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interests of the company.

In the discussion that follows and throughout this document, we distinguish between marginable and non-marginable debt. When we refer to non-marginable debt and marginable debt, we are referring to whether or not such debt is subject to market value-based margin calls on underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is generally determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional residential loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency of the mortgage or security being financed, or a decline in the value of the underlying asset securing the collateral. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the value of the property securing the mortgage loan that is financed by us under a loan warehouse facility.

We also distinguish between recourse and non-recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.

We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential loan warehouse facilities, securities repurchase facilities, and other short- and long-term debt facilities and other risks relating to our use of derivatives. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."

Cash Flows and Liquidity for the ~~Six~~Nine Months Ended ~~June~~September 30, 2021

Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the profitability of mortgage banking activities, the timing and amount of securities acquisitions, sales and repayments, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.

Cash Flows from Operating Activities

Cash flows from operating activities were negative ~~$2.65~~$3.78 billion during the ~~six~~nine months ended ~~June~~September 30, 2021. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were positive ~~$52~~$84 million and positive ~~$58~~$94 million during the first ~~six~~nine months of 2021 and 2020, respectively.

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Cash Flows from Investing Activities

During the ~~six~~nine months ended ~~June~~September 30, 2021, our net cash provided by investing activities was ~~$1.07~~$1.36 billion and primarily resulted from proceeds from principal payments on loans held-for-investment. Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these assets in order to manage our liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market conditions.

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

As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the ~~six~~nine months ended ~~June~~September 30, 2021, we transferred loans between held-for-sale and held-for-investment classification and retained securities from securitizations we sponsored, 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, 2021, our net cash provided by financing activities was ~~$1.51~~$2.52 billion. This primarily resulted from ~~$1.18~~$1.40 billion of proceeds from net short-term debt borrowings used to finance higher levels of loan inventory for our mortgage banking businesses, particularly for residential loans held-for-sale, as that business has seen a sustained increase in acquisition volumes. Additionally, ~~$540 million~~$1.27 billion of net proceeds were generated from ABS issued. These cash inflows were partially offset by ~~$167~~$107 million of net repayments of long-term debt.

During the ~~six~~nine months ended ~~June~~September 30, 2021, we declared dividends of ~~$0.34~~$0.55 per common share. On ~~June 10,~~September 13, 2021, the Board of Directors declared a regular dividend of ~~$0.18~~$0.21 per share for the ~~second~~third quarter of 2021, which was paid on ~~June~~September 30, 2021 to shareholders of record on ~~June~~September 23, 2021.

In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, and restricted stock units, which are generally long-term compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent cash payment in that same per share amount on each outstanding deferred stock unit, cash-settled deferred stock unit, and restricted stock unit.

Repurchase Authorization

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the ~~three~~nine months ended ~~June~~September 30, 2021, we did not repurchase any shares. At ~~June~~September 30, 2021, $78 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above.

Loan Warehouse Facilities

We maintain loan warehouse facilities to finance our residential jumbo loan inventory, SFR loan inventory and for our bridge loan investments. These facilities can be classified as short-term or long-term depending on their specific terms and provisions. At ~~June~~September 30, 2021, we had residential warehouse facilities outstanding with ~~six~~seven different counterparties, with ~~$2.35~~$2.70 billion of total capacity and ~~$1.30~~$1.36 billion of available capacity. These included non-marginable facilities with ~~$800 million~~$1.18 billion of total capacity and marginable facilities with ~~$1.55~~$1.53 billion of total capacity. At ~~June~~September 30, 2021, we had business purpose warehouse facilities outstanding with ~~five~~four different counterparties, with $1.30 billion of total capacity and ~~$587~~$663 million of available capacity. All $1.30 billion of these facilities are non-marginable.

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Short-Term Debt

In the ordinary course of our business, we ~~use recourse debt through~~utilize several different types of borrowing facilities and use cash borrowings under these facilities to, among other things, fund the acquisition of loans (including those we acquire and originate in anticipation of securitization), finance investments in securities, BPL bridge loans and other investments, and otherwise fund our business and operations. At ~~June~~September 30, 2021, we had ~~$1.48~~$1.75 billion of short-term debt outstanding. During the first ~~six~~nine months of 2021, the highest balance of our short-term debt outstanding was $2.66 billion.

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

Long-Term Debt

The following discusses significant activity related to our long-term debt during the first ~~half~~nine months of 2021. For further detail on our long-term debt, see Note 15 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Recourse Subordinate Securities Financing

Non-Recourse BPL Financing Facilities

In the third quarter of 2021, we reclassified one of our non-recourse facilities from long-term to short-term debt as the maturity of this facility was less than one year at September 30, 2021.

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

Recourse BPL Financing Facilities

Asset-Backed Securities Issued

During the three and ~~six~~nine months ended ~~June~~September 30, 2021, we issued ~~$1.48~~$1.19 billion and ~~$1.63~~$2.82 billion of ABS through our consolidated securitization entities, respectively. This included ~~$282~~$583 million and ~~$430 million~~$1.01 billion of CAFL ABS issued during the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, and ~~$1.20~~$462 million and $1.66 billion of Sequoia ABS issued during the three and nine months ended ~~June~~September 30, ~~2021.~~2021, respectively. Additionally, during the three months ended September 30, 2021, we issued $146 million of Point ABS. For further detail on our Asset-backed Securities Issued, see Note 14 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly 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, which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and origination of residential and business purpose mortgage loans (including those we acquire and originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our common stock. Recourse debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2020, under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities,” and under the caption “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. Many of the risks described above materialized during the first quarter of 2020 as a result of pandemic- and liquidity-related disruptions and their impacts on the economy and financial markets, as described under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” within our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Our sources of debt financing include secured borrowings under residential and business purpose mortgage loan warehouse facilities (including recourse and non-recourse warehouse facilities), short-term securities repurchase facilities, a $10 million committed line of short-term secured credit from a bank, short-term servicer advance financing, a secured, revolving debt facility collateralized by mortgage servicing rights, and subordinate securities financing facilities. 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 during the second quarter of 2021, we repaid the remaining amount of outstanding advances under our borrowing facility. Under federal regulations applicable to the FHLBC, we can no longer borrow advances from the FHLBC.

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

Under many of our mortgage loan warehouse facilities, our short-term securities repurchase facilities, and our secured, revolving debt facility collateralized by mortgage service rights, while transferred or pledged assets are financed under the facility, to the extent the value of the assets, or the collateral underlying those assets, declines, we are generally required to either immediately reacquire the assets or meet a margin requirement to transfer or pledge additional assets or cash in an amount at least equal to the decline in value. During the second quarter of 2020, we amended several of our mortgage loan warehouse facilities to revise these margin call provisions to remove obligations to make margin calls for changes in the market value of transferred or pledged assets, which determinations of market value were generally within the sole discretion of the lending counterparty. Under these revised agreements, if the estimated value of a property securing a financed mortgage loan declines, based on, for example, an appraisal or broker-price opinion, then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional residential mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at ~~June~~September 30, 2021, only our short-term securities repurchase facilities (with ~~$81~~$80 million of borrowings outstanding at ~~June~~September 30, 2021), and ~~three~~four of our residential mortgage loan warehouse facilities (with ~~$664~~$618 million of borrowings outstanding at ~~June~~September 30, 2021) retain market-value based margin call provisions.

Margin call provisions under these facilities are further described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2020 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2020 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”

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Because many of these borrowing facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Market Risks.” In addition, with respect to mortgage loans that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Market Risks,” if and when those loans or securities become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility.

At ~~June~~September 30, 2021, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at ~~June~~September 30, 2021 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at ~~June~~September 30, 2021 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur at least $600 million in additional recourse indebtedness.

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OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

In the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, while others are off-balance sheet or recorded on the balance sheet in amounts different from the full contract or notional amount of the transaction.

For additional information on our contractual obligations, see the Off-Balance Sheet Arrangements and Contractual Obligations section in the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

For additional information on our commitments and contingencies as of ~~June~~September 30, 2021, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies 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, 2020. Management discusses the ongoing development and selection of these critical accounting policies with the audit committee of the board of directors.

We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities, increases or decreases in earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates. Our critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements are included in the "Critical Accounting Policies and Estimates" section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets, has caused additional volatility impacting many of our estimates. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Continued volatility resulting from the pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility.

Market Risks

We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Other Risks

In addition to the market and other risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

NEW ACCOUNTING STANDARDS

A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information concerning market risk is incorporated herein by reference to Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, 2020.

Item 4. Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

There have been no changes in our internal control over financial reporting during the ~~second~~third quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information on our legal proceedings, see Note 16 to the Financial Statements within this Quarterly Report on Form 10-Q under the heading "Loss Contingencies - Litigation, Claims and Demands," which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Loss Contingencies - Litigation, Claims and Demands.”

Item 1A. Risk Factors

Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.

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

During the three months ended ~~June~~September 30, 2021, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three months ended ~~June~~September 30, 2021, we did not repurchase any shares. At ~~June~~September 30, 2021, $78 million of this current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended ~~June~~September 30, 2021.

Total Number of Shares Purchased or Acquired Average
Price per
Share Paid Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)
April 1, 2021 - April 30, 2021 — (1) $ 10.70 — $ —
May 1, 2021 - May 31, 2021 — $ — — $ —
June 1, 2021 - June 30, 2021 — $ — — $ 78,369
Total — $ 10.70 — $ 78,369

~~(1)Represents fewer than 1,000 shares reacquired to satisfy tax withholding requirements related to the vesting of restricted shares.~~


	Total Number of Shares Purchased or Acquired	Average Price per Share Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)
July 1, 2021 - July 31, 2021	—	$	—	—	$	—
August 1, 2021 - August 31, 2021	—	$	—	—	$	—
September 1, 2021 - September 30, 2021	—	$	—	—	$	78,369
Total	—	$	—	—	$	78,369

Item 3. Defaults Upon Senior Securities

None.

Item 4. Not Applicable

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Item 5. Other Information

~~On August 4,~~Effective November 3, 2021, ~~we issued a Participation Notice under the Company’s Change in Control Severance Plan (the “CIC Plan”) to Mr. Collin Cochrane, Chief Accounting Officer,~~our Board of Directors adopted Amended and Mr. Shoshone (“Bo”) Stern, Managing Director - Portfolio Strategy and Risk, to designate them as participants in the CIC Plan. Mr. Stern’s Participation Notice was effective on August 4, 2021 and Mr. Cochrane’s Participation Notice is effective on March 2, 2022, subject to his continued employment byRestated Bylaws of the Company ~~through March 2, 2022. As participants~~ in order to, among other things:

•Reflect changes to the ~~CIC Plan, Mr. Cochrane~~Maryland General Corporation Law or Maryland law practice;

•Clarify timing of delivery with respect to electronically delivered notices of annual meetings of stockholders;

•Clarify that it is permitted for the Board to hold, or allow stockholder participation at, meetings of stockholders by remote communications technology to the extent permitted under Maryland law;

•Clarify that a stockholder be a stockholder of record, as of the record date set for determining stockholders entitled to vote at the annual meeting, for any such stockholder proponent to make nominations or proposals;

•Update the information that a stockholder proponent must provide, including information about a director nominee proposed by such stockholder proponent, information such proponent must provide relating to certain persons acting in concert with such stockholder, and ~~Mr. Stern will~~certain written undertakings required from a proposed nominee;

•Require a stockholder proponent to appear in person or by proxy at the meeting set for such proponent’s proposal in order for the proposal to be ~~eligible~~considered at such meeting;

•Update the record date determination applicable to ~~receive~~a meeting of stockholders that has been postponed or adjourned;

•Address recent developments in public company governance;

•Clarify certain ~~severance benefits, including a cash payment~~corporate roles, responsibilities and procedures; and

•Clarify and conform language, style and practice.

The preceding summary of ~~150%~~the amendment and restatement of ~~their “Base Compensation” (as defined in~~ the ~~CIC Plan), if their employment with~~Bylaws of the Company is terminated without “cause” or for “good reason” and such termination is a “Qualifying Termination” related to a “Change-in-Control”, as each of those terms is defined in the CIC Plan. The foregoing description of the terms of the CIC Plan does not purport to be complete and is qualified in its entirety by reference to, and should be read in connection with, the ~~full text~~complete copy of the ~~CIC Plan included~~Amended and Restated Bylaws attached hereto as Exhibit ~~10.6 hereto.~~3.2.1 and incorporated by reference herein.

97108

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*						~~Sixth~~ ~~Amended and Restated Employment Agreement, dated as of~~ ~~June 10, 2021, by and between Christopher J. Abate and the Registrant (filed herewith)~~
10.2*						~~Fourth Amended and Restated Employment Agreement, dated as of June 10, 2021, by and between Dashiell I. Robinson and the Registrant (filed herewith)~~
10.3*						~~Sixth Amended and Restated Employment Agreement, dated as of June 10, 2021, by and between Andrew P. Stone and the Registrant (filed herewith)~~
10.4*						~~Amended and Restated Employment Agreement, dated as of June 10, 2021, by and between Brooke E. Carillo and the Registrant (filed herewith)~~
10.5*						~~Amended and Restated Employment Agreement, dated as of June 10, 2021, by and between Sasha G. Macomber and the Registrant (filed herewith)~~
10.6*						~~Redwood Trust, Inc. Change in Control Severance Plan, dated~~ November 3, ~~2020 (filed herewith)~~2021
~~10.7~~						~~Sixth Amendment to Lease Agreement, dated as of December 4, 2020, between ARTIS HRA Inverness Point, LP, as Landlord, and the Registrant, as Tenant (filed herewith)~~ (
~~10.8~~						~~Seventh Amendment to Lease Agreement, dated as of May 21, 2021, between ARTIS HRA Inverness Point, LP, as Landlord, and the Registrant, as Tenant (filed herewith)~~filed herewith )
31.1						Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1						Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2						Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


Exhibit Number						~~Exhibit~~
101						Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended ~~June~~September 30, 2021, is filed in inline XBRL-formatted interactive data files: (i) Consolidated Balance Sheets at ~~June~~September 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Income (Loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020; (iii) Statements of Consolidated Comprehensive Income (Loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020; (v) Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020; and (vi) Notes to Consolidated Financial Statements.
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

______________________

* Indicates exhibits that include management contracts or compensatory plan arrangements.

99109

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~~November 4, 2021	By:	/s/ Christopher J. Abate
			Christopher J. Abate
			Chief Executive Officer
			(Principal Executive Officer)

Date:	~~August~~November 4, 2021	By:	/s/ Brooke E. Carillo
			Brooke E. Carillo
			Chief Financial Officer
			(Principal Financial Officer)

Date:	~~August~~November 4, 2021	By:	/s/ Collin L. Cochrane
			Collin L. Cochrane
			Chief Accounting Officer
			(Principal Accounting Officer)

~~100~~110


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

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


	Three Months Ended June 30,				Six Months Ended June 30, (1)
(In Thousands, except per Share Data)	2021 est. (2)		2020 est. (2)		2021 est. (2)		2020 est. (2)
REIT taxable income (loss)	$	12,497	$	(57,905)	$	22,779	$	(20,378)
Taxable REIT subsidiary income (loss)	30,671		(19,496)		83,732		(8,085)
Total Taxable Income (Loss)	$	43,168	$	(77,401)	$	106,511	$	(28,463)

REIT taxable income (loss) per share	$	0.11	$	(0.50)	$	0.20	$	(0.17)
Total taxable income (loss) per share	$	0.38	$	(0.67)	$	0.94	$	(0.24)

Distributions to shareholders	$	20,346	$	14,366	$	38,423	$	51,107
Distributions to shareholders per share	$	0.18	$	0.125	$	0.34	$	0.445