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(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 March 31, 2020 and December 31, 2019, assets of consolidated VIEs totaled $7,470,706 and $11,931,869, respectively. At March 31, 2020 and December 31, 2019, liabilities of consolidated VIEs totaled $6,759,260 and $10,717,072, respectively. See Note 4 for further discussion.

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(1)	Cash, cash equivalents, and restricted cash at March 31, 2020 includes cash and cash equivalents of $378 million and restricted cash of $26 million, and at December 31, 2019 includes cash and cash equivalents of $197 million and restricted cash of $94 million.

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

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

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

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

Principles of Consolidation

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

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

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

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

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

See Note 4 for further discussion on principles of consolidation.

Use of Estimates

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

Acquisitions

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

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In connection with the acquisitions of 5 Arches and CoreVest, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The amortization period for each of these assets and the activity for the three months ended March 31, 2020 is summarized in the table below.

Table 2.1 – Intangible Assets – Activity

		Carrying Value at December 31, 2019				Additions				Amortization Expense				Carrying Value at March 31, 2020				Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network		$	43,952			$	—			$	(1,618	)		$	42,334			7
Broker network		15,083				—				(905		)		14,178				4
Non-compete agreements		8,236				—				(792		)		7,444				3
Tradenames		3,472				—				(333		)		3,139				3
Developed technology		1,613				—				(225		)		1,388				2
Loan administration fees on existing loan assets		433				—				(433		)		—				—
Total		$	72,789			$	—			$	(4,306	)		$	68,483			6

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

Table 2.2 – Intangible Asset Amortization Expense by Year

(In Thousands)		March 31, 2020
2020 (9 months)		$	11,619
2021		15,304
2022		12,800
2023		10,091
2024		7,073
2025 and thereafter		11,596
Total Future Intangible Asset Amortization		$	68,483

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

During the first quarter of 2020, as a result of the deterioration in economic conditions caused by the spread of the COVID-19 pandemic (the "pandemic"), and its impact on our business, including a significant decline in the market price of our common stock, we determined that it was more likely than not that the fair value of our Business Purpose Lending reporting unit was lower than its carrying amount, including goodwill. Based on this analysis, we determined that an interim goodwill impairment test should be performed as of March 31, 2020 and prepared updated cash flow projections for the reporting unit, resulting in a reduction in the long-term forecasts of profitability for our Business Purpose Lending reporting unit as compared to the prior year forecasts. Using these projections, we concluded that the fair value of our Business Purpose Lending reporting unit was less than its carrying value, including goodwill. As a result of this evaluation, we recorded a non-cash $89 million goodwill impairment expense through Other expenses on our consolidated statements of income (loss) during the three months ended March 31, 2020. In conjunction with our assessment of goodwill, we also assessed our intangible assets for impairment and determined they were not impaired. As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, our goodwill impairment testing is highly sensitive to certain assumptions and estimates used.

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The liability resulting from the contingent consideration arrangement with 5 Arches was recorded at its acquisition-date fair value of $25 million as part of total consideration for the acquisition of 5 Arches. These contingent earn-out payments were classified as a contingent consideration liability and carried at fair value prior to March 31, 2020. During the three months ended March 31, 2020, we made a cash payment of $11 million and granted $3 million of Redwood common stock in connection with the first anniversary of the purchase date. Additionally, as a result of an amendment to the agreement, we reclassified the contingent liability to a deferred liability, as the remaining payments became payable on a set timetable without any remaining contingencies. At March 31, 2020, the carrying value of this deferred liability was $15 million and was recorded as a component of Accrued expenses and other liabilities on our consolidated balance sheets. During the three months ended March 31, 2020, we recorded $0.3 million of contingent consideration expense through Other expenses on our consolidated statements of income (loss). See Note 16 for additional information on our contingent consideration liability.

The following unaudited pro forma financial information presents Net interest income, Non-interest income, and Net income of Redwood, 5 Arches, and CoreVest combined, for the three months ended March 31, 2019, as if the acquisitions occurred as of January 1, 2018. These pro forma amounts have been adjusted to include the amortization of intangible assets and acquisition-related compensation expense for both periods, and to exclude the income statement impacts related to our equity method investment in 5 Arches. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated financial results of operations that would have been reported if the acquisitions had been completed as of January 1, 2018 and should not be taken as indicative of our future consolidated results of operations.

Table 2.3 – Unaudited Pro Forma Financial Information

		Three Months Ended March 31, 2019
(In Thousands)
Supplementary pro forma information:
Net interest income		$	43,390
Non-interest income		42,976
Net income		56,028

Significant Accounting Policies

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

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Available-for-Sale Securities

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

Goodwill

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

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

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

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This new guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This new guidance is effective for fiscal years beginning after December 15, 2019. We adopted this new guidance, as required, in the first quarter of 2020, which did not have a material impact on our consolidated financial statements.

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

Other Recent Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This new guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact the adoption of this standard would have on our consolidated financial statements.

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

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

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.

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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 March 31, 2020 and December 31, 2019.

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

		Gross Amounts of Recognized Assets (Liabilities)				Gross Amounts Offset in Consolidated Balance Sheet				Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet				Gross Amounts Not Offset in Consolidated Balance Sheet (1)								Net Amount
March 31, 2020 (In Thousands)														Financial Instruments				Cash Collateral (Received) Pledged
Assets (2)
TBAs		$	90,717			$	—			$	90,717			$	(89,433	)		$	(1,283	)		$	1
Total Assets		$	90,717			$	—			$	90,717			$	(89,433	)		$	(1,283	)		$	1
Liabilities (2)
TBAs		$	(110,648	)		$	—			$	(110,648	)		$	89,433			$	19,308			$	(1,907	)
Loan warehouse debt		(1,035,817		)		—				(1,035,817		)		1,034,622				—				(1,195		)
Security repurchase agreements		(485,147		)		—				(485,147		)		482,528				1,574				(1,045		)
Total Liabilities		$	(1,631,612	)		$	—			$	(1,631,612	)		$	1,606,583			$	20,882			$	(4,147	)

		Gross Amounts of Recognized Assets (Liabilities)				Gross Amounts Offset in Consolidated Balance Sheet				Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet				Gross Amounts Not Offset in Consolidated Balance Sheet (1)								Net Amount
December 31, 2019 (In Thousands)														Financial Instruments				Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements		$	19,020			$	—			$	19,020			$	(14,178	)		$	(915	)		$	3,927
TBAs		5,755				—				5,755				(5,755		)		—				—
Futures		137				—				137				—				—				137
Total Assets		$	24,912			$	—			$	24,912			$	(19,933	)		$	(915	)		$	4,064
Liabilities (2)
Interest rate agreements		$	(148,765	)		$	—			$	(148,765	)		$	14,178			$	134,587			$	—
TBAs		(13,359		)		—				(13,359		)		5,755				6,673				(931		)
Loan warehouse debt		(432,126		)		—				(432,126		)		432,126				—				—
Security repurchase agreements		(1,096,578		)		—				(1,096,578		)		1,096,578				—				—
Total Liabilities		$	(1,690,828	)		$	—			$	(1,690,828	)		$	1,548,637			$	141,260			$	(931	)

(1)

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

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

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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.

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

Analysis of Consolidated VIEs

At March 31, 2020, we consolidated Legacy Sequoia, Freddie Mac SLST, Freddie Mac K-Series and CAFL securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for the consolidated Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. At March 31, 2020, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series and CAFL entities was $6 million, $144 million, $309 million, $23 million, and $170 million, respectively.

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

Beginning in 2018, we consolidated two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At March 31, 2020, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s interest. Additionally, beginning in 2018, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing. At March 31, 2020, the estimated fair value of our investment in the Servicing Investment entities was $59 million.

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

Table 4.1 – Assets and Liabilities of Consolidated VIEs

March 31, 2020		Legacy Sequoia				Sequoia Choice				Freddie Mac SLST				Freddie Mac K-Series				CAFL				Servicing Investment				Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment		$	316,677			$	1,932,658			$	2,131,125			$	—			$	—			$	—			$	4,380,460
Business purpose residential loans, held-for-investment		—				—				—				—				2,248,665				—				2,248,665
Multifamily loans, held-for-investment		—				—				—				470,484				—				—				470,484
Other investments		—				—				—				—				—				314,394				314,394
Cash and cash equivalents		—				—				—				—				—				2,886				2,886
Restricted cash		143				15				—				—				—				11,810				11,968
Accrued interest receivable		580				8,574				7,184				1,390				10,803				5,567				34,098
Other assets		952				—				1,050				—				5,749				—				7,751
Total Assets		$	318,352			$	1,941,247			$	2,139,359			$	471,874			$	2,265,217			$	334,657			$	7,470,706
Short-term debt		$	—			$	—			$	—			$	—			$	—			$	258,931			$	258,931
Accrued interest payable		351				6,920				5,251				1,230				8,188				205				22,145
Accrued expenses and other liabilities		—				15				—				—				—				16,305				16,320
Asset-backed securities issued		312,201				1,790,094				1,825,000				447,699				2,086,870				—				6,461,864
Total Liabilities		$	312,552			$	1,797,029			$	1,830,251			$	448,929			$	2,095,058			$	275,441			$	6,759,260
Number of VIEs		20				9				2				1				11				3				46

December 31, 2019		Legacy Sequoia				Sequoia Choice				Freddie Mac SLST				Freddie Mac K-Series				CAFL				Servicing Investment				Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment		$	407,890			$	2,291,463			$	2,367,215			$	—			$	—			$	—			$	5,066,568
Business purpose residential loans, held-for-investment		—				—				—				—				2,192,552				—				2,192,552
Multifamily loans, held-for-investment		—				—				—				4,408,524				—				—				4,408,524
Other investments		—				—				—				—				—				184,802				184,802
Cash and cash equivalents		—				—				—				—				—				9,015				9,015
Restricted cash		143				27				—				—				—				21,766				21,936
Accrued interest receivable		655				9,824				7,313				13,539				9,572				4,869				45,772
Other assets		460				—				445				—				1,795				—				2,700
Total Assets		$	409,148			$	2,301,314			$	2,374,973			$	4,422,063			$	2,203,919			$	220,452			$	11,931,869
Short-term debt		$	—			$	—			$	—			$	—			$	—			$	152,554			$	152,554
Accrued interest payable		395				7,732				5,374				12,887				7,485				187				34,060
Accrued expenses and other liabilities		—				27				—				—				—				14,956				14,983
Asset-backed securities issued		402,465				2,037,198				1,918,322				4,156,239				2,001,251				—				10,515,475
Total Liabilities		$	402,860			$	2,044,957			$	1,923,696			$	4,169,126			$	2,008,736			$	167,697			$	10,717,072
Number of VIEs		20				9				2				5				10				3				49

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The following table presents income (loss) from these VIEs for the three months ended March 31, 2020 and 2019.

Table 4.2 – Income (Loss) from Consolidated VIEs

		Three Months Ended March 31, 2020
		Legacy Sequoia				Sequoia Choice				Freddie Mac SLST				Freddie Mac K-Series				CAFL				Servicing Investment				Total Consolidated VIEs
(Dollars in Thousands)
Interest income		$	3,194			$	25,083			$	21,986			$	40,172			$	30,010			$	4,083			$	124,528
Interest expense		(2,522		)		(21,510		)		(16,176		)		(38,348		)		(21,939		)		(1,577		)		(102,072		)
Net interest income		672				3,573				5,810				1,824				8,071				2,506				22,456
Non-interest income
Investment fair value changes, net		(391		)		(69,668		)		(142,161		)		(86,509		)		(67,846		)		(11,884		)		(378,459		)
Total non-interest income, net		(391		)		(69,668		)		(142,161		)		(86,509		)		(67,846		)		(11,884		)		(378,459		)
General and administrative expenses		—				—				—				—				—				(31		)		(31		)
Other expenses		—				—				—				—				—				1,882				1,882
Income (Loss) from Consolidated VIEs		$	281			$	(66,095	)		$	(136,351	)		$	(84,685	)		$	(59,775	)		$	(7,527	)		$	(354,152	)

		Three Months Ended March 31, 2019
		Legacy Sequoia				Sequoia Choice				Freddie Mac SLST				Freddie Mac K-Series				CAFL				Servicing Investment				Total Consolidated VIEs
(Dollars in Thousands)
Interest income		$	4,853			$	25,662			$	11,794			$	21,388			$	—			$	3,346			$	67,043
Interest expense		(4,115		)		(22,113		)		(8,747		)		(20,320		)		—				(3,613		)		(58,908		)
Net interest income		738				3,549				3,047				1,068				—				(267		)		8,135
Non-interest income
Investment fair value changes, net		(374		)		3,265				6,365				3,119				—				1,430				13,805
Total non-interest income, net		(374		)		3,265				6,365				3,119				—				1,430				13,805
General and administrative expenses		—				—				—				—				—				(30		)		(30		)
Other expenses		—				—				—				—				—				(227		)		(227		)
Income from Consolidated VIEs		$	364			$	6,814			$	9,412			$	4,187			$	—			$	906			$	21,683

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

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

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Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 51 Sequoia securitization entities sponsored by us that are still outstanding as of March 31, 2020, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.

The following table presents information related to securitization transactions that occurred during the three months ended March 31, 2020 and 2019.

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

		Three Months Ended March 31,
(In Thousands)		2020				2019
Principal balance of loans transferred		$	1,573,703			$	348,257
Trading securities retained, at fair value		43,362				1,716
AFS securities retained, at fair value		3,198				885

The following table summarizes the cash flows during the three months ended March 31, 2020 and 2019 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

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

		Three Months Ended March 31,
(In Thousands)		2020				2019
Proceeds from new transfers		$	1,610,761			$	352,371
MSR fees received		2,690				3,060
Funding of compensating interest, net		(92		)		(90		)
Cash flows received on retained securities		6,581				7,546

The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization for securitizations completed during the three months ended March 31, 2020 and 2019.

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

		Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
At Date of Securitization		Senior IO Securities			Subordinate Securities			Senior IO Securities			Subordinate Securities
Prepayment rates		41	%		13	%		16	%		14	%
Discount rates		16	%		6	%		14	%		8	%
Credit loss assumptions		0.21	%		0.22	%		0.20	%		0.20	%

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

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood

(In Thousands)		March 31, 2020				December 31, 2019
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading		$	54,894			$	88,425
Subordinate securities, classified as AFS		77,433				140,649
Mortgage servicing rights		22,482				40,254
Maximum loss exposure (1)		$	154,809			$	269,328
Assets transferred:
Principal balance of loans outstanding		$	11,181,034			$	10,299,442
Principal balance of loans 30+ days delinquent		40,930				41,809

(1)

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

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

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

March 31, 2020		MSRs				Senior Securities (1)				Subordinate Securities
(Dollars in Thousands)
Fair value at March 31, 2020		$	22,482			$	26,980			$	105,347
Expected life (in years) (2)		4				3				14
Prepayment speed assumption (annual CPR) (2)		21		%		28		%		15		%
Decrease in fair value from:
10% adverse change		$	1,760			$	2,414			$	1,404
25% adverse change		4,278				5,954				3,836
Discount rate assumption (2)		13		%		18		%		10		%
Decrease in fair value from:
100 basis point increase		$	611			$	549			$	8,088
200 basis point increase		1,188				1,072				15,165
Credit loss assumption (2)		N/A				0.22		%		0.22		%
Decrease in fair value from:
10% higher losses		N/A				$	—			$	1,107
25% higher losses		N/A				—				2,723

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

(1)	Senior securities included $27 million and $49 million of interest-only securities at March 31, 2020 and December 31, 2019, respectively.

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

Analysis of Unconsolidated Third-Party VIEs

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

Table 4.8 – Third-Party Sponsored VIE Summary

(In Thousands)		March 31, 2020				December 31, 2019
Mortgage-Backed Securities
Senior		$	12,580			$	127,094
Mezzanine		25,867				508,195
Subordinate		122,689				235,510
Total Mortgage-Backed Securities		161,136				870,799
Excess MSR		16,339				16,216
Total Investments in Third-Party Sponsored VIEs		$	177,475			$	887,015

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

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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.

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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 March 31, 2020 and December 31, 2019.

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

		March 31, 2020								December 31, 2019
		Carrying Value				Fair Value				Carrying Value				Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value		$	2,330,566			$	2,330,566			$	536,385			$	536,509
Residential loans, held-for-investment		4,380,460				4,380,460				7,178,465				7,178,465
Business purpose residential loans, held-for-sale		415,333				415,333				331,565				331,565
Business purpose residential loans, held-for-investment		3,048,409				3,048,409				3,175,178				3,175,178
Multifamily loans		470,484				470,484				4,408,524				4,408,524
Trading securities		164,219				164,219				860,540				860,540
Available-for-sale securities		129,243				129,243				239,334				239,334
Servicer advance investments (1)		298,946				298,946				169,204				169,204
MSRs (1)		23,616				23,616				42,224				42,224
Excess MSRs (1)		31,788				31,788				31,814				31,814
Shared home appreciation options (1)		40,642				40,642				45,085				45,085
Cash and cash equivalents		378,233				378,233				196,966				196,966
Restricted cash		25,752				25,752				93,867				93,867
Accrued interest receivable		57,215				57,215				71,058				71,058
Derivative assets		90,717				90,717				35,701				35,701
REO (2)		14,366				15,714				9,462				10,389
Margin receivable (2)		93,745				93,745				209,776				209,776
FHLBC stock (2)		43,393				43,393				43,393				43,393
Guarantee asset (2)		905				905				1,686				1,686
Pledged collateral (2)		33,191				33,191				32,945				32,945
Liabilities
Short-term debt facilities		$	2,082,717			$	2,082,717			$	2,176,591			$	2,176,591
Short-term debt - servicer advance financing		258,931				258,931				152,554				152,554
Accrued interest payable		40,102				40,102				60,655				60,655
Margin payable (3)		1,283				1,283				1,700				1,700
Guarantee obligation (3)		13,395				12,382				14,009				13,754
Contingent consideration (3)		14,819				14,819				28,484				28,484
Derivative liabilities		114,614				114,614				163,424				163,424
ABS issued at fair value		6,461,864				6,461,864				10,515,475				10,515,475
FHLBC long-term borrowings		1,367,681				1,367,681				1,999,999				1,999,999
Other long-term debt, net		315,583				317,498				183,520				184,666
Convertible notes, net		631,857				359,875				631,125				661,985
Trust preferred securities and subordinated notes, net		138,640				27,900				138,628				99,045

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

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

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

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During the three months ended March 31, 2020, we elected the fair value option for $68 million of securities, $2.63 billion of residential loans (principal balance), $467 million of business purpose residential loans (principal balance), $159 million of servicer advance investments, $9 million of excess MSRs, and $4 million of shared home appreciation options. We anticipate electing the fair value option for all future purchases of residential and business purpose residential loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.

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

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

March 31, 2020		Carrying Value				Fair Value Measurements Using
(In Thousands)						Level 1				Level 2				Level 3
Assets
Residential loans		$	6,711,025			$	—			$	—			$	6,711,025
Business purpose residential loans		3,463,742				—				—				3,463,742
Multifamily loans		470,484				—				—				470,484
Trading securities		164,219				—				—				164,219
Available-for-sale securities		129,243				—				—				129,243
Servicer advance investments		298,946				—				—				298,946
MSRs		23,616				—				—				23,616
Excess MSRs		31,788				—				—				31,788
Shared home appreciation options		40,642				—				—				40,642
Derivative assets		90,717				90,717				—				—
Pledged collateral		33,191				33,191				—				—
FHLBC stock		43,393				—				43,393				—
Guarantee asset		905				—				—				905
Liabilities
Contingent consideration		$	14,819			$	—			$	—			$	14,819
Derivative liabilities		114,614				110,648				—				3,966
ABS issued		6,461,864				—				—				6,461,864

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December 31, 2019		Carrying Value				Fair Value Measurements Using
(In Thousands)						Level 1				Level 2				Level 3
Assets
Residential loans		$	7,714,745			$	—			$	—			$	7,714,745
Business purpose residential loans		3,506,743				—				—				3,506,743
Multifamily loans		4,408,524				—				—				4,408,524
Trading securities		860,540				—				—				860,540
Available-for-sale securities		239,334				—				—				239,334
Servicer advance investments		169,204				—				—				169,204
MSRs		42,224				—				—				42,224
Excess MSRs		31,814				—				—				31,814
Shared home appreciation options		45,085				—				—				45,085
Derivative assets		35,701				6,531				19,020				10,150
Pledged collateral		32,945				32,945				—				—
FHLBC stock		43,393				—				43,393				—
Guarantee asset		1,686				—				—				1,686
Liabilities
Contingent consideration		$	28,484			$	—			$	—			$	28,484
Derivative liabilities		163,424				13,368				148,766				1,290
ABS issued		10,515,475				—				—				10,515,475

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2020.

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

		Assets
		Residential Loans				Business Purpose Residential Loans				Multifamily Loans				Trading Securities				AFS Securities				Servicer Advance Investments				MSRs				Excess MSRs				Shared Home Appreciation Options
(In Thousands)
Beginning balance -    December 31, 2019		$	7,714,745			$	3,506,743			$	4,408,524			$	860,540			$	239,334			$	169,204			$	42,224			$	31,814			$	45,085
Acquisitions		2,695,846				—				—				67,639				31,181				158,618				—				9,468				3,517
Originations		—				486,710				—				—				—				—				—				—				—
Sales		(2,729,161		)		(42,802		)		—				(493,126		)		(46,457		)		—				—				—				—
Principal paydowns		(490,439		)		(161,896		)		(5,830		)		(7,507		)		(4,445		)		(22,815		)		—				—				(406		)
Deconsolidations		—				—				(3,849,779		)		—				—				—				—				—				—
Gains (losses) in net (loss) income, net		(478,743		)		(320,528		)		(82,431		)		(263,327		)		(90,370		)		(6,061		)		(18,608		)		(9,494		)		(7,554		)
Other settlements, net (1)		(1,223		)		(4,485		)		—				—				—				—				—				—				—
Ending balance -    March 31, 2020		$	6,711,025			$	3,463,742			$	470,484			$	164,219			$	129,243			$	298,946			$	23,616			$	31,788			$	40,642

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

		Assets								Liabilities
		Guarantee Asset				Derivatives (2)				Contingent Consideration				ABS Issued
(In Thousands)
Beginning balance - December 31, 2019		$	1,686			$	8,860			$	28,484			$	10,515,475
Acquisitions		—				—				—				377,164
Principal paydowns		—				—				(13,353		)		(363,696		)
Deconsolidations		—				—				—				(3,706,789		)
Gains (losses) in net (loss) income, net		(781		)		18,005				(312		)		(360,290		)
Other settlements, net (1)		—				(30,831		)		—				—
Ending balance - March 31, 2020		$	905			$	(3,966	)		$	14,819			$	6,461,864

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

(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.

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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 March 31, 2020 and 2019. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2020 and 2019 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2020 and 2019 Included in Net Income

		Included in Net Income
		Three Months Ended March 31,
(In Thousands)		2020				2019
Assets
Residential loans at Redwood		$	(102,867	)		$	35,801
Residential loans at consolidated Sequoia entities		(179,499		)		14,472
Residential loans at consolidated Freddie Mac SLST entities		(193,035		)		23,527
Business purpose residential loans		(68,864		)		1,050
Single-family rental loans at consolidated CAFL entities		(271,917		)		—
Multifamily loans at consolidated Freddie Mac K-Series entity		(10,351		)		34,372
Trading securities		(136,359		)		21,543
Servicer advance investments		(6,062		)		1,008
MSRs		(16,640		)		(4,295		)
Excess MSRs		(9,494		)		(437		)
Shared home appreciation options		(7,554		)		—
Loan purchase and interest rate lock commitments		—				4,962
Other assets - Guarantee asset		(781		)		(277		)
Liabilities
Loan purchase commitments		$	(3,967	)		$	(753	)
Contingent consideration		(312		)		—
ABS issued		360,640				(60,182		)

The following table presents information on assets recorded at fair value on a non-recurring basis at March 31, 2020. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance sheets at March 31, 2020.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2020

																		Gain (Loss) for
March 31, 2020		Carrying Value				Fair Value Measurements Using												Three Months Ended
(In Thousands)						Level 1				Level 2				Level 3				March 31, 2020
Assets
REO		$	4,456			$	—			$	—			$	4,456			$	(476	)

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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 months ended March 31, 2020 and 2019.

Table 5.6 – Market Valuation Gains and Losses, Net

		Three Months Ended March 31,
(In Thousands)		2020				2019
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value		$	(13,480	)		$	3,533
Residential loan purchase and forward sale commitments		21,435				11,311
Single-family rental loans held-for-sale, at fair value		11,467				1,603
Single-family rental loan purchase and interest rate lock commitments		341				141
Residential bridge loans		(3,934		)		86
Risk management derivatives, net		(52,832		)		(4,984		)
Total mortgage banking activities, net (1)		$	(37,003	)		$	11,690
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood		$	(93,636	)		$	28,108
Single-family rental loans held-for-investment		(23,028		)		—
Residential bridge loans held-for-investment		(38,602		)		(303		)
Trading securities		(263,325		)		21,860
Servicer advance investments		(6,062		)		1,008
Excess MSRs		(9,494		)		(437		)
Net investments in Legacy Sequoia entities (2)		(391		)		(374		)
Net investments in Sequoia Choice entities (2)		(69,669		)		3,265
Net investments in Freddie Mac SLST entities (2)		(142,162		)		6,365
Net investments in Freddie Mac K-Series entities (2)		(86,509		)		3,119
Net investments in CAFL entities (2)		(67,846		)		—
Other investments		(9,441		)		(77		)
Risk management derivatives, net		(59,142		)		(42,375		)
Credit losses on AFS securities		(1,525		)		—
Total investment fair value changes, net		$	(870,832	)		$	20,159
Other Income
MSRs		$	(18,608	)		$	(5,102	)
Risk management derivatives, net		13,966				2,251
Gain on re-measurement of 5 Arches investment		—				2,441
Total other income (3)		$	(4,642	)		$	(410	)
Total Market Valuation (Losses) Gains, Net		$	(912,477	)		$	31,439

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

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

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

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

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments

March 31, 2020		Fair Value						Input Values
(Dollars in Thousands, except Input Values)						Unobservable Input		Range									Weighted Average(5)
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans		$	86,053			Dollar price		$	74.38		-	$	99.50				$	96.73
Jumbo hybrid loans		97,956				Dollar price		$	90.00		-	$	99.00				$	97.78
Jumbo loans committed to sell		2,146,557				Whole loan committed sales price		$	95.00		-	$	103.50				$	98.32
Loans held by Legacy Sequoia (1)		316,677				Liability price						N/A					N/A
Loans held by Sequoia Choice (1)		1,932,658				Liability price						N/A					N/A
Loans held by Freddie Mac SLST (1)		2,131,125				Liability price						N/A					N/A
Business purpose residential loans:
Single-family rental loans		415,333				Senior credit spread		290			-	290			bps		290			bps
						Subordinate credit spread		400			-	2,700			bps		688			bps
						Senior credit support		32			-	47			%		34			%
						IO discount rate		14			-	14			%		14			%
						Prepayment rate (annual CPR)		5			-	5			%		5			%
Single-family rental loans held by CAFL		2,248,665				Liability price						N/A					N/A
Residential bridge loans		799,744				Discount rate		9			-	17			%		12			%
Multifamily loans held by Freddie Mac K-Series (1)		470,484				Liability price						N/A					N/A
Trading and AFS securities		293,462				Discount rate		5			-	51			%		17			%
						Prepayment rate (annual CPR)		6			-	34			%		12			%
						Default rate		—			-	7			%		1			%
						Loss severity		—			-	50			%		9			%
Servicer advance investments		298,946				Discount rate		5			-	5			%		5			%
						Prepayment rate (annual CPR)		8			-	14			%		14			%
						Expected remaining life (2)		2			-	2			years		2			years
						Mortgage servicing income		8			-	13			bps		10			bps
MSRs		23,616				Discount rate		13			-	13			%		13			%
						Prepayment rate (annual CPR)		8			-	63			%		21			%
						Per loan annual cost to service		$	95		-	$	95				$	95
Excess MSRs		31,788				Discount rate		18			-	26			%		22			%
						Prepayment rate (annual CPR)		9			-	14			%		11			%
						Excess mortgage servicing income		8			-	17			bps		12			bps

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

March 31, 2020		Fair Value						Input Values
(Dollars in Thousands, except Input Values)						Unobservable Input		Range									Weighted Average (5)
Assets (continued)
Shared home appreciation options		$	40,642			Discount rate		18			-	18			%		18			%
						Prepayment rate (annual CPR)		10			-	30			%		23			%
						Home price appreciation		3			-	3			%		3			%
Guarantee asset		905				Discount rate		11			-	11			%		11			%
						Prepayment rate (annual CPR)		37			-	37			%		37			%
REO		4,456				Loss severity		3			-	55			%		32			%
Liabilities
Residential loan purchase commitments, net		196				Committed sales price		$	95.50		-	$	95.50				$	95.50
						Pull-through rate		100			-	100			%		100			%
ABS issued (1):
At consolidated Sequoia entities		2,102,295				Discount rate		3			-	32			%		6			%
						Prepayment rate (annual CPR)		15			-	43			%		25			%
						Default rate		—			-	15			%		1			%
						Loss severity		—			-	50			%		19			%
At consolidated Freddie Mac SLST entities		1,825,000				Discount rate		3			-	17			%		4			%
						Prepayment rate (annual CPR)		6			-	6			%		6			%
						Default rate		17			-	18			%		17			%
						Loss severity		30			-	30			%		30			%
At consolidated Freddie Mac K-Series entities (4)		447,699				Discount rate		2			-	20			%		3			%
						Non-IO prepayment rate (annual CPR)		—			-	—			%		—			%
						IO prepayment rate (annual CPY/CPP)		100			-	100			%		100			%
At consolidated CAFL entities (4)		2,086,870				Discount rate		1			-	68			%		6			%
						Prepayment rate (annual CPR)		—			-	5			%		—			%
Contingent consideration		14,819				Discount rate		23			-	23			%		23			%
						Probability of outcomes (3)		100			-	100			%		100			%

(1)

The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. At March 31, 2020, the fair value of securities we owned at the consolidated Sequoia, Freddie Mac SLST, Freddie Mac K-Series, and CAFL entities was $148 million, $307 million, $23 million, and $167 million, respectively.

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

(3)	Represents the probability of a full payout of contingent purchase consideration.

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

(5)	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.

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Determination of Fair Value

A description of the instruments measured at fair value as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy is listed herein. 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.

Residential loans at Redwood

Estimated fair values for residential loans are determined using third-party committed sales prices or models that incorporate various observable inputs, including pricing information from whole loan sales and securitizations. Certain significant inputs in these models are considered unobservable and are therefore Level 3 in nature. Significant pricing inputs obtained from market whole loan transaction activity include indicative spreads to indexed to be announced ("TBA") prices and indexed swap rates for fixed-rate loans and indexed swap rates for hybrid loans (Level 3). Significant pricing inputs obtained from market securitization activity include indicative spreads to indexed TBA prices for senior residential mortgage-backed securities ("RMBS") and indexed swap rates for subordinate RMBS, senior credit support levels, and assumed future prepayment rates (Level 3). These assets would generally decrease in value based upon an increase in the credit spread, prepayment speed, or credit support assumptions.

Residential loans, business purpose residential loans, and multifamily loans at consolidated entities

We have elected to account for our consolidated securitization entities as CFEs in accordance with GAAP. A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. Pursuant to this guidance, we use the fair value of the ABS issued by the CFEs (which we determined to be more observable) to determine the fair value of the loans held at these entities, whereby the net assets we consolidate in our financial statements related to these entities represent the estimated fair value of our retained interests in the CFEs. 

Business purpose residential loans

Business purpose residential loans include single-family rental loans and residential bridge loans that are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3 in nature, due to the lack of readily available market quotes and related inputs.

Estimated fair values for our single-family rental loans are determined using models that incorporate various inputs, including pricing information from market comparable securitizations. Certain significant inputs in these models are considered unobservable and are therefore Level 3 in nature. Significant pricing inputs obtained from market activity include indicative spreads to indexed swap rates for senior and subordinate MBS, IO MBS discount rates, senior credit support levels, and assumed future prepayment rates (Level 3). These assets would generally decrease in value based upon an increase in the credit spread, prepayment speed, or credit support assumptions.

Prices for our residential bridge loans are determined using discounted cash flow modeling, which incorporates a primary significant unobservable input of discount rate. These assets would generally decrease in value based upon an increase in the discount rate.

Real estate securities

Real estate securities include residential, multifamily, and other mortgage-backed securities that are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3 in nature, due to the lack of readily available market quotes and related inputs. For real estate securities, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators that are factored into the analysis include bid/ask spreads, the amount and timing of credit losses, interest rates, and collateral prepayment rates. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3). These cash flow models use significant unobservable inputs such as a discount rate, prepayment rate, default rate and loss severity. The estimated fair value of our securities would generally decrease based upon an increase in discount rate, default rates, loss severities, or a decrease in prepayment rates.

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As part of our securities valuation process, we request and consider indications of value from third-party securities dealers. For purposes of pricing our securities at March 31, 2020, we received dealer price indications on 78% of our securities, representing 91% of our carrying value. Once we receive the price indications from dealers, they are compared to other relevant market inputs, such as actual or comparable trades, and the results of our discounted cash flow analysis. In circumstances where relevant market inputs cannot be obtained, increased reliance on discounted cash flow analysis and management judgment are required to estimate fair value.

Derivative assets and liabilities

Our derivative instruments include swaps, swaptions, TBAs, interest rate futures, loan purchase commitments ("LPCs"), and interest rate lock commitments ("IRLCs"). Fair values of derivative instruments are determined using quoted prices from active markets, when available, or from valuation models and are supported by valuations provided by dealers active in derivative markets. Fair values of TBAs and interest rate futures are generally obtained using quoted prices from active markets (Level 1). Our derivative valuation models for swaps and swaptions require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of certain inputs. Model inputs can generally be verified and model selection does not involve significant management judgment (Level 2).

LPC and IRLC fair values for residential jumbo and single-family rental loans are estimated based on the estimated fair values of the underlying loans (as described in "Residential loans at Redwood" and "Business purpose residential loans" above). In addition, fair values for LPCs and IRLCs are estimated based on the probability that the mortgage loan will be purchased or originated (the "Pull-through rate") (Level 3).

For other derivatives, valuations are based on various factors such as liquidity, bid/ask spreads, and credit considerations for which we rely on available market inputs. In the absence of such inputs, management’s best estimate is used (Level 3).

Servicer advance investments

Estimated fair values for servicer advance investments are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs that are considered unobservable and are therefore Level 3 in nature. Our estimations of cash flows include the combined cash flows of all of the components that comprise the servicer advance investments: existing advances, the requirement to purchase future advances, the recovery of advances, and the right to a portion of the associated mortgage servicing fee ("mortgage servicing income"). The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included prepayment rate (of the loans underlying the investments), mortgage servicing income, servicer advance WAL (the weighted-average expected remaining life of servicer advances), and discount rate. These assets would generally decrease in value based upon an increase in prepayment rates, an increase in servicer advance WAL, or an increase in discount rate, or a decrease in mortgage servicing income.

MSRs

MSRs include the rights to service jumbo residential mortgage loans. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. Changes in the fair value of MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions. Estimated fair values are based on applying the inputs to generate the net present value of estimated future MSR income (Level 3). These discounted cash flow models utilize certain significant unobservable inputs including market discount rates, assumed future prepayment rates of serviced loans, and the market cost of servicing. An increase in these unobservable inputs would generally reduce the estimated fair value of the MSRs.

As part of our MSR valuation process, we received a valuation estimate from a third-party valuations firm. In the aggregate, our internal valuation of the MSRs were within 5% of the third-party valuation.

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Excess MSRs

Estimated fair values for excess MSRs are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs that are considered unobservable and are therefore Level 3 in nature. The valuation technique is based on discounted cash flows. Significant unobservable inputs used in the valuations included prepayment rate (of the loans underlying the investments), the amount of excess servicing income expected to be received ("excess mortgage servicing income"), and discount rate. These assets would generally decrease in value based upon an increase in prepayment rates or discount rate, or a decrease in excess mortgage servicing income.

Shared Home Appreciation Options

Estimated fair values for shared home appreciation options are determined through internal pricing models that estimate future cash flows and utilize certain significant unobservable inputs such as forecasted home price appreciation, prepayment rates, and discount rate, and are therefore Level 3 in nature. The valuation technique is based on discounted cash flows. An increase in discount rate, or a decrease in expected future home values combined with a decrease in prepayment rates, would generally reduce the estimated fair value of the shared home appreciation options.

FHLBC stock

Our Federal Home Loan Bank ("FHLB") member subsidiary is required to purchase FHLBC stock under a borrowing agreement between our FHLB-member subsidiary and the FHLBC. Under this agreement, the stock is redeemable at face value, which represents the carrying value and fair value of the stock (Level 2).

Guarantee asset

The guarantee asset represents the estimated fair value of cash flows we are contractually entitled to receive related to a risk-sharing arrangement with Fannie Mae. Significant inputs in the valuation analysis are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.

Pledged collateral

Pledged collateral consists of cash and U.S. Treasury securities held by a custodian in association with certain agreements we have entered into. Treasury securities are carried at their fair value, which is determined using quoted prices in active markets (Level 1).

Cash and cash equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. Fair values equal carrying values (Level 1).

Restricted cash

Restricted cash primarily includes interest-earning cash balances related to risk-sharing transactions with the Agencies, cash held in association with borrowings from the FHLBC, cash held at Servicing Investment entities, and cash held at consolidated Sequoia entities for the purpose of distribution to investors and reinvestment. Due to the short-term nature of the restrictions, fair values approximate carrying values (Level 1).

Accrued interest receivable and payable

Accrued interest receivable and payable includes interest due on our assets and payable on our liabilities. Due to the short-term nature of when these interest payments will be received or paid, fair values approximate carrying values (Level 1).

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Real estate owned

Real estate owned ("REO") includes properties owned in satisfaction of foreclosed loans. Fair values are determined using available market quotes, appraisals, broker price opinions, comparable properties, or other indications of value (Level 3).

Margin receivable

Margin receivable reflects cash collateral we have posted with our various derivative and debt counterparties as required to satisfy margin requirements. Fair values approximate carrying values (Level 2).

Contingent consideration

Contingent consideration is related to our acquisition of 5 Arches and is estimated and recorded at fair value as part of purchase consideration. Each reporting period we estimate the change in fair value of the contingent consideration, and such change is recognized in our consolidated statements of income (loss), unless it is determined to be a measurement period adjustment. The estimate of the fair value of contingent consideration requires significant judgment and assumptions to be made about future operating results, discount rates, and probabilities of projected operating result scenarios (Level 3).

Short-term debt

Short-term debt includes our credit facilities for residential and business purpose residential loans and real estate securities as well as non-recourse short-term borrowings used to finance servicer advance investments. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2).

ABS issued

ABS issued includes asset-backed securities issued through the Legacy Sequoia, Sequoia Choice, and CAFL securitization entities, as well as securities issued by certain third-party Freddie Mac K-Series and SLST securitization entities that we consolidate. These instruments are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. For ABS issued, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators factored into the analysis include bid/ask spreads, the amount and timing of collateral credit losses, interest rates, and collateral prepayment rates. Estimated fair values incorporate market indicators as well as other significant unobservable inputs to generate discounted cash flows (Level 3). These cash flow models use significant unobservable inputs such as discount rate, prepayment rate, default rate, loss severity and credit support. A decrease in credit losses or discount rates, or an increase in prepayment rates, would generally cause the fair value of the ABS issued to decrease (i.e., become a larger liability).

FHLBC borrowings

FHLBC borrowings include amounts borrowed from the FHLBC that are secured, generally by residential mortgage loans. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2).

Financial Instruments Carried at Amortized Cost

Participation in loan warehouse facility

Our participation in a loan warehouse facility was carried at amortized cost (Level 2).

Guarantee obligations

In association with our risk-sharing transactions with the Agencies, we have made certain guarantees which are carried on our balance sheet at amortized cost (Level 3).

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Subordinate securities financing facility

Borrowings under our subordinate securities financing facility are secured by real estate securities and carried at unpaid principal balance net of any unamortized deferred issuance costs (Level 3).

Convertible notes

Convertible notes include unsecured convertible and exchangeable senior notes that are carried at their unpaid principal balance net of any unamortized deferred issuance costs. The fair value of the convertible notes is determined using quoted prices in generally active markets (Level 2).

Trust preferred securities and subordinated notes

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 March 31, 2020 and December 31, 2019.

Table 6.1 – Classifications and Carrying Values of Residential Loans

March 31, 2020						Legacy				Sequoia				Freddie Mac
(In Thousands)		Redwood				Sequoia				Choice				SLST				Total
Held-for-sale at fair value		$	2,330,669			$	—			$	—			$	—			$	2,330,669
Held-for-investment at fair value		—				316,677				1,932,658				2,131,125				4,380,460
Total Residential Loans		$	2,330,669			$	316,677			$	1,932,658			$	2,131,125			$	6,711,129

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

At March 31, 2020, we owned mortgage servicing rights associated with $1.75 billion (principal balance) of consolidated residential loans 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.

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Residential Loans Held-for-Sale

At Fair Value

At March 31, 2020, we owned 3,345 loans held-for-sale at fair value with an aggregate unpaid principal balance of $2.37 billion and a fair value of $2.33 billion, compared to 669 loans with an aggregate unpaid principal balance of $525 million and a fair value of $536 million at December 31, 2019. At March 31, 2020, six of these loans with an aggregate fair value and unpaid principal balance of $3 million were greater than 90 days delinquent and one of these loans with a fair value of $0.4 million and an unpaid principal balance of $1 million was in foreclosure. At December 31, 2019, one of these loans with a fair value of $0.6 million and an unpaid principal balance of $0.7 million was greater than 90 days delinquent and none of these loans were in foreclosure.

During the three months ended March 31, 2020 and 2019, we purchased $2.63 billion and $0.96 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $2.66 billion and $1.16 billion (principal balance) of loans, respectively, for which we recorded a net market valuation loss of $13 million and a net market valuation gain of $4 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). At March 31, 2020, loans held-for-sale with a market value of $882 million were pledged as collateral under short-term borrowing agreements. At March 31, 2020, we committed to sell $2.15 billion of residential loans to third parties for settlement during the second quarter of 2020.

Residential Loans Held-for-Investment at Fair Value

At Redwood

At March 31, 2020, we did not own any held-for-investment loans at Redwood. At December 31, 2019, we owned 2,940 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.05 billion and a fair value of $2.11 billion. At December 31, 2019, two of these loans with an aggregate fair value of $1 million and an unpaid principal balance of $2 million were greater than 90 days delinquent and none of these loans were in foreclosure.

During the three months ended March 31, 2020 and 2019, we purchased zero and $39 million (principal balance) of loans, respectively, for which we elected the fair value option, and did not sell any loans during either of these periods. During the three months ended March 31, 2020 and 2019, we transferred loans with a fair value of $13 million and $39 million, respectively, from held-for-sale to held-for-investment. During the three months ended March 31, 2020 and 2019, we transferred loans with a fair value of $1.87 billion and $23 million, respectively, from held-for-investment to held-for-sale. During the three months ended March 31, 2020 and 2019, we recorded a net market valuation loss of $94 million and a net market valuation gain of $28 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss).

At Consolidated Legacy Sequoia Entities

At March 31, 2020, we consolidated 2,123 held-for-investment loans at consolidated Legacy Sequoia entities, with an aggregate unpaid principal balance of $402 million and a fair value of $317 million, as compared to 2,198 loans at December 31, 2019, with an aggregate unpaid principal balance of $425 million and a fair value of $408 million. At origination, the weighted average FICO score of borrowers backing these loans was 727, the weighted average LTV ratio of these loans was 65%, and the loans were nearly all first lien and prime-quality.

At March 31, 2020 and December 31, 2019, the aggregate unpaid principal balance of loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $9 million and $10 million, respectively, of which the aggregate unpaid principal balance of loans in foreclosure was $5 million and $4 million, respectively. During the three months ended March 31, 2020 and 2019, we recorded a net market valuation loss of $69 million and a net market valuation gain of $5 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the associated ABS issued. The net impact to our income statement associated with our retained economic investment in the Legacy Sequoia securitization entities is presented in Note 5.

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At Consolidated Sequoia Choice Entities

At March 31, 2020, we consolidated 2,831 held-for-investment loans at the consolidated Sequoia Choice entities, with an aggregate unpaid principal balance of $1.99 billion and a fair value of $1.93 billion, as compared to 3,156 loans at December 31, 2019 with an aggregate unpaid principal balance of $2.24 billion and a fair value of $2.29 billion. At origination, the weighted average FICO score of borrowers backing these loans was 743, the weighted average LTV ratio of these loans was 75%, and the loans were all first lien and prime-quality. At March 31, 2020, five of these loans with an aggregate unpaid principal balance of $3 million were greater than 90 days delinquent and four of these loans with an aggregate unpaid principal balance of $3 million was in foreclosure. At December 31, 2019, nine of these loans with an aggregate unpaid principal balance of $7 million were greater than 90 days delinquent and three of these loans with an aggregate unpaid principal balance of $2 million were in foreclosure.

During the three months ended March 31, 2020, we did not transfer any loans from held-for-sale to held-for-investment associated with Choice securitizations. During the three months ended March 31, 2019, we transferred loans with a fair value of $350 million from held-for-sale to held-for-investment associated with Choice securitizations. During the three months ended March 31, 2020, we recorded a net market valuation loss of $110 million and a net market valuation gain of $10 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with Choice securitizations. The net impact to our income statement associated with our retained economic investment in the Sequoia Choice securitization entities is presented in Note 5.

At Consolidated Freddie Mac SLST Entities

Beginning in 2018, we invested in subordinate securities issued by certain Freddie Mac SLST securitization trusts and were required to consolidate the underlying seasoned re-performing and non-performing residential loans owned at these entities for financial reporting purposes in accordance with GAAP. At securitization, each of these mortgage loans was a fully amortizing, fixed- or step-rate, first-lien loan that had been modified. At March 31, 2020, we consolidated 14,303 held-for-investment loans at the consolidated Freddie Mac SLST entities, with an aggregate unpaid principal balance of $2.39 billion and a fair value of $2.13 billion, as compared to 14,502 loans at December 31, 2019 with an aggregate unpaid principal balance of $2.43 billion and a fair value of $2.37 billion. At securitization, the weighted average FICO score of borrowers backing these loans was 600 and the weighted average LTV ratio of these loans was 73%. At March 31, 2020, 632 of these loans with an aggregate unpaid principal balance of $156 million were greater than 90 days delinquent, and 286 of these loans with an aggregate unpaid principal balance of $46 million were in foreclosure. At December 31, 2019, 587 of these loans with an aggregate unpaid principal balance of $135 million were greater than 90 days delinquent and 208 of these loans with an aggregate unpaid principal balance of $33 million were in foreclosure.

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

Business Purpose Residential Loan Originations

During the three months ended March 31, 2020, we funded $487 million of business purpose residential loans, of which $21 million of residential bridge loans and $26 million of single-family rental loans were sold to third parties. The remaining business purpose residential loans were transferred to our investment portfolio (residential bridge loans and certain single-family rental loans), or retained in our mortgage banking business (single-family rental loans) for future securitizations. Prior to the transfer of residential bridge loans to our investment portfolio, we recorded a net market valuation loss of $0.2 million on these loans through Mortgage banking activities, net on our consolidated statements of income (loss) for the three months ended March 31, 2020. Market valuation adjustments on our single-family rental loans are also recorded in Mortgage banking activities, net on our consolidated statements of income (loss) prior to their sale or transfer to our investment portfolio. Additionally, during the three months ended March 31, 2020, we recorded loan origination fee income associated with business purpose residential loans of $8 million through Mortgage banking activities, net on our consolidated statements of income (loss).

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

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

March 31, 2020		Single-Family Rental								Residential
(In Thousands)		Redwood				CAFL				Bridge				Total
Held-for-sale at fair value		$	415,333			—				$	—			$	415,333
Held-for-investment at fair value		—				2,248,665				799,744				3,048,409
Total Business Purpose Residential Loans		$	415,333			$	2,248,665			$	799,744			$	3,463,742

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

Business Purpose Residential Loans Held-for-Sale at Fair Value

Single-Family Rental Loans

At March 31, 2020, we owned 222 single-family rental loans held-for-sale with an aggregate unpaid principal balance of $440 million and a fair value of $415 million, as compared to 201 loans at December 31, 2019 with an aggregate unpaid principal balance of $322 million and a fair value of $332 million. At March 31, 2020, two of these loans with an aggregate unpaid principal balance and fair value of $1 million were greater than 90 days delinquent, of which one of these loans with an unpaid principal balance of $0.1 million was in foreclosure. At December 31, 2019, two of these loans with an aggregate unpaid principal balance and fair value of $2 million were greater than 90 days delinquent, of which one of these loans with an unpaid principal balance of $0.1 million was in foreclosure.

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During the three months ended March 31, 2020, we originated $260 million of single-family rental loans. During the three months ended March 31, 2020, $38 million of single-family rental loans were transferred to our investment portfolio and financed with FHLB borrowings, and the remaining loans were retained in our mortgage banking business. During this same period, we transferred $378 million of single-family rental loans from held-for-sale to held-for-investment associated with a CAFL securitization and sold $26 million to third parties. Additionally, at March 31, 2020, we transferred all held-for-investment single-family rental loans to held-for-sale. During the three months ended March 31, 2020 and 2019, we recorded a net market valuation gain of $10 million and a net market valuation gain of $1 million, respectively, on single-family rental loans held-for-sale at fair value through Mortgage banking activities, net on our consolidated statements of income (loss).

The outstanding single-family rental loans held-for-sale at March 31, 2020 were first lien, fixed-rate loans with original maturities of five, seven, or ten years. At March 31, 2020, the weighted average coupon of our single-family rental loans was 4.93% and the weighted average remaining loan term was seven years. At origination, the weighted average LTV ratio of these loans was 70% and the weighted average debt service coverage ratio ("DSCR") was 1.38 times.

Business Purpose Residential Loans Held-for-Investment at Fair Value

Single-Family Rental Loans at Redwood

At March 31, 2020, we did not own any single-family rental loan held-for-investment. At December 31, 2019, we owned 107 single-family rental loans held-for-investment with an aggregate unpaid principal balance of $231 million and a fair value of $238 million. At December 31, 2019, none of these loans were greater than 90 days delinquent or in foreclosure. During the three months ended March 31, 2020, we recorded a net market valuation loss of $23 million on single-family rental loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss). At March 31, 2020, we transferred all existing loans from held-for-investment to held-for-sale.

Single-Family Rental Loans at CAFL

In conjunction with our acquisition of CoreVest in the fourth quarter of 2019, we consolidated the single-family rental loans owned at certain CAFL securitization entities. At March 31, 2020, we consolidated 889 held-for-investment single-family rental loans at the consolidated CAFL entities, with an aggregate unpaid principal balance of $2.37 billion and a fair value of $2.25 billion, as compared to 783 loans at December 31, 2019 with an aggregate unpaid principal balance of $2.08 billion and a fair value of $2.19 billion. The outstanding single-family rental loans held-for-investment at CAFL at March 31, 2020 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years. At March 31, 2020, the weighted average coupon of our single-family rental loans was 5.60% and the weighted average remaining loan term was six years. At origination, the weighted average LTV ratio of these loans was 68% and the weighted average DSCR was 1.36 times. At March 31, 2020, 14 of these loans with an aggregate unpaid principal balance of $24 million were greater than 90 days delinquent and seven of these loans with an aggregate unpaid principal balance of $10 million were in foreclosure. At December 31, 2019, 18 of these loans with an aggregate unpaid principal balance of $29 million were greater than 90 days delinquent and five of these loans with an aggregate unpaid principal balance of $9 million were in foreclosure.

During the three months ended March 31, 2020, we recorded a net market valuation loss of $272 million on these loans through Investment fair value changes, net on our consolidated statements of income (loss). Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with CAFL securitizations. The net impact to our income statement associated with our retained economic investment in the CAFL securitization entities is presented in Note 5.

Residential Bridge Loans

At March 31, 2020, we owned 3,053 residential bridge loans held-for-investment with an aggregate unpaid principal balance of $833 million and a fair value of $800 million, as compared to 2,653 loans at December 31, 2019 with an aggregate unpaid principal balance of $743 million and a fair value of $745 million.

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As part of our credit risk management practices, our residential bridge loans are subject to individual risk assessment using an internal borrower and collateral quality evaluation framework. At March 31, 2020, 16 loans with an aggregate fair value of $32 million and an unpaid principal balance of $36 million were greater than 90 days delinquent, of which 11 of these loans with an aggregate fair value of $21 million and an unpaid principal balance of $24 million were in foreclosure. At December 31, 2019, 31 loans with an aggregate fair value of $12 million and an unpaid principal balance of $14 million were in foreclosure, of which 15 of these loans with an aggregate fair value of $7 million and an unpaid principal balance of $9 million were greater than 90 days delinquent. During the three months ended March 31, 2020, we transferred one loan with a fair value of $1 million to REO, which is included in Other assets on our consolidated balance sheets.

During the three months ended March 31, 2020, $206 million of newly originated residential bridge loans were transferred to our investment portfolio. During the three months ended March 31, 2020 and 2019, we recorded net market valuation losses of $39 million and $0.3 million, respectively, on residential bridge loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income (loss).

The outstanding residential bridge loans held-for-investment at March 31, 2020 were first lien, fixed-rate, interest-only loans with a weighted average coupon of 7.95% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was 728 and the weighted average LTV ratio of these loans was 69%.

At March 31, 2020, we had a $223 million commitment to fund residential bridge loans. See Note 16 for additional information on this commitment.

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

At March 31, 2020, we consolidated 28 held-for-investment multifamily loans, with an aggregate unpaid principal balance of $465 million and a fair value of $470 million, as compared to 279 loans at December 31, 2019 with an aggregate unpaid principal balance of $4.20 billion and a fair value of $4.41 billion. The outstanding multifamily loans held-for-investment at the Freddie Mac K-Series entities at March 31, 2020 were first-lien, fixed-rate loans that were originated in 2015 and had original loan terms of ten years and an original weighted average LTV ratio of 67%. At March 31, 2020, the weighted average coupon of these multifamily loans was 4.25% and the weighted average remaining loan term was five years. At both March 31, 2020 and December 31, 2019, none of these loans were greater than 90 days delinquent or in foreclosure.

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

Table 9.1 – Fair Values of Real Estate Securities by Type

(In Thousands)		March 31, 2020				December 31, 2019
Trading		$	164,219			$	860,540
Available-for-sale		129,243				239,334
Total Real Estate Securities		$	293,462			$	1,099,874

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

Trading Securities

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

Table 9.2 – Trading Securities by Position

(In Thousands)		March 31, 2020				December 31, 2019
Senior		$	39,559			$	150,067
Mezzanine		53,781				538,489
Subordinate		70,879				171,984
Total Trading Securities		$	164,219			$	860,540

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). At March 31, 2020 and December 31, 2019, our senior trading securities included $40 million and $64 million of interest-only securities, respectively, for which there is no principal balance, and the unpaid principal balance of our remaining senior trading securities was zero and $84 million, respectively. Our interest-only securities included $19 million and $36 million of A-IO-S securities at March 31, 2020 and December 31, 2019, respectively, which are securities we retained from certain of our Sequoia securitizations that represent certificated servicing strips. At March 31, 2020 and December 31, 2019, our senior trading securities included $13 million and $55 million of RPL securities, respectively.

At March 31, 2020 and December 31, 2019, our mezzanine trading securities had an unpaid principal balance of $69 million and $537 million, respectively. At March 31, 2020 and December 31, 2019, the fair value of our mezzanine securities was $54 million and $538 million, respectively, and included $28 million and $39 million of Sequoia securities, respectively, zero and $395 million of multifamily securities, respectively, and $26 million and $104 million of other third-party residential securities, respectively, including $5 million and $30 million of RPL securities, respectively.

At March 31, 2020 and December 31, 2019, our subordinate trading securities had an unpaid principal balance of $283 million and $302 million, respectively. At March 31, 2020 and December 31, 2019, the fair value of our subordinate securities was $71 million and $172 million, respectively, and included $20 million and $90 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, $47 million and $82 million, respectively, of other third-party residential securities, including $44 million and $76 million of RPL securities, respectively.

During the three months ended March 31, 2020 and 2019, we acquired $56 million and $154 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $619 million and $29 million, respectively, of such securities. During the three months ended March 31, 2020 and 2019, we recorded a net market valuation loss of $263 million and a net market valuation gain of $22 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income (loss).

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AFS Securities

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

Table 9.3 – Available-for-Sale Securities by Position

(In Thousands)		March 31, 2020				December 31, 2019
Senior		$	—			$	25,792
Mezzanine		—				13,687
Subordinate		129,243				199,855
Total AFS Securities		$	129,243			$	239,334

At March 31, 2020 and December 31, 2019, our available-for-sale securities were comprised of $106 million and $230 million of residential mortgage-backed securities, respectively, and $23 million and $9 million of multifamily mortgage-backed securities, respectively. During the three months ended March 31, 2020, we purchased $31 million and $5 million of AFS securities, respectively, and sold $46 million and $42 million of AFS securities, respectively, which resulted in net realized gains of $4 million and $7 million, respectively.

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

At March 31, 2020, we had $20 million of AFS securities with contractual maturities less than five years, $2 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.

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

Table 9.4 – Carrying Value of AFS Securities

March 31, 2020
(In Thousands)		Senior				Mezzanine				Subordinate				Total
Principal balance		$	—			$	—			$	280,024			$	280,024
Credit reserve		—				—				(37,717		)		(37,717		)
Unamortized discount, net		—				—				(109,538		)		(109,538		)
Amortized cost		—				—				132,769				132,769
Gross unrealized gains		—				—				22,315				22,315
Gross unrealized losses		—				—				(24,316		)		(24,316		)
Allowance for credit losses		—				—				(1,525		)		(1,525		)
Carrying Value		$	—			$	—			$	129,243			$	129,243

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

The following table presents the changes for the three months ended March 31, 2020, in unamortized discount and designated credit reserves on AFS securities.

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

		Three Months Ended March 31, 2020
		Credit Reserve				Unamortized Discount, Net
(In Thousands)
Beginning balance		$	32,940			$	124,255
Amortization of net discount		—				(1,754		)
Realized credit losses		(519		)		—
Acquisitions		5,184				777
Sales, calls, other		(206		)		(13,422		)
(Release of) transfers to credit reserves, net		318				(318		)
Ending Balance		$	37,717			$	109,538

AFS Securities with Unrealized Losses

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

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

		Less Than 12 Consecutive Months												12 Consecutive Months or Longer
		Amortized Cost				Unrealized Losses				Fair Value				Amortized Cost				Unrealized Losses				Fair Value
(In Thousands)
March 31, 2020		$	97,730			$	(24,316	)		$	71,889			$	—			$	—			$	—
December 31, 2019		—				—				—				5,830				(29		)		5,801

At March 31, 2020, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 100 AFS securities, of which 57 were in an unrealized loss position and zero were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2019, our consolidated balance sheet included 107 AFS securities, of which one was in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer.

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Evaluating AFS Securities for Credit Losses

Gross unrealized losses on our AFS securities were $24 million at March 31, 2020. Pursuant to our adoption of ASU 2016-13, "Financial Instruments - Credit Losses" in the first quarter of 2020, we evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At March 31, 2020, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

At March 31, 2020, our allowance for credit losses related to our AFS securities was $2 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at March 31, 2020.

Table 9.7 – Significant Credit Quality Indicators

March 31, 2020		Subordinate Securities
Prepayment rate		12%
Default rate		0.5%
Loss severity		20%

The following table details the activity related to the allowance for credit losses for AFS securities held at March 31, 2020.

Table 9.8 – Rollforward of Allowance for Credit Losses

		Three Months Ended
(In Thousands)		March 31, 2020
Beginning balance allowance for credit losses		$	—
Transition impact from adoption of new standard		—
Additions to allowance for credit losses on securities for which credit losses were not previously recorded		1,525
Allowance on purchased financial assets with credit deterioration		—
Reduction for securities sold during the period		—
Write-offs charged against allowance		—
Recoveries of amounts previously written off		—
Ending balance of allowance for credit losses		$	1,525

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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 months ended March 31, 2020 and 2019.

Table 9.9 – Gross Realized Gains and Losses on AFS Securities

		Three Months Ended March 31,
(In Thousands)		2020				2019
Gross realized gains - sales		$	7,705			$	6,660
Gross realized gains - calls		—				4,026
Gross realized losses - sales		(3,853		)		—
Total Realized Gains on Sales and Calls of AFS Securities, net		$	3,852			$	10,686

Other investments at March 31, 2020 and December 31, 2019 are summarized in the following table.

Table 10.1 – Components of Other Investments

(In Thousands)		March 31, 2020				December 31, 2019
Servicer advance investments		$	298,946			$	169,204
Shared home appreciation options		40,642				45,085
Excess MSRs		31,788				31,814
Mortgage servicing rights		23,616				42,224
Investment in multifamily loan fund		15,731				39,802
Other		35,497				30,001
Total Other Investments		$	446,220			$	358,130

Servicer advance investments

In 2018, we and a third-party co-investor, through two partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor (Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding the transaction). At March 31, 2020, we had funded $90 million of total capital to the SA Buyers (see Note 16 for additional detail).

At March 31, 2020, our servicer advance investments had a carrying value of $299 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $10.25 billion. The outstanding servicer advance receivables associated with this investment were $283 million at March 31, 2020, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at March 31, 2020 and December 31, 2019:

Table 10.2 – Components of Servicer Advance Receivables

(In Thousands)		March 31, 2020				December 31, 2019
Principal and interest advances		$	113,612			$	15,081
Escrow advances (taxes and insurance advances)		117,876				96,732
Corporate advances		51,255				39,769
Total Servicer Advance Receivables		$	282,743			$	151,582

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We account for our servicer advance investments at fair value and during the three months ended March 31, 2020 and 2019, we recorded $3 million of interest income associated with these investments for each of these periods, and recorded a net market valuation loss of $6 million and a net market valuation gain of $1 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).

Mortgage Servicing Rights

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

At March 31, 2020 and December 31, 2019, our MSRs had a fair value of $24 million and $42 million, respectively, and were associated with loans with an aggregate principal balance of $4.10 billion and $4.35 billion, respectively.

The following table presents activity for MSRs for the three months ended March 31, 2020 and 2019.

Table 10.3 – Activity for MSRs

		Three Months Ended March 31,
(In Thousands)		2020				2019
Balance at beginning of period		$	42,224			$	60,281
Additions		—				104
Changes in fair value due to:
Changes in assumptions (1)		(16,746		)		(3,586		)
Other changes (2)		(1,862		)		(1,515		)
Balance at End of Period		$	23,616			$	55,284

(1)	Primarily reflects changes in prepayment assumptions due to changes in market interest rates.

(2)	Represents changes due to the realization of expected cash flows.

The following table presents the components of our MSR income (loss) for the three months ended March 31, 2020 and 2019.

Table 10.4 – Components of MSR Income (Loss), net

		Three Months Ended March 31,
(In Thousands)		2020				2019
Servicing income		$	3,311			$	3,610
Cost of sub-servicer		(478		)		(503		)
Net servicing fee income		2,833				3,107
Market valuation changes of MSRs		(18,608		)		(5,101		)
Market valuation changes of associated derivatives		13,966				2,251
MSR Income (Loss), Net (1)		$	(1,809	)		$	257

(1)	MSR income, net is included in Other income on our consolidated statements of income (loss).

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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 months ended March 31, 2020 and 2019, we recognized $3 million and $2 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $9 million and $0.4 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss).

Investment in Multifamily Loan Fund

In January 2019, we invested in a limited partnership created to acquire floating rate, light-renovation multifamily loans from Freddie Mac. We committed to fund an aggregate of $78 million to the partnership, and have funded approximately $54 million at March 31, 2020. During the three months ended March 31, 2020, we acquired $28 million of securities from the partnership's first securitization transaction. At March 31, 2020, the carrying amount of our investment in the partnership was $16 million. During the three months ended March 31, 2020, we recorded $1 million of income associated with this investment in Other income on our consolidated statements of income (loss).

Shared Home Appreciation Options

In the third quarter of 2019, we entered into a flow purchase agreement to acquire shared home appreciation options. At March 31, 2020, we had acquired $47 million of shared home appreciation options under this flow purchase agreement and had an outstanding commitment to fund up to an additional $3 million under this agreement. We account for these investments under the fair value option and during the three months ended March 31, 2020, we recorded a net market valuation loss of $8 million related to these assets through Investment fair value changes, net on our consolidated statements of income (loss).

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

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

		March 31, 2020								December 31, 2019
		Fair Value				Notional Amount				Fair Value				Notional Amount
(In Thousands)
Assets - Risk Management Derivatives
Interest rate swaps		$	—			$	—			$	17,095			$	1,399,000
TBAs		90,717				4,490,000				5,755				2,445,000
Interest rate futures		—				—				777				213,700
Swaptions		—				—				1,925				1,065,000
Assets - Other Derivatives
Loan purchase and interest rate lock commitments		—				—				10,149				1,537,162
Total Assets		$	90,717			$	4,490,000			$	35,701			$	6,659,862
Liabilities - Cash Flow Hedges
Interest rate swaps		$	—			$	—			$	(51,530	)		$	139,500
Liabilities - Risk Management Derivatives
Interest rate swaps		—				—				(97,235		)		2,314,300
TBAs		(110,648		)		4,490,000				(13,359		)		4,160,000
Interest rate futures		—				—				(10		)		12,300
Liabilities - Other Derivatives
Loan purchase commitments		(3,966		)		226,372				(1,290		)		303,394
Total Liabilities		$	(114,614	)		$	4,716,372			$	(163,424	)		$	6,929,494
Total Derivative Financial Instruments, Net		$	(23,897	)		$	9,206,372			$	(127,723	)		$	13,589,356

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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 March 31, 2020, we were party to TBA agreements sold with an aggregate notional amount of $8.98 billion. At December 31, 2019, we were party to swaps and swaptions with an aggregate notional amount of $4.78 billion, TBA agreements sold with an aggregate notional amount of $6.61 billion, and interest rate futures contracts with an aggregate notional amount of $226 million.

During the three months ended March 31, 2020 and 2019, risk management derivatives had net market valuation losses of $98 million and $45 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income on our consolidated statements of income (loss). During the three months ended March 31, 2020, we settled substantially all of our outstanding derivative contracts as we determined that they were no longer effectively managing the risks associated with certain assets and liabilities.

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For the three months ended March 31, 2020 and 2019, LPCs and IRLCs had net market valuation gains of $18 million and $11 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).

Derivatives Designated as Cash Flow Hedges

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

For the three months ended March 31, 2020 and 2019, changes in the values of designated cash flow hedges were negative $33 million and negative $6 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. During the three months ended March 31, 2020, we terminated and settled all of our outstanding derivatives that had been designated as cash flow hedges with a payment of $84 million. For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $84 million and $51 million at March 31, 2020 and December 31, 2019, respectively. We will amortize this loss into interest expense over the remaining term of the trust preferred securities and subordinated notes.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three months ended March 31, 2020 and 2019.

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

		Three Months Ended March 31,
(In Thousands)		2020				2019
Net interest expense on cash flows hedges		$	(860	)		$	(637	)
Realized net losses reclassified from other comprehensive income		(79		)		—
Total Interest Expense		$	(939	)		$	(637	)

Derivative Counterparty Credit Risk

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

At March 31, 2020, we were in compliance with our derivative counterparty ISDA agreements.

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Other assets at March 31, 2020 and December 31, 2019 are summarized in the following table.

Table 12.1 – Components of Other Assets

(In Thousands)		March 31, 2020				December 31, 2019
Margin receivable		$	93,745			$	209,776
Investment receivable		58,541				23,330
FHLBC stock		43,393				43,393
Pledged collateral		33,191				32,945
Right-of-use asset		16,375				11,866
REO		14,366				9,462
Fixed assets and leasehold improvements (1)		4,966				4,901
Other		30,776				12,590
Total Other Assets		$	295,353			$	348,263

(1)	Fixed assets and leasehold improvements had a basis of $12 million and accumulated depreciation of $7 million at March 31, 2020.

Accrued expenses and other liabilities at March 31, 2020 and December 31, 2019 are summarized in the following table.

Table 12.2 – Components of Accrued Expenses and Other Liabilities

(In Thousands)		March 31, 2020				December 31, 2019
Dividends payable		$	37,800			$	—
Lease liability		18,072				13,443
Contingent consideration		14,819				28,484
Payable to minority partner		14,804				13,189
Guarantee obligations		13,395				14,009
Accrued compensation		9,582				33,888
Residential bridge loan holdbacks		9,066				10,682
Deferred tax liabilities		5,152				5,152
Residential loan and MSR repurchase reserve		4,460				4,268
Other		36,449				23,123
Total Accrued Expenses and Other Liabilities		$	163,599			$	146,238

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

Margin Receivable and Payable

Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral. Through March 31, 2020, we had met all margin calls due.

Dividends Payable

Dividends payable of $38 million at March 31, 2020 represent cash dividends on our common stock and certain equity awards for the first quarter of 2020, which were paid on May 8, 2020 to shareholders of record on March 16, 2020.

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REO

The carrying value of REO at March 31, 2020 was $14 million, which included $1 million of REO from our Legacy Sequoia entities, $7 million from our residential bridge loan portfolio, $1 million from our consolidated Freddie Mac SLST entities, and $5 million from CAFL entities. At March 31, 2020, there were five REO assets at our Legacy Sequoia entities, four residential bridge loan REO assets, nine REO assets at our Freddie Mac SLST entities, and two REO assets at our CAFL entities recorded on our consolidated balance sheets. During the three months ended March 31, 2020, transfers into REO included $1 million from Legacy Sequoia entities, a $1 million residential bridge loan, $1 million from Freddie Mac SLST entities, and $4 million from CAFL entities. During the three months ended March 31, 2020, there were REO liquidations of $1 million, resulting in $0.5 million of unrealized losses which were recorded in Investment fair value changes, net, on our consolidated statements of income (loss). At December 31, 2019, there were four REO assets at our Legacy Sequoia entities, four residential bridge loan REO assets, three REO assets at our Freddie Mac SLST entities, and two REO assets at our CAFL entities recorded on our consolidated balance sheets.

We enter into repurchase agreements, bank warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and investment banking firms. At March 31, 2020, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants.

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

Table 13.1 – Short-Term Debt

		March 31, 2020
(Dollars in Thousands)		Number of Facilities			Outstanding Balance				Limit				Weighted Average Interest Rate			Maturity		Weighted Average Days Until Maturity
Facilities
Residential loan warehouse (1)		4			$	841,186			$	1,525,000			2.38	%		10/2020-3/2021		312
Business purpose residential loan warehouse (2)		6			756,384				1,410,000				3.51	%		12/2020-5/2022		404
Real estate securities repo (1)		7			485,147				—				2.77	%		4/2020-6/2020		32
Total Short-Term Debt Facilities		17			2,082,717
Servicer advance financing		1			258,931				400,000				2.57	%		11/2020		244
Total Short-Term Debt					$	2,341,648

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		December 31, 2019
(Dollars in Thousands)		Number of Facilities			Outstanding Balance				Limit				Weighted Average Interest Rate			Maturity		Weighted Average Days Until Maturity
Facilities
Residential loan warehouse (1)		4			$	185,894			$	1,425,000			3.23	%		1/2020-10/2020		69
Business purpose residential loan warehouse (2)		8			814,118				1,475,000				4.11	%		12/2020-5/2022		489
Real estate securities repo (1)		10			1,176,579				—				2.94	%		1/2020-3/2020		23
Total Short-Term Debt Facilities		22			2,176,591
Servicer advance financing		1			152,554				400,000				3.56	%		11/2020		335
Total Short-Term Debt					$	2,329,145

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

(2)	Due to the revolving nature of the borrowings under these facilities, we have classified these facilities as short-term debt at March 31, 2020. Borrowings under these facilities will be repaid as the underlying loans mature or are sold to third parties or transferred to securitizations.

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

Table 13.2 – Collateral for Short-Term Debt

(In Thousands)		March 31, 2020				December 31, 2019
Collateral Type
Held-for-sale residential loans		$	881,607			$	201,949
Business purpose residential loans		908,712				988,179
Real estate securities
On balance sheet		78,909				618,881
Sequoia Choice securitizations (1)		51,026				111,341
Freddie Mac SLST securitizations (1)		307,175				381,640
Freddie Mac K-Series securitizations (1)		22,785				252,284
CAFL securitizations (1)		—				127,840
Total real estate securities owned		459,895				1,491,986
Other assets (2)		106,467				16,252
Total Collateral for Short-Term Debt		$	2,356,681			$	2,698,366

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

(2)	In addition to securities that serve as collateral for our securities repo borrowings, we had posted $74 million of cash collateral as margin with our borrowing counterparties and had trade receivables from third parties of $32 million related to securities sold in March 2020, which settled in April 2020.

For the three months ended March 31, 2020 and 2019, the average balances of our short-term debt facilities were $1.74 billion and $1.61 billion, respectively. At March 31, 2020 and December 31, 2019, accrued interest payable on our short-term debt facilities was $4 million and $6 million, respectively.

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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 March 31, 2020, the fair value of servicer advances, cash and restricted cash collateralizing the securitization financing was $297 million. At March 31, 2020, the accrued interest payable balance on this financing was $0.2 million and the unamortized capitalized commitment costs were $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 $3 million at March 31, 2020. At both March 31, 2020 and December 31, 2019, we had no outstanding borrowings on this facility.

Remaining Maturities of Short-Term Debt

The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt as well as our convertible notes at March 31, 2020.

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

		March 31, 2020
(In Thousands)		Within 30 days				31 to 90 days				Over 90 days				Total
Collateral Type
Held-for-sale residential loans		$	—			$	—			$	841,186			$	841,186
Business purpose residential loans		—				—				756,384				756,384
Real estate securities		260,035				225,112				—				485,147
Total Secured Short-Term Debt		260,035				225,112				1,597,570				2,082,717
Servicer advance financing		—				—				258,931				258,931
Total Short-Term Debt		$	260,035			$	225,112			$	1,856,501			$	2,341,648

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

Table 14.1 – Asset-Backed Securities Issued

March 31, 2020		Legacy Sequoia				Sequoia Choice				Freddie Mac SLST				Freddie Mac K-Series				CAFL				Total
(Dollars in Thousands)
Certificates with principal balance		$	398,352			$	1,776,396			$	1,800,218			$	418,212			$	2,141,434			$	6,534,612
Interest-only certificates		1,356				10,862				24,782				14,383				93,801				145,184
Market valuation adjustments		(87,507		)		2,836				—				15,104				(148,365		)		(217,932		)
ABS Issued, Net		$	312,201			$	1,790,094			$	1,825,000			$	447,699			$	2,086,870			$	6,461,864
Range of weighted average interest rates, by series		1.81% to 2.91%				4.37% to 5.04%				3.50		%		3.53		%		3.22% to 5.22%
Stated maturities		2024 - 2036				2047 - 2049				2028 - 2029				2025				2022 - 2048
Number of series		20				9				2				1				11

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

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 March 31, 2020, the majority of the ABS issued and outstanding had contractual maturities beyond five years. See Note 4 for detail on the carrying value components of the collateral for ABS issued and outstanding. The following table summarizes the accrued interest payable on ABS issued at March 31, 2020 and December 31, 2019. Interest due on consolidated ABS issued is payable monthly.

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

(In Thousands)		March 31, 2020				December 31, 2019
Legacy Sequoia		$	351			$	395
Sequoia Choice		6,920				7,732
Freddie Mac SLST		5,251				5,374
Freddie Mac K-Series		1,230				12,887
CAFL		8,078				7,298
Total Accrued Interest Payable on ABS Issued		$	21,830			$	33,686

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

FHLBC Borrowings

At March 31, 2020, $1.37 billion of advances were outstanding under our FHLBC borrowing agreement, with a weighted average interest rate of 1.31% and a weighted average maturity of approximately five years. At December 31, 2019, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 1.88% and a weighted average maturity of six years. During the three months ended March 31, 2020, we repaid $632 million of our FHLBC borrowings. At March 31, 2020, total advances under this agreement were secured by residential mortgage loans with a fair value of $1.43 billion, single-family rental loans with a fair value of $248 million, and $1 million of restricted cash. This agreement also requires our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. At March 31, 2020, our subsidiary held $43 million of FHLBC stock that is included in Other assets in our consolidated balance sheets.

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The following table presents maturities of our FHLBC borrowings by year at March 31, 2020.

Table 15.1 – Maturities of FHLBC Borrowings by Year

(In Thousands)		March 31, 2020
2024		$	470,171
2025		481,686
2026		415,824
Total FHLBC Borrowings		$	1,367,681

Subordinate Securities Financing Facilities

In 2019, a subsidiary of Redwood entered into a repurchase agreement providing non-mark-to-market recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia Choice securitizations. In the first quarter of 2020, a subsidiary of Redwood entered into a second repurchase agreement with similar terms to provide non mark-to-market recourse debt financing of certain securities retained form our consolidated CAFL securitizations. The financing is fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through February 2023. The financing facility may be terminated, at our option, in February 2023, and has a final maturity in February 2025, provided that the interest rate on amounts outstanding under the facility increases between March 2023 and February 2025.

At March 31, 2020, we had borrowings under these facilities totaling $287 million, net of $2 million of deferred issuance costs, for a carrying value of $286 million. At March 31, 2020, the fair value of real estate securities pledged as collateral under these long-term debt facilities was $258 million, which included $155 million of Sequoia securities and securities retained from our Sequoia Choice securitizations and $103 million of securities retained from our consolidated CAFL securitizations, respectively.

Secured Revolving Debt Facility

In the first quarter of 2020, a subsidiary of Redwood entered into a secured revolving debt facility agreement collateralized by MSRs and certificated mortgage servicing rights. Borrowings under this facility will accrue interest at per annum rates equal to one-month LIBOR plus 2.75% through January 2021, with an increase in rate between February 2021 and the maturity of the facility in January 2022. This facility has an aggregate maximum borrowing capacity of $50 million. Borrowings under this facility totaled $30 million at March 31, 2020. At March 31, 2020, $49 million of MSRs and certificated servicing rights were pledged as collateral under this facility.

Convertible Notes

At March 31, 2020, we had $201 million principal amount outstanding of 5.75% exchangeable senior notes due 2025. At March 31, 2020, the accrued interest payable balance on this debt was $6 million and the unamortized deferred issuance costs were $6 million.

At March 31, 2020 we had $200 million principal amount outstanding of 5.625% convertible senior notes due 2024. At March 31, 2020, the accrued interest payable on this debt was $2 million, the unamortized deferred issuance costs were $4 million, and the debt discount was $1 million.

At March 31, 2020, we had $245 million principal amount outstanding of 4.75% convertible senior notes due 2023. At March 31, 2020, the accrued interest payable balance on this debt was $1 million and the unamortized deferred issuance costs were $4 million.

Trust Preferred Securities and Subordinated Notes

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Lease Commitments

At March 31, 2020, we were obligated under seven non-cancelable operating leases with expiration dates through 2031 for $22 million of cumulative lease payments. Our operating lease expense was $1 million for both three-month periods ended March 31, 2020 and 2019.

The following table presents our future lease commitments at March 31, 2020.

Table 16.1 – Future Lease Commitments by Year

(In Thousands)		March 31, 2020
2020 (9 months)		$	2,776
2021		3,104
2022		2,597
2023		2,087
2024		2,095
2025		9,214
Total Lease Commitments		21,873
Less: Imputed interest		(3,801		)
Lease Liability		$	18,072

During the three months ended March 31, 2020, we entered into three new office leases and determined that each of these leases qualified as operating leases. At March 31, 2020, our lease liability was $18 million, which was a component of Accrued expenses and other liabilities, and our right-of-use asset was $16 million, which was 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 March 31, 2020, the weighted-average remaining lease term and weighted-average discount rate for our leases was 8 years and 4.9%, respectively.

Commitment to Fund Residential Bridge Loans

As of March 31, 2020, we had commitments to fund up to $223 million of additional advances on existing residential bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the customer and other terms regarding advances that must be met before we fund the commitment. At March 31, 2020, we recorded a $4 million derivative liability related to these commitments to fund construction advances (see Note 7 for additional detail). We may also advance funds related to loans sold under a separate loan sale agreement that are generally repaid immediately by the loan purchaser and do not generally expose us to loss. The outstanding commitments related to these loans that we may temporarily fund totaled approximately $44 million at March 31, 2020.

Commitment to Fund Partnerships

In the fourth quarter of 2018, we invested in two 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.

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In the first quarter of 2019, we invested in a partnership created to acquire floating rate, light-renovation multifamily loans from Freddie Mac (see Note 10 for additional detail). At March 31, 2020, we had an outstanding commitment to fund an additional $24 million to the partnership. Additionally, in connection with this transaction, we have made a guarantee to Freddie Mac in the event of losses incurred on the loans that exceed the equity available in the partnership to absorb such losses. At March 31, 2020, the carrying value of this guarantee was $0.1 million. We believe the likelihood of performance under the guarantee is remote. Our maximum loss exposure from this guarantee arrangement is $135 million less the value of securities collateralizing our partner's portion of the partnership's guarantee obligations.

5 Arches Contingent Consideration

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

Commitment to Fund Shared Home Appreciation Options

In the third quarter of 2019, we entered into a flow purchase agreement to acquire shared home appreciation options. The counterparty purchases an option to buy a fractional interest in a homeowner's ownership interest in residential property, and subsequently the counterparty sells the option contract to us. Pursuant to the terms of the option contract, we share in both home price appreciation and depreciation. At March 31, 2020, we had acquired $47 million of shared home appreciation options under this agreement, which are included in Other investments on our consolidated balance sheets. At March 31, 2020, we had an outstanding commitment to fund up to an additional $3 million under this agreement.

Loss Contingencies — Risk-Sharing

During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At March 31, 2020, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was fully collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At March 31, 2020, we had not incurred any losses under these arrangements. For the three months ended March 31, 2020 and 2019, other income related to these arrangements was $1 million for both periods, and net market valuation losses related to these investments were $0.5 million and $0.1 million, respectively.

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at March 31, 2020, the loans had an unpaid principal balance of $1.47 billion and a weighted average FICO score of 759 (at origination) and LTV ratio of 76% (at origination). At March 31, 2020, $6 million of the loans were 90 days or more delinquent, of which $1 million were in foreclosure. At March 31, 2020, the carrying value of our guarantee obligation was $13 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to Redwood Trust, Inc. or its affiliates. At March 31, 2020 and December 31, 2019, assets of such SPEs totaled $47 million and $48 million, respectively, and liabilities of such SPEs totaled $13 million and $14 million, respectively.

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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.

At both March 31, 2020 and December 31, 2019, our repurchase reserve associated with our residential loans and MSRs was $4 million and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. We received three and four repurchase requests during the three months ended March 31, 2020 and 2019, respectively, and did not repurchase any loans during either of these periods. During the three months ended March 31, 2020 and 2019, we recorded repurchase provisions of $0.2 million and $0.1 million, respectively, that were recorded in Mortgage banking activities, net and Other income on our consolidated statements of income (loss).

Loss Contingencies — Litigation

There is no significant update regarding the litigation matters described in Note 16 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Loss Contingencies - Litigation.”

In addition to those matters, in connection with the impact of the effects of the pandemic on the non-Agency mortgage finance market and on our business and operations, we became more selective in making residential loan purchases. These actions have impacted our relationships with certain of the counterparties that have regularly sold residential mortgage loans to us and, in some cases, these counterparties have alleged that we have breached perceived obligations to them, and requested or demanded that we purchase loans from them and/or compensate them for perceived damages resulting from our decision not to purchase certain loans from them. One such counterparty has filed a breach of contract lawsuit against us alleging that it has suffered in excess of $2 million of losses as a result of our alleged failure to purchase residential mortgage loans from it. We may become subject to additional litigation and claims from these counterparties or other counterparties that are similarly situated (“Residential Loan Seller Claims”), which could have a material adverse effect on our reputation, business, financial condition, results of operations and cash flows.

We believe that any such Residential Loan Seller Claims are without merit or subject to defenses and we intend to defend vigorously any such actions to which we become a party. In the ordinary course of evaluating and responding to any request, demand, claim or litigation, including in the case of certain of the Residential Loan Seller Claims, we have engaged and may engage in formal or informal resolution or settlement communications with certain counterparties. While we have not engaged in any formal or informal resolution or settlement communications with respect to Residential Loan Seller Claims that have caused us to determine that a material loss from these matters is probable, communications, including demands, we have received from certain counterparties since mid-March 2020 relating to certain Residential Loan Seller Claims, are a factor that has contributed to our concluding that we can estimate a range of reasonably possible losses with respect to Residential Loan Seller Claims we have received. Accordingly, with respect to Residential Loan Seller Claims we have received, we estimate that the aggregate range of reasonably possible losses with respect to such Residential Loan Seller Claims is between zero and $10 million. However, future developments (including receipt of additional information and documents relating to these matters, new or additional resolution or settlement communications relating to these matters, resolutions of similar claims against other industry participants in similar circumstances, or receipt of additional Residential Loan Seller Claims) could result in our concluding in the future to establish loss contingency reserves or modify our aggregate range of reasonably possible losses with respect to these matters. Our actual losses, and any loss contingency reserves we may establish in the future, relating to Residential Loan Seller Claims may be materially higher than the aggregate range of reasonably possible losses we have estimated above, including in the event that any of these matters proceed to trial and result in a judgment against us. We cannot be certain that any of these matters will be resolved through a resolution or settlement prior to trial and we cannot be certain that the resolution of these matters, whether through trial, settlement, or otherwise, will not have a material adverse effect on our financial condition or results of operations in any future period.

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In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due. At March 31, 2020, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described in our Annual Report on Form 10-K for the year ended December 31, 2019 was $2 million. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review.

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

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The following table provides a summary of changes to accumulated other comprehensive income by component for the three months ended March 31, 2020 and 2019. During the three months ended March 31, 2020, the net unrealized losses recognized on our Level 3 AFS securities which we own as of March 31, 2020 totaled $81 million.

Table 17.1 – Changes in Accumulated Other Comprehensive Income by Component

		Three Months Ended March 31, 2020								Three Months Ended March 31, 2019
(In Thousands)		Net Unrealized Gains on Available-for-Sale Securities				Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges				Net Unrealized Gains on Available-for-Sale Securities				Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period		$	92,452			$	(50,939	)		$	95,342			$	(34,045	)
Other comprehensive income (loss) before reclassifications (1)		(80,519		)		(32,806		)		6,718				(5,838		)
Amounts reclassified from other accumulated comprehensive income		(13,798		)		79				(9,493		)		—
Net current-period other comprehensive income (loss)		(94,317		)		(32,727		)		(2,775		)		(5,838		)
Balance at End of Period		$	(1,865	)		$	(83,666	)		$	92,567			$	(39,883	)

The following table provides a summary of reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2020 and 2019.

Table 17.2 – Reclassifications Out of Accumulated Other Comprehensive Income

				Amount Reclassified From Accumulated Other Comprehensive Income
		Affected Line Item in the		Three Months Ended March 31,
(In Thousands)		Income Statement		2020				2019
Net Realized (Gain) Loss on AFS Securities
Credit loss expense on AFS securities		Investment fair value changes, net		$	1,525			$	—
Gain on sale of AFS securities		Realized gains, net		(15,323		)		(9,493		)
				$	(13,798	)		$	(9,493	)

Issuance of Common Stock

In 2018, we established a program to sell up to an aggregate of $150 million of common stock from time to time in at-the-market ("ATM") offerings. During the three months ended March 31, 2020, we issued 129,500 common shares for net proceeds of approximately $2 million through ATM offerings. At March 31, 2020, approximately $85 million remained outstanding for future offerings under this program.

Direct Stock Purchase and Dividend Reinvestment Plan

During the three months ended March 31, 2020, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. During the three months ended March 31, 2019, we issued 399,838 shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan, resulting in net proceeds of approximately $6 million.

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(Loss) Earnings per Common Share

The following table provides the basic and diluted (loss) earnings per common share computations for the three months ended March 31, 2020 and 2019.

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

		Three Months Ended March 31,
(In Thousands, except Share Data)		2020				2019
Basic (Loss) Earnings per Common Share:
Net (loss) income attributable to Redwood		$	(943,398	)		$	54,464
Less: Dividends and undistributed earnings allocated to participating securities		(1,209		)		(1,539		)
Net (loss) income allocated to common shareholders		$	(944,607	)		$	52,925
Basic weighted average common shares outstanding		114,076,568				92,685,350
Basic (Loss) Earnings per Common Share		$	(8.28	)		$	0.57
Diluted (Loss) Earnings per Common Share:
Net (loss) income attributable to Redwood		$	(943,398	)		$	54,464
Less: Dividends and undistributed earnings allocated to participating securities		(1,209		)		(1,539		)
Add back: Interest expense on convertible notes for the period, net of tax		—				8,687
Net (loss) income allocated to common shareholders		$	(944,607	)		$	61,612
Weighted average common shares outstanding		114,076,568				92,685,350
Net effect of dilutive equity awards		—				150,170
Net effect of assumed convertible notes conversion to common shares		—				33,442,640
Diluted weighted average common shares outstanding		114,076,568				126,278,160
Diluted (Loss) Earnings per Common Share		$	(8.28	)		$	0.49

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

During the three months ended March 31, 2019, our convertible notes were determined to be dilutive and were included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money) are included in the denominator.

For the three months ended March 31, 2020, 35,435,019 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 months ended March 31, 2020 and 2019, the number of outstanding equity awards that were antidilutive totaled 21,249 and 7,376, respectively.

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Stock Repurchases

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. At March 31, 2020, $100 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.

At March 31, 2020 and December 31, 2019, 3,326,806 and 3,637,480 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan and purchases under the Employee Stock Purchase Plan totaled $32 million at March 31, 2020, as shown in the following table.

Table 18.1 – Activities of Equity Compensation Costs by Award Type

		Three Months Ended March 31, 2020
(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		$	1,990			$	3,534			$	17,858			$	8,946			$	—			$	32,328
Equity grants		5				3,352				5,480				—				160				8,997
Performance-based valuation adjustment		—				—				—				(7,352		)		—				(7,352		)
Equity grant forfeitures		(24		)		(114		)		—				—				—				(138		)
Equity compensation expense		(344		)		(347		)		(1,993		)		729				(40		)		(1,995		)
Unrecognized Compensation Cost at End of Period		$	1,627			$	6,425			$	21,345			$	2,323			$	120			$	31,840

At March 31, 2020, the weighted average amortization period remaining for all of our equity awards was two years.

Restricted Stock Awards ("RSAs")

At March 31, 2020 and December 31, 2019, there were 113,836 and 216,470 shares, respectively, of RSAs outstanding. Restrictions on these shares lapse through 2022. During the three months ended March 31, 2020, there were no RSAs granted, restrictions on 101,063 RSAs lapsed and those shares were distributed, and 1,571 RSAs were forfeited.

Restricted Stock Units ("RSUs")

At March 31, 2020 and December 31, 2019, there were 409,311 and 275,173 shares, respectively, of RSUs outstanding. Restrictions on these shares lapse through 2024. During the three months ended March 31, 2020, there were 190,624 RSUs granted, 49,385 RSUs distributed, and 7,101 RSUs forfeited.

Deferred Stock Units (“DSUs”)

At March 31, 2020 and December 31, 2019, there were 2,721,349 and 2,630,805 DSUs, respectively, outstanding of which 1,218,304 and 1,286,063, respectively, had vested. During the three months ended March 31, 2020, there were 310,473 DSUs granted, 219,929 DSUs distributed, and no DSUs forfeited. Unvested DSUs at March 31, 2020 vest through 2024.

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Performance Stock Units (“PSUs”)

At both March 31, 2020 and December 31, 2019, the target number of PSUs that were unvested was 839,070. Vesting for all PSUs will generally occur at the end of three years from their grant date based on various TSR performance calculations, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2019. During the three months ended March 31, 2020, we adjusted our vesting estimate of certain PSUs to reflect updated assumptions regarding performance-based vesting and recorded a reversal of $1 million of stock-based compensation expense recorded in prior quarters.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of 600,000 shares of common stock to be purchased in aggregate for all employees. As of March 31, 2020 and December 31, 2019, 452,021 and 430,772 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at March 31, 2020.

The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income (loss) for the three months ended March 31, 2020 and 2019.

Table 19.1 – Mortgage Banking Activities

		Three Months Ended March 31,
(In Thousands)		2020				2019
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)		$	7,955			$	14,844
Risk management derivatives (2)		(31,294		)		(4,138		)
Other income, net (3)		258				121
Total residential mortgage banking activities, net		(23,081		)		10,827
Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
Single-family rental loans, at fair value (1)		11,808				1,744
Risk management derivatives (2)		(21,538		)		(846		)
Residential bridge loans, at fair value		(3,934		)		86
Other income, net (4)		8,334				498
Total business purpose mortgage banking activities, net		(5,330		)		1,482
Mortgage Banking Activities, Net		$	(28,411	)		$	12,309

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

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

(3)	Amounts in this line item include other fee income from loan acquisitions and the provision for repurchases expense, presented net.

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

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The following table presents the components of Investment fair value changes, net, recorded in our consolidated statements of income (loss) for the three months ended March 31, 2020 and 2019.

Table 20.1 – Investment Fair Value Changes

		Three Months Ended March 31,
(In Thousands)		2020				2019
Investment Fair Value Changes, Net
Changes in fair value of:
Residential loans held-for-investment at Redwood		$	(93,636	)		$	28,108
Single-family rental loans held-for-investment		(23,028		)		—
Residential bridge loans held-for-investment		(38,602		)		(303		)
Trading securities		(263,325		)		21,860
Servicer advance investments		(6,062		)		1,008
Excess MSRs		(9,494		)		(437		)
Shared home appreciation options		(7,554		)		—
REO		(498		)		—
Net investments in Legacy Sequoia entities (1)		(391		)		(374		)
Net investments in Sequoia Choice entities (1)		(69,669		)		3,265
Net investments in Freddie Mac SLST entities (1)		(142,162		)		6,365
Net investments in Freddie Mac K-Series entities (1)		(86,509		)		3,119
Net investments in CAFL entities (1)		(67,846		)		—
Risk-sharing and other investments		(1,389		)		(77		)
Risk management derivatives, net		(59,142		)		(42,375		)
Credit losses on AFS securities		(1,525		)		—
Investment Fair Value Changes, Net		$	(870,832	)		$	20,159

(1)	Includes changes in fair value of the loans held-for-investment, REO and the ABS issued at the entities, which netted together represent the change in value of our investments at the consolidated VIEs. For certain Freddie Mac K-Series entities, includes the impact of sales of underlying securities and subsequent deconsolidation of these entities for the three months ended March 31, 2020.

For the three months ended March 31, 2020, Investment fair value changes, net includes $274 million of net realized losses associated with the sales of loans and securities and the settlement of derivatives. These realized amounts included, among other items, $129 million associated with trading securities, $72 million associated with investments in Freddie Mac K-Series entities, and $59 million associated with risk management derivatives. The remaining changes, totaling $597 million, were unrealized and associated with assets and liabilities we continued to hold at March 31, 2020.

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The following table presents the components of Other income recorded in our consolidated statements of income (loss) for the three months ended March 31, 2020 and 2019.

Table 21.1 – Other Income

		Three Months Ended March 31,
(In Thousands)		2020				2019
MSR (loss) income, net		$	(1,809	)		$	257
Risk share income		765				646
FHLBC capital stock dividend		547				547
Equity investment income		848				268
5 Arches loan administration fee income		870				466
Gain on re-measurement of investment in 5 Arches		—				2,441
Other		1,216				—
Other Income		$	2,437			$	4,625

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Components of our general and administrative, and other expenses for the three months ended March 31, 2020 and 2019 are presented in the following table.

Table 22.1 – Components of General and Administrative Expenses and Other Expenses

		Three Months Ended March 31,
(In Thousands)		2020				2019
General and Administrative Expenses
Fixed compensation expense		$	14,684			$	8,097
Variable compensation expense		11				4,402
Equity compensation expense		1,995				2,953
Acquisition-related equity compensation expense (1)		1,212				—
Systems and consulting		3,212				1,828
Loan acquisition costs (2)		4,726				1,585
Office costs		2,108				1,304
Accounting and legal		2,216				1,125
Corporate costs		671				674
Other operating expenses		1,833				1,191
Total General and Administrative Expenses		32,668				23,159
Other Expenses
Goodwill impairment expense		88,675				—
Amortization of purchase-related intangible assets		4,309				811
Contingent consideration expense (3)		312				—
Other		(1,881		)		227
Total Other Expenses		91,415				1,038
Total General and Administrative Expenses and Other Expenses		$	124,083			$	24,197

(1)

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

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

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

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For the three months ended March 31, 2020 and 2019, we recognized a benefit for income taxes of $22 million and a provision from income taxes of $1 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at March 31, 2020 and 2019.

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

		March 31, 2020			March 31, 2019
Federal statutory rate		21.0	%		21.0	%
State statutory rate, net of Federal tax effect		8.6	%		8.6	%
Differences in taxable (loss) income from GAAP income		(25.9	)%		(8.5	)%
Change in valuation allowance		(2.5	)%		(4.1	)%
Dividends paid deduction		1.1	%		(15.4	)%
Effective Tax Rate		2.3	%		1.6	%

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

Redwood operates in four segments: Residential Lending, Business Purpose Lending, Multifamily Investments, and Third-Party Residential 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, 2019.

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 four segments, as well as activity from certain consolidated Sequoia entities, are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include indirect general and administrative expenses and other expense.

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The following tables present financial information by segment for the three months ended March 31, 2020 and 2019.

Table 24.1 – Business Segment Financial Information

		Three Months Ended March 31, 2020
(In Thousands)		Residential Lending				Business Purpose Lending				Multifamily Investments				Third-Party Residential Investments				Corporate/ Other				Total
Interest income		$	60,631			$	53,060			$	46,883			$	34,313			$	3,194			$	198,081
Interest expense		(41,402		)		(34,990		)		(43,286		)		(24,471		)		(2,522		)		(146,671		)
Net interest income		19,229				18,070				3,597				9,842				672				51,410
Non-interest income
Mortgage banking activities, net		(23,081		)		(5,330		)		—				—				—				(28,411		)
Investment fair value changes, net		(196,635		)		(142,130		)		(227,122		)		(304,436		)		(509		)		(870,832		)
Other income		(497		)		1,693				1,240				1				—				2,437
Realized gains, net		1,796				—				(1,604		)		3,660				—				3,852
Total non-interest income, net		(218,417		)		(145,767		)		(227,486		)		(300,775		)		(509		)		(892,954		)
General and administrative expenses		(5,632		)		(14,333		)		(610		)		(1,178		)		(10,915		)		(32,668		)
Other expenses		—				(92,985		)		—				1,882				(312		)		(91,415		)
Benefit from (provision for) income taxes		5,330				6,582				(106		)		10,423				—				22,229
Segment Contribution		$	(199,490	)		$	(228,433	)		$	(224,605	)		$	(279,806	)		$	(11,064	)
Net Loss																						$	(943,398	)
Non-cash amortization income (expense), net		$	367			$	(5,363	)		$	54			$	812			$	(367	)		$	(4,497	)
Other significant non-cash expense: goodwill impairment		$	—			$	(88,675	)		$	—			$	—			$	—			$	(88,675	)

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		Three Months Ended March 31, 2019
(In Thousands)		Residential Lending				Business Purpose Lending				Multifamily Investments				Third-Party Residential Investments				Corporate/ Other				Total
Interest income		$	66,839			$	2,937			$	28,208			$	28,204			$	4,853			$	131,041
Interest expense		(47,676		)		(1,539		)		(25,870		)		(20,076		)		(4,115		)		(99,276		)
Net interest income		19,163				1,398				2,338				8,128				738				31,765
Non-interest income
Mortgage banking activities, net		10,827				1,482				—				—				—				12,309
Investment fair value changes, net		(1,720		)		(303		)		8,524				14,055				(397		)		20,159
Other income		1,449				466				—				—				2,710				4,625
Realized gains, net		4,937				—				—				5,749				—				10,686
Total non-interest income, net		15,493				1,645				8,524				19,804				2,313				47,779
General and administrative expenses		(7,203		)		(2,565		)		(323		)		(663		)		(12,405		)		(23,159		)
Other expenses		—				(633		)		—				(227		)		(178		)		(1,038		)
Provision for income taxes		(501		)		(5		)		—				(377		)		—				(883		)
Segment Contribution		$	26,952			$	(160	)		$	10,539			$	26,665			$	(9,532	)
Net Income																						$	54,464
Non-cash amortization income (expense), net		$	1,975			$	(732	)		$	(136	)		$	(271	)		$	(491	)		$	345

The following table presents the components of Corporate/Other for the three months ended March 31, 2020 and 2019.

Table 24.2 – Components of Corporate/Other

		Three Months Ended March 31,
		2020												2019
(In Thousands)		Legacy Consolidated VIEs (1)				Other				Total				Legacy Consolidated VIEs (1)				Other				Total
Interest income		$	3,194			$	—			$	3,194			$	4,853			$	—			$	4,853
Interest expense		(2,522		)		—				(2,522		)		(4,115		)		—				(4,115		)
Net interest income		672				—				672				738				—				738
Non-interest income
Investment fair value changes, net		(391		)		(118		)		(509		)		(374		)		(23		)		(397		)
Other income		—				—				—				—				2,710				2,710
Total non-interest income, net		(391		)		(118		)		(509		)		(374		)		2,687				2,313
General and administrative expenses		—				(10,915		)		(10,915		)		—				(12,405		)		(12,405		)
Other expenses		—				(312		)		(312		)		—				(178		)		(178		)
Total		$	281			$	(11,345	)		$	(11,064	)		$	364			$	(9,896	)		$	(9,532	)

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

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The following table presents supplemental information by segment at March 31, 2020 and December 31, 2019.

Table 24.3 – Supplemental Segment Information

(In Thousands)		Residential Lending				Business Purpose Lending				Multifamily Investments				Third-Party Residential Investments				Corporate/ Other				Total
March 31, 2020
Residential loans		$	4,263,327			$	—			$	—			$	2,131,125			$	316,677			$	6,711,129
Business purpose residential loans		—				3,463,742				—				—				—				3,463,742
Multifamily loans		—				—				470,484				—				—				470,484
Real estate securities		132,326				—				26,487				134,649				—				293,462
Other investments		23,616				26,877				36,691				359,036				—				446,220
Goodwill and intangible assets		—				68,483				—				—				—				68,483
Total assets		4,639,181				3,675,336				557,964				2,735,677				692,632				12,300,790
December 31, 2019
Residential loans		$	4,939,745			$	—			$	—			$	2,367,215			$	407,890			$	7,714,850
Business purpose residential loans		—				3,506,743				—				—				—				3,506,743
Multifamily loans		—								4,408,524				—				—				4,408,524
Real estate securities		229,074								404,128				466,672				—				1,099,874
Other investments		42,224				21,002				61,018				233,886				—				358,130
Goodwill and intangible assets		—				161,464				—				—				—				161,464
Total assets		5,410,540				3,786,641				4,889,330				3,139,616				769,313				17,995,440

On March 25, 2020, the SEC issued an order (the “Order”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), extending the deadlines for filing certain reports made under the Exchange Act, including quarterly reports on Form 10-Q, for registrants subject to the reporting obligations under the Exchange Act that have been particularly impacted by the pandemic and which reports have filing deadlines between March 1 and July 31, 2020. In a Current Report on Form 8-K filed on May 7, 2020, we disclosed our reliance on the Order with respect to this Quarterly Report on Form 10-Q for the three months ended March 31, 2020 (the “Form 10-Q”). We are relying on the Order because, in light of the pandemic, non-essential businesses in the State of California have been closed by the state’s governor’s order, as a result of which our personnel, our auditors, and our other advisors have generally been required to work and communicate remotely, which has slowed their ability to complete preparation and review of the Form 10-Q. Additional information regarding the impact of on our business, operations, and financial results is included in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors.”

The pandemic has had serious and adverse consequences on business conditions in North America, the principal geographic area in which we invest, and elsewhere around the globe, including limitations on travel, transportation, education, production of goods, provision of services and business operations generally. Further, the equity and credit markets have experienced significant volatility, and it is uncertain how long this volatility will continue. Although the long-term economic fallout of the pandemic is difficult to predict, the challenging business and market conditions we currently face have had and may continue to have adverse effects on our financial performance and, as a result, may adversely impact valuations of our residential loans, securities, and other investments in future periods. If the continued economic fallout is severe and/or extended, the adverse impacts may be material.

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Continuing our efforts to reduce our outstanding debt and leverage, and to generate additional liquidity, between April 1, 2020 and May 13, 2020, we settled sales of residential mortgage loans for aggregate proceeds of approximately $1.8 billion and repaid approximately $1.5 billion of associated borrowings. Additionally, as of May 13, 2020, we had entered into agreements to sell residential mortgage loans with a principal balance of $203 million, which transactions are expected to settle during the second quarter of 2020, subject to customary closing conditions. Additionally, subsequent to March 31, 2020, we have also reduced our exposure to marginable borrowing facilities (which may be subject to margin calls if the value of the assets securing borrowings declines), by entering into two new non-marginable borrowing facilities and transferring residential loans and business purpose loans previously financed on marginable facilities onto these new non-marginable facilities. As a result of these activities, in the coming weeks, we expect to have sold or refinanced substantially all of the remaining assets financed through our FHLBC facility and to have substantially repaid our borrowings under this facility.

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•	Overview

•	Results of Operations

•	Liquidity and Capital Resources

•	Off-Balance Sheet Arrangements and Contractual Obligations

•	Critical Accounting Policies and Estimates

•	New Accounting Standards

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

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

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

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

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

•	changes in the values of assets we own;

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

•

federal and state legislative and regulatory developments, and the actions of governmental authorities, including the new U.S. presidential administration, and in particular those affecting the mortgage industry or our business (including, but not limited to, the Federal Housing Finance Agency’s rules relating to FHLB membership requirements and the implications for our captive insurance subsidiary’s membership in the FHLB);

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

•	strategic business and capital deployment decisions we make;

•	our recent acquisitions of business purpose lending origination platforms;

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

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

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

•	our exposure to adjustable-rate mortgage loans;

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

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

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

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

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

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

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

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

•	ongoing litigation against various trustees of RMBS transactions;

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

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

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

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

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

•	exposure to environmental liabilities;

•	our failure to comply with applicable laws and regulations;

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

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

•	changes in accounting principles and tax rules;

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

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

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

•	other factors not presently identified.

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•

Our first quarter 2020 results were significantly impacted by the pandemic, which ultimately led to substantial losses on our investments and an overall loss for the quarter. While our operating businesses saw increased volumes early in the first quarter, as markets became dislocated in March, profitability was negatively impacted due to less favorable execution on securitizations we completed in March, and lower marks on the remaining loan inventories we held at quarter-end. Additionally, as a result of the recent market dislocation, we determined all of the goodwill on our balance sheet was impaired.

•

Our book value per share declined $9.66 per share to $6.32 per share during the first quarter of 2020, resulting primarily from negative fair value changes on investments and hedges of $8.73 per share that were recorded both through our consolidated statements of income (loss) and through accumulated comprehensive income on our consolidated balance sheets. A significant portion of these losses were unrealized and associated with assets we still held at March 31, 2020. The impairment of goodwill resulted in an expense of $0.78 per share.

•	Our business purpose lending platform originated $487 million of business purpose mortgage loans in the first quarter, including $260 million of single-family rental loans and $227 million of residential bridge loans.

•	During the first quarter of 2020, our residential lending platform purchased $2.70 billion of residential jumbo loans and sold $2.73 billion of loans held in inventory for our mortgage banking business, including through three Sequoia Select securitizations totaling $1.62 billion, and through Select and Choice whole loan sales to third parties of $1.11 billion.

•

During the first quarter, we sold $83 million of securities from our residential lending investment portfolio, $430 million of multifamily securities (representing nearly all of our multifamily mezzanine securities), $210 million of third-party residential investments (including $95 million of recently issued subordinate securities), $74 million of re-performing loan securities, $23 million of Agency CRT securities, and $18 million of legacy securities.

•	On March 27, 2020, we announced the deferral of the payment of our previously declared first quarter dividend of $0.32 per share, which was originally scheduled to be paid on March 30, 2020. On May 8, 2020, we paid the dividend fully in cash.

•	Our unrestricted cash position increased meaningfully at March 31, 2020, as we repositioned our balance sheet to generate additional liquidity.

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(1)

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

(2)

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

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(1)	Excludes Sequoia Choice loans held at VIEs that we consolidate for GAAP purposes. All residential loans classified as held-for-investment at December 31, 2019 were reclassified to held-for-sale at March 31, 2020, based on our intent to sell the loans in the near term.

(2)	Represents our retained economic investment in the consolidated Sequoia Choice securitization VIEs. For GAAP purposes, we consolidated $1.93 billion of loans and $1.79 billion of ABS issued associated with these investments at March 31, 2020.

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

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

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

(2)	Represents our economic investment in securities issued by consolidated CAFL securitization VIEs. For GAAP purposes, we consolidated $2.25 billion of loans and $2.09 billion of ABS issued associated with these investments at March 31, 2020.

(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.

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(1)

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

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

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(1)	Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $470 million of loans and $448 million of ABS issued associated with these investments at March 31, 2020.

(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.

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(1)	Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $2.13 billion of loans and $1.83 billion of ABS issued associated with these investments at March 31, 2020.

(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.

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

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(1)

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

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(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 March 31, 2020, excludes $143 million and $167 million of securities retained from our consolidated Sequoia Choice and CAFL securitizations, respectively, as well as $307 million and $23 million of securities we owned that were issued by consolidated Freddie Mac SLST and Freddie Mac K-Series securitizations, respectively.

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

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

(3)	Allocated capital divided by GAAP fair value.

(4)	Includes $51 million of securities we owned that were issued by consolidated Sequoia Choice securitizations, which we consolidate in accordance with GAAP. Also includes $10 million of trade receivables from unsettled trades.

(5)	Includes $307 million of securities we owned that were issued by consolidated Freddie Mac SLST securitizations, which we consolidate in accordance with GAAP.

(6)	Includes $23 million of securities we owned that were issued by consolidated Freddie Mac K-Series securitizations, which we consolidate in accordance with GAAP. Also includes $22 million of trade receivables from unsettled trades.

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(1)

At March 31, 2020, senior Sequoia and third-party securities included $40 million of IO securities. At March 31, 2020, subordinate third-party securities included $8 million of IO securities. Our interest-only securities included $19 million of A-IO-S securities at March 31, 2020 that we retained from certain of our Sequoia securitizations. These securities represent certificated servicing strips and therefore may be negatively impacted by the operating and funding costs related to servicing the associated securitized mortgage loans.

(2)	Mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later.

(3)	At March 31, 2020, excluded $143 million, $307 million, $23 million, and $167 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series, and CAFL securitizations, respectively. For GAAP purposes we consolidated $6.78 billion of residential loans and $6.15 billion of non-recourse ABS debt associated with these retained securities.

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(1)	Our tax results for the three months ended March 31, 2020 and 2019 are estimates until we file tax returns for these years.

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(1)	Represents shares reacquired to satisfy tax withholding requirements related to the vesting of restricted shares.

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