Exhibit 99.2

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

Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood’s business strategy and strategic focus, including statements relating to our confidence in our overall market position, strategy and long-term prospects, and our belief in the long-term efficiency of private label securitization as a form of mortgage financing; (ii) statements we make regarding the “three levers” that we expect to drive higher earnings and investment creation in our residential business; (iii) statements we make regarding our new business relationships with the Federal Home Loan Bank of Chicago (FHLBC), including our belief that these relationships will add new sellers and broaden the reach of our loan acquisition efforts by positioning us to acquire high balance residential loans from up to approximately 750 Federal Home Loan Bank members and provide us with access to collateralized financing for mortgage loans and securities, our expectations regarding the timing for commencing the acquisition program, our statements relating to quantifying the acquisition opportunity, and statements related to potential uses for the financing that may be available from the FHBLC; (iv) statements we make regarding the potential for long-term growth and profitability in our conforming loan business, including our belief that it is a better business decision to invest and build near the bottom of a market cycle and position ourselves for upside as the cycle turns, our belief that the pressure on margins that is broadly impacting the residential mortgage industry will gradually correct, as market capacity and pricing move back in line with origination volumes, our belief that we can improve our conforming loan sale margins by increasing loan purchase volumes and better leveraging the cost of our operating infrastructure, our belief that our conforming loan business also opens up opportunities to invest in “homegrown” servicing and potentially in credit risk transfers with the GSEs and our statement that we are optimistic about reaching our goal of acquiring $1 billion of conforming loans per month by the end of 2014; (v) statements we make regarding the outlook for our commercial business, including our positioning to benefit from both the tailwinds of an expanding economy and a substantial wave of maturing commercial loans that will need to be refinanced over the next few years, our belief that we are currently on track to exceed last year’s origination volume and achieve our annual origination goal for commercial loans in 2014, while maintaining healthy margins, and our expectation to contribute approximately $300 million of senior loans to a third-party CMBS transaction in September; (vi) statements we make regarding the outlook for the mortgage market, including expectations relating to residential loan originations in 2014; (vii) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the second quarter of 2014 and at June 30, 2014, and statements relating to expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase; (viii) statements relating to our estimate of our investment capacity (including that we estimate our investment capacity at June 30, 2014 to be approximately $62 million), our statement that we may need to source additional capital prior to the end of 2014, and our expectations relating to our ability to source capital internally, by selling or financing existing investments, and externally, via the issuance of convertible debt or common equity, other debt securities, or similar or other types of securities in public or private offerings; (ix) statements we make regarding our dividend policy and our

process for determining dividends; and (x) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, our estimates of REIT taxable income and TRS taxable income, and our anticipation of additional credit losses for tax purposes in future periods (and, in particular, our statement that, for tax purposes, we expect an additional $40 million of tax credit losses on residential securities we currently own to be realized over an estimated three- to five-year period).

Important factors, among others, that may affect our actual results include: general economic trends, the performance of the housing, commercial 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 those affecting the mortgage industry or our business; 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; the availability of assets for purchase at attractive prices and our ability to reinvest cash we hold; changes in the values of assets we own; 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; 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; exposure to environmental liabilities; our failure to comply with applicable laws and regulations; our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures; the impact on our reputation that could result from our actions or omissions or from those of others; changes in accounting principles and tax rules; our ability to maintain our status as a REIT for tax purposes; limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940; decisions about raising, managing, and distributing capital; and other factors not presently identified.

This Redwood Review may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.

Note to Readers:

We file annual reports (on Form 10-K) and quarterly reports (on Form 10-Q) with the Securities and Exchange Commission. These filings and our earnings press releases provide information about Redwood and our financial results in accordance with generally accepted accounting principles (GAAP). We urge you to review these documents, which are available through our website, www.redwoodtrust.com.

This document, called The Redwood Review, is an additional format for providing information about Redwood through a discussion of our GAAP financial results, as well as other metrics, such as taxable income. Supplemental information is also provided in the Financial Tables in this Review to facilitate more detailed understanding and analysis of Redwood. We may also provide non-GAAP financial measures in this Review. When we use non-GAAP financial measures it is because we believe that these figures provide additional insight into Redwood’s business. In each case in which we discuss a non-GAAP financial measure you will find an explanation of how it has been calculated, why we think the figure is important, and a reconciliation between the GAAP and non-GAAP figures.

References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries. Note that because we round numbers in the tables to millions, except per share amounts, some numbers may not foot due to rounding. References to the “second quarter” refer to the quarter ending June 30, 2014, and references to the “first quarter” refer to the quarter ending March 31, 2014, unless otherwise specified.

We hope you find this Review helpful to your understanding of our business. We thank you for your input and suggestions, which have resulted in our changing the form and content of The Redwood Review over time.

Dear Fellow Shareholders:

Your Redwood team is actively managing, investing and positioning our residential and commercial businesses for long-term growth and to build sustainable franchise value. With these goals in mind, it is encouraging that both businesses continue to make really solid, measurable progress.

Adding new products, new sellers, and more distribution capability are the “three levers” that will drive higher earnings and investment creation in our residential business. We made significant progress on all of these fronts during the second quarter, and two important puzzle pieces fell into place with the recent announcement of our new business relationships with the Federal Home Loan Bank of Chicago (“FHLBC”). We believe one of these relationships will add new sellers and broaden the reach of our loan acquisition efforts by positioning us to acquire high balance residential loans from up to approximately 750 Federal Home Loan Bank members that participate in the FHLBC’s Mortgage Partnership Finance® Program. The other relationship is through our wholly owned subsidiary, RWT Financial LLC, which has become a member of the FHLBC. This relationship provides us with access to collateralized financing for mortgage loans and securities, while contributing to the Federal Home Loan Bank system’s mission of funding residential mortgage lending.

Unfortunately, despite all the good news with key growth metrics, our near-term quarterly earnings remain under pressure and are lagging the progress we see in our operations. This fact is not lost on us. Both of us have significant personal equity stakes in Redwood and most of our annual and longer-term compensation is performance-based, linked to return-on-equity or total shareholder return. We don’t make decisions that may negatively impact near-term earnings lightly, but we do so when we believe the short-term pain is justified by the potential for long-term gain.

The earnings from our commercial mortgage banking business and our investment portfolio continue to be in line with, or ahead of, our expectations. The primary earnings pressure we face currently relates to our residential mortgage banking business. While our established jumbo mortgage banking activities continue to produce healthy returns, our expansion into conforming loan products is being impacted by a double whammy of sorts. First, industrywide gain-on-sale margins for conforming loans remain under pressure as refinance origination volumes wane. Additionally, we are incurring upfront costs as we build our operations and systems to facilitate long-term growth and profitability. Although this expansion has placed near-term pressure on earnings, all in all, we still think it is a better business decision to invest and build near the bottom of a market cycle and position ourselves for upside as the cycle turns, rather than waiting to build and invest near the top of a cycle, only to chase diminishing returns. We have also chosen an economical loan acquisition model of acquiring closed loans from third parties, which relieves us of the costs associated with loan origination (personnel, compliance, and bricks and mortar).

Ultimately, we believe the pressure on margins that is broadly impacting the residential mortgage industry will gradually correct, as market capacity and pricing move back in line with origination volumes. Additionally, we believe we can improve our conforming loan sale margins by increasing loan purchase volumes and better leveraging the cost of our operating infrastructure. Our conforming loan business also opens up opportunities to invest in “homegrown” servicing and potentially in credit risk transfers with the GSEs.

In our commercial mortgage banking business, we continue to build our brand as a provider of senior and mezzanine financing for a variety of stabilized property types. We have an experienced commercial team that is performing well in terms of its growth metrics and its contribution to earnings, and we ended the second quarter with a strong commercial mortgage pipeline. They have positioned us to benefit from both

the tailwinds of an expanding economy that is driving property fundamentals in the right direction and a substantial wave of maturing commercial loans that will need to be refinanced over the next few years. To take advantage of this opportunity, we are adding originators and support staff, and have expanded our footprint in New York. While the market for originating loans remains highly competitive, putting pressure on margins over time, we believe we are currently on track to exceed last year’s origination volume and achieve our origination goals for 2014, while maintaining healthy margins.

In closing, we remain highly focused on positioning Redwood for long-term growth and building sustainable franchise value. While external market factors may temporarily aid or hinder our progress in any given quarter, we are working on what we can control, including the “three levers” — new products, sellers, and distribution capabilities — that will drive our residential business forward. Our more established jumbo and commercial mortgage banking activities are generating attractive earnings, and over time we expect to see similar results from our conforming mortgage banking activities. We remain excited about the potential need for private capital to play a larger role in the residential mortgage market, and the ways Redwood can participate.

Thank you as always for your continuing support.

Martin S. Hughes		Brett D. Nicholas
CEO		President

Second Quarter 2014 Results

Overview

We made great progress on some of our long-term initiatives during the second quarter of 2014 while generating positive momentum in both our residential and commercial businesses. In our residential business, we achieved a significant increase in loan acquisition volume compared to the prior quarter, and our pipeline of both jumbo and conforming loans remained strong at quarter-end. Our commercial origination activity grew compared to the first quarter of 2014, ending the second quarter with a record pipeline of senior commercial loans under application.

In June 2014, we announced an agreement with the Federal Home Loan Bank of Chicago (FHLBC) to purchase high-balance residential loans through the FHLBC’s Mortgage Partnership Finance® (MPF®) Program under the MPF Direct™ Product (MPF Direct). We expect the program to commence early in the fourth quarter of 2014. We also announced that our subsidiary, RWT Financial, LLC, was approved as a member in the FHLBC, and this new subsidiary is currently using borrowings from the FHLBC to finance certain jumbo loans.

Before we get into any further details, here is a summary of Redwood’s second quarter 2014 results:

Residential Mortgage Banking

The residential mortgage market improved in the second quarter of 2014 after a steep decline in industry origination volume in the first quarter of 2014, but remained down compared to the year-ago period. Despite stronger economic data, interest rates generally fell during the second quarter. The 10-year Treasury fell to 2.52% on June 30, 2014, from 2.72% on March 31, 2014, which resulted in higher overall industry origination volume during the second quarter. While the Mortgage Bankers Association of America projected second quarter originations to increase by 18% compared to the first quarter (and to decline by 40% annually in 2014), many market participants believe that second quarter originations have exceeded those projections.

In the second quarter of 2014, we continued to advance our residential mortgage banking business in what is still a challenging operating environment. We expanded our residential business by adding loan sellers — the number of sellers has increased by 19% year-to-date, to 140 sellers at June 30, 2014. This contributed to a record $3.2 billion of loans identified for purchase during the second quarter of 2014, up from $1.7 billion in the prior quarter. In addition, with the upcoming launch of MPF Direct with the FHLBC (more on that below), we expect to add a substantial number of new sellers over the next few years. Our conforming loan activity continues to ramp up as well, following our fourth quarter 2013 test phase. We added new sellers and several of our existing jumbo sellers also began to deliver conforming loans to us in the second quarter. This led to $868 million of conforming loan acquisitions in the second quarter of 2014, a 190% increase compared to the first quarter of 2014. Based on our recent activity, we are optimistic about reaching our goal of acquiring $1 billion of conforming loans per month by the end of 2014.

Private-label securitization activity remained subdued during the second quarter of 2014, but showed signs of improvement. Our recent July Sequoia securitization (SEMT 2014-2) was met with strong investor interest and the triple-A rated securities priced at spreads that were tighter than our April 2014 (SEMT 2014-1) securitization. When we consider the profitability, franchise value, and ability to create investments for our investment portfolio, Sequoia securitization execution is becoming more competitive with whole loan sales, which significantly outpaced securitization activity in the first quarter of 2014.

We also continued to make progress on non-Qualified Mortgage (non-QM) loans and conforming loan risk-sharing during the second quarter of 2014. We included a small number of non-QM loans in our July Sequoia securitization and were satisfied with the execution and investor reception. As a result, in early August we expanded the menu of jumbo loan products we acquire to include non-QM loans with characteristics similar to those of jumbo loans we had historically acquired prior to the implementation of the QM rule in early 2014.

MPF Direct™ Loans

In June we announced a new business relationship with the FHLBC under which we will purchase high-balance mortgage loans that are originated by participating member banks in various Federal Home Loan Bank districts. This business relationship is separate and distinct from our subsidiary’s membership in the FHLBC. In summary, we will be able to purchase, through the FHLBC (as administrator of the MPF Program), high-balance residential mortgage loans that conform to our underwriting standards from member banks that participate in the MPF Program. Eligible loans will generally have balances between $417,000 and $729,270. There are 12 Federal Home Loan Banks (FHLBanks) located throughout the U.S. and more than 7,400 total members (banks, thrifts, insurance companies, and credit unions), of which about 750 members are currently active MPF Program participants that could sell us high balance loans under MPF Direct. Ten of the FHLBanks offered their members the opportunity to participate in the MPF Program as of June 30, 2014. We are currently working with the FHLBC to identify a target list of potential sellers from within the FHLBC, with the goal of beginning a test phase of MPF Direct early in the fourth quarter of 2014. After the test phase, we plan to roll out MPF Direct to other participating FHLBanks. At this time, it is too early to quantify the overall opportunity, which we believe could be substantial over time.

Commercial Mortgage Banking Market Conditions

In the second quarter of 2014, our commercial team increased originations and generated higher loan sale profit margins compared to the first quarter of 2014. We remain optimistic that our positive momentum will enable us to achieve our annual origination goal for 2014. During the second quarter, we originated 15 senior commercial loans totaling $149 million, as compared to six loans totaling $119 million in the first quarter of 2014. We entered the third quarter with our largest-ever pipeline of loans under application at $347 million, and in September expect to contribute approximately $300 million of senior loans to a CMBS transaction sponsored by a third party.

Summary of Financial Results

GAAP Earnings

In the second quarter of 2014, we earned $16 million, or $0.18 per share, an increase from $12 million, or $0.14 per share, in the first quarter of 2014. The following table sets forth the components of Redwood’s GAAP income for the second and first quarters of 2014.

The increase in earnings shown above primarily resulted from a $6 million improvement in income from mortgage banking activities, which was partially offset by higher operating expenses related to the expansion of our residential mortgage banking operations.

Our second quarter earnings were negatively impacted by timing differences related to how we account for our $1.6 billion jumbo mortgage pipeline and the hedges for those loans, in addition to differences in how changes in the fair value of certain securities and hedges for those securities are recognized in earnings. The GAAP Income section on page 14 provides a detailed analysis of our second quarter 2014 earnings.

GAAP Book Value

At June 30, 2014, our GAAP book value was $1.2 billion, or $15.03 per share, a decrease from $15.14 per share at March 31, 2014. The following table sets forth the changes in Redwood’s GAAP book value per share for the second and first quarters of 2014.

The decrease in GAAP book value per share shown above primarily resulted from dividends paid in excess of GAAP earnings, combined with an increase in shares outstanding related to our annual distribution of common stock underlying vested equity awards in May 2014. These effects were partially offset by net unrealized gains, primarily resulting from an increase in the market value of our securities during the second quarter of 2014. The Financial Insights section on page 18 provides a detailed analysis of the components of our GAAP balance sheet and book value.

Quarterly Investment Activity

Our capital deployment modestly increased in the second quarter of 2014. The following table details our capital invested for the second and first quarters of 2014.

(1) Included in our third-party RMBS acquisitions was $4.4 million of acquisitions late in the second quarter of 2014 that did not settle until early in the third quarter of 2014. In order to reflect the fact that capital had not yet been used to acquire this asset at June 30, 2014, the Short-term debt / Other liabilities line item in the table above includes a $4.4 million payable associated with this transaction. In early July 2014, we completed the purchase of this security using $4.0 million of short-term debt, resulting in net capital invested of $0.4 million that is not reflected in the table above.

At June 30, 2014, our residential securities portfolio had a market value of $1.8 billion, up from $1.7 billion at March 31, 2014. This increase included $142 million of acquisitions, $3 million in positive valuation adjustments, $10 million in discount accretion, and $53 million in net principal paydowns. Included in these numbers are $159 million of Sequoia senior and IO securities, which are included in our Residential Mortgage Banking segment for financial reporting purposes.

Our residential securities acquisitions of $142 million in the second quarter of 2014 included $115 million of senior securities, $20 million of subordinate securities retained from our Sequoia 2014-1 securitization, and $7 million of additional subordinate securities purchased from third parties. These acquisitions were funded with $121 million of short-term debt and $21 million of capital. We also invested $6 million in commercial mezzanine loans. Finally, we added $12 million of MSRs in the second quarter of 2014 associated with $1.2 billion of residential loans serviced, increasing our investment in MSRs to $71 million associated with $7.1 billion of residential loans serviced.

Following the end of the second quarter of 2014 and through July 31, 2014, we acquired $22 million of securities from SEMT 2014-2 and $6 million of MSR investments.

Capital and Liquidity

During June 2014, our subsidiary, RWT Financial, LLC, was approved as a member of the FHLBC. This membership provides access to attractive short- and long-term financing options that broaden our sources of liquidity and potentially increase investment opportunities for us that require tailored funding. Because there is no amount of financing that the FHLBC has committed to provide to RWT Financial at any given time, we may not be able to obtain additional financing from FHLBC when we request it. At July 31, 2014, we had utilized $26 million of FHLBC advances to fund $30 million of jumbo residential loans. In future periods, RWT Financial may seek to use financing from the FHLBC for MPF Direct loans we acquire through the FHLBC. However, our agreement with the FHLBC relating to MPF Direct is separate from RWT Financial’s membership in the FHLBC. Any limitation on RWT Financial’s ability to borrow from FHLBC would not necessarily impact our ability to acquire MPF Direct loans.

At June 30, 2014, we held $157 million in cash, and our investment capacity (defined as the approximate amount of capital we had readily available for long-term investments) was estimated to be approximately $62 million. Total capital of $1.7 billion at June 30, 2014, included $1.2 billion of equity capital, $140 million of long-term debt, and $288 million of long-term convertible debt.

While we had previously expected our available capital and liquidity to be sufficient to fund our business and investment objectives for most of 2014, as a result of improving market conditions, our rate of capital deployment in the second half of 2014 may require us to source additional capital prior to the end of the year. As we have stated in the past, we look first to our own balance sheet for attractive opportunities to raise capital through sales or financings of assets before we look externally. Since the end of the second quarter of 2014, we sold $229 million of third-party securities generating net proceeds to Redwood of $21 million after repaying the associated financing. Should we decide we need to raise additional external capital to fund our business activities, we would consider the issuance of convertible debt securities under the shelf registration statement we currently have on file with the SEC, as well as the issuance of common equity, other debt securities, or similar or other types of securities in public or private offerings.

GAAP Income

Our consolidated GAAP net income for the second quarter of 2014 was $16 million, or $0.18 per diluted common share, as compared to $12 million, or $0.14 per diluted common share, for the first quarter of 2014. The following table presents the GAAP income statements for the second and first quarters of 2014.

Net Interest Income

Net interest income was $37 million in the second quarter of 2014, an increase of $1 million from the first quarter of 2014. The following table highlights the components of net interest income for the second and first quarters of 2014.

(1) For each of the three months ended 6/30/2014 and 3/31/14, net interest income from Corporate/Other includes $6 million of interest expense from long-term debt that is not directly assigned or allocated to any segment and $1 million of net interest income from legacy Sequoia entities.

Net interest income from our residential mortgage banking operations increased $1 million in the second quarter of 2014, as the average balance of residential loans held-for-sale on our balance sheet increased 43% to $740 million. The amount of interest income earned from loans held-for-sale is dependent on many factors, including the amount of loans, the length of time they are on our balance sheet, and their interest rates.

Net interest income from our residential investments portfolio remained stable as increases in interest income from a higher average balance of securities were offset by lower average yields. The average balance of our available-for-sale securities increased 5% to $1.5 billion in the second quarter of 2014, primarily from the acquisition of $150 million of Sequoia subordinate securities and third-party securities during the first and second quarters of 2014. The average yield on our available-for-sale securities declined to 7.4% from 7.7% in the first quarter of 2014, offsetting most of the benefit from higher average security balances.

Net interest income from our commercial operations remained stable as the average balances of senior loans held-for-sale as well as our investment portfolio of loans held-for-investment increased only slightly during the second quarter of 2014.

Mortgage Banking Activities

The following table presents the components of our mortgage banking activities for the second and first quarters of 2014.

Income from mortgage banking activities was $6 million for the second quarter of 2014, as compared to a loss of less than $1 million in the first quarter of 2014, primarily reflecting increased income from commercial mortgage banking.

Income from residential mortgage banking activities improved with a gain of $1 million in the second quarter of 2014, as compared to a loss of $1 million in the first quarter of 2014. The improvement resulted primarily from a substantial increase in loan acquisition volume and related fair value gains during the second quarter.

Consistent with prior quarters, we continue to experience timing differences related to our jumbo mortgage pipeline (defined as those loans we have identified for purchase) and the hedging for those loans, making it difficult to fully ascertain our quarterly operating performance from our high-level GAAP results. In the second quarter, we incurred hedging expenses that were reflected in that period’s earnings, but the change in value of the $1.6 billion (unadjusted for expected fallout) of jumbo loans we expect to purchase in the pipeline at June 30, 2014, was not reflected in earnings. Instead, the valuation change on these loans will be reflected in earnings when they are purchased in the third quarter of 2014.

Our commercial operations generated income from mortgage banking activities of $5 million in the second quarter of 2014, up from $1 million in the first quarter of 2014. The improvement is due to a combination of increased loan sale profit margins and higher origination volume, which improved from a seasonally low level in the first quarter of 2014. During the second quarter of 2014, we originated 15 senior commercial loans totaling $149 million, as compared to six loans totaling $119 million in the first quarter of 2014.

MSR Income, Net

Income from our investments in mortgage servicing rights was negative $2 million in the second quarter of 2014, as compared to positive $1 million in the first quarter of 2014. Fee income generated from MSRs was $4 million for the second quarter of 2014, as compared to $3 million in the first quarter, as the amount of loans associated with our servicing rights increased $1.2 billion to $7.1 billion at June 30, 2014. Our second quarter MSR income was adversely impacted by continued declines in interest rates that resulted in $6 million of negative market valuation adjustments, as compared to negative $3 million in the first quarter.

Other Market Valuation Adjustments

Other market valuation adjustments were negative $4 million for the second quarter of 2014, a $2 million improvement from the first quarter of 2014. The majority of this expense is attributable to declines in the value of interest rate hedging derivatives caused by declining interest rates during the second quarter of 2014. These derivatives are used to manage risks associated with the net interest rate exposure at our Residential Investments segment. The Residential Investments segment includes fixed-rate securities, which increase in value as rates decline, and MSRs, which decrease in value as rates decline. The fair value of the hedged securities increased $12 million and the MSRs declined in value by $6 million in the second quarter of 2014. The aggregate changes in security values include changes attributable to interest rates, and this increase was recorded through other comprehensive income on our balance sheet rather than through our reported earnings.

Realized Gains, Net

In both the second and first quarters of 2014, we recognized $1 million of gains related to sales and calls of residential investment securities.

Operating Expenses

Operating expenses were $22 million for the second quarter of 2014, as compared to $20 million for the first quarter of 2014, primarily due to an increase in compensation and other personnel-related expenses associated with the expansion of our residential and commercial mortgage banking operations.

Provision for Income Taxes

During the second quarter of 2014, we recognized a provision for income taxes of less than $1 million primarily related to GAAP income generated at our taxable REIT subsidiaries. See the Taxable Income and Dividends section on page 27 for further information.

Balance Sheet

The following table shows the components of our balance sheet at June 30, 2014.

(1) We changed the format of this consolidating balance sheet to more clearly delineate between (i) the $2.1 billion of assets belonging to certain securitization entities (variable interest entities, or VIEs) that we are required to consolidate on our balance sheet in accordance with GAAP, but which are not legally ours, and the $1.8 billion of liabilities of these VIEs, which are payable only from the cash flows generated by their assets and are, therefore, nonrecourse to us, and (ii) the $3.3 billion of assets that are legally ours and the $2.4 billion of liabilities of ours for which there is recourse to us.

(2) Consolidated VIEs include certain Sequoia securitizations completed prior to 2012 as well as the Residential Resecuritization and Commercial Securitization transactions we completed in 2011 and 2012, respectively, that we are required to consolidate under GAAP. Our estimated GAAP investment in these entities was $359 million at June 30, 2014, representing the difference between the aggregate assets and liabilities of these entities. Legally, we own only the securities and interests that we acquired from these VIEs.

(3) Sequoia securitizations completed between January 2012 and June 2014 are treated as sales for GAAP, and the $609 million of securities we have retained from these transactions are reflected in the “At Redwood” column above in “Real Estate Securities — Sequoia.”

Residential Loans

The table below details residential loan activity at Redwood during the second and first quarters of 2014.

At June 30, 2014, we owned $1.1 billion of prime residential loans, including $848 million of jumbo loans and $260 million of conforming loans. These loans included $840 million of 30-year fixed-rate loans, $84 million of 10-year to 25-year fixed-rate loans, $182 million of hybrid loans, and $2 million of ARM loans. At June 30, 2014, our pipeline of loans identified for purchase (unadjusted for fallout) included $1.6 billion of jumbo loans and $379 million of conforming loans. See the Residential Mortgage Banking section on page 30 for additional information.

The remainder of our residential loans, totaling $1.6 billion, are held in consolidated Sequoia entities. Our investments in these entities, as estimated for GAAP, totaled $69 million at June 30, 2014. This amount reflects the book value of our retained investments in consolidated Sequoia entities and is based on the difference between the consolidated assets and liabilities of the entities in the aggregate according to their GAAP carrying amounts.

Commercial Loans

The following table details commercial loan activity during the second and first quarters of 2014.

At June 30, 2014, we owned $469 million of commercial loans, as compared to $491 million of commercial loans at March 31, 2014. During the second quarter of 2014, we originated 15 senior loans and sold 13 senior loans. Additionally, we originated two mezzanine loans. During the second quarter of 2014, we also sold an A-note that did not qualify as a sale under GAAP and continues to be consolidated on our balance sheet. A-notes we sell and the associated B-notes we retain are both held at fair value and are shown separately in the table above. See the Commercial Mortgage Banking Activities section on page 33 for additional information.

Residential Real Estate Securities

The following table details commercial loan activity during the second and first quarters of 2014.

(1) Included in the real estate securities table above are $246 million of senior securities that are included in the Residential Resecuritization that we completed in July 2011. Under GAAP accounting, we account for the resecuritization as a financing even though these securities are owned by the resecuritization entity and are legally not ours. We own only the securities and interests that we acquired from the resecuritization entity, which amounted to $165 million at June 30, 2014. As a result, to adjust at June 30, 2014 for the legal and economic interests that resulted from the resecuritization, Total Senior Securities would be decreased by $246 million to $826 million, Prime Re-REMIC Securities would be increased by $165 million to $358 million, and Total Real Estate Securities would be reduced by $81 million to $1.76 billion.

(2) Non-prime residential securities consist of Alt-A senior securities.

(3) Prime mezzanine includes securities initially rated AA, A, and BBB- and issued in 2012 or later.

Residential Real Estate Securities (continued)

The table below details the change in fair value of real estate securities during the second and first quarters of 2014.

During the second quarter of 2014, we acquired $65 million of senior Sequoia securities, $20 million of mezzanine and subordinate Sequoia securities, $51 million of third-party senior securities and $6 million of third-party subordinate securities. We sold one third-party residential senior security during the second quarter of 2014, resulting in a $1 million gain.

At June 30, 2014, residential securities we owned (as a percentage of current market value) consisted of fixed-rate assets (46%), adjustable-rate assets (16%), hybrid assets that reset within the next year (33%), and hybrid assets that reset between 12 and 36 months (5%).

Mortgage Servicing Rights (MSRs)

The table below details the change in fair value of Redwood’s MSRs during the second and first quarters of 2014.

At June 30, 2014, we owned $56 million of jumbo MSR investments and $15 million of conforming MSR investments associated with residential loan aggregate principal balances of $5.6 billion and $1.4 billion, respectively. We earn fees from these MSRs, but outsource the actual servicing of the associated loans to a third-party servicer.

During the second quarter of 2014, we added $12 million of MSRs associated with $1.2 billion of residential loans primarily acquired through our residential mortgage banking operations. The GAAP carrying value, which is the estimated fair value, of our MSRs at June 30, 2014 was equal to 1.01% of the aggregate principal balance of the associated residential loans. At June 30, 2014, the 30-day delinquency ratio was 0.19%. There was one loan delinquent greater than 30 days.

Derivatives

The following table presents the fair value and notional value of derivative financial instruments held at June 30, 2014 and March 31, 2014, which are components of other assets and other liabilities on our consolidated balance sheet.

We use derivative financial instruments in part to mitigate the interest rate risk associated with some of our residential and commercial loan activity, in addition to the net interest rate exposure within our investment portfolio. Net changes in the fair value of risk management derivatives are reflected in our income statement in Mortgage banking activities, net, for residential and commercial mortgage banking segments and in Other market valuation adjustments, net for our residential investments segment. The timing of when we enter into and exit these derivatives, and the corresponding levels of benchmark interest rates, has a significant effect on the amount of valuation income or loss recognized. During the second quarter of 2014, the aggregate fair value of risk management derivatives, including those agreements that we exited during the quarter, declined by $12 million.

We also record conforming loan purchase and forward sale commitments as derivatives. In the second quarter of 2014, these derivatives increased in value by $4 million.

Falling benchmark interest rates resulted in a $5 million increase to our derivative liability related to cash flow hedges on our long-term debt. Changes in the fair value of our cash flow hedges were recorded in shareholders’ equity through accumulated other comprehensive income.

Short-Term Debt

At June 30, 2014, we had short-term residential mortgage warehouse debt outstanding of $852 million, which was used to finance a portion of the $1.1 billion inventory of residential mortgage loans held for sale. We also had short-term commercial mortgage warehouse debt outstanding of $12 million, which was used to finance a portion of the $51 million inventory of commercial mortgage loans held for sale.

At June 30, 2014, we had five uncommitted residential mortgage warehouse facilities with an aggregate borrowing capacity of $1.4 billion, and one uncommitted commercial mortgage warehouse facility for senior loans with a borrowing capacity of $100 million.

At June 30, 2014, we had short-term debt incurred through securities repurchase facilities of $854 million, which was secured by $1.0 billion of residential securities, resulting in a debt-to-equity leverage ratio for these residential securities of 5.8x (excluding the additional risk capital we hold related to these short-term borrowings).

The table below details the activity of short-term debt during the second and first quarters of 2014.

Long-Term Debt and ABS Issued

At June 30, 2014, we had $288 million of convertible senior notes outstanding at a stated interest rate of 4.625% (excluding deferred issuance costs), that are convertible into 41.1320 shares of common stock per $1,000 principal amount (equivalent to a conversion price of $24.31 per common share and subject to certain adjustments) on or before their maturity in April 2018.

At June 30, 2014, we had $140 million of other long-term debt outstanding due in 2037 with a stated interest rate of three-month LIBOR plus 225 basis points (excluding deferred issuance costs). In 2010, we effectively fixed the interest rate on this long-term debt at approximately 6.75% (excluding deferred issuance costs) through interest rate swaps.

At June 30, 2014, we had $53 million of borrowings outstanding under a $150 million commercial warehouse facility for mezzanine and B-note loans. Due to the 15-month remaining term of this facility as of June 30, 2014, it is classified as long-term debt on our consolidated balance sheet.

At June 30, 2014, we had commercial secured borrowings of $67 million as a result of our requirement under GAAP to classify certain senior commercial loans we originated and sold to third-parties as financings and not sales. These secured borrowings are recorded at their fair value, which is equal to the fair value of the associated senior loans that were sold but not derecognized.

At June 30, 2014, we had $1.8 billion outstanding of non-recourse, asset-backed debt issued at consolidated VIEs. Included in this amount was $70 million at a stated interest rate of one-month LIBOR plus 200 basis points related to our Residential Resecuritization, $145 million at a stated interest rate of 5.62% (excluding deferred issuance costs) related to our Commercial Securitization, and $1.6 billion at consolidated Sequoia entities.