rwt-20220630

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended: June 30, 2022


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

For the Transition Period from _______________ to _______________.

Commission File Number 1-13759

REDWOOD TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)


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


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

(415) 389-7373

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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


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

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


Common Stock, $0.01 par value per share						116,765,789			shares outstanding as of August 2, 2022

REDWOOD TRUST, INC.

2022 FORM 10-Q REPORT

TABLE OF CONTENTS


		Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at June 30 , 2022 (Unaudited) and December 31, 2021	2
	Consolidated Statements of Income (Loss) for the Three and S ix Months Ended June 30 , 2022 and 2021 (Unaudited)	3
	Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30 , 2022 and 2021 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three and Six Months Ended June 30 , 2022 and 2021 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30 , 2022 and 2021 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	9
	Note 1. Organization	9
	Note 2. Basis of Presentation	9
	Note 3. Summary of Significant Accounting Policies	11
	Note 4. Principles of Consolidation	15
	Note 5. Fair Value of Financial Instruments	24
	Note 6. Residential Loans	32
	Note 7. Business Purpose Loans	35
	Note 8. Consolidated Agency Multifamily Loans	39
	Note 9. Real Estate Securities	40
	Note 10. Other Investments	45
	Note 11. Derivative Financial Instruments	47
	Note 12. Other Assets and Liabilities	48
	Note 13. Short-Term Debt	50
	Note 14. Asset-Backed Securities Issued	52
	Note 15. Long-Term Debt	55
	Note 16. Commitments and Contingencies	58
	Note 17. Equity	60
	Note 18. Equity Compensation Plans	63
	Note 19. Mortgage Banking Activities, Net	64
	Note 20. Other Income, Net	65
	Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	66
	Note 22. Taxes	67
	Note 23. Segment Information	67
	Note 24. Subsequent Events	71
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	72
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	103
Item 4.	Controls and Procedures	103

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	104
Item 1A.	Risk Factors	104
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	104
Item 3.	Defaults Upon Senior Securities	104
Item 4.	Mine Safety Disclosures (Not Applicable)	104
Item 5.	Other Information	104
Item 6.	Exhibits	105
Signatures		106

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(In Thousands, except Share Data) (Unaudited)	June 30, 2022		December 31, 2021
ASSETS (1)
Residential loans, held-for-sale, at fair value	$	1,213,067	$	1,845,282
Residential loans, held-for-investment, at fair value	5,365,532		5,747,150
Business purpose loans, held-for-sale, at fair value	505,171		358,309
Business purpose loans, held-for-investment, at fair value	4,697,766		4,432,680
Consolidated Agency multifamily loans, at fair value	443,114		473,514
Real estate securities, at fair value	284,278		377,411
Other investments	679,667		641,969
Cash and cash equivalents	371,296		450,485
Restricted cash	72,558		80,999
Intangible assets	34,720		41,561
Derivative assets	36,587		26,467
Other assets	171,780		231,117
Total Assets	$	13,875,536	$	14,706,944

LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net	$	1,869,822	$	2,177,362

Derivative liabilities	6,591		3,317
Accrued expenses and other liabilities	190,825		245,788

Asset-backed securities issued (includes $7,993,953 and $8,843,147 at fair value), net	8,584,146		9,253,557
Long-term debt, net	1,966,061		1,640,833
Total liabilities	12,617,445		13,320,857
Commitments and Contingencies (see Note 16)
Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 116,753,174 and 114,892,309 issued and outstanding	1,168		1,149
Additional paid-in capital	2,363,709		2,316,799
Accumulated other comprehensive loss	(57,788)		(8,927)
Cumulative earnings	1,247,839		1,316,890
Cumulative distributions to stockholders	(2,296,837)		(2,239,824)
Total equity	1,258,091		1,386,087
Total Liabilities and Equity	$	13,875,536	$	14,706,944

——————

(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At June 30, 2022 and December 31, 2021, assets of consolidated VIEs totaled $9,951,520 and $10,661,081, respectively. At June 30, 2022 and December 31, 2021, liabilities of consolidated VIEs totaled $8,899,020 and $9,619,347, respectively. See Note 4 for further discussion.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)


(In Thousands, except Share Data)	Three Months Ended June 30,				Six Months Ended June 30,
(Unaudited)	2022		2021		2022		2021
Interest Income
Residential loans	$	65,047	$	48,433	$	130,250	$	92,088
Business purpose loans	80,934		70,323		175,233		134,511
Multifamily loans	4,732		4,860		9,485		9,646
Real estate securities	7,828		9,279		23,783		18,942
Other interest income	8,914		5,800		18,104		11,813
Total interest income	167,455		138,695		356,855		267,000
Interest Expense
Short-term debt	(13,661)		(11,195)		(25,149)		(18,968)
Asset-backed securities issued	(88,859)		(76,419)		(194,554)		(148,980)
Long-term debt	(24,447)		(20,451)		(43,562)		(42,669)
Total interest expense	(126,967)		(108,065)		(263,265)		(210,617)
Net Interest Income	40,488		30,630		93,590		56,383
Non-interest (Loss) Income
Mortgage banking activities, net	(30,017)		54,419		(13,702)		137,026
Investment fair value changes, net	(87,972)		49,480		(94,092)		94,567
Other income, net	7,006		2,126		12,989		5,969
Realized gains, net	—		8,384		2,581		11,100
Total non-interest (loss) income, net	(110,983)		114,409		(92,224)		248,662
General and administrative expenses	(31,966)		(40,594)		(66,820)		(84,145)
Loan acquisition costs	(3,480)		(3,748)		(7,945)		(7,307)
Other expenses	(3,468)		(3,985)		(7,553)		(8,081)
Net (Loss) Income before Benefit from (Provision for) Income Taxes	(109,409)		96,712		(80,952)		205,512
Benefit from (provision for) income taxes	9,443		(6,687)		11,901		(18,230)
Net (Loss) Income	$	(99,966)	$	90,025	$	(69,051)	$	187,282

Basic (loss) earnings per common share	$	(0.85)	$	0.77	$	(0.60)	$	1.61
Diluted (loss) earnings per common share	$	(0.85)	$	0.66	$	(0.60)	$	1.38
Basic weighted average shares outstanding	119,660,173		112,921,070		119,771,554		112,337,984
Diluted weighted average shares outstanding	119,660,173		141,761,084		119,771,554		141,139,212

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(In Thousands)	Three Months Ended June 30,					Six Months Ended June 30,
(Unaudited)	2022		2021			2022		2021
Net (Loss) Income	$	(99,966)	$	90,025		$	(69,051)	$	187,282
Other comprehensive (loss) income:
Net unrealized (loss) gain on available-for-sale securities	(33,409)		11,224			(51,282)		22,210
Reclassification of unrealized loss (gain) on available-for-sale securities to net (loss) income	1,066		(7,500)			374		(10,295)

Reclassification of unrealized loss on interest rate agreements to net (loss) income	1,029		1,028			2,047		2,046
Total other comprehensive (loss) income	(31,314)		4,752		4752000	(48,861)		13,961
Total Comprehensive (Loss) Income	$	(131,280)	$	94,777		$	(117,912)	$	201,243

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended June 30, 2022


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
March 31, 2022	120,289,243	$	1,203	$	2,391,344	$	(26,474)	$	1,347,805	$	(2,268,612)	$	1,445,266
Net (loss)	—	—		—		—		(99,966)		—		(99,966)
Other comprehensive (loss)	—	—		—		(31,314)		—		—		(31,314)


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

For the Six Months Ended June 30, 2022


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2021	114,892,309	$	1,149	$	2,316,799	$	(8,927)	$	1,316,890	$	(2,239,824)	$	1,386,087
Net (loss)	—	—		—		—		(69,051)		—		(69,051)
Other comprehensive (loss)	—	—		—		(48,861)		—		—		(48,861)
Issuance of common stock	5,232,869	52		67,423		—		—		—		67,475

Employee stock purchase and incentive plans	308,029	3		(1,183)		—		—		—		(1,180)
Non-cash equity award compensation	—	—		13,436		—		—		—		13,436
Share repurchases	(3,680,033)	(36)		(32,766)		—		—		—		(32,802)
Common dividends declared ($0.46 per share)	—	—		—		—		—		(57,013)		(57,013)
June 30, 2022	116,753,174	$	1,168	$	2,363,709	$	(57,788)	$	1,247,839	$	(2,296,837)	$	1,258,091

For the Three Months Ended June 30, 2021


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
March 31, 2021	112,998,732	$	1,130	$	2,281,647	$	4,988	$	1,094,534	$	(2,166,724)	$	1,215,575
Net income	—	—		—		—		90,025		—		90,025
Other comprehensive income	—	—		—		4,752		—		—		4,752


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

Common dividends declared ($0.18 per share)	—	—		—		—		—		(20,976)		(20,976)
June 30, 2021	113,052,780	$	1,131	$	2,287,412	$	9,740	$	1,184,559	$	(2,187,700)	$	1,295,142

For the Six Months Ended June 30, 2021


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2020	112,090,006	$	1,121	$	2,264,874	$	(4,221)	$	997,277	$	(2,148,152)	$	1,110,899
Net income	—	—		—		—		187,282		—		187,282
Other comprehensive income	—	—		—		13,961		—		—		13,961
Issuance of common stock	806,068	8		13,366		—		—		—		13,374

Employee stock purchase and incentive plans	156,706	2		(689)		—		—		—		(687)
Non-cash equity award compensation	—	—		9,861		—		—		—		9,861

Common dividends declared ($0.34 per share)	—	—		—		—		—		(39,548)		(39,548)
June 30, 2021	113,052,780	$	1,131	$	2,287,412	$	9,740	$	1,184,559	$	(2,187,700)	$	1,295,142

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

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


(In Thousands) (Unaudited)	Six Months Ended June 30,
	2022		2021
Cash Flows From Operating Activities:
Net (loss) income	$	(69,051)	$	187,282
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	(2,538)		3,998
Depreciation and amortization of non-financial assets	7,710		8,405
Originations of held-for-sale loans	(766,852)		(567,546)
Purchases of held-for-sale loans	(3,395,459)		(6,682,864)
Proceeds from sales of held-for-sale loans	3,376,600		4,526,370
Principal payments on held-for-sale loans	114,731		19,856
Net settlements of derivatives	112,649		39,697

Non-cash equity award compensation expense	13,436		9,861

Market valuation adjustments	132,594		(213,641)
Realized gains, net	(2,581)		(11,100)
Net change in:
Accrued interest receivable and other assets	63,829		10,260
Accrued interest payable and accrued expenses and other liabilities	(75,856)		17,327
Net cash used in operating activities	(490,788)		(2,652,095)
Cash Flows From Investing Activities:
Originations of loan investments	(954,179)		(348,389)
Purchases of loan investments	(22,006)		—
Proceeds from sales of loan investments	—		9,231
Principal payments on loan investments	1,160,403		1,312,064
Purchases of real estate securities	(15,006)		(18,593)


Sales of securities held in consolidated securitization trusts	—		8,197
Proceeds from sales of real estate securities	23,329		36,735
Principal payments on real estate securities	26,033		29,786

Principal repayments from servicer advance investments	71,401		45,838






Purchases of HEIs	(97,389)		—
Principal payments on HEIs	25,826		—
Other investing activities, net	(14,573)		(5,025)
Net cash provided by investing activities	203,839		1,069,844
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	3,450,606		6,604,603
Repayments on short-term debt	(4,125,634)		(5,421,494)
Proceeds from issuance of asset-backed securities	1,167,711		1,629,218
Repayments on asset-backed securities issued	(954,136)		(1,088,809)

Proceeds from borrowings on long-term debt	1,424,088		487,975
Deferred long-term debt issuance costs paid	(17,363)		—
Repayments on long-term debt	(726,076)		(654,893)

Net payments on repurchase of common stock	(26,857)		—
Taxes paid on equity award distributions	(1,477)		(943)
Net proceeds from issuance of common stock	67,770		255
Dividends paid	(57,013)		(39,548)
Other financing activities, net	(2,300)		(2,292)
Net cash provided by financing activities	199,319		1,514,072
Net decrease in cash, cash equivalents and restricted cash	(87,630)		(68,179)
Cash, cash equivalents and restricted cash at beginning of period (1)	531,484		544,450
Cash, cash equivalents and restricted cash at end of period (1)	$	443,854	$	476,271

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


(In Thousands) (Unaudited)	Six Months Ended June 30,
	2022		2021
























































Supplemental Cash Flow Information:
Cash paid during the period for:
Interest	$	247,968	$	198,364
Taxes paid	3,894		19,183
Supplemental Noncash Information:
Real estate securities retained from loan securitizations	$	—	$	9,374
Retention of mortgage servicing rights from loan securitizations and sales	4,543		—




Transfers from loans held-for-sale to loans held-for-investment	1,953,421		1,998,535
Transfers from loans held-for-investment to loans held-for-sale	—		44,922
Transfers from residential loans to real estate owned	3,132		15,827
Transfers from long-term debt to short-term debt	367,431		47,994
Right-of-use asset obtained in exchange for operating lease liability	—		1,135

Issuance of common stock for 5 Arches acquisition	—		13,375

(1) Cash, cash equivalents, and restricted cash includes cash and cash equivalents of $371 million and restricted cash of $73 million at June 30, 2022, and includes cash and cash equivalents of $450 million and restricted cash of $81 million at December 31, 2021.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit, with a mission to help make quality housing, whether rented or owned, accessible to all American households. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not well served by government programs. We deliver customized housing credit investments to a diverse mix of investors through our best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential, business purpose and multifamily assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio.

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

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

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

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at June 30, 2022 and December 31, 2021, and for the three and six months ended June 30, 2022 and 2021. 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, 2021. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the Company at June 30, 2022 and results of operations for all periods presented. The results of operations for the three and six months ended June 30, 2022 should not be construed as indicative of the results to be expected for the full year.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 2. Basis of Presentation - (continued)

Principles of Consolidation

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

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

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

See Note 4 for further discussion on principles of consolidation.

Use of Estimates

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

Acquisitions

Refer to Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for additional information regarding the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 2. Basis of Presentation - (continued)

In connection with the acquisitions of 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at June 30, 2022.

Table 2.1 – Intangible Assets – Activity


	Intangible Assets at Acquisition		Accumulated Amortization at June 30, 2022		Carrying Value at June 30, 2022		Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network	$	45,300	$	(17,527)	$	27,773	7
Broker network	18,100		(12,067)		6,033		5
Non-compete agreements	9,500		(8,858)		642		3
Tradenames	4,000		(3,728)		272		3
Developed technology	1,800		(1,800)		—		2
Loan administration fees on existing loan assets	2,600		(2,600)		—		1
Total	$	81,300	$	(46,580)	$	34,720	6

All of our intangible assets are amortized on a straight-line basis. For each of the six months ended June 30, 2022 and 2021, we recorded intangible asset amortization expense of $7 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year



(In Thousands)	June 30, 2022
2022 (6 months)	$	5,959
2023	10,091
2024	7,075
2025	6,471
2026	5,124
Total Future Intangible Asset Amortization	$	34,720

On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at June 30, 2022.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Included in Note 3 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2021 is a summary of our significant accounting policies.

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)." This new guidance simplifies the accounting for convertible debt by reducing the number of accounting models to separately present certain conversion features in equity. This new guidance was effective for fiscal years beginning after December 31, 2021. We adopted this guidance in the first quarter of 2022, which did not have a material impact on our consolidated financial statements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

Other Recent Accounting Pronouncements

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued to (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the accounting and disclosure requirements of ASU 2022-03 and we plan to adopt this new guidance by the required date. We do not anticipate that this update will have a material impact on our financial statements.

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the current expected credit loss ("CECL") model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method," which will expand companies' abilities to hedge the benchmark interest rate risk of portfolios of financial assets (or beneficial interests) in a fair value hedge. The ASU expands the use of the portfolio layer method (previously referred to as the last-of-layer method) to allow multiple hedges of a single closed portfolio of assets using spot starting, forward starting, and amortizing-notional swaps. The ASU also permits both prepayable and non-prepayable financial assets to be included in the closed portfolio of assets hedged in a portfolio layer hedge. The ASU further requires that basis adjustments not be allocated to individual assets for active portfolio layer method hedges, but rather be maintained on the closed portfolio of assets as a whole. This guidance is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

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

We have an established cross-functional group that has evaluated our exposure to LIBOR, reviewed relevant contracts and has monitored regulatory updates to assess the potential impact to our business, processes and technology from the ultimate full cessation of LIBOR in 2023, and has established a LIBOR transition plan to facilitate an orderly transition to alternative reference rates. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability with LIBOR exposure. At June 30, 2022, our primary LIBOR exposure included the following: $868 million of repo or warehouse debt, $468 million of interest rate swaps, $740 million of bridge loans, and $140 million of trust preferred securities and subordinated notes debt. Since December 31, 2021, certain of our contracts, such as interest rate swaps, have experienced an orderly market transition and we have transitioned a substantial portion of our derivative positions off of LIBOR-benchmarks. Other contracts, such as warehouse debt agreements, require bilateral amendments, many of which we have amended or are currently in the process of amending.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

We anticipate most of these facilities will be amended in 2022, with sufficient time remaining to resolve the remainder. In early 2022, we began benchmarking all newly originated bridge loans to the Secured Overnight Financing Rate (“SOFR”), and our existing portfolio of bridge loans are short-dated and we expect the vast majority to mature before the LIBOR cessation date in 2023. Additionally, as the result of legislation that was passed in the state of New York, our trust preferred securities and subordinated notes are expected to convert to SOFR upon the cessation of LIBOR.

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.

The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at June 30, 2022 and December 31, 2021.

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


	Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet		Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount
June 30, 2022 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	29,601	$	—	$	29,601	$	(2,445)	$	(6,451)	$	20,705

TBAs	3,104		—		3,104		(530)		(2,574)		—
Futures	1,875		—		1,875		(1,615)		(2)		258
Total Assets	$	34,580	$	—	$	34,580	$	(4,590)	$	(9,027)	$	20,963

Liabilities (2)
Interest rate agreements	$	(2,445)	$	—	$	(2,445)	$	2,445	$	—	$	—
TBAs	(2,004)		—		(2,004)		530		1,474		—
Futures	(1,615)		—		(1,615)		1,615		—		—
Loan warehouse debt	(423,619)		—		(423,619)		423,619		—		—

Total Liabilities	$	(429,683)	$	—	$	(429,683)	$	428,209	$	1,474	$	—

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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


	Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet		Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount
December 31, 2021 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	18,929	$	—	$	18,929	$	(1,251)	$	(16,046)	$	1,632

TBAs	2,880		—		2,880		(633)		(704)		1,543
Futures	25		—		25		(25)		—		—
Total Assets	$	21,834	$	—	$	21,834	$	(1,909)	$	(16,750)	$	3,175

Liabilities (2)
Interest rate agreements	$	(1,251)	$	—	$	(1,251)	$	1,251	$	—	$	—
TBAs	$	(658)	$	—	$	(658)	$	633	$	15	$	(10)
Futures	(905)		—		(905)		25		880		—
Loan warehouse debt	(572,720)		—		(572,720)		572,720		—		—

Total Liabilities	$	(575,534)	$	—	$	(575,534)	$	574,629	$	895	$	(10)

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation

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

Analysis of Consolidated VIEs

At June 30, 2022, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for certain securitizations, we are exposed to financial risks associated with our role as a sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

We also consolidate two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At June 30, 2022, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s non-controlling interest. Additionally, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing.

During 2021, we consolidated a HEI securitization entity formed to invest in HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At June 30, 2022 and December 31, 2021, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 12 for additional information on non-controlling interests in the entity. We consolidate the HEI securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Table 4.1 – Assets and Liabilities of Consolidated VIEs


June 30, 2022	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST(1)		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	208,788	$	3,525,459	$	—	$	1,631,285	$	—	$	—	$	—	$	5,365,532
Business purpose loans, held-for-investment	—		—		3,588,428		—		—		—		—		3,588,428
Consolidated Agency multifamily loans	—		—		—		—		443,114		—		—		443,114

Other investments	—		—		—		—		—		305,379		146,215		451,594
Cash and cash equivalents	—		—		—		—		—		14,399		—		14,399
Restricted cash	143		10		8,688		—		—		26,236		4,120		39,197
Accrued interest receivable	215		11,317		14,955		5,378		1,304		403		—		33,572
Other assets	410		—		5,320		2,299		—		7,605		50		15,684
Total Assets	$	209,556	$	3,536,786	$	3,617,391	$	1,638,962	$	444,418	$	354,022	$	150,385	$	9,951,520
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	231,846	$	—	$	231,846
Accrued interest payable	171		9,232		10,610		3,720		1,178		223		—		25,134
Accrued expenses and other liabilities	—		10		6,996		—		—		25,466		25,422		57,894
Asset-backed securities issued	207,647		3,288,682		3,207,867		1,358,459		411,380		—		110,111		8,584,146
Total Liabilities	$	207,818	$	3,297,924	$	3,225,473	$	1,362,179	$	412,558	$	257,535	$	135,533	$	8,899,020

Value of our investments in VIEs(1)	$	1,552	$	236,777	$	388,849	$	275,127	$	31,732	$	96,487	$	14,852	$	1,045,376
Number of VIEs	20		17		18		3		1		3		1		63

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2021	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST(1)		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	230,455	$	3,628,465	$	—	$	1,888,230	$	—	$	—	$	—	$	5,747,150
Business purpose loans, held-for-investment	—		—		3,766,316		—		—		—		—		3,766,316
Consolidated Agency multifamily loans	—		—		—		—		473,514		—		—		473,514

Other investments	—		—		—		—		—		384,754		159,553		544,307
Cash and cash equivalents	—		—		—		—		—		6,481		—		6,481
Restricted cash	148		5		15,221		—		—		25,420		5,292		46,086
Accrued interest receivable	210		10,885		15,737		5,792		1,315		1,462		—		35,401
Other assets	61		—		32,510		2,028		—		7,177		50		41,826
Total Assets	$	230,874	$	3,639,355	$	3,829,784	$	1,896,050	$	474,829	$	425,294	$	164,895	$	10,661,081
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	294,447	$	—	$	294,447
Accrued interest payable	99		8,452		11,030		4,055		1,190		192		—		25,018
Accrued expenses and other liabilities	—		5		1,171		—		—		28,115		17,034		46,325
Asset-backed securities issued	227,881		3,383,048		3,474,898		1,588,463		441,857		—		137,410		9,253,557
Total Liabilities	$	227,980	$	3,391,505	$	3,487,099	$	1,592,518	$	443,047	$	322,754	$	154,444	$	9,619,347

Value of our investments in VIEs(1)	$	2,634	$	245,417	$	339,419	$	301,795	$	31,657	$	102,540	$	10,451	$	1,033,913
Number of VIEs	20		16		16		3		1		3		1		60

(1)Value of our investments in VIEs, as presented in this table, represent the fair value of our economic interests in the VIEs only for consolidated VIEs we account for under the CFE election. CAFL includes SFR loan securitizations we account for under the CFE election and two bridge loan securitizations for which we did not make the CFE election. As of June 30, 2022 and December 31, 2021, the fair value of our interests in the CAFL SFR securitizations were $307 million and $302 million, respectively, and the remaining values were associated with our interests in the CAFL Bridge securitizations, for which the ABS issued is carried at amortized historical cost. Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a resecuritization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. As of June 30, 2022 and December 31, 2021, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election were $390 million and $445 million, respectively, with the difference from the tables above representing ABS issued and carried at amortized historical cost.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents income (loss) from these VIEs for the three and six months ended June 30, 2022 and 2021.

Table 4.2 – Income (Loss) from Consolidated VIEs


	Three Months Ended June 30, 2022
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,108	$	31,923	$	56,608	$	16,553	$	4,732	$	7,568	$	—	$	118,492
Interest expense	(967)		(28,329)		(41,923)		(13,372)		(4,351)		(1,842)		—		(90,784)
Net interest income	141		3,594		14,685		3,181		381		5,726		—		27,708
Non-interest income

Investment fair value changes, net	(336)		(5,886)		(22,109)		(35,940)		(190)		(4,505)		1,201		(67,765)
Other income	—		—		255		—		—		—		—		255

Total non-interest income, net	(336)		(5,886)		(21,854)		(35,940)		(190)		(4,505)		1,201		(67,510)
General and administrative expenses	—		—		—		—		—		(44)		—		(44)
Other expenses	—		—		—		—		—		(235)		—		(235)

Income (loss) from Consolidated VIEs	$	(195)	$	(2,292)	$	(7,169)	$	(32,759)	$	191	$	942	$	1,201	$	(40,081)


	Six Months Ended June 30, 2022
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,120	$	64,021	$	133,942	$	33,753	$	9,485	$	15,487	$	—	$	258,808
Interest expense	(1,668)		(56,500)		(100,403)		(27,457)		(8,722)		(3,504)		—		(198,254)
Net interest income	452		7,521		33,539		6,296		763		11,983		—		60,554
Non-interest income

Investment fair value changes, net	(1,050)		(9,708)		(19,445)		(32,904)		74		(7,973)		4,612		(66,394)
Other income	—		—		345		—		—		—		—		345

Total non-interest income, net	(1,050)		(9,708)		(19,100)		(32,904)		74		(7,973)		4,612		(66,049)
General and administrative expenses	—		—		—		—		—		(75)		—		(75)
Other expenses	—		—		—		—		—		(786)		—		(786)

Income (loss) from Consolidated VIEs	$	(598)	$	(2,187)	$	14,439	$	(26,608)	$	837	$	3,149	$	4,612	$	(6,356)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)


	Three Months Ended June 30, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,169	$	14,492	$	54,849	$	19,506	$	4,860	$	4,041	$	—	$	98,917
Interest expense	(755)		(11,374)		(43,201)		(16,611)		(4,478)		(1,110)		—		(77,529)
Net interest income	414		3,118		11,648		2,895		382		2,931		—		21,388
Non-interest income

Investment fair value changes, net	(216)		4,906		3,697		36,316		1,855		(2,320)		—		44,238


Total non-interest income, net	(216)		4,906		3,697		36,316		1,855		(2,320)		—		44,238
General and administrative expenses	—		—		—		—		—		(52)		—		(52)
Other expenses	—		—		—		—		—		(112)		—		(112)

Income (loss) from Consolidated VIEs	$	198	$	8,024	$	15,345	$	39,211	$	2,237	$	447	$	—	$	65,462


	Six Months Ended June 30, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,517	$	29,975	$	103,722	$	39,665	$	9,646	$	8,263	$	—	$	193,788
Interest expense	(1,630)		(23,480)		(81,054)		(33,982)		(8,834)		(2,396)		—		(151,376)
Net interest income	887		6,495		22,668		5,683		812		5,867		—		42,412
Non-interest income

Investment fair value changes, net	(915)		9,804		3,411		40,433		10,776		(3,566)		—		59,943


Total non-interest income, net	(915)		9,804		3,411		40,433		10,776		(3,566)		—		59,943
General and administrative expenses	—		—		—		—		—		(90)		—		(90)
Other expenses	—		—		—		—		—		(442)		—		(442)

Income (loss) from Consolidated VIEs	$	(28)	$	16,299	$	26,079	$	46,116	$	11,588	$	1,769	$	—	$	101,823

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 46 Sequoia securitization entities sponsored by us that are still outstanding as of June 30, 2022, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.

During the three months ended June 30, 2022, we did not call any of our unconsolidated Sequoia entities. During the six months ended June 30, 2022, we called three of our unconsolidated Sequoia entities, and purchased $102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $0.3 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At June 30, 2022, we held $222 million of loans for sale at fair value that were acquired following the calls.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents information related to securitization transactions that occurred during the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Principal balance of loans transferred	$	—	$	355,924	$	—	$	1,231,803
Trading securities retained, at fair value	—		1,225		—		7,774
AFS securities retained, at fair value	—		522		—		1,600

The following table summarizes the cash flows during the three and six months ended June 30, 2022 and 2021 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Proceeds from new transfers	$	—	$	361,673	$	—	$	1,266,063
MSR fees received	764		1,336		1,628		2,943
Funding of compensating interest, net	(14)		(70)		(30)		(170)
Cash flows received on retained securities	3,158		16,764		17,284		25,393

The following table presents the key weighted-average assumptions used to value securities retained at the date of securitization for securitizations completed during the three and six months ended June 30, 2022 and 2021.

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

Three Months Ended June 30, 2022

Three Months Ended June 30, 2021

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

8 %

Discount rates

N/A

15 %

7 %

Credit loss assumptions

N/A

0.25 %

Six Months Ended June 30, 2022

Six Months Ended June 30, 2021

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

11 %

Discount rates

N/A

15 %

6 %

Credit loss assumptions

N/A

0.23 %

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents additional information at June 30, 2022 and December 31, 2021, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	June 30, 2022		December 31, 2021
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	27,293	$	18,214
Subordinate securities, classified as AFS	85,269		127,542
Mortgage servicing rights	11,092		6,450
Maximum loss exposure (1)	$	123,654	$	152,206
Assets transferred:
Principal balance of loans outstanding	$	4,281,806	$	4,959,234
Principal balance of loans 30+ days delinquent	27,683		30,594

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

The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at June 30, 2022 and December 31, 2021.

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


June 30, 2022	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at June 30, 2022	$	11,092		$	27,293		$	85,269
Expected life (in years) (2)	6			6			15
Prepayment speed assumption (annual CPR) (2)	10		%	11		%	10		%
Decrease in fair value from:
10% adverse change	$	1,402		$	1,002		$	568
25% adverse change	3,405			2,406			1,323
Discount rate assumption (2)	11		%	12		%	8		%
Decrease in fair value from:
100 basis point increase	$	1,649		$	910		$	8,522
200 basis point increase	3,180			1,759			15,860
Credit loss assumption (2)	N/A			0.03		%	0.03		%
Decrease in fair value from:
10% higher losses	N/A			N/A			$	42
25% higher losses	N/A			N/A			103

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2021	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at December 31, 2021	$	6,450		$	18,214		$	127,542
Expected life (in years) (2)	3			4			5
Prepayment speed assumption (annual CPR) (2)	29		%	23		%	32 %
Decrease in fair value from:
10% adverse change	$	447		$	1,130		$	531
25% adverse change	1,020			2,596			1,440
Discount rate assumption (2)	12 %			16		%	5		%
Decrease in fair value from:
100 basis point increase	$	152		$	426		$	4,801
200 basis point increase	297			829			9,139
Credit loss assumption (2)	N/A			0.35		%	0.35		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,528
25% higher losses	N/A			—			3,819

(1)Senior securities included $27 million and $18 million of interest-only securities at June 30, 2022 and December 31, 2021, respectively.

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

Analysis of Unconsolidated Third-Party VIEs

Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at June 30, 2022 and December 31, 2021, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	June 30, 2022		December 31, 2021
Mortgage-Backed Securities
Senior	$	4,205	$	3,572

Subordinate	167,512		228,083
Total Mortgage-Backed Securities	171,717		231,655
Excess MSR	8,633		10,400
Total Investments in Third-Party Sponsored VIEs	$	180,350	$	242,055

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 5. Fair Value of Financial Instruments

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at June 30, 2022 and December 31, 2021.

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


	June 30, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value	$	1,213,067	$	1,213,067	$	1,845,248	$	1,845,248
Residential loans, held-for-investment, at fair value	5,365,531		5,365,531		5,747,150		5,747,150
Business purpose loans, held-for-sale, at fair value	505,171		505,171		358,309		358,309
Business purpose loans, held-for-investment, at fair value	4,697,766		4,697,766		4,432,680		4,432,680
Consolidated Agency multifamily loans, at fair value	443,114		443,114		473,514		473,514
Real estate securities, at fair value	284,278		284,278		377,411		377,411
Servicer advance investments (1)	273,210		273,210		350,923		350,923
MSRs (1)	23,560		23,560		12,438		12,438
Excess MSRs (1)	40,803		40,803		44,231		44,231
HEIs (1)	276,366		276,366		192,740		192,740
Other investments (1)	10,869		10,869		12,663		12,663
Cash and cash equivalents	371,296		371,296		450,485		450,485
Restricted cash	72,558		72,558		80,999		80,999
Derivative assets	36,587		36,587		26,467		26,467
REO (2)	7,813		9,170		36,126		39,272
Margin receivable (2)	11,420		11,420		7,269		7,269



Liabilities
Short-term debt	$	1,869,822	$	1,869,822	$	2,177,362	$	2,177,362
Margin payable (3)	15,023		15,023		24,368		24,368
Guarantee obligations (3)	6,768		6,241		7,459		7,133
HEI securitization non-controlling interest	25,422		25,422		17,035		17,035
Derivative liabilities	6,591		6,591		3,317		3,317
ABS issued, net
At fair value	7,993,953		7,993,953		8,843,147		8,843,147
At amortized cost	590,193		569,731		410,410		410,471
Other long-term debt, net (4)	1,104,050		1,101,622		988,483		989,570
Convertible notes, net (4)	723,267		684,922		513,629		537,300
Trust preferred securities and subordinated notes, net (4)	138,744		83,700		138,721		97,650

(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.

(4)These liabilities are included in Long-Term debt, net of our consolidated balance sheets.

During the three and six months ended June 30, 2022, we elected the fair value option for zero and $5 million of securities, respectively, $1.15 billion and $3.26 billion of residential loans (principal balance), respectively, and $923 million and $1.84 billion of business purpose loans (principal balance), respectively. Additionally, during the three and six months ended June 30, 2022, we elected the fair value option for $57 million and $97 million of HEIs, respectively, and $3 million and $8 million of Other Investments, respectively. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities, fixed-rate securities rated investment grade or higher and HEIs.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at June 30, 2022 and December 31, 2021, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

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


June 30, 2022	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	6,578,566	$	—	$	—	$	6,578,566
Business purpose loans	5,202,938		—		—		5,202,938
Consolidated Agency multifamily loans	443,114		—		—		443,114
Real estate securities	284,278		—		—		284,278
Servicer advance investments	273,210		—		—		273,210
MSRs	23,560		—		—		23,560
Excess MSRs	40,803		—		—		40,803
HEIs	276,366		—		—		276,366
Other investments	10,869		—		—		10,869
Derivative assets	36,587		4,979		29,601		2,007



Liabilities
HEI securitization non-controlling interest	$	25,422	$	—	$	—	$	25,422
Derivative liabilities	6,591		3,619		2,445		527
ABS issued	7,993,953		—		—		7,993,953


December 31, 2021	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	7,592,398	$	—	$	—	$	7,592,398
Business purpose loans	4,790,989		—		—		4,790,989
Consolidated Agency multifamily loans	473,514		—		—		473,514
Real estate securities	377,411		—		—		377,411
Servicer advance investments	350,923		—		—		350,923
MSRs	12,438		—		—		12,438
Excess MSRs	44,231		—		—		44,231
HEIs	192,740		—		—		192,740
Other investments	17,574		—		—		17,574
Derivative assets	26,467		2,906		18,928		4,633



Liabilities
HEI securitization non-controlling interest	$	17,035	$	—	$	—	$	17,035
Derivative liabilities	3,317		1,563		1,251		503
ABS issued	8,843,147		—		—		8,843,147

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2022.

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


	Assets
	Residential Loans		Business Purpose Loans		Multifamily Loans		Trading Securities		AFS Securities		Servicer Advance Investments		Excess MSRs		HEIs		MSRs and Other Investments
(In Thousands)
Beginning balance - December 31, 2021	$	7,592,398	$	4,790,989	$	473,514	$	170,619	$	206,792	$	350,923	$	44,231	$	192,740	$	25,101

Acquisitions	3,247,960		122,065		—		5,006		10,000		—		—		97,389		8,293
Originations	—		1,721,032		—		—		—		—		—		—		—
Sales	(3,050,759)		(331,750)		—		(23,329)		—		—		—		—		(2,231)
Principal paydowns	(551,470)		(719,690)		(3,971)		(1,018)		(25,015)		(71,401)		—		(25,826)		(30)

Gains (losses) in net income (loss), net	(657,601)		(378,745)		(26,429)		(17,498)		11,730		(6,312)		(3,428)		12,063		6,875
Unrealized losses in OCI, net	—		—		—		—		(53,009)		—		—		—		—
Other settlements, net (1)	(1,962)		(963)		—		—		—		—		—		—		(3,579)
Ending balance - June 30, 2022	$	6,578,566	$	5,202,938	$	443,114	$	133,780	$	150,498	$	273,210	$	40,803	$	276,366	$	34,429


	Liabilities
		Derivatives (2)		HEI Securitization Non-Controlling Interest		ABS Issued
(In Thousands)
Beginning balance - December 31, 2021		$	4,130	$	17,035	$	8,843,147

Acquisitions		—		—		952,711

Principal paydowns		—		—		(925,650)

Gains (losses) in net income (loss), net		(51,265)		6,218		(876,255)

Other settlements, net (1)		48,615		—		—
Ending balance - June 30, 2022		$	1,480	$	23,253	$	7,993,953

(1) Other settlements, net for residential and business purpose loans represents the transfer of loans to REO, and for derivatives, the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental business purpose loans, and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

The following table presents the portion of fair value gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at June 30, 2022 and 2021. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2022 and 2021 are not included in this presentation.

Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at June 30, 2022 and 2021 Included in Net Income (Loss)


	Included in Net Income (Loss)
	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Assets
Residential loans at Redwood	$	(15,995)	$	14,130	$	(31,858)	$	10,481
Business purpose loans	(28,385)		28,404		(36,566)		40,003
Net investments in consolidated Sequoia entities (1)	(6,222)		4,693		(11,203)		8,893
Net investments in consolidated Freddie Mac SLST entities (1)	(36,014)		36,137		(33,074)		40,225
Net investments in consolidated Freddie Mac K-Series entities (1)	(190)		1,855		74		10,776
Net investments in consolidated CAFL SFR entities (1)	(21,828)		2,908		(17,780)		2,556
Net investment in consolidated HEI securitization entity (1)	3,371		—		13,000		—
Trading securities	(17,501)		1,772		(19,884)		2,262

Servicer advance investments	(3,231)		(940)		(6,313)		(1,100)
MSRs	4,248		(330)		7,644		273
Excess MSRs	(2,220)		(2,477)		(3,428)		(4,430)
HEIs at Redwood	1,549		2,080		2,701		7,395
Loan purchase and interest rate lock commitments	2,056		14,550		2,007		14,171



Liabilities
HEI securitization non-controlling interest	$	(2,170)	$	—	$	(8,388)	$	—
Loan purchase commitments	(488)		(696)		(527)		(724)

(1) Represents the portion of net fair value gains or losses included in our consolidated statements of income (loss) related to securitized loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at June 30, 2022 and 2021, which netted together represent the change in value of our investments at the consolidated VIEs accounted for under CFE election, excluding REO.

The following table presents information on assets recorded at fair value on a non-recurring basis at June 30, 2022. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance sheets at June 30, 2022.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at June 30, 2022


									Gain (Loss) for
June 30, 2022	Carrying Value		Fair Value Measurements Using						Three Months Ended		Six Months Ended
(In Thousands)			Level 1		Level 2		Level 3		June 30, 2022		June 30, 2022
Assets


REO	$	1,380	$	—	$	—	$	1,380	$	—	$	—
Strategic investments	17,240		—		—		17,240		9,990		9,990

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and six months ended June 30, 2022 and 2021.

Table 5.6 – Market Valuation Gains and Losses, Net


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	(24,517)	$	24,988	$	(51,716)	$	48,100
Residential loan purchase commitments	(8,897)		51,919		(50,520)		(466)
Single-family rental loans held-for-sale, at fair value	(40,034)		25,222		(64,502)		35,470
Single-family rental loan interest rate lock commitments	40		744		(685)		744
Bridge loans	116		2,225		2,251		3,269
Trading securities (1)	1,315		(1,095)		4,101		(374)
Risk management derivatives, net	25,387		(58,244)		115,774		34,578
Total mortgage banking activities, net (2)	$	(46,590)	$	45,759	$	(45,297)	$	121,321
Investment Fair Value Changes, Net
Residential loans held-for-sale, at fair value (called Sequoia loans)	$	(8,010)	$	1,290	$	(12,262)	$	1,607

Bridge loans held-for-investment	(9,559)		(62)		(11,702)		3,242
Trading securities	(17,358)		2,893		(21,600)		23,521
Servicer advance investments	(3,231)		(940)		(6,312)		(1,100)
Excess MSRs	(2,220)		(2,477)		(3,428)		(4,430)
Net investments in Legacy Sequoia entities (3)	(336)		(216)		(1,050)		(915)
Net investments in Sequoia entities (3)	(5,886)		4,906		(9,708)		9,804
Net investments in Freddie Mac SLST entities (3)	(35,940)		36,316		(32,904)		40,433
Net investment in Freddie Mac K-Series entity (3)	(190)		1,855		74		10,776
Net investments in CAFL SFR entities (3)	(21,828)		3,697		(17,780)		3,411
Net investment in HEI securitization entity (3)	1,201		—		4,612		—
HEIs at Redwood	1,596		2,080		2,788		7,395
Other investments	10,460		125		10,583		435
Risk management derivatives, net	4,395		—		6,368		—
Credit (losses) recoveries on AFS securities	(1,066)		13		(1,771)		388
Total investment fair value changes, net	$	(87,972)	$	49,480	$	(94,092)	$	94,567
Other Income
MSRs	$	3,827	$	(1,381)	$	6,795	$	(2,247)


Total other income (4)	$	3,827	$	(1,381)	$	6,795	$	(2,247)
Total Market Valuation Gains (Losses), Net	$	(130,735)	$	93,858	$	(132,594)	$	213,641

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

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

At June 30, 2022, 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, 2021.

The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments


June 30, 2022	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average(1)
Assets
Residential loans, at fair value:

Jumbo fixed-rate loans	$	714,777	Whole loan spread to swap rate	217		-	240		bps	221		bps

			Called loan dollar price	$	96	-	$	96		$	96





Jumbo loans committed to sell	498,258		Whole loan committed sales price	$	97	-	$	99		$	98






Loans held by Legacy Sequoia (2)	208,788		Liability price				N/A			N/A

Loans held by Sequoia (2)	3,525,459		Liability price				N/A			N/A

Loans held by Freddie Mac SLST (2)	1,631,285		Liability price				N/A			N/A

Business purpose loans:
Single-family rental loans	505,171		Senior credit spread	215		-	235		bps	220		bps
			Subordinate credit spread	260		-	1,099		bps	504		bps
			Senior credit support	39		-	40		%	39		%
			IO discount rate	8		-	13		%	9		%
			Prepayment rate (annual CPR)	3		-	25		%	6		%
			Non-securitizable loan dollar price	$	80	-	$	100		$	93

Single-family rental loans held by CAFL (2)	3,046,277		Liability price				N/A			N/A

Bridge loans	1,651,489		Whole loan discount rate	5		-	15		%	8		%
			Senior credit spread	325		-	325		bps	325		bps
			Subordinate credit discount rate	15		-	15		%	15		%
			Senior credit support	15		-	15		%	15		%


Multifamily loans held by Freddie Mac K-Series (2)	443,114		Liability price				N/A			N/A



Trading and AFS securities	284,278		Discount rate	4		-	18		%	9		%
			Prepayment rate (annual CPR)	6		-	65		%	13		%
			Default rate	—		-	11		%	1		%
			Loss severity	—		-	50		%	25		%
			CRT dollar price	$	74	-	$	88		$	83

Servicer advance investments	273,210		Discount rate	2		-	4		%	3		%
			Prepayment rate (annual CPR)	16		-	30		%	16		%
			Expected remaining life (3)	5		-	5		yrs	5		yrs
			Mortgage servicing income	—		-	18		bps	9		bps

MSRs	23,560		Discount rate	11		-	115		%	11		%
			Prepayment rate (annual CPR)	5		-	31		%	9		%
			Per loan annual cost to service	$	93	-	$	93		$	93

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

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


June 30, 2022	Fair Value		Input Values
(Dollars in Thousands, except Input Values)		Unobservable Input	Range						Weighted Average (1)
Assets (continued)









































































Excess MSRs	40,803	Discount rate	13		-	19		%	18		%
		Prepayment rate (annual CPR)	16		-	35		%	20		%
		Excess mortgage servicing income	8		-	18		bps	11		bps

HEI	130,151	Discount rate	10		-	10		%	10		%
		Prepayment rate (annual CPR)	1		-	24		%	17		%
		Home price appreciation	3		-	4		%	3		%

HEIs held by HEI securitization entity	146,215	Liability price	N/A			N/A			N/A

REO	1,380	Loss severity	12		-	25		%	20		%

Liabilities
Residential loan purchase commitments, net	1,500	Whole loan spread to swap rate	217		-	240		bps	224		bps

		Pull-through rate	18		-	100		%	68		%
		Committed sales price	$	97	-	$	102		$	97








ABS issued (2):
At consolidated Sequoia entities	3,496,329	Discount rate	4		-	18		%	6		%
		Prepayment rate (annual CPR)	5		-	27		%	14		%
		Default rate	—		-	22		%	1		%
		Loss severity	25		-	50		%	32		%

At consolidated CAFL SFR entities (4)	2,732,964	Discount rate	2		-	15		%	5		%
		Prepayment rate (annual CPR)	—		-	3		%	3		%
		Default rate	5		-	28		%	7		%
		Loss severity	30		-	30		%	30		%

At consolidated Freddie Mac SLST entities	1,243,167	Discount rate	4		-	7		%	5		%
		Prepayment rate (annual CPR)	6		-	8		%	6		%
		Default rate	7		-	9		%	8		%
		Loss severity	35		-	35		%	35		%

At consolidated Freddie Mac K-Series entities (4)	411,380	Discount rate	3		-	9		%	4		%





At consolidated HEI securitization entity (4)	110,111	Discount rate	8		-	13		%	9		%
		Prepayment rate (annual CPR)	20		-	20		%	20		%
		Default rate	12		-	12		%	12		%
		Loss severity	30		-	30		%	30		%
		Home price appreciation	3		-	4		%	3		%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

Footnotes to Table 5.7

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

(2)The fair value of the loans and HEIs held by consolidated entities was based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At June 30, 2022, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was $238 million, $307 million, $390 million, $32 million, and $15 million, respectively.

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

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

Determination of Fair Value

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

Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2021 is a more detailed description of our financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy.

Certain of our Other investments (inclusive of strategic investments in early-stage start-up companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We initially record these investments at cost and adjust their fair value based on observable price changes, such as follow-on capital raises or secondary sales, and will also evaluate impacts to valuation from changing market conditions and underlying business performance. As of June 30, 2022, the carrying value of these investments was $9 million, which was based on the investments' original cost.

Note 6. Residential Loans

We acquire residential loans from third-party originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at June 30, 2022 and December 31, 2021.

Table 6.1 – Classifications and Carrying Values of Residential Loans


June 30, 2022			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	1,213,067	$	—	$	—	$	—	$	1,213,067
Held-for-investment at fair value	—		208,788		3,525,459		1,631,285		5,365,532
Total Residential Loans	$	1,213,067	$	208,788	$	3,525,459	$	1,631,285	$	6,578,599


December 31, 2021			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	1,845,282	$	—	$	—	$	—	$	1,845,282
Held-for-investment at fair value	—		230,455		3,628,465		1,888,230		5,747,150
Total Residential Loans	$	1,845,282	$	230,455	$	3,628,465	$	1,888,230	$	7,592,432

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 6. Residential Loans - (continued)

At June 30, 2022, we owned mortgage servicing rights associated with $1.16 billion (principal balance) of residential loans owned at Redwood that were purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

Residential Loans Held-for-Sale

The following table summarizes the characteristics of residential loans held-for-sale at June 30, 2022 and December 31, 2021.

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


(Dollars in Thousands)	June 30, 2022			December 31, 2021
Number of loans	1,469			2,196
Unpaid principal balance	$	1,238,469		$	1,813,865
Fair value of loans	$	1,213,067		$	1,845,282
Market value of loans pledged as collateral under short-term borrowing agreements	$	1,207,185		$	1,838,797
Weighted average coupon	4.47		%	3.27		%

Delinquency information
Number of loans with 90+ day delinquencies	1			3
Unpaid principal balance of loans with 90+ day delinquencies	$	211		$	2,923
Fair value of loans with 90+ day delinquencies	$	170		$	2,304
Number of loans in foreclosure	—			—

The following table provides the activity of residential loans held-for-sale during the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Principal balance of loans acquired (1)	$	1,145,450	$	3,484,633	$	3,260,641	$	6,580,681
Principal balance of loans sold	1,238,327		3,324,919		3,065,691		5,600,751
Principal balance of loans transferred to HFI	—		—		687,192		—
Net market valuation gains (losses) recorded (2)	(32,527)		26,278		(63,978)		49,707

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Investment at Fair Value

We invest in residential subordinate securities issued by Legacy Sequoia, Sequoia and Freddie Mac SLST securitization trusts and consolidate the underlying residential loans owned by these entities for financial reporting purposes in accordance with GAAP. The following tables summarize the characteristics of the residential loans owned at consolidated Sequoia and Freddie Mac SLST entities at June 30, 2022 and December 31, 2021.

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


June 30, 2022	Legacy						Freddie Mac
(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	1,447			4,738			11,285
Unpaid principal balance	$	234,213		$	3,988,148		$	1,796,594
Fair value of loans	$	208,788		$	3,525,459		$	1,631,285
Weighted average coupon	2.27		%	3.26		%	4.50		%

Delinquency information
Number of loans with 90+ day delinquencies (1)	29			14			1,370
Unpaid principal balance of loans with 90+ day delinquencies	$	5,107		$	12,008		$	236,941
Fair value of loans with 90+ day delinquencies (2)	N/A			N/A			N/A
Number of loans in foreclosure	11			5			257
Unpaid principal balance of loans in foreclosure	$	1,483		$	5,004		$	45,536


December 31, 2021	Legacy						Freddie Mac
(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	1,583			4,300			11,986
Unpaid principal balance	$	264,057		$	3,605,469		$	1,932,241
Fair value of loans	$	230,455		$	3,628,465		$	1,888,230
Weighted average coupon	1.87		%	3.39		%	4.51		%

Delinquency information
Number of loans with 90+ day delinquencies (1)	32			18			1,208
Unpaid principal balance of loans with 90+ day delinquencies	$	7,482		$	15,124		$	212,961
Fair value of loans with 90+ day delinquencies (2)	N/A			N/A			N/A
Number of loans in foreclosure	10			2			241
Unpaid principal balance of loans in foreclosure	$	2,188		$	1,624		$	43,637

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

(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 6. Residential Loans - (continued)

The following table provides the activity of residential loans held-for-investment at consolidated entities during the three and six months ended June 30, 2022 and 2021.

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

Three Months Ended June 30, 2022

Three Months Ended June 30, 2021

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

—

N/A

1,205,494

N/A

Net market valuation gains (losses) recorded (2)

779

(211,486)

(76,735)

4,863

(12,835)

22,579

Six Months Ended June 30, 2022

Six Months Ended June 30, 2021

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

684,491

N/A

1,205,494

N/A

Net market valuation gains (losses) recorded (2)

7,104

(482,217)

(120,503)

12,476

(15,413)

19,013

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

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

REO

See Note 12 for detail on residential loans transferred to REO during 2022.

Note 7. Business Purpose Loans

We originate and invest in business purpose loans, including single-family rental ("SFR") loans and bridge loans. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood and at consolidated CAFL entities at June 30, 2022 and December 31, 2021.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


June 30, 2022	Single-Family Rental				Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	505,171	—		$	—	$	—	$	505,171
Held-for-investment at fair value	—		3,046,277		1,109,337		542,152		4,697,766
Total Business Purpose Loans	$	505,171	$	3,046,277	$	1,109,337	$	542,152	$	5,202,937


December 31, 2021	Single-Family Rental				Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	358,309	$	—	$	—	$	—	$	358,309
Held-for-investment at fair value	—		3,488,074		666,364		278,242		4,432,680
Total Business Purpose Loans	$	358,309	$	3,488,074	$	666,364	$	278,242	$	4,790,989

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Nearly all of the outstanding single-family rental loans at June 30, 2022 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with 3% having original maturities of 30 years. The outstanding bridge loans held-for-investment at June 30, 2022 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of 45% one-month LIBOR-indexed adjustable-rate loans, 39% one-month SOFR-indexed adjustable-rate loans, and 17% fixed-rate loans.

At June 30, 2022, we had a $835 million commitment to fund bridge loans. See Note 16 for additional information on this commitment.

The following table provides the activity of business purpose loans at Redwood during the three and six months ended June 30, 2022 and 2021.

Table 7.2 – Activity of Business Purpose Loans at Redwood


	Three Months Ended June 30, 2022				Three Months Ended June 30, 2021
(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	$	323,245	$	542,241	$	312,217	$	215,160
Principal balance of loans acquired	38,457		19,023		—		—
Principal balance of loans sold to third parties	—		—		—		354
Fair value of loans transferred (1)	295,037		306,313		297,301		—

Mortgage banking activities income (loss) recorded (2)	(40,034)		(1,136)		25,222		978
Investment fair value changes recorded (3)	—		(5,455)		—		(62)


	Six Months Ended June 30, 2022				Six Months Ended June 30, 2021
(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	$	765,972	$	954,179	$	565,315	$	348,389
Principal balance of loans acquired	100,349		22,006		—		—
Principal balance of loans sold to third parties	331,502		—		—		9,231
Fair value of loans transferred (1)	295,037		388,604		466,705		N/A

Mortgage banking activities income (loss) recorded (2)	(64,502)		1,239		35,470		1,520
Investment fair value changes recorded (3)	—		(6,214)		—		3,242

(1)For SFR at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL SFR securitizations. For Bridge at Redwood, represents the transfer of bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their securitization.

(2)Represents net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three and six months ended June 30, 2022, we recorded loan origination fee income of $12 million and $27 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

(3)Represents net market valuation changes for loans classified as held-for-investment and associated interest-only strip liabilities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loans Held-for-Investment at CAFL

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30, 2022				Three Months Ended June 30, 2021
(In Thousands)	SFR at CAFL		Bridge at CAFL		SFR at CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded (1)	$	(118,299)	$	(281)	$	(1,230)	$	—


	Six Months Ended June 30, 2022				Six Months Ended June 30, 2021
(In Thousands)	SFR at CAFL		Bridge at CAFL		SFR at CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded (1)	$	(310,202)	$	(1,856)	$	(62,132)	$	—

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

REO

See Note 12 for detail on BPL loans transferred to REO during 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loan Characteristics

The following tables summarize the characteristics of the business purpose loans owned at Redwood and at consolidated CAFL entities at June 30, 2022 and December 31, 2021.

Table 7.4 – Characteristics of Business Purpose Loans


June 30, 2022	SFR at Redwood			SFR at CAFL			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	355			1,154			1,131			2,268
Unpaid principal balance	$	536,344		$	3,227,172		$	1,116,582		$	541,677
Fair value of loans	$	505,171		$	3,046,277		$	1,109,337		$	542,152
Weighted average coupon	5.31		%	5.16		%	6.73		%	6.89		%
Weighted average remaining loan term (years)	14			6			2			1
Market value of loans pledged as collateral under short-term debt facilities	$	312,732		N/A			$	265,242		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	180,482		N/A			$	779,467		N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)	4			20			51			48
Unpaid principal balance of loans with 90+ day delinquencies	$	5,212		$	50,469		$	32,941		$	7,847
Fair value of loans with 90+ day delinquencies (2)	$	4,086		N/A			$	30,209		$	7,847
Number of loans in foreclosure (3)	4			7			53			3
Unpaid principal balance of loans in foreclosure	$	5,212		$	10,356		$	35,070		$	4,472
Fair value of loans in foreclosure (2)	$	4,086		N/A			$	32,338		$	4,472


December 31, 2021	SFR at Redwood			SFR at CAFL			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	245			1,173			1,134			1,640
Unpaid principal balance	$	348,232		$	3,340,949		$	670,392		$	274,617
Fair value of loans	$	358,309		$	3,488,074		$	666,364		$	278,242
Weighted average coupon	4.73		%	5.17		%	6.91		%	7.05		%
Weighted average remaining loan term (years)	12			6			1			1
Market value of loans pledged as collateral under short-term debt facilities	$	75,873		N/A			$	91,814		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	244,703		N/A			$	554,597		N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)	6			18			31			—
Unpaid principal balance of loans with 90+ day delinquencies	$	5,384		$	41,998		$	18,032		$	—
Fair value of loans with 90+ day delinquencies (2)	$	4,238		N/A			$	14,218		$	—
Number of loans in foreclosure (3)	7			9			28			—
Unpaid principal balance of loans in foreclosure	$	5,473		$	12,648		$	18,043		$	—
Fair value of loans in foreclosure (2)	$	4,305		N/A			$	14,257		$	—

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Footnotes to Table 7.4

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

(2)The fair value of the loans held by consolidated CAFL entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.

(3)May include loans that are less than 90 days delinquent.

Note 8. Consolidated Agency Multifamily Loans

We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of our consolidated Agency multifamily loans at June 30, 2022 and December 31, 2021.

Table 8.1 – Characteristics of Consolidated Agency Multifamily Loans


(Dollars in Thousands)	June 30, 2022			December 31, 2021
Number of loans	28			28
Unpaid principal balance	$	451,197		$	455,168
Fair value of loans	$	443,114		$	473,514
Weighted average coupon	4.25		%	4.25		%
Weighted average remaining loan term (years)	3			4

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


Number of loans in foreclosure	—			—

The outstanding consolidated Agency multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at June 30, 2022 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of multifamily loans held-for-investment during the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Net market valuation gains (losses) recorded (1)	$	(6,748)	$	(2,528)	$	(26,429)	$	(3,258)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 9. Real Estate Securities

We invest in real estate securities that we create and retain from our Sequoia securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at June 30, 2022 and December 31, 2021.

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	June 30, 2022		December 31, 2021
Trading	$	133,780	$	170,619
Available-for-sale	150,498		206,792
Total Real Estate Securities	$	284,278	$	377,411

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

Trading Securities

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). The following table presents the fair value of trading securities by position and collateral type at June 30, 2022 and December 31, 2021.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	June 30, 2022		December 31, 2021
Senior
Interest-only securities (1)	$	31,498	$	21,787


Total Senior	31,498		21,787





Subordinate
RPL securities	46,607		65,140
Multifamily securities	7,960		10,549
Other third-party residential securities	47,715		73,143
Total Subordinate	102,282		148,832
Total Trading Securities	$	133,780	$	170,619

(1)Includes $24 million and $15 million of Sequoia certificated mortgage servicing rights at June 30, 2022 and December 31, 2021, respectively.

The following table presents the unpaid principal balance of trading securities by position and collateral type at June 30, 2022 and December 31, 2021.

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	June 30, 2022		December 31, 2021
Senior (1)	$	—	$	—

Subordinate	221,473		235,306
Total Trading Securities	$	221,473	$	235,306

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table provides the activity of trading securities during the three and six months ended June 30, 2022 and 2021.

Table 9.4 – Trading Securities Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Principal balance of securities acquired (1)	$	—	$	1,750	$	—	$	17,630
Principal balance of securities sold (1)	12,716		18,068		12,716		52,811
Net market valuation gains (losses) recorded (2)	(16,042)		1,798		(17,498)		23,147

(1)For the three and six months ended June 30, 2022 and 2021, excludes zero and $2 million of securities bought and sold during the same quarter, respectively.

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

AFS Securities

The following table presents the fair value of our available-for-sale securities by position and collateral type at June 30, 2022 and December 31, 2021.

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


(In Thousands)	June 30, 2022		December 31, 2021








Subordinate
Sequoia securities	$	85,269	$	127,542
Multifamily securities	13,169		22,166
Other third-party residential securities	52,060		57,084
Total Subordinate	150,498		206,792
Total AFS Securities	$	150,498	$	206,792

The following table provides the activity of available-for-sale securities during the three and six months ended June 30, 2022 and 2021.

Table 9.6 – Available-for-Sale Securities Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Fair value of securities acquired	$	—	$	522	$	10,000	$	1,600
Fair value of securities sold	—		2,585		—		4,785
Principal balance of securities called	—		1,307		14,486		1,507
Net unrealized (losses) gains on AFS securities (1)	(33,409)		11,224		(51,282)		22,210

(1)Net unrealized (losses) gains on AFS securities are recorded on our consolidated balance sheets through Accumulated other comprehensive loss.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

At June 30, 2022, we had $10 million of AFS securities with contractual maturities less than five years, $1 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 June 30, 2022 and December 31, 2021.

Table 9.7 – Carrying Value of AFS Securities


June 30, 2022
(In Thousands)	Total
Principal balance	$	227,911
Credit reserve	(30,619)
Unamortized discount, net	(61,303)
Amortized cost	135,989
Gross unrealized gains	25,930
Gross unrealized losses	(9,650)
CECL allowance	(1,771)
Carrying Value	$	150,498


December 31, 2021
(In Thousands)	Total
Principal balance	$	242,852
Credit reserve	(27,555)
Unamortized discount, net	(76,023)
Amortized cost	139,274
Gross unrealized gains	67,815
Gross unrealized losses	(297)
CECL allowance	—
Carrying Value	$	206,792

The following table presents the changes for the three and six months ended June 30, 2022, in unamortized discount and designated credit reserves on residential AFS securities.

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


	Three Months Ended June 30, 2022				Six Months Ended June 30, 2022
	Credit Reserve		Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net
(In Thousands)
Beginning balance	$	29,901	$	63,206	$	27,555	$	76,023
Amortization of net discount	—		(1,347)		—		(9,817)
Realized credit recoveries (losses), net	162		—		74		—
Acquisitions	—		—		—		—
Sales, calls, other	—		—		(343)		(1,570)

Transfers to (release of) credit reserves, net	556		(556)		3,333		(3,333)
Ending Balance	$	30,619	$	61,303	$	30,619	$	61,303

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses

The following table presents the total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at June 30, 2022 and December 31, 2021.

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


	Less Than 12 Consecutive Months				12 Consecutive Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(In Thousands)
June 30, 2022	$	46,369	$	(9,456)		$	1,406	$	(194)
December 31, 2021	6,827		(251)			1,554		(46)

At June 30, 2022, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 82 AFS securities, of which 21 were in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2021, our consolidated balance sheet included 85 AFS securities, of which four were in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer.

Evaluating AFS Securities for Credit Losses

Gross unrealized losses on our AFS securities were $10 million at June 30, 2022. We evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At June 30, 2022, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

At June 30, 2022, our current expected credit loss ("CECL") allowance related to our AFS securities was $1.8 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at June 30, 2022.

Table 9.10 – Significant Credit Quality Indicators

June 30, 2022

Subordinate Securities

Default rate

0.8%

Loss severity

20%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table details the activity related to the allowance for credit losses for AFS securities for the three and six months ended June 30, 2022.

Table 9.11 – Rollforward of Allowance for Credit Losses


	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022
(In Thousands)
Beginning balance allowance for credit losses	$	705	$	—

Additions to allowance for credit losses on securities for which credit losses were not previously recorded	785		1,490
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	281		281
Allowance on purchased financial assets with credit deterioration	—		—
Reduction to allowance for securities sold during the period	—		—
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell	—		—
Write-offs charged against allowance	—		—
Recoveries of amounts previously written off	—		—
Ending balance of allowance for credit losses	$	1,771	$	1,771

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and six months ended June 30, 2022 and 2021.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Gross realized gains - sales	$	—	$	1,307	$	—	$	1,507
Gross realized gains - calls	—		6,687		1,914		9,095
Gross realized losses - sales	—		—		—		—

Total Realized Gains on Sales and Calls of AFS Securities, net	$	—	$	7,994	$	1,914	$	10,602

During the six months ended June 30, 2022, we called three of our unconsolidated Sequoia entities, and purchased $102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $0.3 million gain on the securities we owned from these securitizations. The remaining realized gains were from third-party securities we owned that were called during the six months ended June 30, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 10. Other Investments

Other investments at June 30, 2022 and December 31, 2021 are summarized in the following table.

Table 10.1 – Components of Other Investments


(In Thousands)	June 30, 2022		December 31, 2021
HEIs	$	276,366	$	192,740
Servicer advance investments	273,210		350,923
Strategic investments	63,860		35,702
Excess MSRs	40,803		44,231
Mortgage servicing rights	23,560		12,438

Other	1,868		5,935
Total Other Investments	$	679,667	$	641,969

Servicer advance investments

We and a third-party co-investor, through two partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor (Refer to Note 10 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding the transactions). At June 30, 2022, we had funded $148 million of total capital to the SA Buyers (see Note 16 for additional detail).

At June 30, 2022, our servicer advance investments had a carrying value of $273 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $12.09 billion. The outstanding servicer advance receivables associated with this investment were $240 million at June 30, 2022, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at June 30, 2022 and December 31, 2021.

Table 10.2 – Components of Servicer Advance Receivables


(In Thousands)	June 30, 2022		December 31, 2021
Principal and interest advances	$	76,506	$	94,148
Escrow advances (taxes and insurance advances)	133,403		172,847
Corporate advances	29,643		43,958
Total Servicer Advance Receivables	$	239,552	$	310,953

We account for our servicer advance investments at fair value and during the three and six months ended June 30, 2022, we recorded $5 million and $10 million of interest income, respectively, through Other interest income, and recorded a net market valuation loss of $3 million and loss of $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 10. Other Investments - (continued)

HEIs

We purchase home equity investment contracts from third party originators under flow purchase agreements. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property. At June 30, 2022, we had flow purchase agreements outstanding with $225 million of cumulative commitments remaining. See Note 16 for additional information on these commitments.

As of June 30, 2022, we owned $130 million of HEIs at Redwood and consolidated $146 million of HEIs through the HEI securitization entity. We account for these investments under the fair value option and during the three and six months ended June 30, 2022, we recorded net market valuation gains of $2 million and $3 million, respectively, related to HEIs owned at Redwood through Investment fair value changes, net on our consolidated statements of income (loss).

We consolidate the HEI securitization in accordance with GAAP and have elected to account for it under the CFE election. During the three and six months ended June 30, 2022, we recorded net market valuation gains of $1 million and $5 million (including $1 million and $2 million of interest expense), respectively, related to our net investment in the HEI securitization entity through Investment fair value changes, net on our consolidated statements of income (loss).

Strategic Investments

Strategic investments represent investments we made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At June 30, 2022, we had made a total of 24 investments in companies through RWT Horizons with a total carrying value of $24 million, as well as six corporate-level investments. During the three and six months ended June 30, 2022, we recognized a mark-to-market valuation gain of $10 million on one of our strategic investments, which was recorded in Investment fair value changes, net on our consolidated statements of income (loss). During the three months ended June 30, 2022, we recorded losses of $0.3 million in Other income from our strategic investments.

Excess MSRs

In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and six months ended June 30, 2022, we recognized $4 million and $8 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2 million and $3 million, respectively, through Investment fair value changes, net on 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 sold to third parties. During the three and six months ended June 30, 2022, we retained zero and $5 million, respectively, of MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At June 30, 2022 and December 31, 2021, our MSRs had a fair value of $24 million and $12 million, respectively, and were associated with loans with an aggregate principal balance of $2.28 billion and $2.12 billion, respectively. During the three and six months ended June 30, 2022, including net market valuation gains and losses on our MSRs, we recorded net income of $5 million and $10 million, respectively, through Other income on our consolidated statements of income (loss) related to our MSRs.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 11. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at June 30, 2022 and December 31, 2021.

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


	June 30, 2022				December 31, 2021
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)


Assets - Risk Management Derivatives
Interest rate swaps	$	19,113	$	644,000	$	611	$	161,500
TBAs	3,104		455,000		2,880		2,440,000
Interest rate futures	1,875		273,600		25		9,000
Swaptions	10,488		620,000		18,318		1,660,000

Assets - Other Derivatives
Loan purchase and interest rate lock commitments	2,007		235,723		4,633		971,631

Total Assets	$	36,587	$	2,228,323	$	26,467	$	5,242,131



Liabilities - Risk Management Derivatives
Interest rate swaps	$	(2,445)	$	226,000	$	(1,251)	$	283,100
TBAs	(2,004)		405,000		(658)		870,000
Interest rate futures	(1,615)		115,000		(905)		62,500
Liabilities - Other Derivatives
Loan purchase and interest rate lock commitments	(527)		50,947		(503)		404,190

Total Liabilities	$	(6,591)	$	796,947	$	(3,317)	$	1,619,790
Total Derivative Financial Instruments, Net	$	29,996	$	3,025,270	$	23,150	$	6,861,921

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At June 30, 2022, we were party to swaps and swaptions with an aggregate notional amount of $1.49 billion, TBA agreements with an aggregate notional amount of $860 million, and interest rate futures contracts with an aggregate notional amount of $389 million. At December 31, 2021, we were party to swaps and swaptions with an aggregate notional amount of $2.10 billion, futures with an aggregate notional amount of $72 million and TBA agreements with an aggregate notional amount of $3.31 billion.

For the three and six months ended June 30, 2022, risk management derivatives had a net market valuation gain of $30 million, and a net market valuation gain of $122 million, respectively. For the three and six months ended June 30, 2021, risk management derivatives had a net market valuation loss of $58 million, and a net market valuation gain of $35 million, respectively. 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

Loan Purchase and Interest Rate Lock Commitments

Loan purchase commitments ("LPCs") and interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. For the three and six months ended June 30, 2022, LPCs and IRLCs had a net market valuation loss of $9 million and loss of $51 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income.

Derivatives Designated as Cash Flow Hedges

For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $74 million and $76 million at June 30, 2022 and December 31, 2021, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of June 30, 2022, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Net interest expense on cash flows hedges	$	—	$	—	$	—	$	—

Realized net losses reclassified from other comprehensive income	(1,029)		(1,028)		(2,047)		(2,046)
Total Interest Expense	$	(1,029)	$	(1,028)	$	(2,047)	$	(2,046)

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At June 30, 2022, we assessed this risk as remote and did not record an associated specific valuation adjustment. At June 30, 2022, we were in compliance with our derivative counterparty ISDA agreements.

Note 12. Other Assets and Liabilities

Other assets at June 30, 2022 and December 31, 2021 are summarized in the following table.

Table 12.1 – Components of Other Assets


(In Thousands)	June 30, 2022		December 31, 2021
Accrued interest receivable	$	51,006	$	47,515
Investment receivable	25,688		82,781
Deferred tax asset	20,867		20,867
Operating lease right-of-use assets	17,074		18,772
Income tax receivables	15,573		22
Margin receivable	11,420		7,269
Fixed assets and leasehold improvements (1)	11,189		9,019
REO	7,813		36,126





Other	11,150		8,746
Total Other Assets	$	171,780	$	231,117

(1)Fixed assets and leasehold improvements had a basis of $20 million and accumulated depreciation of $9 million at June 30, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

Accrued expenses and other liabilities at June 30, 2022 and December 31, 2021 are summarized in the following table.

Table 12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	June 30, 2022		December 31, 2021
Payable to non-controlling interests	$	49,544	$	42,670
Accrued interest payable	42,548		39,297
Operating lease liabilities	19,448		20,960
Accrued compensation	17,765		74,636
Margin payable	15,023		24,368
Accrued operating expenses	8,743		4,377
Guarantee obligations	6,768		7,459
Residential loan and MSR repurchase reserve	5,678		9,306
Current accounts payable	5,518		8,273


Bridge loan holdbacks	3,983		3,109





Other	15,807		11,333
Total Accrued Expenses and Other Liabilities	$	190,825	$	245,788

Refer to Note 12 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 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 June 30, 2022, we had met all margin calls due.

REO

The following table summarizes the activity and carrying values of REO assets held at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities during the six months ended June 30, 2022.

Table 12.3 – REO Activity


	Six Months Ended June 30, 2022
(In Thousands)	Bridge		Legacy Sequoia		Freddie Mac SLST		SFR at CAFL		Total
Balance at beginning of period	$	13,068	$	61	$	2,028	$	20,969	$	36,126
Transfers to REO	963		407		1,763		—		3,133
Liquidations (1)	(9,549)		(504)		(1,661)		(20,969)		(32,683)
Changes in fair value, net	625		443		169		—		1,237
Balance at End of Period	$	5,107	$	407	$	2,299	$	—	$	7,813

(1)For the six months ended June 30, 2022, REO liquidations resulted in $1 million of realized gains, which were recorded in Investment fair value changes, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

The following table provides the detail of REO assets at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities at June 30, 2022 and December 31, 2021.

Table 12.4 – REO Assets


Number of REO assets	Bridge	Legacy Sequoia	Freddie Mac SLST	SFR at CAFL	Total
At June 30, 2022	3	1	21	—	25
At December 31, 2021	5	2	24	3	34

Note 13. Short-Term Debt

We enter into repurchase agreements ("repo"), loan warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At June 30, 2022, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants.

The table below summarizes our short-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at June 30, 2022 and December 31, 2021.

Table 13.1 – Short-Term Debt


	June 30, 2022
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	7	$	1,085,802	$	2,750,000	3.28	%	8/2022-3/2023	213

Business purpose loan warehouse	3	456,887		1,200,000		4.21	%	3/2023-6/2023	258
Real estate securities repo	4	95,287		—		1.91	%	7/2022-9/2022	32

Total Short-Term Debt Facilities	14	1,637,976
Servicer advance financing	1	231,846		300,000		3.40	%	11/2022	125

Total Short-Term Debt		$	1,869,822


	December 31, 2021
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	7	$	1,669,344	$	2,900,000	1.87	%	1/2022-12/2022	153

Business purpose loan warehouse	2	138,746		350,000		3.34	%	3/2022-7/2022	105
Real estate securities repo	4	74,825		—		1.13	%	1/2022-3/2022	33
Total Short-Term Debt Facilities	13	1,882,915
Servicer advance financing	1	294,447		350,000		1.90	%	11/2022	306

Total Short-Term Debt		$	2,177,362

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 13. Short-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our short-term debt at June 30, 2022 and December 31, 2021.

Table 13.2 – Collateral for Short-Term Debt


(In Thousands)	June 30, 2022		December 31, 2021
Collateral Type
Held-for-sale residential loans	$	1,207,185	$	1,838,797
Business purpose loans	577,974		167,687
Real estate securities
On balance sheet	10,014		5,823
Sequoia securitizations (1)	82,636		61,525

Freddie Mac K-Series securitization (1)	31,732		31,657

Total real estate securities owned	124,382		99,005
Restricted cash and other assets	2,512		1,962
Total Collateral for Short-Term Debt Facilities	1,912,053		2,107,451
Cash	14,381		6,480
Restricted cash	26,236		25,420
Servicer advances	273,210		310,953
Total Collateral for Servicer Advance Financing	313,827		342,853
Total Collateral for Short-Term Debt	$	2,225,880	$	2,450,304

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

For the three and six months ended June 30, 2022, the average balance of our short-term debt facilities was $1.64 billion and $1.66 billion, respectively. At June 30, 2022 and December 31, 2021, accrued interest payable on our short-term debt facilities was $3 million and $2 million, respectively.

Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. At June 30, 2022, the accrued interest payable balance on this financing was $0.2 million and the unamortized capitalized commitment costs were $0.3 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 $1 million at June 30, 2022. At both June 30, 2022 and December 31, 2021, we had no outstanding borrowings on this facility.

During the three months ended June 30, 2022, a business purpose loan warehouse facility with a borrowing limit of $450 million was reclassified to short-term debt from long-term debt as the maturity of this facility was less than one year at June 30, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 13. Short-Term Debt - (continued)

Remaining Maturities of Short-Term Debt

The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt at June 30, 2022.

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


	June 30, 2022
(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total
Collateral Type
Held-for-sale residential loans	$	—	$	128,440	$	957,362	$	1,085,802
Business purpose loans	—		—		456,887		456,887
Real estate securities	57,323		37,964		—		95,287
Total Secured Short-Term Debt	57,323		166,404		1,414,249		1,637,976
Servicer advance financing	—		—		231,846		231,846

Total Short-Term Debt	$	57,323	$	166,404	$	1,646,095	$	1,869,822

Note 14. Asset-Backed Securities Issued

ABS issued represents securities issued by non-recourse securitization entities we consolidate under GAAP. The majority of our ABS issued is carried at fair value under the CFE election (see Note 4 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by our consolidated securitization entities at June 30, 2022 and December 31, 2021, along with other selected information, are summarized in the following table.

Table 14.1 – Asset-Backed Securities Issued


June 30, 2022	Legacy Sequoia		Sequoia		CAFL (1)		Freddie Mac SLST (2)		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)
Certificates with principal balance	$	229,651	$	3,733,955	$	3,303,312	$	1,392,244	$	414,729		$	117,581		$	9,191,472
Interest-only certificates	258		60,183		149,184		14,938		8,809			—			233,372
Market valuation adjustments	(22,262)		(505,456)		(244,629)		(48,723)		(12,158)			(7,470)			(840,698)


ABS Issued, Net	$	207,647	$	3,288,682	$	3,207,867	$	1,358,459	$	411,380		$	110,111		$	8,584,146
Range of weighted average interest rates, by series(3)	1.59% to 2.88%		2.52% to 5.00%		2.34% to 5.34%		3.50% to 4.75%		3.41		%	3.74		%
Stated maturities(3)	2024 - 2036		2047-2052		2027-2032		2028-2059		2025			2052
Number of series	20		17		18		3		1			1

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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


December 31, 2021	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST (2)		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)
Certificates with principal balance	$	259,505	$	3,353,073	$	3,264,766	$	1,535,638	$	418,700		$	138,792		$	8,970,474
Interest-only certificates	619		32,749		193,725		11,714		10,184			—			248,991
Market valuation adjustments	(32,243)		(2,774)		16,407		41,111		12,973			(1,382)			34,092


ABS Issued, Net	$	227,881	$	3,383,048	$	3,474,898	$	1,588,463	$	441,857		$	137,410		$	9,253,557
Range of weighted average interest rates, by series(3)	0.23% to 1.44%		2.40% to 5.03%		2.64% to 5.24%		3.50% to 4.75%		3.41		%	3.31		%
Stated maturities(3)	2024 - 2036		2047-2052		2027-2031		2028-2059		2025			2052
Number of series	20		16		16		3		1			1

(1)Includes $485 million and $270 million (principal balance) of ABS issued by two CAFL bridge securitization trusts sponsored by Redwood and accounted for at amortized cost at June 30, 2022 and December 31, 2021, respectively.

(2)Includes $117 million and $145 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at June 30, 2022 and December 31, 2021, respectively.

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

During the second quarter of 2022, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest bridge loans (presented within CAFL in table 14.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $215 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At June 30, 2022, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $8 million in total, for a net carrying value of $207 million. The weighted average stated coupon of the ABS issued was 4.32% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in May 2024, and beginning in June 2025, the interest rate on the ABS issued increases by 2% through final maturity in May 2029. The ABS issued by this securitization were backed by assets including $249 million of bridge loans and $1 million of restricted cash at June 30, 2022. The securitization is structured with $250 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 24 months of the transaction (through May 2024), unless an amortization event occurs prior to the expiration of the 24-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest bridge loans (presented within CAFL in table 14.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At June 30, 2022, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $2 million, for a net carrying value of $268 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were backed by assets including $293 million of bridge loans, $8 million of restricted cash and $7 million of other assets at June 30, 2022. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024), unless an amortization event occurs prior to the expiration of the 30-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

During the third quarter of 2021, we consolidated the assets and liabilities of the HEI securitization entity formed in connection with the securitization of HEIs, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income. The ABS issued by the HEI securitization entity are subject to an optional redemption in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.

During the third quarter of 2020, we transferred all of the subordinate securities we owned from two consolidated re-performing loan securitization VIEs sponsored by Freddie Mac SLST to a re-securitization trust, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. At June 30, 2022, the principal balance of the ABS issued was $117 million, and the debt discount and deferred issuance costs totaled $1 million, for a net carrying value of $115 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued are subject to an optional redemption in July 2022 and in July 2023 the ABS interest rate steps up to 7.75%.

The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than the stated maturity. At June 30, 2022, the majority of the ABS issued and outstanding had contractual maturities beyond five years. See Note 4 for detail on the carrying value components of the collateral for ABS issued and outstanding. The following table summarizes the accrued interest payable on ABS issued at June 30, 2022 and December 31, 2021. Interest due on consolidated ABS issued is payable monthly.

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


(In Thousands)	June 30, 2022		December 31, 2021
Legacy Sequoia	$	171	$	99
Sequoia	9,232		8,452
CAFL	10,611		11,030
Freddie Mac SLST (1)	4,182		4,630
Freddie Mac K-Series	1,178		1,190
Total Accrued Interest Payable on ABS Issued	$	25,374	$	25,401

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 15. Long-Term Debt

The tables below summarize our long-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at June 30, 2022 and December 31, 2021.

Table 15.1 – Long-Term Debt


	June 30, 2022
(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit		Weighted Average Interest Rate (1)		Final Maturity
Facilities
Recourse Subordinate Securities Financing
Facility A	$	132,212	$	(104)	$	132,108	N/A		4.21	%	9/2024
CAFL
Facility B	102,018		(202)		101,816		N/A		4.21	%	2/2025
Facility C	76,195		(251)		75,944		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility D	500,608		(1,026)		499,582		$	600,000	L + 2.50%		N/A
Recourse BPL Financing
Facility E	294,702		(103)		294,599		450,000		SOFR + 2.25%		9/2023

Total Long-Term Debt Facilities	1,105,735		(1,686)		1,104,049
Convertible notes
4.75% convertible senior notes	198,629		(1,302)		197,327		N/A		4.75	%	8/2023
5.625% convertible senior notes	150,200		(1,683)		148,517		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	172,092		(2,977)		169,115		N/A		5.75	%	10/2025
7.75% convertible senior notes	215,000		(6,691)		208,309		N/A		7.75	%	6/2027
Trust preferred securities and subordinated notes	139,500		(756)		138,744		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,981,156	$	(15,095)	$	1,966,061

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 15. Long-Term Debt - (continued)


	December 31, 2021
(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit		Weighted Average Interest Rate (1)		Final Maturity
Facilities
Recourse Subordinate Securities Financing
Facility A	$	144,385	$	(313)	$	144,072	N/A		4.21	%	9/2024
CAFL
Facility B	102,351		(353)		101,998		N/A		4.21	%	2/2025
Facility C	91,707		(376)		91,331		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility D	307,215		(507)		306,708		$	400,000	L + 2.75%		N/A
Recourse BPL Financing
Facility E	234,349		(123)		234,226		450,000		L + 2.21%		9/2023
Facility F	110,148		—		110,148		450,000		L + 3.35%		6/2023
Total Long-Term Debt Facilities	990,155		(1,672)		988,483
Convertible notes
4.75% convertible senior notes	198,629		(1,836)		196,793		N/A		4.75	%	8/2023
5.625% convertible senior notes	150,200		(2,072)		148,128		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	172,092		(3,384)		168,708		N/A		5.75	%	10/2025
Trust preferred securities and subordinated notes	139,500		(779)		138,721		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,650,576	$	(9,743)	$	1,640,833

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

Refer to Note 15 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for a full description of our long-term debt.

Non-Recourse BPL Financing Facility

During the three months ended March 31, 2022, we amended facility D (see Table 15.1 above) to increase the borrowing limit from $400 million to $600 million.

Recourse BPL Financing Facilities

During the three months ended March 31, 2022, we amended the interest rate for Facilities E and F (see Table 15.1 above) to be indexed to a spread over one-month SOFR compared to a LIBOR-indexed spread at March 31, 2022.

During the three months ended June 30, 2022, Facility F was reclassified to short-term debt as the maturity of this facility was less than one year at June 30, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 15. Long-Term Debt - (continued)

Convertible Notes

In June 2022, we issued $215 million principal amount of 7.75% convertible senior notes due 2027. These notes require semi-annual interest payments at a fixed annual coupon rate of 7.75% until maturity or conversion, which will be no later than June 15, 2027. After deducting the underwriting discount and offering costs, we received $208 million of net proceeds. Including amortization of deferred debt issuance costs, the effective interest expense yield on these notes was approximately 8.50% per annum. We may elect to settle conversions either entirely in cash or in a combination of cash and shares of common stock. Upon conversion, the conversion value will be paid in cash up to at least the principal amount of the notes being converted. The initial conversion rate of the notes is 95.6823 common shares per $1,000 principal amount of notes (equivalent to a conversion price of $10.45 per common share).

The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at June 30, 2022 and December 31, 2021.

Table 15.2 – Collateral for Long-Term Debt


(In Thousands)	June 30, 2022		December 31, 2021
Collateral Type
Bridge loans	$	779,467	$	554,597
Single-family rental loans	180,482		244,703
Real estate securities
Sequoia securitizations (1)	198,640		247,227
CAFL securitizations (1)	247,106		260,405



Total Collateral for Long-Term Debt	$	1,405,695	$	1,306,932

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

The following table summarizes the accrued interest payable on long-term debt at June 30, 2022 and December 31, 2021.

Table 15.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	June 30, 2022		December 31, 2021
Long-term debt facilities	$	2,775	$	815
Convertible notes
4.75% convertible senior notes	3,564		3,564
5.625% convertible senior notes	3,896		3,896
5.75% exchangeable senior notes	2,474		2,474
7.75% convertible senior notes	1,018		—
Trust preferred securities and subordinated notes	850		581
Total Accrued Interest Payable on Long-Term Debt	$	14,577	$	11,330

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 16. Commitments and Contingencies

Lease Commitments

At June 30, 2022, 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 $2 million each for the six-month periods ended June 30, 2022 and 2021.

The following table presents our future lease commitments at June 30, 2022.

Table 16.1 – Future Lease Commitments by Year


(In Thousands)	June 30, 2022
2022 (6 months)	$	2,203
2023	4,428
2024	4,338
2025	3,475
2026	3,420
2027 and thereafter	4,553
Total Lease Commitments	22,417
Less: Imputed interest	(2,969)
Operating Lease Liabilities	$	19,448

During the six months ended June 30, 2022, we did not enter into any new office leases. At June 30, 2022, our operating lease liabilities were $19 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $17 million, which were a component of Other assets.

We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At June 30, 2022, the weighted-average remaining lease term and weighted-average discount rate for our leases was 6 years and 5.1%, respectively.

Commitment to Fund Bridge Loans

As of June 30, 2022, we had commitments to fund up to $835 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At June 30, 2022, we carried a $4 million contingent liability related to these commitments to fund construction advances. During both the three and six months ended June 30, 2022, we recorded a net market valuation loss of $3 million related to this liability through Mortgage banking activities, net and Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2021, we recorded a net market valuation gain of $1 million and $2 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).

Commitment to Fund Partnerships

In 2018, we invested in 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Commitment to Acquire HEIs

During the second quarter of 2022, we entered into an additional flow purchase agreement to acquire $100 million home equity investment contracts from a third party. At June 30, 2022, we had outstanding flow purchase agreements with third parties, with an aggregate commitment to purchase $350 million of HEIs, of which $225 million of the commitments remained outstanding. We account for these investments under the fair value option. See Note 10 for additional detail on these investments.

Commitments to Fund Strategic Investments

In the first quarter of 2022, we entered into a $25 million commitment to an investment fund with the mission of providing quality workforce housing opportunities in several California urban communities, including the San Francisco Bay Area. At June 30, 2022, we had funded $9.4 million of this commitment. This investment is included in Other Investments on our Consolidated Balance Sheets.

In 2021, we entered into a commitment to fund a $5 million RWT Horizons investment. At June 30, 2022, we had funded $1 million of this commitment. This investment is included in Other Investments on our Consolidated Balance Sheets.

Loss Contingencies — Risk-Sharing

During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At June 30, 2022, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was partially collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At June 30, 2022, we had incurred less than $100 thousand of cumulative losses under these arrangements. For the three and six months ended June 30, 2022, other income related to these arrangements was $0.3 million and $1 million, respectively.

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at June 30, 2022, the loans had an unpaid principal balance of $476 million and a weighted average FICO score of 756 (at origination) and LTV ratio of 74% (at origination). At June 30, 2022, $12 million of the loans were 90 days or more delinquent, of which four of these loans with an unpaid principal balance of $1 million were in foreclosure. At June 30, 2022, the carrying value of our guarantee obligation was $7 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to us. At both June 30, 2022 and December 31, 2021, assets of such SPEs totaled $34 million, and liabilities of such SPEs totaled $7 million.

Loss Contingencies — Residential Repurchase Reserve

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

At June 30, 2022 and December 31, 2021, our repurchase reserve associated with our residential loans and MSRs was $6 million and $9 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. During the six months ended June 30, 2022 and 2021, we received three and one repurchase requests, respectively, and repurchased zero and one loan, respectively. During both the three and six months ended June 30, 2022, we recorded a reversal of repurchase provision

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

expense of $4 million, and during the three and six months ended June 30, 2021, we recorded repurchase provision expense of $0.2 million and $0.3 million, respectively, that were recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income on our consolidated statements of income.

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 16 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Loss Contingencies - Litigation, Claims and Demands.” At June 30, 2022, 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, 2021 was $2 million.

Note 17. Equity

The following table provides a summary of changes to accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30, 2022				Three Months Ended June 30, 2021
(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	$	48,938	$	(75,412)	$	84,527	$	(79,539)
Other comprehensive (loss) income before reclassifications	(33,409)		—		11,224		—
Amounts reclassified from other accumulated comprehensive (income) loss	1,066		1,029		(7,500)		1,028
Net current-period other comprehensive (loss) income	(32,343)		1,029		3,724		1,028
Balance at End of Period	$	16,595	$	(74,383)	$	88,251	$	(78,511)


	Six Months Ended June 30, 2022				Six Months Ended June 30, 2021
(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	$	67,503	$	(76,430)	$	76,336	$	(80,557)
Other comprehensive (loss) income before reclassifications	(51,282)		—		22,210		—
Amounts reclassified from other accumulated comprehensive (income) loss	374		2,047		(10,295)		2,046
Net current-period other comprehensive (loss) income	(50,908)		2,047		11,915		2,046
Balance at End of Period	$	16,595	$	(74,383)	$	88,251	$	(78,511)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 17. Equity - (continued)

The following table provides a summary of reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021.

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



		Amount Reclassified From Accumulated Other Comprehensive (Loss)
	Affected Line Item in the	Three Months Ended June 30,
(In Thousands)	Income Statement	2022		2021
Net Realized (Gain) Loss on AFS Securities
Increase (decrease) in allowance for credit losses on AFS securities	Investment fair value changes, net	$	1,066	$	(13)
Gain on sale of AFS securities	Realized gains, net	—		(7,487)

		$	1,066	$	(7,500)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Interest expense	$	1,029	$	1,028
		$	1,029	$	1,028



		Amount Reclassified From Accumulated Other Comprehensive (Loss)
	Affected Line Item in the	Six Months Ended June 30,
(In Thousands)	Income Statement	2022		2021
Net Realized (Gain) Loss on AFS Securities
Increase (decrease) in allowance for credit losses on AFS securities	Investment fair value changes, net	$	1,771	$	(388)
Gain on sale of AFS securities	Realized gains, net	(1,397)		(9,907)

		$	374	$	(10,295)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Interest expense	$	2,047	$	2,046
		$	2,047	$	2,046

Issuance of Common Stock

We have an established program to sell common stock from time to time in at-the-market ("ATM") offerings. During the six months ended June 30, 2022, we issued 5,232,869 common shares for net proceeds of $67 million under this program. During the three months ended March 31, 2022, we increased the capacity of this program to $175 million, all of which remained outstanding for future offerings under this program as of June 30, 2022.

Direct Stock Purchase and Dividend Reinvestment Plan

During the six months ended June 30, 2022, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At June 30, 2022, approximately 6 million shares remained outstanding for future offerings under this plan.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 17. Equity - (continued)

Earnings per Common Share

The following table provides the basic and diluted (loss) earnings per common share computations for the three and six months ended June 30, 2022 and 2021.

Table 17.3 – Basic and Diluted Earnings per Common Share


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, except Share Data)	2022		2021		2022		2021
Basic Earnings per Common Share:
Net (loss) income attributable to Redwood	$	(99,966)	$	90,025	$	(69,051)	$	187,282
Less: Dividends and undistributed earnings allocated to participating securities	(1,159)		(3,149)		(2,286)		(6,458)
Net (loss) income allocated to common shareholders	$	(101,125)	$	86,876	$	(71,337)	$	180,824
Basic weighted average common shares outstanding	119,660,173		112,921,070		119,771,554		112,337,984
Basic (Loss) Earnings per Common Share	$	(0.85)	$	0.77	$	(0.60)	$	1.61
Diluted Earnings per Common Share:
Net (loss) income attributable to Redwood	$	(99,966)	$	90,025	$	(69,051)	$	187,282
Less: Dividends and undistributed earnings allocated to participating securities	(1,159)		(2,869)		(2,286)		(5,829)
Add back: Interest expense on convertible notes for the period, net of tax	—		6,990		—		13,971
Net (loss) income allocated to common shareholders	$	(101,125)	$	94,146	$	(71,337)	$	195,424
Weighted average common shares outstanding	119,660,173		112,921,070		119,771,554		112,337,984
Net effect of dilutive equity awards	—		273,139		—		234,353
Net effect of assumed convertible notes conversion to common shares	—		28,566,875		—		28,566,875
Diluted weighted average common shares outstanding	119,660,173		141,761,084		119,771,554		141,139,212
Diluted (Loss) Earnings per Common Share	$	(0.85)	$	0.66	$	(0.60)	$	1.38

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

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

For the three and six months ended June 30, 2022, 33,992,377 and 31,294,614 of common shares, respectively, related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and six months ended June 30, 2022, the number of outstanding equity awards that were antidilutive totaled 249,224 and 278,604, respectively. For the three and six months ended June 30, 2021, the number of outstanding equity awards that were antidilutive totaled 18,645 and 17,053, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 17. Equity - (continued)

Stock Repurchases

Our Board of Directors previously approved an authorization for the repurchase of up to $100 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization has no expiration date and does not obligate us to acquire any specific number of shares or securities. During the three months ended June 30, 2022, we repurchased 3.7 million shares of our common stock for a total cost of $33 million. At June 30, 2022, $46 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. In July 2022, our Board of Directors approved a new repurchase authorization – see Note 24 for further discussion.

Note 18. Equity Compensation Plans

At June 30, 2022 and December 31, 2021, 5,551,039 and 5,958,390 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock and purchases under the Employee Stock Purchase Plan, totaled $39 million at June 30, 2022, as shown in the following table.

Table 18.1 – Activities of Equity Compensation Costs by Award Type


	Six Months Ended June 30, 2022
(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	$	84	$	3,589	$	26,473	$	12,237	$	—	$	42,383
Equity grants	—		2,684		4,350		—		323		7,357
Performance-based valuation adjustment	—		—		—		(1,719)		—		(1,719)
Equity grant forfeitures	(5)		(339)		—		—		—		(344)
Equity compensation expense	(72)		(1,049)		(5,782)		(1,988)		(162)		(9,053)
Unrecognized Compensation Cost at End of Period	$	7	$	4,885	$	25,041	$	8,530	$	161	$	38,624

At June 30, 2022, the weighted average amortization period remaining for all of our equity awards was less than two years.

Restricted Stock Awards ("RSAs")

At June 30, 2022 and December 31, 2021, there were 1,551 and 28,141 shares of RSAs outstanding, respectively. Restrictions on these shares lapse during 2022. During the six months ended June 30, 2022, there were no RSAs granted, restrictions on 26,249 RSAs lapsed and those shares were distributed, and 341 RSAs were forfeited.

Restricted Stock Units ("RSUs")

At June 30, 2022 and December 31, 2021, there were 486,546 and 431,072 RSUs outstanding, respectively. During the six months ended June 30, 2022, there were 206,179 RSUs granted, 120,154 RSUs distributed, and 30,551 RSUs forfeited. Unvested RSUs at June 30, 2022 vest through 2026.

Deferred Stock Units (“DSUs”)

At June 30, 2022 and December 31, 2021, there were 4,551,475 and 4,022,088 DSUs outstanding, respectively, of which 2,089,958 and 1,469,903, respectively, had vested. During the six months ended June 30, 2022, there were 824,875 DSUs granted, 295,488 DSUs distributed, and zero DSUs forfeited. Unvested DSUs at June 30, 2022 vest through 2026.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 18. Equity Compensation Plans - (continued)

Performance Stock Units (“PSUs”)

At June 30, 2022 and December 31, 2021, the target number of PSUs that were unvested was 1,267,849 and 1,473,883, respectively. Vesting for PSUs generally occurs three years from their respective grant dates based on various total shareholder return performance calculations, as discussed in Note 18 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. During the three months ended June 30, 2022, for PSUs granted in 2020 and 2021, we decreased the book value total shareholder return estimate for the 2022 performance period, reducing the future equity compensation expense related to these awards by $2 million.

For 206,034 target PSU awards that were granted in December 2018, the performance vesting period ended on January 1, 2022. These 2018 PSU awards failed to reach a threshold level under their performance-based vesting criteria and resulted in the vesting of no shares of our common stock underlying these PSUs.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of 850,000 shares of common stock to be purchased in aggregate for all employees. As of June 30, 2022 and December 31, 2021, 607,877 and 569,728 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at June 30, 2022.

Note 19. Mortgage Banking Activities, Net

The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income for the three and six months ended June 30, 2022 and 2021.

Table 19.1 – Mortgage Banking Activities


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)	$	(33,414)	$	76,907	$	(102,236)	$	47,634
Trading securities (2)	1,315		(1,095)		4,101		(374)
Risk management derivatives (3)	9,900		(55,740)		83,254		33,224
Other income (expense), net (4)	4,412		1,193		5,029		2,216
Total residential mortgage banking activities, net	(17,787)		21,265		(9,852)		82,700

Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
Single-family rental loans, at fair value (1)	(39,994)		25,966		(65,187)		36,214
Risk management derivatives (3)	15,487		(2,504)		32,520		1,354
Bridge loans, at fair value	116		2,225		2,251		3,269
Other income, net (5)	12,161		7,467		26,566		13,489
Total business purpose mortgage banking activities, net	(12,230)		33,154		(3,850)		54,326
Mortgage Banking Activities, Net	$	(30,017)	$	54,419	$	(13,702)	$	137,026

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

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

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 20. Other Income, Net

The following table presents the components of Other income recorded in our consolidated statements of income for the three and six months ended June 30, 2022 and 2021.

Table 20.1 – Other Income, Net


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
MSR income, net (1)	$	5,376	$	(43)	$	9,679	$	654
Bridge loan fees	1,473		911		2,463		1,604
Risk share income	323		861		783		1,743




Other	(166)		397		64		1,968
Other Income, Net	$	7,006	$	2,126	$	12,989	$	5,969

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

Components of our general and administrative expenses, loan acquisition costs, and other expenses for the three and six months ended June 30, 2022 and 2021 are presented in the following table.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
General and Administrative Expenses
Fixed compensation expense	$	12,110	$	11,269	$	26,738	$	23,074
Annual variable compensation expense	1,811		12,508		5,168		31,177
Long-term incentive award expense (1)	5,532		5,682		11,192		9,851
Acquisition-related equity compensation expense (2)	—		1,212		—		2,424
Systems and consulting	3,703		3,272		6,887		6,249
Office costs	2,083		2,024		4,108		3,832
Accounting and legal	1,576		1,221		3,251		1,935
Corporate costs	1,000		873		1,864		1,564
Other	4,151		2,533		7,612		4,039
Total General and Administrative Expenses	31,966		40,594		66,820		84,145

Loan Acquisition Costs
Commissions	2,116		1,661		4,730		2,924
Underwriting costs	1,096		1,836		2,468		3,521
Transfer and holding costs	268		251		747		862

Total Loan Acquisition Costs	3,480		3,748		7,945		7,307

Other Expenses

Amortization of purchase-related intangible assets	3,306		3,873		6,840		7,746

Other	162		112		713		335
Total Other Expenses	3,468		3,985		7,553		8,081
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	38,914	$	48,327	$	82,318	$	99,533

(1)For the three months ended June 30, 2022 and 2021, long-term incentive award expense included $5 million and $4 million of expense for awards settleable in shares of our common stock, and $0.4 million and $1 million of expense for awards settleable in cash, respectively. For the six months ended June 30, 2022 and 2021, long-term incentive award expense included $10 million and $7 million of expense for awards settleable in shares of our common stock, and $1 million and $3 million of expense for awards settleable in cash, respectively.

(2)Acquisition-related equity compensation expense relates to 588,260 shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in CoreVest in 2019. The grant date fair value of these restricted stock awards was $10 million, which was recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

Long-Term Cash-Based Awards and Cash Settled Deferred Stock Units

During the six months ended June 30, 2022, $2 million of long-term cash-based retention awards were granted to employees that will vest and be paid over a three-year period, subject to continued employment through the vesting periods from 2022 through 2025. At both June 30, 2022 and December 31, 2021, the unamortized compensation cost of long-term cash-based awards was $4 million.

During the six months ended June 30, 2022, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020 and 2021 vest over four years through 2025. At June 30, 2022 and December 31, 2021, the unamortized compensation cost of cash settled deferred stock units was $3 million and $7 million, respectively. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period.

Refer to Note 21 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

Note 22. Taxes

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

For the six months ended June 30, 2022 and 2021, we recognized a benefit from income taxes of $12 million and a provision for income taxes of $18 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at June 30, 2022 and 2021.

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


	June 30, 2022		June 30, 2021
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	(22.4)	%	(14.1)	%
Change in valuation allowance	(4.4)	%	(3.3)	%
Dividends paid deduction	11.9	%	(3.3)	%
Effective Tax Rate	14.7	%	8.9	%

We assessed our tax positions for all open tax years (i.e., Federal, 2018 to 2022, and State, 2017 to 2022) at June 30, 2022 and December 31, 2021, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

Note 23. Segment Information

Redwood operates in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. The accounting policies of the reportable segments are the same as those described in Note 3 — Summary of Significant Accounting Policies. For a full description of our segments, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2021.

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

The following tables present financial information by segment for the three and six months ended June 30, 2022 and 2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 23. Segment Information - (continued)

Table 23.1 – Business Segment Financial Information


	Three Months Ended June 30, 2022
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	13,199	$	8,586	$	144,478	$	1,192	$	167,455
Interest expense	(8,297)		(4,258)		(102,589)		(11,823)		(126,967)
Net interest income	4,902		4,328		41,889		(10,631)		40,488
Non-interest (loss) income
Mortgage banking activities, net	(17,787)		(12,230)		—		—		(30,017)
Investment fair value changes, net	—		—		(98,111)		10,139		(87,972)
Other income, net	—		1,054		6,235		(283)		7,006
Realized gains, net	—		—		—		—		—
Total non-interest (loss) income, net	(17,787)		(11,176)		(91,876)		9,856		(110,983)
General and administrative expenses	(6,082)		(11,069)		(3,041)		(11,774)		(31,966)
Loan acquisition costs	(881)		(2,599)		—		—		(3,480)
Other expenses	74		(3,306)		(236)		—		(3,468)
Benefit from (provision for) income taxes	5,588		3,169		686		—		9,443
Segment Contribution	$	(14,186)	$	(20,653)	$	(52,578)	$	(12,549)
Net (Loss)									$	(99,966)
Non-cash amortization (expense) income, net	$	(760)	$	(3,480)	$	(1,450)	$	(2,137)	$	(7,827)


	Six Months Ended June 30, 2022
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	26,166	$	13,427	$	315,050	$	2,212	$	356,855
Interest expense	(15,233)		(6,826)		(219,171)		(22,035)		(263,265)
Net interest income	10,933		6,601		95,879		(19,823)		93,590
Non-interest (loss) income
Mortgage banking activities, net	(9,852)		(3,850)		—		—		(13,702)
Investment fair value changes, net	—		—		(103,517)		9,425		(94,092)
Other income, net	—		1,629		11,517		(157)		12,989
Realized gains, net	—		—		2,581		—		2,581
Total non-interest (loss) income, net	(9,852)		(2,221)		(89,419)		9,268		(92,224)
General and administrative expenses	(12,183)		(21,541)		(6,174)		(26,922)		(66,820)
Loan acquisition costs	(2,298)		(5,647)		—		—		(7,945)
Other expenses	74		(6,840)		(787)		—		(7,553)
Benefit from (provision for) income taxes	6,595		6,450		(1,144)		—		11,901
Segment Contribution	$	(6,731)	$	(23,198)	$	(1,645)	$	(37,477)
Net (Loss)									$	(69,051)
Non-cash amortization (expense) income, net	$	(298)	$	(7,370)	$	(9,644)	$	(4,170)	$	(21,482)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 23. Segment Information - (continued)


	Three Months Ended June 30, 2021
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	13,246	$	3,026	$	121,248	$	1,175	$	138,695
Interest expense	(7,618)		(1,521)		(88,693)		(10,233)		(108,065)
Net interest income	5,628		1,505		32,555		(9,058)		30,630
Non-interest income
Mortgage banking activities, net	21,265		33,154		—		—		54,419
Investment fair value changes, net	—		—		49,727		(247)		49,480
Other income, net	—		156		1,705		265		2,126
Realized gains, net	—		—		8,384		—		8,384
Total non-interest income, net	21,265		33,310		59,816		18		114,409
General and administrative expenses	(6,898)		(12,356)		(3,157)		(18,183)		(40,594)
Loan acquisition costs	(1,887)		(1,861)		—		—		(3,748)
Other expenses	—		(3,873)		(112)		—		(3,985)
Provision for income taxes	(3,725)		(2,182)		(780)		—		(6,687)
Segment Contribution	$	14,383	$	14,543	$	88,322	$	(27,223)
Net Income									$	90,025
Non-cash amortization (expense) income, net	$	(13)	$	(4,054)	$	7	$	(1,955)	$	(6,015)



	Six Months Ended June 30, 2021
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	20,825	$	5,881	$	237,757	$	2,537	$	267,000
Interest expense	(12,365)		(3,120)		(174,638)		(20,494)		(210,617)
Net interest income	8,460		2,761		63,119		(17,957)		56,383
Non-interest income
Mortgage banking activities, net	82,700		54,326		—		—		137,026
Investment fair value changes, net	—		—		95,488		(921)		94,567
Other income, net	—		278		5,279		412		5,969
Realized gains, net	—		—		11,100		—		11,100
Total non-interest income (loss), net	82,700		54,604		111,867		(509)		248,662
General and administrative expenses	(19,587)		(22,550)		(6,321)		(35,687)		(84,145)
Loan acquisition costs	(3,291)		(3,353)		(659)		(4)		(7,307)
Other expenses	(6)		(7,650)		(442)		17		(8,081)
Provision for income taxes	(13,211)		(3,503)		(1,516)		—		(18,230)
Segment Contribution	$	55,065	$	20,309	$	166,048	$	(54,140)
Net Income									$	187,282
Non-cash amortization income (expense), net	$	(16)	$	(8,152)	$	(227)	$	(3,850)	$	(12,245)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 23. Segment Information - (continued)

The following table presents the components of Corporate/Other for the three and six months ended June 30, 2022 and 2021.

Table 23.2 – Components of Corporate/Other


	Three Months Ended June 30,
	2022						2021
(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	$	1,108	$	84	$	1,192	$	1,169	$	6	$	1,175
Interest expense	(967)		(10,856)		(11,823)		(755)		(9,478)		(10,233)
Net interest income	141		(10,772)		(10,631)		414		(9,472)		(9,058)
Non-interest income

Investment fair value changes, net	(336)		10,475		10,139		(216)		(31)		(247)
Other income	—		(283)		(283)		—		265		265

Total non-interest income, net	(336)		10,192		9,856		(216)		234		18
General and administrative expenses	—		(11,774)		(11,774)		—		(18,183)		(18,183)
Loan acquisition costs	—		—		—		—		—		—
Other expenses	—		—		—		—		—		—

Total	$	(195)	$	(12,354)	$	(12,549)	$	198	$	(27,421)	$	(27,223)


	Six Months Ended June 30,
	2022						2021
(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	$	2,120	$	92	$	2,212	$	2,517	$	20	$	2,537
Interest expense	(1,668)		(20,367)		(22,035)		(1,630)		(18,864)		(20,494)
Net interest income	452		(20,275)		(19,823)		887		(18,844)		(17,957)
Non-interest income

Investment fair value changes, net	(1,050)		10,475		9,425		(915)		(6)		(921)
Other income	—		(157)		(157)		—		412		412
Realized gains, net	—		—		—		—		—		—
Total non-interest income, net	(1,050)		10,318		9,268		(915)		406		(509)
General and administrative expenses	—		(26,922)		(26,922)		—		(35,687)		(35,687)
Loan acquisition costs	—		—		—		—		(4)		(4)
Other expenses	—		—		—		—		17		17

Total	$	(598)	$	(36,879)	$	(37,477)	$	(28)	$	(54,112)	$	(54,140)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 23. Segment Information - (continued)

The following table presents supplemental information by segment at June 30, 2022 and December 31, 2021.

Table 23.3 – Supplemental Segment Information


(In Thousands)	Residential Mortgage Banking		Business Purpose Lending Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
June 30, 2022
Residential loans	$	990,924	$	—	$	5,378,886	$	208,789	$	6,578,599
Business purpose loans	—		503,945		4,698,992		—		5,202,937
Consolidated Agency multifamily loans	—		—		443,114		—		443,114
Real estate securities	3,994		—		280,284		—		284,278
Other investments	—		—		615,807		63,860		679,667
Intangible assets	—		34,720		—		—		34,720
Total assets	1,032,281		645,428		11,513,520		684,307		13,875,536

December 31, 2021
Residential loans	$	1,673,235	$	—	$	5,688,742	$	230,455	$	7,592,432
Business purpose loans	—		347,860		4,443,129		—		4,790,989
Consolidated Agency multifamily loans	—		—		473,514		—		473,514
Real estate securities	4,927		—		372,484		—		377,411
Other investments	—		—		606,267		35,702		641,969
Intangible assets	—		41,561		—		—		41,561
Total assets	1,716,285		464,967		11,770,486		755,206		14,706,944

Note 24. Subsequent Events

In July 2022, we completed the previously-announced acquisition of Riverbend Funding, LLC for an initial cash purchase price paid at closing of approximately $44 million (subject to certain adjustments including potential earnout consideration).

In July 2022, our Board of Directors approved an authorization for the repurchase of up to $125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced our previous $100 million stock repurchase authorization. This authorization has no expiration date and does not obligate us to acquire any specific number of shares or securities.

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

INTRODUCTION

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

• Overview

• Results of Operations

–Consolidated Results of Operations

–Results of Operations by Segment

–Income Taxes

• Liquidity and Capital Resources

• Critical Accounting Estimates

• Market and Other Risks

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

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

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

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

Our Business

Cautionary Statement

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, and our ability to pay dividends in the future); (ii) statements related to our financial outlook and expectations for 2022 and future years, including statements regarding the economic impact of inflation, supply chain disruptions, and war in Europe; (iii) statements regarding our expectations with respect to Riverbend’s integration into, and effect upon, the Redwood and CoreVest businesses; (iv) statements related to our opportunities for growth, including opportunities to grow and increase our market share for our residential and business purpose lending mortgage banking platforms; (v) statements related to our investment portfolio, including that there remains potential upside in our portfolio through market discount, and that at June 30, 2022, our securities portfolio had approximately $391 million of net discount to par (approximately $3.35 per share), which we have the potential to recover over time; (vi) statements related to RWT Horizons and our strategic investment initiatives; (vii) statements relating to our estimate of our available capital (including that we estimate our available capital at June 30, 2022 was approximately $190 million); (viii) 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 2022 and at June 30, 2022, expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase, and residential mortgage loans subject to forward sale commitments; (ix) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2022; 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, and our estimates of REIT taxable income and TRS taxable income.

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

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

•the impact of the COVID-19 pandemic;

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

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

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

•our ability to compete successfully;

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

•strategic business and capital deployment decisions we make;

•our use of financial leverage;

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

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

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

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

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

•changes in mortgage prepayment rates;

•changes in interest rates;

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

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

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

•changes in the values of assets we own;

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

•our exposure to the discontinuation of LIBOR;

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

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

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

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

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

•our ability to successfully retain or attract key personnel;

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

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

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

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

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

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

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

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

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

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

•decisions about raising, managing, and distributing capital;

•our exposure to broad market fluctuations; and

•other factors not presently identified.

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

OVERVIEW

Business Update

The second quarter of 2022 was marked by volatility, the impact of inflation, and rising mortgage rates. The ongoing repricing of interest rate-sensitive assets accelerated during the quarter, impacting the value of mortgage-related investments. Our positioning became decisively more conservative in order to manage mortgage credit and market risk, as we prioritized loan pipeline turnover and strong liquidity. We ended the second quarter with $371 million of unrestricted cash, low leverage and significant unencumbered assets, strong credit performance from our investment portfolio, and conservative volume in our mortgage banking pipelines at quarter-end.

Our book value declined approximately 10% during the quarter to $10.78 per share at June 30, 2022, primarily reflecting negative fair value changes impacting our investment portfolio. Our overall decline in GAAP book value included $(1.02) per share of investment portfolio fair value changes that primarily reflect unrealized mark-to-market losses due to credit spread widening. These assets remain on our balance sheet and we generally expect to hold them for the long term. We observed very little deterioration in expected future cash flows during the quarter. As a result, much of the GAAP losses in our investment portfolio segment were non-cash. At June 30, 2022, our securities portfolio had approximately $391 million of net discount to par (approximately $3.35 per share), which we have the potential to recover over time, offset by any net losses on the underlying loans(1). While we have previously seen book value upside potential from call rights on outstanding RMBS transactions, we expect call activity will remain limited in the near term given the overall interest rate and prepayment environment.

During the second quarter of 2022, we actively managed our jumbo residential and single-family rental (“SFR”) mortgage loan pipelines as interest rate volatility increased, guiding residential loan acquisition volumes lower for interest rate-sensitive assets (such as residential jumbo and business purpose term loans), and adjusting interest rates within our SFR pipeline to reflect current market conditions. Coupled with hedging discipline, this activity allowed us to mitigate the impact of negative market price movements in the underlying securities. In our Residential business, for example, margin declines during the second quarter were less than half the underperformance of jumbo loans versus their benchmarks during the same period.

We also continued to strengthen our capital position during the second quarter of 2022, including through the issuance of $215 million in convertible notes in June 2022, and the extension or initiation since January 1, 2022 of approximately $3.8 billion of warehouse financing capacity, over 60% of which is non-marginable(2). This allowed us to remain opportunistic, and we deployed approximately $245 million of capital during the second quarter, including $33 million into share repurchases at a significant discount to our June 30, 2022 book value. The remainder of capital deployment was primarily related to business purpose lending (“BPL”) investments, including bridge loans with higher interest rates, and growth in our home equity investment (“HEI”) portfolio. For capital deployed during the second quarter, we were focused on investment opportunities with lower interest-rate sensitivity and target yields approximately in the range of 12% to 18%.(3)

Our mortgage banking platforms will remain focused on returning to profitability and maintaining a stable market presence. The functions we serve in the non-Agency mortgage finance ecosystem remain a critical source of market liquidity for hundreds of mortgage originators, thousands of real estate investors, and a deep cohort of whole loan and RMBS investors. While sentiment has begun to improve, most market participants remain uncertain around the direction of the economy, and we suspect that the sentiment of most will follow the Federal Reserve's monetary policy actions and the resulting path of interest rates. We will continue to prioritize the path to consistent profitability, which we expect to entail lower loan acquisition and origination volume levels in the near-term relative to our long-term strategic growth ambitions.

As a direct BPL lender, we leverage technology to serve our clients more quickly, and closely monitor our net cost to originate. We can also pivot efficiently to meet both borrower demand and appropriate risk and return thresholds for our capital. As such, approximately 60% of second quarter BPL originations were primarily floating-rate bridge loans. While second quarter BPL mortgage banking income was impacted by significant spread widening on our securitizations, we adjusted our loan pricing and interest rates and continued to observe strong demand for bridge loans, with borrowers accepting higher interest rates for shorter-term loans with more prepayment flexibility. While we expect BPL origination volume to likely slow in the second half of the year, we believe we can continue to serve our borrowers in ways many others cannot.

We have recently witnessed significant retrenchment by other market participants that we do not believe possess the liquidity or track record to survive a sustained market downturn. Many of these companies had only commenced operations in recent years, during the most accommodating period in the history of the mortgage market due to quantitative easing by the Federal Reserve and historically low mortgage rates. We expect this trend to bode well for Redwood, in terms of opportunities for both organic growth and further strategic acquisitions. We have already seen credit standards begin to tighten for a number of other lenders, offering us an opportunity to increase our competitive advantage and market share.

We expect to continue to evaluate strategic merger and acquisition opportunities, with an emphasis on identifying leading platforms that can be potentially acquired at favorable prices compared to recent years. On July 1, 2022, we successfully closed the acquisition of Riverbend Funding, LLC (“Riverbend”). We anticipate full integration with Riverbend to be complete by the end of 2022. We believe Riverbend’s bridge loan origination capability will add valuable diversity to CoreVest’s existing loan product and geographic scope.

We continue to remain focused on the fundamentals supporting our long-term investment portfolio. Many of our assets are now well seasoned, with continued expectations of pay performance and low losses driven in part by recent home price appreciation. For instance, the loans underlying our SLST reperforming loan investments, which constitute approximately 20% of our investment portfolio (by capital), have over 15 years of seasoning, declining delinquencies (from issuance), cumulative losses of less than 0.2% and home price appreciation-adjusted loan-to-value ratios of approximately 45%. Overall, across our investment portfolio delinquencies remain low – at June 30, 2022, 90+ day delinquencies within our jumbo, SFR and bridge portfolios stood at 1.7%, 2.4% and 2.6%, respectively.

Following active use of our share repurchase program in the second quarter, in July 2022, we announced a new $125 million common stock repurchase program (replacing our previously approved repurchase plan from 2018) and continued our previous authorization for the repurchase of outstanding corporate debt. As we look towards the remainder of the year, we view current market challenges as significant long-term opportunities for Redwood. The housing market remains woefully undersupplied, creating a durable technical driver that supports investments in residential credit across a broad array of economic scenarios. We will continue to maintain a patient, long-term investor mindset, aggressively manage risk, and work diligently to enhance our franchise value while pursuing efficiencies.

Footnotes to Business update

_________________________________________________________________________________________________________

(1) Based on our current estimates, we believe low realized losses and ultimate recovery of asset values will help us realize positive fair value changes for our investment portfolio over time. There are several factors that may impact our ability to recover all, or a portion, of these fair value changes which may be be out of our control, including credit performance and prepayment speeds, and which may cause our actual results to vary.

(2) Not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent.

(3) Target yields are based on our current market observations, estimates and assumptions, including our assumptions regarding credit losses, prepayment speeds, market interest rates, and discount rates, all of which are subject to significant uncertainty and which may cause our actual results to vary. We continue to believe that today’s investing environment is attractive and, over future quarters, we intend to deliberately deploy available capital into accretive opportunities across organic and third-party investments, including potential common stock repurchases.

Second Quarter Overview

The following table presents key financial metrics for the three and six months ended June 30, 2022.

Table 1 – Key Financial Results and Metrics


	Three Months Ended		Six Months Ended
(In Thousands, except per Share Data)	June 30, 2022		June 30, 2022
Net (loss) income per diluted common share	$	(0.85)	$	(0.60)
Annualized GAAP return on equity	(28.8)%		(9.8)		%
Dividends per share	$	0.23	$	0.46
Book value per share	$	10.78	$	10.78
Economic return on book value (1)	(8.3)%		(6.8)%

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

Operational Business Highlights

Investment Portfolio

•Deployed $166 million of capital into new, attractively priced organic and third-party investments

•Credit performance remained strong with stable delinquencies and continued home price appreciation

Business Purpose Mortgage Banking

•Funded $923 million in business purpose loans, essentially flat with first quarter 2022 fundings

◦Second quarter fundings included $561 million of bridge loans (up 35% from the first quarter) and $361 million of single-family rental loans (down 28% from the first quarter)

•Securitized $563 million of loans in two transactions (one backed by $313 million of SFR loans, and one backed by $250 million of bridge loans with a 24-month revolving feature)

•Received a special servicing ranking from DBRS Morningstar, acknowledging CoreVest's successful performance in loan management

Residential Mortgage Banking

•Distributed $1.2 billion of jumbo loans through whole loan sales; at June 30, 2022, total net jumbo loan exposure was $751 million, down 44% from the end of the first quarter

•Locked $1.0 billion of jumbo loans, down from $2.6 billion in first quarter 2022; loan purchase commitments were $0.5 billion, down from $2.0 billion in first quarter 2022

◦Second quarter lock mix was 82% purchase money loans and 18% refinancings

Financing Highlights

•Maintained robust balance sheet with unrestricted cash of $371 million and available capital of $190 million at June 30, 2022 (available capital reflects the subtraction of approximately $44 million for the initial cash purchase price paid at closing in connection with the acquisition of Riverbend following the end of the second quarter of 2022)

•Successfully closed new warehouse facility with up to $400 million of capacity to fund CLO-eligible multifamily bridge loans originated by CoreVest

•Raised $215 million of gross proceeds through a convertible notes offering with a 5-year term; use of proceeds includes opportunistic deployment of capital into attractive investments in our investment portfolio and operating businesses

•Repurchased 3.7 million shares of Redwood’s common stock at a cost of $33 million (including $25 million purchased in conjunction with RWT’s June convertible notes offering and an additional $8 million through open market purchases), resulting in $0.10 per share of book value accretion in the second quarter

RWT Horizons Highlights

•Completed three new investments in the second quarter of 2022

•Recognized approximately $10 million of pre-tax valuation gain from an early RWT Horizons investment

RESULTS OF OPERATIONS

Within this Results of Operations section, we provide commentary that compares results year-over-year for 2022 and 2021. Most tables include a "change" column that shows the amount by which the results from 2022 are greater or less than the results from the respective period in 2021. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the second quarter of 2022, compared to the second quarter of 2021, and increases or decreases during the "six-month periods" refer to the change in results for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Consolidated Results of Operations

The following table presents the components of our net (loss) income for the three and six months ended June 30, 2022 and 2021.

Table 2 – Net (Loss) Income


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands, except per Share Data)	2022		2021		Change		2022		2021		Change
Net Interest Income	$	40,488	$	30,630	$	9,858	$	93,590	$	56,383	$	37,207
Non-interest Income
Mortgage banking activities, net	(30,017)		54,419		(84,436)		(13,702)		137,026		(150,728)
Investment fair value changes, net	(87,972)		49,480		(137,452)		(94,092)		94,567		(188,659)
Other income, net	7,006		2,126		4,880		12,989		5,969		7,020
Realized gains, net	—		8,384		(8,384)		2,581		11,100		(8,519)
Total non-interest (loss) income, net	(110,983)		114,409		(225,392)		(92,224)		248,662		(340,886)
General and administrative expenses	(31,966)		(40,594)		8,628		(66,820)		(84,145)		17,325
Loan acquisition costs	(3,480)		(3,748)		268		(7,945)		(7,307)		(638)
Other expenses	(3,468)		(3,985)		517		(7,553)		(8,081)		528
Net (loss) income before income taxes	(109,409)		96,712		(206,121)		(80,952)		205,512		(286,464)
Benefit from (provision for) income taxes	9,443		(6,687)		16,130		11,901		(18,230)		30,131
Net (Loss) Income	$	(99,966)	$	90,025	$	(189,991)	$	(69,051)	$	187,282	$	(256,333)
Diluted (loss) earnings per common share	$	(0.85)	$	0.66	$	(1.51)	$	(0.60)	$	1.38	$	(1.98)

Net Interest Income

The increase in net interest income during the three- and six-month periods was primarily attributable to the performance of our investment portfolio, which accounted for $9 million and $33 million of the increase, respectively, and generally resulted from higher average asset balances in 2022, as we increased our investments in bridge loans and bonds we retained from CoreVest SFR securitizations during the prior twelve months. Additionally, we recognized elevated levels of discount accretion on our available-for-sale securities and yield maintenance income on our SFR securities during the first quarter of 2022. In association with a rise in interest rates during 2022 that accelerated into the second quarter, prepayment speeds on many of our assets slowed and discount accretion on our available-for-sale securities decreased meaningfully and we also experienced lower yield maintenance income on our SFR securities in the second quarter.

The increase in net interest income during the three- and six-month periods was also attributable to higher average balances of SFR loans held in inventory at our business purpose mortgage banking business, which accounted for $3 million and $4 million of the increase, respectively. Net interest income from residential mortgage banking activities increased by $2 million for the six-month periods, but decreased by $0.7 million during the three months periods, as we conservatively positioned our pipeline in the second quarter of 2022 given the challenging market backdrop.

While our overall weighted average cost of funds declined during the three- and six-month periods, given rising benchmark interest rates, we expect our borrowing costs in general to increase in the near-term. However, given our relative balance of fixed and floating rate assets and liabilities, we expect the net impact to net interest income to be muted. Additionally, in June we issued new convertible notes that will negatively impact net interest income in the near term, until the capital is deployed into interest earning assets.

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

Mortgage Banking Activities, Net

The decrease in income from mortgage banking activities during the three-month periods was attributable to a $39 million decrease from our Residential Mortgage Banking operations and a $45 million decrease from our Business Purpose Mortgage Banking operations. The decrease in income from mortgage banking activities during the six-month periods was attributable to a $93 million decrease from our Residential Mortgage Banking operations and a $58 million decrease from our Business Purpose Mortgage Banking operations.

The decreases from Residential Mortgage Banking operations were attributable to lower acquisition volumes as well as decreased margins during 2022. A sharp increase in mortgage rates during the first half of 2022 resulted in a decrease in residential mortgage origination activity industry-wide, which also negatively impacted our loan acquisition volumes. Additionally, given market volatility, we focused on risk management and were deliberate in moderating volume and transferring financial risk quickly in the second quarter of 2022. Margins and profitability during the first half of 2022 were impacted by wider credit spreads for securitizations and whole loans, as well as increased rate volatility, which resulted in higher hedging costs.

Despite record volumes during the first half of 2022, Business Purpose Mortgage Banking activities produced losses as continued market volatility and extreme credit spread widening, which accelerated into the second quarter of 2022, negatively impacted valuations of our loan inventory held-for-sale and resulted in lower margins for SFR loans we originated during the quarter.

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

Investment Fair Value Changes, Net

Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option. During the three and six months ended June 30, 2022, negative investment fair value changes reflected extreme levels of credit spread widening across many of our investments, partially offset by fair value increases in our IO securities and MSRs, which benefited from rising interest rates, and our home equity investments, which benefited from continued home price appreciation. Negative fair value changes primarily reflected unrealized mark-to-market losses, while fundamental credit performance, including delinquencies and LTVs, remained stable across most of our portfolio.

During the three and six months ended June 30, 2021, positive investment fair value changes reflected improvements in credit performance and credit spread tightening across our investment portfolio.

Additional detail on our investment fair value changes during 2022 is included in the “Results of Operations by Segment” section that follows as well as Table 5.6 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Other Income

The increase in other income for the three- and six-month periods primarily resulted from higher income on our MSR investments, which accounted for $5 million and $9 million of the increase, respectively. The increase in income from MSRs was primarily due to positive valuation changes resulting from a slowdown in prepayment speeds during the first half of 2022 as interest rates rose.

Additional detail on our other income is presented in Table 20.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Realized Gains, Net

During the three and six months ended June 30, 2022, we realized gains of zero and $3 million, primarily resulting from calls associated with third-party available-for-sale ("AFS") securities during the first quarter of 2022. During the three and six months ended June 30, 2021, we realized gains of $8 million and $11 million, respectively, primarily resulting from the call of one and four seasoned Sequoia securitizations, respectively.

General and Administrative Expenses

General and administration expenses decreased for the three- and six-month periods, primarily due to $11 million and $26 million decreases in variable compensation expense, respectively, associated with the decreases in earnings during the respective periods. While variable compensation expenses have been lower in the first half of 2022 compared to the first half of 2021, we anticipate incurring increased compensation expense in the second half of 2022 to the extent we provide retention-based compensation to employees. Fixed compensation expense in the second quarter of 2022 included a $2 million benefit from a payroll tax refund related to a prior year that was realized during the quarter. These decreases were partially offset by higher compensation expenses associated with an increased headcount in 2022 and higher per-employee costs.

Additional detail on our General and administrative expenses is presented in Table 21.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Loan Acquisition Costs

Loan acquisition costs for our business purpose mortgage banking operations increased $1 million and $2 million for the three- and six-month periods, respectively, as a result of higher loan origination volumes in 2022. These increases were offset by a decrease in loan origination costs of $1 million during the second quarter of 2022 at our residential mortgage banking operations, as a result of lower acquisition volumes during the quarter.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. The switch to a tax benefit from a tax provision year-over-year was primarily the result of GAAP losses at our TRS during the first half of 2022 versus GAAP income earned during the same periods in 2021.

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

Net Interest Income

The following table presents the components of net interest income for the three and six months ended June 30, 2022 and 2021.

Table 3 – Net Interest Income


	Three Months Ended June 30,
	2022						2021
(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income
Residential loans, held-for-sale	$	15,463	$	1,507,928	4.1	%	$	13,266	$	1,825,086	2.9	%

Residential loans - HFI at Legacy Sequoia (2)	1,108		213,793		2.1	%	1,169		263,735		1.8	%
Residential loans - HFI at Sequoia (2)	31,923		3,778,552		3.4	%	14,492		1,444,831		4.0	%
Residential loans - HFI at Freddie Mac SLST (2)	16,553		1,725,030		3.8	%	19,506		2,111,445		3.7	%
Business purpose loans - HFS	8,715		602,597		5.8	%	3,167		252,233		5.0	%
Business purpose loans - HFI	15,611		978,086		6.4	%	12,307		667,956		7.4	%
Single-family rental loans - HFI at CAFL (2)	49,878		2,976,988		6.7	%	54,849		3,336,773		6.6	%
Bridge loans - HFI at CAFL (2)	6,730		416,288		6.5	%	—		—		—	%
Multifamily loans at Freddie Mac K-Series (2)	4,732		448,002		4.2	%	4,860		488,715		4.0	%
Trading securities	4,327		155,168		11.2	%	5,527		140,115		15.8	%
Available-for-sale securities	3,501		137,179		10.2	%	3,752		128,413		11.7	%
Other interest income	8,914		870,538		4.1	%	5,800		779,236		3.0	%
Total interest income	167,455		13,810,149		4.9	%	138,695		11,438,538		4.9	%
Interest Expense
Short-term debt facilities	(11,819)		1,598,593		(3.0)	%	(10,085)		1,850,913		(2.2)	%
Short-term debt - servicer advance financing	(1,842)		232,942		(3.2)	%	(1,110)		164,154		(2.7)	%

ABS issued - Legacy Sequoia (2)	(967)		212,033		(1.8)	%	(755)		260,857		(1.2)	%
ABS issued - Sequoia (2)	(28,329)		3,536,911		(3.2)	%	(11,374)		1,220,211		(3.7)	%
ABS issued - Freddie Mac SLST (2)	(13,372)		1,419,538		(3.8)	%	(16,611)		1,864,842		(3.6)	%
ABS issued - Freddie Mac K-Series (2)	(4,351)		416,148		(4.2)	%	(4,478)		459,344		(3.9)	%
ABS issued - CAFL (2)	(41,840)		2,984,375		(5.6)	%	(43,201)		3,087,741		(5.6)	%
Long-term debt facilities	(13,592)		1,405,431		(3.9)	%	(10,972)		674,306		(6.5)	%
Long-term debt - corporate	(10,855)		703,810		(6.2)	%	(9,479)		650,953		(5.8)	%
Total interest expense	(126,967)		12,509,781		(4.1)	%	(108,065)		10,233,321		(4.2)	%
Net Interest Income	$	40,488					$	30,630


	Six Months Ended June 30,
	2022						2021
(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income
Residential loans, held-for-sale	$	30,356	$	1,620,642	3.7	%	$	19,931	$	1,381,960	2.9	%

Residential loans - HFI at Legacy Sequoia (2)	$	2,120	$	218,032	1.9	%	2,517		268,724		1.9	%
Residential loans - HFI at Sequoia (2)	$	64,021	$	3,865,980	3.3	%	29,975		1,414,397		4.2	%
Residential loans - HFI at Freddie Mac SLST (2)	$	33,753	$	1,777,180	3.8	%	39,665		2,143,942		3.7	%
Business purpose loans - HFS	$	13,753	$	537,053	5.1	%	6,014		258,600		4.7	%
Business purpose loans - HFI	$	27,538	$	844,682	6.5	%	24,775		649,943		7.6	%
Single-family rental loans - HFI at CAFL (2)	$	122,671	$	3,127,065	7.8	%	103,722		3,296,042		6.3	%
Bridge loans - HFI at CAFL(2)	$	11,271	$	353,181	6.4	%	—		—		—	%
Multifamily loans at Freddie Mac K-Series (2)	$	9,485	$	457,750	4.1	%	9,646		491,282		3.9	%
Trading securities	9,596		162,202		11.8	%	11,423		136,336		16.8	%
Available-for-sale securities	14,187		137,608		20.6	%	7,519		132,823		11.3	%
Other interest income	18,104		928,072		3.9	%	11,813		801,270		2.9	%
Total interest income	356,855		14,029,447		5.1	%	267,000		10,975,319		4.9	%
Interest Expense
Short-term debt facilities	(21,645)		1,662,458		(2.6)	%	(16,572)		1,423,017		(2.3)	%
Short-term debt - servicer advance financing	(3,504)		250,009		(2.8)	%	(2,396)		175,132		(2.7)	%

ABS issued - Legacy Sequoia (2)	(1,668)		215,911		(1.5)	%	(1,630)		265,430		(1.2)	%
ABS issued - Sequoia (2)	(56,500)		3,622,067		(3.1)	%	(23,480)		1,192,582		(3.9)	%
ABS issued - Freddie Mac SLST (2)	(27,457)		1,473,896		(3.7)	%	(33,982)		1,906,613		(3.6)	%
ABS issued - Freddie Mac K-Series (2)	(8,722)		425,946		(4.1)	%	(8,834)		462,962		(3.8)	%
ABS issued - CAFL (2)	(100,207)		3,120,553		(6.4)	%	(81,054)		3,046,141		(5.3)	%
Long-term debt facilities	(23,200)		1,272,918		(3.6)	%	(23,804)		723,861		(6.6)	%
Long-term debt - FHLBC	—		—		—	%	(2)		558		(0.7)	%
Long-term debt - corporate	(20,362)		678,442		(6.0)	%	(18,863)		650,508		(5.8)	%
Total interest expense	(263,265)		12,936,978		(4.1)	%	(210,617)		9,846,804		(4.3)	%
Net Interest Income	$	93,590					$	56,383

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

(2)Interest income from residential loans held-for-investment ("HFI") at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our consolidated Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia and the interest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia entities. Interest income from residential loans - HFI at Freddie Mac SLST and the interest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities. Interest income from multifamily loans at Freddie Mac K-Series and the interest expense from ABS issued - Freddie Mac K-Series represent activity from our consolidated Freddie Mac K-Series entities. Interest income from single-family rental loans - HFI at CAFL, bridge loans - HFI at CAFL and the interest expense from ABS issued - CAFL represent activity from our consolidated CAFL entities.

Results of Operations by Segment

We report on our business using three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio. For additional information on our segments, refer to Note 23 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The following table presents the segment contribution from our three segments reconciled to our consolidated net (loss) income for the three and six months ended June 30, 2022 and 2021.

Table 4 – Segment Results Summary


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2022		2021		Change		2022		2021		Change
Segment Contribution from:
Residential Mortgage Banking	$	(14,186)	$	14,383	$	(28,569)	$	(6,731)	$	55,065	$	(61,796)
Business Purpose Mortgage Banking	(20,653)		14,543		(35,196)		(23,198)		20,309		(43,507)
Investment Portfolio	(52,578)		88,322		(140,900)		(1,645)		166,048		(167,693)
Corporate/Other	(12,549)		(27,223)		14,674		(37,477)		(54,140)		16,663
Net (Loss) Income	$	(99,966)	$	90,025	$	(189,991)	$	(69,051)	$	187,282	$	(256,333)

The sections that follow provide further detail for our three business segments and their results of operations for the three and six months ended June 30, 2022.

Corporate/Other

The decrease in net expense from Corporate/Other for the three- and six-month periods was primarily due to $6 million and $9 million, respectively, of lower compensation expense for corporate employees, primarily related to variable compensation, which decreased in association with lower earnings year-over-year. In addition, other income increased by approximately $10 million, resulting from pre-tax valuation gains recognized in the second quarter of 2022 from an early RWT Horizons investment. These decreases were partially offset by increased net interest expense of $2 million in the second quarter of 2022, primarily related to the issuance of new convertible notes in June 2022.

Residential Mortgage Banking Segment

Our Residential Mortgage Banking segment consists of a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization through our Sequoia private-label securitization program, or transfer into our investment portfolio. We typically acquire prime jumbo mortgages and the related mortgage servicing rights on a flow basis from our network of loan sellers. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of residential loans held-for-sale within this segment. This segment’s main source of mortgage banking income is net interest income from its inventory of loans held-for-sale, as well as income from mortgage banking activities, which includes valuation increases (or gains) on loans we acquire and subsequently sell, securitize, or transfer into our investment portfolio, and the hedges used to manage risks associated with these activities. Direct operating expenses and tax expenses associated with these activities are also included in this segment.

Net income from this segment is primarily comprised of net interest income earned on loans while they are held in inventory, mortgage banking activities income (including mark-to-market adjustments on loans from the time they are purchased to when they are sold or securitized, mark-to-market adjustments on new and outstanding loan purchase commitments and gains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate securities that we retain from our Sequoia securitizations (many of which we consolidate for GAAP purposes) are transferred to and held in our Investment Portfolio segment.

The following table provides the activity of residential loans held in inventory for sale at our mortgage banking business during the three and six months ended June 30, 2022.

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


	Three Months Ended		Six Months Ended
(In Thousands)	June 30, 2022		June 30, 2022
Balance at beginning of period	$	1,101,006	$	1,673,236
Acquisitions	1,137,466		3,145,911
Sales	(1,200,885)		(3,050,759)
Transfers between segments (1)	—		(684,491)
Principal repayments	(22,146)		(43,285)
Changes in fair value, net	(24,517)		(49,688)
Balance at End of Period	$	990,924	$	990,924

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

During the three and six months ended June 30, 2022, our residential mortgage loan conduit locked $1.01 billion and $3.64 billion of loans ($0.54 billion and $2.49 billion adjusted for expected pipeline fallout - i.e., loan purchase commitments), including $824 million and $3.21 billion of Select loans and $188 million and $430 million of Choice loans, and purchased $1.14 billion and $3.15 billion of loans, respectively. During the three and six months ended June 30, 2022, approximately 82% and 69% of locked loans were purchase-money loans and 18% and 31% were refinancings, respectively. During the three and six months ended June 30, 2022, we distributed $1.24 billion and $3.07 billion of loans (unpaid principal balance) through whole loan sales, respectively. During the six months ended June 30, 2022, we completed one securitization backed by $687 million of loans (unpaid principal balance).

During the second quarter of 2022, we focused on transferring financial risk and selling our lower-coupon inventory expediently to whole loan investors. When markets normalize, we expect securitization activity to pick up, particularly as banks seek a place to invest deposits. At June 30, 2022, we had total net loan exposure of $751 million (down 44% from March 31, 2022), including $991 million of loans in inventory on our balance sheet, $285 million of loans identified for purchase (locked loans, unadjusted for fallout), and $541 million of forward sale agreements for loans. As of June 30, 2022, we had sold substantially all of our lower coupon jumbo mortgages, and our remaining mortgage banking loan inventory had an average mortgage rate over 5%.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At June 30, 2022, we had residential warehouse facilities outstanding with seven different counterparties, with $2.75 billion of total capacity and $1.66 billion of available capacity. These included non-marginable facilities (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent) with $1.38 billion of total capacity and marginable facilities with $1.38 billion of total capacity.

The following table presents key earnings and operating metrics for our Residential Mortgage Banking segment during the three and six months ended June 30, 2022.

Table 6 – Residential Mortgage Banking Earnings Summary and Operating Metrics


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2022		2021		Change		2022		2021		Change
Mortgage banking (loss) income	$	(12,885)	$	26,893	$	(39,778)	$	1,081	$	91,160	$	(90,079)
Operating expenses	(6,889)		(8,785)		1,896		(14,407)		(22,884)		8,477
Benefit from (provision for) income taxes	5,588		(3,725)		9,313		6,595		(13,211)		19,806
Segment Contribution	$	(14,186)	$	14,383	$	(28,569)	$	(6,731)	$	55,065	$	(61,796)
Loan purchase commitments (loan locks, adjusted for expected fallout)	$	537,925	$	2,743,105	$	(2,205,180)	$	2,493,866	$	6,253,397	$	(3,759,531)

Residential mortgage banking income presented in the table above is comprised of net interest income from residential loans held-for-sale in inventory and mortgage banking activities, net from this segment (see Note 19 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities, net). Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.

The decrease in contribution from our residential mortgage banking operations during the three- and six-month periods was primarily attributable to lower mortgage banking activities income, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These decreases in income were partially offset by lower general and administrative expenses, which declined during the three- and six-month periods, primarily due to lower variable compensation expenses.

Our gross margin (mortgage banking income earned in the period divided by loan purchase commitments entered into during the period) for the second quarter of 2022 was negative 240 basis points, a decrease from 71 basis points during the first quarter of 2022. As discussed previously, our margins during the second quarter of 2022 were negatively impacted by wider credit spreads during the quarter, and in particular from the impact of spread widening on our inventory from March 31, 2022 that we carried into the second quarter. While we began to see some stabilization in interest rates and credit spread moderation during July 2022, a re-widening of credit spreads or further rate volatility could continue to negatively impact our margins and profitability.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit from income taxes for the second quarter of 2022 was due to an overall GAAP loss incurred at our TRS during that period.

Business Purpose Mortgage Banking Segment

Our Business Purpose Mortgage Banking segment consists of a platform that originates and acquires business purpose loans (consisting of SFR loans and bridge loans) for subsequent securitization, sale, or transfer into our investment portfolio. SFR loans are business purpose mortgage loans to investors in single-family (primarily 1-4 unit) rental properties. Bridge loans are business purpose mortgage loans to investors rehabilitating and subsequently reselling or renting residential and multifamily properties. We typically originate SFR loans and distribute most of our SFR loans through our CAFL private-label securitization program and on occasion will sell as whole loans. We originate and acquire bridge loans and typically transfer these loans into our Investment Portfolio where they will be retained for investment, and on occasion may sell as whole loans. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of single-family rental loans held-for-sale.

Net income from this segment is primarily comprised of net interest income earned on loans while they are held in inventory, mortgage banking activities income (including mark-to-market adjustments on loans from the time they are purchased to when they are sold, securitized or transferred into our investment portfolio, fee income earned on originations and gains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate securities that we retain from our CAFL securitizations (which we consolidate for GAAP purposes) and bridge loans we originate in this segment are transferred to and held in our Investment Portfolio segment.

On July 1, 2022, we closed the previously announced acquisition of Riverbend, a private mortgage lender to investors in transitional residential and multifamily real estate. This acquisition adds capacity, product breadth and geographic footprint to our existing bridge loan origination platform.

The following table provides business purpose loan origination activity at Redwood during the three and six months ended June 30, 2022.

Table 7 – Business Purpose Loans — Funding Activity


	Three Months Ended June 30, 2022						Six Months Ended June 30, 2022
(In Thousands)	Single-Family Rental		Bridge (1)		Total		Single-Family Rental		Bridge (1)		Total
Fair value at beginning of period	$	505,889	$	—	$	505,889	$	358,309	$	—	$	358,309
Fundings	361,731		561,264		922,995		866,912		976,185		1,843,097

Sales	—		—		—		(331,750)		—		(331,750)
Transfers between segments (2)	(295,037)		(560,128)		(855,165)		(295,037)		(977,424)		(1,272,461)
Principal repayments	(30,201)		—		(30,201)		(31,584)		—		(31,584)
Changes in fair value, net	(37,211)		(1,136)		(38,347)		(61,679)		1,239		(60,440)
Fair Value at End of Period	$	505,171	$	—	$	505,171	$	505,171	$	—	$	505,171

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

(2)For single-family rental loans, amounts represent transfers of loans from held-for-sale at our Business Purpose Mortgage Banking segment to held-for-investment at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP. Bridge loan amounts represent the transfer of loans originated or acquired by our Business purpose mortgage banking group at our TRS and transferred to our Investment Portfolio segment at our REIT as described in preceding footnote.

Single-family rental loan fundings for the three and six months ended June 30, 2022 included $38 million and $100 million of loans acquired from third parties, respectively. Bridge loan fundings for the three and six months ended June 30, 2022 included $19 million and $22 million of loans acquired from third parties, respectively. During the three and six months ended June 30, 2022, we completed two business purpose loan securitizations, one backed by approximately $250 million of bridge loans that includes a 24-month revolving feature, and one backed by $313 million of SFR loans. At June 30, 2022, we had $505 million of single-family rental loans in inventory on our balance sheet.

During the second quarter of 2022, demand for business purpose loans remained strong as rates moved higher. Given continued rate volatility, our borrowers opted for short-term fully prepayable bridge loans relative to term loans, leading to strong volumes in bridge (up 35% from the first quarter of 2022) – particularly in multifamily (up 31% from the first quarter of 2022) and renovate/build-to-rent (up 74% from the first quarter of 2022).

We utilize a combination of capital and loan warehouse facilities to manage our inventory of single-family rental loans that we hold for sale. At June 30, 2022, we had business purpose warehouse facilities outstanding with five different counterparties, with $2.25 billion of total capacity (used for both SFR and bridge loans) and $997 million of available capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent).

The following table presents an earnings summary for our Business Purpose Mortgage Banking segment for the three and six months ended June 30, 2022.

Table 8 – Business Purpose Mortgage Banking Earnings Summary


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2022		2021		Change		2022		2021		Change
Mortgage banking income	$	(6,848)	$	34,815	$	(41,663)	$	4,380	$	57,365	$	(52,985)
Operating expenses	(16,974)		(18,090)		1,116		(34,028)		(33,553)		(475)
Benefit from income taxes	3,169		(2,182)		5,351		6,450		(3,503)		9,953
Segment Contribution	$	(20,653)	$	14,543	$	(35,196)	$	(23,198)	$	20,309	$	(43,507)

Business Purpose Mortgage Banking income presented in the table above is comprised of net interest income from single-family rental ("SFR") loans held-for-sale in inventory, mortgage banking activities, net (see Note 19 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities), and other income, net for this segment. Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.

The decrease in contribution from our business purpose mortgage banking operations during the three- and six-month periods was primarily attributable to lower mortgage banking activities income. While higher loan origination volumes during 2022 contributed to increased origination fees and higher net interest income earned on loan inventory during the first half of 2022, severe credit spread widening significantly impacted margins and profitability. Continued rate volatility or a further widening of spreads would continue to impact our margins and profitability at this business.

General and administrative expenses declined during the three- and six-month periods, primarily due to lower variable compensation expenses. These decreases were partially offset by higher fixed compensation and other costs associated with an increased headcount during 2022. Additionally, higher funding volumes in the first half of 2022 resulted in higher loan acquisition costs relative to 2021.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit from income taxes for the first half of 2022 was due to an overall GAAP loss incurred at our TRS during that period.

Investment Portfolio Segment

Our Investment Portfolio segment consists of investments sourced through our residential and business purpose mortgage banking operations, including primarily securities retained from our residential and business purpose securitization activities (some of which we consolidate for GAAP purposes), business purpose residential and multifamily bridge loans, as well as third-party investments including RMBS issued by third parties (including Agency CRT securities), investments in Freddie Mac K-Series multifamily loan securitizations and reperforming loan securitizations (both of which we consolidate for GAAP purposes), servicer advance investments, HEIs, and other housing-related investments. This segment’s main sources of income are net interest income and other income from investments, changes in fair value of investments and associated hedges, and realized gains and losses upon the sale of securities. Direct operating expenses and tax provisions associated with these activities are also included in this segment.

The following table presents details of our Investment Portfolio at June 30, 2022 and December 31, 2021 organized by investments organically created through our mortgage banking segments and acquired from third-parties. Amounts presented in the table represent our retained economic investments in consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted.

Table 9 – Investment Portfolio - Detail of Economic Interests


(In Thousands)	June 30, 2022		December 31, 2021
Organic Residential Investments
Residential loans at Redwood (1)	$	222,143	$	172,047
Residential securities at Redwood (2)	112,562		143,838
Residential securities at consolidated Sequoia entities (3)	236,777		245,417
Other investments (4)	50,150		12,438
Organic Business Purpose Investments
Bridge loans	1,651,489		944,606
Single-family rental securities at consolidated CAFL SFR entities (5)	307,413		301,506
Other investments	1,869		5,935
Third-Party Investments
Residential securities at Redwood	146,382		195,930
Residential securities at consolidated Freddie Mac SLST entities (6)	390,417		444,751
Multifamily securities at Redwood	21,129		32,715
Multifamily securities at consolidated Freddie Mac K-Series entities (7)	31,732		31,657
Servicing investments (8)	96,487		102,540
HEIs (9)	145,003		43,638
Other investments	8,633		10,400
Total Segment Investments	$	3,422,186	$	2,687,418

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

(2)Excludes $4 million of trading securities that are designated as hedges for our mortgage banking operations and are not considered part of our investment portfolio.

(3)Represents our retained economic investment in securities issued by consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $3.53 billion of loans and $3.29 billion of ABS issued associated with these investments at June 30, 2022. We consolidated $3.63 billion of loans and $3.38 billion of ABS issued associated with these investments at December 31, 2021.

(4)Organic residential other investments at June 30, 2022 includes net risk share investments of $27 million, representing $34 million of restricted cash and other assets, net of other liabilities of $7 million.

(5)Represents our retained economic investment in securities issued by consolidated CAFL SFR securitization VIEs. For GAAP purposes, we consolidated $3.05 billion of loans and $2.73 billion of ABS issued associated with these investments at June 30, 2022. We consolidated $3.49 billion of loans and $3.21 billion of ABS issued associated with these investments at December 31, 2021.

(6)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $1.63 billion of loans and $1.24 billion of ABS issued associated with these investments at June 30, 2022. We consolidated $1.89 billion of loans and $1.45 billion of ABS issued associated with these investments at December 31, 2021.

(7)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $443 million of loans and $411 million of ABS issued associated with these investments at June 30, 2022. We consolidated $474 million of loans and $442 million of ABS issued associated with these investments at December 31, 2021.

(8)Represents our economic investment in consolidated Servicing Investment variable interest entities. At June 30, 2022, for GAAP purposes, we consolidated $305 million of servicing investments and $232 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2021, for GAAP purposes, we consolidated $385 million of servicing investments and $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.

(9)At June 30, 2022 and December 31, 2021, represents HEIs owned at Redwood of $130 million and $33 million, respectively, and our retained economic investment in securities issued by the consolidated HEI securitization entity of $15 million and $10 million, respectively. At June 30, 2022, for GAAP purposes, we consolidated $146 million of HEIs and $110 million of ABS issued, as well as other assets and liabilities for this entity. At December 31, 2021, for GAAP purposes, we consolidated $160 million of HEIs and $137 million of ABS issued, as well as other assets and liabilities for this entity.

The growth in our Investment Portfolio during the first half of 2022 was primarily attributable to a net increase in business purpose bridge loans, the acquisition of residential jumbo loans from calls and incremental investments in HEIs through a third-party flow purchase agreement. See the Investments Detail and Activity section that follows for additional detail on our portfolio investments and their associated borrowings.

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

Table 10 – Investment Portfolio Earnings Summary


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2022		2021		Change		2022		2021		Change
Net interest income	$41,889		$32,555		$	9,334	$	95,879	$	63,119	$	32,760
Investment fair value changes, net	(98,111)		49,727		(147,838)		(103,517)		95,488		(199,005)
Other income, net	6,235		1,705		4,530		11,517		5,279		6,238
Realized gains, net	—		8,384		(8,384)		2,581		11,100		(8,519)
Operating expenses	(3,277)		(3,269)		(8)		(6,961)		(7,422)		461
Benefit from (provision for) income taxes	686		(780)		1,466		(1,144)		(1,516)		372
Segment Contribution	$	(52,578)	$	88,322	$	(140,900)	$	(1,645)	$	166,048	$	(167,693)

The decrease in contribution from the investment portfolio during the three- and six-month periods was primarily attributable to negative investment fair value changes, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These decreases were partially offset by higher net interest income and other income during the three- and six-month periods, each as discussed in the Consolidated Results of Operations section of this MD&A.

Net interest income during the first quarter of 2022 included approximately $8 million of yield maintenance income (triggered by prepayments) received on retained SFR securities. During the second quarter of 2022, interest rates increased sharply, prepayments slowed and yield maintenance income on retained SFR securities declined to $4 million. Additionally, during the first quarter of 2022, we recorded $8 million of discount accretion for AFS securities, much of which was associated with securities we expected to be called given high prepayment speeds experienced during 2021. As a result of interest rate increases during the first half of 2022, expected call dates were extended for certain available-for-sale securities and discount accretion income from these securities declined, resulting in $1 million of total discount accretion in the second quarter of 2022.

Investment fair value changes is primarily comprised of the change in fair value (both realized and unrealized) of our portfolio investments accounted for under the fair value option and hedges associated with these investments (see Table 5.6 in Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of investment fair value changes – difference in amount from the table above to Table 5.6 in the notes to our consolidated financial statements relates to fair value changes for investments held at corporate/other). The negative investment fair value changes in the first half of 2022 were nearly all unrealized and resulted primarily from credit spread widening across many of our investments, which began in the first quarter and increased sharply during the end of the second quarter. Rising interest rates and slower actual and expected prepayment speeds resulted in positive fair value changes for our interest only securities, and hedges allocated to our investment portfolio, and credit improvements benefited several of our investments, including in particular our retained CAFL SFR securities and bridge loans. While our investments generally continue to experience stable credit performance, further spread widening or a deterioration in credit could result in additional negative investment fair value changes for our investments.

Other income within this segment is primarily comprised of income (loss) from our MSR investments, bridge loan extension fees, and risk share investment income. Details on the composition of Other income is included in Note 20 in Part I, Item 1 of this Quarterly Report on Form 10-Q. Realized gains generally result from sales or calls of available-for-sale securities we own. Refer to the analysis of this line item in the Consolidated Results of Operations section of this MD&A for an explanation of current year activity. Operating expenses at this segment are primarily attributable to compensation expense and remained relatively consistent during the three- and six-month periods, as decreases in variable compensation were partially offset by higher fixed compensation costs resulting from higher headcount in 2022.

We hold certain of our investments, primarily our MSRs, at our taxable REIT subsidiary. Our Provision for income taxes at this segment is primarily driven by the amount of income earned from these assets and, for the first half of 2022, reflects positive net income earned from investment portfolio activities at our taxable REIT subsidiary.

Investments Detail and Activity

This section presents additional details on our investments and their activity during the three and six months ended June 30, 2022.

Real Estate Securities Portfolio

The following table sets forth our real estate securities activity by collateral type for the three and six months ended June 30, 2022.

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


Three Months Ended June 30, 2022	Residential		Multifamily		Total
(In Thousands)	Senior		Subordinate				Mezzanine
Beginning fair value	$	34,206	$	300,352	$	24,324		$	358,882

Acquisitions:
Sequoia securities	—		—		—			—
Third-party securities	—		—		—			—
Sales:
Sequoia securities	(3,855)		—		—			(3,855)
Third-party securities	(6,337)		(13,137)		—			(19,474)
Gains on sales and calls, net	—		—		—			—
Effect of principal payments (2)	—		(753)		(2,009)			(2,762)
Change in fair value, net	7,482		(54,810)		(1,185)			(48,513)
Ending Fair Value	$	31,496	$	231,652	$	21,130		$	284,278


Six Months Ended June 30, 2022	Residential		Multifamily		Total
(In Thousands)	Senior		Subordinate				Mezzanine
Beginning fair value	$	21,787	$	322,909	$	32,715		$	377,411

Acquisitions:	—		—		—
Sequoia securities	—		—		—			—
Third-party securities	5,006		10,000		—			15,006
Sales:	—		—		—
Sequoia securities	(3,855)		—		—			(3,855)
Third-party securities	(6,337)		(13,137)		—			(19,474)
Gains on sales and calls, net	—		1,914		—			1,914
Effect of principal payments (2)	—		(15,677)		(8,688)			(24,365)
Change in fair value, net	14,895		(74,357)		(2,897)			(62,359)
Ending Fair Value	$	31,496	$	231,652	$	21,130		$	284,278

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

(2)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.

At June 30, 2022, our securities at Redwood (exclusive of securities owned in consolidated entities) consisted of fixed-rate assets (91%), adjustable-rate assets (6%), and hybrid assets that reset within the next year (3%).

The following table sets forth activity in our real estate securities portfolio for the three and six months ended June 30, 2022, organized by investments organically created through our mortgage banking segments and acquired from third-parties. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.

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


Three Months Ended June 30, 2022	Residential Organic				Business Purpose Organic		Third-Party Investments						Total
	Sequoia Securities on Balance Sheet		Consolidated Sequoia Securities		Consolidated CAFL Securities		Consolidated SLST Securities		Consolidated Multifamily Securities		Other Third-Party Securities
(In Thousands)
Beginning fair value	$	133,014	$	244,396	$	305,554	$	436,677	$	31,921	$	225,868	$	1,377,430
Acquisitions(1)	—		—		23,687		—		—		—		23,687
Sales	(3,854)		(612)		—		—		—		(19,475)		(23,941)
Gains on sales and calls, net	—		—		—		—		—		—		—
Effect of principal payments (2)	(193)		(1,095)		—		(10,424)		—		(2,569)		(14,281)
Change in fair value, net	(16,405)		(5,912)		(21,828)		(35,837)		(189)		(32,108)		(112,279)
Ending Fair Value (3)	$	112,562	$	236,777	$	307,413	$	390,416	$	31,732	$	171,716	$	1,250,616


Six Months Ended June 30, 2022	Residential Organic				Business Purpose Organic		Third-Party Investments						Total
	Sequoia Securities on Balance Sheet		Consolidated Sequoia Securities		Consolidated CAFL Securities		Consolidated SLST Securities		Consolidated Multifamily Securities		Other Third-Party Securities
(In Thousands)
Beginning fair value	$	145,757	$	245,417	$	301,506	$	444,751	$	31,657	$	231,654	$	1,400,742
Acquisitions(1)	—		3,742		23,687		—		—		15,006		42,435
Sales	(3,854)		(612)		—		—		—		(19,475)		(23,941)
Gains on sales and calls, net	284		—		—		—		—		1,630		1,914
Effect of principal payments (2)	(10,632)		(2,033)		—		(21,572)		—		(13,733)		(47,970)
Change in fair value, net	(18,993)		(9,737)		(17,780)		(32,763)		75		(43,366)		(122,564)
Ending Fair Value (3)	$	112,562	$	236,777	$	307,413	$	390,416	$	31,732	$	171,716	$	1,250,616

(1)During the six months ended June 30, 2022, we retained $4 million of securities from one Sequoia securitization.

(3)At June 30, 2022, $4 million of securities within the "Other third-party securities" column of this table were used as hedges for our residential mortgage banking operations. These same securities are presented as a component of securities within our residential lending segment on our segment balance sheet.

At June 30, 2022, our securities (both those held on our balance sheet and our economic interests in consolidated VIEs) consisted of fixed-rate assets (98%), adjustable-rate assets (1%) and hybrid assets that reset within the next year (1%).

We directly finance our holdings of real estate securities with a combination of non-recourse debt, non-marginable term debt and marginable debt in the form of repurchase (or “repo”) financing. At June 30, 2022, real estate securities with a fair value of $446 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with $310 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities, re-performing loan securities with a fair value of $390 million were financed with $115 million of non-recourse securitization debt, and real estate securities with a fair value of $124 million (including securities owned in consolidated securitization entities) were financed with $95 million of short-term debt incurred through repurchase facilities with four different counterparties. The remaining $290 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at June 30, 2022. This table includes both our securities held on balance sheet and our economic interests in securities we own in securitizations we consolidate in accordance with GAAP.

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


June 30, 2022							Weighted Average Values
	Market Value - IO Securities		Market Value - Non-IO Securities		Principal Balance - Non-IO Securities		Gross Weighted Average Coupon		90+ Delinquency		3-Month Prepayment Rate		Investment Thickness(1)
(Dollars in Thousands)
Sequoia securities on balance sheet	$	27,293	$	85,269	$	140,270	3.8	%	0.5	%	18	%	7	%
Consolidated Sequoia securities	23,452		213,325		248,551		4.7	%	2.0	%	25	%	40	%
Total Sequoia Securities	50,745		298,594		388,821		4.4	%	1.5	%	23	%	29	%
Consolidated Freddie Mac SLST securities	10,854		379,562		511,195		4.5	%	13.3	%	12	%	29	%
RPL securities on balance sheet	209		46,608		143,169		4.3	%	3.7	%	12	%	2	%
Total RPL Securities	11,063		426,170		654,364		4.5	%	12.3	%	12	%	26	%
Consolidated Freddie Mac K-Series securities	—		31,732		36,468		4.3	%	—	%	—	%	10	%
Multifamily securities on balance sheet	179		20,950		22,809		3.3	%	—	%	23	%	9	%
Total Multifamily Securities	179		52,682		59,277		3.9	%	—	%	9	%	10	%
Consolidated CAFL securities	40,383		267,030		402,960		5.3	%	2.4	%	19	%	15	%
Other third-party securities	4,010		99,760		143,136		3.3	%	0.7	%	15	%	2	%
Total Securities	$	106,380	$	1,144,236	$	1,648,558

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

We primarily target investments that have a sensitivity to housing credit risk, typically sourced through our operating businesses where we control the underwriting and review of underlying collateral. During the first half of 2022, our investment portfolio continued to demonstrate strong performance across a range of credit metrics, including loan delinquencies which generally remained stable, and loan-to-value ratios (LTVs), which continued to decline or remain stable. Given the seasoned nature of our investments (particularly within our RPL securities and Sequoia securities), many of these investments are supported by substantial home price appreciation and borrower equity in the underlying homes.

Bridge Loans Held-for-Investment

The following table provides the activity of bridge loans held-for-investment during the three and six months ended June 30, 2022.

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


	Three Months Ended		Six Months Ended
(In Thousands)	June 30, 2022		June 30, 2022
Fair value at beginning of period	$	1,209,950	$	944,606



Transfers between portfolios (1)	560,128		977,424
Transfers to REO	(691)		(963)
Principal repayments	(112,162)		(261,538)
Changes in fair value, net	(5,736)		(8,040)
Fair Value at End of Period	$	1,651,489	$	1,651,489

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

Our $1.65 billion of bridge loans held-for-investment at June 30, 2022 were comprised of first-lien, interest-only loans with a weighted average coupon of 6.78% and original maturities of six to 36 months. At origination, the weighted average FICO score of borrowers backing these loans was 744 and the weighted average LTV ratio of these loans was 67%. At June 30, 2022, of the 3,399 loans in this portfolio, 56 of these loans with an aggregate fair value of $37 million and an aggregate unpaid principal balance of $40 million were in foreclosure and 99 loans with an aggregate fair value of $38 million and an unpaid principal balance of $41 million were greater than 90 days delinquent (certain loans in foreclosure were also 90 days delinquent).

We finance our bridge loans with a combination of recourse, non-marginable warehouse facilities, non-recourse, non-marginable warehouse facilities, and non-recourse securitization debt. During the second quarter of 2022, we completed our second bridge loan securitization. This bridge loan securitizations includes a 24-month revolving feature allowing us to add additional loans as loans within the structure pay down. These two structures have $550 million of total capacity. At June 30, 2022, we had: $196 million of debt incurred through short-term warehouse facilities with three counterparties, which was secured by $265 million of business purpose bridge loans; $635 million of debt incurred through long-term facilities with two different counterparties, which was secured by $779 million of business purpose bridge loans; and $485 million of securitization debt secured by $542 million of business purpose bridge loans and $9 million of restricted cash.

The following table provides the composition of bridge loans held-for-investment by product type as of June 30, 2022 and December 31, 2021.

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


(In Thousands)	June 30, 2022		December 31, 2021
Multifamily	$	786,556	$	326,004



Renovate / Build to rent	670,070		375,729
Fix and Flip	133,964		150,928
Other	60,899		91,945
Fair Value at End of Period	$	1,651,489	$	944,606

Residential Loans

The following table provides the activity of residential loans held at our investment portfolio during the three and six months ended June 30, 2022.

Table 16 – Investment Portfolio Residential Loans - Activity


	Three Months Ended		Six Months Ended
(In Thousands)	June 30, 2022		June 30, 2022
Fair value at beginning of period	$	246,064	$	172,048
Acquisitions	—		102,258




Principal repayments	(15,874)		(39,864)
Changes in fair value, net	(8,046)		(12,298)
Fair Value at End of Period	$	222,144	$	222,144

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

During six months ended June 30, 2022, we called three of our unconsolidated Sequoia securitizations and purchased $102 million (unpaid principal balance) of loans from the securitization trusts.

Other Investments

The following table sets forth our other investments activity at our Investment Portfolio segment by significant asset type for the three and six months ended June 30, 2022.

Table 17 – Other Investments at Investment Portfolio Segment - Activity


Three Months Ended June 30, 2022	Servicing Investments(1)		Home Equity Investments(2)		MSRs and Excess Servicing		Other		Total
(In Thousands)
Balance at beginning of period	$	302,837	$	227,133	$	62,762	$	2,324	$	595,056
New/additional investments	—		57,248		—		—		57,248
Sales/distribution	—		—		—		(469)		(469)
Reductions in investments	(26,396)		(13,155)		—		—		(39,551)
Changes in fair value, net	(3,231)		5,140		1,601		13		3,523
Other	—		—		—		—		—
Balance at End of Period	$	273,210	$	276,366	$	64,363	$	1,868	$	615,807


Six Months Ended June 30, 2022	Servicing Investments(1)			Home Equity Investments(2)			MSRs and Excess Servicing				Other		Total
(In Thousands)
Balance at beginning of period	$	350,923	0	$	192,740	0	$	56,669	$	—	$	5,935	$	606,267
New/additional investments	—			97,389			4,543				—		101,932
Sales/distribution	—			—			—				(4,769)		(4,769)
Reductions in investments	(71,401)			(25,826)			—				(30)		(97,257)
Changes in fair value, net	(6,312)			12,063			3,360				732		9,843
Other	—			—			(209)				—		(209)
Balance at End of Period	$	273,210		$	276,366		$	64,363			$	1,868	$	615,807

Footnotes for Table 16

(1)Our servicing investments are owned through our consolidated Servicing Investment entities. At June 30, 2022, our economic investment in these entities was $96 million (for GAAP purposes, we consolidated $305 million of servicing investments, $232 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities). At December 31, 2021, our economic investment in these entities was $103 million (for GAAP purposes, we consolidated $385 million of servicing investments, $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities).

(2)Our home equity investments presented in this table as of June 30, 2022, include $146 million of HEIs owned in our consolidated HEI securitization entity and $130 million of HEIs owned directly at Redwood. At June 30, 2022, our economic investment in the consolidated HEI securitization entity was $15 million (for GAAP purposes, we consolidated $146 million of HEIs and $110 million of ABS issued, as well as other assets and liabilities for this entity).

Reductions in investments for our servicing investments primarily represent recoveries of servicing advances within our consolidated servicing VIEs. Positive changes in fair value for HEIs in 2022 primarily reflect improvements in home prices (positive HPA). Changes in fair value for MSRs and excess servicing for 2022 include a reduction in basis from the regular receipt of scheduled cash flows, which was more than offset by a positive impact to fair value from a decrease in forecasted prepayment speeds.

Additional details on our other investments is included in Note 10 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Income Taxes

Taxable Income, REIT Status and Dividend Characterization

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

In June 2022, our Board of Directors declared a regular dividend of $0.23 per share for the second quarter of 2022, which was paid on June 30, 2022 to shareholders of record on June 23, 2022. As of June 30, 2022, our year-to-date dividend distributions of $0.46 per share exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and we would not be able to elect to be taxed as a REIT for four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.

While our minimum REIT dividend requirement is generally 90% of our annual REIT taxable income, we carried a $37 million federal net operating loss carry forward (NOL) into 2022 at our REIT that affords us the ability to retain REIT taxable income up to the NOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of NOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our NOL and any remaining NOL amount will carry forward into future years.

While the exact amount is uncertain at this time, we currently expect a significant portion of our 2022 dividend distributions to be taxable as ordinary income for federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is nontaxable (provided it does not exceed a shareholder's tax basis in Redwood shares) and reduces a shareholder's basis in Redwood shares (but not below zero). To the extent such distributions exceed a shareholder's basis in Redwood shares, such excess amount would be taxable as capital gain. Under the federal income tax rules applicable to REITs, none of Redwood’s 2022 dividend distributions are currently expected to be characterized as long-term capital gain dividends. The income or loss generated at our TRS will not directly affect the tax characterization of our 2022 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.

Tax Provision under GAAP

For the three and six months ended June 30, 2022, we recorded tax benefits of $9 million and $12 million, respectively. For the three and six months ended June 30, 2021, we recorded tax provisions of $7 million and $18 million, respectively. Our tax provision is primarily derived from the activities at our TRS as we do not book a material tax provision associated with income generated at our REIT. The switch to a tax benefit from a tax provision year-over-year was primarily the result of GAAP income being recorded at our TRS in 2021 versus GAAP losses being recorded at our TRS in 2022.

Realization of our deferred tax assets ("DTAs") is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. To the extent we determine it is more likely than not that we will not be able to realize a deferred tax asset, we establish a valuation allowance accordingly. At December 31, 2021, we reported net federal ordinary and capital DTAs with no valuation allowance recorded against them. We continue to believe it is more likely than not that we will realize all of our federal deferred tax assets; therefore, there continues to be no valuation allowance recorded against our net federal DTAs. As we have experienced GAAP losses at our TRS the past two quarters, we are continuing to monitor our estimate of the realizability of our net deferred tax assets and will reassess the need for a valuation allowance, in whole or in part, in future periods.

Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs exist and we project most of our state DTAs will expire prior to their utilization.

LIQUIDITY AND CAPITAL RESOURCES

Summary

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

At June 30, 2022, our total capital was $2.12 billion and included $1.26 billion of equity capital and $862 million of convertible notes and long-term debt on our consolidated balance sheet, including $199 million of convertible debt due in 2023, $150 million of convertible debt due in 2024, $172 million of exchangeable debt due in 2025, $215 million of convertible debt due in 2027 and $140 million of trust-preferred securities due in 2037.

As of June 30, 2022, our unrestricted cash was $371 million, and we estimate we had approximately $190 million of available capital (available capital reflects the subtraction of approximately $44 million for the initial cash purchase price paid at closing in connection with the acquisition of Riverbend following the end of the second quarter of 2022). While we believe our available cash is sufficient to fund our operations, we may raise equity or debt capital from time to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interests of the company.

In the discussion that follows and throughout this document, we distinguish between marginable and non-marginable debt. When we refer to non-marginable debt and marginable debt, we are referring to whether or not such debt is subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional mortgage loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender).

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

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

Repurchase Authorization

Our Board of Directors previously approved an authorization for the repurchase of up to $100 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three and six months ended June 30, 2022, we repurchased 3.7 million shares of our common stock. At June 30, 2022, $46 million of the authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

In July 2022, our Board of Directors authorized the repurchase of up to $125 million of common stock. This common stock repurchase authorization replaced the $100 million common stock repurchase authorization approved by the Board of Directors in 2018, has no time limit, may be modified, suspended or discontinued at any time, and does not obligate us to acquire any specific number of shares or securities. The Board of Directors also continued its previous authorization for the repurchase of outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above.

Cash Flows and Liquidity for the Six Months Ended June 30, 2022

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

Cash Flows from Operating Activities

Cash flows from operating activities were negative $491 million during the six months ended June 30, 2022. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. During the first six months of 2022, excluding cash flows from the purchase, origination, sale, principal payments of loans classified as held-for-sale and the settlement of associated derivatives (which cumulatively totaled $558 million), cash flows from operating activities were positive $68 million.

Cash Flows from Investing Activities

During the six months ended June 30, 2022, our net cash provided by investing activities was $204 million and primarily resulted from proceeds from principal payments on loans held-for-investment. Because many of our investment securities and loans are financed through various borrowing agreements, a significant portion of the proceeds from any sales or principal payments of these assets are generally used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated securitization entities would generally be used to repay ABS issued by those entities.

Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these assets in order to manage our liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market conditions.

As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the six months ended June 30, 2022, we transferred loans between held-for-sale and held-for-investment classification and retained securities from securitizations we sponsored, which represent significant non-cash transactions that were not included in cash flows from investing activities.

Cash Flows from Financing Activities

During the six months ended June 30, 2022, our net cash provided by financing activities was $199 million. This primarily resulted from net long-term debt borrowings of $681 million, which included the issuance of $215 million of convertible debt during three months ended June 30, 2022, as well as $214 million of net borrowings under ABS issued, including from the issuance of CAFL SFR, CAFL bridge and Sequoia ABS securitizations during the six months ended June 30, 2022. These amounts were partially offset by $675 million of net paydowns on short-term borrowings, resulting primarily from a reduction in financed loan inventory at our residential mortgage banking business at June 30, 2022, as well as the payment of our two quarterly dividends totaling $57 million. Cash raised through stock issuances under our ATM program of $68 million during the first quarter of 2022 were partially offset by stock repurchases of $27 million during the second quarter of 2022.

During the six months ended June 30, 2022, we declared dividends of $0.46 per common share. On June 9, 2022, the Board of Directors declared a regular dividend of $0.23 per share for the second quarter of 2022, which was paid on June 30, 2022 to shareholders of record on June 23, 2022.

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

Material Cash Requirements

In the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, while others are off-balance sheet or recorded on the balance sheet in amounts different from the full contract or notional amount of the transaction.

Our material cash requirements from known contractual and other obligations during the twelve months following June 30, 2022 include maturing short-term debt, interest payments on short-term and long-term debt, payments on operating leases, and funding commitments for bridge loans and under HEI flow purchase agreements. Our material cash requirements from known contractual and other obligations beyond the twelve months following June 30, 2022 include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for bridge loans and under HEI flow purchase agreements.

For additional information regarding our material cash requirements, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 under the caption Contractual Obligations. For additional information on commitments and contingencies as of June 30, 2022 that could impact our liquidity and capital resources, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Several of our loan warehouse facilities were established with initial one-year terms and are regularly amended on an annual basis to extend the terms for an additional year ahead of their maturity. We renewed several of these facilities in the first half of 2022 and have other such facilities with scheduled maturities during the next twelve months. While there is no assurance of our ability to renew these facilities, given current market conditions we would expect to extend these in the normal course of business.

We expect to meet our obligations coming due in less than one year from June 30, 2022, through a combination of cash on hand, payments of principal and interest we receive from our investment portfolio assets, proceeds from the sale of investment portfolio assets, cash generated from our operating activities, or incremental borrowings under existing, new or amended financing arrangements. As of June 30, 2022, we had approximately $500 million of pledgeable and unencumbered assets.

During the first six months of 2022, the highest balance of our short-term debt outstanding was $2.39 billion. See Note 13 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our short-term debt. See Note 15 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our long-term debt.

Liquidity Needs for our Mortgage Banking Activities

We generally use loan warehouse facilities to finance the residential loans we acquire and the business purpose loans we originate or acquire in our mortgage banking operations while we aggregate the loans for sale or securitization. These facilities may be designated as short-term or long-term for financial reporting purposes, depending on the remaining maturity of the facility or the amount of time individual borrowings may remain outstanding on a facility.

At June 30, 2022, we had residential warehouse facilities outstanding with seven different counterparties, with $2.75 billion of total capacity and $1.66 billion of available capacity. These included non-marginable facilities with $1.38 billion of total capacity and marginable facilities with $1.38 billion of total capacity.

At June 30, 2022, we had business purpose warehouse facilities outstanding with four different counterparties, with $2.25 billion of total capacity and $997 million of available capacity. All of these facilities are non-marginable.

Several of these facilities have variable interest rates based on LIBOR or SOFR benchmarks and recent policy statements from the Federal Reserve indicate the likelihood of further increases in the federal funds rate, which would result in higher benchmark rates and interest costs for us under certain of our debt facilities.

As discussed above, several of the facilities we use to finance our mortgage banking loan inventory are short-term in nature and will require renewals. Additionally, because several of our warehouse facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks. Additional information regarding risks related to the debt we use to finance our mortgage banking operations can be found under the heading "Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities" that follows within this section.

Liquidity Needs for our Investment Portfolio

We use various forms of secured recourse and non-recourse debt to finance assets in our investment portfolio. We distinguish our debt between recourse and non-recourse, as our non-recourse debt is mostly comprised of ABS issued, which has unique characteristics that differentiate it in important ways from our recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.

ABS issued represents debt of securitization entities that we consolidate for GAAP reporting purposes. Our exposure to these entities is primarily through the financial interests we have purchased or retained from these entities (typically subordinate securities and interest only securities). Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood. As the debt issued by these entities is not a direct obligation of Redwood, and since the debt generally can remain outstanding for the full term of the loans it is financing within each securitization, this debt effectively provides permanent financing for these assets. See Notes 4 and 14, respectively, in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our principles of consolidation and our asset-backed securities issued.

Separately, we use non-recourse debt in the form of non-marginable term facilities to finance a portion of our business purpose bridge loan portfolio. While this debt is non-recourse to Redwood, it does have fixed terms with prepayment options that allows us to refinance this debt or ultimately repay it upon maturity. The remainder of the debt we use to finance our investments is recourse debt. For securities we have financed, the majority of our financing is in the form of recourse non-marginable secured term debt, with the smaller remaining amount being marginable securities repurchase debt. Additionally, a portion of our business purpose bridge loan portfolio is financed with recourse non-marginable secured term debt.

We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. Recent policy statements from the Federal Reserve indicate the likelihood of further increases in the federal funds rate, which if enacted could result in lower net interest income to the extent our variable rate assets and liabilities are not aligned. Additionally, to the extent interest rates remain elevated or increase further, certain fixed-rate term borrowings that mature in the coming quarters could have to be refinanced at higher interest rates, which could cause a reduction in net interest income.

At June 30, 2022, in aggregate, we had $3.12 billion of secured recourse debt outstanding, financing our mortgage banking and investment portfolio, of which $662 million was marginable and $2.46 billion was non-marginable.

Corporate Capital

In addition to secured recourse and non-recourse debt we use specifically in association with our mortgage banking operations and within our investment portfolio, we also use unsecured recourse debt to finance our overall operations. This is generally in the form of convertible debt securities we issue in the public markets and also includes trust preferred securities. See Note 15 in Part II, Item 8 of our Annual Report on Form 10-K, for additional information on our long-term debt.

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

As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and/or origination of residential and business purpose mortgage loans (including those we acquire or originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our common stock. Recourse debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, under the caption(s) “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities,” and “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements.”

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Our sources of debt financing include secured borrowings under residential and business purpose mortgage loan warehouse facilities (including recourse and non-recourse warehouse facilities), short-term securities repurchase facilities, a $10 million committed line of short-term secured credit from a bank, short-term servicer advance financing, a secured, revolving debt facility collateralized by mortgage servicing rights, and subordinate securities financing facilities.

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

Under many of our mortgage loan warehouse facilities and our short-term securities repurchase facilities, while transferred or pledged assets are financed under the facility, to the extent the value of the assets, or the collateral underlying those assets, declines, we are generally required to either immediately reacquire the assets or meet a margin requirement to transfer or pledge additional assets or cash in an amount at least equal to the decline in value. We refer to borrowing facilities with margin call provisions based solely on the lender's determination, in its discretion, of changes in the market value of transferred or pledged assets, as marginable debt. Borrowing facilities that we refer to as non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender), in which case the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at June 30, 2022, only our short-term securities repurchase facilities (with $95 million of borrowings outstanding at June 30, 2022), and four of our residential mortgage loan warehouse facilities (with $567 million of borrowings outstanding at June 30, 2022) retain market-value based margin call provisions based solely on the lender's determination of market value and, as such, are considered marginable.

Margin call provisions under these facilities are further described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”

Because many of these borrowing facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Market Risks.” In addition, with respect to mortgage loans that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Market Risks,” if and when those loans or securities become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility.

At June 30, 2022, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at June 30, 2022 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at June 30, 2022 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur at least $600 million in additional recourse indebtedness.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Note 2 — Basis of Presentation and Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We have elected the fair value option of accounting for a significant portion of the assets and some of the liabilities on our balance sheet, and the majority of these assets and liabilities utilize Level 3 valuation inputs, which require a significant level of estimation uncertainty. See Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our assets and liabilities accounted for at fair value at June 30, 2022, including the significant inputs used to estimate their fair values and the impact the changes in their fair values had to our financial condition and results of operations. See Note 5 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021, incorporated herein by reference, for the same information on these assets and liabilities as of December 31, 2021. Periodic fluctuations in the values of these assets and liabilities are inherently volatile and thus can lead to significant period-to-period GAAP earnings volatility.

Additional detail on our critical accounting estimates is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, under the heading "Critical Accounting Estimates."

MARKET AND OTHER RISKS

We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

In addition to the market risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information concerning market risk is incorporated herein by reference to Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, 2021.

Item 4. Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

There have been no changes in our internal control over financial reporting during the second quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information on our legal proceedings, see Note 16 to the Financial Statements within this Quarterly Report on Form 10-Q under the heading "Loss Contingencies - Litigation, Claims and Demands," which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Loss Contingencies - Litigation, Claims and Demands.”

Item 1A. Risk Factors

Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.

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

During the three months ended June 30, 2022, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three months ended June 30, 2022, we repurchased 3,680,795 shares of our common stock. At June 30, 2022, $46 million of this current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

In July 2022, our Board of Directors authorized the repurchase of up to $125 million of common stock. This common stock repurchase authorization replaces the $100 million common stock repurchase authorization approved by the Board of Directors in 2018, has no time limit and may be modified, suspended or discontinued at any time. The Board of Directors also continued its previous authorization for the repurchase of outstanding debt securities.

The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended June 30, 2022.


	Total Number of Shares Purchased or Acquired	Average Price per Share Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)
April 1, 2022 - April 30, 2022	—	$	—	—	$	—
May 1, 2022 - May 31, 2022	—	$	—	—	$	—
June 1, 2022 - June 30, 2022	3,681	$	8.87	—	$	45,727
Total	3,681	$	8.87	—	$	45,727

Item 3. Defaults Upon Senior Securities

None.

Item 4. Not Applicable

Item 5. Other Information

None.

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Item 6. Exhibits


Exhibit Number						Exhibit
3.1						Articles of Amendment and Restatement of the Registrant, effective July 6, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1, filed on August 6, 2008)
3.1.1						Articles Supplementary of the Registrant, effective August 10, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.1, filed on August 6, 2008)
3.1.2						Articles Supplementary of the Registrant, effective August 11, 1995 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.2, filed on August 6, 2008)
3.1.3						Articles Supplementary of the Registrant, effective August 9, 1996 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.3, filed on August 6, 2008)
3.1.4						Certificate of Amendment of the Registrant, effective June 30, 1998 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.4, filed on August 6, 2008)
3.1.5						Articles Supplementary of the Registrant, effective April 7, 2003 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.5, filed on August 6, 2008)
3.1.6						Articles of Amendment of the Registrant, effective June 12, 2008 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.6, filed on August 6, 2008)
3.1.7						Articles of Amendment of the Registrant, effective May 19, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2009)
3.1.8						Articles of Amendment of the Registrant, effective May 24, 2011 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 20, 2011)
3.1.9						Articles of Amendment of the Registrant, effective May 18, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2012)
3.1.10						Articles of Amendment of the Registrant, effective May 16, 2013 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2013)
3.1.11						Articles of Amendment of the Registrant, effective May 16, 2019 (incorporated by reference to the Registrant's Current Report on Form 8-K, Exhibit 3.1, filed on May 17, 2019)
3.1.12						Articles of Amendment of the Registrant, effective June 15, 2020 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on June 15, 2020)
3.2.1						Amended and Restated Bylaws of the Registrant, as adopted on November 3, 2021 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 3.2.1, filed on November 4, 2021)
4.1						Indenture, by and among Redwood Trust, Inc. and Wilmington Trust, National Association, as Trustee, dated as of June 9, 2022 (including the form of 7.75% Convertible Senior Note due 2027) (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 4.1, filed June 9, 2022)
31.1						Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1						Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2						Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101						Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2022, is filed in inline XBRL-formatted interactive data files: (i) Consolidated Balance Sheets at June 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income (Loss) for the three and six months ended June 30, 2022 and 2021; (iii) Statements of Consolidated Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and 2021; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2022 and 2021; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021; and (vi) Notes to Consolidated Financial Statements.
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

______________________

* Indicates exhibits that include management contracts or compensatory plan arrangements.

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SIGNATURES

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


		REDWOOD TRUST, INC.

Date:	August 5, 2022	By:	/s/ Christopher J. Abate
			Christopher J. Abate
			Chief Executive Officer
			(Principal Executive Officer)

Date:	August 5, 2022	By:	/s/ Brooke E. Carillo
			Brooke E. Carillo
			Chief Financial Officer
			(Principal Financial Officer)

Date:	August 5, 2022	By:	/s/ Collin L. Cochrane
			Collin L. Cochrane
			Chief Accounting Officer
			(Principal Accounting Officer)

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