Companies: 10,796     total market cap: $141.881 T
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Redwood Trust
RWT
#6558
Rank
$0.75 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$6.02
Share price
0.75%
Change (1 day)
18.87%
Change (1 year)
๐Ÿ  Real estate๐Ÿ’ฐ Investment ๐Ÿ˜๏ธ REITs
Categories
  1. Redwood Trust
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2021 Q3

Redwood Trust - 10-Q quarterly report FY2021 Q3


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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: September 30, 2021

OR
☐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)
Maryland68-0329422
(State or Other Jurisdiction of
Incorporation or Organization)		(I.R.S. Employer
Identification No.)
One Belvedere Place, Suite 300
Mill Valley,California94941
(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 classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareRWTNew 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 share114,674,962 shares outstanding as of November 1, 2021


REDWOOD TRUST, INC.
2021 FORM 10-Q REPORT
TABLE OF CONTENTS
 
Page
PART I —
FINANCIAL INFORMATION
Item 1.
Note 1. Organization
Note 2. Basis of Presentation
Note 3. Summary of Significant Accounting Policies
Note 4. Principles of Consolidation
Note 5. Fair Value of Financial Instruments
Note 6. Residential Loans
Note 7. Business Purpose Loans
Note 8. Multifamily Loans
Note 9. Real Estate Securities
Note 10. Other Investments
Note 11. Derivative Financial Instruments
Note 12. Other Assets and Liabilities
Note 13. Short-Term Debt
Note 14. Asset-Backed Securities Issued
Note 15. Long-Term Debt
Note 16. Commitments and Contingencies
Note 17. Equity
Note 18. Equity Compensation Plans
Note 19. Mortgage Banking Activities, Net
Note 20. Other Income
Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
Note 22. Taxes
Note 23. Segment Information
Item 2.
Item 3.
Item 4.
PART II —
OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
i

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except Share Data)
(Unaudited)		September 30, 2021December 31, 2020
ASSETS (1)
Residential loans, held-for-sale, at fair value$1,495,079 $176,641 
Residential loans, held-for-investment, at fair value4,721,389 4,072,410 
Business purpose loans, held-for-sale, at fair value466,346 245,394 
Business purpose loans, held-for-investment, at fair value4,227,209 3,890,959 
Multifamily loans, held-for-investment, at fair value482,791 492,221 
Real estate securities, at fair value353,286 344,125 
Other investments422,366 348,175 
Cash and cash equivalents556,989 461,260 
Restricted cash88,717 83,190 
Intangible assets45,246 56,865 
Derivative assets51,103 53,238 
Other assets162,193 130,588 
Total Assets$13,072,714 $10,355,066 
LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net $1,750,941 $522,609 
Derivative liabilities10,972 16,072 
Accrued expenses and other liabilities251,576 179,340 
Asset-backed securities issued (includes $7,756,101 and $6,900,362 at fair value), net
8,183,825 7,100,661 
Long-term debt, net1,499,577 1,425,485 
Total liabilities11,696,891 9,244,167 
Commitments and Contingencies (see Note 16)
Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 114,661,762 and 112,090,006 issued and outstanding
1,147 1,121 
Additional paid-in capital2,312,272 2,264,874 
Accumulated other comprehensive income (loss)1,923 (4,221)
Cumulative earnings1,272,845 997,277 
Cumulative distributions to stockholders(2,212,364)(2,148,152)
Total equity1,375,823 1,110,899 
Total Liabilities and Equity$13,072,714 $10,355,066 
——————
(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At September 30, 2021 and December 31, 2020, assets of consolidated VIEs totaled $9,358,317 and $8,141,069, respectively. At September 30, 2021 and December 31, 2020, liabilities of consolidated VIEs totaled $8,391,761 and $7,348,713, respectively. See Note 4 for further discussion.


The accompanying notes are an integral part of these consolidated financial statements.
2

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In Thousands, except Share Data)Three Months Ended September 30,Nine Months Ended September 30,
(Unaudited)2021202020212020
Interest Income
Residential loans$53,993 $44,921 $146,081 $179,331 
Business purpose loans67,129 55,637 201,640 161,710 
Multifamily loans4,846 4,918 14,492 49,960 
Real estate securities14,242 10,135 33,184 38,471 
Other interest income5,512 6,371 17,325 20,537 
Total interest income145,722 121,982 412,722 450,009 
Interest Expense
Short-term debt(11,826)(5,145)(30,794)(45,119)
Asset-backed securities issued(73,732)(66,514)(222,712)(232,316)
Long-term debt(18,196)(28,752)(60,865)(72,313)
Total interest expense(103,754)(100,411)(314,371)(349,748)
Net Interest Income41,968 21,571 98,351 100,261 
Non-interest Income (Loss)
Mortgage banking activities, net63,163 59,395 200,189 24,511 
Investment fair value changes, net26,077 107,047 120,644 (611,557)
Other income, net2,388 (114)8,357 3,979 
Realized gains, net6,703 602 17,803 30,419 
Total non-interest income (loss), net98,331 166,930 346,993 (552,648)
General and administrative expenses(47,692)(27,630)(131,837)(84,832)
Loan acquisition costs(4,621)(2,158)(11,928)(7,716)
Other expenses(4,023)(7,788)(12,104)(104,286)
Net Income (Loss) before (Provision for) Benefit from Income Taxes83,963 150,925 289,475 (649,221)
Benefit from (provision for) income taxes4,323 (9,113)(13,907)13,079 
Net Income (Loss)$88,286 $141,812 $275,568 $(636,142)
Basic earnings (loss) per common share$0.75 $1.21 $2.36 $(5.60)
Diluted earnings (loss) per common share$0.65 $1.02 $2.03 $(5.60)
Basic weighted average shares outstanding112,995,847 113,403,102 112,754,691 113,952,308 
Diluted weighted average shares outstanding141,855,471 141,969,977 141,575,385 113,952,308 

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


3

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)Three Months Ended September 30,Nine Months Ended September 30,
(Unaudited)2021202020212020
Net Income (Loss)$88,286 $141,812 $275,568 $(636,142)
Other comprehensive income (loss):
Net unrealized (loss) gain on available-for-sale securities (2,658)8,236 19,552 (19,890)
Reclassification of unrealized (gain) loss on available-for-sale securities to net income (6,200)(445)(16,495)(11,525)
Net unrealized loss on interest rate agreements— — — (32,806)
Reclassification of unrealized loss on interest rate agreements to net income1,041 1,040 3,087 2,148 
Total other comprehensive (loss) income(7,817)8,831 6,144 (62,073)
Total Comprehensive Income (Loss)$80,469 $150,643 $281,712 $(698,215)


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


4

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended September 30, 2021
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
June 30, 2021113,052,780 $1,131 $2,287,412 $9,740 $1,184,559 $(2,187,700)$1,295,142 
Net income— — — — 88,286 — 88,286 
Other comprehensive loss— — — (7,817)— — (7,817)
Issuance of common stock1,585,709 16 19,810 — — — 19,826 
Employee stock purchase and incentive plans23,273 — 153 — — — 153 
Non-cash equity award compensation— — 4,897 — — — 4,897 
Common dividends declared ($0.21 per share)
— — — — — (24,664)(24,664)
September 30, 2021114,661,762 $1,147 $2,312,272 $1,923 $1,272,845 $(2,212,364)$1,375,823 
For the Nine Months Ended September 30, 2021
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
December 31, 2020112,090,006 $1,121 $2,264,874 $(4,221)$997,277 $(2,148,152)$1,110,899 
Net income— — — — 275,568 — 275,568 
Other comprehensive income— — — 6,144 — — 6,144 
Issuance of common stock2,391,777 24 33,176 — — — 33,200 
Employee stock purchase and incentive plans179,979 2 (536)— — — (534)
Non-cash equity award compensation— — 14,758 — — — 14,758 
Common dividends declared ($0.55 per share)
— — — — — (64,212)(64,212)
September 30, 2021114,661,762 $1,147 $2,312,272 $1,923 $1,272,845 $(2,212,364)$1,375,823 
For the Three Months Ended September 30, 2020
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
June 30, 2020114,940,197 $1,149 $2,279,625 $(29,391)$801,170 $(2,115,977)$936,576 
Net income— — — — 141,812 — 141,812 
Other comprehensive income— — — 8,831 — — 8,831 
Employee stock purchase and incentive plans11,460 — 9 — — — 9 
Non-cash equity award compensation— — 3,906 — — — 3,906 
Share repurchases(3,047,335)(30)(21,629)— — — (21,659)
Common dividends declared ($0.14 per share)
— — — — — (16,011)(16,011)
September 30, 2020111,904,322 $1,119 $2,261,911 $(20,560)$942,982 $(2,131,988)$1,053,464 


5

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Nine Months Ended September 30, 2020
(In Thousands, except Share Data)Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Cumulative
 Earnings		Cumulative
Distributions
to Stockholders		Total
(Unaudited)SharesAmount
December 31, 2019114,353,036 $1,144 $2,269,617 $41,513 $1,579,124 $(2,064,167)$1,827,231 
Net loss— — — — (636,142)— (636,142)
Other comprehensive loss— — — (62,073)— — (62,073)
Issuance of common stock350,088 3 5,544 — — — 5,547 
Employee stock purchase and incentive plans248,533 2 (2,767)— — — (2,765)
Non-cash equity award compensation— — 11,146 — — — 11,146 
Share repurchases(3,047,335)(30)(21,629)— — — (21,659)
Common dividends declared ($0.585 per share)
— — — — — (67,821)(67,821)
September 30, 2020111,904,322 $1,119 $2,261,911 $(20,560)$942,982 $(2,131,988)$1,053,464 


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

6

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)		Nine Months Ended September 30,
20212020
Cash Flows From Operating Activities:
Net income (loss)$275,568 $(636,142)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net300 6,213 
Depreciation and amortization of non-financial assets12,674 13,166 
Originations of held-for-sale loans(960,419)(654,820)
Purchases of held-for-sale loans(9,902,028)(2,893,246)
Proceeds from sales of held-for-sale loans6,948,264 3,224,526 
Principal payments on held-for-sale loans49,619 53,677 
Net settlements of derivatives27,412 (187,130)
Non-cash equity award compensation expense14,758 11,146 
Goodwill impairment expense— 88,675 
Market valuation adjustments(292,056)606,764 
Realized gains, net(17,803)(30,419)
Net change in:
Accrued interest receivable and other assets(9,680)304,147 
Accrued interest payable and accrued expenses and other liabilities73,120 (82,489)
Net cash used in operating activities(3,780,271)(175,932)
Cash Flows From Investing Activities:
Originations of loan investments(557,327)(327,494)
Purchases of loan investments(35,713)— 
Proceeds from sales of loan investments9,484 1,574,160 
Principal payments on loan investments1,950,151 1,652,418 
Purchases of real estate securities(29,342)(106,422)
Sales of securities held in consolidated securitization trusts8,197 142,990 
Proceeds from sales of real estate securities37,500 634,709 
Principal payments on real estate securities46,904 19,446 
Purchases of servicer advance investments— (179,419)
Principal repayments from servicer advance investments58,248 83,124 
Purchases of home equity investment contracts(109,174)(986)
Other investing activities, net(15,915)22,019 
Net cash provided by investing activities1,363,013 3,514,545 
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt9,847,178 3,981,572 
Repayments on short-term debt(8,443,664)(5,828,972)
Proceeds from issuance of asset-backed securities2,822,785 1,343,845 
Repayments on asset-backed securities issued(1,549,766)(1,037,546)
Proceeds from borrowings on long-term debt948,674 1,251,850 
Repayments on long-term debt(1,055,475)(2,640,007)
Net settlements of derivatives— (84,336)
Net proceeds from issuance of common stock20,248 5,791 
Net payments on repurchase of common stock— (21,659)
Taxes paid on equity award distributions(957)(3,009)
Dividends paid(64,212)(67,821)
Other financing activities, net(6,297)(4,876)
Net cash provided by (used in) financing activities2,518,514 (3,105,168)
Net increase in cash, cash equivalents and restricted cash101,256 233,445 
Cash, cash equivalents and restricted cash at beginning of period (1)
544,450 290,833 
Cash, cash equivalents and restricted cash at end of period (1)
$645,706 $524,278 
7


REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In Thousands)
(Unaudited)		Nine Months Ended September 30,
20212020
Supplemental Cash Flow Information:
Cash paid during the period for:
 Interest$298,507 $364,875 
 Taxes28,092 218 
Supplemental Noncash Information:
Real estate securities retained from loan securitizations$9,375 $46,560 
Retention of mortgage servicing rights from loan securitizations and sales7,065 — 
Deconsolidation of multifamily loans held in securitization trusts— (3,849,779)
Deconsolidation of multifamily ABS— (3,706,789)
Transfers from loans held-for-sale to loans held-for-investment3,005,041 770,754 
Transfers from loans held-for-investment to loans held-for-sale44,922 — 
Transfers from residential loans to real estate owned21,655 12,547 
Transfers from long-term debt to short-term debt93,150 — 
Right-of-use asset obtained in exchange for operating lease liability1,135 5,362 
Reduction in operating lease liability due to lease modification— 1,466 
Issuance of common stock for 5 Arches acquisition13,375 3,375 
(1)    Cash, cash equivalents, and restricted cash at September 30, 2021 includes cash and cash equivalents of $557 million and restricted cash of $89 million, and at December 31, 2020 includes cash and cash equivalents of $461 million and restricted cash of $83 million.

The accompanying notes are an integral part of these consolidated financial statements.
8

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)



Note 1. Organization
Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We deliver customized housing credit investments to a diverse mix of investors, through our best-in-class securitization platforms; whole-loan distribution activities; and our publicly-traded shares. Our consolidated investment portfolio has evolved to incorporate a diverse mix of residential, business purpose and multifamily investments. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in three segments: Residential Lending, Business Purpose Lending, and Third-Party Investments.
Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income primarily consists of the interest income we earn on investments less the interest expense we incur on borrowed funds and other liabilities. Income from mortgage banking activities is generated through the origination and acquisition of loans, and their subsequent sale, securitization, or transfer to our investment portfolios.
Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are generally not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our taxable REIT subsidiaries” or “TRS.”
Redwood was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.
Note 2. Basis of Presentation
The consolidated financial statements presented herein are at September 30, 2021 and December 31, 2020, and for the three and nine months ended September 30, 2021 and 2020. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2020. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the Company at September 30, 2021 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2021 should not be construed as indicative of the results to be expected for the full year.

9

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 2. Basis of Presentation - (continued)
Principles of Consolidation
In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 ("Legacy Sequoia"), certain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans ("Sequoia"), entities formed in connection with the securitization of CoreVest single-family rental and bridge loans ("CAFL"), and beginning in the third quarter of 2021, an entity ("Point HEI") formed in connection with the securitization of home equity investment contracts ("HEIs"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we have invested. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for 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 Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment at fair value, the underlying loans at the consolidated Freddie Mac K-Series entity are shown under Multifamily loans held-for-investment at fair value, the underlying single-family rental and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment at fair value, and the underlying HEIs at the consolidated Point HEI entity are shown under Other investments at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income (loss), we recorded interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as fair value changes, other income and expenses associated with these entities' activities. See Note 14 for further discussion on ABS issued.
We also consolidate 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 our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations.
10

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 2. Basis of Presentation - (continued)
In connection with the acquisitions of 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at September 30, 2021.
Table 2.1 – Intangible Assets – Activity
Intangible Assets at AcquisitionAccumulated Amortization at September 30, 2021Carrying Value at September 30, 2021Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network$45,300 $(12,672)$32,628 7
Broker network18,100 (9,352)8,748 5
Non-compete agreements9,500 (6,806)2,694 3
Tradenames4,000 (2,861)1,139 3
Developed technology1,800 (1,763)37 2
Loan administration fees on existing loan assets2,600 (2,600)— 1
Total$81,300 $(36,054)$45,246 6
All of our intangible assets are amortized on a straight-line basis. For both of the nine months ended September 30, 2021 and 2020, we recorded intangible asset amortization expense of $12 million. Estimated future amortization expense is summarized in the table below.
Table 2.2 – Intangible Asset Amortization Expense by Year
(In Thousands)September 30, 2021
2021 (3 months)$3,685 
202212,800 
202310,091 
20247,073 
2025 and thereafter11,597 
Total Future Intangible Asset Amortization$45,246 

On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at September 30, 2021.
A liability resulting from the contingent consideration arrangement with 5 Arches was initially recorded in 2019 at its acquisition-date fair value as part of total consideration for the acquisition of 5 Arches. During the first quarter of 2021, we distributed 806,068 shares of Redwood common stock and paid $1 million in cash in full settlement of the remaining deferred consideration associated with this acquisition.
Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies
Included in Note 3 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2020 is a summary of our significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the company's consolidated financial position and results of operations for the three and nine months ended September 30, 2021.

11

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)
Other Investments
Strategic Investments
We have made and may make additional strategic investments in companies through our RWT Horizons venture investment strategy or at a corporate level. These investments can take the form of equity or debt and often have conversion features. Depending on the terms of the investments, we may account for these investments under the fair value option or as non-marketable equity securities under the equity method of accounting or the measurement alternative (to the extent they do not have a “readily determinable fair value,” or are not traded in a verifiable public market or are restricted for sale in the public market by a restricted stock legend or otherwise).
Investments accounted for under the fair value option are carried at fair value with periodic changes in value recorded through Investment fair value changes on our consolidated statements of income (loss). For non-marketable securities, we utilize the equity method of accounting when we are able to exert significant influence over but do not control the activities of the investee. Under the equity method of accounting, we generally elect to record our share of earnings or losses from equity method investments on a one-quarter lag and we assess our investments for impairment whenever events or changes in circumstances indicate that the carrying amount of our investment might not be recoverable. Income from equity method investments is recorded in Other income, net on our consolidated statements of income (loss). Under the measurement alternative, the carrying value of our investment is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Adjustments are determined primarily based on a market approach as of the transaction date and are recorded as a component of Other income, net on our consolidated statements of income (loss).
Recent Accounting Pronouncements
Newly Adopted Accounting Standards Updates ("ASUs")
In August 2021, the FASB issued ASU 2021-06, "Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update)." This new guidance aligns certain SEC paragraphs in the codification with new SEC rules issued in May 2020 related to changes to the disclosure requirements for acquired and disposed businesses. We adopted this guidance upon issuance in the third quarter of 2021, which did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, "Codification Improvements." This new guidance updates various codification topics by clarifying or improving disclosure requirements. This new guidance is effective for fiscal years ending after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-09, "Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762." This new guidance aligns certain SEC paragraphs in the codification with new SEC rules issued in March 2020 related to changes to the disclosure requirements for registered debt securities. This new guidance became effective January 4, 2021. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs." This new guidance clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. This new guidance is effective for fiscal years ending after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.

12

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)
In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." This new guidance clarifies the interaction of the accounting for equity securities, equity method investments, and certain forward contracts and purchased options. This new guidance is effective for fiscal years beginning after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance. This new guidance is effective for fiscal years beginning after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.
Other Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)." This new guidance simplifies the accounting for convertible debt by reducing the number of accounting models to separately present certain conversion features in equity. This new guidance is effective for fiscal years beginning after December 31, 2021. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This new guidance clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This new guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact the adoption of this standard would have on our consolidated financial statements. Through September 30, 2021, we have not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or other transactions.
Balance Sheet Netting
Certain of our derivatives and short-term debt are subject to master netting arrangements or similar agreements. Under GAAP, in certain circumstances we may elect to present certain financial assets, liabilities and related collateral subject to master netting arrangements in a net position on our consolidated balance sheets. However, we do not report any of these financial assets or liabilities on a net basis, and instead present them on a gross basis on our consolidated balance sheets.

13

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)
The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at September 30, 2021 and December 31, 2020.
Table 3.1 – Offsetting of Financial Assets, Liabilities, and Collateral
Gross Amounts of Recognized Assets (Liabilities)Gross Amounts Offset in Consolidated Balance SheetNet Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet
Gross Amounts Not Offset in Consolidated
Balance Sheet (1)
Net Amount
September 30, 2021 (In Thousands)Financial InstrumentsCash Collateral (Received) Pledged
Assets (2)
Interest rate agreements$33,628 $— $33,628 $(74)$(32,408)$1,146 
TBAs8,213 — 8,213 (4,278)(3,117)818 
Total Assets$41,841 $— $41,841 $(4,352)$(35,525)$1,964 
Liabilities (2)
Interest rate agreements$(74)$— $(74)$74 $— $— 
TBAs(7,599)— (7,599)4,278 3,321 — 
Futures(749)— (749)— 749 — 
Loan warehouse debt(1,335,464)— (1,335,464)1,335,464 — — 
Security repurchase agreements(79,766)— (79,766)79,766 — — 
Total Liabilities$(1,423,652)$— $(1,423,652)$1,419,582 $4,070 $— 
14

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

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

Gross Amounts of Recognized Assets (Liabilities)Gross Amounts Offset in Consolidated Balance SheetNet Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet
Gross Amounts Not Offset in Consolidated
Balance Sheet (1)
Net Amount
December 31, 2020 (In Thousands)Financial InstrumentsCash Collateral (Received) Pledged
Assets (2)
Interest rate agreements$19,951 $— $19,951 $— $(7,769)$12,182 
TBAs18,260 — 18,260 (13,423)(4,658)179 
Total Assets$38,211 $— $38,211 $(13,423)$(12,427)$12,361 
Liabilities (2)
TBAs$(15,495)$— $(15,495)$13,423 $1,061 $(1,011)
Loan warehouse debt(137,269)— (137,269)137,269 — — 
Security repurchase agreements(77,775)— (77,775)77,775 — — 
Total Liabilities$(230,539)$— $(230,539)$228,467 $1,061 $(1,011)
(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column ("Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet") by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.
(2)Interest rate agreements and TBAs are components of derivatives instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by certain residential and business purpose loans, and security repurchase agreements are components of Short-term debt and Long-term debt on our consolidated balance sheets.
For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be aggregated and treated as a single transaction. For certain categories of these instruments, some of our transactions are cleared and settled through one or more clearinghouses that are substituted as our counterparty. References herein to master netting arrangements or similar agreements include the arrangements and agreements governing the clearing and settlement of these transactions through the clearinghouses. In the event of the termination and close-out of any of those transactions, the corresponding master netting agreement or similar agreement provides for settlement on a net basis. Any such settlement would include the proceeds of the liquidation of any corresponding collateral, subject to certain limitations on termination, settlement, and liquidation of collateral that may apply in the event of the bankruptcy or insolvency of a party. Such limitations should not inhibit the eventual practical realization of the principal benefits of those transactions or the corresponding master netting arrangement or similar agreement and any corresponding collateral.
Note 4. Principles of Consolidation
GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.
15

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 4. Principles of Consolidation - (continued)
Analysis of Consolidated VIEs
At September 30, 2021, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and Point HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for 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 September 30, 2021, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s non-controlling interest. Additionally, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing.
During the third quarter of 2021, we consolidated a Point securitization entity formed to invest in Point HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At September 30, 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 Point securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

16

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 4. Principles of Consolidation - (continued)
For certain of our consolidated VIEs, we have elected to account for the assets and liabilities of these entities as collateralized financing entities ("CFE"). A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. The net equity in an entity effectively represents the fair value of the beneficial interests we own in the entity. The following table presents a summary of the assets and liabilities of these VIEs.
Table 4.1 – Assets and Liabilities of Consolidated VIEs Accounted for as Collateralized Financing Entities
September 30, 2021Legacy
Sequoia 		Sequoia CAFL
SFR		Freddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentPoint HEITotal
Consolidated
CFE VIEs
(Dollars in Thousands)
Residential loans, held-for-investment$242,234 $2,479,750 $— $1,999,405 $— $— $— $4,721,389 
Business purpose loans, held-for-investment— — 3,402,410 — — — — 3,402,410 
Multifamily loans, held-for-investment— — — — 482,791 — — 482,791 
Other investments— — — — — 187,880 167,442 355,322 
Cash and cash equivalents— — — — — 12,977 — 12,977 
Restricted cash148 — — — — 19,872 5,033 25,053 
Accrued interest receivable232 7,869 13,451 6,068 1,321 1,068 — 30,009 
Other assets275 — 13,172 1,958 — 6,283 50 21,738 
Total Assets$242,889 $2,487,619 $3,429,033 $2,007,431 $484,112 $228,080 $172,525 $9,051,689 
Short-term debt$— $— $— $— $— $151,910 $— $151,910 
Accrued interest payable108 5,918 10,691 4,279 1,195 97 — 22,288 
Accrued expenses and other liabilities— — 224 — — 15,835 16,740 32,799 
Asset-backed securities issued239,447 2,243,299 3,126,405 1,550,111 451,402 — 145,437 7,756,101 
Total Liabilities$239,555 $2,249,217 $3,137,320 $1,554,390 $452,597 $167,842 $162,177 $7,963,098 
Fair value of our investments$3,062 $236,451 $287,813 $451,252 $31,389 $60,238 $10,348 $1,080,553 
Number of VIEs20 13 15 3 1 3 1 56 

17

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 4. Principles of Consolidation - (continued)
December 31, 2020Legacy
Sequoia 		Sequoia CAFL
SFR		Freddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentPoint HEITotal
Consolidated
CFE VIEs
(Dollars in Thousands)
Residential loans, held-for-investment$285,935 $1,565,322 $— $2,221,153 $— $— $— $4,072,410 
Business purpose loans, held-for-investment— — 3,249,194 — — — — 3,249,194 
Multifamily loans, held-for-investment— — — — 492,221 — — 492,221 
Other investments— — — — — 251,773 — 251,773 
Cash and cash equivalents— — — — — 11,579 — 11,579 
Restricted cash148 — — — — 23,220 — 23,368 
Accrued interest receivable305 6,802 13,055 6,754 1,337 2,334 — 30,587 
Other assets638 — 2,930 646 — 5,723 — 9,937 
Total Assets$287,026 $1,572,124 $3,265,179 $2,228,553 $493,558 $294,629 $— $8,141,069 
Short-term debt$— $— $— $— $— $208,375 $— $208,375 
Accrued interest payable141 4,697 10,278 4,846 1,177 135 — 21,274 
Accrued expenses and other liabilities— 50 — — — 18,353 — 18,403 
Asset-backed securities issued282,326 1,347,357 3,013,093 1,793,620 463,966 — — 6,900,362 
Total Liabilities$282,467 $1,352,104 $3,023,371 $1,798,466 $465,143 $226,863 $— $7,148,414 
Fair value of our investments$4,559 $220,020 $241,808 $430,087 $28,415 $67,766 $— $992,655 
Number of VIEs20 10 14 2 1 3 — 50 
The following table presents income (loss) from these VIEs for the three and nine months ended September 30, 2021 and 2020.
Table 4.2 – Income (Loss) from Consolidated VIEs Accounted for as Collateralized Financing Entities
Three Months Ended September 30, 2021
Legacy
Sequoia 		Sequoia CAFL
SFR		Freddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentPoint HEITotal
Consolidated
CFE VIEs
(Dollars in Thousands)
Interest income$1,042 $18,867 $48,723 $18,707 $4,846 $3,905 $— $96,090 
Interest expense(641)(15,368)(37,415)(13,303)(4,460)(1,018)— (72,205)
Net interest income 401 3,499 11,308 5,404 386 2,887 — 23,885 
Non-interest income
Investment fair value changes, net(247)3,314 2,943 13,849 554 (2,080)47 18,380 
Other income — — 10 — — — — 10 
Total non-interest income, net(247)3,314 2,953 13,849 554 (2,080)47 18,390 
General and administrative expenses— — — — — (60)— (60)
Other expenses— — — — — (149)— (149)
Income from Consolidated VIEs$154 $6,813 $14,261 $19,253 $940 $598 $47 $42,066 
18

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 4. Principles of Consolidation - (continued)
Nine Months Ended September 30, 2021
Legacy
Sequoia 		Sequoia CAFL
SFR		Freddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentPoint HEITotal
Consolidated
CFE VIEs
(Dollars in Thousands)
Interest income$3,559 $48,842 $152,445 $58,372 $14,492 $12,168 $— $289,878 
Interest expense(2,271)(38,848)(118,469)(41,698)(13,294)(3,414)— (217,994)
Net interest income 1,288 9,994 33,976 16,674 1,198 8,754 — 71,884 
Non-interest income
Investment fair value changes, net(1,162)13,118 6,354 54,282 11,330 (5,646)47 78,323 
Other income — — 10 — — — — 10 
Total non-interest income, net(1,162)13,118 6,364 54,282 11,330 (5,646)47 78,333 
General and administrative expenses— — — — — (150)— (150)
Other expenses— — — — — (591)— (591)
Income from Consolidated VIEs$126 $23,112 $40,340 $70,956 $12,528 $2,367 $47 $149,476 
Three Months Ended September 30, 2020
Legacy
Sequoia 		Sequoia CAFL
SFR		Freddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentPoint HEITotal
Consolidated
CFE VIEs
(Dollars in Thousands)
Interest income$1,795 $20,919 $36,181 $21,696 $4,918 $4,403 $— $89,912 
Interest expense(1,059)(17,828)(26,383)(15,473)(4,426)(1,587)— (66,756)
Net interest income 736 3,091 9,798 6,223 492 2,816 — 23,156 
Non-interest income
Investment fair value changes, net(81)7,851 9,692 82,214 2,166 (422)— 101,420 
Total non-interest income, net(81)7,851 9,692 82,214 2,166 (422)— 101,420 
General and administrative expenses— — — — — (41)— (41)
Other expenses— — — — — (471)— (471)
Income from Consolidated VIEs$655 $10,942 $19,490 $88,437 $2,658 $1,882 $— $124,064 
Nine Months Ended September 30, 2020
Legacy
Sequoia 		Sequoia CAFL
SFR		Freddie Mac SLSTFreddie Mac
K-Series		Servicing InvestmentPoint HEITotal
Consolidated
CFE VIEs
(Dollars in Thousands)
Interest income$7,674 $68,566 $99,169 $64,869 $49,960 $13,026 $— $303,264 
Interest expense(5,099)(58,455)(72,768)(47,495)(47,154)(4,961)— (235,932)
Net interest income 2,575 10,111 26,401 17,374 2,806 8,065 — 67,332 
Non-interest income
Investment fair value changes, net(702)(22,065)(41,841)(33,081)(82,744)(9,015)— (189,448)
Total non-interest income, net(702)(22,065)(41,841)(33,081)(82,744)(9,015)— (189,448)
General and administrative expenses— — — — — (784)— (784)
Other expenses— — — — — 346 — 346 
Income (Loss) from Consolidated VIEs$1,873 $(11,954)$(15,440)$(15,707)$(79,938)$(1,388)$— $(122,554)

19

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 4. Principles of Consolidation - (continued)
In addition to our consolidated VIEs for which we made the CFE election, we consolidate additional VIEs for which we did not make the CFE election, and elected to account for the ABS issued by these entities at amortized cost. These include our CAFL Bridge securitization, Freddie Mac SLST re-securitization, and Servicing Investment entities.
We consolidate the assets and liabilities of certain Sequoia, CAFL and Point HEI securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia, CAFL and Point HEI entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity 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 Point HEI entities in accordance with GAAP.
We consolidate the assets and liabilities of certain Freddie Mac K-Series and SLST securitization trusts resulting from our investment in subordinate securities issued by these trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.
During the three months ended September 30, 2021, we did not call any of our consolidated CAFL entities. During the nine months ended September 30, 2021, we called one of our consolidated CAFL entities and repaid the associated ABS issued. In association with this call, we transferred $45 million (unpaid principal balance) of loans from held-for-investment to held-for-sale.
During 2020, we re-securitized subordinate securities we owned in our consolidated Freddie Mac SLST securitization trusts, through the transfer of these financial assets to a re-securitization trust that we sponsored. We retain a subordinate investment in the re-securitization trust and maintain certain discretionary rights associated with the ownership of this investment that we determined reflected a controlling financial interest in the entity, as we have both the power to direct the activities that most significantly impact the performance of the VIE and the right to receive benefits of and the obligation to absorb losses from the VIE that could potentially be significant to the VIE.
Analysis of Unconsolidated VIEs with Continuing Involvement
Since 2012, we have transferred residential loans to 50 Sequoia securitization entities sponsored by us that are still outstanding as of September 30, 2021, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.
During the three months ended September 30, 2021, we called two of our unconsolidated Sequoia entities, and purchased $66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the nine months ended September 30, 2021, we called six of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At September 30, 2021, we held $151 million of loans for sale at fair value that were acquired following the calls.


20

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 4. Principles of Consolidation - (continued)
The following table presents information related to securitization transactions that occurred during the three and nine months ended September 30, 2021 and 2020.
Table 4.3 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Principal balance of loans transferred$— $— $1,231,803 $1,573,703 
Trading securities retained, at fair value— — 7,774 43,362 
AFS securities retained, at fair value— — 1,600 3,198 
The following table summarizes the cash flows during the three and nine months ended September 30, 2021 and 2020 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.
Table 4.4 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Proceeds from new transfers$— $— $1,266,063 $1,610,761 
MSR fees received1,095 2,280 4,038 7,445 
Funding of compensating interest, net54 4 (116)(293)
Cash flows received on retained securities16,724 5,873 42,117 19,242 
The following table presents the key weighted-average assumptions used to value securities retained at the date of securitization for securitizations completed during the three and nine months ended September 30, 2021 and 2020.
Table 4.5 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood
Three Months Ended September 30, 2021Three Months Ended September 30, 2020
At Date of SecuritizationSenior IO SecuritiesSubordinate SecuritiesSenior IO SecuritiesSubordinate Securities
Prepayment rates N/A  N/A N/AN/A
Discount rates N/A  N/A N/AN/A
Credit loss assumptions N/A  N/A N/AN/A
Nine Months Ended September 30, 2021Nine Months Ended September 30, 2020
At Date of SecuritizationSenior IO SecuritiesSubordinate SecuritiesSenior IO SecuritiesSubordinate Securities
Prepayment rates11 %11 %41 %13 %
Discount rates15 %6 %16 %6 %
Credit loss assumptions0.23 %0.23 %0.21 %0.22 %


21

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 4. Principles of Consolidation - (continued)
The following table presents additional information at September 30, 2021 and December 31, 2020, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.
Table 4.6 – Unconsolidated VIEs Sponsored by Redwood
(In Thousands)September 30, 2021December 31, 2020
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading$18,380 $20,982 
Subordinate securities, classified as AFS128,874 136,475 
Mortgage servicing rights6,068 8,413 
Maximum loss exposure (1)
$153,322 $165,870 
Assets transferred:
Principal balance of loans outstanding$5,542,244 $7,728,432 
Principal balance of loans 30+ days delinquent32,422 138,029 
(1)Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.
The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at September 30, 2021 and December 31, 2020.
Table 4.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
September 30, 2021MSRs
Senior
Securities (1)
Subordinate Securities
(Dollars in Thousands)
Fair value at September 30, 2021$6,068 $18,380 $128,874 
Expected life (in years) (2)
248
Prepayment speed assumption (annual CPR) (2)
36 %25 %32 %
Decrease in fair value from:
10% adverse change
$502 $1,173 $57 
25% adverse change
1,173 2,789 141 
Discount rate assumption (2)
12 %18 %3.8 %
Decrease in fair value from:
100 basis point increase
$134 $417 $9,353 
200 basis point increase
261 812 17,829 
Credit loss assumption (2)
N/A0.34 %0.34 %
Decrease in fair value from:
10% higher losses
N/A$— $2,190 
25% higher losses
N/A— 5,473 
22

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 4. Principles of Consolidation - (continued)
December 31, 2020MSRs
Senior
Securities (1)
Subordinate Securities
(Dollars in Thousands)
Fair value at December 31, 2020$8,413 $17,333 $140,124 
Expected life (in years) (2)
238
Prepayment speed assumption (annual CPR) (2)
37 %31 %33 %
Decrease in fair value from:
10% adverse change
$906 $1,557 $452 
25% adverse change
2,058 3,754 2,298 
Discount rate assumption (2)
12 %21 %5 %
Decrease in fair value from:
100 basis point increase
$196 $337 $9,769 
200 basis point increase
380 659 18,650 
Credit loss assumption (2)
N/A0.41 %0.41 %
Decrease in fair value from:
10% higher losses
N/A$— $2,409 
25% higher losses
N/A— 5,915 

(1)Senior securities included $18 million and $17 million of interest-only securities at September 30, 2021 and December 31, 2020, respectively.
(2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.
Analysis of Unconsolidated Third-Party VIEs
Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at September 30, 2021 and December 31, 2020, grouped by asset type.
Table 4.8 – Third-Party Sponsored VIE Summary
(In Thousands)September 30, 2021December 31, 2020
Mortgage-Backed Securities
Senior $4,114 $11,131 
Mezzanine— 2,014 
Subordinate201,918 173,523 
Total Mortgage-Backed Securities206,032 186,668 
Excess MSR11,368 14,133 
Total Investments in Third-Party Sponsored VIEs$217,400 $200,801 
We determined that we are not the primary beneficiary of these third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.
Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.

23

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)


Note 5. Fair Value of Financial Instruments
For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.
In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.


24

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at September 30, 2021 and December 31, 2020.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
September 30, 2021December 31, 2020
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value$1,495,044 $1,495,044 $176,604 $176,604 
Residential loans, held-for-investment4,721,389 4,721,389 4,072,410 4,072,410 
Business purpose loans, held-for-sale466,346 466,346 245,394 245,394 
Business purpose loans, held-for-investment4,227,209 4,227,209 3,890,959 3,890,959 
Multifamily loans482,791 482,791 492,221 492,221 
Real estate securities353,286 353,286 344,125 344,125 
Servicer advance investments (1)
170,062 170,062 231,489 231,489 
MSRs (1)
12,389 12,389 8,815 8,815 
Excess MSRs (1)
29,185 29,185 34,418 34,418 
HEIs (1)
167,856 167,856 42,440 42,440 
Other investments (2)
17,574 17,574 18,847 18,847 
Cash and cash equivalents556,989 556,989 461,260 461,260 
Restricted cash88,717 88,717 83,190 83,190 
Derivative assets51,103 51,103 53,238 53,238 
REO (3)
18,863 21,657 8,413 9,229 
Margin receivable (3)
16,503 16,503 4,758 4,758 
FHLBC stock (3)
10 10 5,000 5,000 
Pledged collateral (3)
— — 1,177 1,177 
Liabilities
Short-term debt $1,750,941 $1,750,941 $522,609 $522,609 
Margin payable (4)
48,298 48,298 — — 
Guarantee obligation (4)
7,902 5,263 10,039 7,843 
Point HEI non-controlling interest16,722 16,722 — — 
Derivative liabilities10,972 10,972 16,072 16,072 
ABS issued, net
Fair value7,756,101 7,756,101 6,900,362 6,900,362 
Amortized cost427,724 428,059 200,299 204,892 
Other long-term debt, net (5)
847,889 848,929 774,726 783,570 
Convertible notes, net (5)
512,979 539,067 511,085 499,865 
Trust preferred securities and subordinated notes, net (5)
138,709 94,163 138,674 80,910 
(1)These investments are included in Other investments on our consolidated balance sheets.
(2)Comprised of financial instruments included in Other investments on our consolidated balance sheets.
(3)These assets are included in Other assets on our consolidated balance sheets.
(4)These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.
(5)These liabilities are included in Long-term debt, net on our consolidated balance sheets.
25

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
During the three and nine months ended September 30, 2021, we elected the fair value option for $11 million and $37 million of securities, respectively, $3.17 billion and $9.75 billion of residential loans (principal balance), respectively, $637 million and $1.55 billion of business purpose loans (principal balance), respectively, $5 million and $9 million of MSRs, respectively, and $11 million and $15 million of other financial instruments, respectively. Additionally, during the three months ended September 30, 2021, we elected the fair value option for $122 million of HEIs. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, for business purpose bridge loans, HEIs, MSRs retained from sales of residential loans, and for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.
The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at September 30, 2021 and December 31, 2020, as well as the fair value hierarchy of the valuation inputs used to measure fair value.
Table 5.2 – Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2021Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$6,216,433 $— $— $6,216,433 
Business purpose loans4,693,555 — — 4,693,555 
Multifamily loans482,791 — — 482,791 
Real estate securities353,286 — — 353,286 
Servicer advance investments170,062 — — 170,062 
MSRs12,389 — — 12,389 
Excess MSRs29,185 — — 29,185 
HEIs167,856 — — 167,856 
Other investments17,574 — — 17,574 
Derivative assets51,103 8,213 33,628 9,262 
Liabilities
Non-controlling interest in consolidated Point HEI entity$16,722 $— $— $16,722 
Derivative liabilities10,972 8,348 74 2,550 
ABS issued7,756,101 — — 7,756,101 
26

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
December 31, 2020Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$4,249,014 $— $— $4,249,014 
Business purpose loans4,136,353 — — 4,136,353 
Multifamily loans492,221 — — 492,221 
Real estate securities344,125 — — 344,125 
Servicer advance investments231,489 — — 231,489 
MSRs8,815 — — 8,815 
Excess MSRs34,418 — — 34,418 
HEIs42,440 — — 42,440 
Other investments18,847 — — 18,847 
Derivative assets53,238 18,260 19,951 15,027 
Pledged collateral1,177 1,177 — — 
FHLBC stock5,000 — 5,000 — 
Liabilities
Derivative liabilities$16,072 $15,495 $— $577 
ABS issued6,900,362 — — 6,900,362 

27

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2021.
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets
Residential LoansBusiness Purpose
Loans		Multifamily LoansTrading SecuritiesAFS
Securities		Servicer Advance InvestmentsExcess MSRsHEIsOther
(In Thousands)
Beginning balance -
   December 31, 2020		$4,249,014 $4,136,353 $492,221 $125,667 $218,458 $231,489 $34,418 $42,440 $27,662 
Acquisitions9,926,335 38,176 — 37,117 1,600 — — 122,373 14,615 
Originations— 1,515,262 — — — — — — — 
Sales(6,958,669)(9,484)— (32,704)(4,785)— — — — 
Principal paydowns(1,051,390)(942,096)(5,685)(1,783)(45,120)(58,248)— (10,220)(9,224)
Gains (losses) in net income (loss), net53,549 (25,658)(3,745)24,713 26,998 (3,179)(5,233)13,263 (2,974)
Unrealized losses in OCI, net— — — — 3,125 — — — — 
Other settlements, net (1)
(2,406)(18,998)— — — — — — (116)
Ending balance -
   September 30, 2021		$6,216,433 $4,693,555 $482,791 $153,010 $200,276 $170,062 $29,185 $167,856 $29,963 
Liabilities
Derivatives (2)
Point HEI Non-Controlling InterestABS
Issued
(In Thousands)
Beginning balance - December 31, 2020$14,450 $— $6,900,362 
Acquisitions— 16,639 2,552,785 
Principal paydowns— — (1,500,357)
Gains (losses) in net income (loss), net17,806 83 (196,689)
Other settlements, net (1)
(25,544)— — 
Ending balance - September 30, 2021$6,712 $16,722 $7,756,101 
(1)    Other settlements, net for residential and business purpose loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans.
(2)    For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments and interest rate lock commitments, are presented on a net basis.

28

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
The following table presents the portion of gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, 2021 and 2020. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 2021 and 2020 are not included in this presentation.
Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, 2021 and 2020 Included in Net Income
Included in Net Income
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Assets
Residential loans at Redwood$6,553 $(107)$9,371 $(865)
Business purpose loans18,810 21,155 19,829 17,901 
Net investments in consolidated Sequoia entities (1)
2,885 7,700 11,779 (22,802)
Net investments in consolidated Freddie Mac SLST entities (1)
13,781 82,209 54,006 (33,087)
Net investments in consolidated Freddie Mac K-Series entity (1)
555 2,165 11,330 (11,014)
Net investments in consolidated CAFL SFR entities (1)
2,943 9,673 5,500 (41,048)
Net investment in consolidated Point HEI entity (1)
47 — 129 — 
Trading securities1,547 (3,549)3,824 (80,358)
Servicer advance investments(2,079)25 (3,179)(6,172)
MSRs(235)(2,376)(49)(16,798)
Excess MSRs(803)(1,127)(5,233)(7,650)
HEIs at Redwood(41)2,384 21 (4,286)
Loan purchase and interest rate lock commitments9,021 10,791 9,261 10,773 
Liabilities
Non-controlling interest in consolidated Point HEI entity $(83)$— $(83)$— 
Loan purchase commitments(2,570)420 (2,550)(1,334)
(1)    Represents the portion of net gains or losses included in our consolidated statements of income (loss) related to loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at September 30, 2021 and 2020, which netted together represent the change in value of our investments at the consolidated VIEs, excluding REO.

29

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2021. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance sheets at September 30, 2021.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2021
Gain (Loss) for
September 30, 2021Carrying
Value		Fair Value Measurements UsingThree Months EndedNine Months Ended
(In Thousands)Level 1Level 2Level 3September 30, 2021September 30, 2021
Assets
REO$622 $— $— $622 $(1)$(4)

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, 2021 and 2020.
30

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
Table 5.6 – Market Valuation Gains and Losses, Net
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value$9,045 $(478)$57,145 $(15,972)
Residential loan purchase commitments18,817 13,067 18,351 35,123 
Single-family rental loans held-for-sale, at fair value19,205 43,191 54,675 55,868 
Single-family rental loan interest rate lock commitments(744)— — 341 
Bridge loans3,433 938 6,702 (4,256)
Trading securities (1)
32 — (342)— 
Risk management derivatives, net3,539 (99)38,117 (52,931)
Total mortgage banking activities, net (2)
$53,327 $56,619 $174,648 $18,173 
Investment Fair Value Changes, Net
Residential loans at Redwood$816 $218 $2,423 $(93,314)
Single-family rental loans held-for-investment— — — (20,806)
Bridge loans held-for-investment900 6,812 4,142 (10,016)
Trading securities1,546 (3,600)25,067 (224,679)
Servicer advance investments(2,079)26 (3,179)(6,172)
Excess MSRs(803)(1,127)(5,233)(7,650)
Net investments in Legacy Sequoia entities (3)
(247)(81)(1,162)(702)
Net investments in Sequoia entities (3)
3,314 7,851 13,118 (22,065)
Net investments in Freddie Mac SLST entities (3)
13,849 82,214 54,282 (33,081)
Net investment in Freddie Mac K-Series entity (3)
554 2,166 11,330 (82,744)
Net investments in CAFL entities (3)
2,943 9,673 6,354 (41,048)
Net investment in Point HEI entity (3)
47 — 47 — 
HEIs at Redwood5,622 2,384 13,017 (4,286)
Other investments(385)67 50 (4,825)
Risk management derivatives, net— — — (59,142)
Credit recoveries (losses) on AFS securities— 444 388 (1,027)
Total investment fair value changes, net$26,077 $107,047 $120,644 $(611,557)
Other Income
MSRs$(989)$(4,783)$(3,236)$(27,346)
Risk management derivatives, net— — — 13,966 
Total other income (4)
$(989)$(4,783)$(3,236)$(13,380)
Total Market Valuation Gains (Losses), Net$78,415 $158,883 $292,056 $(606,764)
(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the mark-to-market risks associated with our residential mortgage banking operations.
(2)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases expense, and other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income (loss), as these amounts do not represent market valuation changes.
(3)Includes changes in fair value of the residential loans held-for-investment, securitized Point HEIs, REO and the ABS issued at the entities, which netted together represent the change in value of our investments at the consolidated VIEs.
(4)Other income presented above does not include net MSR fee income or provisions for repurchases for MSRs, as these amounts do not represent market valuation adjustments.
31

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
At September 30, 2021, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2020. The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments
September 30, 2021Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average(1)
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans$624,477 Prepayment rate (annual CPR)20 -20 %20 %
Whole loan spread to TBA price$3.00 -$3.00 $3.00 
Whole loan spread to swap rate202 -202 bps202 bps
Jumbo loans committed to sell870,568 Whole loan committed sales price$101.90 -$103.32 $102.46 
Loans held by Legacy Sequoia (2)
242,234 Liability priceN/AN/A
Loans held by Sequoia (2)
2,479,750 Liability priceN/AN/A
Loans held by Freddie Mac SLST (2)
1,999,405 Liability priceN/AN/A
Business purpose loans:
Single-family rental loans466,346 Senior credit spread65 -65 bps65 bps
Subordinate credit spread110 -1,523 bps401 bps
Senior credit support35 -35 %35 %
IO discount rate9 -9 %9 %
Prepayment rate (annual CPR)3 -3 %3 %
Non-securitizable loan dollar price$76 -$111 $101 
Single-family rental loans held by CAFL (2)
3,402,410 Liability priceN/AN/A
Bridge loans824,799 Discount rate4 -15 %6 %
Multifamily loans held by Freddie Mac K-Series (2)
482,791 Liability priceN/AN/A
Trading and AFS securities353,286 Discount rate2 -38 %7  %
Prepayment rate (annual CPR)8 -58 %27  %
Default rate— -25 %4  %
Loss severity— -50 %24  %
CRT dollar price$96 -$116 $104 
Servicer advance investments170,062 Discount rate2 -3 %2 %
Prepayment rate (annual CPR)20 -30 %21 %
Expected remaining life (3)
5-5years5years
Mortgage servicing income2 -11 bps9 bps
MSRs12,389 Discount rate12 -15 %13  %
Prepayment rate (annual CPR)6 -80 %28  %
Per loan annual cost to service$95 -$95 $95 
Excess MSRs29,185 Discount rate13 -16 %15 %
Prepayment rate (annual CPR)21 -30 %25 %
Excess mortgage servicing income8 -17 bps11 bps
32

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
September 30, 2021Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average (1)
Assets (continued)
HEIs at Redwood$414 Dollar Price$92 -$124 $105 
HEIs held by Point HEI entity167,442 Liability priceN/AN/A
REO622 Loss severity11 -40 %22 %
Residential loan purchase commitments, net 6,712 Committed sales price$102.11 -$102.77 $102.54 
Pull-through rate4 -100 %71 %
Whole loan spread to TBA price$3.00 -$3.00 $3.00 
Whole loan spread to swap rate 185 -202 bps201 bps
Prepayment rate (annual CPR)20 -20 %20 %
Liabilities
ABS issued (2):
At consolidated Sequoia entities2,482,746 Discount rate1 -18 %3  %
Prepayment rate (annual CPR)7 -55 %33  %
Default rate— -36 %2  %
Loss severity25 -50 %32  %
At consolidated CAFL SFR entities (4)
3,126,405 Discount rate1 -13 %3 %
Prepayment rate (annual CPR)3 -3 %3 %
Default rate2 -18 %9 %
Loss severity30 -30 %30 %
At consolidated Freddie Mac SLST entities1,550,111 Discount rate2 -7 %3 %
Prepayment rate (annual CPR)6 -8 %6 %
Default rate9 -10 %9 %
Loss severity35 -35 %35 %
At consolidated Freddie Mac K-Series entities (4)
451,402 Discount rate1 -8 %2  %
At consolidated Point HEI entity (4)
145,437 Discount rate3 -15 %4 %
Prepayment rate (annual CPR)20 -20 %20 %
Default rate6 -6 %6 %
Loss severity25 -25 %25 %
Home price appreciation3 -4 %3 %
(1)The weighted average input values for all loan types are based on the unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.
(2)The fair value of the loans and HEIs held by consolidated entities was based on the fair value of the ABS issued by these entities 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 September 30, 2021, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and Point HEI entities was $240 million, $288 million, $451 million, $31 million, and $10 million, respectively.
(3)Represents the estimated average duration of outstanding servicer advances at a given point in time (not taking into account new advances made with respect to the pool).
(4)As a market convention, certain securities are priced to a no-loss yield and therefore do not include default and loss severity assumptions.
33

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)
Determination of Fair Value
We generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs - such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions - in isolation would likely result in a significantly lower or higher fair value measurement.
Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2020 is a more detailed description of our financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy.
In addition to the Level 3 financial instruments included in Table 5.7 above, certain of our Other investments (comprised of strategic investments in early-stage start-up companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We generally value these assets based on our original investment price until there is an observable price change in an orderly transaction for the identical or similar investment of the same issuer.
Note 6. Residential Loans
We acquire residential loans from third-party originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at September 30, 2021 and December 31, 2020.
Table 6.1 – Classifications and Carrying Values of Residential Loans
September 30, 2021LegacyFreddie Mac
(In Thousands)RedwoodSequoiaSequoiaSLSTTotal
Held-for-sale at fair value$1,495,079 $— $— $— $1,495,079 
Held-for-investment at fair value— 242,234 2,479,750 1,999,405 4,721,389 
Total Residential Loans$1,495,079 $242,234 $2,479,750 $1,999,405 $6,216,468 
December 31, 2020LegacyFreddie Mac
(In Thousands)RedwoodSequoiaSequoiaSLSTTotal
Held-for-sale at fair value$176,641 $— $— $— $176,641 
Held-for-investment at fair value— 285,935 1,565,322 2,221,153 4,072,410 
Total Residential Loans$176,641 $285,935 $1,565,322 $2,221,153 $4,249,051 
At September 30, 2021, we owned mortgage servicing rights associated with $1.40 billion (principal balance) of residential loans owned at Redwood that were purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

34

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 6. Residential Loans - (continued)
Residential Loans Held-for-Sale
At Fair Value
The following table summarizes the characteristics of residential loans held-for-sale at September 30, 2021 and December 31, 2020.
Table 6.2 – Characteristics of Residential Loans Held-for-Sale
(Dollars in Thousands)September 30, 2021December 31, 2020
Number of loans1,958 198 
Unpaid principal balance$1,464,767 $172,748 
Fair value of loans$1,495,079 $176,641 
Market value of loans pledged as collateral under short-term borrowing agreements$1,478,424 $156,355 
Delinquency information
Number of loans with 90+ day delinquencies4 1 
Unpaid principal balance of loans with 90+ day delinquencies$3,159 $1,882 
Fair value of loans with 90+ day delinquencies$2,490 $1,223 
Number of loans in foreclosure— — 
The following table provides the activity of residential loans held-for-sale during the three and nine months ended September 30, 2021 and 2020.
Table 6.3 – Activity of Residential Loans Held-for-Sale
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Principal balance of loans acquired$3,167,186 $172,162 $9,747,867 $2,859,813 
Principal balance of loans sold2,360,862 87,868 6,787,490 4,750,615 
Principal balance of loans transferred to HFI448,878 — 1,623,000 274,048 
Net market valuation gains (losses) recorded (1)
9,861 (478)59,568 (15,972)
(1)Net market valuation gains (losses) on residential loans held-for-sale are recorded primarily through Mortgage banking activities, net on our consolidated statements of income (loss).

35

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 6. Residential Loans - (continued)
Residential Loans Held-for-Investment at Fair Value
We invest in residential subordinate securities issued by Legacy Sequoia, Sequoia, and Freddie Mac SLST securitization trusts and consolidate the underlying residential loans owned by these entities for financial reporting purposes in accordance with GAAP. The following tables summarize the characteristics of the residential loans owned at consolidated Sequoia and Freddie Mac SLST entities at September 30, 2021 and December 31, 2020.
Table 6.4 – Characteristics of Residential Loans Held-for-Investment
September 30, 2021LegacyFreddie Mac
(Dollars in Thousands)SequoiaSequoiaSLST
Number of loans1,653 3,022 12,444 
Unpaid principal balance$278,815 $2,447,402 $2,022,724 
Fair value of loans$242,234 $2,479,750 $1,999,405 
Delinquency information
Number of loans with 90+ day delinquencies (1)
40 30 1,168 
Unpaid principal balance of loans with 90+ day delinquencies$14,038 $24,438 $209,913 
Fair value of loans with 90+ day delinquencies (2)
N/AN/AN/A
Number of loans in foreclosure18 4 305 
Unpaid principal balance of loans in foreclosure$4,416 $2,863 $52,319 
December 31, 2020LegacyFreddie Mac
(Dollars in Thousands)SequoiaSequoiaSLST
Number of loans1,908 2,177 13,605 
Unpaid principal balance$333,474 $1,550,454 $2,247,771 
Fair value of loans$285,935 $1,565,322 $2,221,153 
Delinquency information
Number of loans with 90+ day delinquencies (1)
52 94 2,110 
Unpaid principal balance of loans with 90+ day delinquencies$17,285 $74,742 $389,245 
Fair value of loans with 90+ day delinquencies (2)
N/AN/AN/A
Number of loans in foreclosure21 3 245 
Unpaid principal balance of loans in foreclosure$4,939 $2,251 $38,610 
(1)For loans held at consolidated entities, the number of loans greater than 90 days delinquent includes loans in foreclosure.
(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.
36

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 6. Residential Loans - (continued)
The following table provides the activity of residential loans held-for-investment at Redwood during the three and nine months ended September 30, 2021 and 2020.
Table 6.5 – Activity of Residential Loans Held-for-Investment at Redwood
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Fair value of loans transferred from HFS to HFI$— $— $— $13,258 
Fair value of loans transferred from HFI to HFS— — — 1,870,986 
Net market valuation gains (losses) recorded (1)
— 218 — (93,314)
(1)Subsequent to the transfer of these loans to our investment portfolio, net market valuation gains (losses) on residential loans held-for-investment at Redwood are recorded through Investment fair value changes, net on our consolidated statements of income (loss).
The following table provides the activity of residential loans held-for-investment at consolidated entities during the three and nine months ended September 30, 2021 and 2020.
Table 6.6 – Activity of Residential Loans Held-for-Investment at Consolidated Entities
Three Months Ended September 30, 2021Three Months Ended September 30, 2020
LegacyFreddie MacLegacyFreddie Mac
(In Thousands)SequoiaSequoiaSLSTSequoiaSequoiaSLST
Fair value of loans transferred from HFS to HFI (1)
N/A$464,189 N/AN/A$— N/A
Net market valuation gains (losses) recorded (2)
(2,580)(11,663)(13,836)21,938 (5,175)159,687 
Nine Months Ended September 30, 2021Nine Months Ended September 30, 2020
LegacyFreddie MacLegacyFreddie Mac
(In Thousands)SequoiaSequoiaSLSTSequoiaSequoiaSLST
Fair value of loans transferred from HFS to HFI (1)
N/A$1,669,683 N/AN/A$270,506 N/A
Net market valuation gains (losses) recorded (2)
9,896 (27,076)5,177 (38,996)(21,727)15,254 
(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with Sequoia securitizations.
(2)For loans held at our consolidated Legacy Sequoia, Sequoia, and Freddie Mac SLST entities, market value changes are based on the estimated fair value of the associated ABS issued, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.










37

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)


Note 7. Business Purpose Loans
We originate and invest in business purpose loans, including single-family rental ("SFR") loans and bridge loans. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2021 and December 31, 2020.
Table 7.1 – Classifications and Carrying Values of Business Purpose Loans
September 30, 2021Single-Family RentalBridge
(In Thousands)RedwoodCAFLRedwoodCAFLTotal
Held-for-sale at fair value$466,346 — $— $— $466,346 
Held-for-investment at fair value— 3,402,410 548,445 276,354 4,227,209 
Total Business Purpose Loans$466,346 $3,402,410 $548,445 $276,354 $4,693,555 
December 31, 2020Single-Family RentalBridge
(In Thousands)RedwoodCAFLRedwoodCAFLTotal
Held-for-sale at fair value$245,394 $— $— $— $245,394 
Held-for-investment at fair value— 3,249,194 641,765 — 3,890,959 
Total Business Purpose Loans$245,394 $3,249,194 $641,765 $— $4,136,353 
Single-Family Rental Loans
Nearly all of the outstanding single-family rental loans at September 30, 2021 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with less than 1% with original maturities of 30 years.
Bridge Loans
The outstanding bridge loans held-for-investment at September 30, 2021 were first-lien, interest-only loans with original maturities of six to 24 months and were comprised of 69% one-month LIBOR-indexed adjustable-rate loans and 31% fixed-rate loans.
At September 30, 2021, we had a $426 million commitment to fund bridge loans. See Note 16 for additional information on this commitment.

38

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 7. Business Purpose Loans - (continued)
The following table provides the activity of business purpose loans at Redwood during the three and nine months ended September 30, 2021 and 2020.
Table 7.2 – Activity of Business Purpose Loans at Redwood
Three Months Ended 
 September 30, 2021		Three Months Ended 
 September 30, 2020
(In Thousands)SFR at RedwoodBridge at RedwoodSFR at RedwoodBridge at Redwood
Principal balance of loans originated$392,620 $208,938 $195,744 $65,517 
Principal balance of loans acquired2,463 35,713 — — 
Principal balance of loans sold to third parties — 253 7,695 1,567 
Fair value of loans transferred from HFS to HFI (1)
332,670 276,354 326,405 N/A
Fair value of loans transferred from HFI to HFS (2)
— N/A— N/A
Mortgage banking activities income (loss) recorded (3)
19,205 3,691 43,191 29 
Investment fair value changes recorded (4)
— 900 — 6,812 
Nine Months Ended 
 September 30, 2021		Nine Months Ended 
 September 30, 2020
(In Thousands)SFR at RedwoodBridge at RedwoodSFR at RedwoodBridge at Redwood
Principal balance of loans originated$957,935 $557,327 $631,749 $351,353 
Principal balance of loans acquired2,463 35,713 — — 
Principal balance of loans sold to third parties — 9,484 33,843 23,860 
Fair value of loans transferred from HFS to HFI (1)
799,375 276,354 925,437 N/A
Fair value of loans transferred from HFI to HFS (2)
44,922 N/A— N/A
Mortgage banking activities income (loss) recorded (3)
54,675 5,212 54,731 (3,412)
Investment fair value changes recorded (4)
— 4,142 (20,806)(10,016)
(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL securitizations.
(2)Represents the transfer of single-family rental loans from held-for-investment to held-for-sale associated with the call of a consolidated CAFL securitization during the second quarter of 2021.
(3)Represents net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three and nine months ended September 30, 2021, we recorded loan origination fee income of $9 million and $22 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2020, we recorded loan origination fee income of $3 million and $13 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).
(4)Represents net market valuation changes for loans classified as held-for-investment.

39

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(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. During the nine months ended September 30, 2021, we transferred three CAFL loans with a fair value of $12 million to REO, which is included in Other assets on our consolidated balance sheets.
The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2021 and 2020.
Table 7.3 – Activity of Business Purpose Loans Held-for-Investment at CAFL
Three Months Ended 
 September 30, 2021		Three Months Ended 
 September 30, 2020
(In Thousands)SFR at
CAFL		Bridge at CAFLSFR at
CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded (1)
$(34,803)$— $88,271 $— 
Nine Months Ended 
 September 30, 2021		Nine Months Ended 
 September 30, 2020
(In Thousands)SFR at
CAFL		Bridge at CAFLSFR at
CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded (1)
$(96,934)$— $(14,319)$— 
(1)For loans held at our consolidated CAFL entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.
REO
See Note 12 for detail on BPL loans transferred to REO during 2021.

40

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 7. Business Purpose Loans - (continued)
Business Purpose Loan Characteristics
The following tables summarize the characteristics of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2021 and December 31, 2020.
Table 7.4 – Characteristics of Business Purpose Loans
September 30, 2021SFR at RedwoodSFR at
CAFL		 Bridge at RedwoodBridge at CAFL
(Dollars in Thousands)
Number of loans123 1,157 1,092 1,589 
Unpaid principal balance$451,295 $3,207,118 $550,711 $272,243 
Fair value of loans$466,346 $3,402,411 $548,445 $276,354 
Weighted average coupon4.57 %5.27 %7.48 %7.19 %
Weighted average remaining loan term (years)7611
Market value of loans pledged as collateral under short-term debt facilities$127,930 N/A$126,725 N/A
Market value of loans pledged as collateral under long-term debt facilities$298,014 N/A$373,597 N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)
7 15 35 — 
Unpaid principal balance of loans with 90+ day delinquencies $5,067 $39,423 $30,132 $— 
Fair value of loans with 90+ day delinquencies (2)
$2,664 N/A$26,525 $— 
Number of loans in foreclosure6 10 34 — 
Unpaid principal balance of loans in foreclosure$4,978 $22,004 $26,177 $— 
Fair value of loans in foreclosure (2)
$2,619 N/A$22,570 $— 
December 31, 2020SFR at RedwoodSFR at
CAFL		Bridge at RedwoodBridge at CAFL
(Dollars in Thousands)
Number of loans65 1,094 1,725 — 
Unpaid principal balance$234,475 $3,017,137 $649,532 $— 
Fair value of loans$245,394 $3,249,194 $641,765 $— 
Weighted average coupon4.84 %5.44 %8.09 %— %
Weighted average remaining loan term (years)851— 
Market value of loans pledged as collateral under short-term debt facilities$34,098 N/A$92,931 N/A
Market value of loans pledged as collateral under long-term debt facilities$154,774 N/A$544,151 N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)
10 22 31 — 
Unpaid principal balance of loans with 90+ day delinquencies$7,127 $61,440 $39,415 $— 
Fair value of loans with 90+ day delinquencies (2)
$6,143 N/A$33,605 $— 
Number of loans in foreclosure— 10 25 — 
Unpaid principal balance of loans in foreclosure$— $24,745 $38,552 $— 
Fair value of loans in foreclosure (2)
$— N/A$33,066 $— 
(1)The number of loans greater than 90 days delinquent includes loans in foreclosure.
(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.
41
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 8. Multifamily Loans
We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at September 30, 2021 and December 31, 2020.
Table 8.1 – Characteristics of Multifamily Loans
(Dollars in Thousands)September 30, 2021December 31, 2020
Number of loans28 28 
Unpaid principal balance$457,123 $462,808 
Fair value of loans$482,791 $492,221 
Weighted average coupon4.25 %4.25 %
Weighted average remaining loan term (years)45
Delinquency information
Number of loans with 90+ day delinquencies— — 
Number of loans in foreclosure— — 
The outstanding multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at September 30, 2021 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of multifamily loans held-for-investment during the three and nine months ended September 30, 2021 and 2020.
Table 8.2 – Activity of Multifamily Loans Held-for-Investment
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Net market valuation gains (losses) recorded (1)
$(487)$2,340 $(3,745)$(61,500)
(1)Net market valuation gains (losses) on multifamily loans held-for-investment are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For loans held at our consolidated Freddie Mac K-Series entity, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2.
Note 9. Real Estate Securities
We invest in real estate securities that we create and retain from our Sequoia securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at September 30, 2021 and December 31, 2020.
Table 9.1 – Fair Values of Real Estate Securities by Type
(In Thousands)September 30, 2021December 31, 2020
Trading$153,010 $125,667 
Available-for-sale200,276 218,458 
Total Real Estate Securities$353,286 $344,125 
Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Mezzanine securities are interests that are generally subordinate to senior securities in their rights to receive cash flows, and have subordinate securities below them that are first to absorb losses. Subordinate securities are all interests below mezzanine. Exclusive of our re-performing loan securities, nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.
42

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 9. Real Estate Securities - (continued)

Trading Securities
We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). The following table presents the fair value of trading securities by position and collateral type at September 30, 2021 and December 31, 2020.
Table 9.2 – Fair Value of Trading Securities by Position
(In Thousands)September 30, 2021December 31, 2020
Senior
Interest-only securities (1)
$22,494 $28,464 
Total Senior22,494 28,464 
Mezzanine
Sequoia securities— 3,649 
Total Mezzanine— 3,649 
Subordinate
RPL securities64,845 47,448 
Multifamily securities11,298 5,592 
Other third-party residential securities54,373 40,514 
Total Subordinate130,516 93,554 
Total Trading Securities$153,010 $125,667 
(1)Includes $15 million and $13 million of Sequoia certificated mortgage servicing rights at September 30, 2021 and December 31, 2020, respectively.
The following table presents the unpaid principal balance of trading securities by position and collateral type at September 30, 2021 and December 31, 2020.
Table 9.3 – Unpaid Principal Balance of Trading Securities by Position
(In Thousands)September 30, 2021December 31, 2020
Senior (1)
$— $— 
Mezzanine— 3,577 
Subordinate216,771 242,278 
Total Trading Securities$216,771 $245,855 
(1)Our senior trading securities include interest-only securities, for which there is no principal balance.
The following table provides the activity of trading securities during the three and nine months ended September 30, 2021 and 2020.
Table 9.4 – Trading Securities Activity
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Principal balance of securities acquired$10,750 $11,000 $28,380 $77,721 
Principal balance of securities sold750 15,903 53,561 720,517 
Net market valuation gains (losses) recorded (1)
1,578 (3,600)24,725 (224,679)
(1)Net market valuation gains (losses) on trading securities are recorded through Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income (loss).
43

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities
The following table presents the fair value of our available-for-sale securities by position and collateral type at September 30, 2021 and December 31, 2020.
Table 9.5 – Fair Value of Available-for-Sale Securities by Position
(In Thousands)September 30, 2021December 31, 2020
Mezzanine
Other third-party residential securities$— $2,014 
Total Mezzanine— 2,014 
Subordinate
Sequoia securities128,874 136,475 
Multifamily securities31,320 43,663 
Other third-party residential securities40,082 36,306 
Total Subordinate200,276 216,444 
Total AFS Securities$200,276 $218,458 
The following table provides the activity of available-for-sale securities during the three and nine months ended September 30, 2021 and 2020.
Table 9.6 – Available-for-Sale Securities Activity
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Fair value of securities acquired$— $25,483 $1,600 $56,664 
Fair value of securities sold— — 4,785 55,193 
We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.
At September 30, 2021, we had $28 million of AFS securities with contractual maturities less than five years, $4 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

44

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table presents the components of carrying value (which equals fair value) of AFS securities at September 30, 2021 and December 31, 2020.
Table 9.7 – Carrying Value of AFS Securities
September 30, 2021
(In Thousands)MezzanineSubordinateTotal
Principal balance$— $238,459 $238,459 
Credit reserve— (29,448)(29,448)
Unamortized discount, net— (88,108)(88,108)
Amortized cost— 120,903 120,903 
Gross unrealized gains— 79,406 79,406 
Gross unrealized losses— (33)(33)
CECL allowance— — — 
Carrying Value$— $200,276 $200,276 
December 31, 2020
(In Thousands)MezzanineSubordinateTotal
Principal balance$2,000 $281,284 $283,284 
Credit reserve— (44,967)(44,967)
Unamortized discount, net— (95,718)(95,718)
Amortized cost2,000 140,599 142,599 
Gross unrealized gains14 77,280 77,294 
Gross unrealized losses— (1,047)(1,047)
CECL allowance— (388)(388)
Carrying Value$2,014 $216,444 $218,458 
The following table presents the changes for the three and nine months ended September 30, 2021, in unamortized discount and designated credit reserves on residential AFS securities.
Table 9.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities
Three Months Ended 
 September 30, 2021		Nine Months Ended 
 September 30, 2021
Credit
Reserve		Unamortized
Discount, Net		Credit
Reserve		Unamortized
Discount, Net
(In Thousands)
Beginning balance$40,349 $90,216 $44,967 $95,718 
Amortization of net discount— (6,437)— (9,620)
Realized credit losses(184)— (433)— 
Acquisitions— — 2,825 1,208 
Sales, calls, other(320)(6,068)(1,312)(15,797)
Transfers to (release of) credit reserves, net(10,397)10,397 (16,599)16,599 
Ending Balance$29,448 $88,108 $29,448 $88,108 


45

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses
The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at September 30, 2021 and December 31, 2020.
Table 9.9 – Components of Fair Value of AFS Securities by Holding Periods
Less Than 12 Consecutive Months12 Consecutive Months or Longer
Amortized
Cost		Unrealized
Losses		Fair
Value		Amortized
Cost		Unrealized
Losses		Fair
Value
(In Thousands)
September 30, 2021$— $— $— $1,600 $(33)$1,567 
December 31, 20209,129 (1,047)7,920 — — — 
At September 30, 2021, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 84 AFS securities, of which one was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2020, our consolidated balance sheet included 96 AFS securities, of which five were in an unrealized loss position and zero were in a continuous unrealized loss position for 12 consecutive months or longer.

Evaluating AFS Securities for Credit Losses
Gross unrealized losses on our AFS securities were $33 thousand at September 30, 2021. We evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At September 30, 2021, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.
At September 30, 2021, our current expected credit loss ("CECL") allowance related to our AFS securities was zero. AFS securities for which an allowance is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.
The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at September 30, 2021.
Table 9.10 – Significant Credit Quality Indicators
September 30, 2021Subordinate Securities
Default rateN/A
Loss severityN/A

46

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table details the activity related to the allowance for credit losses for AFS securities for the three and nine months ended September 30, 2021.
Table 9.11 – Rollforward of Allowance for Credit Losses
Three Months Ended September 30, 2021Nine Months Ended September 30, 2021
(In Thousands)
Beginning balance allowance for credit losses$— $388 
Additions to allowance for credit losses on securities for which credit losses were not previously recorded— — 
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period— (388)
Allowance on purchased financial assets with credit deterioration— — 
Reduction to allowance for securities sold during the period— — 
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell— — 
Write-offs charged against allowance— — 
Recoveries of amounts previously written off— — 
Ending balance of allowance for credit losses$— $— 
Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income (loss). The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended September 30, 2021 and 2020.
Table 9.12 – Gross Realized Gains and Losses on AFS Securities
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Gross realized gains - sales$— $— $1,507 $8,779 
Gross realized gains - calls6,389 — 15,484 — 
Gross realized losses - sales— — — (4,144)
Total Realized Gains on Sales and Calls of AFS Securities, net$6,389 $— $16,991 $4,635 
During the three months ended September 30, 2021, we called two of our unconsolidated Sequoia entities, and purchased $66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the nine months ended September 30, 2021, we called six of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss).
47

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)


Note 10. Other Investments
Other investments at September 30, 2021 and December 31, 2020 are summarized in the following table.
Table 10.1 – Components of Other Investments
(In Thousands)September 30, 2021December 31, 2020
Servicer advance investments$170,062 $231,489 
HEIs167,856 42,440 
Strategic investments31,108 4,449 
Excess MSRs29,185 34,418 
Mortgage servicing rights12,389 8,815 
Other 11,766 26,564 
Total Other Investments$422,366 $348,175 
Servicer advance investments
We and a third-party co-investor, through two partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor (Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding the transactions). At September 30, 2021, we had funded $94 million of total capital to the SA Buyers (see Note 16 for additional detail).
At September 30, 2021, our servicer advance investments had a carrying value of $170 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $7.53 billion. The outstanding servicer advance receivables associated with this investment were $159 million at September 30, 2021, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at September 30, 2021 and December 31, 2020.
Table 10.2 – Components of Servicer Advance Receivables
(In Thousands)September 30, 2021December 31, 2020
Principal and interest advances$77,116 $110,923 
Escrow advances (taxes and insurance advances)62,117 79,279 
Corporate advances20,175 27,454 
Total Servicer Advance Receivables$159,408 $217,656 
We account for our servicer advance investments at fair value and during the three and nine months ended September 30, 2021, we recorded $2 million and $7 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 in our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded $3 million and $8 million of interest income, respectively, through Other interest income, and recorded a net market valuation gain of less than $0.1 million and a net market valuation loss of $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).

48

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 10. Other Investments - (continued)
HEIs
In 2019, we entered into a flow purchase agreement to acquire home equity investment contracts from Point Digital. At September 30, 2021, we had acquired $47 million of HEIs under this flow purchase agreement. We account for these investments under the fair value option and during the three and nine months ended September 30, 2021, we recorded net market valuation gains of $6 million and $13 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $2 million and a net market valuation loss of $4 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss).
During the three months ended September 30, 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization, then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS (See Note 4 for further discussion on the Point securitization entity and Note 14 for further discussion on ABS issued). We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity. The other contributors to the securitization own subordinate certificates in the entity that were valued at $17 million at September 30, 2021 and are carried on our balance sheet as non-controlling interests within the Accrued expenses and other liabilities line item of our consolidated balance sheets.
We consolidate the Point HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. During the three months ended September 30, 2021, we recorded net market valuation gains of less than $0.1 million related to our net investment in the Point HEI entity through Investment fair value changes, net on our consolidated statements of income (loss).
During three months ended September 30, 2021, we amended our flow purchase agreement with Point Digital and committed to purchase additional HEIs. See Note 16 for additional detail on this commitment.
Strategic Investments
Strategic investments represent investments we have made in companies through our RWT Horizons venture investment strategy or at a corporate level. At September 30, 2021, we had made 11 investments in companies through RWT Horizons and two corporate investments, including our investment in Churchill Finance. See Note 3 for additional detail on how we account for our strategic investments.
Excess MSRs
In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and nine months ended September 30, 2021, we recognized $3 million and $9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million and $5 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recognized $3 million and $9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million and $8 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 nine months ended September 30, 2021, we retained $5 million and $9 million of MSRs, respectively, from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

49

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 10. Other Investments - (continued)
At September 30, 2021 and December 31, 2020, our MSRs had a fair value of $12 million and $9 million, respectively, and were associated with loans with an aggregate principal balance of $2.29 billion and $2.59 billion, respectively. During the three and nine months ended September 30, 2021, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded net income of $0.3 million and $1 million, respectively, through Other income on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded net losses of $2 million and $6 million, respectively, through Other income on our consolidated statements of income (loss).
Note 11. Derivative Financial Instruments
The following table presents the fair value and notional amount of our derivative financial instruments at September 30, 2021 and December 31, 2020.
Table 11.1 – Fair Value and Notional Amount of Derivative Financial Instruments
September 30, 2021December 31, 2020
Fair
Value		Notional
Amount		Fair
Value		Notional
Amount
(In Thousands)
Assets - Risk Management Derivatives
Interest rate swaps$3,213 $293,200 $224 $42,000 
TBAs8,213 2,205,000 18,260 3,520,000 
Swaptions30,415 1,335,000 19,727 1,585,000 
Assets - Other Derivatives
Loan purchase and interest rate lock commitments9,262 1,687,314 15,027 2,617,254 
Total Assets$51,103 $5,520,514 $53,238 $7,764,254 
Liabilities - Risk Management Derivatives
Interest rate swaps$(74)$40,500 $— $— 
TBAs(7,599)2,190,000 (15,495)3,105,000 
Interest rate futures(749)133,200 — — 
Liabilities - Other Derivatives
Loan purchase commitments(2,550)1,084,579 (577)477,153 
Total Liabilities$(10,972)$3,448,279 $(16,072)$3,582,153 
Total Derivative Financial Instruments, Net$40,131 $8,968,793 $37,166 $11,346,407 
Risk Management Derivatives
To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At September 30, 2021, we were party to swaps and swaptions with an aggregate notional amount of $1.67 billion, TBA agreements with an aggregate notional amount of $4.40 billion, and interest rate futures contracts with an aggregate notional amount of $133 million. At December 31, 2020, we were party to swaps and swaptions with an aggregate notional amount of $1.63 billion and TBA agreements with an aggregate notional amount of $6.63 billion.
During the three and nine months ended September 30, 2021, risk management derivatives had net market valuation gains of $4 million and $38 million, respectively. During the three and nine months ended September 30, 2020, risk management derivatives had net market valuation losses of zero and $98 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income on our consolidated statements of income (loss).

50

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 11. Derivative Financial Instruments - (continued)
Loan Purchase and Interest Rate Lock Commitments
LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For both the three and nine months ended September 30, 2021, LPCs and IRLCs had net market valuation gains of $18 million that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2020, LPCs and IRLCs had net market valuation gains of $13 million and $35 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).
Derivatives Designated as Cash Flow Hedges
To manage the variability in interest expense related to a portion of our long-term debt that is included in our consolidated balance sheets for financial reporting purposes, we designated certain interest rate swaps as cash flow hedges.
During the first quarter of 2020, we terminated and settled all of our outstanding derivatives that had been designated as cash flow hedges for our long-term debt, with a payment of $84 million. For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $77 million and $81 million at September 30, 2021 and December 31, 2020, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of September 30, 2021, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.
For both the three and nine months ended September 30, 2021, we did not have any derivatives designated as cash flow hedges. For the three and nine months ended September 30, 2020, changes in the values of designated cash flow hedges were zero and negative $33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.
The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and nine months ended September 30, 2021 and 2020.
Table 11.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Net interest expense on cash flows hedges$— $— $— $(860)
Realized net losses reclassified from other comprehensive income(1,041)(1,040)(3,086)(2,148)
Total Interest Expense$(1,041)$(1,040)$(3,086)$(3,008)
Derivative Counterparty Credit Risk
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, 2021, we assessed this risk as remote and did not record an associated specific valuation adjustment.
At September 30, 2021, we were in compliance with our derivative counterparty ISDA agreements.
51

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 12. Other Assets and Liabilities
Other assets at September 30, 2021 and December 31, 2020 are summarized in the following table.
Table 12.1 – Components of Other Assets
(In Thousands)September 30, 2021December 31, 2020
Accrued interest receivable$41,997 $39,445 
Investment receivable32,420 43,176 
Deferred tax asset20,153 871 
REO18,863 8,413 
Margin receivable16,503 4,758 
Operating lease right-of-use assets13,659 15,012 
Fixed assets and leasehold improvements (1)
9,344 4,203 
Pledged collateral— 1,177 
Other9,254 13,533 
Total Other Assets$162,193 $130,588 
(1)Fixed assets and leasehold improvements had a basis of $17 million and accumulated depreciation of $7 million at September 30, 2021.
Accrued expenses and other liabilities at September 30, 2021 and December 31, 2020 are summarized in the following table.
Table 12.2 – Components of Accrued Expenses and Other Liabilities
(In Thousands)September 30, 2021December 31, 2020
Accrued compensation$64,354 $24,393 
Margin payable48,298 14,728 
Accrued interest payable34,545 34,858 
Payable to non-controlling interests (1)
31,781 16,941 
Operating lease liabilities15,771 16,687 
Accrued income taxes payable11,336 5,614 
Residential loan and MSR repurchase reserve9,003 8,631 
Guarantee obligations7,902 10,039 
Accrued operating expenses4,068 5,509 
Bridge loan holdbacks3,784 5,708 
Deferred consideration— 14,579 
Other20,734 21,653 
Total Accrued Expenses and Other Liabilities$251,576 $179,340 
(1)Includes $11 million and $17 million of payables to non-controlling interest holders in our consolidated Servicing Investment and Point HEI entities, respectively, as September 30, 2021. Includes $17 million payable to a non-controlling interest holder in our consolidated Servicing Investment entities at December 31, 2020.
Deferred Consideration
The deferred consideration presented in the table above is related to our acquisition of 5 Arches in 2019. During the first quarter of 2021, we distributed 806,068 shares of Redwood common stock and paid $1 million in cash in full settlement of the remaining deferred consideration associated with this acquisition.
52

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 12. Other Assets and Liabilities - (continued)
REO
The following table summarizes the activity and carrying values of REO assets held at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities during the nine months ended September 30, 2021.
Table 12.3 – REO Activity
Nine Months Ended September 30, 2021
(In Thousands)
 Bridge(1)
Legacy SequoiaFreddie Mac SLSTCAFL SFRTotal
Balance at beginning of period $4,600 $638 $646 $2,529 $8,413 
Transfers to REO7,074 65 2,591 11,924 21,654 
Liquidations (2)
(7,387)(607)(1,555)(1,990)(11,539)
Changes in fair value, net536 178 276 (655)335 
Balance at End of Period$4,823 $274 $1,958 $11,808 $18,863 
(1)Includes activity of bridge loans at Redwood and at consolidated CAFL bridge entity.
(2)For the nine months ended September 30, 2021, REO liquidations resulted in $0.3 million of realized losses, which were recorded in Investment fair value changes, net on our consolidated statements of income (loss).
The following table provides the detail of REO assets at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities at September 30, 2021 and December 31, 2020.
Table 12.4 – REO Assets
Number of REO assetsBridge Legacy SequoiaFreddie Mac SLSTCAFL SFRTotal
At September 30, 20215 2 20 2 29 
At December 31, 20203 3 9 2 17 
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional descriptions of our other assets and liabilities.












53

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

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 September 30, 2021, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants.
The table below summarizes our short-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at September 30, 2021 and December 31, 2020.
Table 13.1 – Short-Term Debt
September 30, 2021
(Dollars in Thousands)Number of FacilitiesOutstanding BalanceLimit
Weighted Average Interest Rate (1)
MaturityWeighted Average Days Until Maturity
Facilities
Residential loan warehouse 7 $1,335,464 $2,700,000 1.89 %11/2021-8/2022156
Business purpose loan warehouse2 183,800 350,000 3.39 %3/2022-7/2022201
Real estate securities repo
3 79,766 — 1.23 %10/2021-12/202134
Total Short-Term Debt Facilities12 1,599,030 
Servicer advance financing1 151,911 260,000 1.89 %11/202161
Total Short-Term Debt$1,750,941 
December 31, 2020
(Dollars in Thousands)Number of FacilitiesOutstanding BalanceLimit
Weighted Average Interest Rate (1)
MaturityWeighted Average Days Until Maturity
Facilities
Residential loan warehouse 4 $137,269 $1,300,000 2.45 %1/2021-11/2021268
Business purpose loan warehouse2 99,190 500,000 3.37 %5/2022-6/2022521
Real estate securities repo
3 77,775 — 2.24 %1/2021-3/202136
Total Short-Term Debt Facilities9 314,234 
Servicer advance financing1 208,375 335,000 1.95 %11/2021334
Total Short-Term Debt$522,609 
(1)Borrowings under our facilities are generally uncommitted and charged interest based on a specified margin over the 1- or 3-month LIBOR.

54

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 13. Short-Term Debt - (continued)
The following table below presents the value of loans, securities, and other assets pledged as collateral under our short-term debt at September 30, 2021 and December 31, 2020.
Table 13.2 – Collateral for Short-Term Debt
(In Thousands)September 30, 2021December 31, 2020
Collateral Type
Held-for-sale residential loans$1,478,424 $156,355 
Business purpose loans 254,655 127,029 
Real estate securities
On balance sheet14,367 23,193 
Sequoia securitizations (1)
62,075 63,105 
Freddie Mac K-Series securitization (1)
31,388 28,255 
Total real estate securities owned
107,830 114,553 
Restricted cash and other assets1,709 315 
Total Collateral for Short-Term Debt Facilities1,842,618 398,252 
Cash12,975 9,978 
Restricted cash19,872 23,220 
Servicer advances159,408 217,656 
Total Collateral for Servicer Advance Financing192,255 250,854 
Total Collateral for Short-Term Debt$2,034,873 $649,106 
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.
For the three and nine months ended September 30, 2021, the average balances of our short-term debt facilities were $1.98 billion and $1.61 billion, respectively. At September 30, 2021 and December 31, 2020, accrued interest payable on our short-term debt facilities was $2 million and $1 million, respectively.
Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. At September 30, 2021, the accrued interest payable balance on this financing was $0.1 million and the unamortized capitalized commitment costs were $0.1 million.
We also maintain a $10 million committed line of credit with a financial institution that is secured by certain mortgage-backed securities with a fair market value of $2 million at September 30, 2021. At both September 30, 2021 and December 31, 2020, we had no outstanding borrowings on this facility.

55

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 13. Short-Term Debt - (continued)
Remaining Maturities of Short-Term Debt
The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt at September 30, 2021.
Table 13.3 – Short-Term Debt by Collateral Type and Remaining Maturities
September 30, 2021
(In Thousands)Within 30 days31 to 90 daysOver 90 daysTotal
Collateral Type
Held-for-sale residential loans$— $278,663 $1,056,801 $1,335,464 
Business purpose loans— — 183,800 183,800 
Real estate securities43,800 35,966 — 79,766 
Total Secured Short-Term Debt43,800 314,629 1,240,601 1,599,030 
Servicer advance financing— 151,911 — 151,911 
Total Short-Term Debt$43,800 $466,540 $1,240,601 $1,750,941 
Note 14. Asset-Backed Securities Issued
ABS issued represents securities issued by non-recourse securitization entities we consolidate under GAAP. The majority of our ABS issued is carried at fair value under the CFE election (see Note 4 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by our consolidated securitization entities at September 30, 2021 and December 31, 2020, along with other selected information, are summarized in the following table.
Table 14.1 – Asset-Backed Securities Issued
September 30, 2021Legacy
Sequoia		Sequoia
CAFL (1)
Freddie Mac SLST (2)
Freddie Mac
K-Series		Point HEITotal
(Dollars in Thousands)
Certificates with principal balance$273,957 $2,199,488 $3,134,946 $1,630,252 $420,654 $145,320 $7,804,617 
Interest-only certificates739 21,003 189,946 19,787 10,885 — 242,360 
Market valuation adjustments (35,249)22,808 68,684 60,625 19,863 117 136,848 
ABS Issued, Net $239,447 $2,243,299 $3,393,576 $1,710,664 $451,402 $145,437 $8,183,825 
Range of weighted average interest rates, by series(3)
0.49% to 1.45%
2.34% to 5.07%
2.34% to 5.21%
3.50% to 4.75%
3.41 %3.27 %
Stated maturities(3)
2024 - 20362047 - 20512021 - 20312028 - 205920252052
Number of series20 13 16 3 1 1 

56

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 14. Asset-Backed Securities Issued - (continued)
December 31, 2020Legacy
Sequoia		SequoiaCAFL
Freddie Mac SLST (2)
Freddie Mac K-SeriesPoint HEITotal
(Dollars in Thousands)
Certificates with principal balance$329,039 $1,309,957 $2,716,425 $1,866,145 $416,339 $— $6,637,905 
Interest-only certificates1,092 4,591 162,934 23,335 13,026 — 204,978 
Market valuation adjustments (47,805)32,809 133,734 104,439 34,601 — 257,778 
ABS Issued, Net $282,326 $1,347,357 $3,013,093 $1,993,919 $463,966 $— $7,100,661 
Range of weighted average interest rates, by series(3)
0.35% to 1.55%
2.25% to 5.04%
2.68% to 5.42%
3.50% to 4.75%
3.39 %— %
Stated maturities(3)
2024 - 20362047 - 20502021 - 20312028 - 20592025— 
Number of series20 10 14 3 1 — 
(1)Includes $270 million (principal balance) of ABS issued by a CAFL bridge securitization trust sponsored by Redwood and accounted for at amortized cost at September 30, 2021.
(2)Includes $163 million and $205 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at September 30, 2021 and December 31, 2020, respectively.
(3)Certain ABS issued by CAFL, Freddie Mac SLST, and Point HEI entities is subject to early redemption and interest rate step-ups as described below.
During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest bridge loans (presented within CAFL in table 14.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2021, the principal balance of the ABS issued was $270 million, and the debt discount and deferred issuance costs were $3 million, for a net carrying value of $267 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).
During the third quarter of 2021, we consolidated the assets and liabilities of the Point HEI entity formed in connection with the securitization of HEIs, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income (loss). The ABS issued by the Point HEI entity are subject to an optional redemption 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 September 30, 2021, the principal balance of the ABS issued was $163 million, and the debt discount and deferred issuance costs were $3 million, for a carrying value of $161 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued is subject to an optional redemption in July 2022 and in July 2023 the ABS interest rate steps up to 7.75%.


57

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 14. Asset-Backed Securities Issued - (continued)
The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than its stated maturity. At September 30, 2021, the majority of the ABS issued and outstanding had contractual maturities beyond five years. See Note 4 for detail on the carrying value components of the collateral for ABS issued and outstanding. The following table summarizes the accrued interest payable on ABS issued at September 30, 2021 and December 31, 2020. Interest due on consolidated ABS issued is payable monthly.
Table 14.2 – Accrued Interest Payable on Asset-Backed Securities Issued
(In Thousands)September 30, 2021December 31, 2020
Legacy Sequoia$107 $141 
Sequoia 5,918 4,697 
CAFL10,760 10,122 
Freddie Mac SLST (1)
4,925 5,656 
Freddie Mac K-Series1,195 1,177 
Total Accrued Interest Payable on ABS Issued$22,905 $21,793 
(1)Includes accrued interest payable on ABS issued by a re-securitization trust sponsored by Redwood.

58

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 15. Long-Term Debt
The table below summarizes our long-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at September 30, 2021.
Table 15.1 – Long-Term Debt
September 30, 2021
(Dollars in Thousands)BorrowingsUnamortized Deferred Issuance Costs / DiscountNet Carrying ValueLimit
Weighted Average Interest Rate (1)
Final Maturity
Facilities
Recourse Subordinate Securities Financing
Sequoia$147,182 $(417)$146,765 N/A4.21 %9/2024
CAFL
Facility A102,370 (429)101,941 N/A4.21 %2/2025
Facility B95,011 (439)94,572 N/A4.75 %6/2026
Non-Recourse BPL Financing
Facility C105,961 (320)105,641 250,000 
L + 3.00%
N/A
Recourse BPL Financing
Facility D168,228 — 168,228 450,000 
L + 3.10%
6/2023
Facility E230,883 (141)230,742 250,000 
L + 3.00%
9/2023
Total Long-Term Debt Facilities849,635 (1,746)847,889 
Convertible notes
4.75% convertible senior notes
198,629 (2,098)196,531 N/A4.75 %8/2023
5.625% convertible senior notes
150,200 (2,262)147,938 N/A5.625 %7/2024
5.75% exchangeable senior notes
172,092 (3,582)168,510 N/A5.75 %10/2025
Trust preferred securities and subordinated notes139,500 (791)138,709 N/A
L + 2.25%
7/2037
Total Long-Term Debt$1,510,056 $(10,479)$1,499,577 
(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table above) plus an applicable spread.
Recourse Subordinate Securities Financing
In the third quarter of 2021, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023, and has a final maturity in June 2026, provided that the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026. See "Facility B" above for details on borrowings and securities pledged as collateral under this facility at September 30, 2021.
Non-Recourse BPL Financing Facilities
In the third quarter of 2021, we reclassified one of our non-recourse facilities from long-term to short-term debt as the maturity of this facility was less than one year at September 30, 2021.
59

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 15. Long-Term Debt - (continued)

In the second quarter of 2021, we repaid one of our non-recourse BPL financing facilities that had a balance of $242 million at March 31, 2021, and entered into a new non-recourse facility to finance business purpose bridge loans with a total borrowing capacity of $250 million (see details for "Facility C" above).
Recourse BPL Financing Facilities
In the second quarter of 2021, we reclassified one of our recourse facilities with a borrowing capacity of $450 million from short-term to long-term debt as we amended the terms of this facility, including an extension of its maturity (see details for "Facility D" above).
The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at September 30, 2021 and December 31, 2020.
Table 15.2 – Collateral for Long-Term Debt
(In Thousands)September 30, 2021December 31, 2020
Collateral Type
Bridge loans$373,597 $544,151 
Single-family rental loans298,014 154,774 
Real estate securities
Sequoia securitizations (1)
246,892 249,446 
CAFL securitizations (1)
256,976 114,044 
Total real estate securities owned
503,868 363,490 
Other BPL investments— 21,414 
Restricted cash— 1,100 
Total Collateral for Long-Term Debt$1,175,479 $1,084,929 
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.
The following table summarizes the accrued interest payable on long-term debt at September 30, 2021 and December 31, 2020.
Table 15.3 – Accrued Interest Payable on Long-Term Debt
(In Thousands)September 30, 2021December 31, 2020
Long-term debt facilities$900 $1,799 
Convertible notes
4.75% convertible senior notes
1,206 3,564 
5.625% convertible senior notes
1,784 3,896 
5.75% exchangeable senior notes
4,948 2,474 
Trust preferred securities and subordinated notes572 669 
Total Accrued Interest Payable on Long-Term Debt$9,410 $12,402 
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a full description of our long-term debt.
Note 16. Commitments and Contingencies
Lease Commitments
At September 30, 2021, we were obligated under seven non-cancelable operating leases with expiration dates through 2031 for $18 million of cumulative lease payments. Our operating lease expense was $3 million for both nine-month periods ended September 30, 2021 and 2020.
60

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 16. Commitments and Contingencies - (continued)
The following table presents our future lease commitments at September 30, 2021.
Table 16.1 – Future Lease Commitments by Year
(In Thousands)September 30, 2021
2021 (3 months)$928 
20223,714 
20233,235 
20242,411 
20251,983 
2026 and thereafter6,128 
Total Lease Commitments18,399 
Less: Imputed interest(2,628)
Operating Lease Liabilities$15,771 
During the nine months ended September 30, 2021, we did not enter into any new office leases. During the nine months ended September 30, 2021, we increased our operating lease right-of-use assets and liabilities by $1 million as the result of an amendment to one of our existing leases. At September 30, 2021, our operating lease liabilities were $16 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $14 million, which were a component of Other assets.
We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At September 30, 2021, the weighted-average remaining lease term and weighted-average discount rate for our leases was 7 years and 4.9%, respectively.
Commitment to Fund Bridge Loans
As of September 30, 2021, we had commitments to fund up to $426 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At September 30, 2021, we carried a $1 million contingent liability related to these commitments to fund construction advances. During the three and nine months ended September 30, 2021, we recorded a net market valuation loss of $0.3 million and a net market valuation gain of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $1 million and a net market valuation loss of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).
Commitment to Fund Partnerships
In 2018, we invested in 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.

61

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 16. Commitments and Contingencies - (continued)
Commitment to Acquire HEIs
In the third quarter of 2021, we amended an existing flow purchase agreement with Point Digital to acquire HEIs that Point Digital originates with homeowners. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property. At September 30, 2021, we had an outstanding commitment to fund up to $125 million under this agreement.
Loss Contingencies — Risk-Sharing
During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At September 30, 2021, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was partially collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At September 30, 2021, we had incurred less than $0.1 million of losses under these arrangements. For the three and nine months ended September 30, 2021, other income related to these arrangements was $1 million and $2 million, respectively, and net market valuation losses related to these investments were less than $0.1 million and $0.1 million, respectively. For the three and nine months ended September 30, 2020, other income related to these arrangements was $1 million and $3 million, respectively, and net market valuation losses related to these investments were $0.3 million and $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 September 30, 2021, the loans had an unpaid principal balance of $618 million and a weighted average FICO score of 756 (at origination) and LTV ratio of 74% (at origination). At September 30, 2021, $21 million of the loans were 90 days or more delinquent, of which one of these loans with an unpaid principal balance of $0.2 million was in foreclosure. At September 30, 2021, the carrying value of our guarantee obligation was $8 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.
Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to us. At September 30, 2021 and December 31, 2020, assets of such SPEs totaled $34 million and $46 million, respectively, and liabilities of such SPEs totaled $8 million and $10 million, respectively.
Loss Contingencies — Residential Repurchase Reserve
We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential loans we have sold to securitization trusts or third parties and for conforming residential loans associated with MSRs that we have purchased from third parties. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation. Additionally, for certain loans we sold during the second quarter of 2020 that were previously held for investment, we have a direct obligation to repurchase these loans in the event of any early payment defaults (or "EPDs") by the underlying mortgage borrowers within certain specified periods following the sales.
At both September 30, 2021 and December 31, 2020, our repurchase reserve associated with our residential loans and MSRs was $9 million and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets.
During the nine months ended September 30, 2021 and 2020, we received three and eight repurchase requests, respectively, and repurchased one and zero loans, respectively. During the nine months ended September 30, 2021 and 2020, we recorded repurchase provisions of $0.6 million and $4 million, respectively, that were recorded in Mortgage banking activities, net; Investment fair value changes, net; and Other income on our consolidated statements of income (loss).

62

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 16. Commitments and Contingencies - (continued)
Loss Contingencies — Litigation, Claims and Demands
There is no significant update regarding the litigation matters described in Note 16 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Loss Contingencies - Litigation.” At September 30, 2021, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million. At September 30, 2021, the aggregate amount of our accrual for estimated costs associated with the "Residential Loan Seller Demands" described in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million, a portion of which is contingent on the successful completion of future residential loan purchase and sale transactions with certain counterparties. We believe we have either resolved or adequately accrued for any unresolved Residential Loan Seller Demands and that there are no other Residential Loan Seller Demands that are reasonably possible to result in a material loss.
Note 17. Equity
The following table provides a summary of changes to accumulated other comprehensive income by component for the three and nine months ended September 30, 2021 and 2020.
Table 17.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component
Three Months Ended September 30, 2021Three Months Ended September 30, 2020
(In Thousands)Available-for-Sale SecuritiesInterest Rate Agreements Accounted for as Cash Flow HedgesAvailable-for-Sale SecuritiesInterest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period$88,251 $(78,511)$53,246 $(82,637)
Other comprehensive (loss) income
before reclassifications 		(2,658)— 8,236 — 
Amounts reclassified from other
accumulated comprehensive income (loss)		(6,200)1,041 (445)1,040 
Net current-period other comprehensive (loss) income (8,858)1,041 7,791 1,040 
Balance at End of Period$79,393 $(77,470)$61,037 $(81,597)
Nine Months Ended September 30, 2021Nine Months Ended September 30, 2020
(In Thousands)Available-for-Sale SecuritiesInterest Rate Agreements Accounted for as Cash Flow HedgesAvailable-for-Sale SecuritiesInterest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period$76,336 $(80,557)$92,452 $(50,939)
Other comprehensive income (loss)
before reclassifications 		19,552 — (19,890)(32,806)
Amounts reclassified from other
accumulated comprehensive income (loss)		(16,495)3,087 (11,525)2,148 
Net current-period other comprehensive income (loss)3,057 3,087 (31,415)(30,658)
Balance at End of Period$79,393 $(77,470)$61,037 $(81,597)

63

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 17. Equity - (continued)
The following table provides a summary of reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2021 and 2020.
Table 17.2 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Amount Reclassified From
Accumulated Other Comprehensive Income
Affected Line Item in theThree Months Ended September 30,
(In Thousands)Income Statement20212020
Net Realized (Gain) Loss on AFS Securities
Decrease in allowance for credit losses on AFS securitiesInvestment fair value changes, net$— $(445)
Gain on sale of AFS securitiesRealized gains, net(6,200)— 
$(6,200)$(445)
Net Realized Loss on Interest Rate
  Agreements Designated as Cash Flow Hedges
Amortization of deferred lossInterest expense$1,041 $1,040 
$1,041 $1,040 
Amount Reclassified From
Accumulated Other Comprehensive Income
Affected Line Item in theNine Months Ended September 30,
(In Thousands)Income Statement20212020
Net Realized (Gain) Loss on AFS Securities
(Decrease) increase in allowance for credit losses on AFS securitiesInvestment fair value changes, net$(388)$1,026 
Gain on sale of AFS securitiesRealized gains, net(16,107)(12,552)
$(16,495)$(11,526)
Net Realized Loss on Interest Rate
  Agreements Designated as Cash Flow Hedges
Amortization of deferred lossInterest expense$3,087 $2,148 
$3,087 $2,148 
Issuance of Common Stock
We have an established program to sell up to an aggregate of $175 million of common stock from time to time in at-the-market ("ATM") offerings. During the nine months ended September 30, 2021, we issued 1,466,669 common shares for net proceeds of $18 million under this program. At September 30, 2021, approximately $92 million remained outstanding for future offerings under this program.
Direct Stock Purchase and Dividend Reinvestment Plan
During the nine months ended September 30, 2021, we issued 119,040 shares of common stock for net proceeds of $1 million through our Direct Stock Purchase and Dividend Reinvestment Plan. During the nine months ended September 30, 2020, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At September 30, 2021, approximately 6 million shares remained outstanding for future offerings under this plan.

64

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 17. Equity - (continued)
Earnings (Loss) per Common Share
The following table provides the basic and diluted earnings (loss) per common share computations for the three and nine months ended September 30, 2021 and 2020.
Table 17.3 – Basic and Diluted Earnings (Loss) per Common Share
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, except Share Data)2021202020212020
Basic Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood$88,286 $141,812 $275,568 $(636,142)
Less: Dividends and undistributed earnings allocated to participating securities(2,984)(4,067)(8,979)(1,427)
Net income (loss) allocated to common shareholders$85,302 $137,745 $266,589 $(637,569)
Basic weighted average common shares outstanding112,995,847 113,403,102 112,754,691 113,952,308 
Basic Earnings (Loss) per Common Share$0.75 $1.21 $2.36 $(5.60)
Diluted Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood$88,286 $141,812 $275,568 $(636,142)
Less: Dividends and undistributed earnings allocated to participating securities(2,747)(3,512)(8,151)(1,427)
Add back: Interest expense on convertible notes for the period, net of tax6,870 6,990 20,585 — 
Net income (loss) allocated to common shareholders$92,409 $145,290 $288,002 $(637,569)
Weighted average common shares outstanding112,995,847 113,403,102 112,754,691 113,952,308 
Net effect of dilutive equity awards292,749 — 253,819 — 
Net effect of assumed convertible notes conversion to common shares28,566,875 28,566,875 28,566,875 — 
Diluted weighted average common shares outstanding141,855,471 141,969,977 141,575,385 113,952,308 
Diluted Earnings (Loss) per Common Share$0.65 $1.02 $2.03 $(5.60)
We included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights, in the calculations of basic and diluted earnings per common share as we determined that the two-class method was more dilutive than the alternative treasury stock method for these shares. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances.
During the three and nine months ended September 30, 2021 and the three months ended September 30, 2020, certain of our convertible notes were determined to be dilutive and were included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money) are included in the denominator.
For the nine months ended September 30, 2020, 32.2 million of common shares related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2021, the number of outstanding equity awards that were antidilutive totaled 22,102 and 18,736, respectively. For the three and nine months ended September 30, 2020, the number of outstanding equity awards that were antidilutive totaled 13,560 and 15,457, respectively.

65

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 17. Equity - (continued)
Stock Repurchases
In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2021, we did not repurchase any shares. At September 30, 2021, $78 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.
Note 18. Equity Compensation Plans
At September 30, 2021 and December 31, 2020, 7,273,676 and 7,957,891 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock and purchases under the Employee Stock Purchase Plan, totaled $26 million at September 30, 2021, as shown in the following table.
Table 18.1 – Activities of Equity Compensation Costs by Award Type
Nine Months Ended September 30, 2021
(In Thousands)Restricted Stock AwardsRestricted Stock UnitsDeferred Stock UnitsPerformance Stock UnitsEmployee Stock Purchase PlanTotal
Unrecognized compensation cost at beginning of period$564 $3,540 $17,766 $5,794 $— $27,664 
Equity grants— 2,370 5,766 — 335 8,471 
Performance-based valuation adjustment— — — 1,072 — 1,072 
Equity grant forfeitures(2)(670)(550)— — (1,222)
Equity compensation expense(375)(1,188)(5,681)(2,002)(251)(9,497)
Unrecognized Compensation Cost at End of Period$187 $4,052 $17,301 $4,864 $84 $26,488 
At September 30, 2021, the weighted average amortization period remaining for all of our equity awards was one year.
Restricted Stock Awards ("RSAs")
At September 30, 2021 and December 31, 2020, there were 29,693 and 78,998 shares, respectively, of RSAs outstanding. Restrictions on these shares lapse through 2022. During the nine months ended September 30, 2021, there were no RSAs granted, restrictions on 49,305 RSAs lapsed and those shares were distributed, and no RSAs were forfeited.
Restricted Stock Units ("RSUs")
At September 30, 2021 and December 31, 2020, there were 445,183 and 282,424 shares, respectively, of RSUs outstanding. During the nine months ended September 30, 2021, there were 272,261 RSUs granted, 64,759 RSUs distributed, and 44,743 RSUs forfeited. Unvested RSUs at September 30, 2021 vest through 2025.
Deferred Stock Units (“DSUs”)
At September 30, 2021 and December 31, 2020, there were 3,318,540 and 2,805,144 DSUs, respectively, outstanding of which 1,546,724 and 1,206,125, respectively, had vested. During the nine months ended September 30, 2021, there were 700,552 DSUs granted, 155,995 DSUs distributed, and 31,161 DSUs forfeited. Unvested DSUs at September 30, 2021 vest through 2025.
66

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 18. Equity Compensation Plans - (continued)
Performance Stock Units (“PSUs”)
At September 30, 2021 and December 31, 2020, the target number of PSUs that were unvested was 955,710 and 978,735, respectively. Vesting for PSUs generally occurs at the end of three years from their respective grant dates based on various total shareholder return performance calculations, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2020. With respect to PSUs granted in May 2018, the three-year performance period ended during the second quarter of 2021, resulting in the vesting of no shares of our common stock. During the second quarter of 2021, for PSUs granted in 2020, we adjusted the future amortization expense by $1 million to reflect our current estimate of the number of shares expected to vest in relation to the performance condition for the initial one-year vesting tranche.
Employee Stock Purchase Plan ("ESPP")
The ESPP allows a maximum of 850,000 shares of common stock to be purchased in aggregate for all employees. As of September 30, 2021 and December 31, 2020, 546,093 and 489,886 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at September 30, 2021.
Note 19. Mortgage Banking Activities, Net
The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income (loss) for the three and nine months ended September 30, 2021 and 2020.
Table 19.1 – Mortgage Banking Activities
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)
$27,862 $12,589 $75,496 $19,151 
Trading securities (2)
32 — (342)— 
Risk management derivatives (3)
3,963 (10)37,187 (31,304)
Other income (expense), net (4)
1,089 (715)3,305 (7,069)
Total residential mortgage banking activities, net32,946 11,864 115,646 (19,222)
Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
Single-family rental loans, at fair value (1)
18,461 43,191 54,675 56,209 
Risk management derivatives (3)
(424)(89)930 (21,627)
Bridge loans, at fair value3,433 938 6,702 (4,256)
Other income, net (5)
8,747 3,491 22,236 13,407 
Total business purpose mortgage banking activities, net30,217 47,531 84,543 43,733 
Mortgage Banking Activities, Net$63,163 $59,395 $200,189 $24,511 
(1)For residential loans, includes changes in fair value for associated loan purchase and forward sale commitments. For single-family rental loans, includes changes in fair value for associated interest rate lock commitments.
(2)Represents fair value changes on trading securities that are being used as hedges to manage the mark-to-market risks associated with our residential mortgage banking operations.
(3)Represents market valuation changes of derivatives that were used to manage risks associated with our mortgage banking operations.
(4)Amounts in this line item include other fee income from loan acquisitions and provisions for repurchase expense, presented net.
(5)Amounts in this line item include other fee income from loan originations.
67

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 20. Other Income
The following table presents the components of Other income recorded in our consolidated statements of income (loss) for the three and nine months ended September 30, 2021 and 2020.
Table 20.1 – Other Income
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
MSR (loss) income, net (1)
$295 $(2,362)$949 $(5,595)
Agency risk sharing agreement income575 1,200 2,318 3,146 
FHLBC capital stock dividend3 116 53 1,201 
Bridge loan fees1,131 716 2,735 2,520 
Other384 216 2,302 2,707 
Other Income, Net$2,388 $(114)$8,357 $3,979 
(1)Includes servicing fees and fair value changes for MSRs and associated hedges, net.
68

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
Components of our general and administrative expenses, loan acquisition costs, and other expenses for the three and nine months ended September 30, 2021 and 2020 are presented in the following table.
Table 21.1 – Components of General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
General and Administrative Expenses
Fixed compensation expense$11,285 $10,103 $34,359 $36,605 
Annual variable compensation19,844 5,882 51,021 9,171 
Long-term incentive award expense (1)
4,915 2,639 14,766 7,896 
Acquisition-related equity compensation expense (2)
1,189 1,212 3,613 3,636 
Systems and consulting2,975 2,145 9,224 7,752 
Office costs2,197 1,859 6,029 5,854 
Accounting and legal1,197 1,601 3,132 6,605 
Corporate costs964 831 2,528 2,128 
Other 3,126 1,358 7,165 5,185 
Total General and Administrative Expenses47,692 27,630 131,837 84,832 
Loan Acquisition Costs
Commissions1,906 879 4,830 3,027 
Underwriting costs2,351 771 5,872 3,289 
Transfer and holding costs364 508 1,226 1,400 
Total Loan Acquisition Costs4,621 2,158 11,928 7,716 
Other Expenses
Goodwill impairment expense— — — 88,675 
Amortization of purchase-related intangible assets 3,873 3,873 11,619 12,052 
Other150 3,915 485 3,559 
Total Other Expenses4,023 7,788 12,104 104,286 
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses$56,336 $37,576 $155,869 $196,834 
(1)For the three months ended September 30, 2021, long-term incentive award expense includes $3 million of expense for awards settleable in shares of our common stock and $1 million of expense for awards settleable in cash. For the nine months ended September 30, 2021, long-term incentive award expense includes $10 million of expense for awards settleable in shares of our common stock and $4 million of expense for awards settleable in cash.
(2)Acquisition-related equity compensation expense relates to 588,260 shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in CoreVest. The grant date fair value of these restricted stock awards was $10 million, which is being recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.


69

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 22. Taxes
We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. To qualify as a REIT, the Company must distribute at least 90% of its annual REIT taxable income and meet certain other requirements that relate to, among others, the assets it holds, the income it generates, and the composition of its stockholders.
For the nine months ended September 30, 2021 and 2020, we recognized a provision for income taxes of $14 million and a benefit from income taxes of $13 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at September 30, 2021 and 2020.
Table 22.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate
September 30, 2021September 30, 2020
Federal statutory rate21.0 %21.0 %
State statutory rate, net of Federal tax effect8.6 %8.6 %
Differences in taxable (loss) income from GAAP income(13.1)%(23.6)%
Change in valuation allowance(6.8)%(4.0)%
Dividends paid deduction (1)
(4.9)%— %
Effective Tax Rate4.8 %2.0 %
(1)The dividends paid deduction in the effective tax rate reconciliation is generally representative of the amount of distributions to shareholders that reduce REIT taxable income. For the nine months ended September 30, 2020, the dividends paid deduction is 0% because there was no REIT taxable income available to apply against the dividends paid. This was due to our REIT incurring a taxable loss during the period.
We assessed our tax positions for all open tax years (i.e., Federal, 2017 to 2021, and State, 2016 to 2021) at September 30, 2021 and December 31, 2020, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.
For the three months ended September 30, 2021, we reassessed the valuation allowance on our deferred tax assets ("DTAs") noting an increase in positive evidence related to our ability to utilize certain DTAs. The positive evidence includes significant revenue growth in recent quarters and expectations regarding future profitability at our TRS. After assessing both the positive and negative evidence, we determined it was more likely than not that we will realize all of our federal DTAs. Therefore, we reversed our federal valuation allowance of $17 million as a discrete benefit in the third quarter of 2021. In addition to the federal valuation allowance release, we determined it was more likely than not that we will realize a portion of our state DTAs and, as such, reversed $3 million of state valuation allowance as a discrete item in the third quarter of 2021. Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs exist and we project most of our state DTAs will expire prior to their utilization.
Note 23. Segment Information
Redwood operates in three segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For a full description of our segments, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2020.
Segment contribution represents the measure of profit that management uses to assess the performance of our business segments and make resource allocation and operating decisions. Certain corporate expenses not directly assigned or allocated to one of our 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.

70

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 23. Segment Information - (continued)
The following tables present financial information by segment for the three and nine months ended September 30, 2021 and 2020.
Table 23.1 – Business Segment Financial Information
Three Months Ended September 30, 2021
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other 		 Total
Interest income$44,220 $67,235 $33,218 $1,049 $145,722 
Interest expense(25,395)(46,834)(21,370)(10,155)(103,754)
Net interest income18,825 20,401 11,848 (9,106)41,968 
Non-interest income
Mortgage banking activities, net32,946 30,217 — — 63,163 
Investment fair value changes, net2,285 3,470 20,569 (247)26,077 
Other income, net874 1,184 — 330 2,388 
Realized gains, net6,389 314 — — 6,703 
Total non-interest income (loss), net42,494 35,185 20,569 83 98,331 
General and administrative expenses(8,989)(13,987)(1,415)(23,301)(47,692)
Loan acquisition costs(2,395)(2,175)(51)— (4,621)
Other expenses— (3,873)(150)— (4,023)
(Provision for) benefit from income taxes(11,139)(3,485)(335)19,282 4,323 
Segment Contribution$38,796 $32,066 $30,466 $(13,042)
Net Income$88,286 
Non-cash amortization (expense) income, net$5,862 $(4,713)$276 $(1,995)$(570)
Nine Months Ended September 30, 2021
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other 		 Total
Interest income$104,801 $202,155 $102,180 $3,586 $412,722 
Interest expense(65,488)(151,351)(66,883)(30,649)(314,371)
Net interest income39,313 50,804 35,297 (27,063)98,351 
Non-interest income
Mortgage banking activities, net115,646 84,543 — — 200,189 
Investment fair value changes, net8,958 10,551 102,303 (1,168)120,644 
Other income, net4,566 3,044 5 742 8,357 
Realized gains, net15,484 812 1,507 — 17,803 
Total non-interest income, net144,654 98,950 103,815 (426)346,993 
General and administrative expenses(30,539)(38,834)(3,476)(58,988)(131,837)
Loan acquisition costs(5,698)(6,088)(138)(4)(11,928)
Other expenses(6)(11,523)(592)17 (12,104)
(Provision for) benefit from income taxes(25,289)(6,988)(912)19,282 (13,907)
Segment Contribution$122,435 $86,321 $133,994 $(67,182)
Net Income$275,568 
Non-cash amortization (expense) income, net$8,867 $(16,154)$317 $(5,845)$(12,815)
71

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 23. Segment Information - (continued)
Three Months Ended September 30, 2020
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other 		 Total
Interest income$26,672 $55,930 $37,576 $1,804 $121,982 
Interest expense(21,401)(44,159)(24,238)(10,613)(100,411)
Net interest income5,271 11,771 13,338 (8,809)21,571 
Non-interest income
Mortgage banking activities, net11,864 47,531 — — 59,395 
Investment fair value changes, net2,443 16,892 87,890 (178)107,047 
Other income, net(2,011)623 340 934 (114)
Realized gains, net— — 602 — 602 
Total non-interest income, net12,296 65,046 88,832 756 166,930 
General and administrative expenses(4,602)(9,321)(709)(12,998)(27,630)
Loan acquisition costs(304)(1,660)(194)— (2,158)
Other expenses(3,309)(3,874)(470)(135)(7,788)
(Provision for) benefit from income taxes(826)(8,544)257 — (9,113)
Segment Contribution$8,526 $53,418 $101,054 $(21,186)
Net Income$141,812 
Non-cash amortization income (expense), net$1,785 $(6,719)$117 $(1,516)$(6,333)
Nine Months Ended September 30, 2020
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other 		 Total
Interest income$123,956 $162,732 $155,583 $7,738 $450,009 
Interest expense(87,725)(113,143)(111,666)(37,214)(349,748)
Net interest income36,231 49,589 43,917 (29,476)100,261 
Non-interest income
Mortgage banking activities, net(19,222)43,733 — — 24,511 
Investment fair value changes, net(159,107)(84,837)(366,696)(917)(611,557)
Other income, net(2,278)3,493 1,072 1,692 3,979 
Realized gains, net2,001 — 3,236 25,182 30,419 
Total non-interest income, net(178,606)(37,611)(362,388)25,957 (552,648)
General and administrative expenses(12,901)(29,977)(4,230)(37,724)(84,832)
Loan acquisition costs(1,512)(5,630)(567)(7)(7,716)
Other expenses(3,309)(100,743)347 (581)(104,286)
Benefit from income taxes7,827 477 4,775 — 13,079 
Segment Contribution$(152,270)$(123,895)$(318,146)$(41,831)
Net Loss$(636,142)
Non-cash amortization income (expense), net$732 $(18,035)$1,170 $(3,244)$(19,377)
Other significant non-cash expense: goodwill impairment$— $(88,675)$— $— $(88,675)
72

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 23. Segment Information - (continued)
The following table presents the components of Corporate/Other for the three and nine months ended September 30, 2021 and 2020.

Table 23.2 – Components of Corporate/Other
Three Months Ended September 30,
20212020
(In Thousands)
Legacy Consolidated VIEs (1)
OtherTotal
Legacy Consolidated VIEs (1)
Other Total
Interest income$1,042 $7 $1,049 $1,795 $9 $1,804 
Interest expense(641)(9,514)(10,155)(1,059)(9,554)(10,613)
Net interest income401 (9,507)(9,106)736 (9,545)(8,809)
Non-interest income
Investment fair value changes, net(247)— (247)(81)(97)(178)
Other income— 330 330 — 934 934 
Total non-interest income, net(247)330 83 (81)837 756 
General and administrative expenses— (23,301)(23,301)— (12,998)(12,998)
Other expenses— — — — (135)(135)
Provision for income taxes— 19,282 19,282 — — — 
Total$154 $(13,196)$(13,042)$655 $(21,841)$(21,186)
Nine Months Ended September 30,
20212020
(In Thousands)
Legacy Consolidated VIEs (1)
OtherTotal
Legacy Consolidated VIEs (1)
Other Total
Interest income$3,559 $27 $3,586 $7,674 $64 $7,738 
Interest expense(2,271)(28,378)(30,649)(5,099)(32,115)(37,214)
Net interest income1,288 (28,351)(27,063)2,575 (32,051)(29,476)
Non-interest income
Investment fair value changes, net(1,162)(6)(1,168)(702)(215)(917)
Other income— 742 742 — 1,692 1,692 
Realized gains, net— — — — 25,182 25,182 
Total non-interest income, net(1,162)736 (426)(702)26,659 25,957 
General and administrative expenses— (58,988)(58,988)— (37,724)(37,724)
Loan acquisition costs— (4)(4)— (7)(7)
Other expenses— 17 17 — (581)(581)
Provision for income taxes— 19,282 19,282 — — — 
Total$126 $(67,308)$(67,182)$1,873 $(43,704)$(41,831)
(1)     Legacy consolidated VIEs represent Legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.

73

REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Note 23. Segment Information - (continued)
The following table presents supplemental information by segment at September 30, 2021 and December 31, 2020.
Table 23.3 – Supplemental Segment Information
(In Thousands)Residential LendingBusiness Purpose LendingThird-Party Investments Corporate/
Other		Total
September 30, 2021
Residential loans$3,974,829 $— $1,999,405 $242,234 $6,216,468 
Business purpose loans— 4,693,555 — — 4,693,555 
Multifamily loans— — 482,791 — 482,791 
Real estate securities150,368 — 202,918 — 353,286 
Other investments12,389 6,767 379,102 24,108 422,366 
Intangible assets— 45,246 — — 45,246 
Total assets4,219,950 4,860,226 3,088,815 903,723 13,072,714 
December 31, 2020
Residential loans$1,741,963 $— $2,221,153 $285,935 $4,249,051 
Business purpose loans— 4,136,353 — — 4,136,353 
Multifamily loans— — 492,221 — 492,221 
Real estate securities160,780 — 183,345 — 344,125 
Other investments8,815 21,627 317,282 451 348,175 
Intangible assets— 56,865 — — 56,865 
Total assets1,989,802 4,323,040 3,232,415 809,809 10,355,066 
74

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six main sections:
•    Overview
•    Results of Operations
–Consolidated Results of Operations
–Results of Operations by Segment
–Investments Detail
–Income Taxes
•    Liquidity and Capital Resources
•    Off-Balance Sheet Arrangements and Contractual Obligations
•    Critical Accounting Policies and Estimates
•    New Accounting Standards
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part II, Item 8, Financial Statements and Supplementary Data in our most recent Annual Report on Form 10-K, as well as the sections entitled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as other cautionary statements and risks described elsewhere in this report and our most recent Annual Report on Form 10-K. The discussion in this MD&A contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, such as those discussed in the Cautionary Statement below.
References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. Financial information concerning our business is set forth in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes thereto, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our website can be found at www.redwoodtrust.com. We make available, free of charge through the investor information section of our website, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). We also make available, free of charge, access to our charters for our Audit Committee, Compensation Committee, and Governance and Nominating Committee, our Corporate Governance Standards, and our Code of Ethics governing our directors, officers, and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any executive officer or director of Redwood. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, and may include disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.
Our Investor Relations Department can be contacted at One Belvedere Place, Suite 300, Mill Valley, CA 94941, Attn: Investor Relations, telephone (866) 269-4976.

75

Our Business
Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We deliver customized housing credit investments to a diverse mix of investors through our best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded shares. Our consolidated investment portfolio has evolved to incorporate a diverse mix of residential, business purpose and multifamily investments. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in three segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For a full description of our segments, see Part 1, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2020.
Cautionary Statement
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, our ability to pay dividends in the future, and the prospects for federal housing finance reform); (ii) statements related to our financial outlook and expectations for 2021 and future years; (iii) statements related to our opportunities for growth, including by continuing to creatively expand distribution channels for our loans products; (iv) statements related to our investment portfolio, including that there remains potential upside in our portfolio through a combination of accretable market discount and call rights that we control, and that we reinitiated our flow purchase arrangement with Point, providing us with continuing HEI acquisition and securitization opportunities; (v) statements related to our residential and business purpose lending platforms, including that we expect CoreVest to continue to consider issuing bridge loan securitizations in conjunction with our traditional SFR loan securitizations; (vi) statements relating to our estimate of our available capital (including that we estimate our available capital at September 30, 2021 was approximately $350 million); (vii) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the third quarter of 2021 and at September 30, 2021, and expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase; (viii) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2021; and (ix) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.
Many of the factors that could affect our actual results are summarized below. One of the most significant factors, however, is the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Moreover, each of the factors summarized below is likely to also be impacted directly or indirectly by the ongoing impact of the pandemic and investors are cautioned to interpret substantially all of the risks identified in the Company’s previously published “Risk Factors” as being heightened as a result of the ongoing impact of the pandemic.
Important factors, among others, that may affect our actual results include:
•the impact of the COVID-19 pandemic;
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•general economic trends and the performance of the housing, real estate, mortgage finance, and broader financial markets;
•federal and state legislative and regulatory developments and the actions of governmental authorities and entities;
•changing benchmark interest rates, and the Federal Reserve’s actions and statements regarding monetary policy;
•our ability to compete successfully;
•our ability to adapt our business model and strategies to changing circumstances;
•strategic business and capital deployment decisions we make;
•our use of financial leverage;
•our exposure to a breach of our cybersecurity or data security;
•our exposure to credit risk and the timing of credit losses within our portfolio;
•the concentration of the credit risks we are exposed to, including due to the structure of assets we hold, the geographical concentration of real estate underlying assets we own, and our exposure to environmental and climate-related risks;
•the efficacy and expense of our efforts to manage or hedge credit risk, interest rate risk, and other financial and operational risks;
•changes in credit ratings on assets we own and changes in the rating agencies’ credit rating methodologies;
•changes in mortgage prepayment rates;
•changes in interest rates;
•our ability to redeploy our available capital into new investments;
•interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
•our ability to finance the acquisition of real estate-related assets with short-term debt;
•changes in the values of assets we own;
•the ability of counterparties to satisfy their obligations to us;
•our exposure to the discontinuation of LIBOR;
•our exposure to liquidity risk, risks associated with the use of leverage, and market risks;
•changes in the demand from investors for residential and business purpose mortgages and investments, and our ability to distribute residential and business purpose mortgages through our whole-loan distribution channel;
•our involvement in securitization transactions, the profitability of those transactions, and the risks we are exposed to in engaging in securitization transactions;
•exposure to claims and litigation, including litigation arising from our involvement in loan origination and securitization transactions;
•whether we have sufficient liquid assets to meet short-term needs;
•our ability to successfully retain or attract key personnel;
•changes in our investment, financing, and hedging strategies and new risks we may be exposed to if we expand our business activities;
•our exposure to a disruption of our technology infrastructure and systems;
•the impact on our reputation that could result from our actions or omissions or from those of others;
•our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
•the termination of our captive insurance subsidiary’s membership in the Federal Home Loan Bank and the implications for our income generating abilities;
•the impact of changes to U.S. federal income tax laws on the U.S. housing market, mortgage finance markets, and our business;
•our failure to comply with applicable laws and regulation, including our ability to obtain or maintain the governmental licenses;
•our ability to maintain our status as a REIT for tax purposes;
•limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940;
•our common stock may experience price declines, volatility, and poor liquidity, and we may reduce our dividends in a variety of circumstances;
•decisions about raising, managing, and distributing capital;
•our exposure to broad market fluctuations; and
•other factors not presently identified.
This Quarterly Report on Form 10-Q may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.
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OVERVIEW
Business Update
During the third quarter, we hosted Redwood’s third annual Investor Day. During our event we affirmed our commitment to our corporate mission to make quality housing, whether rented or owned, accessible to all American households, and discussed the Company's vision of being the leading operator and strategic capital provider driving sustainable innovation in housing finance.
We have significantly broadened our business within the housing market over the past several years. This includes expanding our mortgage banking platform and investment portfolio beyond the jumbo residential mortgage space, while maintaining the core competencies of the firm around our expertise in residential housing credit. Our expansion includes our acquisition of CoreVest in 2019 – which has now been part of our platform for two years – and investments in several other areas of housing finance. More recently, our approach to capital deployment has continued to evolve. Our progress this year growing our RWT Horizons initiative – investing in advanced technologies with the potential to transform our businesses – reflects an important step in that process. While our capital remains predominantly allocated to our operating businesses and investment portfolio, RWT Horizons reflects our belief in the strategic importance of innovation and partnership in driving profitable scale.
Our strategic vision is based upon the vast addressable market we see in front of us, driven by macroeconomic and market forces that have made liquidity sourced from the private markets essential for a robust housing finance system, for both consumers and investors alike. The recent modest increase in benchmark rates belies a lack of yield in the market that – but for some brief and notable intervals – has been persistent for over a decade. Taken together, this puts a premium on enterprises that can directly access markets efficiently and with discipline. We believe that these competencies, coupled with capital optimization and efficiency gains, will drive our financial results, and continuing to creatively expand distribution channels for mortgage loans we originate or acquire will be an important part of our evolution.
Turning to the third quarter of 2021, after a successful first half of the year, our team continued its strong performance. CoreVest maintained its momentum, funding $639 million of loans for the quarter, including $239 million in September alone. Our third quarter results saw strong contributions from both our SFR and Bridge lending teams, and we made key progress in our correspondent loan business, including our strategic investment in Churchill. Meanwhile, the Residential business identified $4.7 billion of loans for purchase in the third quarter (locked loans, unadjusted for fallout). Notwithstanding that benchmark interest rates hit lows not seen since February, almost 60% of our residential loan locks during the third quarter were on purchase-money loans, which we believe is indicative of the quality of our pipeline and our sellers.
Our investment portfolio remained in step with this operating progress, appreciating in value by approximately 2% during the third quarter of 2021. We believe there remains potential upside in our securities portfolio from a combination of accretable market discount and call rights that we control.
These factors contributed to another strong quarter of financial results, with GAAP earnings of $0.65 per diluted share, a 27% annualized return on equity for the third quarter of 2021. Book value increased 4.7% in the third quarter to $12.00 per share, contributing to an overall year-to-date increase of 21%. We declared a third quarter dividend of $0.21 per share and have now earned a 27% economic return year to date, which represents growth in GAAP book value combined with dividends paid.
Additionally, we executed a series of strategic and novel transactions across various disciplines within our firm that both positively contributed to earnings and provided indicators of our operating progress. Our Residential team completed a securitization leveraging blockchain technology for enhanced payment reporting for Sequoia investors. Historically, RMBS investors have needed to wait until well into the following month to see a month’s worth of remittance details on underlying loans. Liquid Mortgage – an early portfolio company of RWT Horizons – has coordinated with our sub-servicer to publish daily remittance information on a public blockchain. We believe this implementation is just the first step in the application of this type of technology to our business.
Next, we completed CoreVest’s first securitization of bridge loans, which priced competitively against comparable transactions in the market. This new form of distribution provides a valuable capital management tool with a 30-month reinvestment feature. We expect CoreVest to continue to consider issuing bridge loan securitizations in conjunction with our traditional single-family rental ("SFR") loan securitizations, having recently priced the 19th overall CAFL securitization in October 2021.

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Finally, we co-sponsored a securitization backed entirely by residential Home Equity Investment contracts (“HEIs”). Co-sponsored with Point Digital, a financial technology company, this transaction allowed investors to participate in a new sector of the residential housing finance market that enables homeowners to participate in the benefits of home price appreciation without having to sell their homes or incur additional debt obligations. In parallel with this securitization, we renewed our flow purchase arrangement with Point, providing us with continuing HEI acquisition and securitization opportunities.
RWT Horizons also continued its investment activity, completing six investments during the third quarter while continuing to analyze a broad array of opportunities in the pipeline, including several in the climate analytics area, which continues to be of interest as traditional methods of predicting how climate change can impact property valuation and insurability continue to evolve. With a direct relationship to our firmwide ESG work, we expect to continue dedicating focus to this type of opportunity through RWT Horizons.
As we approach the end of 2021, we are proceeding cautiously. We see several macro and market risks ahead, including COVID-19 variants, rising inflation, central bank tapering (now officially signaled by the Federal Reserve) and Federal debt ceiling extension uncertainty, among others. More fundamentally, recent trends in unemployment claims data suggest that the economy is still in a recovery phase and the current economic situation is far from stable, notwithstanding consistent upward pressure on home prices and rents that has otherwise been favorable to our business results. Our interest rate, capital and broader risk management posture reflects this cautious view: while we have generated strong earnings thus far in 2021, we have done so with record levels of cash on hand – including $557 million at September 30, 2021.
We are also focused on making a positive impact for our people, our customers, our communities, and the overall society within which we operate. We believe this focus on a business model vision and a set of core values can produce long-term and sustainable benefits for all our stakeholders. Going forward, we expect to continue operating to fulfill our broadly-conceived mission, focusing on the significant addressable markets in front of us, embracing the cusp of innovation, running a business grounded in fundamentals and sound analysis, and nurturing a diverse talent bench engaged and aligned with our values.



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Third Quarter Overview
The following table presents key financial metrics for the three and nine months ended September 30, 2021.
Table 1 – Key Financial Metrics
Three Months EndedNine Months Ended
(In Thousands, except per Share Data)September 30, 2021September 30, 2021
Net income per diluted common share$0.65 $2.03 
Annualized GAAP return on equity26.7 %29.6 %
Dividends per share$0.21 $0.55 
Book value per share$12.00 $12.00 
Economic return on book value (1)
6.5 %26.6 %
(1)Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period.
•Our third quarter 2021 results reflect ongoing strength of our operating platforms with higher volumes and strong margins driving increased revenues, improved returns in our investment portfolio from more efficient financing, and a tax benefit realized during the quarter. These results, along with an increase in the value of our securities portfolio attributable to continued positive fundamental trends, contributed to a 4.7% increase in our book value per share during the quarter.
•In September 2021, we announced a 17% increase in our quarterly dividend to $0.21 per share for the third quarter of 2021.
•Our book value increased $0.54 per share to $12.00 per share during the third quarter of 2021, as basic earnings per share significantly exceeded our third quarter dividend of $0.21 per share.
•Our business purpose lending platform funded $639 million of business purpose mortgage loans in the third quarter, including $394 million of single-family rental loans and $245 million of residential bridge loans.
•During the third quarter of 2021, we locked a record $4.74 billion of jumbo loans with over 125 discrete sellers, jumbo loan purchase commitments were $3.29 billion, and we purchased $3.18 billion of residential jumbo loans.
•During the third quarter of 2021, we securitized $1.03 billion of loans through three securitizations across Residential and Business Purpose Lending, and distributed $2.43 billion of jumbo loans through whole loan sales.
•During the third quarter of 2021, we completed a securitization backed entirely by residential home equity investment contracts ("HEIs"), issuing approximately $146 million of securities through a transaction co-sponsored with Point Digital.
•During the third quarter of 2021, we funded six venture investments through our RWT Horizons venture investment initiative.
•During the third quarter of 2021, we added over $350 million of financing capacity to support growth of our operating platforms and completed a new $100 million non-marginable term financing collateralized by retained securities in our investment portfolio.
•At September 30, 2021, our unrestricted cash was $557 million, and our estimated available capital was $350 million.


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RESULTS OF OPERATIONS
Within this Results of Operations section, we provide commentary that compares results year-over-year for 2021 and 2020. Most tables include a "change" column that shows the amount by which the results from 2021 are greater or less than the results from the respective period in 2020. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the third quarter of 2021, compared to the third quarter of 2020, and increases or decreases in the "nine-month periods" refer to the change in results for the nine months of 2021, compared to the first nine months of 2020.
Consolidated Results of Operations
The following table presents the components of our net income for the three and nine months ended September 30, 2021 and 2020.
Table 2 – Net Income (Loss)
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, except per Share Data)20212020Change20212020Change
Net Interest Income$41,968 $21,571 $20,397 $98,351 $100,261 $(1,910)
Non-interest Income
Mortgage banking activities, net63,163 59,395 3,768 200,189 24,511 175,678 
Investment fair value changes, net26,077 107,047 (80,970)120,644 (611,557)732,201 
Other income2,388 (114)2,502 8,357 3,979 4,378 
Realized gains, net6,703 602 6,101 17,803 30,419 (12,616)
Total non-interest income (loss), net98,331 166,930 (68,599)346,993 (552,648)899,641 
General and administrative expenses(47,692)(27,630)(20,062)(131,837)(84,832)(47,005)
Loan acquisition costs(4,621)(2,158)(2,463)(11,928)(7,716)(4,212)
Other expenses(4,023)(7,788)3,765 (12,104)(104,286)92,182 
Net income (loss) before income taxes83,963 150,925 (66,962)289,475 (649,221)938,696 
Benefit from (provision for) income taxes4,323 (9,113)13,436 (13,907)13,079 (26,986)
Net Income (Loss)$88,286 $141,812 $(53,526)$275,568 $(636,142)$911,710 
Diluted earnings (loss) per common share$0.65 $1.02 $(0.37)$2.03 $(5.60)$7.63 
Net Interest Income
The increase in net interest income during the three-month periods was primarily due to higher average asset balances during the third quarter of 2021, as well as a higher net interest margin, driven by the combination of a lower average cost of funds and higher discount accretion on our available-for-sale securities. For the nine-month periods, the decrease in net interest expense was primarily related to higher average asset balances during the first half of 2020, as we repositioned our portfolio during the second quarter of 2020, selling a significant amount of assets.
Additional detail on net interest income is provided in the “Net Interest Income” section that follows.
Mortgage Banking Activities, Net
The increase in income from mortgage banking activities during the three- and nine-month periods was primarily due to an increase in loan acquisition and origination volumes at both our residential and business purpose mortgage banking businesses during 2021, due to pandemic-related disruptions in 2020, which adversely impacted our origination volumes in 2020.
A more detailed analysis of the changes in this line item is included in the “Results of Operations by Segment” section that follows.

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Investment Fair Value Changes, Net
Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and, prior to the second quarter of 2020, interest rate hedges associated with these investments. During the three and nine months ended September 30, 2021, positive investment fair value changes reflected continuing improvement in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained CAFL SFR securities. Additional detail on our investment fair value changes during 2021 is included in the “Results of Operations by Segment” section that follows.
During the three months ended September 30, 2020, investment fair value changes reflected increases in the fair value of our investment assets from improved credit performance and spread tightening. During the nine months ended September 30, 2020, the negative investment fair value changes reflected significant declines in the value of our investments in the first quarter of 2020 resulting from market dislocations caused by the pandemic.
Other Income
The increase in other income for the three- and nine-month periods was primarily the result of an increase in income from our MSR investments, which generally benefited from a stabilization in prepayment speeds during 2021.
Realized Gains, Net
During the three and nine months ended September 30, 2021, we realized gains of $7 million and $18 million, respectively, primarily resulting from the call of two and six seasoned Sequoia securitizations, respectively. During the three and nine months ended September 30, 2020, we realized gains of $1 million and $30 million, respectively, primarily resulting from the sale of AFS securities, and for the nine-month period, a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020.
General and Administrative Expenses
The increase in general and administrative expenses for the three- and nine-month periods primarily resulted from increased accruals of variable compensation expense associated with improved financial results in 2021 as compared to 2020, as well as long-term incentive award expense from awards granted in the second half of 2020.
Loan Acquisition Costs
The increase in loan acquisition costs for the three- and nine-month periods was primarily due to higher loan origination volumes throughout 2021 as compared to 2020.
Other Expenses
The decrease in other expenses for the nine-month periods was primarily due to $89 million of goodwill impairment expense at our Business Purpose Lending segment recorded in the first quarter of 2020 that was taken as a result of the onset of pandemic- and liquidity-related disruptions.
Provision for Income Taxes
Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. For the three-month periods, our income tax provision decreased as we realized a $19 million benefit from the release of valuation allowance on a portion of our deferred tax assets. This decrease was partially offset by an increase in GAAP income recorded at our TRS and state taxes during 2021. For the nine-month periods, the tax provision in 2021 is reflective of the positive income earned at our taxable subsidiaries, partially offset by the benefit from the release of valuation allowance and higher state taxes, as compared to a tax benefit in 2020 reflective of a net loss incurred in that period.
For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.




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Net Interest Income
The following table presents the components of net interest income for the three and nine months ended September 30, 2021 and 2020.
Table 3 – Net Interest Income
Three Months Ended September 30,
20212020
(Dollars in Thousands)Interest Income/ (Expense)
 Average
   Balance (1)
YieldInterest Income/ (Expense)
 Average
   Balance (1)
Yield
Interest Income
Residential loans, held-for-sale$15,377 $1,936,882 3.2 %$434 $53,297 3.3 %
Residential loans - HFI at Redwood (2)
— — — %77 — — %
Residential loans - HFI at Legacy Sequoia (2)
1,042 248,791 1.7 %1,795 285,077 2.5 %
Residential loans - HFI at Sequoia (2)
18,867 2,104,357 3.6 %20,919 1,910,771 4.4 %
Residential loans - HFI at Freddie Mac SLST (2)
18,707 2,043,813 3.7 %21,696 2,153,447 4.0 %
Business purpose loans at Redwood18,192 1,019,393 7.1 %19,456 1,149,171 6.8 %
Single-family rental loans - HFI at CAFL48,723 3,455,645 5.6 %36,181 2,663,541 5.4 %
Bridge loans - HFI at CAFL214 12,015 7.1 %— — — %
Multifamily loans - HFI at Freddie Mac K-Series4,846 483,930 4.0 %4,918 489,736 4.0 %
Trading securities5,710 147,925 15.4 %6,539 140,892 18.6 %
Available-for-sale securities8,532 120,183 28.4 %3,596 135,942 10.6 %
Other interest income5,512 769,308 2.9 %6,371 859,808 3.0 %
Total interest income145,722 12,342,242 4.7 %121,982 9,841,682 5.0 %
Interest Expense
Short-term debt facilities(10,808)1,982,726 (2.2)%(3,558)313,190 (4.5)%
Short-term debt - servicer advance financing(1,018)149,450 (2.7)%(1,587)218,885 (2.9)%
ABS issued - Legacy Sequoia (2)
(641)245,910 (1.0)%(1,058)280,954 (1.5)%
ABS issued - Sequoia (2)
(15,368)1,872,636 (3.3)%(17,828)1,708,687 (4.2)%
ABS issued - Freddie Mac SLST (2)
(15,774)1,765,465 (3.6)%(16,819)1,892,967 (3.6)%
ABS issued - Freddie Mac K-Series(4,460)453,031 (3.9)%(4,426)464,693 (3.8)%
ABS issued - CAFL(37,489)3,118,792 (4.8)%(26,383)2,509,828 (4.2)%
Long-term debt facilities(8,715)881,669 (4.0)%(19,198)1,094,608 (7.0)%
Long-term debt - FHLBC— — — %(1)1,000 (0.4)%
Long-term debt - corporate(9,481)651,468 (5.8)%(9,553)648,923 (5.9)%
Total interest expense(103,754)11,121,147 (3.7)%(100,411)9,133,735 (4.4)%
Net Interest Income$41,968 $21,571 
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Nine Months Ended September 30,
20212020
(Dollars in Thousands)Interest Income/ (Expense)
 Average
   Balance (1)
YieldInterest Income/ (Expense)
 Average
   Balance (1)
Yield
Interest Income
Residential loans, held-for-sale$35,308 $1,568,966 3.0 %$17,220 $599,609 3.8 %
Residential loans - HFI at Redwood (2)
— — — %21,003 659,998 4.2 %
Residential loans - HFI at Legacy Sequoia (2)
3,559 262,007 1.8 %7,673 327,460 3.1 %
Residential loans - HFI at Sequoia (2)
48,842 1,644,256 4.0 %68,566 1,957,484 4.7 %
Residential loans - HFI at Freddie Mac SLST (2)
58,372 2,110,555 3.7 %64,869 2,203,677 3.9 %
Business purpose loans48,982 945,899 6.9 %62,541 1,266,493 6.6 %
Single-family rental loans - HFI at CAFL152,444 3,349,828 6.1 %99,169 2,411,312 5.5 %
Bridge loans - HFI at CAFL214 4,049 7.0 %— — — %
Multifamily loans - HFI at Freddie Mac K-Series14,492 488,804 4.0 %49,960 1,711,123 3.9 %
Trading securities17,133 140,241 16.3 %26,789 336,151 10.6 %
Available-for-sale securities16,051 128,564 16.6 %11,682 139,487 11.2 %
Other interest income17,325 790,499 2.9 %20,537 763,898 3.6 %
Total interest income412,722 11,433,668 4.8 %450,009 12,376,692 4.8 %
Interest Expense
Short-term debt facilities(27,380)1,609,295 (2.3)%(40,158)1,415,975 (3.8)%
Short-term debt - servicer advance financing(3,414)166,605 (2.7)%(4,961)199,517 (3.3)%
ABS issued - Legacy Sequoia (2)
(2,271)258,915 (1.2)%(5,099)322,829 (2.1)%
ABS issued - Sequoia (2)
(38,848)1,419,153 (3.6)%(58,455)1,757,851 (4.4)%
ABS issued - Freddie Mac SLST (2)
(49,756)1,859,559 (3.6)%(48,840)1,861,309 (3.5)%
ABS issued - Freddie Mac K-Series(13,294)459,648 (3.9)%(47,154)1,614,333 (3.9)%
ABS issued - CAFL(118,543)3,041,714 (5.2)%(72,768)2,247,583 (4.3)%
Long-term debt facilities(32,518)776,846 (5.6)%(29,789)641,094 (6.2)%
Long-term debt - FHLBC(2)374 (0.7)%(10,411)786,790 (1.8)%
Long-term debt - corporate(28,345)650,828 (5.8)%(32,113)708,708 (6.0)%
Total interest expense(314,371)10,242,937 (4.1)%(349,748)11,555,989 (4.0)%
Net Interest Income$98,351 $100,261 
(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business purpose loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value.
(2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our consolidated Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia and the interest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia entities. Interest income from residential loans - HFI at Freddie Mac SLST and the interest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities.







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Results of Operations by Segment
We report on our business using three distinct segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For additional information on our segments, refer to Note 23 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the three and nine months ended September 30, 2021 and 2020.
Table 4 – Segment Results Summary
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20212020Change20212020Change
Segment Contribution from:
Residential Lending$38,796 $8,526 $30,270 $122,435 $(152,270)$274,705 
Business Purpose Lending32,066 53,418 (21,352)86,321 (123,895)210,216 
Third-Party Investments30,466 101,054 (70,588)133,994 (318,146)452,140 
Corporate/Other(13,042)(21,186)8,144 (67,182)(41,831)(25,351)
Net Income (Loss)$88,286 $141,812 $(53,526)$275,568 $(636,142)$911,710 
The following sections provide a discussion of the results of operations at each of our three business segments for the three and nine months ended September 30, 2021.
The decrease in net expense from Corporate/Other for the three-month periods was primarily due to the reversal of $19 million of valuation allowance on our deferred tax assets in the third quarter of 2021. This decrease was partially offset by higher accruals of variable compensation expense associated with improved financial results in 2021. The increase in net expense for the nine-month periods was primarily due to a $25 million gain associated with the repurchase of $125 million of convertible debt in the second quarter of 2020.
Residential Lending Segment
Overview
Our Residential Lending segment generated $39 million of net income during the third quarter of 2021, driven primarily by $40 million of mortgage banking income and $12 million of net interest income from investments. Mortgage banking income increased from the second quarter of 2021, as loan purchase commitments of $3.3 billion in the third quarter were 20% higher than the second quarter and margins improved from the second quarter. Net interest income from investments increased approximately $5 million in the third quarter of 2021 from the second quarter of 2021, due to increased discount amortization on our available-for-sale securities.
Our Residential Lending segment generated $31 million of net income during the second quarter of 2021, driven primarily by $27 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income decreased from the first quarter of 2021, as loan purchase commitments of $2.7 billion in the second quarter were 22% lower than the first quarter and margins normalized towards the high end of our historic target range.
Our Residential Lending segment generated $53 million of net income during the first quarter of 2021, driven primarily by $64 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income increased significantly during the quarter, as loan purchase commitments increased 41% from the fourth quarter of 2020 to $3.51 billion, and gross margins nearly doubled.

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Mortgage Banking
The following table provides the activity of residential loans held in inventory for sale at our mortgage banking business during the three and nine months ended September 30, 2021.
Table 5 – Loan Inventory for Residential Mortgage Banking Operations — Activity
Three Months EndedNine Months Ended
(In Thousands)September 30, 2021September 30, 2021
Balance at beginning of period $1,063,722 $176,641 
Acquisitions3,176,004 9,758,766 
Sales (2,426,858)(6,958,670)
Transfers between portfolios (1)
(464,189)(1,669,683)
Principal repayments(15,280)(26,155)
Changes in fair value, net10,630 63,130 
Balance at End of Period$1,344,029 $1,344,029 
(1)Represents the fair value of the net transfers of loans from held-for-sale to held-for-investment within our Residential Lending investment portfolio, associated with securitizations we sponsored that we consolidate under GAAP.
The following table presents our mortgage banking income and loan purchase commitments during the three and nine months ended September 30, 2021.
Table 6 – Mortgage Banking Income and Residential Loan Purchase Commitments
Three Months EndedNine Months Ended
(In Thousands)September 30, 2021September 30, 2021
Mortgage banking income$40,121 $131,281 
Loan purchase commitments entered into$3,288,102 $9,541,499 
Mortgage banking income is comprised of net interest income from loans held-for-sale in inventory and mortgage banking activities. Income from mortgage banking activities is comprised of mark-to-market adjustments on loans from the time they are purchased to when they are sold, mark-to-market adjustments on new and outstanding loan purchase commitments, gains/losses from associated hedges, and other miscellaneous income/expenses (see Note 19 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail).
During the three months ended September 30, 2021, our residential mortgage loan conduit locked $4.74 billion of loans ($3.29 billion adjusted for expected pipeline fallout - i.e, loan purchase commitments), including $4.21 billion of Select loans and $0.53 billion of Choice loans, and purchased $3.18 billion of loans. Approximately 59% of loans locked in the third quarter were purchase-money loans and 41% were refinancings. During the three months ended September 30, 2021, we distributed $2.43 billion of loans through whole loan sales, and completed one securitization backed by $449 million of loans (unpaid principal balance).
At September 30, 2021, we had $1.34 billion of loans in inventory on our balance sheet, our loan pipeline included $2.77 billion of loans identified for purchase (locked loans, unadjusted for fallout), and we had entered into forward sale agreements for $662 million of loans.
Our gross margin (mortgage banking income earned in the period divided by loan purchase commitments entered into during the period) for the three months ended September 30, 2021 was 122 basis points, up from 98 basis points in the second quarter of 2021.
We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At September 30, 2021, we had residential warehouse facilities outstanding with seven different counterparties, with $2.70 billion of total capacity and $1.36 billion of available capacity. These included non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral that is non-delinquent) facilities with $1.18 billion of total capacity and marginable facilities with $1.53 billion of total capacity.

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Investment Portfolio
The following table presents details of our Residential Lending investment portfolio at September 30, 2021 and December 31, 2020.
Table 7 – Residential Lending Investments
(In Thousands)September 30, 2021December 31, 2020
Residential loans at Redwood (1)
$151,050 $— 
Residential securities at Redwood (2)
145,430 155,501 
Residential securities at consolidated Sequoia entities (3)
236,451 217,965 
Other investments12,389 8,815 
Total Segment Investments$545,320 $382,281 
(1)Balance consists of loans called from Sequoia securitizations. Excludes Sequoia loans held at VIEs that we consolidated for GAAP purposes.
(2)Excludes $5 million of trading securities that are designated as hedges for our mortgage banking operations and are not considered part of our investment portfolio.
(3)Represents our retained economic investment in the consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $2.48 billion of loans and $2.24 billion of ABS issued associated with these investments at September 30, 2021.
During the third quarter of 2021, we purchased $66 million of loans from Sequoia securitizations we called, and we retained $2 million of securities from one Sequoia securitization we completed during the quarter. During the second quarter of 2021, we purchased $83 million of loans from Sequoia securitizations we called, and we retained $8 million of securities from three Sequoia securitizations we completed during the quarter. During the first quarter of 2021, we sold $4 million of securities from our residential lending investment portfolio and retained $8 million of securities from two Sequoia securitizations we completed during the quarter. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.
During the third quarter of 2021, net interest income from our residential lending investment portfolio was $12 million, which increased $5 million from the second quarter of 2021, and other income was $1 million in the third quarter of 2021, consistent with the second quarter of 2021. The increase in net interest income was primarily due to higher discount accretion income on our available-for-sale securities, driven by expectations for certain of our retained Sequoia securities to be called over the next several quarters, affecting our cash flow forecasts and effective yields for those investments.
The following table presents the components of investment fair value changes for our Residential Lending segment by investment type for the three and nine months ended September 30, 2021.
Table 8 – Investment Fair Value Changes, Net from Residential Lending
Three Months EndedNine Months Ended
(In Thousands)September 30, 2021September 30, 2021
Investment Fair Value Changes, Net
     Changes in fair value of:
Residential loans at Redwood$816 $2,423 
Trading securities(1,825)(6,553)
Net investments in Sequoia entities (1)
3,314 13,118 
Risk-sharing and other investments(20)(63)
Recoveries (impairments) on AFS securities— 33 
Investment Fair Value Changes, Net$2,285 $8,958 
(1)Includes changes in fair value of the loans held-for-investment and the ABS issued at the entities, which netted together represent the change in value of our investments (subordinate securities) at the consolidated VIEs.
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Strengthening credit performance helped drive spreads tighter during the three-and nine-month periods for most of our subordinate securities, which resulted in net positive fair value changes for our residential lending investments. Additionally, during the first nine months of 2021, most of our investment securities experienced elevated prepayments, which generally benefited our subordinate securities, but negatively impacted our interest-only and certificated servicing securities, causing a net negative fair value change for our trading securities.
Business Purpose Lending Segment
Overview
Our Business Purpose Lending segment generated $32 million of net income during the third quarter of 2021, driven primarily by $32 million of mortgage banking income and $18 million of net interest income from investments. Our business purpose investments saw an increase in interest income in the third quarter from a higher average balance of investments and lower cost of funds, compared to the second quarter of 2021, and increased positive fair value changes due to continued strength in credit performance and spread tightening.
Our Business Purpose Lending segment generated $33 million of net income during the second quarter of 2021, driven primarily by $35 million of mortgage banking income and $15 million of net interest income from investments. Business purpose mortgage banking income in the second quarter of 2021 benefited from a 37% increase in origination volume from the first quarter of 2021 and modest spread tightening on securitization execution during the second quarter. Our business purpose investments saw an increase in interest income in the second quarter from a higher average balance of investments compared to the first quarter of 2021 and increased positive fair value changes due to continued spread tightening.
Our Business Purpose Lending segment generated $21 million of net income during the first quarter of 2021, driven primarily by $22 million of mortgage banking income and $13 million of net interest income from investments. Business purpose mortgage banking income normalized in the first quarter of 2021, relative to the third and fourth quarters of 2020, as more modest spread tightening on securitization execution during the quarter had a reduced impact to the valuation of our loans held in inventory at the beginning of the quarter. Net interest income from BPL investments increased from the fourth quarter of 2020 due to higher yield maintenance income on our SFR securities resulting from faster prepayments, and reduced debt costs on our bridge loan portfolio resulting from a decrease in leverage on these assets.

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Mortgage Banking
The following table provides business purpose loans funding activity at Redwood during the three and nine months ended September 30, 2021.
Table 9 – Business Purpose Loans — Funding Activity
Three Months Ended September 30, 2021Nine Months Ended September 30, 2021
(In Thousands)Single-Family Rental
Bridge (1)
TotalSingle-Family Rental
Bridge (1)
Total
Fair value at beginning of period$418,442 $— $418,442 $245,394 $— $245,394 
Fundings395,083 244,652 639,735 960,398 593,041 1,553,439 
Sales— (253)(253)— (2,484)(2,484)
Transfers between portfolios (2)
(332,670)(246,096)(578,766)(754,453)(593,774)(1,348,227)
Principal repayments(36,970)— (36,970)(47,090)— (47,090)
Changes in fair value, net22,461 1,697 24,158 62,097 3,217 65,314 
Fair Value at End of Period$466,346 $— $466,346 $466,346 $— $466,346 
(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 (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitization, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into this securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our bridge loans held-for-investment, see the Investments section that follows.
(2)For single-family rental loans, amounts represent the fair value of transfers of loans from held-for-sale to held-for-investment, including when loans are securitized (and consolidated for GAAP purposes). For bridge loans, represents the transfer of loans originated at our TRS to our REIT as described in preceding footnote.
Business purpose mortgage banking income was $23 million, $35 million and $32 million in the first, second and third quarters of 2021, respectively. Mortgage banking income is comprised of net interest income from single-family rental loans held-for-sale in inventory and mortgage banking activities income from single family rental and bridge loans (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 mortgage banking activities).
Business purpose funding volumes increased steadily through the first nine months of 2021. These growing volumes, along with improved SFR securitization execution in the second and third quarters of 2021, drove strong mortgage banking income results for those periods. Approximately 66% of total origination volumes in the third quarter were from repeat borrowers.
We utilize a combination of capital and loan warehouse facilities to manage our inventory of single-family rental loans that we hold for sale. At September 30, 2021, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.30 billion of total capacity (used for both SFR and bridge loans) and $663 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 on the market value of the underlying collateral that is non-delinquent).

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Investment Portfolio
The following table presents details of our Business Purpose Lending investment portfolio at September 30, 2021 and December 31, 2020.
Table 10 – Business Purpose Lending Investments
(In Thousands)September 30, 2021December 31, 2020
Bridge loans$824,799 $641,765 
Single-family rental securities at consolidated CAFL entities (1)
287,813 238,630 
Other investments6,767 21,627 
Total Segment Investments$1,119,379 $902,022 
(1)Represents our economic investment in securities issued by consolidated CAFL securitization VIEs. For GAAP purposes, we consolidated $3.40 billion of loans and $3.13 billion of ABS issued associated with these investments at September 30, 2021.
In September 2021, we completed a CAFL securitization backed by $272 million (principal balance) of bridge loans. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.
The following table presents the components of investment fair value changes for our Business Purpose Lending segment by investment type for the three and nine months ended September 30, 2021.
Table 11 – Investment Fair Value Changes, Net from Business Purpose Lending
Three Months EndedNine Months Ended
(In Thousands)September 30, 2021September 30, 2021
Investment Fair Value Changes, Net
     Changes in fair value of:
Bridge loans held-for-investment$900 $4,142 
REO108 536 
Net investments in CAFL SFR entities (1)
2,943 6,354 
Other(481)(481)
Investment Fair Value Changes, Net$3,470 $10,551 
(1)Includes changes in fair value of the loans held-for-investment and the ABS issued at the entities, which netted together represent the change in value of our investments (subordinate securities) at the consolidated VIEs.
Spreads tightened throughout 2021 for our CAFL subordinate securities, with positive fair value changes for these assets more than offsetting the decline in the value of our CAFL interest-only securities from a reduction in their basis through the receipt of regular cash flows. We also had positive resolutions on several previously delinquent bridge loans during 2021, resulting in positive fair value changes for recoveries in excess of carrying values.
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Third-Party Investments Segment
Overview
Our Third-Party Investments segment generated $30 million of net income during the third quarter of 2021, driven primarily by $21 million of positive investment fair value changes and $12 million of net interest income. Our Third-Party Investments segment generated $54 million of net income during the second quarter of 2021, driven primarily by $42 million of positive investment fair value changes and $12 million of net interest income, and generated $50 million of net income during the first quarter of 2021, driven primarily by $40 million of positive investment fair value changes and $12 million of net interest income. Positive investment fair value changes in 2021 reflected continuing improvement in credit performance and spread tightening, particularly for our RPL and multifamily securities.
Investment Portfolio
The following table presents details of the investments in our Third-Party Investments segment at September 30, 2021 and December 31, 2020.
Table 12 – Third-Party Investments
(In Thousands)September 30, 2021December 31, 2020
Residential securities at Redwood $160,300 $134,090 
Residential securities at consolidated Freddie Mac SLST entities (1)
451,252 428,179 
Multifamily securities at Redwood42,618 49,255 
Multifamily securities at consolidated Freddie Mac K-Series entity (2)
31,389 28,255 
Other investments (3)
379,102 317,282 
Total Segment Investments$1,064,661 $957,061 
(1)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $2.00 billion of loans and $1.55 billion of ABS issued associated with these investments at September 30, 2021.
(2)Represents our economic investment in securities issued by a consolidated Freddie Mac K-Series securitization entity. For GAAP purposes, we consolidated $483 million of loans and $451 million of ABS issued associated with this investment at September 30, 2021.
(3)At September 30, 2021, Other investments presented in this table includes $188 million of servicing investments owned in our consolidated Servicing Investment entities. At September 30, 2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of servicing investments, $152 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities). Additionally, at September 30, 2021, Other investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for GAAP purposes, we consolidated $167 million of HEIs and $145 million of ABS issued, as well as other assets and liabilities for this entity).
During the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization, then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity.
Additionally, during the third quarter of 2021, we purchased $11 million of other third-party investments. During the second quarter, we purchased $3 million of third-party investments and sold $11 million of third-party investments. During the first quarter, we purchased $16 million of third-party investments and sold $34 million of third-party investments.
See the "Investments Detail" section that follows for additional details on these investments and their associated borrowings.

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The following table presents the components of investment fair value changes for our Third-Party Investments segment by investment type for the three and nine months ended September 30, 2021.
Table 13 – Investment Fair Value Changes, Net from Third-Party Investments
Three Months EndedNine Months Ended
(In Thousands)September 30, 2021September 30, 2021
Investment Fair Value Changes, Net
     Changes in fair value of:
Residential securities$3,371 $31,620 
Net investments in Freddie Mac SLST entities (1)
13,849 54,282 
Net investment in Freddie Mac K-Series entity (1)
554 11,330 
Net investment in Point HEI entity (1)
47 47 
Servicer advance investments(2,079)(3,179)
Excess MSRs(803)(5,233)
HEIs at Redwood5,622 13,017 
Other8 65 
Recoveries (impairments) on AFS securities— 354 
Investment Fair Value Changes, Net$20,569 $102,303 
(1)Includes changes in fair value of the loans held-for-investment, securitized Point HEIs, and the ABS issued at the entities, which netted together represent the change in value of our investments (subordinate securities) at the consolidated VIEs.
Continued strengthening of credit and elevated prepayment speeds helped drive credit spreads tighter on our third-party assets in 2021, in particular for our investments in re-performing loan assets (primarily represented by our net investment in Freddie Mac SLST entities in the table above). HEI valuations benefited from our securitization of HEIs in the third quarter of 2021. The decline in value of our Servicer advance investments and excess MSRs is primarily attributable to a reduction in their basis through the receipt of regular cash flows.
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Investments Detail
This section presents additional details on our investment assets and their activity during the three and nine months ended September 30, 2021.
Real Estate Securities Portfolio
The following table presents activity of our real estate securities on balance sheet by collateral type for the three and nine months ended September 30, 2021.
Table 14 – Activity of Real Estate Securities at Redwood by Collateral Type
Three Months Ended September 30, 2021ResidentialMultifamilyTotal
(In Thousands)SeniorMezzanineSubordinateMezzanine
Beginning fair value$25,267 $— $287,140 $42,479 $354,886 
Transfers— — — — — 
Acquisitions— — 6,750 4,000 10,750 
Sales— — (755)— (755)
Gains on sales and calls, net— — 6,389 — 6,389 
Effect of principal payments (1)
— — (13,204)(3,261)(16,465)
Change in fair value, net(2,773)— 1,854 (600)(1,519)
Ending Fair Value$22,494 $— $288,174 $42,618 $353,286 
Nine Months Ended September 30, 2021ResidentialMultifamilyTotal
(In Thousands)SeniorMezzanineSubordinateMezzanine
Beginning fair value$28,464 $5,663 $260,743 $49,255 $344,125 
Acquisitions8,737 — 21,050 8,930 38,717 
Sales— (5,724)(31,765)— (37,489)
Gains on sales and calls, net— 60 16,931 — 16,991 
Effect of principal payments (1)
— (26)(30,751)(14,064)(44,841)
Change in fair value, net(14,707)27 51,966 (1,503)35,783 
Ending Fair Value$22,494 $— $288,174 $42,618 $353,286 
(1)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.
At September 30, 2021, our securities at Redwood (exclusive of securities owned in consolidated entities) consisted of fixed-rate assets (86%), adjustable-rate assets (11%), and hybrid assets that reset within the next year (3%).

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The following table sets forth activity in our entire real estate securities portfolio by segment for the three and nine months ended September 30, 2021. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.
Table 15 – Activity of Real Estate Securities at Redwood and in Consolidated Entities by Segment
Three Months Ended
September 30, 2021
Residential(1)
BPLThird-Party InvestmentsTotal
Sequoia Securities on Balance SheetConsolidated Sequoia SecuritiesConsolidated CAFL SecuritiesConsolidated SLST SecuritiesConsolidated Multifamily Securities
Other
Third-Party Securities(1)
(In Thousands)
Beginning fair value$160,847 $232,005 $268,131 $450,173 $30,834 $194,039 $1,336,029 
Acquisitions— 1,965 16,646 — — 10,750 29,361 
Sales— — — — — (755)(755)
Gains on sales and calls, net6,389 — — — — — 6,389 
Effect of principal payments (2)
(12,212)(832)— (12,769)— (4,253)(30,066)
Change in fair value, net(7,770)3,313 2,943 13,849 554 6,251 19,140 
Ending Fair Value147,254 236,451 287,720 451,253 31,388 206,032 1,360,098 
Nine Months Ended
September 30, 2021		ResidentialBPLThird-Party InvestmentsTotal
Sequoia Securities on Balance SheetConsolidated Sequoia SecuritiesConsolidated CAFL SecuritiesConsolidated SLST SecuritiesConsolidated Multifamily SecuritiesOther
Third-Party Securities
(In Thousands)
Beginning fair value$157,456 $217,965 $238,630 $428,178 $28,255 $186,669 $1,257,153 
Acquisitions9,375 7,746 53,846 — — 29,342 100,309 
Sales(3,664)— — — (8,197)(33,825)(45,686)
Gains on sales and calls, net15,484 — — — — 1,507 16,991 
Effect of principal payments (2)
(28,928)(2,377)(11,110)(31,207)— (15,913)(89,535)
Change in fair value, net(2,469)13,117 6,354 54,282 11,330 38,252 120,866 
Ending Fair Value147,254 236,451 287,720 451,253 31,388 206,032 1,360,098 
(1)At September 30, 2021, $3 million of securities used as hedges for our residential mortgage banking operations are included within the "Other third-party securities" column of this table. These same securities are presented as a component of securities within our residential lending segment on our segment balance sheet.
(2)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.


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The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at September 30, 2021. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.
Table 16 – Real Estate Securities Credit Statistics
September 30, 2021Weighted Average Values for Non-IO Securities
Market Value -
IO
Securities		Market Value -
Non-IO Securities		Principal Balance - Non-IO
Securities		Coupon90+ Delinquency3-Month Prepayment Rate
Investment Thickness(1)
(Dollars in Thousands)
Sequoia securities on balance sheet$18,380 $128,874 $153,388 3.7 %0.66 %42 %7 %
Consolidated Sequoia securities9,329 227,122 243,524 4.6 %2.84 %51 %31 %
Total Sequoia Securities27,709 355,996 396,912 4.3 %2.05 %48 %22 %
Consolidated Freddie Mac SLST securities17,714 433,539 547,393 3.1 %10.98 %14 %28 %
RPL securities on balance sheet998 64,845 143,877 3.6 %5.11 %16 %7 %
Total RPL Securities18,712 498,384 691,270 3.2 %10.21 %14 %25 %
Consolidated Freddie Mac K-Series securities— 31,388 36,468 4.1 %— %— %20 %
Multifamily securities on balance sheet2,039 40,579 41,241 3.2 %0.02 %15 %8 %
Total Multifamily Securities2,039 71,967 77,709 3.6 %0.01 %8 %13 %
Consolidated CAFL securities49,828 237,892 354,319 5.1 %1.87 %15 %13 %
Other third-party securities3,164 94,407 116,725 4.5 %2.03 %34 %5 %
Total Securities$101,452 $1,258,646 $1,636,935 
(1)Investment thickness represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. We generally own first loss positions in Sequoia, RPL and CAFL securities. We own both first loss and mezzanine positions (positions credit enhanced by subordinate securities) in multifamily and other third-party securities.
We directly finance our holdings of real estate securities with a combination of capital and collateralized debt in the form of repurchase (or “repo”) financing. At September 30, 2021, we had short-term debt incurred through repurchase facilities of $80 million with three different counterparties, which was secured by $108 million of real estate securities (including securities owned in consolidated securitization entities).
At September 30, 2021, real estate securities with a fair value of $504 million (including securities owned in consolidated Sequoia and CAFL securitization entities), were financed with long-term, non-mark-to-market recourse debt through our subordinate securities financing facilities. Additionally, at September 30, 2021, we had $451 million of re-performing loan securities financed with $161 million of non-recourse securitization debt. The remaining $297 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.










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Bridge Loans Held-for-Investment
The following table provides the activity of bridge loans held-for-investment during the three and nine months ended September 30, 2021.
Table 17 – Bridge Loans Held-for-Investment - Activity
Three Months EndedNine Months Ended
(In Thousands)September 30, 2021September 30, 2021
Fair value at beginning of period$726,569 $641,765 
Sales— (7,000)
Transfers between portfolios (1)
246,096 593,775 
Transfers to REO(4,785)(7,074)
Principal repayments(145,975)(402,701)
Changes in fair value, net2,894 6,034 
Fair Value at End of Period$824,799 $824,799 
(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 (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitization, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into this securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our bridge loans held-for-investment, see the Investments section that follows.
Our $825 million of bridge loans held-for-investment at September 30, 2021 were comprised of first-lien, interest-only loans with a weighted average coupon of 7.48% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was 741 and the weighted average LTV ratio of these loans was 68%. At September 30, 2021, of the 1,092 loans in this portfolio, 34 of these loans with an aggregate fair value of $23 million and an aggregate unpaid principal balance of $26 million were in foreclosure, of which 35 loans with an aggregate fair value of $27 million and an unpaid principal balance of $30 million were greater than 90 days delinquent.
We finance our bridge loans with a combination of recourse, non-marginable warehouse facilities and non-recourse, non-marginable warehouse facilities. At September 30, 2021, we had $83 million of debt incurred through short-term warehouse facilities with one different counterparty, which was secured by $127 million of loans, and $279 million of debt incurred through long-term facilities with three different counterparties, which was secured by $374 million of loans. Additionally, in the third quarter of 2021, we completed a securitization of CoreVest bridge loans. The ABS issued by this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).
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Other Investments
The following table sets forth our other investments activity by segment for the three and nine months ended September 30, 2021.
Table 18 – Other Investments by Segment - Activity
Three Months Ended September 30, 2021ResidentialBPL
Third-Party Investments(1)
Corporate/OtherTotal
(In Thousands)
Balance at beginning of period$8,721 $13,168 $267,850 $18,992 $308,731 
New/additional investments4,782 — 125,373 5,050 135,205 
Reductions in investments— (6,959)(17,116)— (24,075)
Changes in fair value, net(1,047)482 2,995 66 2,496 
Other(67)76 — — 9 
Balance at End of Period$12,389 $6,767 $379,102 $24,108 $422,366 
Nine Months Ended September 30, 2021ResidentialBPLThird-Party InvestmentsCorporate/OtherTotal
(In Thousands)
Balance at beginning of period$8,815 $21,627 $317,283 $451 $348,176 
New/additional investments7,065 — 125,373 23,550 155,988 
Reductions in investments— (16,012)(68,470)— (84,482)
Changes in fair value, net(3,299)1,076 4,916 106 2,799 
Other(192)76 — 1 (115)
Balance at End of Period$12,389 $6,767 $379,102 $24,108 $422,366 
(1)At September 30, 2021 (our "Balance at End of Period"), Third-party investments presented in this table includes $188 million of servicing investments owned in our consolidated Servicing Investment entities. At September 30, 2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of servicing investments, $152 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities). Additionally, At September 30, 2021, Third-party investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for GAAP purposes, we consolidated $167 million of HEIs and $145 million of ABS issued, as well as other assets and liabilities for this entity).
During the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization (included within "Third-Party Investments" in the table above), then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity.
During the first nine months of 2021, in addition to the HEIs acquired in the third quarter described above, other new/ additional investments included MSRs retained from whole loan sales at our Residential Segment and strategic investments through our RWT Horizons venture investment strategy within Corporate/Other.
During the first nine months of 2021, reductions in investments for Third-Party Investments was primarily attributable to the recovery of servicing advances within our consolidated servicing VIEs. Our economic investment in these entities was $60 million at September 30, 2021 and $68 million at December 31, 2020.
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Income Taxes
Taxable Income, REIT Status and Dividend Characterization
As a REIT, under the Internal Revenue Code, Redwood is required to distribute to shareholders at least 90% of its annual REIT taxable income, excluding net capital gains, and meet certain other requirements that relate to, among other matters, the assets it holds, the income it generates, and the composition of its stockholders. To the extent Redwood retains REIT taxable income, including net capital gains, it is taxed at corporate tax rates. Redwood also earns taxable income at its taxable REIT subsidiaries (TRS), which it is not required to distribute under the Internal Revenue Code.
In September 2021, our Board of Directors declared a regular dividend of $0.21 per share for the third quarter of 2021, which was paid on September 30, 2021 to shareholders of record on September 23, 2021. As of September 30, 2021, our year-to-date dividend distributions of $0.55 per share exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and 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 2021 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.
We currently expect all or nearly all of our 2021 dividend distributions to be taxable as ordinary income for federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is nontaxable (provided it does not exceed a shareholder's tax basis in Redwood shares) and reduces a shareholder's basis in Redwood shares (but not below zero). To the extent such distributions exceed a shareholder's basis in Redwood shares, such excess amount would be taxable as capital gain. Under the federal income tax rules applicable to REITs, none of Redwood’s 2021 dividend distributions are currently expected to be characterized as long-term capital gain dividends. The income or loss generated at our TRS will not directly affect the tax characterization of our 2021 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.
Tax Provision under GAAP
For the three and nine months ended September 30, 2021, we recorded a tax benefit of $4 million and a tax provision of $14 million, respectively. For the three and nine months ended September 30, 2020, we recorded a tax provision of $9 million and a tax benefit of $13 million, respectively. Our tax provision is primarily derived from the activities at our TRS as we do not book a material tax provision associated with income generated at our REIT. For the nine-month periods, the switch to a tax provision from a tax benefit year-over-year was primarily the result of GAAP income being recorded at our TRS during this period in 2021 versus GAAP losses being recorded at our TRS during this period in 2020. For the three-month periods, the switch to a tax benefit from a tax provision year-over-year was due to the release of valuation allowance on a portion of our deferred tax assets, partially offset by an increase in state taxes. While our TRS effective tax rate in the prior year approximated the federal statutory corporate tax rate (due to state NOL carryforwards), for 2021 and 2022 we expect it to increase (exclusive of the valuation allowance release) due to California’s temporary suspension of net operating loss carryforwards.
Realization of our deferred tax assets ("DTAs") is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of our DTAs is not assured and establish a valuation allowance accordingly. At December 31, 2020, we reported net federal ordinary and capital DTAs with a full valuation allowance of $17 million recorded against our net federal ordinary DTAs based on our determination that their realization was not assured. However, no valuation allowance was recorded against our net federal capital DTAs as we currently expect to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years. At December 31, 2020, we reported a valuation allowance of $134 million recorded against our net state DTAs.

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For the three months ended September 30, 2021, we reassessed the valuation allowance noting the increase in positive evidence related to our ability to utilize certain deferred tax assets. The positive evidence includes significant revenue growth and expectations regarding future profitability at our TRS. After assessing both the positive evidence and negative evidence, we determined it was more likely than not that we will realize all of our federal deferred tax assets. Therefore, we reversed our federal valuation allowance of $17 million as a discrete benefit in the third quarter of 2021. In addition to the federal valuation allowance release, we determined it was more likely than not that we will realize a portion of our state deferred assets and, as such, reversed $3 million of state valuation allowance as a discrete item in the third quarter of 2021. Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs exist and we project most of our state DTAs will expire prior to their utilization.
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LIQUIDITY AND CAPITAL RESOURCES
Summary
In addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash consist of borrowings under mortgage loan warehouse facilities, securities repurchase agreements, payments of principal and interest we receive from our investment portfolios, proceeds from the sale of portfolio assets, and cash generated from our operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations, to purchase investment securities and make other investments, to repay principal and interest on our debt, to meet margin calls associated with our debt and other obligations, to make dividend payments on our capital stock, and to fund our operations.
At September 30, 2021, our total capital was $2.03 billion and included $1.38 billion of equity capital and $652 million of convertible notes and long-term debt on our consolidated balance sheet, including $199 million of convertible debt due in 2023, $150 million of convertible debt due in 2024, $172 million of exchangeable debt due in 2025, and $140 million of trust-preferred securities due in 2037.
As of September 30, 2021, our unrestricted cash was $557 million, and we estimate we had approximately $350 million of available capital. While we believe our available cash is sufficient to fund our operations, we may raise equity or debt capital from time to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interests of the company.
In the discussion that follows and throughout this document, we distinguish between marginable and non-marginable debt. When we refer to non-marginable debt and marginable debt, we are referring to whether or not such debt is subject to market value-based margin calls on underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is generally determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional residential loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency of the mortgage or security being financed, or a decline in the value of the underlying asset securing the collateral. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the value of the property securing the mortgage loan that is financed by us under a loan warehouse facility.
We also distinguish between recourse and non-recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.
We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential loan warehouse facilities, securities repurchase facilities, and other short- and long-term debt facilities and other risks relating to our use of derivatives. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."
Cash Flows and Liquidity for the Nine Months Ended September 30, 2021
Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the profitability of mortgage banking activities, the timing and amount of securities acquisitions, sales and repayments, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.
Cash Flows from Operating Activities
Cash flows from operating activities were negative $3.78 billion during the nine months ended September 30, 2021. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were positive $84 million and positive $94 million during the first nine months of 2021 and 2020, respectively.

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Cash Flows from Investing Activities
During the nine months ended September 30, 2021, our net cash provided by investing activities was $1.36 billion and primarily resulted from proceeds from principal payments on loans held-for-investment. Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these assets in order to manage our liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market conditions.
Because many of our investment securities and loans are financed through various borrowing agreements, a significant portion of the proceeds from any sales or principal payments of these assets are generally used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated securitization entities would generally be used to repay ABS issued by those entities.
As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the nine months ended September 30, 2021, we transferred loans between held-for-sale and held-for-investment classification and retained securities from securitizations we sponsored, which represent significant non-cash transactions that were not included in cash flows from investing activities.
Cash Flows from Financing Activities

During the nine months ended September 30, 2021, our net cash provided by financing activities was $2.52 billion. This primarily resulted from $1.40 billion of proceeds from net short-term debt borrowings used to finance higher levels of loan inventory for our mortgage banking businesses, particularly for residential loans held-for-sale, as that business has seen a sustained increase in acquisition volumes. Additionally, $1.27 billion of net proceeds were generated from ABS issued. These cash inflows were partially offset by $107 million of net repayments of long-term debt.
During the nine months ended September 30, 2021, we declared dividends of $0.55 per common share. On September 13, 2021, the Board of Directors declared a regular dividend of $0.21 per share for the third quarter of 2021, which was paid on September 30, 2021 to shareholders of record on September 23, 2021.
In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, and restricted stock units, which are generally long-term compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent cash payment in that same per share amount on each outstanding deferred stock unit, cash-settled deferred stock unit, and restricted stock unit.
Repurchase Authorization
In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2021, we did not repurchase any shares. At September 30, 2021, $78 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above.
Loan Warehouse Facilities
We maintain loan warehouse facilities to finance our residential jumbo loan inventory, SFR loan inventory and for our bridge loan investments. These facilities can be classified as short-term or long-term depending on their specific terms and provisions. At September 30, 2021, we had residential warehouse facilities outstanding with seven different counterparties, with $2.70 billion of total capacity and $1.36 billion of available capacity. These included non-marginable facilities with $1.18 billion of total capacity and marginable facilities with $1.53 billion of total capacity. At September 30, 2021, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.30 billion of total capacity and $663 million of available capacity. All $1.30 billion of these facilities are non-marginable.


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Short-Term Debt
In the ordinary course of our business, we utilize several different types of borrowing facilities and use cash borrowings under these facilities to, among other things, fund the acquisition of loans (including those we acquire and originate in anticipation of securitization), finance investments in securities, BPL bridge loans and other investments, and otherwise fund our business and operations. At September 30, 2021, we had $1.75 billion of short-term debt outstanding. During the first nine months of 2021, the highest balance of our short-term debt outstanding was $2.66 billion.
For further detail on our short-term debt, see Note 13 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Long-Term Debt
The following discusses significant activity related to our long-term debt during the first nine months of 2021. For further detail on our long-term debt, see Note 15 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Recourse Subordinate Securities Financing
In the third quarter of 2021, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023, and has a final maturity in June 2026, provided that the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026.
Non-Recourse BPL Financing Facilities
In the third quarter of 2021, we reclassified one of our non-recourse facilities from long-term to short-term debt as the maturity of this facility was less than one year at September 30, 2021.
In the second quarter of 2021, we repaid one of our non-recourse BPL financing facilities that had a balance of $242 million at March 31, 2021, and entered into a new non-recourse facility to finance business purpose bridge loans with a total borrowing capacity of $250 million.
Recourse BPL Financing Facilities
In the second quarter of 2021, we reclassified one of our recourse facilities with a borrowing capacity of $450 million from short-term to long-term debt as we amended the terms of this facility, including an extension of its maturity.
 Asset-Backed Securities Issued
During the three and nine months ended September 30, 2021, we issued $1.19 billion and $2.82 billion of ABS through our consolidated securitization entities, respectively. This included $583 million and $1.01 billion of CAFL ABS issued during the three and nine months ended September 30, 2021, respectively, and $462 million and $1.66 billion of Sequoia ABS issued during the three and nine months ended September 30, 2021, respectively. Additionally, during the three months ended September 30, 2021, we issued $146 million of Point ABS. For further detail on our Asset-backed Securities Issued, see Note 14 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Other Commitments and Contingencies
For additional information on commitments and contingencies that could impact our liquidity and capital resources, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.



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

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

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

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

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


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Because many of these borrowing facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Market Risks.” In addition, with respect to mortgage loans that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Market Risks,” if and when those loans or securities become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility.

At September 30, 2021, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at September 30, 2021 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at September 30, 2021 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur at least $600 million in additional recourse indebtedness.

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OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
In the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, while others are off-balance sheet or recorded on the balance sheet in amounts different from the full contract or notional amount of the transaction.
For additional information on our contractual obligations, see the Off-Balance Sheet Arrangements and Contractual Obligations section in the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.
For additional information on our commitments and contingencies as of September 30, 2021, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part I, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020. Management discusses the ongoing development and selection of these critical accounting policies with the audit committee of the board of directors.
We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities, increases or decreases in earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates. Our critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements are included in the "Critical Accounting Policies and Estimates" section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.
In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets, has caused additional volatility impacting many of our estimates. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Continued volatility resulting from the pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility.
Market Risks
We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Other Risks
In addition to the market and other risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
NEW ACCOUNTING STANDARDS
A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information concerning market risk is incorporated herein by reference to Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, 2020.
Item 4. Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
There have been no changes in our internal control over financial reporting during the third quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
106

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information on our legal proceedings, see Note 16 to the Financial Statements within this Quarterly Report on Form 10-Q under the heading "Loss Contingencies - Litigation, Claims and Demands," which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Loss Contingencies - Litigation, Claims and Demands.”
Item 1A. Risk Factors
Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2021, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three months ended September 30, 2021, we did not repurchase any shares. At September 30, 2021, $78 million of this current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.
The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended September 30, 2021.
Total Number of Shares Purchased or AcquiredAverage
Price per
Share Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)
July 1, 2021 - July 31, 2021— $— — $— 
August 1, 2021 - August 31, 2021— $— — $— 
September 1, 2021 - September 30, 2021— $— — $78,369 
Total— $— — $78,369 
Item 3. Defaults Upon Senior Securities
None.
Item 4. Not Applicable
107

Item 5. Other Information
Effective November 3, 2021, our Board of Directors adopted Amended and Restated Bylaws of the Company in order to, among other things:

•Reflect changes to the Maryland General Corporation Law or Maryland law practice;
•Clarify timing of delivery with respect to electronically delivered notices of annual meetings of stockholders;
•Clarify that it is permitted for the Board to hold, or allow stockholder participation at, meetings of stockholders by remote communications technology to the extent permitted under Maryland law;
•Clarify that a stockholder be a stockholder of record, as of the record date set for determining stockholders entitled to vote at the annual meeting, for any such stockholder proponent to make nominations or proposals;
•Update the information that a stockholder proponent must provide, including information about a director nominee proposed by such stockholder proponent, information such proponent must provide relating to certain persons acting in concert with such stockholder, and certain written undertakings required from a proposed nominee;
•Require a stockholder proponent to appear in person or by proxy at the meeting set for such proponent’s proposal in order for the proposal to be considered at such meeting;
•Update the record date determination applicable to a meeting of stockholders that has been postponed or adjourned;
•Address recent developments in public company governance;
•Clarify certain corporate roles, responsibilities and procedures; and
•Clarify and conform language, style and practice.

The preceding summary of the amendment and restatement of the Bylaws of the Company is qualified in its entirety by reference to, and should be read in connection with, the complete copy of the Amended and Restated Bylaws attached hereto as Exhibit 3.2.1 and incorporated by reference herein.
108

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
3.2.1
Amended and Restated Bylaws of the Registrant, as adopted on November 3, 2021 (filed herewith)
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101Pursuant 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 September 30, 2021, is filed in inline XBRL-formatted interactive data files:
 
(i) Consolidated Balance Sheets at September 30, 2021 and December 31, 2020;
(ii) Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2021 and 2020;
(iii) Statements of Consolidated Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020;
(iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2021 and 2020;
(v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020; and
(vi) Notes to Consolidated Financial Statements.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
______________________
* Indicates exhibits that include management contracts or compensatory plan arrangements.
109

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
REDWOOD TRUST, INC.
Date:November 4, 2021By:/s/ Christopher J. Abate
Christopher J. Abate
Chief Executive Officer
(Principal Executive Officer)
Date:
November 4, 2021
By:
/s/ Brooke E. Carillo
Brooke E. Carillo
Chief Financial Officer
(Principal Financial Officer)
Date:November 4, 2021
By:
/s/ Collin L. Cochrane
Collin L. Cochrane
Chief Accounting Officer
(Principal Accounting Officer)
110

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