REDWOOD TRUST INC

Overview

We report on our business using three segments: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking, and Investment Portfolio. For additional information on our segments, refer to Part I, Item 1, and Note 24 in Part II, Item 8 of this Annual Report on Form 10-K.

The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the years ended December 31, 2023, 2022, and 2021.

Table 6 – Segment Results Summary

The sections that follow provide further detail on our three business segments and their results of operations for the year ended December 31, 2023.

Corporate/Other

The $25 million increase in net expense from Corporate/Other in 2023 was primarily due to a decrease of $19 million in investment fair value changes, net from positive $16 million in 2022 to negative $3 million in 2023. The negative fair value changes in 2023 were primarily related to certain strategic investments that declined in value over the course of 2023, whereas certain strategic investments increased in value during 2022, as discussed further below. Also contributing to the change was a $5 million increase in general and administrative expenses ("G&A") and a $2 million decrease in other income, which were partially offset by a $2 million benefit recorded in other expense in 2023 resulting from the reversal of a litigation reserve. The increase in G&A was primarily related to higher variable compensation expense associated with improved results year-over-year as well as higher long-term incentive award expense, and the decrease in other income was primarily related to losses from certain of our strategic investments.

The $6 million decrease in net expense from Corporate/Other in 2022 was primarily due to a $21 million reduction in general and administrative expenses from lower variable compensation expense associated with a decrease in earnings in 2022 from 2021, as well as $13 million of positive investment fair value changes in 2022 related to certain of our strategic investments and $2 million of gains from extinguishment of debt. One strategic investment was sold in the fourth quarter of 2022, resulting in $2 million of realized fair value changes, and the remainder of the fair value changes were primarily related to unrealized fair value changes resulting from follow-on funding rounds for several investments. These changes were partially offset by an increase in corporate interest expense in 2022 resulting from the issuance of new convertible debt in June 2022 and from our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates in 2022. Additionally, we recorded a $19 million tax benefit in 2021 related to the reversal of valuation allowance on certain deferred tax assets.

Residential Consumer Mortgage Banking Segment

The following table provides the activity of residential loans held in inventory for sale at our mortgage banking segment during the years ended December 31, 2023 and 2022.

Table 7 – Loan Inventory for Residential Consumer Mortgage Banking Operations — Activity

(1)Represents the fair value of loans transferred from held-for-sale at our Residential Consumer Mortgage Banking segment to held-for-investment at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP.

During the year ended December 31, 2023, our residential mortgage loan conduit locked $3.49 billion of loans, ($2.59 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), and purchased $2.05 billion of loans. During the year ended December 31, 2023, we distributed $126 million of loans (unpaid principal balance) through whole loan sales andcompleted five securitizations backed by$1.70 billion of loans (unpaid principal balance). At December 31, 2023, our Residential Consumer Mortgage Banking loan pipeline was comprised of $917 million (principal value) of loans in inventory on our balance sheet and $647 million of loans identified for purchase (locked loans, unadjusted for fallout).

While loan acquisition volumes decreased year-over year, the majority of acquisition volume in 2022 was in the first quarter and related to loans locked in 2021 before interest rates began rising significantly. In response, over the course of 2022, we reduced capital allocated to our Residential Consumer Mortgage Banking segment by 70% and intentionally slowed our acquisitions. As the rise in interest rates began to moderate midway through 2023, we began to allocate capital back into our Residential Consumer Mortgage Banking segment, increasing the allocation from $15 million at the end of the first quarter to $165 million at the end of 2023. Increased loan purchase commitments and acquisition volumes in the second half of 2023 were supported by strong growth in our seller network, which created opportunities to grow both bulk and flow acquisitions including from new or re-commenced relationships with banks. While lock volumes steadily grew over the first three quarters of 2023, we did experience a decline in the fourth quarter driven primarily by seasonal factors.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At December 31, 2023, we had residential warehouse facilities outstanding with four different counterparties, with $1.15 billion of total capacity and $353 million of available capacity. These included non-marginable facilities (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent) with $500 million of total capacity and marginable facilities with $650 million of total capacity. Given the potential for increasing acquisition volumes within this segment, we are currently working on establishing new warehouse facilities and expanding existing facilities to increase our available borrowing capacity to warehouse residential loan inventory.

The following table presents key earnings and operating metrics for our Residential Consumer Mortgage Banking segment for the years ended December 31, 2023, 2022 and 2021.

Table 8 – Residential Consumer Mortgage Banking Earnings Summary and Operating Metrics

Residential consumer mortgage banking income presented in the table above is comprised of net interest income from residential loans held-for-sale in inventory and mortgage banking activities, net from this segment. See Note 20 in Part II, Item 8 of this Annual Report on Form 10-K for further detail on the composition of mortgage banking activities, net. Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.

In the preceding Consolidated Results of Operations section, we discussed the major factors impacting the change in net interest income and mortgage banking activities in 2023 and 2022 for this segment. We actively manage our exposure to various market risks that can impact the value of our loan inventory in this segment, and our segment contribution in 2023 benefited from these activities. We evaluate monetary policy, housing trends, and economic data, among other factors, in developing our hedging strategy and we leverage a variety of instruments, including TBAs, rates futures, options and securities as hedges.

Lower operating expenses also contributed to the net segment contribution as we operated with a lower headcount in this segment in 2023 and incurred lower loan acquisition costs, given the decrease in volume year-over-year compared to 2022. As part of our expense management initiatives, we reduced headcount in this segment in the fourth quarter of 2022 and made further headcount reductions in the first quarter of 2023. The decrease in operating expenses in 2022 from 2021 was primarily attributable to lower variable compensation expenses and lower loan acquisition costs, resulting from lower year-over-year earnings and loan acquisition volumes, respectively.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The provision for income taxes in 2023 resulted from GAAP income from these operations at our TRS during that period. The benefit from income taxes for 2022 resulted from GAAP losses from these operations at our TRS during that period.

Residential Investor Mortgage Banking Segment

In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary and, during the third quarter of 2023, we began to sell loans into the joint venture. In accordance with the terms of the joint venture, we will offer to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices and will administer the joint venture for ongoing fees. We expect we will sell a portion of our BPL bridge loans to the joint venture while continuing to retain a portion in our investment portfolio (including for inclusion in existing or future revolving bridge loan securitizations) or for sale to other third-party investors or additional joint ventures we may establish in the future.

The following table provides the business purpose loan origination activity at Redwood during the years ended December 31, 2023 and 2022.

Table 9 – Business Purpose Loans — Funding Activity

(1)We originate BPL bridge loans at our TRS and transfer many of them to our REIT. Origination fees and any fair value changes on these loans prior to transfer or sale are recognized within Mortgage banking activities, net on our consolidated statements of income (loss). Loans transferred to our REIT are classified as held-for-investment, with fair value changes subsequent to their transfer generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our BPL bridge loans held-for-investment, see the Investment Portfolio section that follows.

(2)Funding and sales for BPL Bridge loans in 2023, includes $17 million related to construction draws on loans sold to our BPL bridge joint venture.

(3)For BPL term loans, amounts represent transfers of loans from held-for-sale at our Residential Investor Mortgage Banking segment to held-for-investment at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP. During the year ended December 31, 2023, we securitized $278 million of BPL term loans through one transaction. BPL Bridge loan amounts represent the transfer of loans originated or acquired by our Residential Investor Mortgage Banking segment at our TRS and transferred to our Investment Portfolio segment at our REIT as described in the preceding footnote. During the year ended December 31, 2023, we securitized approximately $250 million of BPL bridge loans through one transaction that includes a 24-month revolving feature.

Funding volumes were down year-over-year, due partially to rising interest rates and lower industry-wide demand, as well as a result of our increased selectivity on sponsors and construction projects we chose to finance, particularly those focused on multifamily properties, an asset class we began de-emphasizing for bridge originations, given evolving market conditions, beginning in the third quarter of 2022. While origination volumes related to multifamily product declined, origination of single-asset bridge loans increased throughout the year as key sponsors re-entered the market and we were able leverage the Riverbend infrastructure we acquired in 2022, which is focused on this product. We remain focused on originating loans secured by assets with strong fundamentals and business plans with experienced sponsorship teams. Looking ahead, if rates stabilize or move lower, we would expect sustained demand from sponsors, including those seeking fixed-rate bridge loans or term loans with more prepayment flexibility, and will continue to assess our bridge loan portfolio for opportunities to refinance borrowers into term loans. However, if rates experience renewed volatility or stay higher for longer than the market currently expects, our volumes could decline from 2023 levels.

We utilize a combination of capital and loan warehouse facilities to manage our inventory of business purpose loans that we hold for sale. At December 31, 2023, we had eight business purpose warehouse facilities outstanding with six different counterparties, with $2.81 billion of total capacity (used for both BPL term and BPL bridge loans) and $1.71 billion of available capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent).

The following table presents an earnings summary for our Residential Investor Mortgage Banking segment for the years ended December 31, 2023, 2022 and 2021.

Table 10 – Residential Investor Mortgage Banking Earnings Summary

Residential investor mortgage banking income presented in the table above is comprised of net interest income from our loans held-for-sale in inventory, mortgage banking activities, net (see Note 20 in Part II, Item 8 of this Annual Report on Form 10-K for further detail on the composition of mortgage banking activities, net), and other income, net for this segment. Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses (including amortization of purchase intangibles) for this segment.

The increase in contribution from our Residential Investor Mortgage Banking segment in 2023 from 2022 was attributable to higher mortgage banking income, as discussed in the preceding Consolidated Results of Operations section of this MD&A, as well as lower general and administrative expenses, loan acquisition costs and other expenses (including amortization of purchase intangibles) for this segment. The reduction in general and administrative expenses was primarily related to reductions in headcount at this segment in the fourth quarter of 2022 and first quarter of 2023, as we effected a management transition and aligned expenses with the evolving operating environment. Looking forward, we expect our expense structure to remain dynamic in response to market conditions, whereby we would expect higher variable costs with increasing volumes. Conversely, we would expect to re-assess our expense structure and re-align it accordingly if expectations for volumes or margins remain constrained. Additionally, if we sell a higher portion of our loans into existing or new joint ventures going forward, the timing and character of our income could change, as we may earn less mortgage banking income upfront when loans are sold and earn a higher level of recurring loan administration fees from joint ventures over time.

The decrease in contribution from our Residential Investor Mortgage Banking segment in 2022 from 2021 was attributable to lower mortgage banking income, as discussed in the preceding Consolidated Results of Operations section of this MD&A, as well as higher operating expenses at this segment. The increase in operating expenses was primarily attributable to higher general and administrative expenses in 2022, as ordinary course headcount additions in the first half of the year and the acquisition of Riverbend increased our fixed cost base at this segment. These increases were partially offset by a decrease of $7 million in variable compensation expenses resulting from decreased earnings at the segment in 2022. Additionally, we incurred $7 million of employee severance and transition-related expenses at this segment in the second half of 2022, associated with expense management initiatives including the reorganization of the business unit's management structure.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit for income taxes in 2023 and 2022 resulted from GAAP losses from these operations at our TRS during those periods.

Investment Portfolio Segment

The following table presents details of our Investment Portfolio at December 31, 2023 and December 31, 2022 organized by investments organically created through our mortgage banking segments and acquired from third-parties. Amounts presented in the table represent our retained economic interests in consolidated Sequoia, CAFL Term, Freddie Mac SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted.

Table 11 – Investment Portfolio - Detail of Economic Interests

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

(2)Represents our retained economic investment in securities issued by consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $4.64 billion of loans and $4.43 billion of ABS issued associated with these investments at December 31, 2023. We consolidated $3.19 billion of loans and $2.97 billion of ABS issued associated with these investments at December 31, 2022.

(3)Organic residential other investments at December 31, 2023 includes net risk share investments of $22 million, representing $28 million of restricted cash and other assets, net of other liabilities of $6 million.

(4)Represents our retained economic investment in securities issued by consolidated CAFL Term securitization VIEs. For GAAP purposes, we consolidated $2.97 billion of loans and $2.65 billion of ABS issued associated with these investments at December 31, 2023. We consolidated $2.94 billion of loans and $2.64 billion of ABS issued associated with these investments at December 31, 2022.

(5)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities (excluding our SLST re-securitization). For GAAP purposes, we consolidated $1.36 billion of loans and $1.09 billion of ABS issued associated with these investments at December 31, 2023. We consolidated $1.46 billion of loans and $1.14 billion of ABS issued associated with these investments at December 31, 2022.

(6)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $425 million of loans and $392 million of ABS issued associated with these investments at December 31, 2023. We consolidated $425 million of loans and $393 million of ABS issued associated with these investments at December 31, 2022.

(7)Represents our economic investment in consolidated Servicing Investment entities. At December 31, 2023, for GAAP purposes, we consolidated $257 million of servicing investments and $154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2022, for GAAP purposes, we consolidated $301 million of servicing investments and $207 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.

(8)At December 31, 2023, represents HEI owned at Redwood of $245 million and our retained economic investment in securities issued by consolidated HEI securitization entities of $34 million. At December 31, 2022, for GAAP purposes, we consolidated $271 million of HEI and $13 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity.

The size of our Investment Portfolio decreased during 2023, as we sold non-strategic third-party securities and residential loans and re-deployed the capital primarily into our Residential Consumer Mortgage Banking business. These sales were partially offset by incremental investments in BPL Bridge loans and securities retained from Sequoia and CAFL Term loan securitizations we executed during 2023. The size of the BPL Bridge loan portfolio at December 31, 2023, remained close to flat from December 31, 2022, as new fundings were mostly offset by the $740 million of paydowns in 2023. During 2023, we continued to enhance our overall portfolio financing efficiency through various activities, which included, among others, a co-sponsored rated securitization backed by $205 million (intrinsic value) of HEI, a re-securitization backed by $256 million of RPL securities and a securitization backed by bridge loans with a 24-month revolving feature and up to $250 million of collateral capacity. See the Investments Detail and Activity section that follows for additional detail on our portfolio investments and their associated borrowings.

The following table presents an earnings summary for our Investment Portfolio segment for the years ended December 31, 2023, 2022 and 2021.

Table 12 – Investment Portfolio Earnings Summary

The increase in contribution from this segment in 2023 from 2022, was primarily attributable to smaller negative investment fair value changes and higher HEI income in 2023, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These improvements were partially offset by lower net interest income and lower other income in 2023, each as discussed in the Consolidated Results of Operations section of this MD&A.

The decrease in contribution from this segment in 2022 from 2021, was primarily attributable to negative investment fair value changes, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These decreases were partially offset by higher net interest income and higher other income in 2022, each as discussed in the Consolidated Results of Operations section of this MD&A.

Investment fair value changes, net is primarily comprised of the change in fair value of our portfolio investments (both realized and unrealized) accounted for under the fair value option. See Table 5.6 in Note 5 in Part II, Item 8 of this Annual Report on Form 10-K for further detail on the composition of investment fair value changes (the difference in amounts in the table above and Table 5.6 in the notes to our consolidated financial statements relates to fair value changes for investments held at corporate/other)

While we began to see improvements in market sentiment during the fourth quarter, reflected by spread tightening and lower rates, challenging market technicals through most of 2023 weighed on valuations of many of our investments for the full year. Additionally, much of the reduction in rates seen late in the fourth quarter of 2023, had subsequently reversed in early 2024 and there is renewed uncertainty around the path and timing of potential interest rate reductions by the Federal Reserve.

Despite the challenging market conditions in 2023, the residential consumer loan investments within our Investment Portfolio continued to exhibit strong fundamental performance, driven by strong employment data, embedded equity protection via loan seasoning and borrowers motivated to stay current on their low-coupon mortgages. The Residential Investor sector overall continues to manage through macro crosswinds that have impacted sponsor sentiment, project timelines and reduced transaction volumes across the industry. In our residential investor (BPL) loan portfolio, we remain focused on the impact that higher short-term interest rates have on sponsors, and have observed an increasing divergence in performance between single-family and multifamily loans, particularly within our BPL bridge loan portfolio. If higher rates persist, this trend may continue given the impact that higher interest rates have had on the valuation of multifamily properties, in contrast to continued upward overall momentum in single-family home prices. Overall, delinquencies across our bridge and term loan portfolios increased over the course of 2023, along with REO balances in the BPL bridge portfolio. We continue to actively manage this exposure, working with borrowers in advance of their loan maturities to assess project plans and ensure they manage towards successful completions and, when necessary, recasting loans, extending maturity dates and working with borrowers to bring in fresh capital.

Other income, net within this segment is primarily comprised of income from our MSR investments, bridge loan extension fees, and risk share investment income. Details on the composition of Other income, net are included in Note 21 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Realized gains, net generally result from sales or calls of AFS securities we own. In 2023, we realized $2 million of gains from calls of AFS securities, which was partially offset by a loss on extinguishment of debt. In 2022, we realized gains of $3 million from calls of AFS securities.

The increase in operating expenses in 2023 from 2022 at this segment was primarily attributable to $7 million of higher portfolio management costs, driven partially by increased sub-servicing fees related to higher average balances of HEI and bridge loans year-over-year, as well as higher costs incurred on our BPL bridge loans in the management of specially serviced assets and workout arrangements. Other expenses also increased $4 million in 2023, primarily related to a higher allocation of income to the third-party investor in our Servicing Investment entities.

We hold certain of our investments, primarily our MSRs, at our taxable REIT subsidiary. Our provision for income taxes at this segment is primarily driven by the amount of income earned from portfolio assets as well as from gains or losses from hedges held at the TRS, and for 2023 and 2022 generally reflects positive income earned in those years.

Investments Detail and Activity

This section presents additional details on our investment assets and their activity during 2023 and 2022.

Real Estate Securities Portfolio

The following table sets forth our real estate securities activity by collateral type for the years ended December 31, 2023 and 2022.

Table 13 – Real Estate Securities Activity by Collateral Type (1)

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

(2)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.

(3)At December 31, 2023, $5 million of Senior Securities were used as hedges for our Residential Consumer Mortgage Banking operations. These Real estate securities are included in our Residential Consumer Mortgage Banking segment.

At December 31, 2023, our securities consisted of fixed-rate assets (90%), adjustable-rate assets (9%) and hybrid assets that reset within the next year (1%).

The following table sets forth activity in our real estate securities portfolio for the year ended December 31, 2023 organized by investments organically created through our mortgage banking segments and acquired from third-parties. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP. Additionally, this table includes securities held both in our Investment Portfolio segment and our Residential Consumer Mortgage Banking segment.

Table 14 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities

(1)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.

(2)At December 31, 2023, $6 million of Sequoia Securities and $4 million of Other Third-Party Securities were used as hedges for our Residential Consumer Mortgage Banking operations, and were included in our Residential Consumer Mortgage Banking segment.

At December 31, 2023, our securities owned at Redwood and in consolidated entities consisted of fixed-rate assets (99%), adjustable-rate assets (1%), and hybrid assets that reset within the next year (<1%).

We directly finance our holdings of real estate securities with a combination of non-recourse debt, non-marginable recourse term debt and marginable debt in the form of repurchase (or “repo”) financing. At December 31, 2023, we had: real estate securities with a fair value of $413 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with $125 million of short-term, non-marginable recourse debt and $159 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities; re-performing loan securities with a fair value of $274 million (including securities owned in consolidated securitization entities) were financed with $178 million of non-recourse securitization debt (ABS issued); real estate securities with a fair value of $122 million (including securities owned in consolidated securitization entities) were financed with $83 million of recourse short-term debt incurred through repurchase facilities with three different counterparties; and $52 million of securities were financed with a short-term financing facility. The remaining $108 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at December 31, 2023. 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 – Credit Statistics of Real Estate Securities Owned at Redwood and in Consolidated Entities

(1)Weighted averages presented in this table, including delinquencies, are weighted using the notional balance of loans collateralizing each securitization in which we own a security. Prior to December 31, 2023, weighted averages were calculated using the fair value of the securities we owned.

(2)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.

(3)At December 31, 2023, $6 million of Sequoia Securities and $4 million of Other Third-Party Securities were used as hedges for our Residential Consumer Mortgage Banking operations, and were included in our Residential Consumer Mortgage Banking segment.

We primarily target investments that have a sensitivity to housing credit risk, typically sourced through our operating businesses where we control the underwriting and review of underlying collateral. During 2023, our residential and Agency multifamily securities portfolio continued to demonstrate stable fundamentals, driven by underlying loan seasoning, low 90+ day delinquencies and embedded growth in home prices and rents. Given the seasoned nature of our investments (particularly within our RPL securities and Sequoia securities), many of our residential investments are supported by substantial home price appreciation and borrower equity in the underlying homes. As previously noted, 90 day+ delinquencies for the BPL term loans underlying our consolidated CAFL securities rose modestly during 2023.

With a weighted average quarter-end carrying value of 64 cents to face value, we estimate our securities portfolio had approximately $2.68 per share of net discount to par at quarter end. We believe continued credit performance in our underlying securities portfolio could contribute to our ability to realize potential upside in book value over time, reversing unrealized losses taken in 2023, which were largely driven by technical spread widening.

BPL Bridge Loans Held-for-Investment

The following table provides the activity of BPL bridge loans held-for-investment at Redwood during the years ended December 31, 2023 and 2022.

Table 16 – BPL Bridge Loans Held-for-Investment - Activity

(1)We originate BPL bridge loans at our TRS and transfer a portion of them to our REIT, that we intend to hold for investment. 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).

Our $2.07 billion of BPL bridge loans held-for-investment at December 31, 2023, were comprised of first-lien, interest-only loans with a weighted average coupon of 10.57% and original maturities of six to 36 months. At origination, the weighted average FICO score of sponsors of these loans was 752 and the weighted average LTV ratio of these loans was 63%. At December 31, 2023, of the 2,786 loans in this portfolio, 105 loans with an aggregate fair value of $97 million and an unpaid principal balance of $107 million were greater than 90 days delinquent; of which 82 of these loans with an aggregate fair value of $73 million and an aggregate unpaid principal balance of $84 million were in foreclosure. Additionally, REO associated with bridge loans increased to $88 million at December 31, 2023, from $3 million at December 31, 2022 (resulting from foreclosures on loans with $101 million and $4 million of unpaid principal, respectively).

Changes in the fair value of bridge loans held-for-investment during year ended December 31, 2023, primarily reflect reductions in values for non-accrual bridge loans and certain modified bridge loans. During 2023, $295 million of BPL bridge loans (representing cumulative unpaid principal balance as of December 31, 2023) were subject to modifications that included reductions in interest rates (including, in certain cases, deferrals of interest), among other terms, and in certain cases, combined with infusions of fresh capital from either the existing sponsor or third-party sources. The modifications converted the loans from floating rate to fixed rate and resulted in a weighted average reduction in contractual interest rate (including deferred interest) on these loans of approximately 2.5%. Of these $295 million of modified loans, 86% were contractually current at December 31, 2023, and two loans (14%) were less than 30 days delinquent. While we continue to work proactively with certain sponsors to address the impacts of rising interest rates, elongated project timelines, or other issues, further increases in delinquencies or modifications within our BPL bridge loan portfolio could ultimately result in further decreases in the fair value of our bridge loans held for investment, and further instances of borrower/sponsor stress could lead to realized credit losses. In addition to loans for which we completed these types of modifications, during 2023, we extended the maturities of $232 million of loans (representing cumulative unpaid principal balance as of December 31, 2023). An increase in maturity extensions in the BPL bridge portfolio would increase the expected time to repayment with a potential impact on fair values and credit losses. However, given the overall short duration nature of our bridge loans, a level of maturity extensions are a regular asset management function of these loans, irrespective of market conditions. During 2023, the average length of maturity extensions granted on BPL bridge loans was just under six months.

We generally value delinquent BPL loans at a dollar price that is informed by various market data, including the estimated fair value of the collateral securing a loan, for which we typically receive third-party appraisals, as well as estimated sales costs. The amounts we may ultimately recover through the foreclosure of loans and the sale of the underlying collateral or through alternative strategies, such as through loans sales or discounted payoffs, could vary materially from our estimates and could have a material impact on our earnings in future periods.

We finance our BPL bridge loans with a combination of recourse, non-marginable warehouse facilities, non-recourse, non-marginable warehouse facilities, and non-recourse securitization debt. At December 31, 2023, we had: $70 million of debt incurred through short-term facilities with two counterparties, which was secured by $93 million of business purpose bridge loans; $922 million of debt incurred through long-term facilities with five different counterparties, which was secured by $1.21 billion of business purpose bridge loans; and $716 million of securitization debt secured by $763 million of business purpose bridge loans and $34 million of restricted cash. At December 31, 2023, the unpaid principal balance of bridge loans financed was $2.14 billion, of which $657 million was financed with recourse, non-marginable facilities, $727 million was financed with non-recourse, non-marginable facilities, and $756 million was financed through non-recourse CAFL bridge securitizations.

The following table provides the composition of BPL bridge loans held-for-investment by product type as of December 31, 2023 and 2022.

Table 17 – BPL Bridge Loans Held-for-Investment - By Product/Strategy Type

(1) Includes loans to finance acquisition and/or stabilization of existing housing stock or to finance new construction of residential properties for rent

(2) Includes loans for light to moderate renovation of residential and small multifamily properties (generally less than 20 units).

(3) Includes loans for predominantly light to moderate rehab projects on multifamily properties.

At December 31, 2023, the fair value of our total BPL bridge loans held-for-investment and associated REO represented 98.8% of the combined unpaid principal balance of these loans and the unpaid principal balance of the loans associated with the REO at time of foreclosure. The fair value of multifamily loans within this population ($866 million at December 31, 2023) and associated multifamily REO ($88 million at December 31, 2023), represented 97.1% of the combined unpaid principal balance of these loans and the unpaid principal balance of the loans associated with the REO at time of foreclosure.

Residential Loans

During 2022, we called several of our unconsolidated Sequoia securitizations and purchased loans from the associated securitization trusts and held those loans for sale within our Investment Portfolio segment. The following table provides the activity of residential loans held at our investment portfolio during the years ended December 31, 2023 and 2022.

Table 18 – Investment Portfolio Residential Loans - Activity

During the first quarter of 2023, we sold the majority of our remaining residential loans in our Investment Portfolio, and the remaining $17 million were transferred to our Residential Consumer Mortgage Banking segment and were subsequently sold or securitized.

Home Equity Investments

The following table provides the activity of HEI held at our investment portfolio during the years ended December 31, 2023 and 2022.

Table 19 – HEI at Investment Portfolio Segment - Activity

(1)Our home equity investments presented in this table as of December 31, 2023, included$245 million of HEI owned directly at Redwood and$306 million of HEI owned in our consolidated HEI securitization entity. At December 31, 2023, our economic investment in the consolidated HEI securitization entity was $34 million (for GAAP purposes, we consolidated $306 million of HEI and $222 million of ABS issued, as well as other assets and liabilities for this entity).

(2)Amount for 2023 includes $111 million that was purchased in conjunction with the HEI securitization we co-sponsored in the fourth quarter of 2023. While presented as purchases, since we consolidate the HEI securitization, these HEI were effectively contributed by third-parties into the securitization in exchange for cash and subordinate beneficial interests in the securitization (which we present as other liabilities on our consolidated balance sheets).

During 2023, positive investment fair value changes primarily reflected improvements in actual and forecasted home price appreciation, relative to previously modeled amounts. Additional details on our HEI is included in Note 10 of our Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

We finance a portion of our HEI through a short-term warehouse facility. At December 31, 2023, there was $123 million of debt outstanding on this warehouse facility, secured by $238 million of HEI.

The following table sets forth our other investments activity by significant asset type for the years ended December 31, 2023 and December 31, 2022.

Table 20 – Other Investments - Activity(1)

(1)Tables include all "Other investments" as presented on our consolidated balance sheets. Strategic Investments presented above are held at Corporate/Other, and the remaining other investments are held in our Investment Portfolio segment.

(2)Our servicing investments areowned through our consolidated Servicing Investment entities. At December 31, 2023, our economic investment in these entities was $86 million (for GAAP purposes, we consolidated $257 million of servicing investments, $154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities). At December 31, 2022, our economic investment in these entities was $90 million (for GAAP purposes, we consolidated $301 million of servicing investments, $207 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities).

The increase in fair value of our servicing investments in 2023 was primarily driven by slower expected payment speeds associated with the increase in market interest rates during the year, as well as a reduction of associated servicing advances, while the decrease in fair value during 2022 was primarily driven by wider overall credit spreads. We carry certain of our strategic investments (mostly in RWT Horizons) under the fair value option or the measurement alternative under the fair value option. We estimate fair value using both market transactions for the investments as well as internal models, and fair values can experience volatility based on changing market conditions and operating results of the underlying companies we invest in. Changes in fair value for MSRs and excess servicing include a negative fair value change for a reduction in basis from the regular receipt of scheduled cash flows. In 2022, these amounts were more than offset by a positive impact to fair value from a decrease in actual and forecasted prepayment speeds.

Additional details on our other investments is included in Note 11 in Part II, Item 8 of this Annual Report on Form 10-K.