REDWOOD TRUST INC

Note 1. Organization

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

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

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

Redwood Trust, Inc. was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. For a full description of our business, see Part I, Item 1—Businessin our Annual Report on Form 10-K for the year ended December 31, 2023.

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at June 30, 2024 and December 31, 2023, and for the three and six months ended June 30, 2024 and 2023. 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, 2023. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the Company at June 30, 2024 and results of operations for all periods presented. The results of operations for the three and six months ended June 30, 2024 should not be construed as indicative of the results to be expected for the full year.

In the first quarter of 2024, we updated the names of our Residential loans to Residential consumer loans and our Business purpose loans to Residential investor loans. There were no changes to the classifications of account balances as a result of these updates. in names. All prior period references in this document were conformed to this presentation.

In the second quarter of 2024, we combined the presentation of Short-term and Long-term debt within Debt obligations, net and Goodwill and Intangible assets within Other assets on the consolidated balance sheets and consolidated statements of income, as applicable. There was no impact to the consolidated financial statements as a result of this change and all prior periods in this document were conformed to this presentation.

Note 2. Basis of Presentation - (continued)

Principles of Consolidation

The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity ("VOE") or a variable interest entity ("VIE").

A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. if the Company has a controlling majority voting interest in a VOE, the entity is consolidated.

A VIE is an entity that lacks one or more of the characteristics of a VOE. The Company has a controlling financial interest in and consolidates a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits for the VIE that could potentially be significant to the VIE. See Note 15 for further information about VIEs.

For financial reporting purposes, we consolidate the assets and liabilities of certain entities formed in connection with the securitization of our loans and home equity investments ("HEI"), which we have determined to be VIEs and in which we have a controlling financial interest. The underlying loans owned at the consolidated securitization entities are shown under Residential consumer loans and Residential investor loans, at fair value on our consolidated balance sheets. The underlying HEI at the consolidated HEI securitization entities are shown under Home equity investments, at fair value on our consolidated balance sheets. See Note 11 for further discussion on HEI. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income, we record interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as fair value changes, other income and expenses associated with these entities' activities. See Note 16 for further discussion on ABS issued.

We also consolidatetwo 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 15 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, valuation allowances, 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.

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, 2023 is a summary of our significant accounting policies.

Recent Accounting Pronouncements

Newly Adopted Accounting Standard Updates ("ASUs")

In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848." This new guidance defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. Through June 30, 2024, we had not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or other transactions. At June 30, 2024, we had no remaining LIBOR-indexed financial assets or liabilities.

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

Other Recent Accounting Pronouncements Pending Adoption

In August 2023, the FASB issued ASU 2023-05, "Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement." ASU 2023-05 requires a joint venture, upon formation, to initially measure its assets and liabilities at fair value. This generally aligns the treatment to be consistent with the guidance for business combinations. This new guidance is effective for all joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. Joint ventures formed prior to the adoption date may elect to apply the new guidance retrospectively back to their original formation date. We expect that this new guidance will not have a material impact on our consolidated financial statements and plan to adopt this new guidance by the required date.

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. "ASU 2023-07 expands the breadth and frequency of segment disclosures by requiring disclosures of significant segment expenses regularly provided to the Chief Operating Decision Maker ("CODM") and included within the reported measures of a segment's profit or loss. Other disclosure requirements involve the amount and composition of other segment items and how the CODM uses the reported measures of profit or loss to assess segment performance and to decide how to allocate resources. The ASU does not change how a public entity identifies its operating segments, aggregates those operating segments or applies the quantitative thresholds to determine its reportable segments. This new guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. We expect that this new guidance will result in additional disclosures in our consolidated financial statements and plan to adopt this new guidance by the required date.

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." ASU 2023-09 improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation disclosures. Additionally, income taxes paid are required to be disaggregated by jurisdiction, along with other amendments to enhance the effectiveness of income tax disclosures. This new guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted and upon adoption, the guidance can be adopted on a prospective or retrospective basis. We expect that this new guidance will result in additional disclosures in our consolidated financial statements and plan to adopt this new guidance by the required date.

In March 2024, the FASB issued ASU 2024-01, "Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards." ASU 2024-01 provides clarification for determining whether a profits interest award should be accounted for as a share-based payment arrangement or other compensation. This new guidance is effective for annual and interim periods beginning after December 15, 2024. Early adoption is permitted and upon adoption, the guidance can be adopted on a prospective or retrospective basis. We expect that this new guidance will not have a material impact on our consolidated financial statements and plan to adopt this new guidance by the required date.

Note 4. Segment Information

Redwood operates inthree segments: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking and Investment Portfolio. The accounting policies of the reportable segments are the same as those described in Note 3 — Summary of Significant Accounting Policies. For a full description of our segments, see Part I, Item 1—Businessin our Annual Report on Form 10-K for the year ended December 31, 2023. In the normal course of business, loans are originated and acquired at our mortgage banking segments and may subsequently be transferred to our investment portfolio segment either as whole loans or through the retention of securities from securitizations we sponsor and consolidate under GAAP. All of our loans are accounted for under the fair value option and amounts transferred between segments are accounted for at fair value at the time of transfer.

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 ourthree segments are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include interest expense for our convertible notes and trust preferred securities (and in 2024 and 2023, realized gains from the repurchase of convertible notes), indirect general and administrative expenses and other expenses.

The following tables present financial information by segment for the three and six months ended June 30, 2024 and 2023.

Table 4.1 – Business Segment Financial Information

The following table presents supplemental balance sheet information by segment at June 30, 2024 and December 31, 2023. Certain balance sheet accounts are not directly assigned or allocated to one of ourthree segments and are not reflected in the supplemental segment information provided below.

Table 4.2 – Supplemental Segment Information

Note 5. Mortgage Banking Activities, Net

The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income for the three and six months ended June 30, 2024 and 2023.

Table 5.1 – Mortgage Banking Activities

(1)Includes changes in fair value for associated loan purchase commitments for residential consumer loans,.

(2)For the three and six months ended June 30, 2024 and 2023, this represents the fair value changes on trading securities being used as hedges to manage the mark-to-market risks associated with our Residential Consumer Mortgage Banking operations.

(3)Represents market valuation changes of derivatives that were used to manage risks associated with our mortgage banking operations and other derivative financial instruments such as loan purchase commitments and interest rate locks.

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

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

Note 6. 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.

Determination of Fair Value

Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2023 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. At June 30, 2024, 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, 2023.

Certain of our Other investments (inclusive of strategic investments in early-stage companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We initially record these investments at cost and adjust their fair value based on observable price changes, such as follow-on capital raises by these companies or secondary sales of these, or similar, equity or debt instruments, and will also evaluate impacts to valuation from changing market conditions and underlying business performance. As of June 30, 2024, the carrying value of these investments was $3 million. See Note 12 for further discussion on Other Investments.

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at June 30, 2024 and December 31, 2023, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

Table 6.1 – Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2024.

Table 6.2 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

(1) Other settlements, net: for residential consumer and residential investor loans, represents the transfer of loans to REO; for derivatives, represents the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential consumer and residential investor loans; and for mortgage servicing rights ("MSRs) and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.

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

The following table presents the portion of fair value gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at June 30, 2024 and 2023. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2024 and 2023 are not included in this presentation.

Table 6.3 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at June 30, 2024 and June 30, 2023 Included in Net Income

(1) Represents the portion of net fair value gains or losses included in our consolidated statements of income related to securitized loans, securitized Home Equity Investments ("HEI"), and the associated ABS issued at our consolidated securitization entities held at June 30, 2024 and June 30, 2023, which, netted together, represent the change in value of our investments at the consolidated VIEs under the CFE election, excluding REO.

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and six months ended June 30, 2024 and 2023.

Table 6.4 – Market Valuation Gains and Losses, Net

Footnotes to Table 6.4

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

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

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

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

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 6.5 – Fair Value Methodology for Level 3 Financial Instruments

Table 6.5 – Fair Value Methodology for Level 3 Financial Instruments (continued)

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

(2)Values represent pricing inputs used in securitization pricing model. Credit spreads represent spreads to applicable swap rates unless specified otherwise.

(3)The fair value of the loans and HEI held by consolidated entities is based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At June 30, 2024, the fair value of securities we owned at the consolidated Sequoia, CAFL Term, CAFL Bridge (under CFE), Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was $264 million, $337 million, $25 million, $258 million, $34 million, and $41 million, respectively. CAFL Bridge only includes theone securitization entity for which we made the CFE election.

(4)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).

(5)Fair value presented in this line item for ABS issued at consolidated HEI entities does not include non-controlling interests in our HEI entities, which we account for separately as liabilities in our Consolidated Balance Sheets and carry at fair value. However, given the HEI non-controlling interests are priced using the same model and inputs, the unobservable inputs and input values provided in this section include those for the HEI non-controlling interests.

The following table summarizes the estimated fair values presents of assets and liabilities that are not measured at fair value at June 30, 2024 and December 31, 2023.

Table 6.6 – Carrying Values and Estimated Fair Values of Assets and Liabilities

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

During the three and six months ended June 30, 2024, we elected the fair value option for $16 million and $64 million of securities, respectively, $1.87 billion and $2.87 billion (principal balance) of residential consumer loans, respectively, and $452 million and $779 million (principal balance) of residential investor loans, respectively. Additionally, during the three and six months ended June 30, 2024, we elected the fair value option for $0.3 million and $0.6 million of HEI, respectively. For the three and six months ended June 30, 2024, we elected the fair value option for $9 thousand and $0.2 million, respectively, of Other investments.

Nonrecurring Fair Values

We measure the fair value of certain assets and liabilities on a nonrecurring basis when events or changes in circumstances indicate that the carrying value may be impaired. Adjustments to fair value generally result from the write-down of asset value due to impairment. Refer to Note 14 for further information on our Real estate owned ("REO").

Note 7. Residential Consumer Loans

We acquire residential consumer 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 consumer loans owned at Redwood and at the consolidated Sequoia and Freddie Mac SLST entities at June 30, 2024 and December 31, 2023.

Table 7.1 – Classifications and Carrying Values of Residential Consumer Loans

At June 30, 2024, we owned mortgage servicing rights associated with $946 million (principal balance) of residential consumer loans owned at Redwood that were purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

Residential Consumer Loans Held-for-Sale

The following table summarizes the characteristics of residential consumer loans held-for-sale at June 30, 2024 and December 31, 2023.

Table 7.2 – Characteristics of Residential Consumer Loans Held-for-Sale

At both June 30, 2024 and December 31, 2023, there wereno residential consumer loans held-for-sale that were 90 days or more delinquent or in foreclosure.

The following table provides the activity of residential consumer loans held-for-sale during the three and six months ended June 30, 2024 and 2023.

Table 7.3 – Activity of Residential Consumer Loans Held-for-Sale

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

Residential Consumer Loans Held-for-Investment at Fair Value

We invest in residential subordinate securities issued by Sequoia and Freddie Mac SLST securitization trusts and consolidate the underlying residential consumer loans owned by these entities for financial reporting purposes in accordance with GAAP. The following tables summarize the characteristics of the residential consumer loans owned at consolidated Sequoia and Freddie Mac SLST entities at June 30, 2024 and December 31, 2023.

Table 7.4 – Characteristics of Residential Consumer Loans Held-for-Investment

(1)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with the accounting guidance for collateralized financing entities. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 17.2.

(2)For loans held at consolidated entities, the number and unpaid principal balance of loans 90+ days delinquent includes loans in foreclosure.

For loans held at our consolidated Sequoia and Freddie Mac SLST entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to the measurement alternative provided for collateralized financing entities, and are recorded in Investment fair value changes, net on our consolidated statements of income. The following table provides the activity of residential consumer loans held-for-investment at consolidated entities during the three and six months ended June 30, 2024 and 2023.

Table 7.5 – Activity of Residential Consumer Loans Held-for-Investment at Consolidated Entities

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

Note 8. Residential Investor Loans

We originate and invest in residential investor loans, including term loans and bridge loans. The following table summarizes the classifications and carrying values of the residential investor loans owned at Redwood and at consolidated CAFL entities at June 30, 2024 and December 31, 2023.

Table 8.1 – Classifications and Carrying Values of Residential Investor Loans

Nearly all of the outstanding residential investor term loans at June 30, 2024 were first-lien, fixed-rate loans with original maturities ofthree, five, seven, orten years.

The outstanding residential investor bridge loans held-for-investment at June 30, 2024 were first-lien, interest-only loans with original maturities of 6 to 36 months and were comprised of 67% one-month SOFR-indexed adjustable-rate loans, and 33% fixed-rate loans.

At June 30, 2024, we had $448 million in commitments to fund residential investor bridge loans. See Note 18 for additional information on these commitments.

During the three months and six months ended June 30, 2024, we sold $135 million and $187 million, of residential investor bridge loans, net of $6 million and $21 million, respectively, of construction draws, to our joint ventures. See Note 12 for additional information on these joint ventures.

The following table provides the activity of residential investor loans at Redwood during the three and six months ended June 30, 2024 and 2023.

Table 8.2 – Activity of Residential Investor Loans at Redwood

(1)For the three and six months ended June 30, 2024 the principal balance of loans sold to third parties is net of$6 million and$21 million, respectively, related to construction draws on residential investor bridge loans sold to our joint ventures. See Note 12 for additional information on these joint ventures.

(2)For residential investor term at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL term securitizations. For residential investor bridge at Redwood, represents the transfer of residential investor bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their inclusion in one of our bridge loan securitizations, which generally have replenishment features.

(3)Represents net market valuation changes from the time a loan is originated to when it is sold, securitized or transferred to our investment portfolio. See Table 5.1 for additional detail on Mortgage banking activities income (loss).

Residential Investor Loans Held-for-Investment at CAFL

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying residential investor term loans and bridge loans owned by these entities. The following table provides the activity of residential investor loans held-for-investment at CAFL during the three and six months ended June 30, 2024 and 2023.

Table 8.3 – Activity of Residential Investor Loans Held-for-Investment at CAFL

(1)Net market valuation gains (losses) on residential investor loans held-for-investment at CAFL are recorded through Investment fair value changes, net on our consolidated statements of income. For loans held at our consolidated CAFL Term entities and one CAFL Bridge 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 associated with our economic investment in these securitization entities is presented in Tables 15.1 and 15.2. We did not elect to account for two of our CAFL Bridge securitizations under the collateralized financing entity guidelines but have elected to account for the loans in these securitizations at fair value, and changes in fair value for these loans are recorded through Investment fair value changes, net on our consolidated statements of income.

Residential Investor Loan Characteristics

The following tables summarize the characteristics of the residential investor loans owned at Redwood and at consolidated CAFL entities at June 30, 2024 and December 31, 2023.

Table 8.4 – Characteristics of Residential Investor Loans

(1)The fair value of the loans held by consolidated CAFL Term entities and one CAFL Bridge entity were 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 the accounting guidance for collateralized financing entities.

(2)The number of loans 90+ days delinquent includes loans in foreclosure.

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

The following table presents the unpaid principal balance of business purpose loans recorded on our consolidated balance sheets at June 30, 2024 by collateral/strategy type.

Table 8.5 – Residential Investor Loans Collateral/Strategy Type

(1)The fair value of the loans held by consolidated CAFL Term entities and one CAFL Bridge entity were 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 GAAP for collateralized financing entities.

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

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

(4) Includes loans for predominantly light to moderate rehabilitation projects on multifamily properties.

Loan Modifi cations

We may amend or modify a loan depending on the loan's specific facts and circumstances. These loan modifications typically include amendments and restructuring and include terms such as additional time for the borrower to refinance or sell the collateral property, interest rate reductions and/or deferral of scheduled principal and/or interest payments. In some instances, a loan amendment or restructuring may bring the loan out of delinquent status. In exchange for a modification, we may receive a partial repayment of principal, a short-term accrual of capitalized interest for a portion of interest due, a capital infusion to replenish interest or capital improvement reserves and/or termination of all or a portion of the remaining unfunded loan commitment.

For the three and six months ended June 30, 2024, we modified residential investor loans with an aggregate unpaid principal balance of $379 million and $429 million, respectively, with an aggregate fair value of $369 million and $417 million, respectively. At the time of modification, the weighted average length of time these loans were past due was under three months for both the three and six months ended June 30, 2024. Of the modified loans for the three months ending June 30, 2024, $43 million included loans in forbearance without a rate reduction and $335 million 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 new sources. For the three and six months ended June 30, 2024, the average length of maturity extensions granted on residential investor bridge loans was just under five months andseven months, respectively.

Nonaccrual Loans

Interest income is accrued on loans in the period the coupon interest is contractually earned until such time a loan is placed on non-accrual status.

A loan is placed on non-accrual status when it is probable that all principal and interest due under the contractual terms will not be collected and a loan is past due more than 90 days. Income from non-accrual loans is generally recognized on a cash basis when it is received. At the time a loan is placed on non-accrual status, all previously accrued but uncollected interest is reversed against interest income and interest subsequently collected is recognized on a cash basis to the extent the loan balance is deemed collectible or until such time the loan qualifies to be placed back on accrual status.

Generally, a loan is placed back on accrual status when the loan becomes contractually current or the collection of past due and future payments is reasonably assured either through reinstatement by the borrower, estimated net equity in the underlying real estate property or both.

At June 30, 2024 and December 31, 2023, residential investor loans with an aggregate unpaid principal balance of $324 million and $340 million, respectively, and an aggregate fair value of $290 million and $312 million, respectively, were on non-accrual status. Of this balance, loans with an aggregate unpaid principal balance of $204 million and $207 million were less than 90 days past due (including loans that were contractually current) as of June 30, 2024 and December 31, 2023, respectively.

Note 9. Consolidated Agency Multifamily Loans

We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at June 30, 2024 and December 31, 2023.

Table 9.1 – Characteristics of Consolidated Agency Multifamily Loans

There wereno consolidated agency multifamily loans with 90+ day delinquencies andno multifamily loans in foreclosure at June 30, 2024 and December 31, 2023.

The outstanding Consolidated Agency multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at June 30, 2024 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of multifamily loans held-for-investment during the three and six months ended June 30, 2024 and 2023.

Table 9.2 – Activity of Consolidated Agency Multifamily Loans Held-for-Investment

(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. 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 15.2.

Note 10. Real Estate Securities

We invest in real estate securities that we create and retain from our unconsolidated Sequoia securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at June 30, 2024 and December 31, 2023.

Table 10.1 – Fair Value of Real Estate Securities by Type

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. Nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.

Trading Securities

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities. The following table presents the fair value of trading securities by position and collateral type at June 30, 2024 and December 31, 2023.

Table 10.2 – Fair Value of Trading Securities by Position

(1)Includes $32 million and $28 million of Sequoia certificated mortgage servicing rights at June 30, 2024 and December 31, 2023, respectively.

The following table presents the unpaid principal balance of trading securities by position and collateral type at June 30, 2024 and December 31, 2023.

Table 10.3 – Unpaid Principal Balance of Trading Securities by Position

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

The following table provides the activity of trading securities during the three and six months ended June 30, 2024 and 2023.

Table 10.4 – Trading Securities Activity

(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.

AFS Securities

The following table presents the fair value of our available-for-sale ("AFS") securities by position and collateral type at June 30, 2024 and December 31, 2023.

Table 10.5 – Fair Value of Available-for-Sale Securities by Position

The following table provides the activity of available-for-sale securities during the three and six months ended June 30, 2024 and 2023.

Table 10.6 – Available-for-Sale Securities Activity

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

At June 30, 2024, we had $26 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.

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.

The following table presents the components of carrying value (which equals fair value) of AFS securities at June 30, 2024 and December 31, 2023.

Table 10.7 – Carrying Value of AFS Securities

The following table presents the changes for the three and six months ended June 30, 2024, in unamortized discount and designated credit reserves on residential AFS securities.

Table 10.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities

AFS Securities with Unrealized Losses

The following table presents the total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at June 30, 2024 and December 31, 2023.

Table 10.9 – AFS Securities in Gross Unrealized Loss Position by Holding Periods

At June 30, 2024, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheets included 76 AFS securities, of which 16 were in an unrealized loss position and 12 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2023, our consolidated balance sheets included 66 AFS securities, of which 21 were in an unrealized loss position and 19 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 $5 million at June 30, 2024. We evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At June 30, 2024, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

At June 30, 2024, our current expected credit loss ("CECL") allowance related to our AFS securities was $1 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit-related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at June 30, 2024.

Table 10.10 – Significant Credit Quality Indicators

The following table details the activity related to the allowance for credit losses for AFS securities for the three and six months ended June 30, 2024.

Table 10.11 – Rollforward 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. During the six months ended June 30, 2024, we didnot sell any AFS securities relative to the six months ended June 30, 2023, in which we realized gains of $1 million on sales of AFS securities.

Note 11. Home Equity Investments (HEI)

We invest in HEI contracts from third party originators and in the third quarter of 2023, we began to originate HEI directly. 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 recording a security instrument (e.g., deed of trust) with respect to the property. Our investments in HEI expose us to both home price appreciation and depreciation of the associated property.

At June 30, 2024, we co-sponsoredtwo HEI securitization entities that we consolidated in accordance with GAAP, and have elected to account for them under the CFE election. As such, market valuation changes for the securitized HEI are based on the estimated fair value of the associated ABS issued by the entity, including the interest we own, and are reported in HEI income, net on our Consolidated statements of income.

The following table presents our HEI at June 30, 2024 and December 31, 2023.

Table 11.1 – Home Equity Investments

The following table details our HEI activity during the three and six months ended June 30, 2024 and 2023.

Table 11.2 – Activity of HEI

The following table provides the components of HEI income, net for the three and six months ended June 30, 2024 and 2023, and reflect net market valuation gains (losses) recorded on HEI at Redwood and on securitized HEI, net of the third party and non-controlling interests in the HEI securitizations that are not owned by Redwood.

Table 11.3 – Components of HEI Income, net

Note 11. Home Equity Investments (HEI) - (continued)

(1)Amount includes interest expense associated with ABS issued, which totaled $3 million and $1 million for the three and six months ended June 30, 2024 and 2023, respectively.

The following tables summarizes the characteristics of our HEI at June 30, 2024 and December 31, 2023.

Table 11.4 – HEI Characteristics

Note 12. Other Investments

Other investments at June 30, 2024 and December 31, 2023 are summarized in the following table.

Table 12.1 – Components of Other Investments

Servicer advance investments

We and a third-party co-investor, throughtwo partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to portfolios of residential mortgage-backed securitizations serviced by the co-investor. Refer to Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding the transactions.

We account for our servicer advance investments at fair value. At June 30, 2024, our servicer advance investments had a fair value of $227 million and were associated with specified pools of residential mortgage loans with an unpaid principal balance of $9.64 billion. The outstanding servicer advance receivables associated with these investments were $176 million at June 30, 2024, which were financed with short-term, non-recourse securitization debt. See Note 17 for additional detail on this debt. The servicer advance receivables were comprised of the following types of advances at June 30, 2024 and December 31, 2023.

Table 12.2 – Components of Servicer Advance Receivables

During the six months ended June 30, 2024, we received $9 million in repayments on our servicer advance investments. During the three and six months ended June 30, 2024 we recorded $5 million and $10 million of interest income, respectively, through Other interest income, and recorded net market valuation gains of $12 million and $11 million, respectively, through Investment fair value changes, net in our consolidated statements of income.

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 residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and six months ended June 30, 2024, we recognized $3 million and $7 million, respectively, of interest income through Other interest income and we recorded net market valuation losses of $1 million and $3 million, respectively, through Investment fair value changes, net on our consolidated statements of income.

Note 12. Other Investments - (continued)

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 or to unconsolidated Sequoia securitization entities. During the three and six months ended June 30, 2024, we retained MSRs associated with loans with an aggregate principal balance of $1 million and $10 million from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

We account for our MSRs at fair value. At June 30, 2024 and December 31, 2023, our MSRs had a fair value of $29 million and $25 million, respectively, and were associated with loans with an aggregate principal balance of $1.95 billion and $2.03 billion, respectively. During the three and six months ended June 30, 2024, including net market valuation gains and losses on our MSRs, we recorded net income related to our MSRs of $4 million and $8 million, respectively, through Other income on our consolidated statements of income.

Strategic Investments

Strategic investments represent investments we made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At June 30, 2024, we had made a total of 39 investments in companies through RWT Horizons with a total carrying value of $22 million, as well aseight corporate-level investments with a total carrying value of $37 million. For both the three and six months ended June 30, 2024, we recognized net market valuation losses of $1 million on our strategic investments through Investment fair value changes, net in our consolidated statements of income.

In the second quarter of 2023, we established a joint venture with Oaktree Capital Management to invest in residential investor bridge loans originated by our CoreVest subsidiary. At June 30, 2024, the carrying value of our investment in the joint venture was $6 million. We account for our investment in the joint venture under the equity method of accounting as we have a 20% non-controlling interest, but are deemed to be able to exert significant influence over the affairs of the joint venture. We adjust the carrying value of our equity method investment for our share of earnings or losses, dividends or return of capital on a quarterly basis. For both the three and six months ended June 30, 2024, we recognized net equity method earnings of $0.2 million and $0.3 million, respectively, through Other income, net in our consolidated statements of income.

In the first quarter of 2024, we established a joint venture with CPP Investments to invest in residential investor bridge and term loans originated by us. In June 2024, we made an investment in the joint venture of $1 million. We account for our investment in the joint venture under the equity method of accounting as we have a minority non-controlling interest approximating 20% across both Redwood's direct equity capital contribution to joint venture entities and joint venture co-investments to be held in Redwood's investment portfolio, but we are deemed to be able to exert significant influence over the affairs of the joint venture. We adjust the carrying value of our equity method investment for our share of earnings or losses, dividends or return of capital on a quarterly basis.

See Note 8 for further information on residential bridge loans sold to these joint ventures.

Note 13. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at June 30, 2024 and December 31, 2023.

Table 13.1 – Fair Value and Notional Amount of Derivative Financial Instruments

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At June 30, 2024, we were party to interest rate swaptions with an absolute aggregate notional amount of $3.08 billion, TBA agreements with an absolute aggregate notional amount of $1.04 billion, and interest rate futures contracts with an absolute aggregate notional amount of $427 million. At December 31, 2023, we were party to interest rate swaps with an absolute aggregate notional amount of $50 million, futures with an absolute aggregate notional amount of $142 million and TBA agreements with an absolute aggregate notional amount of $1.79 billion.

For the three and six months ended June 30, 2024, risk management derivatives had net market valuation losses of $10 million and gains of $0.1 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net and Investment fair value changes, net on our consolidated statements of income.

Loan Purchase and Interest Rate Lock Commitments

Loan purchase commitments ("LPCs") and interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. For the three and six months ended June 30, 2024, LPCs and IRLCs had net market valuation gains of $8 million and $2 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income. For both the three and six months ended June 30, 2023, LPCs had net market valuation gains of $2 million, which were recorded in Mortgage banking activities, net on our consolidated statements of income.

Derivatives Designated as Cash Flow Hedges

For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive loss was $66 million and $68 million at June 30, 2024 and December 31, 2023, respectively. We are amortizing this loss into interest expense over the remaining term of our trust preferred securities and subordinated notes. For both of the three and six months ended June 30, 2024 and 2023, we reclassified $1 million and $2 million, respectively, of realized net losses from Accumulated other comprehensive loss into Interest expense. As of June 30, 2024, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2023, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At June 30, 2024, we assessed this risk as remote and did not record an associated specific valuation adjustment. At June 30, 2024, we were in compliance with our derivative counterparty ISDA agreements.

Balance Sheet Netting

Certain of our derivatives and debt obligations 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 balance sheets. However, we do not elect to report any of these financial assets or liabilities on a net basis, and instead present them on a gross basis on our consolidated balance sheets.

The following table presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with the corresponding financial instruments and corresponding collateral received or pledged at June 30, 2024 and December 31, 2023.

Table 13.2 – Offsetting of Financial Assets, Liabilities, and Collateral

(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, we have pledged excess cash collateral or financial assets to a counterparty (which, in certain circumstances, may 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, these excess amounts are excluded from the table; they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.

(2)Interest rate agreements, TBAs and futures are components of derivative instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by certain Residential consumer and Residential investor loans, is a component of Debt obligations on our consolidated balance sheets.

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

Note 14. Other Assets and Liabilities

Other Assets

Other assets at June 30, 2024 and December 31, 2023 are summarized in the following table.

Table 14.1 – Components of Other Assets

(1)Fixed assets and leasehold improvements had a basis of $18 million and accumulated depreciation of $11 million at June 30, 2024.

REO

The Company holds REO at the lower of the current carrying amount or fair value less estimated selling costs. The following table summarizes the activity and carrying values of REO assets held at Redwood and at consolidated Sequoia, Freddie Mac SLST, and CAFL entities during the six months ended June 30, 2024.

Table 14.2 – REO Activity

(1)Includes REO held at Redwood and within consolidated CAFL Bridge securitization entities.

(2)For the six months ended June 30, 2024, REO market valuation adjustments and liquidations resulted in net valuation losses of $3 million, which were recorded in Investment fair value changes, net on our consolidated statements of income.

The following table provides detail on the numbers of REO assets at Redwood and at consolidated Sequoia, Freddie Mac SLST, and CAFL entities at June 30, 2024 and December 31, 2023.

Table 14.3 – REO Assets

Investment Receivable

Investment receivable primarily consists of amounts receivable from third-party servicers related to principal and interest receivable from residential investor loans and fees receivable from servicer advance investments.

Intangible Assets and Goodwill

On July 1, 2022, we acquired Riverbend Funding LLC ("Riverbend"), a private mortgage lender to residential transitional and commercial real estate investors. Refer to Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding this acquisition, including purchase price allocations. Additionally, in 2019 we acquired 5 Arches and CoreVest, originators of residential investor loans. In connection with these acquisitions, we identified and recorded finite-lived intangible assets totaling $95 million. Intangible Assets are included in Other Assets on our Consolidated Balance Sheets.

The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at June 30, 2024.

Table 14.4 – Intangible Assets – Activity

All of our intangible assets are amortized on a straight-line basis. For the six months ended June 30, 2024, we recorded intangible asset amortization expense of $5 million. For the six months ended June 30, 2023, we recorded intangible asset amortization expense of $6 million. Estimated future amortization expense is summarized in the table below.

Table 14.5 – Intangible Asset Amortization Expense by Year

On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at June 30, 2024.

Goodwill is tested for impairment annually or more frequently if indicators of impairment exist. We have elected to make the first day of our fiscal fourth quarter as the annual impairment assessment date for goodwill. We recorded total goodwill of $23 million as a result of the total consideration exceeding the fair value of the net assets acquired from Riverbend. For reporting purposes, we included the intangible assets and goodwill from the Riverbend acquisition within our Residential Investor Mortgage Banking segment. There were no changes to the balance of goodwill during the three and six months ended June 30, 2024.

The potential liability resulting from the contingent consideration arrangement with Riverbend was recorded at its acquisition-date fair value of zero as part of the total consideration for the acquisition of Riverbend. At June 30, 2024, the estimated fair value of this contingent liability was zero on our consolidated balance sheets. Our contingent consideration liability is recorded at fair value and periodic changes in the estimated fair value are recorded through Other expenses on our consolidated statements of income. During the six months ended June 30, 2024, we did not record any contingent consideration income or expense related to our acquisition of Riverbend. See Note 18 for additional information on our contingent consideration liability.

Operating Lease Right-of-Use Assets and Operating Lease Liabilities

See Note 18 for additional information on leases.

Margin Receivable and Payable

Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral. We met all margin calls due through June 30, 2024.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at June 30, 2024 and December 31, 2023 are summarized in the following table.

Table 14.6 – Components of Accrued Expenses and Other Liabilities

(1)Bridge loan holdbacks represent amounts withheld from the initial loan proceeds and are subsequently disbursed to the borrower to be used in the construction, rehabilitation or purchase of the mortgaged property or to fund interest on the bridge loan.

Legal and Repurchase Reserves

See Note 18 for additional information on legal and repurchase reserves.

Payable to Non-Controlling Interests

Redwood and a third-party co-investor, throughtwo partnership entities consolidated by Redwood, purchased servicer advances and excess MSRs related to a portfolio of residential mortgage loans serviced by the co-investor (see Note 12 and Note 15 for additional information on the partnership entities and associated investments). We account for the co-investor’s interests in the entities as liabilities, and at June 30, 2024, the carrying value of their interests was $25 million, representing their current economic interest in the entities. Earnings from the partnership entities are allocated to the co-investors on a proportional basis and during the three and six months ended June 30, 2024, we allocated $3 million and $4 million of income to the co-investors, respectively, recorded in Other expenses on our consolidated statements of income.

Additionally, Redwood and a third-party investor co-sponsored the transfer and securitization of HEI throughtwo HEI securitization entities. Other third-party investors contributed HEI into these securitizations through Redwood and retained subordinate beneficial interests issued by the securitization entities alongside Redwood. See Note 11 for a further discussion of the HEI securitization. We account for the co-investors' interests in the HEI securitization entities as liabilities, and at June 30, 2024, the carrying value of their interests was $72 million, representing the fair value of their economic interests in the beneficial interests issued by the HEI entities. During the three and six months ended June 30, 2024, the investors' share of earnings, net from their retained interests was $7 million and $13 million, respectively, recorded through HEI income, net on our consolidated statements of income.

Note 15. Principles of Consolidation

In the normal course of business, we enter into certain types of transactions with entities that are considered to be VIEs. The Company's primary involvement with VIEs has been related to its securitization transactions in which it transfers assets to securitization vehicles. We primarily securitize our acquired and originated loans, which provides a source of funding and has enabled us to transfer a certain portion of economic risk on loans or related debt securities to third parties. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE.

The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.

Analysis of Consolidated VIEs

We currently consolidate the assets and liabilities of variable interests in certain securitization vehicles in which we are the primary beneficiary. These include certain legacy Sequoia securitization entities issued prior to 2012, certain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans (all together referred to as "Sequoia"), entities formed in connection with the securitization of CoreVest residential investor term and bridge loans ("CAFL") and entities formed in connection with the securitization of HEI. We also consolidate the assets and liabilities of certain Freddie Mac K-series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations (and re-securitization of such SLST securities) 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.

We also consolidatetwo Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At June 30, 2024, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 12 for a further description of these entities and the investments they hold and Note 14 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 17 for additional information on the servicer advance financing.

During the fourth quarter of 2023 and the third quarter of 2021, we co-sponsoredtwo HEI securitization transactions, and we consolidate the respective HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. At June 30, 2024 and December 31, 2023, we owned a portion of the subordinate certificates issued by these entities and had certain decision-making rights for the entities. See Note 11 for a further description of these entities and the investments it holds and Note 14 for additional information on non-controlling interests in these entities. We consolidate these HEI securitization entities, but the securitization entities are independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

During the fourth quarter of 2023, 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.

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

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

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

Table 15.1 – Assets and Liabilities of Consolidated VIEs

(1)The value of our investments in VIEs, as presented in this table, generally represents the fair value of the economic interests we own in VIEs (i.e., the securities or other interests we legally own in the consolidated securitizations or other VIEs). While most of our VIEs are accounted for under the CFE election (whereby the net equity in the VIE generally represents the fair value of our retained interests and associated accrued interest receivable), certain entities, includingtwo CAFL bridge loan securitizations (included within the CAFL column), our SLST re-securitization (included within the Freddie Mac SLST column), and our Servicing Investment VIEs are not accounted for under the CFE election and their associated ABS issued are accounted for at amortized historical cost. As of June 30, 2024 and December 31, 2023, the fair value of our interests in the CAFL term loan securitizations accounted for under the CFE election were $337 million and $323 million, respectively, and the fair value of our interest in the CAFL bridge loan securitizations accounted for under the CFE election was$25 million and $22 million, respectively, with the difference from the tables above generally representing ABS issued and carried at amortized historical cost and accrued interest on our economic interests. As of June 30, 2024 and December 31, 2023, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election were $258 million and $274 million, respectively, with the difference from the tables above representing ABS issued and carried at amortized historical cost.

The following tables present income (loss) from these VIEs for the three and six months ended June 30, 2024 and 2023.

Table 15.2 – Income (Loss) from Consolidated VIEs

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential consumer loans to 46 Sequoia securitization entities sponsored by us that are still outstanding as of June 30, 2024, and accounted for these transfers as sales for financial reporting purposes, in accordance with GAAP. 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-servicers to perform) and the receipt of interest income associated with the securities we retained.

The following table presents additional information at June 30, 2024 and December 31, 2023, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 15.3 – Unconsolidated VIEs Sponsored by Redwood

(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.

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.

Note 16. 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 15 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by our consolidated securitization entities at June 30, 2024 and December 31, 2023, along with other selected information, are summarized in the following table.

Table 16.1 – Asset-Backed Securities Issued

(1)Includes $417 million and$485 million (principal balance) of ABS issued bytwo CAFL bridge securitization trusts sponsored by Redwood and accounted for at amortized cost at June 30, 2024 and December 31, 2023, respectively.

(2)Includes $166 million and $182 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at both June 30, 2024 and December 31, 2023, respectively.

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

Note 16. 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 the stated maturity. At June 30, 2024, the majority of the ABS issued and outstanding had contractual maturities beyond five years. See Note 15 for detail on the carrying value components of the collateral for ABS issued and outstanding.

For additional information related to certain of our asset-backed securities issued that are presented above, see Note 15 to the Consolidated Financial Statements of our 2023 Annual Report on Form 10-K.

Note 17. Debt Obligations, Net

We enter into loan warehouse facilities, repurchase agreements ("repo"), recourse subordinate securities financings, and other forms of collateralized (and generally uncommitted) borrowings with several banks and major investment banking firms. Additionally, we have various forms of corporate debt to finance our investments and operations. At June 30, 2024, we had outstanding agreements on debt obligations with several counterparties and we were in compliance with all of the related covenants.

The following tables summarize our debt obligations at June 30, 2024 and December 31, 2023.

Table 17.1 – Debt Obligations, Net

Note 17. Debt Obligations, Net - (continued)

(1)Variable rate borrowings are based on 1- or 3-month AMERIBOR or SOFR, plus an applicable spread.

(2)Promissory notes payable on demand to lender with 90-day notice.

(3)Borrowing has a fixed interest rate at period end.

Facilities and Other Financing

We use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and/or origination of residential consumer and residential investor mortgage loans (including those we acquire or originate in anticipation of sale or securitization), and finance investments in securities and other investments. At June 30, 2024, Redwood and or its subsidiaries have entered into eight short-term warehouse facilities to finance our residential consumer loans, MSRs and unsecuritized HEIs totaling $1.85 billion of total capacity, andseven residential investor loan facilities totaling $2.53 billion of total capacity to finance our residential investor loans.

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.

Note 17. Debt Obligations, Net - (continued)

Recourse Subordinate Securities Financing Facilities

At June 30, 2024, a subsidiary of Redwood had a repurchase agreement providing 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) recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia securitizations. The financing was fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through September 2022,5.71% from October 2022 through September 2023, and 7.21% from October 2023 through final maturity in September 2024. In July 2024, this repurchase facility was refinanced into a new, non-recourse resecuritization, with a principal balance of $205 million, a blended interest rate of 8.5%, and a final stated maturity date of December 2054. The collateral for the July 2024 resecuritization includes Sequoia securities that had been financed with our recourse subordinate securities financing, Sequoia securities financed through other facilities or previously unfinanced Sequoia securities.

In 2020, 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 fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through February 2023, increasing to 5.71% from March 2023 through February 2024, and to 7.21% from March 2024 through February 2025. The financing facility may be terminated at our option, beginning in February 2023, and has a final maturity in February 2025.

In 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, increasing to 6.25% from July 2024 through June 2025, and to 7.75% from July 2025 to June 2026. The financing facility may be terminated at our option, beginning in June 2023, and has a final maturity in June 2026.

Corporate Debt

We use corporate debt obligations to fund other aspects of our business and operations, including the repurchase of shares of our capital stock.

In connection with our acquisition of Riverbend, we assumed promissory notes that are payable on demand with a 90-day notice from the lender or which may be repaid by us with a 90-day notice. These unsecured, non-marginable, recourse notes were issued inthree separate series with fixed interest rates between 6% and 8%.

In March 2024, we entered into a corporate secured revolving financing facility with CPP Investments to provide non-marginable recourse debt financing secured by previously unencumbered assets, such as retained Residential Consumer and Residential Investor subordinate securities and other investments, as well as equity in certain operating subsidiaries. At June 30, 2024, this facility had a capacity of $250 million and atwo-year term, with aone-year extension option.

In January 2024, Redwood issued $60 million of 9.125% Senior Notes due in 2029. The Senior Notes are senior unsecured obligations of Redwood and bear interest at a rate equal to 9.125% per year, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, beginning on June 1, 2024. The Senior Notes mature on March 1, 2029. We may redeem the Senior Notes, in whole or in part, at any time on or after March 1, 2026 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest.

In June 2024, Redwood issued $85 million of 9.0% Senior Notes due in 2029. The Senior Notes are senior unsecured obligations of Redwood and bear interest at a rate equal to 9.0% per year, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, beginning on September 1, 2024. The Senior Notes mature on September 1, 2029. We may redeem the Senior Notes, in whole or in part, at any time on or after September 1, 2026 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest.

During the three and six months ended June 30, 2024, we repurchased $9 million and $36 million par value, respectively, of our 5.625% convertible senior notes and we repaid these notes in full in July 2024.

During the six months ended June 30, 2024, we repurchased $4 million par value of our 7.75% convertible senior notes at a discount and recorded a gain on extinguishment of $0.1 million in Realized gains, net on our consolidated statements of income.

Note 18. Commitments and Contingencies

Lease Commitments

At June 30, 2024, we were obligated under eight non-cancelable operating leases with expiration dates through 2031 for $14 million of cumulative lease payments. For the six-months ended June 30, 2024 and 2023, our operating lease expense was $2 million and $3 million, respectively.

The following table presents our future lease commitments at June 30, 2024.

Table 18.1 – Future Lease Commitments by Year

During the six months ended June 30, 2024, we didnot enter into any new office leases with a lease term of greater thanone year. At June 30, 2024, our operating lease liabilities were $13 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $11 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 lease commencement date. At June 30, 2024, the weighted-average remaining lease term and weighted-average discount rate for our leases was 4 years and 5.3%, respectively.

Commitment to Fund Residential Investor Bridge Loans

As of June 30, 2024, we had commitments to fund up to $448 million of additional advances on existing residential investor bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At June 30, 2024, we carried a $2 million contingent liability related to these commitments to fund construction advances. During the three and six months ended June 30, 2024, we recorded a net market valuation expense of $0.4 million of $1 million, respectively, related to this liability through Mortgage banking activities and Investment of fair value changes, net on our consolidated statements of income.

Note 18. Commitments and Contingencies - (continued)

Commitment to Fund Joint Ventures

In the first quarter of 2024, we entered into a joint venture with CPP Investments pursuant to which we will offer to sell certain residential investor bridge and term loans we originate into joint venture entities that meet specified criteria at contractually pre-established prices. We have committed approximately $100 million of equity capital to be allocated to the joint venture entities and joint venture co-investments to be held in Redwood's investment portfolio. At June 30, 2024, we had contributed $1 million of capital to the joint venture.

In the second quarter of 2023, we entered into a joint venture with Oaktree to invest in residential investor bridge loans originated by our CoreVest subsidiary. We have a commitment to contribute up to approximately $19 million to the joint venture to fund the joint venture's purchase of residential investor bridge loans, under the updated terms of the joint venture. At June 30, 2024, we had contributed $5 million of capital to the joint venture.

For additional information related to our commitments and contingencies, see Note 17 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Loss Contingencies — Repurchase Reserves

We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential consumer and residential investor loans we have sold to securitization trusts or third parties and for conforming residential consumer loans associated with MSRs that we have purchased from third parties. We do not originate residential consumer loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation.

At June 30, 2024 and December 31, 2023, our repurchase reserve associated with our residential consumer loans and MSRs was $3 million and $5 million, respectively, and was recorded in accrued expenses and other liabilities on our consolidated balance sheets. During the six months ended June 30, 2024 and 2023, we receivedtwo andone repurchase request, respectively. During the six months ended June 30, 2024 and 2023 we repurchasedtwo andfive loans, respectively. During both the six months ended June 30, 2024 and 2023, we recorded reversals of repurchase provision expenses of $1 million, in Mortgage banking activities, net, on our consolidated statements of income.

At June 30, 2024 and December 31, 2023, our repurchase reserve associated with residential investor loans sold to third-parties was $0.2 million andzero, respectively, and was recorded in accrued expenses and other liabilities on our consolidated balance sheets. During the six months ended June 30, 2024 and 2023, we receivedten andthree repurchase requests, respectively, for residential investor loans sold to third parties, and repurchasedone andtwelve residential investor loans, respectively, that had been sold to third parties. At June 30, 2024, two open repurchase requests were outstanding for residential investor loans sold to third parties.

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 17 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2023 under the heading “Loss Contingencies - Litigation, Claims and Demands.”

For additional information related to our commitments and contingencies, see Note 17 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Note 19. Equity

The following tables provide a summary of changes to Accumulated other comprehensive income (loss) by component for three and six months ended June 30, 2024 and 2023.

Table 19.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component

Note 19. Equity - (continued)

The following tables provide a summary of reclassifications out of Accumulated other comprehensive income (loss) for the three and six months ended June 30, 2024 and 2023.

Table 19.2 – Reclassifications Out of Accumulated Other Comprehensive Loss

Issuance of Common Stock

We have an established program to sell common stock from time to time in at-the-market ("ATM") offerings. During the six months ended June 30, 2024, we didnot issue any shares of common stock under this program. At June 30, 2024, the remaining share issuance capacity under this program was approximately $50 million.

Preferred Stock

In January 2023, Redwood issued 2.8 million shares of 10.00% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") for gross proceeds of $70 million and net proceeds of approximately $67 million, after deducting the underwriting discount and other estimated expenses. The Series A Preferred Stock pays quarterly cumulative cash dividends through January 15, 2028 at a fixed annual rate of 10%, based on the stated liquidation preference of $25.00 per share, in arrears, when authorized by Redwood's Board of Directors and declared by the Company. Starting April 15, 2028, the annual dividend rate will reset to the five-year U.S. Treasury Rate plus a spread of 6.278%. The Series A Preferred Stock ranks senior to Redwood's common stock with respect to rights to the payment of dividends and the distribution of assets upon any liquidation, dissolution or

Note 19. Equity - (continued)

winding up of the Company. During the three and six months ended June 30, 2024, the Company declared preferred stock dividends of $0.625 and $1.2500 per preferred share, respectively. At June 30, 2024, preferred dividends payable totaling $1 million for the second quarter 2024 dividend were included in Accrued expenses and other liabilities and were payable on July 15, 2024 to preferred stockholders of record on July 1, 2024.

Direct Stock Purchase and Dividend Reinvestment Plan

During the three months ended June 30, 2024, we did not not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At June 30, 2024, approximately six million shares remained outstanding for future offerings under this plan.

Common Stock Warrants

In conjunction with establishing the joint venture with CPP Investments in March 2024, we issued warrants exercisable for 1,974,905 shares of our common stock (the “First Tranche Warrants”); and (ii) warrants exercisable for 4,608,112 shares of our common stock (the “Second Tranche Warrants” and together with the First Tranche Warrants, the “Warrants”). The First Tranche Warrants are exercisable from March 18, 2025 to March 18, 2029. The Second Tranche Warrants will vest upon achievement of specified deployment thresholds related to our joint venture with CPP Investments and, if vested, will be exercisable from the date the Second Tranche Warrants vest to March 18, 2029. The initial strike price of the Warrants is $7.76. The Warrants also contain a mandatory exercise provision, exercisable at Redwood’s option upon satisfaction of specified conditions, including the trading price of Redwood’s common stock exceeding a specified premium to the exercise price. Exercises of any Warrants will be settled on a net basis.

The Warrants met the criteria for equity classification under ASC 815, Derivatives and Hedging, and are recorded as a component of Additional paid-in-capital in Equity on our Consolidated Balance Sheets. The Warrants were valued at $0.8 million on the issuance date and are not subject to subsequent remeasurement. See Note 20 for discussion on the impact of the Warrants on earnings per common share.

For additional information related to our equity, see Note 18 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Note 20. Earnings per Common Share

The following table provides the basic and diluted earnings per common share computations for the three and six months ended June 30, 2024 and 2023.

Table 20.1 – Basic and Diluted Earnings per Common Share

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

During the three and six months ended June 30, 2024 and 2023, none of our convertible notes were determined to be dilutive and were not included in the calculation of diluted EPS under the "if-converted" method. Under this method, for convertible and exchangeable notes due in 2024 and 2025, 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 convertible notes due in 2027, if the potential conversion of the debt is dilutive, then the number of shares needed to settle the conversion premium are added to the shares outstanding used to calculate dilutive EPS.

During the three and six months ended June 30, 2024, none of our Warrants were determined to be dilutive to our calculation of dilutive earnings per common share. The warrants would have a dilutive effect on earnings per common share to the extent that the Warrants are vested and exercisable, and the market value per share of our common stock exceeds the strike price of the Warrants.

For the three and six months ended June 30, 2024,34,537,361 and 35,105,457 of common shares, respectively, related to the assumed conversion of our convertible notes, were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and six months ended June 30, 2023,44,712,499 and 45,509,857 of common shares, respectively, related to the assumed conversion of our convertible notes, were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and six months ended June 30, 2024, the number of outstanding equity awards that were antidilutive totaled 20,376 and 42,537 common shares, respectively. For the three and six months ended June 30, 2023, the number of outstanding equity awards that were antidilutive totaled 27,408 and 55,882 common shares, respectively.

Note 21. Equity Compensation Plans

At June 30, 2024 and December 31, 2023,9,414,568 and 10,211,459 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 $36 million at June 30, 2024, as shown in the following table.

Table 21.1 – Activities of Equity Compensation Costs by Award Type

At June 30, 2024, the weighted average amortization period remaining for all of our equity awards was less thantwo years.

Restricted Stock Units ("RSUs")

We generally grant RSUs annually, as part of our compensation process. In addition, RSUs are granted from time to time in connection with hiring and promotions. RSUs generally vest over the course of afour-year vesting period, and are distributed annually, at the end of each vesting period.

At June 30, 2024 and December 31, 2023, we had 791,439 and 593,570 RSUs outstanding, respectively. During the six months ended June 30, 2024, we granted 542,719 RSUs, distributed 271,010 RSUs, and 73,840 RSUs were forfeited due to employee termination. Unvested RSUs at June 30, 2024 vest through 2028.

Deferred Stock Units (“DSUs”)

We generally grant DSUs annually, as part of our compensation process. In addition, DSUs are granted from time to time in connection with hiring and promotions and in lieu of the payment in cash of a portion of annual bonus earned. DSUs generally vest over the course of afour-year vesting period, and are distributed after the end of the final vesting period or after an employee is terminated.

At June 30, 2024 and December 31, 2023, we had 5,576,627 and 4,821,172 DSUs outstanding, respectively, of which 2,603,607 and 2,284,480, respectively, had vested. During the six months ended June 30, 2024, we granted 1,245,295 DSUs, distributed 378,125 DSUs and 111,715 DSUs were forfeited due to employee termination. Unvested DSUs at June 30, 2024 vest through 2028.

Performance Stock Units (“PSUs”)

We generally grant PSUs annually, as part of our compensation process. PSUs generally have performance-based vesting over the course of athree-year vesting/performance period, and, subject to meeting certain performance criteria, will vest and be distributed after the end of the vesting period.

At June 30, 2024 and December 31, 2023, the target number of PSUs that were unvested was 2,598,194 and 3,072,039, respectively. Vesting for PSUs generally occurs approximately three years from their respective grant dates based on various total shareholder return performance calculations, as discussed in Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Note 21. Equity Compensation Plans - (continued)

For 473,845 target PSU awards that were granted in December 2020, the performance vesting period ended on January 1, 2024. Based upon the performance-based vesting criteria of these awards,564,975 shares of our common stock underlying these PSUs qualified for vesting, which was approved by our Board of Directors during the six months ended June 30, 2024. These PSUs were distributed as shares of our common stock in April 2024.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of 1,100,000 shares of common stock to be purchased in aggregate for all employees. As of June 30, 2024 and December 31, 2023,805,906 and 763,369 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at June 30, 2024.

Note 22. Components of Operating Expenses

Components of our general and administrative expenses, portfolio management costs, loan acquisition costs, and other expenses for the three and six months ended June 30, 2024 and 2023 are presented in the following table.

Table 22.1 – Components of Operating Expenses

(1)Includes $2 million and $1 million of severance and transition-related expenses for the six months ended June 30, 2024 and 2023, respectively.

(2)Includes $1 million of equity amortization expense related to employee terminations for both the six months ended June 30, 2024 and 2023. For the three months ended June 30, 2024 and 2023, long-term incentive award expense included $5 million and $4 million of expense, respectively, for awards settleable in shares of our common stock, and $2 million and $1 million of expense, respectively, for awards settleable in cash. For the six months ended June 30, 2024 and 2023, long-term incentive award expense included $11 million and $10 million of expense, respectively, for awards settleable in shares of our common stock, and $3 million and $3 million of expense, respectively, for awards settleable in cash.

For additional information related to cash-settled, long-term incentive awards, see Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Note 23. Taxes

For the six months ended June 30, 2024 and 2023, we recognized a provision for income taxes of $5 million and benefit from income taxes of $1 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at June 30, 2024 and 2023.

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

We assessed our tax positions for all open tax years (i.e., Federal, 2020 to 2024, and State, 2019 to 2024) at June 30, 2024 and December 31, 2023, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

As of June 30, 2024, the Company has a valuation allowance of $117 million for certain state deferred tax assets, as it is more likely than not that those assets will not be realized. The Company considers all available evidence, both positive and negative, to analyze the realizability of deferred tax assets. After evaluating these sources of taxable income, and considering the jurisdiction and character of the deferred tax assets, the Company continues to recognize its federal and certain state deferred tax assets of $40 million at June 30, 2024, as it believes it is more likely than not that the net deferred tax assets will be realized.