REDWOOD TRUST INC

Business Update

The second quarter of 2024 brought improved efficiency metrics across our segments, as we grew profitability driven by strong volumes and a reduction in fixed costs. Book value generally remained stable at $8.73 per share and we delivered total economic return of 1.3% for the second quarter, inclusive of our $0.16 per share dividend.

One area of focus continues to be deepening our relationships with loan sellers who are banks — and our recent activity with banks illustrates the core asset/liability challenges these institutions face when funding fixed rate mortgages with deposits. Recent commentary from the Federal Reserve also suggests that a re-proposal of the Basel III “endgame” bank capital regulations is forthcoming. Whatever the final form, we believe the Basel rules will inevitably impact the bank capital regime holistically, and further evolve how banks serve their residential mortgage customers in a capital and duration efficient manner. We anticipate that under the new regulatory regime, many banks will also have to manage overall balance sheet size, creating a new addressable market for us from the $1.3 trillion of residential jumbo mortgage loans currently owned by depositories, a development we have long predicted. To wit, approximately 35% of our second quarter bank lock volume was on seasoned portfolios, signaling the start of a durable opportunity that can complement our on-the-run flow business.

As rates continue to impact overall housing activity, these dynamics are driving our Residential Consumer market share higher. Lock volume with banks – a group which now account over half of our 203 sellers – grew 80% from the first quarter of 2024 on strong bulk and flow volume. We are now actively engaged with 60% of the top 50 jumbo originators overall – a significant change in our traditional reach – and our current estimated second quarter market share of 6% was itself a substantial increase from prior quarters.

Secondary financing products also remained in focus during the second quarter, as we gained momentum in purchasing closed end second lien (“CES”) loans and directly originating home equity investments (“HEI”). Untapped home equity in the U.S. continues to grow and grabbed recent headlines with Freddie Mac’s (“Freddie”) preliminary entry into purchasing CES. This development adds credence to the need for more institutional structure around home equity products, an area of competitive advantage for a platform of our tenure. While we remain measured in our HEI rollout awaiting the interest rate cycle to turn, we believe Freddie’s provisional approval creates a refreshed window to use our broadened capital base to support the GSEs in their core missions.

Demand from private credit institutions also drove a strong operating quarter for our Residential Investor segment, which delivered its highest return since the end of 2021. We funded $459 million of Investor loans, up 41% from the first quarter of 2024 with a near even split between term and bridge loans, important progress in our production mix as term loan fundings rose 91% quarter over quarter. Our joint ventures with Oaktree Capital Management and CPP Investments spoke for most of our second quarter 2024 production and were further complemented by an accretive sale of approximately $240 million in term loans to a top-tier insurance-backed buyer. We believe that deeper inroads with new loan buyers, combined with further portfolio growth within our joint ventures, will help evolve the platform’s revenues towards recurring and predictable fee streams, facilitating scale with less direct capital usage through time.

While credit performance in our broader Residential Investor portfolio remains stable overall, workout activity persisted on the legacy multifamily bridge portfolio, a product we largely discontinued originating in the summer of 2022. At June 30, 2024, that portfolio comprised less than 15% of our overall capital base and ran off approximately 10% during the second quarter of 2024. Through the process of stabilizing this portfolio, we have continued to incur incidental workout costs as our asset management team makes progress towards productive resolutions. Given the pace of paydowns and workout activity, we expect the portfolio to continue factoring down in the next two to three quarters, with moderating interest rates potentially accelerating payoff and refinance activity.

Fundamentals on Redwood’s overall $3.4 billion investment portfolio continue to perform well, exceeding our modeled expectations. As interest rates stabilize, and potentially begin to come down, we believe the book values of our long-term fixed-rate investments stand to directly benefit. With the overall portfolio still carried at an aggregate $2.18 per common share net discount, this represents a key source of earnings upside that in recent quarters has been hard to unlock.

Looking ahead to the second half of the year, we are preparing for unexpected challenges – particularly in light of a rapidly evolving Presidential election cycle. But in terms of controlling the controllable, we remain pleased with our market positioning and will continue to execute on our strategic goals. Though interest rates have been stubbornly high, a data-driven Federal Reserve now has increasing evidence to commence a more accommodative monetary policy. Our operating advantages are designed to be durable and we believe the turn in this cycle can have an important boomerang effect across our business lines.

Second Quarter Key Financial Results and Metrics

The following table presents key financial metrics for the three and six months ended June 30, 2024.

Table 1 – Key Financial Results and Metrics

(*) Total economic return is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period. It does not represent an annualized figure.

Second Quarter Operational Highlights

Residential Consumer Mortgage Banking

•Locked $2.7 billion of loans,(1) up 49% from $1.8 billion in the first quarter of 2024

◦Second quarter 2024 volumes were driven by an 83% quarterly increase in bank lock volume, including seasoned loans in bulk form

◦Actively engaged with 113 bank sellers, up 16% from the first quarter of 2024

◦Achieved gross margins of 72bps, relative to our historical target range of 75bps to 100bps

•Distributed $1.4 billion of jumbo loans through three securitizations

Residential Investor Mortgage Banking

•Funded $459 million of loans in the second quarter of 2024 (53% bridge and 47% term), up 41% from $326 million in the first quarter of 2024

◦June 2024 represented the strongest funding month since mid-2023

◦Second quarter 2024 term fundings were up 91% relative to the first quarter 2024

◦Second quarter 2024 single-asset bridge ("SAB") and debt service coverage ratio ("DSCR") loan fundings were up 50% relative to the first quarter 2024

•The second quarter 2024 represented the platform's largest volume life-to-date of non-securitization distribution

◦Distributed $415 million of loans through whole loan sales and sales to joint ventures ("JVs"), including $238 million of term loans sold to a large institutional investor

Investment Portfolio

•Deployed approximately $133 million of capital into internally sourced and third-party investments, the largest quarter of deployment since the third quarter of 2022

•RPL and jumbo securities saw improvement in 90 day+ delinquency rates at 7.3% and 0.2%, respectively; 90 day+ delinquency rates for our combined Residential Investor portfolio were 5.4%, as compared to 4.9% at March 31, 2024(2)

•Secured recourse leverage ratio of 0.6x at June 30, 2024, down from 0.9x at March 31, 2024(3)

Second Quarter Financing / Corporate Highlights

•Unrestricted cash and cash equivalents of $276 million and unencumbered assets of approximately $332 million at June 30, 2024

•Total excess warehouse financing capacity of $3.8 billion at June 30, 2024

◦Successfully renewed or established financing facilities with key counterparties for $2.5 billion of capacity, including two lines to support our JV with CPP Investments

•Issued $85 million (gross proceeds) of senior unsecured notes due 2029

•Completed three investments through RWT Horizons, including two follow-ons in existing portfolio companies (at valuations above our initial investment)

Footnotes to Second Quarter Business Highlights

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1. Lock volume represents loans identified for purchase from loan sellers. Lock volume does not account for potential fallout from pipeline that typically occurs through the lending process.

2. Re-performing loan ("RPL") and jumbo securities delinquency rate calculations are weighted by notional balances of loans collateralizing each of our securities investments. Bridge loan and CAFL securities delinquency rates are calculated as BPL term loans in our consolidated CAFL securitizations, loans held at JVs, unsecuritized bridge loans held for investment, and bridge and term loans held for sale with a delinquent payment greater than 90 days, divided by the total notional balance of loans in consolidated CAFL securitizations, loans held at JVs, unsecuritized bridge loans held for investment, and bridge and term loans held for sale. Bridge loan delinquency rate calculations were updated in Q2'24 to include full UPB values for loans in joint ventures (prior period presented was conformed to updated calculation methodology).

3. Secured recourse leverage ratio for our Investment Portfolio is defined as secured recourse debt financing our investment portfolio assets divided by capital allocated to our investment portfolio.

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