REDWOOD TRUST INC

We report on our business using three segments: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking, and Investment Portfolio. For additional information on our segments, refer to Note 4 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the three and six months ended June 30, 2024 and 2023.

Table 4 – Segment Results Summary

The sections that follow provide further detail on our business segments and their results of operations for the three and six months ended June 30, 2024.

Corporate/Other

The increase in net expense from Corporate/Other for three and six months was primarily due to, among other things, an increase in general and administrative expenses due to organizational restructuring charges associated with employee severance and related transition expenses as we aligned expenses with the evolving operating environment, a decrease in interest income earned on cash and cash equivalents during 2024 and an increase in interest expense related to our corporate debt due to increasing borrowing costs, relative to prior corporate debt financing.

Residential Consumer Mortgage Banking Segment

This segment consists of a mortgage loan conduit that acquires residential consumer loans from third-party originators for subsequent sale to whole loan buyers, securitization through our SEMT® (Sequoia) private-label securitization program, or transfer into our investment portfolio. Subordinate securities that we retain from our Sequoia securitizations (many of which we consolidate for GAAP purposes) are transferred to and held in our Investment Portfolio segment. We typically acquire prime jumbo mortgages and the related mortgage servicing rights on a flow basis from our extensive network of loan sellers. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of residential consumer loans held-for-sale within this segment. This segment’s main source of mortgage banking income is net interest income from its inventory of loans held-for-sale, securities utilized for hedging purposes, as well as income from mortgage banking activities, which includes valuation increases (or gains) on loans we acquire and subsequently sell, securitize, or transfer into our investment portfolio, and the hedges used to manage risks associated with these activities. Direct operating expenses and tax expenses associated with these activities are also included in this segment. See Note 5 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities, net).

The following table presents key earnings and operating metrics for our Residential Consumer Mortgage Banking segment during

the three and six months ended June 30, 2024.

Table 5 – Residential Consumer Mortgage Banking Earnings Summary and Operating Metrics

Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.

The increase in contribution from our Residential Consumer Mortgage Banking operations during the three and six-months periods ending June 30, 2024 was primarily attributable to higher mortgage banking volumes which drove overall income for the segment higher. In the preceding Consolidated Results of Operations section, we discussed additional factors impacting the change in net interest income and mortgage banking activities in the three and six months ended June 30, 2024 and 2023 for this segment. We actively manage our exposure to various market risks that can impact the value of our loan inventory in this segment, and our segment contribution in the three and six months ended June 30, 2024 showed an improvement year-over-year from these activities. We continue to evaluate monetary policy, housing trends and economic data, among other factors, in developing our hedging strategy and we may leverage a variety of instruments as hedges, including TBAs, interest rate futures, real estate securities, options and other types of securities.

Additionally, operating expenses for this segment increased for the three and six-month periods primarily due to an increase in loan acquisition costs related to the increase in loan purchases, as well as higher general and administrative expenses from variable compensation due to improved performance to date in 2024.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The provision for income taxes for the first half of 2024 resulted from GAAP income from these operations at our TRS during that period.

The following table provides the activity of residential consumer loans held in inventory for sale at our Residential Consumer Mortgage Banking business during the three and six months ended June 30, 2024.

Table 6 – Loan Inventory for Residential Consumer Mortgage Banking Operations — Activity

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

During the three and six months ended June 30, 2024, our residential consumer mortgage loan conduit locked $2.66 billion and $4.45 billion of loans ($2.43 billion and $3.73 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), and purchased $1.90 billion and $2.91 billion of loans, respectively. During the three and six months ended June 30, 2024, we distributed $6 million and $207 million (unpaid principal balance) through whole loan sales, respectively. During the three and six months ended June 30, 2024 we completed three and six securitizations backed by $1.42 billion and $2.61 billion of loans (unpaid principal balance), respectively. Both lock volume and securitization distribution volume for the second quarter of 2024 represented the highest volume levels since the Federal Reserve began raising interest rates in the first quarter of 2022, despite continued pressure on housing transaction activity. In addition to securitization distribution, we are also focused on finding alternative avenues for distribution, including identifying new whole loan buyers.

Capital allocation to this segment grew to $300 million at June 30, 2024, compared to $200 million at March 31, 2024. The change in capital allocation was driven by the increase in our volume of activity throughout the quarter. We continue to competitively bid on bulk jumbo loan acquisition opportunities, both new issue and seasoned collateral, while also focusing on our flow agreements with both new or re-established banking relationships as well as our on-going relationships with IMBs. As discussed in the Business Update section of this MD&A, looking ahead, we are focused on continuing to gain market share and volume opportunities with our growing seller network. We are also in discussion with banks regarding their seasoned jumbo loan collateral and locked our first seasoned jumbo loan portfolio in the second quarter of 2024.

We utilize a combination of capital and our residential consumer loan warehouse facilities to manage our inventory of residential consumer loans held-for-sale. At June 30, 2024, we had residential consumer warehouse facilities outstanding with six different counterparties, with $1.65 billion of total capacity and $763 million of available capacity. These facilities included non-marginable facilities (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent) with $500 million of total capacity and marginable facilities with $1.15 billion of total capacity.

Residential Investor Mortgage Banking Segment

This segment consists of a platform that originates residential investor loans for subsequent securitization, sale, or transfer into our investment portfolio. Residential investor loans are loans to investors in single-family rental and multifamily properties, which we classify as either "term" loans (which include loans with maturities that generally range from 3 to 30 years) or "bridge" loans (which include loans with maturities that generally range between 12 and 36 months). Term loans are mortgage loans secured by residential real estate (primarily 1-4 unit detached or multifamily) that the borrower owns as an investment property and rents to residential tenants. Residential investor bridge loans are mortgage loans which are generally secured by unoccupied (or in the case of certain multifamily properties, partially occupied) residential or multifamily real estate that the borrower owns as an investment and that is being renovated, rehabilitated or constructed. Our bridge loans are first-lien, interest-only loans. We may amend or modify bridge loans, including interest rate reductions and/or extended maturity dates, for borrowers experiencing financial difficulty based on specific facts and circumstances. In addition to modifying these loan terms, from time to time, we may also amend a loan's underlying budget (including allocations to hard/soft costs, interest reserves and other items) or construction and completion milestones, if warranted, based on progress with the project versus initial budget.

We typically distribute most of our term loans through our CAFL® private-label securitization program, or through whole loan sales, and typically transfer our residential investor bridge loans to our Investment Portfolio, where they will either be retained for investment or securitized, or sold as whole loans. Since 2023, we have also established joint ventures with global investment managers as another avenue through which we can distribute our bridge and term loan production.

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. 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 our CoreVest subsidiary. During the second quarter of 2024, we established warehouse financing lines to support our joint venture with CPP Investments and placed our first pool of CoreVest originated loans into this joint venture in June 2024. We will administer the joint ventures for ongoing fees and are entitled to earn additional performance fees upon realization of specified return hurdles.

This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of loans held-for-sale. This segment’s main sources of mortgage banking income are net interest income earned on loans while they are held in inventory, origination and other fees on loans, mark-to-market adjustments on loans from the time loans are originated or purchased to when they are sold, securitized or transferred into our investment portfolio, and gains/losses from associated hedges. Direct operating expenses and tax expenses associated with these activities are also included in this segment.

The following table presents an earnings summary for our Residential Investor Mortgage Banking segment for the three and six months ended June 30, 2024 and 2023:

Table 7 – Residential Investor Mortgage Banking Earnings Summary

Residential Investor Mortgage Banking income presented in the table above is comprised of net interest income from our loans held-for-sale in inventory, mortgage banking activities, net (see Note 5 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities), and other income, net for this segment. Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses (including amortization of purchased intangibles) for this segment.

The increase in segment contribution from our Residential Investor Mortgage Banking operations during the three-month period ended June 30, 2024 was primarily attributable to higher mortgage banking income in the second quarter of 2024, as discussed in the preceding Consolidated Results of Operations and in the following Funding Activity sections of this MD&A. The decrease in segment contribution in this segment during six-month period ended June 30, 2024 was primarily attributable to lower mortgage banking income, partially offset by lower general and administrative costs due to lower headcount and fixed compensation expenses in this segment, as we effected an organizational restructuring and aligned expenses with the evolving operating environment.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit from income taxes for the first half of 2024 was primarily due to GAAP losses generated by this segment's operations in those periods.

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

Table 8 – Residential Investor Loans - Funding Activity

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

(2)Funding and sales for Residential investor bridge loans for the three and six months ended June 30, 2024, includes $6 million and $21 million, respectively, related to construction draws on loans sold to our Oaktree joint venture.

(3)For residential investor term loans, amounts primarily represent loans transferred into consolidated securitizations reflected within our Investment Portfolio Segment. Residential investor bridge loan amounts represent the transfer of loans originated or acquired by our Residential Investor Mortgage Banking segment at our TRS and transferred to our Investment Portfolio segment at our REIT, as described in the preceding footnote.

During the three and six months ended June 30, 2024, we funded $459 million and $785 million of residential investor loans (53% and 57% bridge and 47% and 43% term), respectively. The increase in overall funding volumes during the three-month period relative to the first quarter of 2024 is largely attributable to an increase in term loan volumes, as well as SAB and DSCR products. The second quarter was our highest volume quarter for SAB and DSCR to date. As the outlook for rates has tempered, investors are increasingly interested in our fixed-rate term product – as a result, June 2024 term loan origination was our highest funding month in a year. Looking ahead, we expect sustained demand from sponsors seeking fixed-rate bridge loans or term loans with more prepayment flexibility and will continue to assess our bridge loan portfolio for opportunities to refinance borrowers into term loans. We remain focused on strongly-underwritten and less rate-sensitive products that can be distributed efficiently and profitably.

Residential investor loan distribution activity during the three months ended June 30, 2024 was $415 million, including both whole loan sales and joint venture distributions, relative to $59 million during the three months ended March 31, 2024. In particular, we distributed our first pool of loans into our joint venture with CPP Investments during the quarter ended June 30, 2024. Looking ahead, given our established joint ventures, as well as growing network of whole loan buyers, we continue to see healthy demand for our production through our distribution channels.

Capital allocated to this segment decreased during the second quarter of 2024 to $97 million at June 30, 2024 from $124 million at March 31, 2024. We expect this trend could continue as we distribute more of our production into joint ventures and use less balance sheet capital for aggregation. We utilize a combination of capital and loan warehouse facilities to manage our inventory of residential investor loans that we hold for sale. At June 30, 2024, we had residential investor warehouse facilities outstanding with seven different counterparties, with $2.53 billion of total capacity (used for both term and bridge loans) and $1.53 billion of available capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent).

Investment Portfolio Segment

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

The following table presents an earnings summary for our Investment Portfolio segment for the three and six months ended June 30, 2024 and 2023.

Table 9 – Investment Portfolio Earnings Summary

Segment contribution from the Investment Portfolio increased during both the three- and six-month period ended June 30, 2024. The first half of 2024 reflected improved credit performance and spread tightening on our securities portfolio, relative to negative investment fair value changes in the first half of 2023. Additionally, HEI Income and Other Income were higher in the three and six-month periods of 2024, as discussed in the Consolidated Results of Operations section of this MD&A. These improvements were partially offset by lower net interest income and higher credit reserves on our bridge portfolio, as discussed in the preceding Consolidated Results of Operations section of this MD&A.

Investment fair value changes, net is primarily comprised of the change in fair value (both realized and unrealized) of our portfolio investments accounted for under the fair value option and hedges associated with these investments. See Table 6.4 in Note 6 in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of investment fair value changes (the difference in amounts in the table above and in Table 6.4 in the notes to our consolidated financial statements relates to fair value changes for investments held at corporate/other).

In the second quarter of 2024, stable fundamental credit performance continued across most assets within our single-family residential Investment Portfolio. Fundamental performance of our residential consumer assets within our Investment Portfolio continues to be driven by strong employment data, embedded equity protection associated with loan seasoning and borrowers motivated to stay current on their low-coupon mortgages. Notably, 90 day+ delinquencies on our SLST portfolio declined to 7.3% at June 30, 2024, compared to 9.1% at June 30, 2023.

The residential investor sector overall continues to manage through macro crosswinds that have impacted borrower sentiment and reduced transaction volumes across the industry. We remain focused on the impact that higher short-term interest rates have on borrowers, notwithstanding overall strength in leasing trends. In anticipation of this impact, our team has continued to work with borrowers well in advance of their loan maturities to assess project plans and ensure they manage towards successful completions. Delinquencies greater than 90 days across our residential investor bridge loans were slightly higher in the second quarter of 2024, increasing across most of the renovate/build to rent portfolio versus a slight decline in the multifamily portfolio. REO values in the residential investor bridge portfolio decreased slightly in the second quarter of 2024, and we continue to manage through pockets of stress, largely with a handful of more significant borrower relationships where a combination of rate modifications and fresh equity has been utilized. Overall velocity in the bridge portfolio remains positive, as approximately 10% of the bridge book paid off during the second quarter and we resolved 26% of loans that were 90 or more days delinquent at March 31, 2024.

Operating expenses at this segment increased $2 million and $3 million in the three and six month periods, respectively, due to increased costs incurred for organizational restructuring charges associated with employee severance and related transition expenses incurred within this segment in the first quarter of 2024 as well as increased portfolio management costs incurred for the management of specially serviced residential investor bridge loans and related workout arrangements in the first half of 2024.

We hold certain of our investments, primarily our MSRs, at our taxable REIT subsidiary. Our provision for income taxes at this segment is primarily driven by the amount of income earned from portfolio assets and, for each of the three and six month periods, reflects positive net income earned from investment portfolio activities at our taxable REIT subsidiary.

The following table presents details of our Investment Portfolio at June 30, 2024 and December 31, 2023 organized by investments organically created through our mortgage banking segments and those acquired from third-parties. Amounts presented in the table represent our retained economic interests in consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted.

Table 10 – Investment Portfolio - Detail of Economic Interests

Footnotes to Table 10

(1)Represents our retained economic investment in securities issued by consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $6.95 billion of loans and $6.69 billion of ABS issued associated with these investments at June 30, 2024. We consolidated $4.64 billion of loans and $4.43 billion of ABS issued associated with these investments at December 31, 2023.

(2)Organic residential other investments at June 30, 2024 includes net risk share investments of $24 million, representing $28 million of restricted cash and other assets, net of other liabilities of $5 million.

(3)Represents our retained economic investment in securities issued by consolidated CAFL Term securitization VIEs. For GAAP purposes, we consolidated $2.74 billion of loans and $2.41 billion of ABS issued associated with these investments at June 30, 2024. We consolidated $2.97 billion of loans and $2.65 billion of ABS issued associated with these investments at December 31, 2023.

(4)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $1.30 billion of loans and $1.04 billion of ABS issued associated with these investments at June 30, 2024. We consolidated $1.36 billion of loans and $1.09 billion of ABS issued associated with these investments at December 31, 2023.

(5)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $422 million of loans and $388 million of ABS issued associated with these investments at June 30, 2024. We consolidated $425 million of loans and $392 million of ABS issued associated with these investments at December 31, 2023.

(6)Represents our economic investment in consolidated Servicing Investment variable interest entities. At June 30, 2024, for GAAP purposes, we consolidated $258 million of servicing investments and $146 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2023, for GAAP purposes, we consolidated $257 million of servicing investments and $154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.

(7)At June 30, 2024 and December 31, 2023, represents HEI owned at Redwood of $253 million and $245 million, respectively and our retained economic investment in securities issued by consolidated HEI securitization entities of $41 million and $34 million, respectively.

The size of our Investment Portfolio decreased slightly since December 31, 2023, due to the decrease in residential investor bridge loans, offset by actively deploying capital into new residential Sequoia securities and other residential securities investments. At June 30, 2024 and December 31, 2023, 78% and 80% of our Investment Portfolio economic interests were organically created, respectively, and 22% and 20% were purchased from third parties, respectively. Capital deployment activities for the three and six months of 2024 represented the highest quarterly level of capital deployment into investments since the third quarter of 2022. In the second quarter of 2024, we continued to deploy capital into accretive investments, ultimately deploying $133 million of capital in certain third-party securities, as well as the retention of securities created from our Sequoia securitizations. This compares to $50 million of capital deployed during the second quarter of 2023. See the Investments Detail and Activity section that follows for additional detail on our portfolio investments and their associated borrowings.

Investments Detail and Activity

This section presents additional details on our investments (both within our Investment Portfolio segment and held at a corporate level) and their activity during the three and six months ended June 30, 2024.

Real Estate Securities Portfolio

The following table sets forth activity in our real estate securities portfolio for the three and six months ended June 30, 2024, organized by investments organically created through our mortgage banking segments and acquired from third-parties. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP. Additionally, this table includes securities held both in our Investment Portfolio segment and our Residential Consumer Mortgage Banking segment.

Table 11 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities

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

(2)At June 30, 2024, $26 million of Sequoia Securities and $75 million of Other Third-Party Securities were used as hedges for our Residential Consumer Mortgage Banking operations, and were included in our Residential Consumer Mortgage Banking segment.

At June 30, 2024, our securities owned at Redwood and in consolidated entities consisted of fixed-rate assets (98%), adjustable-rate assets (2%) and hybrid assets that reset within the next year (<1%).

We directly finance our holdings of real estate securities with a combination of non-recourse debt, non-marginable recourse term debt and marginable debt in the form of repurchase (or “repo”) financing. At June 30, 2024, we had: real estate securities with a fair value of $429 million (including securities owned in consolidated Sequoia and CAFL securitization entities) that were financed with $271 million of non-marginable recourse debt through our subordinate securities financing facilities; re-performing loan securities with a fair value of $258 million (including securities owned in consolidated securitization entities) that were financed with $163 million of non-recourse securitization debt (ABS issued); real estate securities with a fair value of $123 million (including securities owned in consolidated securitization entities) that were financed with $88 million of recourse debt incurred through repurchase facilities with five different counterparties; and $57 million of securities that were financed using a financing facility. The remaining $290 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at June 30, 2024. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.

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

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

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

(3)At June 30, 2024, $26 million of Sequoia Securities and $75 million of Other Third-Party Securities were used as hedges for our Residential Mortgage Banking operations, and were included in our Residential Consumer Mortgage Banking segment.

We primarily target investments that have a sensitivity to housing credit risk, typically sourced through our operating businesses where we control the underwriting and review of underlying collateral. During the second quarter of 2024, our overall residential and Agency multifamily securities portfolio continued to demonstrate stable fundamentals, driven by underlying loan seasoning, low 90+ day delinquencies and embedded growth in home prices and rents. Given the seasoned nature of our investments (particularly within our RPL securities and Sequoia securities), many of our residential investments are supported by substantial home price appreciation and borrower equity in the underlying homes. For the term loans underlying our consolidated CAFL securities, 90 day+ delinquencies increased modestly during the second quarter of 2024.

With a weighted average quarter-end carrying value of 68 cents to each one dollar of face value, we estimate our securities portfolio had approximately $2.18 per common share of net discount to par at quarter end. We believe continued credit performance in our underlying securities portfolio, combined with firming of risk sentiment and a return to more normalized prepayment speeds, could contribute to our ability to realize potential upside in book value over time, reversing unrealized losses taken in 2023 that were largely driven by technical spread widening.

Residential Investor Bridge Loans Held-for-Investment

The following table provides the activity of Residential investor bridge loans held-for-investment during the three and six months ended June 30, 2024.

Table 13 – Residential Investor Bridge Loans Held-for-Investment - Activity

(1)We originate residential investor bridge loans at our TRS and transfer a portion of them to our REIT that we intend to hold for investment. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated statements of income. Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income.

Our $1.88 billion of Residential investor bridge loans held-for-investment at June 30, 2024, were comprised of first-lien, interest-only loans with a weighted average coupon of 10.33% and original maturities of 6 to 36 months. At origination, the weighted average FICO score of sponsors of these loan borrowers was 728 and the weighted average LTV ratio of these loans was 64%. At June 30, 2024, 6% of the loans in this portfolio, with an aggregate fair value of $116 million and an unpaid principal balance of $128 million, were greater than 90 days delinquent. Included in the 90 days delinquent balance are loans in foreclosure with an aggregate fair value of $90 million and an aggregate unpaid principal balance of $102 million. Additionally, REO associated with bridge loans decreased from $88 million at December 31, 2023, to $86 million at June 30, 2024 resulting from a decrease in fair value of $5 million, offset by transfers to REO of $4 million during the six months ended June 30, 2024.

The fair value of residential investor bridge loans held-for-investment of $1.88 billion at June 30, 2024 declined from $2.07 billion at December 31, 2023. Changes in the fair value of these loans during the second quarter of 2024 primarily reflect reductions in values for non-accrual bridge loans and certain modified bridge loans since the fourth quarter of 2023. In the second quarter of 2024, $379 million of residential investor bridge loans (representing cumulative unpaid principal balance as of June 30, 2024) were subject to modifications. Of this balance, $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. The modifications may involve conversions of the contractual interest on the loans from floating to fixed and/or deferrals of a portion of the stated pay rate to an extended date or to maturity. In the second quarter of 2024, modifications on these loans maintained a weighted average contractual interest rate of approximately 10%, of which 4.35% represented deferred interest. In addition, $4 million of residential investor bridge loans (representing cumulative unpaid principal balance as of June 30, 2024) were subject to modifications to extend the loan term, coupled with an increase in interest rate.

While we continue to work proactively with certain borrowers to address the impacts of rising interest rates, elongated project timelines, or other issues, further increases in delinquencies or modifications within our residential investor bridge loan portfolio could ultimately result in further decreases in net interest income and the fair value of our bridge loans held for investment, and further instances of borrower/sponsor stress could lead to realized credit losses. In addition to the loan modifications described above, during the second quarter of 2024, we extended the maturities of $69 million of loans (representing cumulative unpaid principal balance as of June 30, 2024). An increase in maturity extensions in the residential investor bridge portfolio would increase the expected time to repayment with a potential impact on fair values and credit losses. However, given the overall short duration nature of our bridge loans, a certain level of maturity extensions are a regular asset management outcome for these loans, irrespective of market conditions. In the second quarter of 2024, the average length of maturity extensions granted on residential investor bridge loans was just under five months.

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

We finance our residential investor bridge loans with a combination of recourse, non-marginable warehouse facilities, non-recourse, non-marginable facilities, and non-recourse securitization debt. At June 30, 2024, we had $860 million of debt incurred through warehouse facilities with six counterparties, which was secured by $1.20 billion of residential investor bridge loans; and $648 million of securitization debt secured by $686 million of residential investor bridge loans, $18 million of restricted cash and $53 million of other assets. At June 30, 2024, the unpaid principal balance of bridge loans financed was $1.90 billion, of which $457 million was financed with recourse, non-marginable facilities, $764 million was financed with non-recourse, non-marginable facilities, and $680 million was financed through non-recourse CAFL bridge securitizations.

The following table provides the composition of residential investor bridge loans held-for-investment by product type as of June 30, 2024 and December 31, 2023.

Table 14 – Residential Investor Bridge Loans Held-for-Investment - By Product/Strategy Type

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

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

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

At June 30, 2024, the fair value of our total residential investor bridge loans held-for-investment and associated REO represented 97.9% of the combined unpaid principal balance of these loans and the unpaid principal balance of the loans associated with the REO at time of foreclosure. The fair value of multifamily loans within this population ($827 million at June 30, 2024) and associated multifamily REO ($44 million at June 30, 2024), represented 96.6% of the combined unpaid principal balance of these loans and the unpaid principal balance of the loans associated with the REO at time of foreclosure.

Home Equity Investments

The following table provides the activity of HEI held at our investment portfolio during the three and six months ended June 30, 2024.

Table 15 – HEI at Investment Portfolio Segment - Activity

(1)Our HEIpresented in this table as of June 30, 2024, include $321 million of HEI owned in our consolidated HEI securitization entities and $253 million of HEI owned directly at Redwood.

We finance a portion of our HEI through a short-term warehouse facility. At June 30, 2024, there was $103 million of debt outstanding on this warehouse facility, secured by HEI with a fair value of $212 million.

Additional details on our HEI are included in Note 11 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. During the three and six months ended June 30, 2024, positive investment fair value changes primarily reflected improvements in actual and forecasted home price appreciation, relative to previously modeled amounts.

Other Investments

The following table sets forth our other investments activity at our Investment Portfolio segment by significant asset type for the three and six months ended June 30, 2024.

Table 16 – Other Investments – Activity(1)

Footnotes to Table 16

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

(2)Our servicing investments are owned through our consolidated Servicing Investment entities. At June 30, 2024, our economic investment in these entities was $100 million (for GAAP purposes, we consolidated $258 million of servicing investments, $146 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities).

Additional details on our Other Investments is included in Note 12 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.