REDWOOD TRUST INC

Within this Results of Operations section, in accordance with Item 303(c)(2)(ii) of Regulation S-K, we have elected to discuss any material changes in our results of operations by comparing our quarter ended June 30, 2025 to the immediate preceding quarter ended March 31, 2025. We believe that providing a sequential discussion of our results of operations offers highly relevant information for investors and stakeholders to understand and analyze our business activities. Additionally, we generally continue to address material changes in our results of operations for the most recent fiscal year-to-date period, compared to the corresponding year-to-date period of the preceding fiscal year, pursuant to Item 303(c)(2)(i) of Regulation S-K. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the second quarter of 2025, compared to the first quarter of 2025.

Consolidated Results of Operations

The following table presents the components of our net income (loss) for the three and six months ended June 30, 2025 to the immediate preceding quarter ended March 31, 2025 and year-to-date period ended June 30, 2024.

Table 1 – Net (Loss) Income

Net Interest Income

Net interest income decreased by $14 million during the second quarter of 2025, primarily due to an $11 million decline from our Legacy Investments segment. The decrease was largely due to an increase in the balance of our legacy unsecuritized bridge and term loan portfolios on non-accrual during the quarter, which in certain cases caused a reversal of prior quarter net interest income. This segment was previously included within Redwood Investments, and primarily consists of assets no longer aligned with our core strategic objectives and involves positions primarily linked to legacy unsecuritized bridge and term loan portfolios, our third-party securities portfolio, and other non-core legacy assets. These assets are in the active process of sale, runoff, or other disposition as part of accelerated strategic repositioning of our business model. This segment is expected to wind down over time as the assets are sold or otherwise resolved.

Sequoia Mortgage Banking contributed $3 million lower net interest income due to lower volume as total lock volumes fell by 10% compared to the first quarter of 2025. Furthermore, a large, seasoned bulk portfolio that we locked in the first quarter and settled in the second quarter lowered the gross coupon on our pipeline relative to the first quarter.

Additional detail on net interest income is provided in the“Net Interest Income” section that follows.

Mortgage Banking Activities, Net

Mortgage Banking activities, net increased by $8 million during the second quarter of 2025, primarily due to higher CoreVest Mortgage Banking revenues.

The increase in CoreVest Mortgage Banking activities of $6 million was primarily attributable to improved economics from whole loan sales and joint venture executions, as we saw a 38% increase in loan distribution volume to $583 million, the highest level of quarterly distribution in CoreVest's history. Increased volume and our origination mix contributed to the increase in revenue, as loan fundings increased by 6% to $509 million, compared to the prior quarter. Notably we saw higher originations of higher-margin term loans.

The increase in Sequoia Mortgage Banking activities of $2 million was primarily attributable to a strong execution on loan sales despite a 10% decline in total lock volume from the prior quarter, as well as outperformance of this segment's interest rate hedges. Gain-on-sale margins expanded to 131 basis points, exceeding historical averages, and distribution activity remained robust, with $2.9 billion of loans distributed.

A more detailed analysis of the changes in this line item is included in the “Sequoia Mortgage Banking Segment” and “CoreVest Mortgage Banking Segment” sections that follows.

Investment Fair Value Changes, Net

Investment fair value changes, net declined by $80 million, resulting in a loss of $85 million during the second quarter of 2025. The decline was primarily driven by negative fair value adjustments on our legacy unsecuritized bridge loans, and to a lesser extent, legacy unsecuritized term loans, reflecting both realized and anticipated near-term resolutions on these loans and other non-core legacy assets, as well as changes in the underlying performance of certain legacy unsecuritized bridge and term loan portfolios. In the second quarter of 2025, we began reporting these loans as part of our Legacy Investments segment.

A more detailed analysis of the changes in this line item is included in the “Redwood Investments Segment” and"Legacy Investments Segment" section that follows.

HEI Income, net

HEI income, net decreased by $23 million, resulting in a loss of $13 million during the second quarter of 2025. This was primarily driven by a $14 million fair value loss on our third-party originated HEI portfolio, which are legacy HEI options originated by third-parties and primarily acquired between 2019 and 2022. This fair value change reflected an anticipated near-term disposition, as we intend to a substantial portion of the portfolio during the third quarter of 2025. In the second quarter of 2025, we began reporting this HEI portfolio as part of our Legacy Investments segment. Furthermore, HEI income, net declined due to negative fair value adjustments due to a slowdown in home price appreciation and prepayment speeds during the quarter.

Additional detail on our HEI income is presented in Table 10.3 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Operating Expenses

Operating expenses increased by $4 million during the second quarter of 2025, primarily due to higher portfolio management costs related to specially-serviced residential investor bridge loans.

Additional detail on our General and administrative expenses is presented in Table 22.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our Taxable REIT Subsidiaries ("TRS"), which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. The tax provision for the second quarter of 2025 declined by $2 million, primarily due to losses related to legacy residential investor loans and a reduction in our estimated effective tax rate, reflecting a favorable change for us based on California’s tax apportionment methodology for financial institutions.

Net Interest Income

Net interest income decreased by $8 million for the six months ended June 30, 2025 compared to the same period in 2024. The decline was largely due to an increase in the balance of our legacy unsecuritized bridge and term loan portfolios on non-accrual during the second quarter of 2025, which in certain cases caused a reversal of prior period's net interest income. In addition, corporate interest expense rose by $6 million due to higher unsecured debt balances and fully utilizing the maximum capacity under the secured revolving financing facility established in 2024.

These decreases were partially offset by net interest income from Sequoia and CoreVest mortgage banking, including a $17 million increase from Sequoia, driven by higher loan purchase volumes, capital deployment into certain interest rate hedging instruments, and lower base floating rates on our financing facilities as SOFR declined over 90 basis points between June 30, 2024 and June 30, 2025. CoreVest mortgage banking also contributed $1 million increase in net interest income.

Additional detail on net interest income is provided in the“Net Interest Income” section that follows.

Mortgage Banking Activities, Net

Mortgage Banking activities, net increased by $40 million in the six months ended June 30, 2025 compared to the same period in 2024, due to both higher Sequoia Mortgage Banking and CoreVest Mortgage Banking revenues.

The increase in Sequoia Mortgage Banking activities, net of $32 million was primarily attributable to a 71% year-over-year increase in lock volumes during the six-month period. Lock volume for the six-month period ended June 30, 2025 totaled $7.6 billion, compared to $4.4 billion for the period ended June 30, 2024 as 2025 volumes were supported by continued strength across both flow and bulk executions, including the bulk purchase of a $1.0 billion seasoned loan portfolio in the first quarter of 2025. This also included $441 million of loans locked by Aspire, a mortgage banking business initiative that was newly established in 2025. Sequoia achieved gain-on-sale margins of over 100 basis points, exceeding typical historical levels, and distributed $4.9 billion of loans in the six months ended June 30, 2025.

The increase in CoreVest Mortgage Banking activities, net of $8 million was primarily attributable to higher funding volumes, totaling $991 million in the six months ended June 30, 2025, representing a 26% increase to the same period in 2024. The increase also reflected improved margins and execution economics, supported by strong demand for residential transition (RTL) loans, Term loans, and DSCR loans, as well as active securitization, whole loan sale and joint venture activity across the platform.

A more detailed analysis of the changes in this line item is included in the “Sequoia Mortgage Banking Segment” and “CoreVest Mortgage Banking Segment” sections that follows.

Investment Fair Value Changes, Net

Investment fair value changes, net changed by $113 million, from a $23 million gain in the six months ended June 30, 2024 to a $90 million net loss in the same period in 2025. The decline was primarily related to impairments and adverse fair value adjustments reflecting both realized and anticipated near-term resolutions on our legacy unsecuritized bridge and term loan portfolios and other non-core legacy assets, as well as changes in the underlying performance of certain Legacy bridge loans. These losses were partially offset by fair value gains, net of associated interest rate hedges, on our securities portfolio, which benefited from tighter credit spreads during the period.

A more detailed analysis of the changes in this line item is included in the “Redwood Investments Segment” and"Legacy Investments Segment" section that follows.

HEI Income, net

HEI income, net decreased by $28 million, from a $25 million gain in the six months ended June 30, 2024 to a $3 million loss in the same period in 2025. This was primarily driven by driven by similar trends as described above for the three-month periods in the section above, including the anticipated sale of a substantial portion of this portfolio in the third quarter of 2025.

Additional detail on our HEI income is presented in Table 10.3 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Operating Expenses

Operating expenses increased by $17 million in the six months ended June 30, 2025 compared to the same period ended in 2024, primarily driven by an increase in fixed compensation associated with hiring directly at our operating platforms to support higher volumes and profitability, as well as higher variable and equity compensation expense and higher portfolio management costs related to specially serviced residential investor bridge loans.

Additional detail on our General and administrative expenses is presented in Table 22.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries ("TRS"), which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. The increase of $5 million for the tax provision in the six months ended June 30, 2025 was primarily the result of a higher effective rate and higher income from mortgage banking activities at our TRS compared to the same period ended June 30, 2024.

Consolidated Net Interest Income

The following tables present the components of net interest income recorded in each line item of our consolidated statements of income for the three and six months ended June 30, 2025 to the immediate preceding quarter ended March 31, 2025 and year-to-date period ended June 30, 2024.

Table 2 – Consolidated Net Interest Income

(1)Average balances for residential consumer loans, residential investor loans, and trading securities are calculated based upon carrying values, which represent fair values. Average balances for AFS securities, debt facilities, corporate debt and certain ABS issued are calculated based upon amortized historical cost. Average balances for ABS carried at fair value are calculated based upon fair value.

(2)Interest income and interest expense securitized loans reflect activity from consolidated VIEs. While we consolidate these entities for GAAP reporting purposes, economically, we earn interest income from the securities we own in these entities, which is represented by the net interest income (interest income less interest expense) from these consolidated entities presented in the table above.

(3)Real estate securities include trading securities consisting primarily of interest-only securities, which generate a higher cash interest yield. This interest income may be offset by a decline in fair value (recognized through investment fair value changes, net on our consolidated statements of income) related to the receipt of cash flows each period, resulting in a lower overall economic yield for these investments.

Consolidated Market Valuation Gains and Losses, Net

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, 2025 to the immediate preceding quarter ended March 31, 2025 and year-to-date period ended June 30, 2024.

Table 3 – Consolidated Market Valuation Gains and Losses, Net

(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 Sequoia 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 securitized 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 investments includes changes in fair value of REO assets.

(5)Other income excludes net MSR fee income or provision for repurchases, as these amounts do not represent market valuation adjustments.