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 September 30, 2025 to the immediate preceding quarter ended June 30, 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 third quarter of 2025, compared to the second quarter of 2025. Similarly, references in this section to increases or decreases during the "nine month periods" refer to the change in results for the nine months ending September 30, 2025, compared to the nine months ending September 30, 2024.

Consolidated Results of Operations

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

Table 1 – Net (Loss) Income

Net loss for the three months ended September 30, 2025 totaled $9 million, compared with $100 million for the three months ended June 30, 2025. The improvement reflects the sale or transfer of a portfolio of Legacy unsecuritized bridge loans and REO assets and third-party originated HEI that had been subject to negative fair value adjustments in the prior quarter, together with strong segment contribution from our Mortgage Banking operations in the current quarter.

Net interest income increased to $15 million from $14 million in the prior quarter, primarily driven by an increase in net interest income from our Sequoia Mortgage Banking operations of $6 million, which was offset by a decrease of $5 million in net interest income from our Redwood Investments portfolio. The increase in net interest income in our Sequoia Mortgage Banking operations was due to an increase in average loan balances and higher yields earned on residential consumer loans held-for-sale during the quarter. Lower net interest income in our Redwood Investments portfolio primarily reflected paydowns on our third-party securities during the third quarter, and to a lesser extent, continued third-party security sales of assets as part of our plans to wind-down the Legacy Investments portfolio.

Sequoia mortgage banking activities, net increased to $29 million from $24 million in the prior quarter. This increase was primarily due to a significant increase in lock volumes and distribution activity during the third quarter. Third-quarter lock volumes totaled $6.3 billion, up 75% from $3.6 billion in the second quarter. A significant portion of this lock volume increase was due to contribution from Aspire, which generated $1.2 billion of lock volume compared with $330 million in the prior quarter.

CoreVest mortgage banking activities, net declined to $11 million from $16 million in the prior quarter, reflecting normalized loan sale margins relative to elevated margins in the second quarter of 2025, partially offset by higher funding volumes. CoreVest funded $521 million of loans during the third quarter, a 2% increase from $509 million in the second quarter of 2025.

Negative Investment fair value changes, net improved to $7 million, compared with $85 million in the prior quarter. The second quarter of 2025 included significant fair value adjustments on unsecuritized bridge and term loan portfolios within Legacy Investments, reflecting both realized and anticipated resolutions as well as credit deterioration in certain vintages. Negative fair value changes in the current quarter were primarily related to a negative $6 million investment fair value change, largely reflecting adjustments associated with completing the resolution or transfer of $484 million in fair value of Legacy unsecuritized bridge loans and REO assets.

HEI income, net was $0.5 million, compared to a $13 million net loss in the prior quarter, reflecting the third-quarter sale of $262 million of third-party originated HEI, at levels consistent with the prior quarter valuations.

Operating expenses remained consistent with the prior quarter. General and administrative costs increased by $2 million largely driven by increased headcount supporting growth of new platforms such as Aspire and our expanded small balance focus within CoreVest. Portfolio management costs decreased by $3 million compared to the second quarter, as overall expense decreased with the sale of certain Legacy unsecuritized bridge loans and REO assets. Loan acquisition costs were broadly consistent with the prior quarter, as higher Sequoia volumes in the third quarter were offset by consistent volume within CoreVest as compared to the prior quarter.

Overall quarter-over-quarter results reflect a significant improvement in consolidated performance, supported by strong mortgage banking activity, stabilized investment valuations, and continued reduction in exposure to non-core Legacy assets.

See further discussion of these results in the Segment Results section in Part I, Item 2 of this Quarterly Report on Form 10-Q

Net loss for the nine months ended September 30, 2025 totaled $95 million, compared with net income of $55 million for the same period in 2024. The decline primarily reflects adverse fair value adjustments and the subsequent sales and transfers of a portfolio of Legacy unsecuritized bridge loans and REO assets and third-party originated HEI and higher operating expenses largely taken in the second quarter of 2025. These impacts were partially offset by stronger performance in our Mortgage Banking operations for the nine month period.

Net interest income decreased to $57 million from $75 million. The decline was largely driven by an increase in the balance of Legacy unsecuritized bridge and term loan portfolios placed on non-accrual in 2025, which in certain cases resulted in reversals of previously accrued interest income. Lower net interest income in our Redwood Investments portfolio reflected paydowns on our third-party securities, as well as third-party security sales of assets that are no longer aligned with our core strategic objectives. Corporate interest expense also increased by $8 million, reflecting higher unsecured debt balances and full utilization of the secured revolving financing facility established in 2024. These decreases were partially offset by higher net interest income from our Mortgage Banking operations. Sequoia net interest income increased by $28 million, driven by higher loan purchase volumes and lower base floating rates on financing facilities as SOFR declined for the nine month period in 2025, relative to the 2024 period. CoreVest net interest income also increased incrementally.

Mortgage banking activities, net increased to $114 million from $73 million in the prior-year period, reflecting stronger performance across our Mortgage Banking operations. Within Sequoia, Mortgage banking activities, net increased by $34 million, as lock volumes rose to $13.9 billion from $6.7 billion, supported by continued strength in both flow and bulk executions, including the purchase of a large seasoned loan pool in the first quarter of 2025, along with outperformance of interest rate hedges. Sequoia also benefited from substantial growth in our new Aspire initiative during the nine month 2025 period, where lock volumes totaled $1.7 billion. CoreVest reported $39 million of Mortgage banking income during the nine-month 2025 period, compared with $32 million in the prior year, driven by higher funding levels and improved execution economics across residential transition ("RTL"), term, and debt service coverage ratio ("DSCR") loans, as well as active securitization, whole loan sale and joint ventures activity across the platform.

Investment fair value changes shifted to a $97 million net loss from a $11 million net gain in the prior nine month period, reflecting significant markdowns on a portfolio of Legacy unsecuritized bridge loans and REO assets and other non-core assets. This was partially offset by fair value gains, net of associated interest rate hedges, on our securities portfolio, which benefitted from tighter credit spreads during the period.

HEI recorded a $2 million net loss, compared with a $36 million net gain in the prior nine-month period. The change reflects fair value losses recognized on the sale of $262 million of third-party originated HEI in the second quarter of 2025, as well as lower housing price appreciation observed in 2025 compared to 2024.

Operating expenses increased to $163 million from $139 million in the prior nine month period, primarily reflecting higher fixed and variable compensation tied to volume growth and higher portfolio-management costs linked to Legacy loan resolutions.

See further discussion of these results in the Segment Results section in Part I, Item 2 of this Quarterly Report on Form 10-Q

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 nine months ended September 30, 2025, the immediate preceding quarter ended June 30, 2025 and year-to-date period ended September 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 nine months ended September 30, 2025, the immediate preceding quarter ended June 30, 2025 and year-to-date period ended September 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)Servicing income, net excludes net MSR fee income or provision for repurchases, as these amounts do not represent market valuation adjustments.