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, 2026 to the immediate preceding quarter ended June 30, 2026. 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 2026, compared to the second quarter of 2026.

Consolidated Results of Operations

The following table presents the components of our net (loss) income for the three and nine months ended September 30, 2026, the immediate preceding quarter ended June 30, 2026, and year-to-date period ended September 30, 2025.

Table 1 – Net (Loss) Income

Net loss related to common stockholders for the three months ended September 30, 2026 totaled $47 million, compared with a net loss of $3 million for the three months ended June 30, 2026. The increase in net loss primarily reflected fair value losses within Legacy Investments primarily linked to dispositions, and to a lesser extent lower mortgage banking income within Aspire Mortgage Banking, less favorable investment fair value changes within Redwood Investments and lower HEI results. Higher operating expenses and realized losses associated with the repurchase of a portion of our convertible senior notes during the third quarter also contributed to the decline. These impacts were partially offset by higher net interest income and a change from a provision for income taxes in the prior quarter to a benefit in the current quarter.

Net interest income increased by $9 million to $41 million during the third quarter. Redwood Investments contributed an increase of approximately $9 million, primarily reflecting higher interest income generated by retained interest-only and other assets sourced through Sequoia. Aspire net interest income increased by approximately $3 million, reflecting higher interest income earned on retained interest-only assets and loans held-for-sale, partially offset by higher financing costs. These increases were partially offset by an approximately $3 million increase in net interest expense within Legacy Investments, reflecting the ongoing financing burden on the remaining portfolio as assets are resolved, and a modest decline in CoreVest Mortgage Banking net interest income. Sequoia Mortgage Banking net interest income remained relatively consistent with the prior quarter.

Mortgage banking activities, net decreased by $23 million to $9 million during the third quarter, primarily reflecting a combination of wider execution spreads and lower volume at Aspire and lower valuation gains at CoreVest. Total mortgage banking production declined by 17% to $6.6 billion from $8.0 billion in the prior quarter as the platforms deliberately reduced acquisition activity and prioritized distribution in response to a sharp increase in long-term interest rates and wider credit spreads. Despite the lower production, we distributed $8.8 billion of loans through securitizations, whole loan sales and joint ventures, compared with $8.2 billion in the prior quarter, significantly reducing mortgage banking inventory exposure.

At Sequoia, Mortgage banking activities, net decreased by approximately $1 million. Lock volumes declined by 9% to $5.1 billion while gain-on-sale margins increased to 113 basis points from 92 basis points in the prior quarter, reflecting disciplined pricing, distribution execution and hedge performance. Sequoia continued to demonstrate strong distribution capabilities through securitizations, whole loan sales and joint ventures, including $1.2 billion of loans transferred to the joint venture. Aspire mortgage banking activities, net decreased by $18 million, resulting in a $9 million loss, reflecting lower hedge effectiveness on beginning-of-quarter loan inventory amid a sharp rise in short-term rates, extended distribution timelines and wider non-QM securitization spreads. Lock volumes declined by 45% to $1.1 billion as we deliberately reduced bulk activity in response to market conditions. Aspire nevertheless distributed $1.3 billion of loans through two securitizations and whole loan sales. CoreVest mortgage banking activities, net decreased by approximately $4 million, reflecting lower loan valuation gains, while funded volume remained relatively consistent at $406 million, as higher bridge fundings offset lower term loan fundings.

Investment fair value changes, net declined by $16 million, resulting in $38 million of negative fair value changes during the third quarter, compared with $23 million of negative fair value changes in the prior quarter. Within Redwood Investments, negative fair value changes increased by approximately $6 million, primarily reflecting fair value declines across the retained investment portfolio driven by the sharp increase in benchmark interest rates and wider credit spreads. These declines were partially offset by $5 million of positive fair value changes from the RWT Horizons portfolio. Together with lower other income, a higher provision for income taxes and higher expenses, these changes contributed to Redwood Investments generating a net loss of approximately $4 million, compared with net income of approximately $1 million in the prior quarter.

Negative investment fair value changes within Legacy Investments increased by approximately $10 million, primarily associated with accelerated legacy bridge loan resolutions and REO dispositions. HEI income, net decreased by approximately $6 million, resulting in a $4 million loss during the third quarter, primarily due to fair value changes on the Legacy HEI portfolio. Together with higher net interest expense and portfolio management costs, these changes contributed to a Legacy Investments segment net loss of $45 million, compared with a net loss of $23 million in the prior quarter. Notwithstanding these results, capital allocated to Legacy Investments declined by $79 million to $116 million, or 7% of total invested capital, reflecting dispositions, lower asset carrying values and increased secured financing.

Operating expenses increased by $7 million to $63 million for the third quarter of 2026, compared with $56 million for the second quarter of 2026. General and administrative expenses remained relatively consistent with the prior quarter. Portfolio management costs increased by approximately $4 million, primarily reflecting higher costs associated with Legacy Investment resolutions and the retained investment portfolio within Redwood Investments.

Overall, third quarter results reflect resilient performance across our core operating platforms during a period of significant interest rate and mortgage spread volatility. Higher net interest income, improved Sequoia margins and strong distribution activity were offset primarily by disposition-related valuation changes and ongoing financing and resolution costs within Legacy Investments, and to a lesser extent by wider execution spreads and lower volume at Aspire, lower loan valuation gains at CoreVest, and market-driven valuation changes within Redwood Investments.

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 related to common stockholders for the nine months ended September 30, 2026 totaled $57 million, compared with a net loss of $95 million for the nine months ended September 30, 2025. The improvement was primarily driven by a $51 million increase in net interest income, a $23 million change from a provision for income taxes in the prior-year period to a benefit in the current-year period, a $13 million improvement in investment fair value changes, net, and higher HEI, servicing and other income. These impacts were partially offset by a $41 million decline in mortgage banking activities, net and $28 million of higher operating expenses.

Net interest income increased by $51 million to $107 million during the nine months ended September 30, 2026, driven by a combined increase of approximately $54 million across our Mortgage Banking platforms. Sequoia contributed $38 million of the increase, primarily reflecting significantly higher loan purchase volumes, increased average inventory balances and continued capital deployment into residential securities used to hedge the pipeline. Aspire net interest income increased by approximately $14 million as the platform continued to scale. These increases were partially offset by a $5 million decline in net interest income from Redwood Investments, reflecting portfolio repositioning and paydowns.

Mortgage banking production increased by 50% to $23.2 billion during the nine months ended September 30, 2026 from $15.4 billion in the prior-year period, primarily reflecting continued growth at Sequoia and the scaling of Aspire. Growth across these platforms was supported by expansion of our loan seller network, increased activity from banks and independent mortgage bankers, broader product offerings and demand for expanded-credit products. Total distributions more than doubled to approximately $25.7 billion through securitizations, whole loan sales and joint ventures, supporting capital recycling and the significant increase in production. Despite this growth, mortgage banking activities, net decreased by $41 million to $73 million, as lower gain-on-sale margins at Sequoia, lower margins and funding volumes at CoreVest, and third-quarter valuation losses on Aspire loan inventory and purchase commitments more than offset the benefit of higher production and the increased contribution from Aspire earlier in the year.

At Sequoia, lock volumes increased by 40% to $17.2 billion and distributions more than doubled to $20.5 billion. However, Sequoia mortgage banking activities, net decreased by $22 million as gain-on-sale margins declined to 100 bps from 118 bps in the prior-year period. Aspire lock volumes increased to $4.8 billion from $1.7 billion and distributions increased to $3.6 billion from $0.2 billion. Aspire’s gain-on-sale margin increased to 67 bps from 55 basis points in the prior-year period, supported by higher net interest income and securitization issuance activity. However, Aspire mortgage banking activities, net decreased by approximately $4 million, as third-quarter fair value declines on loan inventory and purchase commitments, which were only partially offset by hedge gains, more than offset the benefit of higher production during the first half of 2026. CoreVest mortgage banking activities, net decreased by $15 million, reflecting lower margins and a 17% decline in funding volumes to $1.2 billion.

Investment fair value changes, net improved by $13 million, resulting in $84 million of negative fair value changes during the nine months ended September 30, 2026, compared with $97 million of negative fair value changes in the prior-year period. The improvement primarily reflected a $49 million reduction in negative fair value changes within Legacy Investments, as the prior-year period included significant adverse fair value adjustments on legacy unsecuritized bridge and term loans associated with anticipated resolutions and credit deterioration. During the third quarter of 2026, $27 million of loans that were 90 or more days delinquent were resolved as part of the continued wind down of the remaining legacy portfolio and reduction of the associated financing burden. This improvement was partially offset by a $34 million increase in negative fair value changes within Redwood Investments, reflecting market-driven valuation changes on portfolio investments and related hedges, including the effects of the sharp increase in benchmark interest rates and wider credit spreads during the third quarter of 2026.

HEI income, net improved by $9 million, from a $2 million loss in the prior-year period to $6 million of income during the nine months ended September 30, 2026. The prior-year period included fair value losses associated with the sale of a portfolio of third-party-originated HEI, which was completed during the third quarter of 2025, while current-period results reflected positive income from the remaining HEI portfolios through the first half of 2026, partially offset by negative fair value changes on the Legacy HEI portfolio during the third quarter. Servicing income and other income increased by approximately $18 million in aggregate, reflecting higher servicing-related earnings and positive contributions from RWT Horizons and other portfolio activity.

Operating expenses increased by $28 million to $191 million during the nine months ended September 30, 2026. General and administrative expenses increased by $13 million, including approximately $7 million of severance and organizational restructuring costs recognized in the first quarter. Loan acquisition costs and other expenses increased by approximately $12 million in aggregate, reflecting higher mortgage banking production. Portfolio management costs increased by approximately $3 million, primarily within Redwood Investments.

The $23 million favorable change in income taxes reflected a $6 million benefit during the current-year period compared with a $17 million provision during the prior-year period, primarily as our taxable REIT subsidiaries generated GAAP losses in the first nine months of 2026 compared with GAAP income in the prior-year period.

Overall, results for the first nine months of 2026 reflect substantially higher production and net interest income across our Mortgage Banking platforms, particularly Sequoia and Aspire, together with a reduction in negative fair value changes within Legacy Investments and higher servicing and other income. These improvements were partially offset by normalization of Sequoia gain-on-sale margins, third-quarter valuation losses at Aspire, lower CoreVest margins and funding volumes, and higher operating expenses associated with increased production and the organizational restructuring completed in the first quarter. Results also reflect significantly higher distribution activity, which supported capital recycling and continued diversification across securitizations, whole loan sales and joint venture channels. Results also reflect continued execution on our strategic repositioning, including the reduction of capital allocated to Legacy Investments to $116 million at September 30, 2026.

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 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 (loss) income for the three and nine months ended September 30, 2026, the immediate preceding quarter ended June 30, 2026 and year-to-date period ended September 30, 2025.

Table 2 – 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 platform.

(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 (loss) 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 the 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.