REDWOOD TRUST INC

Summary

In addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash and liquidity consist of borrowings under warehouse facilities financing mortgage loans, MSRs, interest-only securities, and HEI, secured term financing facilities, securities repurchase agreements, a corporate secured revolving financing facility, payments of principal and interest we receive from our investment portfolio assets, proceeds from the sale of investment portfolio assets, and cash generated from our mortgage banking operating activities, such as the sale and securitization of mortgage loans.

Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking platforms, including financing loans held for sale and managing hedges associated with those activities; to purchase investment securities and make other investments; to repay principal and interest on our debt, including warehouse and other recourse borrowings as loans are sold or securitized; to meet margin calls associated with our debt, interest rate hedges and other obligations; to make dividend payments on our capital stock; to fund draws on our bridge loan portfolio and other commitments when requested; to fund our operations; and from time to time, to repurchase shares of our common stock, outstanding debt securities, and convertible debt.

At September 30, 2026, our total capital was $1.81 billion, consisting of (i) $831 million of equity capital, (ii) $975 million of convertible notes and other corporate debt on our consolidated balance sheets ($173 million of convertible debt due in June 2027, $143 million of senior unsecured notes due in 2029, $205 million of convertible debt due in 2030, $189 million of senior unsecured notes due in 2030, $125 million of senior unsecured notes due in 2031, and $140 million of trust-preferred securities due in 2037), and (iii) $8 million of promissory notes.

Our capital structure continues to reflect the strategic shift toward mortgage banking, which is characterized by faster capital turnover and an originate-to-distribute model. Approximately 44% of our recourse debt supports our mortgage banking activities, where loans typically remain on balance sheet for a short duration (i.e. less than 30 to 40 calendar days) and related borrowings are repaid as loans are sold or securitized, supporting rapid recycling of our capital for subsequent reinvestment.

During the third quarter of 2026, we distributed $8.8 billion of loans through securitizations, whole loan sales and joint ventures, reducing loan inventory exposure and supporting liquidity. Securitization activity also included transactions involving previously retained investments and transactions issued and called during the quarter.

At September 30, 2026, our unrestricted cash and cash equivalents were $201 million, compared to $192 million at June 30, 2026. We believe our available cash is sufficient to fund our operations. We may raise equity or debt capital from time to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. Our capital raising decisions will continue to be based on what we believe to be in the best interests of the Company.

During the third quarter of 2026, we issued $205 million aggregate principal amount of convertible notes with a 7% coupon and used a portion of the proceeds to repurchase approximately $125 million principal amount, or approximately 40%, of our convertible debt maturing in June 2027. We also repurchased 9.2 million common shares for $34 million, generating approximately $0.25 per share of book value accretion, deployed approximately $67 million of capital into retained securities, and paid approximately $23 million in dividends, including a $0.18 per common share dividend. Cash generated through loan distributions and ongoing balance sheet management supported these capital actions while increasing our cash balance. Cash continued to build through early November 2026 as loan inventory remained low.

We continue to expand joint venture utilization to reduce the capital required to finance loan inventory and retained investments. In November 2026, we increased the capacity of our secured revolving financing facility from $400 million to $500 million and extended its maturity to March 2030. The commitment period for one of our CoreVest joint ventures was also extended to March 2030. These initiatives, together with financing optimization and further Legacy Investments dispositions, are expected to provide additional capital for mortgage banking activities and corporate debt repayment or repurchases. We currently estimate that these dispositions could release approximately $40 million to $50 million of capital, with the amount and timing dependent on transaction execution, collateral performance and market conditions.

On November 3, 2026, our Board approved a plan to transition to a taxable C-corporation for the year ending December 31, 2027. The transition is expected to provide greater flexibility to retain earnings for operations, corporate debt reduction and other capital allocation priorities, and to utilize existing tax assets to reduce future cash taxes, subject to applicable limitations. The Board also approved on November 3, 2026, an update to the Company's common stock dividend policy to $0.02 per share per quarter, which is expected to take effect with the declaration of the fourth quarter common dividend in December 2026. This change in the Company's common stock dividend policy is expected to allow the Company to retain an additional $70 million to $75 million of cash annually, based on the September 30, 2026 common share count and before taking into account any impact of the Company's planned preferred-for-common stock exchange offer.

In the discussion that follows and throughout this document, we distinguish between marginable and non-marginable debt and recourse and non-recourse debt. Refer to the section set forth below under the heading "Risks Relating to Debt Incurred under Borrowing Facilities" for additional information regarding these terms on our debt.

At September 30, 2026, in aggregate, we had $3.23 billion of secured recourse debt outstanding, financing our mortgage banking platforms and investment portfolio, of which $2.10 billion was marginable and $1.13 billion was non-marginable. The majority of this debt relates to short-term warehouse financing supporting our Sequoia and Aspire mortgage banking platforms, where capital turns rapidly, with loans remaining on balance sheet for an average of approximately 32 days before being sold or securitized during the first nine months of 2026, down from 36 days for the year ended December 31, 2025. As Sequoia’s business grows, additional securitizations that we consolidate under GAAP may increase our reported debt-to-equity ratio. Consolidation requires us to include the underlying loans and related securitization debt on our balance sheet, even when we retain only a small portion of the securities issued. These securitizations provide long-term, non-recourse financing at high advance rates, reducing the capital required to finance jumbo mortgages and our reliance on short-term warehouse facilities. The related debt is payable from the assets of the securitization trusts and does not create a corresponding increase in our recourse obligations, although we remain exposed to losses on our retained interests.

We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under loan warehouse facilities, securities repurchase facilities, other short- and long-term debt facilities and other risks relating to our corporate debt and use of derivatives, predominantly those that hedge our mortgage banking activities. A further discussion of these risks is set forth below under the heading"Risks Relating to Debt Incurred under Borrowing Facilities."

Cash Flows and Liquidity for the Nine Months Ended September 30, 2026

Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the timing and amount of loan originations, acquisitions, sales and profitability within our mortgage banking platforms, the timing and amount of securities acquisitions, sales and repayments, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these operating or investment activities.

Cash Flows from Operating Activities

Cash flows used in operating activities increased by $4.83 billion from negative $6.73 billion in the nine months ended September 30, 2025 to negative $11.57 billion in the nine months ended September 30, 2026, primarily due to the increase in residential consumer loan purchases associated with our mortgage banking activities. Excluding cash flows from the purchase, origination, sale and principal payments of loans classified as held-for-sale, and the settlement of associated derivatives (which cumulatively totaled $11.44 billion of net cash outflows for the nine month 2026 period, compared to $6.71 billion of net cash outflows for the nine month 2025 period), cash flows from operating activities were negative $123 million during the first nine months of 2026 and negative $26 million for the first nine months of 2025.

Cash Flows from Investing Activities

During the nine months ended September 30, 2026, our net cash provided by investing activities was $3.76 billion and primarily resulted from proceeds from principal payments on loans held-for-investment and other investments, in excess of cash deployed into these investments. Because many of our investment securities, loans and HEI are financed through various borrowing agreements, a significant portion of the proceeds from any sales or principal payments of these assets are generally used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans and HEI at consolidated securitization entities would generally be used to repay ABS issued by those entities.

Cash Flows from Financing Activities

During the nine months ended September 30, 2026, our net cash provided by financing activities was $7.66 billion. This primarily resulted from $7.86 billion of net borrowings under ABS issued (resulting from the issuance of twenty Sequoia securitizations as well as the issuance of ABS through two Sequoia re-securitizations of certain consolidated and unconsolidated Sequoia securities during the nine months ended September 30, 2026), partially offset by $82 million of net repayments on debt obligations.

Material Cash Requirements

In the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, while others are off-balance sheet or recorded on our balance sheet in amounts different from the full contractual or notional amount of the transaction.

Our material cash requirements from known contractual and other obligations during the twelve months following September 30, 2026, include maturing debt obligations, our agreement to repurchase certain trust preferred securities, interest payments on debt obligations and ABS issued, funding commitments for residential investor and consumer loans, strategic investments, potential repurchases of previously sold or securitized loans, meeting margin calls associated with our debt, interest rate hedges and other obligations, and other current payables. Our material cash requirements from known contractual and other obligations beyond the twelve months following September 30, 2026, include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for residential consumer loans, residential investor bridge loans, strategic investments (including our joint ventures), meeting margin calls associated with our debt, interest rate hedges and other obligations, and principal and interest payments under ABS issued (as described further below under Liquidity Needs for our Redwood Investments). In November 2026, the Company agreed to repurchase $53 million in principal of trust preferred securities at a discount to par. The agreement also provides for a waiver of the REIT maintenance covenant set forth in the related junior subordinated notes due 2037. This waiver becomes effective upon the final settlement of the repurchase, but no later than February 15, 2027.

At September 30, 2026, we had commitments to fund up to $152 million of additional advances on existing residential investor bridge loans, of which $102 million related to loans currently in securitizations co-sponsored by one of our joint ventures. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment (for example, funding is dependent on actual progress on a project and we retain the right to conduct due diligence with respect to each draw request to confirm conditions have been met). A majority of the commitments are for longer-term renovate/build-for-rent loans (which generally have funding caps below their full commitment amount) and are expected to fund over the next several quarters. At September 30, 2026, we had $1.56 billion of available warehouse capacity for residential investor loans and scheduled bridge loan maturities are expected to provide an additional source of cash that can be used to fund our commitments. During the nine months ended September 30, 2026, we received $1.02 billion of principal paydowns on residential investor bridge loans. Scheduled bridge loan maturities and future principal paydowns are expected to provide additional sources of cash that can be used, together with our available liquidity, to fund these commitments.

During 2025, in connection with the sale of legacy unsecuritized bridge loans to the Legacy Trust, we entered into an agreement to provide up to $35 million of capital support if the Legacy Trust’s portfolio loan-to-value ratios exceed specified thresholds. As of September 30, 2026, this commitment was fully funded.

For additional information regarding our material cash requirements, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2025 under the caption Contractual Obligations. For additional information on commitments and contingencies as of September 30, 2026 that could impact our liquidity and capital resources, see Note 19 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which supplements the disclosures included in Note 18 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2025.

Most of our loan warehouse facilities and our servicer advance financing were established with initial one-year terms and are regularly amended on an annual basis to extend the terms for an additional year ahead of their maturity. We renewed several of these facilities during the nine months ended September 30, 2026. While there is no assurance of our ability to renew our other facilities maturing in the next year, given current market conditions we expect to extend these in the normal course of business.

We expect to meet our obligations coming due in less than one year from September 30, 2026 most likely from borrowings under existing, new or amended financing arrangements, or through other previously mentioned sources of capital including cash on hand.

See Note 18 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our debt obligations.

Liquidity Needs for our Mortgage Banking Activities

We generally use loan warehouse facilities to finance the loans we acquire and originate in our mortgage banking platforms while we aggregate the loans for sale or securitization.

Aggregate warehouse capacity, including joint venture facilities, was $10.3 billion at September 30, 2026, compared with $8.1 billion a year earlier. During the twelve months ended September 30, 2026, we renewed $7.1 billion of capacity. Average warehouse financing costs were 6.0%, compared with 6.4% a year earlier.

At September 30, 2026, we had residential consumer warehouse facilities outstanding with $4.72 billion of total capacity and $2.50 billion of available capacity. These included non-marginable facilities with $400 million of total capacity and marginable facilities with $4.32 billion of total capacity. At September 30, 2026, we had non-marginable, residential investor warehouse facilities outstanding available to finance our unsecuritized residential investor loans in our Redwood Investments, CoreVest Mortgage Banking and Legacy Investments segments with $1.78 billion of total capacity and $1.56 billion of available capacity. Borrowings under these facilities used to finance our CoreVest Mortgage Banking loan inventory at September 30, 2026 totaled $213 million. Several of the facilities used to finance our CoreVest Mortgage Banking loan inventory are also used to finance bridge loans held in our Legacy Investments portfolio at September 30, 2026.

Most of our loan warehouse facilities were established with initial one-year terms and are regularly amended on an annual basis to extend the terms for an additional year ahead of their maturity. We renewed several of these facilities during the nine months ended September 30, 2026, and have other such facilities with scheduled maturities during the next twelve months. See Note 18 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on the loan warehouse facilities used for our Mortgage Banking platforms.

As described above, our material cash requirements include meeting margin calls associated with loan warehouse facilities and interest rate hedges. During periods when there is higher volatility in benchmark interest rate levels, we may experience increased margin calls related to loans and interest rate hedges, which may be material and present increased liquidity risk. In particular, interest rate hedges associated with our mortgage banking activities are typically intended to fully or partially offset interest rate-driven changes in the fair value of mortgage loans we own or have identified for purchase. When benchmark interest rates rise or decline, there may be liquidity risk due to the fact that any corresponding change in value to such mortgage loans or other financial instruments we own may not be an immediate source of liquidity to offset margin call amounts related to our interest rate hedges, and vice versa.

Additional information regarding risks related to the debt we use to finance our mortgage banking platforms can be found under the heading"Risks Relating to Debt Incurred under Borrowing Facilities" that follows within this section.

Liquidity Needs for our Redwood Investments

At September 30, 2026, in addition to our ABS issued, our investment portfolio was financed with $821 million of secured recourse debt, of which $241 million was marginable and $581 million was non-marginable, and $436 million of secured non-recourse debt that was non-marginable. At September 30, 2026, we have also allocated $100 million of outstanding borrowings from our secured revolving financing facilities to finance our Redwood Investments segment. Our corporate secured revolving financing facility may be used to finance both our Redwood Investments, Sequoia and CoreVest mortgage banking platforms, as well as Legacy Investments.

We use various forms of secured recourse and non-recourse debt to finance assets in our investment portfolio. Refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2025 under the caption Liquidity and Capital Resources for additional information regarding our forms of financing assets in our investment portfolio, as well as for our descriptions of what constitutes non-recourse and non-marginable debt.

See Note 17 and Note 18 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our asset-backed securities issued and debt obligations, respectively.

Liquidity Needs for our Legacy Investments

At September 30, 2026, we financed our Legacy Investments with a combination of recourse and non-recourse, non-marginable residential investor loan warehouse facilities, a recourse non-marginable HEI facility, and non-recourse securitization debt (ABS issued). Certain residential investor warehouse facilities may impose advance rate step-downs or repurchase requirements if underlying loan performance or property valuations deteriorate, which could require the use of additional liquidity. At September 30, 2026, we have also allocated $300 million of outstanding borrowings from our secured revolving financing facility to finance our Legacy Investments segment.

Refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2025 under the caption Liquidity and Capital Resources for additional information regarding our forms of financing for our investments, as well as for our descriptions of what constitutes non-recourse and non-marginable debt.

See Note 17 and Note 18 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our asset-backed securities issued and debt obligations, respectively.

Corporate Capital

We also use unsecured recourse debt to finance our operations, including convertible and non-convertible senior debt securities issued in the public markets, as well as trust preferred securities and promissory notes. These financing arrangements support the capital needs of our operating segments. Accordingly, the associated financing costs, including interest expense, are allocated to our operating segments based on their respective use of capital, consistent with how management evaluates segment performance. See Note 18 in Part I, Item 1 of this Quarterly Report on Form 10-Q and Note 18 in Part II, Item 8 of our Annual Report on Form 10-K, for additional information on our unsecured debt obligations, net.

At September 30, 2026, our $173 million convertible senior notes are due within the next twelve months, maturing in June 2027. We believe we have a number of potential options to address this maturity in whole or in part, including capital freed up from financing optimization within our Redwood Investments portfolio, sales and paydowns of our Legacy Investments portfolio, and capital recycled from our joint venture partnerships which allow us to grow volume with lower capital utilization. We may also consider issuing additional senior notes such as our $125 million senior debt issuance in May 2026, or potentially through an additional convertible senior note issuance such as our recent $205 million in September 2026, subject in each case to market conditions.

In November 2026, we agreed to repurchase, at discount, $53 million in liquidation amount of trust preferred securities on or prior to February 15, 2027. We plan to use available cash and cash equivalents to fund this repurchase commitment.

Risks Relating to Debt Incurred under Borrowing Facilities

As described above under the heading "Results of Operations," in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and/or origination of residential consumer mortgage loans, residential investor mortgage loans, and HEI (including those we acquire or originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use borrowings to fund other aspects of our business and operations, including the repurchase of shares of our capital stock. Recourse debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025, under the caption(s) "Risks Relating to Debt Incurred under Borrowing Facilities," and "Our use of financial leverage exposes us to heightened liquidity risks, including margin calls and acceleration of repayment from defaults and cross-defaults."

Aggregate borrowing limits are stated under certain of these facilities, and certain other facilities have no stated borrowing limit, but many of the facilities are uncommitted, which means that any request we make to borrow funds under these uncommitted facilities may be declined by the lender for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. In general, financing under these facilities is obtained by transferring or pledging mortgage loans, securities or other assets to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred or pledged assets). Given that we may not be able to obtain additional financing under uncommitted lines when we need it, we are exposed to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025 under the heading "Risk Factors," and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2025 under the heading "Market Risks." In addition, with respect to mortgage loans, securities or other assets that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025 under the heading "Risk Factors," and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2025 under the heading "Market Risks," if and when those loans, securities or other assets become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility.

Under many of our mortgage loan facilities, our securities repurchase facilities, and our secured revolving financing facility, while transferred or pledged mortgage loans, HEI, or securities are financed under the facility, to the extent the value of the loans, HEI, or securities, or the collateral underlying those loans, HEI, or securities, declines, we are generally required to either immediately reacquire the loans or securities or meet a margin requirement to transfer or pledge additional loans, securities or cash in an amount at least equal to the decline in value. Of our active financing arrangements with outstanding balances at September 30, 2026, only our securities repurchase facilities (with $86 million of borrowings outstanding at September 30, 2026), nine of our residential consumer mortgage loan warehouse facilities (with a combined $1.9 billion of borrowings outstanding at September 30, 2026), and a certificated MSR facility (with $155 million of borrowings outstanding at September 30, 2026) retain market-value based margin call provisions based solely on the lender's determination of market value and, as such, are considered marginable.

Margin call provisions under these facilities are further described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025 under the caption "Risks Relating to Debt Incurred under Borrowing Facilities - Margin Call Provisions Associated With Debt Facilities and Other Debt Financing." Financial covenants included in these facilities are further described Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025 under the caption "Risks Relating to Debt Incurred under Borrowing Facilities - Financial Covenants Associated With Debt Facilities and Other Debt Financing."

At September 30, 2026, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our debt financing facilities. Our financial covenants require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth and minimum liquidity, as well as financial covenants that require us to maintain recourse indebtedness below a specified ratio. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at September 30, 2026, our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at September 30, 2026, our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur at least $1.3 billion in additional recourse indebtedness.