Redwood Trust Inc: Form 10-Q for the period ended Mar 31, 2025

INTRODUCTION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five main sections:

• Overview
• Results of Operations
• Consolidated Results of Operations
• Results of Operations by Segment
• Income Taxes
• Liquidity and Capital Resources
• Critical Accounting Estimates
• Market and Other Risks

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part II, Item 8, Financial Statements and Supplementary Data in our most recent Annual Report on Form 10-K, as well as the sections entitled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as other cautionary statements and risks described elsewhere in this report and our most recent Annual Report on Form 10-K. The discussion in this MD&A contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, such as those discussed in the Cautionary Statement below.

References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. Financial information concerning our business is set forth in this MD&A and our consolidated financial statements and notes thereto, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our website can be found at www.redwoodtrust.com (http://www.redwoodtrust.com). We make available, free of charge through the investor relations section of our website, access to our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). We also make available, free of charge, access to our charters for our Audit Committee, Compensation Committee, and Governance and Nominating Committee, our Corporate Governance Standards, and our Code of Ethics governing our directors, officers, and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any executive officer or director of Redwood. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, and may include disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.

Our Investor Relations Department can be contacted at One Belvedere Place, Suite 300, Mill Valley, CA 94941, Attn: Investor Relations, telephone (866) 269-4976.

Our Business

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not well served by government programs. We deliver customized housing credit investments to a diverse mix of investors through our best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential consumer and residential investor housing credit assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in three segments: Sequoia Mortgage Banking, CoreVest Mortgage Banking, and Redwood Investments. In the fourth quarter of 2024, we updated the names of our segments: Residential Consumer Mortgage Banking to Sequoia Mortgage Banking, Residential Investor Mortgage Banking to CoreVest Mortgage Banking and our Investment Portfolio to Redwood Investments.

For a full description of our segments, see Part 1, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2024.

Cautionary Statement

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, opportunities, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, and our ability to pay dividends in the future); (ii) statements related to our financial outlook and expectations for 2025 and future years, including statements regarding the economic impacts of inflation, monetary policy, volatility and potential regulatory changes in the banking sector, and shifting sources of liquidity in the residential mortgage market, and our current expectation to achieve annualized returns on equity in the 9% to 12% range in the second half of 2025; (iii) statements related to opportunities we see for our residential consumer and residential investor platforms, and our positioning to capture market share, including our current target returns related to capital deployment opportunities between 15% and 20% on third-party portfolio and retained operating investments; (iv) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we locked in anticipation of purchase during the first quarter of 2025 and at March 31, 2025, expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase, total net jumbo loan exposure, and residential mortgage loans subject to forward sale commitments; (v) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2025; and (vi) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.

Important factors, among others, that may affect our actual results include:

• general economic trends and the performance of the housing, real estate, mortgage finance, and broader financial markets;
• changing benchmark interest rates, and the Federal Reserve’s actions and statements regarding monetary policy;
• federal, state, and local legislative and regulatory developments and the actions of governmental authorities and entities;
• the impact of public health issues such as the COVID-19 pandemic;
• our ability to compete successfully;
• our ability to adapt our business model and strategies to changing circumstances;
• our use of financial leverage and strategic business and capital deployment decisions we make;
• our exposure to a breach of our cybersecurity or data security;
• our exposure to credit risk and the timing of credit losses within our portfolio;
• the concentration of the credit risks we are exposed to, including due to the structure of assets we hold and the geographical concentration of real estate underlying assets we own, and our exposure to environmental and climate-related risks;
• the efficacy and expense efforts to manage or hedge credit or interest rate risk, and other financial and operational risks;
• changes in credit ratings on assets we own and changes in the rating agencies’ credit rating methodologies;
• changes in interest rates or mortgage prepayment rates;
• investment and reinvestment risk;
• asset performance, interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
• our ability to finance the acquisition of real estate-related assets with short-term debt;
• the ability of counterparties to satisfy their obligations to us;
• we may enter into new lines of business, acquire other companies, or engage in other new strategic initiatives;
• changes in the demand from investors for residential consumer and residential investor mortgages and investments, and our ability to distribute residential consumer and residential investor mortgages through our whole-loan distribution channels;
• our involvement in loan and HEI origination and securitization transactions, the profitability of those transactions, and the risks we are exposed to in engaging in loan origination or securitization transactions;
• foreclosure activity may expose us to risks associated with real estate ownership and operation;
• exposure to claims and litigation, including litigation arising from loan or HEI origination and securitization transactions;
• acquisitions or new business initiatives may fail to improve our business and could expose us to new or increased risks;
• whether we have sufficient liquid assets to meet short-term needs;
• the impact of tariffs and global trade disruptions on us;
• changes in our investment, financing, and hedging strategies and new risks we may be exposed to if we expand or reorganize;
• our ability to successfully retain or attract key personnel;
• we are dependent on third-party information systems and third-party service providers;
• our exposure to a disruption of our or a third party's technology infrastructure and systems;
• the impact on our reputation that could result from our actions or omissions or from those of others;
• our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
• our risk management efforts may not be effective;
• we could be harmed by misconduct or fraud;
• inadvertent errors, system failures or cybersecurity incidents could disrupt our business;
• accounting rules related to certain of our transactions and asset valuations are highly complex and involve significant judgment and assumptions;
• the future realization of our deferred tax assets is uncertain, and the amount of valuation allowance we may apply against our deferred tax assets may change materially in future periods;
• the impact of changes to U.S. federal income tax laws on the U.S. housing market, mortgage finance markets, and our business;
• our failure to comply with applicable laws and regulation, including our ability to obtain or maintain governmental licenses;
• our ability to maintain our status as a REIT for tax purposes;
• limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940;
• our stock may experience price declines, volatility, and poor liquidity, and we may reduce our dividends;
• decisions about raising, managing, and distributing capital;
• dividend distributions and the timing and character of such dividends may change;
• limited number of institutional shareholders own a significant percentage of our common stock; and
• other factors not yet identified, including broad market fluctuations.

This Quarterly Report on Form 10-Q may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.

OVERVIEW

Business Update

Our results during the first quarter of 2025 demonstrate the progress of our strategic objectives, especially as our business lines —which encompass a broad suite of non-Agency products, connect borrowers not well-served by government programs with global asset allocators seeking exposure to U.S. housing. While the large money-center banks recently reported quarterly mortgage volume declines of 20% to 30%, our Sequoia jumbo lock volumes rose 73% from the prior quarter to $4 billion, our highest quarterly volume since the third quarter of 2021, which was a period of extreme quantitative easing by the Federal Reserve. Growth in our quarterly jumbo loan flow volume was supplemented by the acquisition of large, seasoned loan pools from both money-center and regional banks, driving higher annualized return on equity (“ROE”) for our Sequoia Mortgage Banking segment, with margins remaining above our historical target range. After making significant inroads with depositories over the past few years, bulk activity with banks now represents a unique and active addressable market for us.

During the first quarter, we expanded our Aspire platform by offering to our seller base an expanded set of loan products tailored to borrowers requiring an alternative underwriting approach. Aspire achieved lock volume of over $100 million in the first quarter, across nearly 25 sellers, including large mortgage originators who have recently broadened their mandates to include this type of lending. Aspire’s current focus is targeted at origination criteria outside of the conventional “W-2” borrower, a historically manual underwriting discipline that can be uniquely influenced by technology enhancements. This notably includes artificial intelligence (“AI”), a technology that continues to dominate the tech landscape. Redwood is actively developing its own data and AI capabilities to more effectively harness this potential and transform the borrowing experience for the prospective homeowners that our loan sellers serve. By providing these innovations to both specialty non-QM originators and the large sellers we’ve served for decades, our loan acquisition funnel could emerge over time as a distinct competitive advantage in the sector.

Away from our Sequoia Mortgage Banking segment, CoreVest funded $482 million in loans during the first quarter of 2025, a 4% decrease from the fourth quarter of 2024 (historically the strongest calendar quarter for residential investor lending), but a 48% jump compared to the first quarter of 2024. This year-over-year growth highlights success in expanding our sourcing channels for smaller-balance, more liquid products, including Residential Transition Loans (“RTL”) (formerly referred to as single-asset bridge) and DSCR products. We see substantial growth potential in products where we remain underpenetrated, positioning CoreVest for further momentum in 2025. Extreme market volatility may be causing the tide to go out for certain of our direct competitors, aiding our efforts to prudently grow market share in this space, particularly through established ties with large private credit partners. Given our capital-light strategy for this business, we expect to reduce the amount of new CoreVest loan origination volume held on balance sheet, with the majority distributed through private credit partnerships with the potential to generate scalable fee income for our platform.

These relationships with institutional investors remain a competitive strength, especially as more banks retreat from mortgage lending or seek to serve customers in a capital-light fashion. A byproduct of the government’s outsize role in housing is how underinvested many large capital allocators remain in U.S. mortgages. This was a key driver behind our joint ventures and ongoing momentum with other investors. As we pursue our 2025 volume objectives, strategic partnerships will remain a key part of our growth initiatives.

In the first quarter of 2025, we took efforts to differentiate our ongoing deployment activities – primarily working capital for our mortgage banking platforms, co-investments made through our joint venture partnerships, and opportunistic purchases from third parties – from our older-vintage bridge loan portfolio and certain seasoned third-party investments. We have begun taking steps to accelerate the reduction of our legacy bridge loan portfolio in order to streamline our operations and focus our human and investment capital on strategic go-forward activities. We have accordingly refined the disclosures in the Results of Operations for our Redwood Investments segment to articulate relative financial performance between legacy assets and on-the-run core investments. We believe this delineation will help provide clearer visibility into our pathway toward sustainable earnings growth.

RESULTS OF OPERATIONS

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 March 31, 2025 to the immediate preceding quarter. 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 first quarter of 2025, compared to the first quarter of 2024.

Consolidated Results of Operations

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

Table 1 – Net Income (Loss)

(In Thousands, except per Share Data)

53

Three Months Ended March 31, 2025 Compared to Three Months Ended December 31, 2024

Net Interest Income

Net interest income increased by $0.3 million during the first quarter of 2025, primarily driven by our mortgage banking operations. The increase of $1 million in net interest income from Sequoia Mortgage Banking operations was primarily as a result of lower variable-rate borrowing costs on our loan warehouse facilities.

Corporate net interest expense increased by $1.6 million during the first quarter of 2025. The increase was related to the higher cost of corporate unsecured debt relative to repurchases and payoffs of older vintage, lower coupon convertible debt. In particular, the majority of this increase was associated with the issuance of $90 million of 9.125% senior notes issued in January 2025.

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 $7 million during the first quarter of 2025, primarily due to higher Sequoia Mortgage Banking revenues.

The increase in Sequoia Mortgage Banking activities of $5 million was primarily attributable to an increase in lock volumes of 73% from last quarter from banks and independent mortgage bankers ("IMBs") across bulk and flow transactions, including our purchase commitment to buy a $1 billion bulk pool of seasoned jumbo loans from a large bank.

The increase in CoreVest Mortgage Banking activities of $1 million was primarily attributable to improved economics from whole loan sales and sales to joint ventures, which partially offset slightly lower margins and a 4% decline in funding volumes quarter over quarter.

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 improved by $20 million to a $5 million loss during the first quarter of 2025, driven in part by investment fair value gains, net on Third-Party Portfolio Investments as a decline in benchmark interest rates resulted in higher valuations. This was partially offset by higher residential bridge loan delinquencies resulting in incremental negative fair value changes on certain 2021 and 2022 vintage bridge loans in Legacy Bridge Loan Investments.

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

HEI Income, net

HEI income, net increased by $4 million during the first quarter of 2025, primarily due to home price appreciation and prepayment speeds steadily improving relative to modeled assumptions. HEI income, net is primarily comprised of increases in the underlying value of the investments as driven by home price appreciation and other factors, such as periodic fluctuations in value influenced by changing housing markets, prepayment rates and other market conditions.

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 $6 million during the first quarter of 2025, primarily related to an increase in equity compensation expense associated with awards granted in the first quarter of 2025 and the fourth quarter of 2024.

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 three-month periods remained flat which was primarily the result of increased GAAP income earned at our TRS from mortgage banking activities in the first quarter of 2025 relative to the higher effective tax rate in the fourth quarter of 2024.

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Net Interest Income

Net interest income increased by $4 million in the three months ended March 31, 2025 compared to the same period ended March 31, 2024, primarily driven by our Sequoia mortgage banking operations. This increase was primarily driven by higher average residential consumer loan balances along with an increase in trading securities used as hedges to manage the mark-to-market risks primarily associated with our mortgage banking operations that were accretive to net interest income. This was partially offset by higher interest expense incurred within the Redwood Investments and Corporate segments from a secured revolving financing facility that was entered into in March 2024 and corporate unsecured debt issued in the first quarter of 2025, respectively.

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 $18 million in the three months ended March 31, 2025 compared to the same period ended March 31, 2024, due to higher Sequoia Mortgage Banking and CoreVest Mortgage Banking revenues.

The increase in Sequoia Mortgage Banking activities, net of $14 million was primarily attributable to an increase in lock volumes of 125% during the three month periods, driven by increases in both flow and bulk lock volumes and the $1 billion purchase commitment from a large money-center bank to acquire a pool of primarily jumbo loans.

The increase in CoreVest Mortgage Banking activities, net of $4 million was primarily attributable to an increase in funding volume of 48% as well as higher margins and improved economics from whole loan sales and sales to joint ventures during the three month periods.

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 $27 million from $22 million of net gains during the first quarter of 2024 to a $5 million net loss in the three months ended March 31, 2025, primarily related to impairments and the impact of interest rate modifications on the values of our unsecuritized residential investor bridge and term loan portfolios at fair value. This was offset by investment fair value gains, net of associated interest rate hedges, on our securities portfolio during the three months ended March 31, 2025.

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

HEI Income, net

HEI income, net increased by $1 million in the three months ended March 31, 2025 compared to the same period ended March 31, 2024, driven by the similar quarter over quarter trends discussed in the preceding section related to home price appreciation and prepayment speeds steadily improving relative to modeled assumptions.

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 $8 million in the three months ended March 31, 2025 compared to the same period ended March 31, 2024, primarily driven by an increase in variable and equity compensation expense as well as higher portfolio management and loan acquisition 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 in the tax provision in the three months ended March 31, 2025 was primarily the result of a higher effective rate compared to the first quarter of 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 months ended March 31, 2025 to the immediate preceding quarter ended December 31, 2024 and year-to-date period ended March 31, 2024.

Table 2 – Consolidated Net Interest Income

(Dollars in Thousands)

56

(Dollars in Thousands)

(1) Average balances for residential consumer loans held-for-sale and held-for-investment, residential investor loans held-for-sale and held-for-investment, multifamily loans held-for-investment, 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 at "Sequoia", "SLST", "CAFL Term", and "CAFL Bridge" 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 months ended March 31, 2025 to the immediate preceding quarter ended December 31, 2024 and year-to-date period ended March 31, 2024.

Table 3 – Consolidated Market Valuation Gains and Losses, Net

(In Thousands)

(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.

Results of Operations by Segment

We report on our business using three segments: Sequoia Mortgage Banking, CoreVest Mortgage Banking, and Redwood Investments. 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 months ended March 31, 2025 to the immediate preceding quarter December 31, 2024 and year-to-date period March 31, 2024.

Table 4 – Segment Results Summary

(In Thousands)

The sections that follow provide further detail on our business segments and their results of operations for the three months ended March 31, 2025 to the immediate preceding quarter December 31, 2024 and year-to-date period March 31, 2024.

Corporate/Other

Net expense from Corporate/Other remained essentially flat from three months ended March 31, 2025 to the three months ended December 31, 2024. The increase in net expenses from Corporate/Other for the three months ended March 31, 2025 to the three months ended March 31, 2024 was primarily driven by an increase in variable and fixed compensation expense associated with additional headcount and an increase in interest expense related to the higher cost of corporate unsecured debt issued in the first quarter of 2025 and payoffs of older vintage, lower coupon convertible debt.

Sequoia 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 Redwood Investments 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 Redwood Investments 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 Redwood investments 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.

In the first quarter of 2025, we launched an additional mortgage loan conduit under our Aspire brand that acquires mortgage loans under expanded underwriting criteria as well as DSCR mortgage loans. While we expect and intend to report this activity as a separate standalone segment in the future, we are including its results within our Sequoia Mortgage Banking segment until this additional conduit activity reaches sufficient scale.

The following table presents key earnings and operating metrics for our Sequoia Mortgage Banking segment during the three months ended March 31, 2025 to the immediate preceding quarter December 31, 2024 and year-to-date period March 31, 2024.

Table 5 – Sequoia Mortgage Banking Earnings Summary and Operating Metrics

(In Thousands)

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

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 periods presented above 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 Sequoia Mortgage Banking business during the three months ended March 31, 2025.

Table 6 – Loan Inventory for Sequoia Mortgage Banking Operations

(In Thousands)

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

Three Months Ended March 31, 2025 Compared to Three Months Ended December 31, 2024

The increase in segment contribution in the three months ended March 31, 2025, as compared to the three months ended December 31, 2024, is due to higher loan purchase and lock volumes, driven by an increase in loan purchases from both banks and IMBs. For the first quarter of 2025, total lock volume of $4.0 billion was 73% higher quarter over quarter, our most active quarter since 2021, and 47% from IMBs and 53% from banks. Notably, in the first quarter of 2025 we locked $1 billion of seasoned loans in a bulk transaction from a large bank. That transaction contributed to the 265% quarter over quarter increase that we saw in bulk lock volumes. Reflecting the ongoing value our loan sellers place on the liquidity we provide, flow volumes also increased by 15% from the prior quarter. These volume increases stand in contrast to the broader industry which is reported by the Mortgage Bankers Association to have experienced a 22% decrease in volume over the same period.

Aspire locked $111 million of loans in the first quarter ended March 31, 2025, 72% of which are considered expanded underwriting loans and 28% of which are considered Debt Service Coverage Ratio ("DSCR") loans.

As has been the case in recent quarters, we also continue to see elevated adjustable-rate mortgage ("ARM") activity, which during the three months ended March 31, 2025 represented 24% of lock volume, compared to 6% for the three months ended December 31, 2024.

Distribution activity remained elevated for the three months ended March 31, 2025, though was lower relative to the fourth quarter 2024 as strength in securitization execution was offset by a decline in whole loan distribution. We completed three securitizations in the first quarter 2025, unchanged relative to the number of securitizations we completed during the fourth quarter 2024, but backed by 52% more jumbo loan collateral. During the quarter ended March 31, 2025, distributed a portion of the collateral from our $1 billion bulk purchase of seasoned jumbo loans, largely in whole loan form. We anticipate additional securitization and whole loan distributions related to this purchase in the second quarter 2025. At March 31, 2025, our securitization activity represented 21% of all jumbo securitization activity for 2025 and we were the largest bank and non-bank issuer of jumbo securitizations during the quarter.

Gain on sale activity during both periods remained in excess of our historical target range of 75 to 100 basis points, though was lower during the quarter ended March 31, 2025 at 123 basis points compared to the quarter ended December 31, 2024 at 181 basis points.

For the three months ended March 31, 2025, our cost per loan was 21 basis points (calculated as operating expenses divided by loan purchase commitments), compared to 29 basis points for the quarter ended December 31, 2024, representing ongoing efficiency of our platform, particularly as we are able to lock a greater number loans while utilizing less capital. We continue to evaluate monetary policy, housing trends and economic data, among other factors, in developing our hedging strategy and we expect to continue to leverage a variety of instruments as hedges, including TBAs, interest rate futures, real estate securities, options and other types of securities.

Operating expenses for this segment increased for the first quarter of 2025, as compared to the preceding quarter, 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 and equity compensation due to improved segment performance for the three-months ended March 31, 2025.

Capital allocation to this segment was $425 million at March 31, 2025, compared to $350 million at December 31, 2024 due to higher loan purchase and lock volumes during the first quarter of 2025. We continue to competitively bid on bulk jumbo loan acquisition opportunities, including newer vintage and seasoned collateral, including both fixed and adjustable-rate mortgages while also focusing on forward flow agreements. As discussed in the Business Update section of this MD&A, looking ahead, we are focused on continuing to gain market share with our seller network, including as it relates to supporting our bank partners with balance sheet solutions for their legacy collateral.

We utilize a combination of capital and our residential consumer loan warehouse facilities to finance our inventory of residential consumer loans held-for-sale. At March 31, 2025, we had residential consumer warehouse facilities outstanding with $2.88 billion of total capacity and $1.66 billion 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 $800 million of total capacity and marginable facilities with $2.08 billion of total capacity.

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Consistent growth trends also drove the increase in segment contribution in the three months ended March 31, 2025 compared to the same period ended March 31, 2024. Total loan sellers as of March 31, 2025 amounted to 209, compared to 190 as of March 31, 2024 with the increase driven largely by new bank sellers. Notably, lock volume increased 125% during the three months ended March 31, 2025 compared to March 31, 2024 driven by focused efforts to make inroads with this larger network of bank sellers as well as our existing network of IMBs. Notably, our efforts resulted in a 192% increase in bank lock activity and a 67% increase in IMB lock activity during the two periods. Both flow and bulk activity saw significant increases, rising 75% and 219% respectively. The market for seasoned bulk loan sales has picked up notably in 2025 compared to the same period in 2024. For instance, in the quarter ended March 31, 2025, over $10 billion in seasoned bulk jumbo loans were brought to market as banks evaluated holding this collateral on balance sheets compared to alternative uses of capital. We actively evaluate these legacy bulk pools as well as other bulk pools related to more recently originated on-the-run collateral. Three banks also exited or signaled their intention to exit all or some channels of mortgage lending during the first quarter 2025.

Distribution activity was up 47% in the first quarter 2025 relative to the same period ended 2024, driven by strength in securitization activity and a resurgence of whole loan activity that began in the fourth quarter 2024. Whole loan sales activity of $421 million in the first quarter 2025 was more than double the amount relative to the same period 2024. Total amount of loans securitized increased by 37% in the quarter ended March 31, 2025 compared to the quarter ended March 31, 2024, given the elevated volumes achieved in the quarters preceding the quarter ended March 31, 2025.

Gain on sale activity between the two periods was slightly higher at 123 basis points in the quarter ended March 31, 2025 compared to 107 basis points for the period ended March 31, 2024. Cost per loan also improved during the two periods. Cost per loan for the quarter ended March 31, 2025 was 21 basis points compared to 37 basis points for the quarter ended March 31, 2024.

Operating expenses for this segment increased for the three-month period ended 2025 relative to the same period ended 2024, 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 and equity compensation due to improved segment performance for the three-months ended March 31, 2024.

CoreVest 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 three to thirty years) or "bridge" loans (which include loans with maturities that generally range between six and 36 months). Term loans are mortgage loans secured by stabilized 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) single-family 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. In some instances, for borrowers experiencing financial difficulty based on specific facts and circumstances, we may amend or modify certain terms of our bridge loans. These modifications and amendments include interest rate reductions and extended maturity dates. In other instances, we extend maturities in the normal course of business, generally for between three to six months on average. These extensions are usually provided to align with updated rehabilitation timelines on the underlying properties. In addition to modifying 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 the initial budget and timelines.

We typically distribute most of our term loans through our CAFL® private-label securitization program, through whole loan sales or into our joint ventures. We typically transfer our residential investor bridge loans to our Redwood Investments portfolio, where they will either be retained for investment, securitized, sold as whole loans or distributed into joint ventures.

As it relates to our joint ventures, since mid-2023, we have established joint ventures with two separate institutional investment managers, one in the second quarter of 2023 to invest in residential investor bridge loans originated by CoreVest and another in the first quarter of 2024 to invest in residential investor bridge and term loans originated by CoreVest. We 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 Redwood Investments 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 CoreVest Mortgage Banking segment for the three months ended March 31, 2025 to the immediate preceding quarter December 31, 2024 and year-to-date period March 31, 2024.

Table 7 – CoreVest Mortgage Banking Earnings Summary

(In Thousands)

CoreVest 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.

Activity of this segment that is performed within/at our TRS is subject to federal and state income taxes. The benefit from income taxes was primarily due to GAAP losses generated by this segment’s operations at our TRS in those periods presented above.

The following table provides unsecuritized residential investor loan origination activity during the three months ended March 31, 2025.

Table 8 – Residential Investor Loans - Funding Activity

(In Thousands)

(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 Redwood Investments section that follows.

(2) Funding and sales for Residential investor bridge loans for the three months ended March 31, 2025, includes $29 million of construction draws, of which $16 million were related to construction draws on loans sold to joint ventures.

(3) For Residential investor term loans, amounts primarily represent loans transferred into consolidated securitizations reflected within our Redwood Investments Segment. Residential investor bridge loan amounts represent the transfer of loans originated or acquired by our CoreVest Mortgage Banking segment at our TRS and transferred to our Redwood Investments segment at our REIT.

Three Months Ended March 31, 2025 Compared to Three Months Ended December 31, 2024

The increase in segment contribution in the three months ended March 31, 2025, as compared to the three months ended December 31, 2024, is due to the $2 million increase in mortgage banking income from the first quarter of 2025 compared to the fourth quarter in 2024. This increase was primarily attributable to improved economics from whole loan sales and sales to joint ventures, partially offset by slightly lower margins and funding volumes quarter over quarter.

Net cost to originate (calculated as operating expenses, less upfront origination fees, divided by origination volumes) of 1.22% for the three months ending March 31, 2025, was up slightly from our net cost to originate of 1.14% for all of 2024, and increased from 0.70% for the three months ending December 31, 2024. Distribution activity remained strong in the first quarter of 2025 with distributions of $421 million through a combination of whole loan sales and sales to joint ventures.

Funding volumes declined 4% in the first quarter 2025 relative to the fourth quarter 2024, as ongoing strength in bridge production was offset by a decline in higher margin term production due in part to interest rate volatility during the quarter. The first quarter of the year also tends to be impacted by seasonal factors, with volumes historically moving higher as the year progresses. While quarterly funded volumes were down quarter over quarter, we saw ongoing momentum in areas of strategic focus, namely Residential Transition Loans ("RTL"), DSCR loans and lines of credit (“LOC”). Combined, originations of these products were up 35% quarter over quarter. Originations remained focused on single-family collateral in the first quarter of 2025, particularly for bridge loans, as 98% of total bridge fundings during the quarter were backed by single-family properties and 2% were backed by multifamily properties.

Capital allocated to this segment was $100 million at March 31, 2025 up from $75 million at December 31, 2024 as we carried certain loans on our balance sheet ahead of intended distribution in the second quarter 2025. We remain focused on our capital light strategy within this segment, utilizing joint ventures and loan sales. Our inventory of loans is managed with a combination of our capital and loan warehouse facilities. At March 31, 2025, total warehouse capacity was $2.33 billion, with $1.54 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).

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

CoreVest segment contribution increased $7 million during the three months ended March 31, 2025, compared to the three months ended March 31, 2024. The increase is attributable to higher mortgage banking income, driven by a 48% increase to total funded volumes, including approximately a 60% year-over-year increase in higher margin term loans. Other funding strategies, such as RTL, DSCR and LOC, also saw increases year over year. Net cost to originate improved to 1.22% during the three months ended March 31, 2025, compared to 2.61% during the three months ended March 31, 2024 as a result of higher loan funding volumes and slightly lower expenses during the first quarter of 2025. Distribution activity in the first quarter 2025 was nearly three times higher than the same period 2024, particularly driven by the increase in joint venture distributions ($253 million during the first quarter ended 2025 relative to $53 million for the first quarter ended 2024) after launching our second joint venture in the second quarter of 2024.

Redwood Investments Segment

This segment consists of retained operating investments sourced through our Sequoia and CoreVest 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, HEI and other housing-related investments and associated hedges.

In the first quarter of 2025, to help investors better understand our go-forward strategy with regards to our Redwood Investments portfolio, we recategorized our investments into three portfolio strategies: Retained Operating Investments, Third-Party Portfolio Investments and Legacy Bridge Investments. Retained Operating Investments primarily consists of retained securities from our Sequoia and CoreVest term and bridge securitizations. Third-Party Portfolio Investments primarily consists of retained securities from securitizations of re-performing loans, servicing investments, HEI investments and other third party securities that reflect our long-term thesis on housing credit. Legacy Bridge Investments primarily consists of unsecuritized bridge loans of the 2021 and 2022 vintage. There was no impact to the segment financial results as a result of this change. All prior period amounts presented within this quarterly report related to these changes in this document were conformed to this presentation.

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 Redwood Investments segment for the three months ended March 31, 2025 to the immediate preceding quarter ended December 31, 2024 and the year-to-date period ended March 31, 2024.

Table 9 – Redwood Investments Earnings Summary

(In Thousands)

64

The following table presents an earnings summary of our Redwood Investments segment for the three months ended March 31, 2025 to the immediate preceding quarter ended December 31, 2024 broken out by our strategies within the Redwood Investments segment.

Table 10 – Redwood Investments Earnings Summary by Strategy

(In Thousands)

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 interest rate hedges associated with these investments. See Table 3 in the Consolidated Results of Operations in Part I, Item 2 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 3 relates to fair value changes for investments held at corporate/other).

We hold certain of our investments, primarily our MSRs, at our TRS. Activity of this segment that is performed within/at our TRS is subject to federal and state income taxes. The benefit from income taxes was primarily due to GAAP losses generated by this segment’s operations at our TRS and our provision for income taxes at this segment is primarily driven by the amount of income earned from portfolio assets.

Three Months Ended March 31, 2025 Compared to Three Months Ended December 31, 2024

The increase in segment contribution during the three months ended March 31, 2025, as compared to the three months ended December 31, 2024, is due to the $20 million improvement in Investment fair value changes, net. This improvement was driven by investment fair value gains, net on Third-Party Portfolio Investments as a decline in benchmark interest rates resulted in higher valuations. This was partially offset by higher residential bridge loan delinquencies resulting in incremental negative fair value changes on certain 2021 and 2022 vintage bridge loans in Legacy Bridge Investments.

Fundamental performance of our residential consumer assets within our Retained Operating Investments (e.g. Sequoia (SEMT)) and Third Party Portfolio Investments (e.g. reperforming loans (SLST)) continue to be driven by strong employment data, embedded equity protection associated with loan seasoning and home price appreciation, and borrowers motivated to stay current on their low-coupon mortgages. Notably, 90 day+ delinquencies on our Sequoia and re-performing loan securities portfolios were stable in the first quarter 2025 at 0.2% and 7.2% of our total unpaid principle balances, respectively, compared to 0.2% and 7.3% at December 31, 2024.

Certain residential investor assets within our Retained Operating Investments continue to manage through the impacts of elevated benchmark interest rates and overall financing costs for investors, particularly for loans originated in 2021 and 2022 when interest rates were significantly lower. In anticipation of this impact, our CoreVest team has continued to work with borrowers well in advance of their loan maturities to assess project plans and position borrowers to manage towards successful completions. Delinquencies greater than 90 days across our residential investor bridge loans were higher in the first quarter of 2025 relative to the fourth quarter 2024, primarily driven by two sponsor relationships. Overall, delinquencies in this portion of our portfolio are concentrated in 2021 and 2022 vintages, as compared to our post 2022 vintages which are largely focused on single-family strategies and continue to perform well and reflect the strength of our more recent investment focus. To that end, we continue to actively reduce exposure in the legacy bridge loan portfolio, seeking resolutions that optimize net present value, including traditional property liquidations and restructurings that better position a sponsor to refinance, as well as more recently pursuing partnership-based solutions with other capital providers at both an asset-specific and portfolio level. Overall repayment velocity in this bridge loan portfolio remains positive, as approximately 10% of the overall bridge loan portfolio (by UPB) paid off during the first quarter of 2025 and we resolved approximately 9% of bridge loans (by UPB) that were 90 or more days delinquent at December 31, 2024, progress that has continued into the second quarter 2025.

Operating expenses at this segment increased $2 million in the first quarter of 2025 compared to the fourth quarter in 2024, primarily due to increased portfolio management costs incurred for the management of specially serviced residential investor bridge loans and related workout arrangements in Legacy Bridge Loan Investments.

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

The decrease in segment contribution in the three months ended March 31, 2025, as compared to the three months ended March 31, 2024 is due the change in Investment fair value changes, net of $26 million from a $22 million net gain during the first quarter of 2024, to a $5 million net loss during the three months ended March 31, 2025. This decrease was primarily related to impairments and the impact of interest rate modifications on the values of our unsecuritized residential investor bridge and term loan portfolios at fair value in Legacy Bridge Investments. This was offset by investment fair value gains, net of associated interest rate hedges, on our Third Party Portfolio Investments during the three months ended March 31, 2024.

Similar trends as mentioned above also drove the increase in operating expenses in the three months ended March 31, 2025 compared to the same period ended March 31, 2024, primarily due to increased portfolio management costs incurred for Legacy Bridge Investments.

The following table presents details of our Redwood Investments Portfolio at March 31, 2025 and December 31, 2024 organized by investments in retained securities from Sequoia and CoreVest securitizations and those acquired from third-parties. Amounts presented in the table represent our retained economic interests in consolidated Sequoia, CAFL Term, SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted.

Table 11 – Redwood Investments - Detail of Economic Interests

(In Thousands)

(1) Represents our retained economic investment in securities issued by consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $10.18 billion of loans and $9.64 billion of ABS issued associated with these investments at March 31, 2025. We consolidated $8.82 billion of loans and $8.40 billion of ABS issued associated with these investments at December 31, 2024.

(2) Represents our retained economic investment in securities issued by consolidated CAFL Term securitization VIEs. For GAAP purposes, we consolidated $2.39 billion of loans and $2.07 billion of ABS issued associated with these investments at March 31, 2025. We consolidated $2.49 billion of loans and $2.17 billion of ABS issued associated with these investments at December 31, 2024.

(3) Other investments at March 31, 2025 includes net risk share investments of $26 million, representing $29 million of restricted cash and other assets, net of other liabilities of $2 million.

(4) Represents our economic investment in securities issued by consolidated SLST securitization entities. For GAAP purposes, we consolidated $1.28 billion of loans and $1.02 billion of ABS issued associated with these investments at March 31, 2025. We consolidated $1.24 billion of loans and $1.01 billion of ABS issued associated with these investments at December 31, 2024.

(5) Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $424 million of loans and $388 million of ABS issued associated with these investments at March 31, 2025. We consolidated $425 million of loans and $389 million of ABS issued associated with these investments at December 31, 2024.

(6) Represents our economic investment in consolidated Servicing Investment variable interest entities. At March 31, 2025, for GAAP purposes, we consolidated $262 million of servicing investments and $161 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2024, for GAAP purposes, we consolidated $262 million of servicing investments and $159 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.

(7) At March 31, 2025 and December 31, 2024, represents HEI owned at Redwood of $262 million and $257 million, respectively and our retained economic investment in securities issued by consolidated HEI securitization entities of $50 million and $47 million, respectively.

The size of our Redwood Investments portfolio increased slightly since December 31, 2024, primarily due to the retention of $138 million of securities from the three Sequoia securitizations during three months ended March 31, 2025, offset by principal payments received on our securitized bridge loans. At both March 31, 2025 and December 31, 2024, 78% of our Redwood Investments portfolio economic interests were retained interests from our securitizations or securitized and unsecuritized bridge loans, respectively, and 22% were purchased from third parties, respectively. 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 Redwood Investments segment and their activity during the three months ended March 31, 2025.

Real Estate Securities Portfolio

The following table sets forth activity in our real estate securities portfolio for the three months ended March 31, 2025, organized by investments in retained securities from Sequoia and CoreVest securitizations and those 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.

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

(In Thousands)

(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 March 31, 2025, $51 million of Sequoia Securities and $126 million of Other Third-Party Securities were used as hedges for our Sequoia Mortgage Banking operations, and were included in our Sequoia Mortgage Banking segment. At March 31, 2025, our securities owned at Redwood and in consolidated entities consisted of fixed-rate assets (98%), adjustable-rate assets (<1%) and hybrid assets that reset within the next 15 months (2%).

We sold $14 million of securities in the first quarter of 2025. In April 2025, we sold an additional $50 million of non-strategic, third-party securities. Strategically, we will look to continue reducing our exposure to our investment portfolio, namely legacy bridge and third-party investments. This could result in an approximate rotation of approximately 20% of capital toward our operating platforms and retained operating investments throughout the remainder of 2025.

We directly finance our holdings of real estate securities with a combination of recourse, non-marginable term debt financing, non-recourse, non-marginable re-securitization debt, and recourse, marginable securities repurchase financing. At March 31, 2025, we had: CAFL securities with a fair value of $320 million that were financed with $267 million of non-marginable recourse debt through a subordinate securities financing facility; re-performing loan securities with a fair value of $264 million (including securities owned in consolidated securitization entities) that were financed with $139 million of non-recourse securitization debt (ABS issued); Sequoia securities we owned from consolidated and unconsolidated Sequoia securitization trusts with a fair value of $331 million that were financed with $276 million of non-recourse re-securitization debt (ABS issued); real estate securities with a fair value of $314 million (including securities owned in consolidated securitization entities) that were financed with $236 million of recourse debt incurred through repurchase facilities; and $107 million of securities that were financed using a recourse residential MSR warehouse facility. The remaining $200 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 Sequoia securities, CAFL term securities and SLST (Re-performing loan) securities at March 31, 2025. 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 13 – Credit Statistics

(Dollars in Thousands)

(1) The methodology for calculating weighted average values for securities investments presented in the tables above, including delinquency rates, is based on notional balances of loans collateralizing each of our securities investments.

(2) Sequoia Securities presented in this table include subordinate and interest only or certificated servicing securities.

(3) HPI updated average LTV is calculated based on the current loan balance and an updated property value amount that is formulaically adjusted from value at origination based on the FHFA home price index (“HPI”).

(4) Delinquency percentages at underlying securitizations are calculated using unpaid principal balance ("UPB"). Aggregate delinquency amounts by security type are weighted using the UPB of the loans collateralizing each of our securities investments.

(5) Includes loans over 90 days delinquent and all loans in foreclosure (regardless of delinquency status).

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. We currently target returns related to capital deployment opportunities of between 15-20% on Third-Party Portfolio and Retained Operating Investments.1 During the first quarter of 2025, our Sequoia Securities portfolio continued to demonstrate stable credit 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 SLST Re-performing loan securities and Sequoia securities), many of our residential investments are supported by stable 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 first quarter of 2025.

1 Target returns are based on management's market observations, estimates, and assumptions, including our assumptions regarding the use of leverage, credit losses, prepayment speeds, and market interest rates. Actual returns may differ due to these or other factors. See "Cautionary Statement" above within this MD&A for a review of risk factors that may impact our ability to realize our target returns.

Residential Investor Bridge Loans Held-for-Investment

The following table provides the activity of residential investor bridge loans held-for-investment during the three months ended March 31, 2025.

Table 14 – Residential Investor Bridge Loans Held-for-Investment - Activity

(In Thousands)

(1) Includes whole loan sales to third parties and our joint ventures.

(2) 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 (loss). 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.

(3) In the fourth quarter of 2024, we completed our first CAFL securitization sponsored by one of our joint ventures. During the three months ended March 31, 2025, we transferred $43 million of residential investor loans to the securitization issuer under the replenishment feature of this transaction. For additional information on our principles of consolidation, see Note 16 of the Notes to Consolidated Financial Statements, included in Part I, Item 1 of the 2025 Quarterly Report on Form 10-Q.

The fair value of residential investor bridge loans held-for-investment of $1.81 billion at March 31, 2025, were comprised of first-lien, interest-only loans with a weighted average coupon of 9.28% and original maturities of 6 to 36 months. At March 31, 2025, interest income, net recognized on these loans totaled $72 million, of which $2 million represented deferred interest. The fair value of the subset of these loans with modifications involving interest deferrals totaled $626 million at March 31, 2025 . This subset of loans had a weighted average coupon of 9.10%, of which 3.77% represented deferred interest.

At origination, the weighted average FICO score of sponsors of these loan borrowers was 753 and the weighted average as-repaired LTV ratio of these loans was 66%. Overall repayment velocity on these loans was strong in three months ended March 31, 2025 with principal repayments of $178 million.

At March 31, 2025, loans in this portfolio with an aggregate fair value of $230 million and an unpaid principal balance of $272 million, were greater than 90+ days delinquent. Included in the 90+ days delinquent balance are loans in foreclosure with an aggregate fair value of $33 million and an aggregate unpaid principal balance of $48 million. Additionally, REO associated with bridge loans decreased from $78 million at December 31, 2024, to $68 million at March 31, 2025, resulting from a decrease in fair value of $14 million, partially offset by transfers to REO of $2 million.

The fair value of residential investor bridge loans held-for-investment of $1.81 billion at March 31, 2025 declined slightly from $1.86 billion at December 31, 2024. Changes in the value of these loans during the first quarter of 2025 reflect incremental negative fair value changes primarily resulting from higher bridge loan delinquencies on certain 2021 and 2022 vintage bridge loans. For the three months ended March 31, 2025 and December 31, 2024, we modified or put into forbearance loans with a total aggregate unpaid principal balance of $206 million and $353 million, respectively. This balance included modifications to the contractual interest rates (including, in certain cases, deferrals of interest) on loans and modifications involving only extensions of loan maturities and/or covenant terms.

For the three months ended March 31, 2025 and December 31, 2024, loans with modifications involving reductions in contractual interest rates (including, in certain cases, deferrals of interest) had an aggregate unpaid principal balance of $68 million and $167 million at March 31, 2025 and December 31, 2024, respectively. In the three months ended March 31, 2025, modifications on these loans maintained a weighted average contractual interest rate of approximately 5.00% and 8.64%, of which 0% and 5.39% represented deferred interest, respectively. Of this balance, $68 million and $24 million, respectively, included loans that had previously been modified and the further modifications on these loans involved additional amendments to the contractual interest pay rate and deferred interest. We also provided maturity extensions, subject to mandatory partial repayments during the loan term, and established a hard lockbox along with funding interest reserves to cover debt service shortfalls. Of the $68 million in total aggregate unpaid principal balance that was further modified in the three months ended March 31, 2025, we have subsequently resolved in the second quarter of 2025 two of these loans totaling $36 million at the agreed upon modified terms.

For the three months ended March 31, 2025 and December 31, 2024, loans with modifications involving extensions in loan maturities and/or covenant terms (but no changes to contractual interest rate) had an aggregate unpaid principal balance of $138 million and $186 million at March 31, 2025 and December 31, 2024, respectively. While we continue to actively engage 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. 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 routine asset management outcome for these loans, irrespective of market conditions. When we provide these types of maturity extensions, our asset management function also seeks to charge fees related to these extensions. For both the first quarter of 2025 and fourth quarter of 2024, the average length of maturity extensions granted on residential investor bridge loans was seven months and five months, respectively.

We generally value delinquent residential investor loans at a dollar price that is informed by various market data, including the 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 March 31, 2025, we had $705 million of debt incurred through warehouse facilities, which was secured by residential investor bridge loans with a fair value of $1.10 billion; and $708 million of securitization debt secured by $769 million of residential investor bridge loans, $35 million of restricted cash and $38 million of other assets. At March 31, 2025, the unpaid principal balance of bridge loans financed was $1.91 billion, of which $530 million was financed with non-recourse, non-marginable facilities, $621 million was financed with recourse, non-marginable facilities, and $760 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 March 31, 2025 and December 31, 2024.

Table 15 – Residential Investor Bridge Loans Held-for-Investment - By Product/Strategy Type

(In Thousands)

(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 March 31, 2025, the fair value of our total residential investor bridge loans held-for-investment and associated REO represented 95.3% 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 ($744 million at March 31, 2025) and associated multifamily REO ($24 million at March 31, 2025), represented 91.3% 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. As we have revised our underwriting practices to discontinue the active origination of large multi-family loans, we expect the exposure to multifamily loans and REO to decrease over time. In the second quarter of 2025, we have begun taking steps to accelerate the reduction of our legacy bridge loan portfolio in order to streamline our operations and focus our human and investment capital on strategic go-forward activities.

Home Equity Investments

The following table provides the activity of HEI held at our Redwood Investment segment during the three months ended March 31, 2025.

Table 16 – HEI at Redwood Investments Segment - Activity

(In Thousands)

(1) Our HEI presented in this table as of March 31, 2025, include $338 million of HEI owned in our consolidated HEI securitization entities and $262 million of HEI owned directly at Redwood.

We finance a portion of our HEI through a short-term warehouse facility. At March 31, 2025, there was $92 million of debt outstanding on this warehouse facility, secured by HEI with a fair value of $208 million.

Additional details on our HEI are included in Note 10 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. During the three months ended March 31, 2025, positive investment fair value changes primarily reflected improvements in actual and forecasted home price appreciation, relative to previously modeled amounts.

Income Taxes

REIT Status and Dividend Characterization

While the exact amount is uncertain at this time, we currently expect a portion of our 2025 common stock dividend distributions to be taxable as ordinary income for federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is nontaxable (provided it does not exceed a shareholder's tax basis in Redwood shares) and reduces a shareholder's basis in Redwood shares (but not below zero). To the extent such distributions exceed a shareholder's basis in Redwood shares, such excess amount would be taxable as capital gains. We currently expect all of our 2025 preferred stock dividend distributions to be taxable as ordinary income for federal income tax purposes. Under the federal income tax rules applicable to REITs, none of Redwood’s 2025 dividend distributions are currently expected to be characterized as long-term capital gain dividends. The income or loss generated at our TRS will not directly affect the tax characterization of our 2025 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.

Tax Provision under GAAP

For the three months ended March 31, 2025 and 2024, we recorded tax provisions of $6 million and $1 million, respectively. Our tax provision is primarily derived from the activities at our TRS, as we do not book a material tax provision associated with income generated at our REIT. The increase in the tax provision year-over-year was primarily the result of increased GAAP income earned at our TRS in 2025 compared to 2024. Refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2024 under the caption Income Taxes for additional information regarding our tax provision and deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

Summary

In addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash and liquidity consist of borrowings under mortgage loan and HEI warehouse facilities, 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 operations and manage hedges associated with those activities, to purchase investment securities and make other investments, to repay principal and interest on our debt, to meet margin calls associated with our debt and other obligations, to make dividend payments on our capital stock, to fund draws on our bridge loan portfolio and other commitments when requested, and to fund our operations.

At March 31, 2025, our total capital was $1.94 billion, consisting of (i) $1.18 billion of equity capital, (ii) $745 million of unsecured and other corporate debt on our consolidated balance sheets (including $124 million of exchangeable debt due in 2025, $247 million of convertible debt due in 2027, $145 million of senior unsecured notes due in 2029, $90 million of senior unsecured notes due in 2030 and $140 million of trust-preferred securities due in 2037), and (iii) $12 million of promissory notes.

At March 31, 2025, our unrestricted cash and cash equivalents were $260 million. In addition, our unencumbered assets of $291 million at March 31, 2025 represent assets that could be pledged on a secured financing basis to provide another source of liquidity, as needed. While 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. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interests of the Company.

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 that describe our debt.

At March 31, 2025, in aggregate, we had $2.14 billion of secured recourse debt outstanding, financing our mortgage banking operations and investment portfolio, of which $1.02 billion was marginable and $1.12 billion was non-marginable.

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. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Borrowing Facilities."

Repurchase Authorization

Our Board of Directors has approved an authorization for the repurchase of up to $125 million of our common stock, up to $70 million of our preferred stock, and has also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. During the three months ended March 31, 2025 we did not repurchase any shares of our common stock or preferred stock or of our convertible and exchangeable debt. At March 31, 2025, $101 million of the current authorization remained available for the repurchase of shares of our common stock, and $70 million remained available for the repurchase of shares of our preferred stock. We are currently evaluating the potential for common share repurchases in 2025, given the current trading price of our common shares, relative to the book value per share of our common stock currently outstanding. Any repurchases of our common stock, preferred stock, or debt securities under these authorizations would reduce our available capital and unrestricted cash described above.

Cash Flows and Liquidity for the Three Months Ended March 31, 2025

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 operations, 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 $998 million from $954 million in the three months ended March 31, 2024 to $1.95 billion in the three months ended March 31, 2025, primarily due to the increase in residential consumer loan purchases as well as an increase in originations of residential investor loans held for sale 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 $2.08 billion of net cash outflows for the three months 2025 period, compared to $970 million of net cash outflows for the three month 2024 period), cash flows from operating activities were positive $127 million during the first three months of 2025 and positive $16 million for the first three months of 2024.

Cash Flows from Investing Activities

During the three months ended March 31, 2025, our net cash provided by investing activities was $659 million 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 three months ended March 31, 2025, our net cash provided by financing activities was $1.33 billion. This primarily resulted from $1.06 billion of net borrowings under ABS issued (resulting from the issuance of three Sequoia securitizations as well as a $100 million Sequoia re-securitization of certain consolidated and unconsolidated Sequoia securities during the first quarter of 2025, net of related issuance costs), and $299 million of net borrowings on debt obligations. During the three months ending March 31, 2025, net cash provided from debt obligations included the issuance of senior notes.

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 the 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 March 31, 2025, include maturing debt obligations, interest payments on debt obligations and ABS issued, payments on operating leases, funding commitments for residential investor and consumer loans, strategic investments, potential repurchases of previously sold or securitized loans, and other current payables. Our material cash requirements from known contractual and other obligations beyond the twelve months following March 31, 2025, include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for residential investor bridge loans, strategic investments, and principal and interest payments under ABS issued (as described further below under Liquidity Needs for our Redwood Investments).

At March 31, 2025, we had commitments to fund up to $350 million of additional advances on existing residential investor bridge loans. 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. Additionally, at March 31, 2025, there was one outstanding repurchase claim on two residential investor term loans totaling $36 million that we are required to repurchase from a securitization trust for which we had recorded an estimated $4 million of valuation losses through Investment fair value changes, net as of March 31, 2025. At March 31, 2025, we had $1.54 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.

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, 2024 under the caption Contractual Obligations. For additional information on commitments and contingencies as of March 31, 2025 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, 2024.

Our 5.75% exchangeable senior notes mature in October 2025 and have an outstanding principal balance of $124 million at March 31, 2025. We expect to utilize cash on hand to repay our exchangeable senior notes that are maturing, which will reduce the amount of cash that can be deployed into our business and could reduce the earnings potential of our business. Further, if market rates for corporate capital remain elevated and we chose to issue new corporate capital, it could negatively impact our profitability.

We expect to meet our obligations coming due in less than one year from March 31, 2025 most likely from borrowings under existing, new or amended financing arrangements, or through other previously mentioned sources of capital. As of March 31, 2025, we had approximately $291 million of unencumbered assets, and we currently estimate we could generate incremental capital through financing certain of these assets. Our unencumbered assets consist primarily of interest-only securities, retained securities from our securitization activities, bridge loans, and HEI.

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 operations while we aggregate the loans for sale or securitization.

At March 31, 2025, we had residential consumer warehouse facilities outstanding with $2.88 billion of total capacity and $1.66 billion of available capacity. These included non-marginable facilities with $800 million of total capacity and marginable facilities with $2.08 billion of total capacity. At March 31, 2025, we had residential investor warehouse facilities outstanding with $2.33 billion of total capacity and $1.54 billion of available capacity. All of these residential investor financing facilities are non-marginable. We note that several of these facilities used to finance our CoreVest Mortgage Banking loan inventory are also used to finance bridge loans held in our Redwood Investments portfolio.

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 three-month period ended March, 31 2025, 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 operations.

Additional information regarding risks related to the debt we use to finance our mortgage banking operations 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 March 31, 2025, in addition to our ABS issued, our investment portfolio was financed with $1.2 billion of secured recourse debt, of which $305 million was marginable and $880 million was non-marginable, and $1.1 billion of secured non-recourse debt that was non-marginable. At March 31, 2025, we have also allocated $200 million of outstanding borrowings from our secured revolving financing facility to finance our Redwood Investments segment and have drawn the remaining $50 million of capacity on this $250 million facility though April 30, 2025. Our secured revolving financing facility may be used to finance both our Redwood Investments and Sequoia and CoreVest mortgage banking operations.

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, 2024 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.

Corporate Capital

In addition to secured recourse and non-recourse debt we use specifically in association with our mortgage banking operations and within our Redwood Investments portfolio, we also use unsecured recourse debt to finance our overall operations. This is generally in the form of convertible and non-convertible senior debt securities we issue in the public markets and also includes trust preferred securities and promissory notes. See Note 18 Part I, Item 1 of this Quarterly Report on Form 10-Q and Note 17 in Part II, Item 8 of our Annual Report on Form 10-K, for additional information on our unsecured debt obligations.

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, 2024, under the caption(s) “Risks Relating to Debt Incurred under Borrowing Facilities,” and “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements.”

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 or securities 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, 2024 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, 2024 under the heading “Market Risks.” In addition, with respect to mortgage loans 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, 2024 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, 2024 under the heading “Market Risks,” if and when those loans or securities 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 and HEI warehouse 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 March 31, 2025, only our securities repurchase facilities (with $236 million of borrowings outstanding at March 31, 2025), six of our residential consumer mortgage loan warehouse facilities (with a combined $716 million of borrowings outstanding at March 31, 2025), and a certificated MSR facility (with $68 million of borrowings outstanding at March 31, 2025) 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, 2024 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, 2024 under the caption “Risks Relating to Debt Incurred under Borrowing Facilities - Financial Covenants Associated With Debt Facilities and Other Debt Financing.”

At March 31, 2025, 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.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Note 2 — Basis of Presentation and Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We have elected the fair value option of accounting for a significant portion of the assets and some of the liabilities on our balance sheet, and the majority of these assets and liabilities utilize Level 3 valuation inputs, which require a significant level of estimation uncertainty. See Note 6 in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our assets and liabilities accounted for at fair value at March 31, 2025, including the significant inputs used to estimate their fair values and the impact the changes in their fair values had to our financial condition and results of operations. See Note 6 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2024, incorporated herein by reference, for the same information on these assets and liabilities as of December 31, 2024. Periodic fluctuations in the values of these assets and liabilities are inherently volatile and thus can lead to significant period-to-period GAAP earnings volatility.

Additional detail on our critical accounting estimates is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2024, under the heading "Critical Accounting Estimates."

MARKET AND OTHER RISKS

We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

In addition to the market and other risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

Information concerning market risk is incorporated herein by reference to Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, 2024.

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

There have been no changes in our internal control over financial reporting during the first quarter of 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024.