REDWOOD TRUST INC (RWT) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 six main sections:

•    Overview

•    Recent Developments

•    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 II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. 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 in Part I, Item 1, Business and in Part I, Item 1A, Risk Factors of this Annual Report on Form 10-K.

OVERVIEW

Our Business

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit, with a mission to help make quality housing, whether rented or owned, accessible to all American households.. 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 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: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking, and Investment Portfolio. In the fourth quarter of 2023, we updated the names of two of our segments: Residential Mortgage Banking was changed to Residential Consumer Mortgage Banking; and Business Purpose Mortgage Banking was changed to Residential Investor Mortgage Banking. No changes were made to the composition of the segments. Our two mortgage banking segments generate income from the origination or acquisition of loans and the subsequent sale or securitization of those loans. Our investment portfolio is comprised of investments sourced through our mortgage banking operations as well as investments purchased from third-parties, and generates income primarily from net interest income and asset appreciation.

Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”). We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our taxable REIT subsidiaries” or “TRS.”

For a full description of our segments, see Part I, Item 1—Business in this Annual Report on Form 10-K.

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Business Update

Over the past twelve months, as housing activity hit record lows and the banking sector became mired in crisis, we created substantial capital flexibility through reducing recourse leverage and extending the overall tenor of corporate debt maturities. We continued to build relationships with regional banks in response to proposed Basel III bank capital rules, the most significant bank regulatory reform proposal since the Great Financial Crisis. In conjunction, we have repositioned our balance sheet and operations to seek to take advantage of the expected increase in loan volume that will be financed through the private markets, and the institutional capital seeking to access such loans.

In the fourth quarter, we completed five securitizations across our business lines, including three specific to our Investment Portfolio. These three transactions reduced recourse leverage by $200 million and organically unlocked $100 million of capital. In addition, we raised capital through our At-the-Market (“ATM”) equity issuance program with significant participation from institutional investors. To date in the first quarter of 2024, we have been actively deploying this capital at an estimated mid-teens blended return, balanced between our mortgage banking platforms and the retirement of our long-term convertible debt at a discount. We believe current capital deployment opportunities exist with illustrative returns between 15-20% for mortgage banking opportunities, 12-18% for organically retained securities and joint-venture co-investments, 8-10% for opportunistic retirement of our unsecured debt, and 15-20% for opportunistic third-party investments. Our ability to deploy capital expeditiously and at similar levels to where we estimate returns are today are both important factors to realize the earnings accretion potential from the capital raised.

In mid-January 2024 we completed Redwood’s first unsecured corporate debt offering, which carries a 5-year maturity and no conversion feature. Like much of our secured debt, this offering is redeemable prior to its stated maturity. Given the high interest cost of debt available in the current market, the ability to refinance our debt if and when markets improve has potentially significant value. Optimizing and strengthening our capital position will continue to be a priority as we look to continue deepening our relationships with our network of jumbo loan originators and housing investors. With $396 million of unrestricted cash at February 16, 2024, along with $290 million of unencumbered assets and $2.1 billion of excess warehouse capacity at year-end 2023, we have expanded our ability to be opportunistic.

Our strategic reallocation of capital also remains a priority, as we focus on de-emphasizing direct portfolio investing in favor of co-investments in joint venture partnerships with private credit institutions. To date, we have successfully formed one joint venture specific to our residential investor loan production and we continue to work towards establishing others across our business to meet the capital needs of our operating platforms. We expect this strategic shift to carry with it a number of benefits to our shareholders. Firstly, these ventures are formed with capital providers who have long-term, strategic allocations to our core mortgage banking product offerings. Secondly, these joint ventures may create reliable distribution channels with the capacity to enhance our liquidity and pricing, supporting predictable revenues and profitability. Similar to our current joint venture, we would receive recurring fee streams earned in overseeing these joint ventures in addition to our share of the investment returns. These joint ventures help us organically scale our operating platforms at a much faster pace than we could achieve solely with our own capital, given we would represent the minority of total capital they deploy.

With respect to sourcing more residential investor and consumer loans to distribute to current and future joint venture partnerships, we remain optimistic that the prospect of major bank regulatory rule changes, coupled with the financial pressures that many depositories already face, will lead more of these institutions to pair their residential mortgage business with Redwood’s capital. This could in turn support an increase in loan acquisition and origination volumes for our operating platforms. The Basel III regulatory changes proposed last year are likely to take shape in some form, and many banks are beginning to adjust in advance of adoption of final rules. Despite strong profits for many large banks and lobbyist opposition to higher capital rules, many banks still require additional risk capital, or an outside capital partner, to prudently manage the asset-liability exposures that 30-year fixed rate mortgage portfolios pose.

With that in mind, we continue to onboard bank loan sellers, ending the year having secured new or renewed jumbo flow relationships with almost 70 banks. We now estimate that we have connectivity with loan sellers that control 60% of residential jumbo origination volume. Banks accounted for over half of our quarterly residential consumer lock volume in the fourth quarter of 2023. Onboarding new bank loan sellers can be challenging, not only from a workflow perspective, but also due to the cultural shift that working with an outside platform, like Redwood's, often requires. As these valued loan sellers make the transition to working with us, we have the opportunity to demonstrate our expertise, speed to close, customized product solutions, and seamless execution.

As activity with bank loan sellers increases, it is important to note that our commitment to our base of non-bank loan sellers remains steadfast. These institutions are already accustomed to transacting with platforms such as Redwood's. Their capital markets prowess comes as second nature, and they provided steady liquidity to the housing market as many bank lenders stepped back amidst last year’s volatility. The message we emphasize to all of our loan sellers is the same: we will enable you to operate more safely, reliably and efficiently.

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To complement our focus on first-lien residential loans, we have continued to invest in our new home equity investment platform, Aspire. Today, home equity remains an attractive market in housing finance, estimated at over $30 trillion. With housing affordability at its lowest level in decades, homeowners continue to look for innovative ways to access the equity in their homes. Since launching Aspire, which leverages our existing loan seller network and infrastructure, we have grown our operating footprint to five states with plans to extend to as many as 15 states in the coming months. Over the last few quarters, we have begun collaborating with our loan sellers to offer our HEI product to their clients. To complement this rollout and the opportunity in home equity broadly, in early 2024 we also launched a program to acquire traditional second lien mortgage products from our seller network, creating a unique, coordinated solution set for them as they service demand for home equity products from their customers.

Our Residential Investor loan platform, CoreVest, is also beginning to benefit from the pullback by banks as they anticipate higher capital requirements. Borrowers who have historically procured funding from banks now actively seek out our platform for solutions. Continuing since the third quarter of 2023, we have been advancing negotiations with several banks on partnership opportunities that would allow us to access their existing pipelines with an eye toward offering our broad product set and deep capital markets experience. Both the pullback from banks as well as various market technicals could create a constructive environment for us to grow Residential Investor loan origination volumes in the year ahead.

We also continue to work closely with Residential Investor borrowers who are experiencing financial stress, particularly within our multifamily bridge portfolio. Two years of rapidly rising rates has resulted in higher debt costs and extended timelines for certain multifamily projects originated in 2021 and the first half of 2022, causing divergence in performance between our single-family and multifamily bridge portfolios. We continue to actively manage this exposure, recasting loans, extending timelines and working with borrowers to bring in fresh capital. This work helps to position their projects, and our portfolio performance, for greater success. These loans are in many cases supported by significant equity, finance housing stock that remains in short supply, and were underwritten within conservative debt yield parameters and rental growth assumptions.

We deliberately curtailed multifamily bridge originations beginning in the third quarter of 2022, and overall exposure to multifamily bridge loans now totals 13% of our total capital. Importantly, the shorter average term of our bridge loans has allowed us to continue recalibrating underwriting assumptions for new projects with the trajectory of interest rates, relegating most of the credit challenges within our portfolio to loans originated 18 to 24 months ago.

As we enter a period of heightened scrutiny for commercial real estate financing, overall, we would note that our business remains focused on residential housing finance, whether engaged in single-family or multifamily residential real estate. Additionally, at December 31, 2023, nearly all of the investments on our balance sheet were marked to market through our GAAP income statement. Therefore, our book value at year-end 2023 reflects, among other fair value changes, accumulated fair value declines on our overall bridge loan portfolio that is not just related to delinquent loans. Additional detail on our bridge loan portfolio, as well as all other aspects of our business and portfolio follows in this Management Discussion and Analysis.

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2023 Financial and Operational Overview

This section includes an overview of our 2023 financial results. A detailed discussion of our results of operations is presented in the next section of this MD&A. The following table presents selected financial highlights from 2023 and 2022.

Table 1 – Key Financial Results and Metrics

(1)    Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period.

We conduct our business in three segments: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking and Investment Portfolio. Following is an overview of key financial and operational results at each of our segments during 2023.

Residential Consumer Mortgage Banking

In line with the rapid rise in benchmark interest rates, mortgage rates continued to increase during much of 2023 to their highest levels since 2008. Mortgage rates hit their peak in October 2023 before moving lower into the end of the year given the decrease in 10-year Treasury yields. As a result of the elevated mortgage rates, transaction volumes for the broader industry remained muted. As estimated by the Mortgage Banker’s Association (“MBA”) Mortgage Finance Forecast, total 1 to 4 family mortgage loan origination volumes were down 27% in 2023 relative to 2022. A combination of low inventory of homes for sale and low incentives for families to relocate or refinance kept the volume of both purchase and refinance mortgage loan originations low, down 16% and 53% year over year, respectively.

While industry volumes were impacted by rates and broader housing market macro factors, additional dynamics ultimately impacted our full year volumes. In particular, fall-out from the regional bank crisis in March 2023 changed the way certain banks approach originating mortgages, a trend which is expected to continue. For years, many banks had elected to own the mortgages that they originated on their balance sheets. As capital and liquidity were stressed for many banks beginning in March 2023, banks were forced to re-evaluate their balance sheets, particularly how they funded the mortgages that they originated. In July 2023, the Board of Governors of the Federal Reserve also released newly proposed risk-based capital rules for the U.S. banking system. While the capital rules are not yet finalized and the timeline for any implementation remains uncertain, these rules are also anticipated to impact banks' liquidity and capital requirements in some form. As a result, banks have sought outlets for their mortgage loan originations beyond their own portfolios and, in the months since the regional banking crisis, we added 68 new or re-established depositories as loan sellers. Much of our lock volume in the second half of 2023 came from these new or re-established depository relationships. As a result of this evolving landscape, we locked $2.8 billion of jumbo loans in the second half of 2023, compared to just $0.7 billion in the first half of the year. Total 2023 jumbo lock volume was $3.5 billion, down from $4.1 billion in 2022.

Given the pick-up in lock activity in the second half of the year, capital markets activity also increased and we priced three securitizations in the second half of 2023, compared to two securitizations in the first half of 2023. We distributed $1.8 billion of loans in 2023, including $1.7 billion through five securitizations and $126 million through whole loan sales. This compared to $4.5 billion of loan distribution activity in 2022, which included $0.7 billion in securitization and $3.8 billion in whole loan sales. A healthy securitization market, combined with successful execution and investor demand in the second half of the year supported our gain on sale margins.

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Residential Investor Mortgage Banking

During 2023, our Residential Investor Mortgage Banking segment, through activities at our wholly owned subsidiary, CoreVest, continued to offer residential real estate investors its broad suite of bridge and term loan products against a challenging market backdrop. The higher rate environment, which persisted across much of the year, challenged business plans for borrowers and negatively impacted overall industry volumes. While consumer demand for rental housing remains elevated given constrained housing inventory and low housing affordability, actual funded loan volumes at CoreVest were tempered by the elevated rate environment. We ultimately funded $1.6 billion of loans in 2023, compared to $2.8 billion in 2022. As rates remained elevated throughout 2023, housing investors continued to favor short-term, floating rate bridge loans over locking into longer fixed-rate term loans with stronger prepayment protection features. In 2023, our loan fundings were comprised of 33% term loans and 67% bridge loans. This compared to 39% term loans and 61% bridge loans in 2022.

Within our bridge products, funding by product migrated year over year, particularly as we remained focused on sponsor/borrower selectivity. In 2023, 66% of total bridge fundings supported renovation or construction of residential properties with a primary sponsor strategy of stabilization as opposed to sale (Renovate or Build for Rent, "BFR"), 18% were Single Asset Bridge (“SAB”) loans, 14% financed multifamily properties and 2% were third-party purchased. This compared to 43% for Renovate/BFR, 8% for SAB, 46% for multifamily and 2% for third-party purchased, in 2022. Our acquisition of Riverbend Funding, LLC ("Riverbend"), which closed in 2022, and benefited from its first full year of integration with the CoreVest platform in 2023, largely drove the increase in SAB production year over year. The decline in multifamily bridge production year over year was largely driven by increased selectivity and tighter underwriting on sponsors and loan production. As the higher rate environment persisted in 2023, we continued to adjust our underwriting, including lowering loan-to-value (“LTV”) and loan-to-cost (“LTC”) limits, increasing stabilized debt yield requirements and further stressing the viability of take-out financing for our sponsors.

We continued to successfully distribute loans through multiple channels during the year, distributing $1.5 billion of loans in 2023, compared to $1.3 billion in 2022. Despite the challenging market backdrop, we made progress in growing our distribution efforts through expanding our whole loan buyer base and selling $603 million of whole loans. Additionally, we issued another bespoke private securitization to one investor, backed by $278 million of loans.

Investment Portfolio

At December 31, 2023, Redwood had $3.4 billion of housing credit investments in our Investment Portfolio, compared to $3.7 billion as of year-end 2022 (in each case reflecting our economic interests – see Table 11 that follows for additional details). Of these, 80% were organically created through Redwood’s Residential Consumer and Residential Investor Mortgage Banking platforms, while the remaining 20% were purchased from third-parties.

Our focus during the year was around portfolio efficiency and optimization. To that end, we reduced our exposure in 2023 to non-strategic third-party investments, selling $140 million of such securities (for net gains of $9 million relative to their prior marks) and redeployed the proceeds into our organic investments and mortgage banking operations. Related to portfolio optimization, we completed three securitizations out of our Investment Portfolio (all in the fourth quarter of 2023). These securitizations included our reperforming loan securities, HEI and BPL bridge loans. Combined, these three securitizations reduced recourse leverage and unlocked capital for redeployment. We ended 2023 with 0.9x of secured recourse leverage in our Investment Portfolio. At December 31, 2023, we estimate that our Investment Portfolio had a net discount to par of $2.68 per share, compared to an estimated $4.33 per share of net discount at December 31, 2022.

Spread widening and the selloff in interest rates during most of 2023 continued to impact the fair values of our Investment Portfolio, though we did see some recovery in the fourth quarter as rates moved off of their 2023 highs and spreads tightened. Negative overall fair value changes were concentrated in our BPL bridge loan portfolio, which were partially offset by benefits on interest only and mortgage servicing related investments.

Fundamental credit performance across our residential consumer loan investments remained strong during 2023, and we generally saw declining delinquencies and LTVs, continued seasoning and strong cash flows. 90 day+ delinquencies for our SLST (RPL) investments were 8.4% at December 31, 2023 compared to 12.4% at December 31, 2022. 90 day+ delinquencies for our SEMT investments were 0.2% at December 31, 2023 compared to 0.2% at December 31, 2022. 90 day+ delinquencies for Other Third-Party Securities were 0.6% at December 31, 2023 compared to 0.2% at December 31, 2022.

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Our Residential Investor related securities and investments experienced some stress during 2023, with delinquencies on our CAFL securities and bridge loans moving higher during the year as sponsors/borrowers were faced with the challenges of a higher rate environment. Our asset management team was active throughout the year connecting with borrowers well ahead of their loan maturities to assess and work through any pockets of stress. 90 day+ delinquencies for our CAFL term loan securities were 3.7% at December 31, 2023, compared to 1.5% at December 31, 2022, and 90 day+ delinquencies for our bridge loans were 5.1% at December 31, 2023, compared to 2.0% at December 31, 2022, along with higher balances of REO associated with our bridge loans year-over-year.

During the year, we launched our in-house home equity investment (“HEI”) origination platform, Aspire. This effort followed multiple years of investing directly in HEI originated by third-party originators.

RWT Horizons

During 2023, the focus for our RWT Horizons team was on portfolio management. We continued to selectively expand RWT Horizons, our investment initiative focused on early-stage technology companies with business plans focused on innovations that we believe can disrupt the mortgage finance landscape. Through RWT Horizons, we aim to extract value at more points along the mortgage value chain, thereby making us a more meaningful partner to the broad network of market constituents to whom we provide liquidity, and building relationships designed to benefit all parties. Our investments continue to focus on companies that have a direct nexus to our operating platforms and investment portfolio.

In 2023, the extreme volatility that public technology companies saw permeated its way through valuations and the fundraising environment for late-stage companies, and ultimately earlier stage companies as well. At December 31, 2023, we had $25 million of capital committed to RWT Horizons, representing 34 investments across 27 portfolio companies. During 2023, we made 7 investments, representing $1.9 million of commitments; of these, three were follow-on investments in existing RWT Horizons portfolio companies. Additionally, during 2023, RWT Horizons had one portfolio exit and twelve RWT Horizons portfolio companies completed follow-on capital raises, with two of those raises being done at valuations below that of their prior capital raise.

RECENT DEVELOPMENTS

In January 2024, we issued $60 million of 9.125% senior notes due 2029 (the "Notes"). The Notes are senior unsecured obligations of ours and bear interest at a rate equal to 9.125% per year, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, beginning on June 1, 2024. The Notes mature on March 1, 2029. We may redeem the notes, in whole or in part, at any time on or after March 1, 2026 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest. See Note 25 in Part II, Item 8 of this Annual Report on Form 10-K for additional information on this issuance.

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RESULTS OF OPERATIONS

Within this Results of Operations section, we provide commentary that compares results year-over-year for 2023, 2022, and 2021. Most tables include "changes" columns that show the amounts by which the year's results are greater or less than the results from the prior year. Unless otherwise specified, references in this section to increases or decreases in 2023 refer to the change in results from 2022 to 2023, and increases or decreases in 2022 refer to the change in results from 2021 to 2022.

Consolidated Results of Operations

The following table presents the components of our net income for the years ended December 31, 2023, 2022, and 2021.

Table 2 – Net Income (Loss)

Net Interest Income

The decrease in net interest income in 2023 was primarily driven by a $43 million decrease from our Investment Portfolio and a $19 million decrease from our Mortgage Banking operations. The decrease in our Investment Portfolio was primarily driven by $13 million of lower yield maintenance income on our CAFL Term securities from slower prepayments in 2023, $10 million of lower accretion income on our AFS securities in 2023 (as calls elevated accretion early in 2022), $12 million of increased interest expense related to HEI (which does not generate interest income but is partially financed with debt), lower net interest income from a lower average balance of securities as we sold non-strategic third-party assets during 2023, and increased interest expense from higher overall financing costs in 2023 as benchmark rates and spreads rose during the year. Additionally, while net interest income on bridge loans increased $20 million in 2023 due to higher average balances year-over-year, we did not recognize $25 million of interest income related to an increase in non-accrual delinquent bridge loans during 2023.

Net interest income from Residential Consumer and Residential Investor Mortgage Banking operations decreased by $11 million and $8 million, respectively, during 2023. These declines were the result of lower average balances of loan inventory and higher financing costs given the rise in benchmark interest rates during the past year. Volume in the residential consumer business was intentionally reduced during 2022 and into the first quarter of 2023, due to the interest rate environment. Given improving market conditions and new opportunities, we increased our quarterly residential consumer loan acquisition volumes beginning in the second quarter of 2023 and see opportunities to further grow acquisitions in the coming quarters in this business.

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See the Investment Portfolio and Mortgage Banking sub-sections of the "Results of Operations by Segment” section that follows for additional detail on the composition of, and activity within, our investment portfolio.

Corporate net interest expense remained flat in 2023, as higher interest expense from the issuance of new convertible debt in June 2022 and from our trust preferred securities, which are variable-rate and were impacted by higher benchmark interest rates in 2023, were mostly offset by higher interest income earned on corporate cash, along with a reduction in interest expense related to the repurchase of $81 million of our convertible debt across 2023 - 2027 maturities during 2023 and the repayment of our convertible debt that matured in August 2023.

We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. However, over the past year, continued increases in benchmark interest rates and borrowing spreads negatively impacted our net interest income. While additional increases in the federal funds rate are not currently predicted by many market participants, further increases or widening of borrowing spreads could result in lower net interest income. To the extent interest rates remain elevated or increase further, certain fixed-rate term borrowings that mature in the coming quarters may have to be refinanced at higher interest rates, which could cause a reduction in net interest income. Given the high interest cost of debt financing available in the current market, we maintained $290 million of unencumbered assets and $2.1 billion of excess warehouse capacity at December 31, 2023.

Net interest income increased in 2022 from 2021, primarily due to a $26 million increase in net interest income earned in our Investment Portfolio. This increase generally resulted from higher average asset balances in 2022, as we increased our investments in BPL bridge loans and carried a higher average balance of securities retained from Sequoia (residential jumbo loans) and CAFL (BPL term loans) securitizations we completed throughout 2021 and into 2022. Additionally, net interest income from bridge loans benefited as we saw the increase in their coupons outpace increases in financing costs throughout the year, as these are primarily floating rate assets. These increases were partially offset by lower levels of discount accretion on our available-for-sale ("AFS") securities resulting from a significant reduction in prepayments of loans underlying the securitizations in association with a continued rise in interest rates throughout 2022.

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

Mortgage Banking Activities, Net

The increase in income from mortgage banking activities during 2023 was attributable to an increase of $49 million from our Residential Consumer Mortgage Banking operations and an increase of $32 million from our Residential Investor Mortgage Banking operations. For both mortgage banking segments, while volumes were higher during 2022 as compared to 2023, margins were negative for 2022 overall, as rapidly rising interest rates and widening spreads impacted valuations of our loan inventory.

In the Residential Consumer Mortgage Banking segment, volumes steadily increased from the first through third quarters of 2023, with a modest decrease in the fourth quarter due primarily to seasonal factors. In 2023, lower overall interest rate volatility aided in distribution execution throughout the year and margins were 112 basis points for the full year, slightly above our historical target range of 75 to 100 basis points.

In the Residential Investor Mortgage Banking segment, higher margins from improving execution on term securitizations and sales during 2023 drove the improvement in mortgage banking income during the year, as term spreads tightened more significantly in the first quarter, then stabilized through the end of 2023. The benefit from higher margins was partially offset by lower funding volumes in 2023, as rising interest rates decreased demand for loans and we were more selective with the types of projects we financed in 2023. Going forward, we expect elevated benchmark interest rates will continue to pressure origination volumes, while we continue to see opportunities to refinance our bridge borrowers with term products.

The decrease in income from mortgage banking activities during 2022 was attributable to a $148 million decrease from our Residential Consumer Mortgage Banking operations and a $101 million decrease from our Residential Investor Mortgage Banking operations. The decrease from Residential Consumer Mortgage Banking operations was attributable to lower acquisition volumes as well as decreased margins during 2022, as a sharp increase in mortgage rates during 2022 drove credit spreads wider and contributed to an industry-wide decrease in residential mortgage origination activity. Despite increased volumes during 2022, Residential Investor Mortgage Banking income declined as compared to 2021, as continued market volatility and extreme credit spread widening in 2022 negatively impacted profitability.

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

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Investment Fair Value Changes, Net

Investment fair value changes, net, is primarily comprised of the change in fair values of our investment portfolio assets that are accounted for under the fair value option and their associated interest rate hedges. During 2023, negative investment fair value changes were primarily driven by reductions in the value of our investments in reperforming loan securities (our investments in consolidated Freddie Mac SLST entities), which were negatively impacted primarily by rising interest rates, as well as reductions in the fair value of our overall BPL bridge loan portfolio, including certain non-performing and modified BPL bridge loans and unrealized losses on certain delinquent term loans.

The negative fair value changes were partially offset by fair value increases in IO securities and interest rate hedges, which benefited from rising interest rates. Fundamental performance of our residential consumer assets within our Investment Portfolio continues to be driven by strong employment data, embedded equity protection and home price appreciation associated with loan seasoning and borrowers motivated to stay current on their low-coupon mortgages.

During the year ended December 31, 2022, negative investment fair value changes reflected extreme levels of credit spread widening across many of our longer-duration, fixed-rate investments, partially offset by fair value increases in our IO securities and interest rate hedges, which benefited from rising interest rates.

Additional detail on our investment fair value changes is included in the “Results of Operations by Segment” section that follows.

HEI Income, net

In 2023, we changed the presentation of our Consolidated Statements of Income (Loss) to include a new line item "HEI income, net" to include all amounts related to our HEI investments that were previously presented within "Investment fair value changes, net." All applicable prior period amounts presented in this document were conformed to this presentation.

In 2023, HEI Income, net increased by $32 million. HEI income is primarily comprised of recurring accretion of the underlying option value of the investments over time based on estimated future home price appreciation and other factors, along with periodic fluctuations in value influenced by changing housing and other market conditions. HEI income in 2023 was primarily driven by this baseline accretion in value, while a smaller portion of the increase in value was driven by actual and projected trends in home prices improving relative to our modeled expectations at the beginning of the year. At the beginning of 2023 we projected negative home price appreciation for most of the year, and actual home price appreciation was positive for 2023 in most regions.

Details on the composition of HEI income, net is included in Note 10 in Part II, Item 8 of this Annual Report on Form 10-K.

Other Income

The decrease in other income for the year primarily resulted from $8 million of lower income on our MSR investments. MSR income was nominally impacted by fair value changes in 2023 given the MSR's reduced sensitivity to rising interest rates during the year, while MSRs benefited significantly in 2022 as the sharp rise in interest rates caused a slowdown in prepayment speeds and was more impactful to valuations.

Details on the composition of other income is included in Note 21 in Part II, Item 8 of this Annual Report on Form 10-K.

Realized Gains, Net

In 2023, we realized net gains of $2 million, primarily resulting from the sales of $54 million of AFS securities, as well as from the repurchase of $81 million of our convertible debt.

In 2022, we realized net gains of $5 million, primarily resulting from calls associated with third-party AFS securities during the first quarter of 2022, as well as $2 million of gains on extinguishment of debt that resulted from the repurchase of $32 million of our convertible debt in the fourth quarter of 2022.

General and Administrative Expenses

Between the fourth quarter of 2022 and the first quarter of 2023, we implemented firm-wide initiatives to rationalize headcount and reduce non-compensation costs, contributing to a net headcount reduction of 26% since September 30, 2022 and reductions to fixed compensation expense of $10 million in 2023. Additionally, non-compensation expenses were reduced by $6 million in 2023. These decreases were partially offset by higher expenses for annual variable compensation associated with improved results year-over-year as well as higher long-term incentive award expense.

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The decrease in general and administrative expenses for 2022 primarily resulted from the decrease in variable compensation expense associated with the decrease in earnings from 2021 to 2022. While expenses from long-term incentive awards increased in 2022 from new award grants, the expense for certain awards (PSUs, csDSUs and Cash Performance Awards) decreased approximately $3 million from 2021, due to negative adjustments (decreasing the expense) related to changes in vesting assumptions and decreases in our stock price during the year. These decreases in 2022 were partially offset by a $17 million increase in fixed compensation expense in 2022, primarily attributable to the acquisition of Riverbend in the third quarter of 2022, which added $5 million of costs in 2022, as well as from other ordinary course headcount additions in early 2022 and competitive wage increases for existing employees in 2022. Additionally, during the third and fourth quarters of 2022, we initiated various expense management initiatives, including the restructuring of our Residential Investor Mortgage Banking management team, and incurred $7 million of employee severance and related transition expenses.

Details on the composition of General and administrative expenses are included in Note 22 in Part II, Item 8 of this Annual Report on Form 10-K.

Portfolio Management Costs

These costs are primarily related to sub-servicing costs on our BPL bridge loans and HEIs, as well as costs incurred for the management of specially serviced BPL bridge loans and related workout arrangements. The increases in portfolio management costs in 2023 and 2022, resulted from growth in our investment portfolio during both years, as well as increased costs related to a higher balance of delinquent BPL bridge loans during 2023.

Loan Acquisition Costs

The decrease in loan acquisition costs in 2023 primarily resulted from lower loan origination and acquisition volumes in our mortgage banking segments in 2023, as compared to 2022.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking operations and MSR investments, as well as certain other investment and hedging activities. The tax provision for the year ended December 31, 2023 reflects GAAP income earned at our TRS, resulting primarily from improved mortgage banking results.

The benefit from income taxes in 2022 resulted from GAAP losses at our TRS during the year associated with losses incurred at both our mortgage banking operations.

For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.

Other Comprehensive Income (Loss), net

Other comprehensive income in 2023 primarily resulted from net unrealized gains on our AFS securities, as improved market conditions in the second half of 2023, including spread tightening and rates moving off their 2023 highs through the end of the year, benefited valuations.

Other comprehensive loss, net in 2022 was primarily comprised of net unrealized losses on AFS securities, due to spread widening and rising benchmark interest rates.

For additional detail on other comprehensive loss, net, see Note 18 in Part II, Item 8 of this Annual Report on Form 10-K.

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Net Interest Income

The following tables present the components of net interest income for the years ended December 31, 2023, 2022, and 2021.

Table 3 – Net Interest Income

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Footnotes to Table 3

(1)Average balances for residential loans held-for-sale and held-for-investment, business purpose loans held-for-sale and held-for-investment, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for AFS securities, short-term debt, long-term 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 "Legacy Sequoia", "Sequoia", "Freddie Mac SLST", "Freddie Mac K-Series", "CAFL Term", and "CAFL Bridge" reflect activity from consolidated variable interest entities. 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)We sold nearly all of our subordinate trading securities over the course of 2023 and our remaining trading securities at December 31, 2023 were interest-only securities, which generate a higher cash interest yield. This interest income is generally 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.

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The following table details how net interest income changed on a consolidated basis as a result of changes in average investment balances (“volume”) and changes in interest yields (“rate”).

Table 4 – Net Interest Income - Volume and Rate Changes

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Net Interest Income by Segment

The following table presents the components of net interest income by segment for the years ended December 31, 2023, 2022, and 2021.

Table 5 – Net Interest Income by Segment

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Results of Operations by Segment

Overview

We report on our business using three segments: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking, and Investment Portfolio. For additional information on our segments, refer to Part I, Item 1, and Note 24 in Part II, Item 8 of this Annual Report on Form 10-K.

The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the years ended December 31, 2023, 2022, and 2021.

Table 6 – Segment Results Summary

The sections that follow provide further detail on our three business segments and their results of operations for the year ended December 31, 2023.

Corporate/Other

The $25 million increase in net expense from Corporate/Other in 2023 was primarily due to a decrease of $19 million in investment fair value changes, net from positive $16 million in 2022 to negative $3 million in 2023. The negative fair value changes in 2023 were primarily related to certain strategic investments that declined in value over the course of 2023, whereas certain strategic investments increased in value during 2022, as discussed further below. Also contributing to the change was a $5 million increase in general and administrative expenses ("G&A") and a $2 million decrease in other income, which were partially offset by a $2 million benefit recorded in other expense in 2023 resulting from the reversal of a litigation reserve. The increase in G&A was primarily related to higher variable compensation expense associated with improved results year-over-year as well as higher long-term incentive award expense, and the decrease in other income was primarily related to losses from certain of our strategic investments.

The $6 million decrease in net expense from Corporate/Other in 2022 was primarily due to a $21 million reduction in general and administrative expenses from lower variable compensation expense associated with a decrease in earnings in 2022 from 2021, as well as $13 million of positive investment fair value changes in 2022 related to certain of our strategic investments and $2 million of gains from extinguishment of debt. One strategic investment was sold in the fourth quarter of 2022, resulting in $2 million of realized fair value changes, and the remainder of the fair value changes were primarily related to unrealized fair value changes resulting from follow-on funding rounds for several investments. These changes were partially offset by an increase in corporate interest expense in 2022 resulting from the issuance of new convertible debt in June 2022 and from our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates in 2022. Additionally, we recorded a $19 million tax benefit in 2021 related to the reversal of valuation allowance on certain deferred tax assets.

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Residential Consumer Mortgage Banking Segment

The following table provides the activity of residential loans held in inventory for sale at our mortgage banking segment during the years ended December 31, 2023 and 2022.

Table 7 – Loan Inventory for Residential Consumer Mortgage Banking Operations — Activity

(1)Represents the fair value of loans transferred from held-for-sale at our Residential Consumer Mortgage Banking segment to held-for-investment at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP.

During the year ended December 31, 2023, our residential mortgage loan conduit locked $3.49 billion of loans, ($2.59 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), and purchased $2.05 billion of loans. During the year ended December 31, 2023, we distributed $126 million of loans (unpaid principal balance) through whole loan sales and completed five securitizations backed by $1.70 billion of loans (unpaid principal balance). At December 31, 2023, our Residential Consumer Mortgage Banking loan pipeline was comprised of $917 million (principal value) of loans in inventory on our balance sheet and $647 million of loans identified for purchase (locked loans, unadjusted for fallout).

While loan acquisition volumes decreased year-over year, the majority of acquisition volume in 2022 was in the first quarter and related to loans locked in 2021 before interest rates began rising significantly. In response, over the course of 2022, we reduced capital allocated to our Residential Consumer Mortgage Banking segment by 70% and intentionally slowed our acquisitions. As the rise in interest rates began to moderate midway through 2023, we began to allocate capital back into our Residential Consumer Mortgage Banking segment, increasing the allocation from $15 million at the end of the first quarter to $165 million at the end of 2023. Increased loan purchase commitments and acquisition volumes in the second half of 2023 were supported by strong growth in our seller network, which created opportunities to grow both bulk and flow acquisitions including from new or re-commenced relationships with banks. While lock volumes steadily grew over the first three quarters of 2023, we did experience a decline in the fourth quarter driven primarily by seasonal factors.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At December 31, 2023, we had residential warehouse facilities outstanding with four different counterparties, with $1.15 billion of total capacity and $353 million of available capacity. These 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 $500 million of total capacity and marginable facilities with $650 million of total capacity. Given the potential for increasing acquisition volumes within this segment, we are currently working on establishing new warehouse facilities and expanding existing facilities to increase our available borrowing capacity to warehouse residential loan inventory.

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The following table presents key earnings and operating metrics for our Residential Consumer Mortgage Banking segment for the years ended December 31, 2023, 2022 and 2021.

Table 8 – Residential Consumer Mortgage Banking Earnings Summary and Operating Metrics

Residential consumer mortgage banking income presented in the table above is comprised of net interest income from residential loans held-for-sale in inventory and mortgage banking activities, net from this segment. See Note 20 in Part II, Item 8 of this Annual Report on Form 10-K for further detail on the composition of mortgage banking activities, net. Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.

In the preceding Consolidated Results of Operations section, we discussed the major factors impacting the change in net interest income and mortgage banking activities in 2023 and 2022 for this segment. We actively manage our exposure to various market risks that can impact the value of our loan inventory in this segment, and our segment contribution in 2023 benefited from these activities. We evaluate monetary policy, housing trends, and economic data, among other factors, in developing our hedging strategy and we leverage a variety of instruments, including TBAs, rates futures, options and securities as hedges.

Lower operating expenses also contributed to the net segment contribution as we operated with a lower headcount in this segment in 2023 and incurred lower loan acquisition costs, given the decrease in volume year-over-year compared to 2022. As part of our expense management initiatives, we reduced headcount in this segment in the fourth quarter of 2022 and made further headcount reductions in the first quarter of 2023. The decrease in operating expenses in 2022 from 2021 was primarily attributable to lower variable compensation expenses and lower loan acquisition costs, resulting from lower year-over-year earnings and loan acquisition volumes, respectively.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The provision for income taxes in 2023 resulted from GAAP income from these operations at our TRS during that period. The benefit from income taxes for 2022 resulted from GAAP losses from these operations at our TRS during that period.

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Residential Investor Mortgage Banking Segment

In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary and, during the third quarter of 2023, we began to sell loans into the joint venture. In accordance with the terms of the joint venture, we will offer to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices and will administer the joint venture for ongoing fees. We expect we will sell a portion of our BPL bridge loans to the joint venture while continuing to retain a portion in our investment portfolio (including for inclusion in existing or future revolving bridge loan securitizations) or for sale to other third-party investors or additional joint ventures we may establish in the future.

The following table provides the business purpose loan origination activity at Redwood during the years ended December 31, 2023 and 2022.

Table 9 – Business Purpose Loans — Funding Activity

(1)We originate BPL 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 (loss). 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 (loss). For the carrying value and activity of our BPL bridge loans held-for-investment, see the Investment Portfolio section that follows.

(2)Funding and sales for BPL Bridge loans in 2023, includes $17 million related to construction draws on loans sold to our BPL bridge joint venture.

(3)For BPL term loans, amounts represent transfers of loans from held-for-sale at our Residential Investor Mortgage Banking segment to held-for-investment at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP. During the year ended December 31, 2023, we securitized $278 million of BPL term loans through one transaction. BPL Bridge loan amounts represent the transfer of loans originated or acquired by our Residential Investor Mortgage Banking segment at our TRS and transferred to our Investment Portfolio segment at our REIT as described in the preceding footnote. During the year ended December 31, 2023, we securitized approximately $250 million of BPL bridge loans through one transaction that includes a 24-month revolving feature.

Funding volumes were down year-over-year, due partially to rising interest rates and lower industry-wide demand, as well as a result of our increased selectivity on sponsors and construction projects we chose to finance, particularly those focused on multifamily properties, an asset class we began de-emphasizing for bridge originations, given evolving market conditions, beginning in the third quarter of 2022. While origination volumes related to multifamily product declined, origination of single-asset bridge loans increased throughout the year as key sponsors re-entered the market and we were able leverage the Riverbend infrastructure we acquired in 2022, which is focused on this product. We remain focused on originating loans secured by assets with strong fundamentals and business plans with experienced sponsorship teams. Looking ahead, if rates stabilize or move lower, we would expect sustained demand from sponsors, including those seeking fixed-rate bridge loans or term loans with more prepayment flexibility, and will continue to assess our bridge loan portfolio for opportunities to refinance borrowers into term loans. However, if rates experience renewed volatility or stay higher for longer than the market currently expects, our volumes could decline from 2023 levels.

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We utilize a combination of capital and loan warehouse facilities to manage our inventory of business purpose loans that we hold for sale. At December 31, 2023, we had eight business purpose warehouse facilities outstanding with six different counterparties, with $2.81 billion of total capacity (used for both BPL term and BPL bridge loans) and $1.71 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).

The following table presents an earnings summary for our Residential Investor Mortgage Banking segment for the years ended December 31, 2023, 2022 and 2021.

Table 10 – Residential Investor Mortgage Banking Earnings Summary

Residential investor 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 20 in Part II, Item 8 of this Annual Report on Form 10-K for further detail on the composition of mortgage banking activities, net), 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 purchase intangibles) for this segment.

The increase in contribution from our Residential Investor Mortgage Banking segment in 2023 from 2022 was attributable to higher mortgage banking income, as discussed in the preceding Consolidated Results of Operations section of this MD&A, as well as lower general and administrative expenses, loan acquisition costs and other expenses (including amortization of purchase intangibles) for this segment. The reduction in general and administrative expenses was primarily related to reductions in headcount at this segment in the fourth quarter of 2022 and first quarter of 2023, as we effected a management transition and aligned expenses with the evolving operating environment. Looking forward, we expect our expense structure to remain dynamic in response to market conditions, whereby we would expect higher variable costs with increasing volumes. Conversely, we would expect to re-assess our expense structure and re-align it accordingly if expectations for volumes or margins remain constrained. Additionally, if we sell a higher portion of our loans into existing or new joint ventures going forward, the timing and character of our income could change, as we may earn less mortgage banking income upfront when loans are sold and earn a higher level of recurring loan administration fees from joint ventures over time.

The decrease in contribution from our Residential Investor Mortgage Banking segment in 2022 from 2021 was attributable to lower mortgage banking income, as discussed in the preceding Consolidated Results of Operations section of this MD&A, as well as higher operating expenses at this segment. The increase in operating expenses was primarily attributable to higher general and administrative expenses in 2022, as ordinary course headcount additions in the first half of the year and the acquisition of Riverbend increased our fixed cost base at this segment. These increases were partially offset by a decrease of $7 million in variable compensation expenses resulting from decreased earnings at the segment in 2022. Additionally, we incurred $7 million of employee severance and transition-related expenses at this segment in the second half of 2022, associated with expense management initiatives including the reorganization of the business unit's management structure.

Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit for income taxes in 2023 and 2022 resulted from GAAP losses from these operations at our TRS during those periods.

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Investment Portfolio Segment

The following table presents details of our Investment Portfolio at December 31, 2023 and December 31, 2022 organized by investments organically created through our mortgage banking segments and acquired from third-parties. Amounts presented in the table represent our retained economic interests in consolidated Sequoia, CAFL Term, Freddie Mac SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted.

Table 11 – Investment Portfolio - Detail of Economic Interests

(1)Balance comprised of loans called from Sequoia securitizations.

(2)Represents our retained economic investment in securities issued by consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $4.64 billion of loans and $4.43 billion of ABS issued associated with these investments at December 31, 2023. We consolidated $3.19 billion of loans and $2.97 billion of ABS issued associated with these investments at December 31, 2022.

(3)Organic residential other investments at December 31, 2023 includes net risk share investments of $22 million, representing $28 million of restricted cash and other assets, net of other liabilities of $6 million.

(4)Represents our retained economic investment in securities issued by consolidated CAFL Term securitization VIEs. For GAAP purposes, we consolidated $2.97 billion of loans and $2.65 billion of ABS issued associated with these investments at December 31, 2023. We consolidated $2.94 billion of loans and $2.64 billion of ABS issued associated with these investments at December 31, 2022.

(5)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities (excluding our SLST re-securitization). For GAAP purposes, we consolidated $1.36 billion of loans and $1.09 billion of ABS issued associated with these investments at December 31, 2023. We consolidated $1.46 billion of loans and $1.14 billion of ABS issued associated with these investments at December 31, 2022.

(6)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $425 million of loans and $392 million of ABS issued associated with these investments at December 31, 2023. We consolidated $425 million of loans and $393 million of ABS issued associated with these investments at December 31, 2022.

(7)Represents our economic investment in consolidated Servicing Investment entities. At December 31, 2023, for GAAP purposes, we consolidated $257 million of servicing investments and $154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2022, for GAAP purposes, we consolidated $301 million of servicing investments and $207 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.

(8)At December 31, 2023, represents HEI owned at Redwood of $245 million and our retained economic investment in securities issued by consolidated HEI securitization entities of $34 million. At December 31, 2022, for GAAP purposes, we consolidated $271 million of HEI and $13 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity.

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The size of our Investment Portfolio decreased during 2023, as we sold non-strategic third-party securities and residential loans and re-deployed the capital primarily into our Residential Consumer Mortgage Banking business. These sales were partially offset by incremental investments in BPL Bridge loans and securities retained from Sequoia and CAFL Term loan securitizations we executed during 2023. The size of the BPL Bridge loan portfolio at December 31, 2023, remained close to flat from December 31, 2022, as new fundings were mostly offset by the $740 million of paydowns in 2023. During 2023, we continued to enhance our overall portfolio financing efficiency through various activities, which included, among others, a co-sponsored rated securitization backed by $205 million (intrinsic value) of HEI, a re-securitization backed by $256 million of RPL securities and a securitization backed by bridge loans with a 24-month revolving feature and up to $250 million of collateral capacity. See the Investments Detail and Activity section that follows for additional detail on our portfolio investments and their associated borrowings.

The following table presents an earnings summary for our Investment Portfolio segment for the years ended December 31, 2023, 2022 and 2021.

Table 12 – Investment Portfolio Earnings Summary

The increase in contribution from this segment in 2023 from 2022, was primarily attributable to smaller negative investment fair value changes and higher HEI income in 2023, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These improvements were partially offset by lower net interest income and lower other income in 2023, each as discussed in the Consolidated Results of Operations section of this MD&A.

The decrease in contribution from this segment in 2022 from 2021, was primarily attributable to negative investment fair value changes, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These decreases were partially offset by higher net interest income and higher other income in 2022, each as discussed in the Consolidated Results of Operations section of this MD&A.

Investment fair value changes, net is primarily comprised of the change in fair value of our portfolio investments (both realized and unrealized) accounted for under the fair value option. See Table 5.6 in Note 5 in Part II, Item 8 of this Annual Report on Form 10-K for further detail on the composition of investment fair value changes (the difference in amounts in the table above and Table 5.6 in the notes to our consolidated financial statements relates to fair value changes for investments held at corporate/other)

While we began to see improvements in market sentiment during the fourth quarter, reflected by spread tightening and lower rates, challenging market technicals through most of 2023 weighed on valuations of many of our investments for the full year. Additionally, much of the reduction in rates seen late in the fourth quarter of 2023, had subsequently reversed in early 2024 and there is renewed uncertainty around the path and timing of potential interest rate reductions by the Federal Reserve.

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Despite the challenging market conditions in 2023, the residential consumer loan investments within our Investment Portfolio continued to exhibit strong fundamental performance, driven by strong employment data, embedded equity protection via loan seasoning and borrowers motivated to stay current on their low-coupon mortgages. The Residential Investor sector overall continues to manage through macro crosswinds that have impacted sponsor sentiment, project timelines and reduced transaction volumes across the industry. In our residential investor (BPL) loan portfolio, we remain focused on the impact that higher short-term interest rates have on sponsors, and have observed an increasing divergence in performance between single-family and multifamily loans, particularly within our BPL bridge loan portfolio. If higher rates persist, this trend may continue given the impact that higher interest rates have had on the valuation of multifamily properties, in contrast to continued upward overall momentum in single-family home prices. Overall, delinquencies across our bridge and term loan portfolios increased over the course of 2023, along with REO balances in the BPL bridge portfolio. We continue to actively manage this exposure, working with borrowers in advance of their loan maturities to assess project plans and ensure they manage towards successful completions and, when necessary, recasting loans, extending maturity dates and working with borrowers to bring in fresh capital.

Other income, net within this segment is primarily comprised of income from our MSR investments, bridge loan extension fees, and risk share investment income. Details on the composition of Other income, net are included in Note 21 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Realized gains, net generally result from sales or calls of AFS securities we own. In 2023, we realized $2 million of gains from calls of AFS securities, which was partially offset by a loss on extinguishment of debt. In 2022, we realized gains of $3 million from calls of AFS securities.

The increase in operating expenses in 2023 from 2022 at this segment was primarily attributable to $7 million of higher portfolio management costs, driven partially by increased sub-servicing fees related to higher average balances of HEI and bridge loans year-over-year, as well as higher costs incurred on our BPL bridge loans in the management of specially serviced assets and workout arrangements. Other expenses also increased $4 million in 2023, primarily related to a higher allocation of income to the third-party investor in our Servicing Investment entities.

We hold certain of our investments, primarily our MSRs, at our taxable REIT subsidiary. Our provision for income taxes at this segment is primarily driven by the amount of income earned from portfolio assets as well as from gains or losses from hedges held at the TRS, and for 2023 and 2022 generally reflects positive income earned in those years.

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Investments Detail and Activity

This section presents additional details on our investment assets and their activity during 2023 and 2022.

Real Estate Securities Portfolio

The following table sets forth our real estate securities activity by collateral type for the years ended December 31, 2023 and 2022.

Table 13 – Real Estate Securities Activity by Collateral Type (1)

(1)Amounts presented in this table include securities reported on our balance sheet and do not include securities we own in consolidated entities. See the following table for a presentation of all securities we own, including those in consolidated entities.

(2)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.

(3)At December 31, 2023, $5 million of Senior Securities were used as hedges for our Residential Consumer Mortgage Banking operations. These Real estate securities are included in our Residential Consumer Mortgage Banking segment.

At December 31, 2023, our securities consisted of fixed-rate assets (90%), adjustable-rate assets (9%) and hybrid assets that reset within the next year (1%).

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The following table sets forth activity in our real estate securities portfolio for the year ended December 31, 2023 organized by investments organically created through our mortgage banking segments and 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. Additionally, this table includes securities held both in our Investment Portfolio segment and our Residential Consumer Mortgage Banking segment.

Table 14 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities

(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 December 31, 2023, $6 million of Sequoia Securities and $4 million of Other Third-Party Securities were used as hedges for our Residential Consumer Mortgage Banking operations, and were included in our Residential Consumer Mortgage Banking segment.

At December 31, 2023, our securities owned at Redwood and in consolidated entities consisted of fixed-rate assets (99%), adjustable-rate assets (1%), and hybrid assets that reset within the next year (1%).

We directly finance our holdings of real estate securities with a combination of non-recourse debt, non-marginable recourse term debt and marginable debt in the form of repurchase (or “repo”) financing. At December 31, 2023, we had: real estate securities with a fair value of $413 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with $125 million of short-term, non-marginable recourse debt and $159 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities; re-performing loan securities with a fair value of $274 million (including securities owned in consolidated securitization entities) were financed with $178 million of non-recourse securitization debt (ABS issued); real estate securities with a fair value of $122 million (including securities owned in consolidated securitization entities) were financed with $83 million of recourse short-term debt incurred through repurchase facilities with three different counterparties; and $52 million of securities were financed with a short-term financing facility. The remaining $108 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.

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The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at December 31, 2023. 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 15 – Credit Statistics of Real Estate Securities Owned at Redwood and in Consolidated Entities

(1)Weighted averages presented in this table, including delinquencies, are weighted using the notional balance of loans collateralizing each securitization in which we own a security. Prior to December 31, 2023, weighted averages were calculated using the fair value of the securities we owned.

(2)Investment thickness represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. We generally own first loss positions in Sequoia, RPL and CAFL securities. We own both first loss and mezzanine positions (positions credit enhanced by subordinate securities) in multifamily and other third-party securities.

(3)At December 31, 2023, $6 million of Sequoia Securities and $4 million of Other Third-Party Securities were used as hedges for our Residential Consumer Mortgage Banking operations, and were included in our Residential Consumer Mortgage Banking segment.

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. During 2023, our residential and Agency multifamily securities portfolio continued to demonstrate stable 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 RPL securities and Sequoia securities), many of our residential investments are supported by substantial home price appreciation and borrower equity in the underlying homes. As previously noted, 90 day+ delinquencies for the BPL term loans underlying our consolidated CAFL securities rose modestly during 2023.

With a weighted average quarter-end carrying value of 64 cents to face value, we estimate our securities portfolio had approximately $2.68 per share of net discount to par at quarter end. We believe continued credit performance in our underlying securities portfolio could contribute to our ability to realize potential upside in book value over time, reversing unrealized losses taken in 2023, which were largely driven by technical spread widening.

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BPL Bridge Loans Held-for-Investment

The following table provides the activity of BPL bridge loans held-for-investment at Redwood during the years ended December 31, 2023 and 2022.

Table 16 – BPL Bridge Loans Held-for-Investment - Activity

(1)We originate BPL 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 (loss).

Our $2.07 billion of BPL bridge loans held-for-investment at December 31, 2023, were comprised of first-lien, interest-only loans with a weighted average coupon of 10.57% and original maturities of six to 36 months. At origination, the weighted average FICO score of sponsors of these loans was 752 and the weighted average LTV ratio of these loans was 63%. At December 31, 2023, of the 2,786 loans in this portfolio, 105 loans with an aggregate fair value of $97 million and an unpaid principal balance of $107 million were greater than 90 days delinquent; of which 82 of these loans with an aggregate fair value of $73 million and an aggregate unpaid principal balance of $84 million were in foreclosure. Additionally, REO associated with bridge loans increased to $88 million at December 31, 2023, from $3 million at December 31, 2022 (resulting from foreclosures on loans with $101 million and $4 million of unpaid principal, respectively).

Changes in the fair value of bridge loans held-for-investment during year ended December 31, 2023, primarily reflect reductions in values for non-accrual bridge loans and certain modified bridge loans. During 2023, $295 million of BPL bridge loans (representing cumulative unpaid principal balance as of December 31, 2023) were subject to modifications that included reductions in interest rates (including, in certain cases, deferrals of interest), among other terms, and in certain cases, combined with infusions of fresh capital from either the existing sponsor or third-party sources. The modifications converted the loans from floating rate to fixed rate and resulted in a weighted average reduction in contractual interest rate (including deferred interest) on these loans of approximately 2.5%. Of these $295 million of modified loans, 86% were contractually current at December 31, 2023, and two loans (14%) were less than 30 days delinquent. While we continue to work proactively with certain sponsors to address the impacts of rising interest rates, elongated project timelines, or other issues, further increases in delinquencies or modifications within our BPL bridge loan portfolio could ultimately result in further decreases in the fair value of our bridge loans held for investment, and further instances of borrower/sponsor stress could lead to realized credit losses. In addition to loans for which we completed these types of modifications, during 2023, we extended the maturities of $232 million of loans (representing cumulative unpaid principal balance as of December 31, 2023). An increase in maturity extensions in the BPL 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 level of maturity extensions are a regular asset management function of these loans, irrespective of market conditions. During 2023, the average length of maturity extensions granted on BPL bridge loans was just under six months.

We generally value delinquent BPL loans at a dollar price that is informed by various market data, including the estimated 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 loans sales or discounted payoffs, could vary materially from our estimates and could have a material impact on our earnings in future periods.

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We finance our BPL bridge loans with a combination of recourse, non-marginable warehouse facilities, non-recourse, non-marginable warehouse facilities, and non-recourse securitization debt. At December 31, 2023, we had: $70 million of debt incurred through short-term facilities with two counterparties, which was secured by $93 million of business purpose bridge loans; $922 million of debt incurred through long-term facilities with five different counterparties, which was secured by $1.21 billion of business purpose bridge loans; and $716 million of securitization debt secured by $763 million of business purpose bridge loans and $34 million of restricted cash. At December 31, 2023, the unpaid principal balance of bridge loans financed was $2.14 billion, of which $657 million was financed with recourse, non-marginable facilities, $727 million was financed with non-recourse, non-marginable facilities, and $756 million was financed through non-recourse CAFL bridge securitizations.

The following table provides the composition of BPL bridge loans held-for-investment by product type as of December 31, 2023 and 2022.

Table 17 – BPL Bridge Loans Held-for-Investment - By Product/Strategy Type

(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 rehab projects on multifamily properties.

At December 31, 2023, the fair value of our total BPL bridge loans held-for-investment and associated REO represented 98.8% 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 ($866 million at December 31, 2023) and associated multifamily REO ($88 million at December 31, 2023), represented 97.1% 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.

Residential Loans

During 2022, we called several of our unconsolidated Sequoia securitizations and purchased loans from the associated securitization trusts and held those loans for sale within our Investment Portfolio segment. The following table provides the activity of residential loans held at our investment portfolio during the years ended December 31, 2023 and 2022.

Table 18 – Investment Portfolio Residential Loans - Activity

During the first quarter of 2023, we sold the majority of our remaining residential loans in our Investment Portfolio, and the remaining $17 million were transferred to our Residential Consumer Mortgage Banking segment and were subsequently sold or securitized.

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Home Equity Investments

The following table provides the activity of HEI held at our investment portfolio during the years ended December 31, 2023 and 2022.

Table 19 – HEI at Investment Portfolio Segment - Activity

(1)Our home equity investments presented in this table as of December 31, 2023, included $245 million of HEI owned directly at Redwood and $306 million of HEI owned in our consolidated HEI securitization entity. At December 31, 2023, our economic investment in the consolidated HEI securitization entity was $34 million (for GAAP purposes, we consolidated $306 million of HEI and $222 million of ABS issued, as well as other assets and liabilities for this entity).

(2)Amount for 2023 includes $111 million that was purchased in conjunction with the HEI securitization we co-sponsored in the fourth quarter of 2023. While presented as purchases, since we consolidate the HEI securitization, these HEI were effectively contributed by third-parties into the securitization in exchange for cash and subordinate beneficial interests in the securitization (which we present as other liabilities on our consolidated balance sheets).

During 2023, positive investment fair value changes primarily reflected improvements in actual and forecasted home price appreciation, relative to previously modeled amounts. Additional details on our HEI is included in Note 10 of our Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

We finance a portion of our HEI through a short-term warehouse facility. At December 31, 2023, there was $123 million of debt outstanding on this warehouse facility, secured by $238 million of HEI.

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Other Investments

The following table sets forth our other investments activity by significant asset type for the years ended December 31, 2023 and December 31, 2022.

Table 20 – Other Investments - Activity(1)

(1)Tables include all "Other investments" as presented on our consolidated balance sheets. Strategic Investments presented above are held at Corporate/Other, and the remaining other investments are held in our Investment Portfolio segment.

(2)Our servicing investments are owned through our consolidated Servicing Investment entities. At December 31, 2023, our economic investment in these entities was $86 million (for GAAP purposes, we consolidated $257 million of servicing investments, $154 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities). At December 31, 2022, our economic investment in these entities was $90 million (for GAAP purposes, we consolidated $301 million of servicing investments, $207 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities).

The increase in fair value of our servicing investments in 2023 was primarily driven by slower expected payment speeds associated with the increase in market interest rates during the year, as well as a reduction of associated servicing advances, while the decrease in fair value during 2022 was primarily driven by wider overall credit spreads. We carry certain of our strategic investments (mostly in RWT Horizons) under the fair value option or the measurement alternative under the fair value option. We estimate fair value using both market transactions for the investments as well as internal models, and fair values can experience volatility based on changing market conditions and operating results of the underlying companies we invest in. Changes in fair value for MSRs and excess servicing include a negative fair value change for a reduction in basis from the regular receipt of scheduled cash flows. In 2022, these amounts were more than offset by a positive impact to fair value from a decrease in actual and forecasted prepayment speeds.

Additional details on our other investments is included in Note 11 in Part II, Item 8 of this Annual Report on Form 10-K.

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Income Taxes

Taxable Income, REIT Status and Dividend Characterization

As a REIT, under the Internal Revenue Code, Redwood is required to distribute to shareholders at least 90% of its annual REIT taxable income, excluding net capital gains, and meet certain other requirements that relate to, among other matters, the assets it holds, the income it generates, and the composition of its stockholders. To the extent Redwood retains REIT taxable income, including net capital gains, it is taxed at corporate tax rates. Redwood also earns taxable income at its taxable REIT subsidiaries (TRS), which it is not required to distribute under the Internal Revenue Code.

In December 2023, our Board of Directors declared regular dividends of $0.16 per common share and $0.625 per Series A preferred share for the fourth quarter of 2023, which were paid on December 28, 2023 and January 16, 2024, respectively. At December 31, 2023, our full-year dividend distributions exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and we would not be able to elect to be taxed as a REIT for four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.

While our minimum REIT dividend requirement is generally 90% of our annual REIT taxable income, we carried a $37 million federal net operating loss carry forward ("NOL") into 2023 at our REIT that affords us the ability to retain REIT taxable income up to the NOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of NOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our NOL and any remaining NOL amount will carry forward into future years.

The tax basis in assets and liabilities at the REIT was $4.32 billion and $2.82 billion, respectively, at December 31, 2023. The GAAP basis in assets and liabilities at the REIT was $13.04 billion and $11.83 billion, respectively, at December 31, 2023. The primary difference in both the tax and GAAP assets and liabilities is attributable to securitization entities that are consolidated for GAAP reporting purposes but not for tax purposes.

Our 2023 common stock dividend distributions are expected to be characterized for federal income tax purposes as 39% ordinary dividend income (Section 199A), 23% qualified dividends, and 38% return of capital. Our 2023 Series A preferred dividend distributions are expected to be characterized for federal income tax purposes as 63% ordinary dividend income (Section 199A) and 37% qualified dividends. Under the federal income tax rules applicable to REITs, none of the 2023 dividend distributions, neither common nor Series A preferred, are expected to be characterized as capital gain dividend income. The income or loss generated at our TRS does not directly affect the tax characterization of our 2023 dividends; however, a $22 million dividend paid from our TRS to our REIT in 2023 allowed a portion of our REIT’s dividends to be classified as qualified dividends.

Tax Provision under GAAP

For the years ended December 31, 2023, 2022, and 2021, we recorded a tax provision of $2 million, a tax benefit of $20 million and a tax provision of $18 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. Our TRS income is generally earned from our mortgage banking activities, MSRs, and other non-REIT eligible security investments. Our TRS effective tax rate in 2023 was approximately 17%.

At December 31, 2023, we reported net deferred tax assets of $40 million. Realization of our deferred tax assets ("DTAs") at December 31, 2023 is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards (where applicable) and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of our DTAs is not assured and establish a valuation allowance accordingly. At December 31, 2022, we reported net federal ordinary and capital DTAs with no material valuation allowance recorded against them. While we earned positive GAAP income at our TRS in 2023, it was less than the GAAP losses incurred at our TRS in 2022; therefore, we closely analyzed the realizability of our net deferred tax assets in whole and in part. We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering, among other things, all available positive and negative evidence, historical operating results and cumulative earnings analysis, forecasts of future profitability, and the duration of statutory carryforward periods. Based on this analysis, we continue to believe it is more likely than not that we will realize our federal deferred tax assets in future periods as income is earned at our TRS; therefore, there continues to be no material valuation allowance recorded against our net federal DTAs. This evaluation requires significant judgment in assessing the possible need for a

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valuation allowance and changes to our assumptions could result in a material change in the valuation allowance with a corresponding impact on the provision for income taxes in the period including such change.

If in a future period, based on available evidence, we conclude that it is not more likely than not that our DTAs will be realized, then a valuation allowance would be established with a corresponding charge to GAAP earnings, which would reduce our book value. Such charges could cause a material reduction, up to the full value of our net DTAs for which a valuation allowance has not previously been established, to our GAAP earnings and book value per share for the quarterly and annual periods in which they are established and could have a material and adverse effect on our financial results.

Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs exist and we project most of our state DTAs will expire prior to their utilization.

The following table details our federal NOLs and capital loss carryforwards available as of December 31, 2023.

Table 21 - Net Operating and Capital Loss Carryforwards

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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 warehouse facilities, secured term financing facilities, securities repurchase agreements, 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 December 31, 2023, our total capital was $1.87 billion, consisting of (i) $1.20 billion of equity capital, (ii) $650 million of convertible notes and long-term debt on our consolidated balance sheet ($143 million of convertible debt due in 2024, $157 million of exchangeable debt due in 2025, $211 million of convertible debt due in 2027 and $140 million of trust-preferred securities due in 2037), and (iii) $16 million of promissory notes included in short-term debt.

As of December 31, 2023, our unrestricted cash was $293 million. In January 2024, we issued $60 million of 9.125% senior notes due in 2029 (See Note 25 to the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on this issuance), and through February 16, 2024, closed two SEMT securitizations in 2024 backed by a total of $800 million of loans, and repurchased $18 million of outstanding convertible debt across our 2024 and 2027 maturities. At February 16, 2024, we had unrestricted cash and cash equivalents of $396 million.

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. When we refer to non-marginable debt and marginable debt, we are referring to whether or not such debt can be 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. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional mortgage loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage loan or security being financed, a decline in the value of the underlying property securing the mortgage loan, as determined by an appraisal, broker price opinion, or similar third-party source, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of mortgage loans, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender).

We also distinguish our debt between recourse and non-recourse, as our non-recourse debt has unique characteristics that differentiate it in important ways from our recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.

At December 31, 2023, in aggregate, we had $1.88 billion of secured recourse debt outstanding, financing our mortgage banking operations and investment portfolio, of which $578 million was marginable and $1.30 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 Short-and Long-Term Borrowing Facilities" and in Part I, Item 1A - Risk Factors of this Annual Report on Form 10-K.

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Repurchase Authorization

In July 2022, our Board of Directors approved an authorization for the repurchase of up to $125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. In May 2023, our Board of Directors approved an additional authorization for the repurchase of up to $70 million of our preferred stock. During the year ended December 31, 2023 we did not repurchase any shares of our common stock or preferred stock and repurchased $81 million of our convertible and exchangeable debt. During the year ended December 31, 2022 we repurchased 7.1 million shares of our common stock for $56 million and repurchased $32 million of our convertible notes. At December 31, 2023, $101 million of the current authorization remained available for the repurchase of shares of our common stock, $70 million remained available for the repurchase of shares of our preferred stock, and we also continued to be authorized to repurchase outstanding debt securities. Like investments we may make, 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 Year Ended December 31, 2023

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.

As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during 2023, 2022 and 2021, we transferred residential and business purpose loans between held-for-sale and held-for-investment classifications, retained securities from certain SEMT® (Sequoia) securitizations we sponsored and deconsolidated and foreclosed and took title to real estate serving as collateral for defaulted loans, among other activities, which represent significant non-cash transactions that were not included in cash flows from operating, investing and financing activities discussed below.

Cash Flows from Operating Activities

In 2023, our net cash used in operating activities was $2.02 billion. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans, and the origination and sale of our business purpose loans associated with our mortgage banking activities. Loans purchased or originated for our mortgage banking operations are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. Additionally, many of these loans are sold into securitizations, which we consolidate under GAAP, and cash inflows from these sales are shown as proceeds from ABS issued within financing activities. Further, loans securitized or transferred into our investment portfolio are reclassified as held-for-investment loans, and any subsequent principal repayments or proceeds from sales of these loans are classified as investing 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 $1.98 billion of net cash outflows), cash flows from operating activities were negative $39 million in 2023.

Cash Flows from Investing Activities

In 2023, our net cash provided by investing activities was $909 million and primarily resulted from proceeds from principal payments and sales of investments. These amounts were partially offset by cash outflows for new investments, including primarily BPL bridge loans and HEI. 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, securities and HEI at consolidated securitization entities would generally be used to repay ABS issued by those entities.

Although we generally intend to hold our investment securities and loans as long-term investments, we may sell certain of these assets in order to manage our liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market conditions.

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Cash Flows from Financing Activities

In 2023, our net cash provided by financing activities was $1.15 billion. This primarily resulted from $1.59 billion of net borrowings under ABS issued (resulting from the issuance of CAFL® SFR, CAFL® bridge and SEMT® (Sequoia) securitizations), as well as $67 million of net proceeds from the issuance of preferred stock in the first quarter of 2023 and $124 million raised through sales of Redwood common stock under our ATM program in the third and fourth quarters of 2023. These increases in cash were partially offset by $371 million of net paydowns on short-term borrowings, $161 million of net paydowns on long-term debt, and the payment of dividends on our common and preferred equity. The ABS issued was primarily associated with the securitization of residential loans acquired through our Residential Consumer Mortgage Banking operations and the bulk of the remaining ABS issued was used to refinance short- and long-term debt that was financing BPL bridge loans, RPL securities and HEI, whereby we reduced recourse debt and unlocked additional capital to be redeployed into other areas of the business.

During 2023, we declared and paid dividends on our common stock of $0.71 per common share (totaling $88 million) and declared dividends of $2.47917 per preferred share and paid dividends of $1.85417 per preferred share (totaling $5 million) on our preferred stock. On December 7, 2023, the Board of Directors declared a regular dividend of $0.16 per share of common stock for the fourth quarter of 2023, which was paid on December 28, 2023 to shareholders of record on December 20, 2023. Additionally, on December 7, 2023, the Board of Directors declared a regular quarterly dividend of $0.625 per share of preferred stock, which was paid on January 16, 2024 to stockholders of record on December 28, 2023.

In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, restricted stock units and cash-settled restricted stock units, which are stock-based compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent payment in that same per share amount on each outstanding deferred stock unit, cash-settled deferred stock unit, restricted stock unit and cash-settled restricted stock unit.

Cash Flows and Liquidity for the Year Ended December 31, 2022

Cash Flows from Operating Activities

In 2022, our cash flows from operating activities were negative $139 million. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Excluding cash flows from the purchase, origination, sale, principal payments of loans classified as held-for-sale, as well as the settlement of associated derivatives, cash flows from operating activities were positive $68 million in 2022.

Cash Flows from Investing Activities

In 2022, our net cash provided by investing activities was $214 million and primarily resulted from proceeds from principal payments on investments. These amounts were partially offset by cash outflows for new investments, including primarily BPL bridge loans and HEIs.

Cash Flows from Financing Activities

In 2022, our net cash used in financing activities was $277 million. This primarily resulted from $1.12 billion of net paydowns on short-term borrowings, resulting primarily from a reduction in financed loan inventory at our mortgage banking operations through December 31, 2022, as well as from the payment of our yearly common stock dividends totaling $112 million and $33 million of net repayments under ABS issued (net of proceeds from the issuance of CAFL® SFR, CAFL® bridge and SEMT® ABS securitizations) during the year ended December 31, 2022. These amounts were partially offset by net long-term debt borrowings of $985 million during the year ended December 31, 2022, which included the issuance of $215 million of convertible notes in June 2022, proceeds from a new $150 million facility to finance HEIs completed in the fourth quarter of 2022, incremental borrowings to finance new investments, primarily in BPL bridge loans, and incremental financing on other investments, such as securities. Cash raised through stock issuances under our ATM program of $68 million during the first quarter of 2022 were partially offset by stock repurchases of $56 million during 2022.

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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 our 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 December 31, 2023 include maturing short-term debt, interest payments on debt and ABS issued, payments on operating leases, funding commitments for BPL bridge loans and strategic investments, and other current payables. Our material cash requirements from known contractual and other obligations beyond the twelve months following December 31, 2023 include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for BPL bridge loans and strategic investments, and principal and interest payments under ABS issued (as described further below under Liquidity Needs for our Investment Portfolio).

At December 31, 2023, we had commitments to fund up to $542 million of additional advances on existing BPL 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 December 31, 2023, we had $1.71 billion of available warehouse capacity for business purpose 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 on commitments and contingencies as of December 31, 2023 that could impact our liquidity and capital resources, see Note 17 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Most of our loan warehouse facilities and our servicer advance financing were established with initial one-year terms and are regularly amended on an annual basis to extend the terms for an additional year ahead of their maturity. We renewed several of these facilities during 2023, extinguished others we deemed under-utilized, and have other such facilities with scheduled maturities during the next twelve months. While there is no assurance of our ability to renew our other facilities maturing in the next year, given current market conditions we expect to extend these in the normal course of business.

One of our subordinate securities financing facilities matures in September 2024. This recourse term borrowing is secured by certain securities we retained from Sequoia securitizations we sponsored. While we will continue to evaluate our alternatives with respect to this maturity, we expect we will be able to refinance these securities utilizing securities repo financing. However, if market interest rates remain elevated, or the underlying securities decline in value, we expect any new financing would increase our borrowing costs for these assets.

Additionally, one series of our convertible notes matures in July 2024. We currently expect to use cash on hand to repay this debt. However, if we choose to issue new corporate capital (for example, unsecured convertible notes, unsecured debt, preferred equity or common equity) and market rates for corporate capital remain elevated, it could negatively impact our future profitability

We expect to meet our obligations coming due in less than one year from December 31, 2023, through a combination of cash on hand, payments of principal and interest we receive from our investment portfolio assets, proceeds from the sale of investment portfolio assets, cash generated from our operating activities, incremental borrowings under existing, new or amended financing arrangements, or through the issuance of equity or debt capital. As of December 31, 2023, we had approximately $290 million of unencumbered assets, and we currently estimate we could generate an incremental $185 million of capital organically through financing of these assets. Our unencumbered assets consist primarily of retained securities from our securitization activities and HEI. Additionally, we are actively engaged in seeking new financing lines and expanded financing capacity for both residential loans and BPL bridge loans.

During 2023, the highest balance of our short-term debt outstanding was $2.03 billion. See Note 14 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on our short-term debt. See Note 16 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on our long-term debt.

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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. These facilities may be designated as short-term or long-term for financial reporting purposes, depending on the remaining maturity of the facility or the amount of time individual borrowings may remain outstanding on a facility.

At December 31, 2023, we had residential loan warehouse facilities outstanding with four different counterparties, with $1.15 billion of total capacity and $353 million of available capacity. These included non-marginable facilities with $500 million of total capacity and marginable facilities with $650 million of total capacity. At December 31, 2023, we had business purpose loan warehouse facilities outstanding with six different counterparties, with $2.81 billion of total capacity and $1.71 billion of available capacity. All of the Residential Investor financing facilities are non-marginable. We note that several of these facilities used to finance our Residential Investor Mortgage Banking loan inventory are also used to finance bridge loans held in our investment portfolio.

As discussed above, several of the facilities we use to finance our mortgage banking loan inventory are short-term in nature and will require renewals. Additionally, because several of our warehouse facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks. 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 Short- and Long-Term Borrowing Facilities" that follows within this section.

Liquidity Needs for our Investment Portfolio

We use various forms of secured recourse and non-recourse debt to finance assets in our investment portfolio. Our ABS issued is non-recourse and represents debt of securitization entities that we consolidate for GAAP reporting purposes. Our exposure to these entities is primarily through the financial interests we have purchased or retained from these entities (typically subordinate securities and interest only securities). Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood. As the debt issued by these entities is not a direct obligation of Redwood, and since the debt generally can remain outstanding for the full term of the loans it is financing within each securitization, this debt effectively provides permanent financing for these assets. Certain of our ABS issued, including that issued through our CAFL Bridge loan securitizations, HEI securitizations, and SLST re-securitization, are subject to optional redemptions and interest rate step-ups. If we choose not to redeem these securitizations, the interest rates will step-up, reducing our net interest income. If we choose to redeem the securities, we will need to secure alternative sources of financing for these assets or utilize available cash. See Note 4 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our principles of consolidation and Note 15 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our asset-backed securities issued.

Additionally, we have non-recourse debt in the form of non-marginable warehouse facilities to finance a portion of our business purpose bridge loan portfolio. While this debt is non-recourse to Redwood, it does have fixed terms with prepayment options that allows us to refinance this debt or ultimately repay it upon maturity. In addition, our BPL bridge loan joint venture we are invested in, has a dedicated warehouse facility. This warehouse facility is a non-recourse obligation of the joint venture, not of Redwood, and it is non-recourse to Redwood (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"). See Notes 11 and 17 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information regarding our BPL bridge loan joint venture.

The remainder of the debt we use to finance our investments is recourse debt, including our subordinate securities financing facilities, BPL financing facilities, MSR financing facility, securities repo borrowings and HEI warehouse facility. For securities we have financed, our subordinate securities financing facilities are non-marginable and our repo debt facilities and MSR facility (which also finances certificated MSRs we classify as securities) are marginable. Our BPL financing facilities and HEI warehouse facility are non-marginable. Additionally, our subordinate securities financing facilities are subject to optional redemptions and interest rate step-ups. If we choose not to redeem these borrowings, the interest rates will step-up, reducing our net interest income. If we choose to redeem the securities, we will need to secure alternative sources of financing for these assets or utilize available cash.

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Delinquencies on BPL bridge loans that are financed through warehouse facilities increased during 2023, and have been and are expected to continue to be, a required use of our liquidity to the extent the terms of the applicable warehouse facility apply reduced financing advance rates to these loans (“advance rate step-downs”) or these loans become ineligible for financing under the terms of the warehouse facility. Loans pledged on certain of our warehouse facilities while they are performing, that subsequently become delinquent, may become subject to advance rate step downs or repurchase requirements. In the fourth quarter of 2023, we entered into a new warehouse facility specifically for non-performing BPL bridge loans and we added capacity for such loans on existing warehouse lines. While we may have the ability to finance delinquent loans on other facilities with capacity for these types of loans, the advance rates are generally lower and the interest rates are higher. Additionally, our liquidity may be impacted to the extent delinquencies on loans financed through CAFL bridge securitizations were elevated above established thresholds for an extended period, which could trigger adverse changes to certain structural terms of these transactions (such as terms relating to the amortization of the issued securities and the revolving availability of financing under these transactions).

We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. To the extent interest rates remain elevated or increase further, certain fixed-rate term borrowings that mature in the coming quarters could have to be refinanced at higher interest rates, which could cause a reduction in net interest income. Further, each of our three recourse subordinate securities financing facilities have interest rate step-up provisions, under which if we do not repay the facilities by certain specified dates, the interest rates on those facilities will increase (see Note 14 and Note 16 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further detail on these provisions).

At December 31, 2023, in addition to our ABS issued, our investment portfolio was financed with $963 million of secured recourse debt, of which $130 million was marginable and $832 million was non-marginable, and $552 million of secured non-recourse debt that was non-marginable.

Corporate Capital

In addition to secured recourse and non-recourse debt we use specifically in association with our mortgage banking operations and within our investment 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 14 and Note 16 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our unsecured short-term and long-term debt, respectively.

Risks Relating to Debt Incurred under Short- and Long-Term 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 and business purpose mortgage loans and HEI (including those we acquire and/or originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our common stock or convertible debt. 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, with respect to recourse debt, guaranteed by Redwood Trust, Inc.

Residential and Business Purpose Loan and HEI Warehouse Facilities. One source of our debt financing is secured borrowings under loan and HEI warehouse facilities. These facilities may be designated as short-term or long-term for financial reporting purposes, depending on the remaining maturity of the facility or the amount of time individual borrowings may remain outstanding on a facility. Residential consumer loan warehouse facilities were in place with four different financial institution counterparties as of December 31, 2023. In addition, as of December 31, 2023, we had residential investor loan warehouse facilities secured by BPL term loans and BPL bridge loans, in place with six financial institution counterparties. As of December 31, 2023, we also had in place one warehouse facility secured by HEI. Under our residential consumer loan warehouse facilities, we had an aggregate borrowing limit of $1.15 billion at December 31, 2023, under our residential investor loan warehouse facilities we had an aggregate borrowing limit of $2.81 billion at December 31, 2023, and under our HEI warehouse facility we had an aggregate borrowing limit of $150 million at December 31, 2023. However, several of these facilities are uncommitted, which means that any request we make to borrow funds under these facilities may be declined 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. Financing for residential consumer or residential investor mortgage loans or HEI is obtained under these facilities by our transfer of mortgage loans or HEI to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred mortgage loans or HEI), and our covenant to reacquire those loans or HEI from the counterparty for the same amount plus a financing charge.

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In order to obtain financing for a residential consumer or residential investor loan or HEI under these facilities, the loan or HEI must initially (and continuously while the financing remains outstanding) meet certain eligibility criteria, including, for example, that a loan is not in a delinquent or defaulted status (although certain loan financing facilities may allow a loan to continue to be financed if it becomes delinquent). In addition, under these warehouse facilities, residential consumer or residential investor loans can only be financed for a maximum period (i.e., a dwell time limit), which period may be limited to 364 days for our short-term warehouse facilities, and we may be subject to geographic concentration limits on real estate underlying loans or HEI being financed under the facility. We generally intend to repay the financing of a loan or HEI under one of these facilities at or prior to the expiration of that financing with the proceeds of a securitization or other sale of that asset, through the proceeds of other short-term or long-term borrowings, or with other equity or long-term debt capital.

Our warehouse facilities may be marginable or non-marginable. When we refer to non-marginable debt and marginable debt, we are referring to whether such debt is subject to market value-based margin calls on underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is generally determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage loan or security being financed, a decline in the value of the underlying property securing the mortgage loan, as determined by an appraisal, broker price opinion, or similar third-party source, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of mortgage loans, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender). See further discussion below under the heading “Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.”

Because several of these warehouse facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors,” and in Part II, Item 7A of this Annual Report on Form 10-K under the heading “Market Risks.” In addition, with respect to residential or business purpose loans or HEI 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 this Annual Report on Form 10-K under the heading “Risk Factors,” and in Part II, Item 7A of this Annual Report on Form 10-K under the heading “Market Risks,” if and when those loans or HEI become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility.

Under our residential consumer and residential investor loan and HEI warehouse facilities, we also make various representations and warranties and have agreed to certain covenants, events of default, and other terms that, if breached or triggered, can 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. In particular, the terms of these facilities include financial covenants, cross-default provisions, judgment default provisions, and other events of default (such as, for example, events of default triggered by one of the following: a change in control over Redwood, regulatory investigation or enforcement action against Redwood, Redwood’s failure to continue to qualify as a REIT for tax purposes, or Redwood’s failure to maintain the listing of its common stock on the New York Stock Exchange). Under a cross-default provision, an event of default is triggered (and the warehouse facility becomes unavailable and outstanding amounts borrowed thereunder become due and payable) if an event of default or similar event occurs under another borrowing or credit facility we maintain in excess of a specified amount. Under a judgment default provision, an event of default is triggered (and the warehouse facility becomes unavailable and outstanding amounts borrowed thereunder become due and payable) if a judgment for damages in excess of a specified amount is entered against us in any litigation and we are unable to promptly satisfy, bond, or obtain a stay of the judgment. Financial covenants included in these warehouse facilities are further described below under the heading “Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”

These residential consumer and residential investor loan and HEI warehouse facilities could also become unavailable and outstanding amounts borrowed thereunder could become immediately due and payable if there is a material adverse change in our business. If we breach or trigger the representations and warranties, covenants, events of default, or other terms of our warehouse facilities, we are exposed to liquidity and other risks, including of the type described in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors,” and in Part II, Item 7A of this Annual Report on Form 10-K under the heading “Market Risks.”

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In addition to the residential consumer and residential investor loan and HEI warehouse facilities described above, in the ordinary course of business we may seek to establish additional warehouse facilities that may be of a similar or greater size and may have similar or more restrictive terms. In the event a counterparty to one or more of our warehouse facilities becomes insolvent or unable or unwilling to perform its obligations under the facility, we may be unable to access short-term financing we need or we may fail to recover the full value of our mortgage loans financed.

Securities Repurchase Facilities. Another source of short-term debt financing is through securities repurchase facilities we have established with various different financial institution counterparties. Under these facilities we do not have an aggregate borrowing limit; however, these facilities are uncommitted, which means that any request we make to borrow funds under these facilities may be declined for any reason. Short-term financing for securities is obtained under these facilities by our transfer of securities to the counterparty in exchange for cash proceeds (in an amount less than 100% of the fair value of the transferred securities), and our covenant to reacquire those securities from the counterparty for the same amount plus a financing charge.

Under these securities repurchase facilities, securities are financed for a fixed period, which would not generally exceed 90 days. We generally intend to repay the short-term financing of a security under one of these facilities through a renewal of that financing with the same counterparty, through a sale of the security, or with other equity or long-term debt capital. While a security is financed under a securities repurchase facility, to the extent the market value of the security declines (which market value is generally determined by the counterparty under the facility), we are required to either immediately reacquire the security or meet a margin requirement to pledge additional collateral, such as cash or U.S. Treasury securities, in an amount at least equal to the decline in value. See further discussion below under the heading “Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.”

At the end of the fixed period applicable to the financing of a security under a securities repurchase facility, if we intend to continue to obtain financing for that security we would typically request the same counterparty to renew the financing for an additional fixed period. If the same counterparty does not renew the financing, it may be difficult for us to obtain financing for that security under one of our other securities repurchase facilities, due to the fact that the financial institution counterparties to our securities repurchase facilities generally only provide financing for securities that we purchased from them or one of their affiliates.

Because our securities repurchase facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors,” and in Part II, Item 7A of this Annual Report on Form 10-K under the heading “Market Risks.” In addition, with respect to securities that at any given time are already being financed through our securities repurchase facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors,” and in Part II, Item 7A of this Annual Report on Form 10-K under the heading “Market Risks,” if and when those securities decline in value, or have been financed for the maximum term permitted under the applicable facility.

Under our securities repurchase facilities, we also make various representations and warranties and have agreed to certain covenants, events of default, and other terms (including of the type described above under the heading “Residential and Business Purpose Loan Warehouse Facilities”) that if breached or triggered can 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. In particular, the terms of these facilities include financial covenants, cross-default provisions, judgment default provisions, and other events of default (including of the type described above under the heading “Residential and Business Purpose Loan Warehouse Facilities”). Financial covenants included in our repurchase facilities are further described below under the heading “Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”

Our securities repurchase facilities could also become unavailable and outstanding amounts borrowed thereunder could become immediately due and payable if there is a material adverse change in our business. If we breach or trigger the representations and warranties, covenants, events of default, or other terms of our securities repurchase facilities, we are exposed to liquidity and other risks, including of the type described in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors,” and in Part II, Item 7A of this Annual Report on Form 10-K under the heading “Market Risks.”

In the ordinary course of business we may seek to establish additional securities repurchase facilities that may have similar or more restrictive terms. In the event a counterparty to one or more of our securities repurchase facilities becomes insolvent or unable or unwilling to perform its obligations under the facility, we may be unable to access the short-term financing we need or fail to recover the full value of our securities financed.

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Servicer Advance Financing. In connection with our servicer advance investments, we consolidate an entity that was formed to finance servicing advances and for which we, through our control of an affiliated entity majority owned by Redwood (the "SA Buyer") formed to invest in servicer advance investments and excess MSRs, are the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity that issued the debt, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

SA Buyer has agreed to purchase all future arising servicer advances under certain residential mortgage servicing agreements. SA Buyer relies, in part, on its members to make committed capital contributions in order to pay the purchase price for future servicer advances. A failure by any or all of the members to make such capital contributions for amounts required to fund servicer advances could result in an event of default under our servicer advance financing and a complete loss of our investment in SA Buyer and its servicer advance investments and excess MSRs. Additionally, to the extent that the servicer of the underlying mortgage loans (who is unaffiliated with us except through its co-investment in SA Buyer and the securitization entity) fails to recover the servicer advances in which we have invested, or takes longer than we expect to recover such advances, the value of our investment could be adversely affected and we could fail to achieve our expected return and suffer losses.

The outstanding balance of servicer advances securing the financing is not likely to be repaid on or before the maturity date of such financing arrangement. We expect to request the same counterparty or another one of our financing sources to renew or refinance the financing for an additional fixed period; however, there can be no assurance that we will be able to extend the financing arrangement upon the expiration of its stated term, which subjects us to a number of risks. A financing source that elects to extend or refinance may charge higher interest rates and impose more onerous terms upon us, including without limitation, lowering the amount of financing that can be extended against the servicer advances being financed. If we are unable to renew or refinance the servicer advance financing, the securitization entity will be required to repay the outstanding balance of the financing on the related maturity date. Additionally, there may be substantial increases in the interest rates under the financing arrangement if the debt is not repaid, extended or refinanced prior to the expected repayment date, which may be before the related maturity date. If the securitization entity is unable to pay the outstanding balance of the notes, the financing counterparty may foreclose on the servicer advances pledged as collateral.

Under this servicer advance financing, SA Buyer and the securitization entity, along with the servicer, make various representations and warranties and have agreed to certain covenants, events of default, and other terms that if breached or triggered can result in acceleration of all outstanding amounts borrowed under this facility and this facility being unavailable to use for future financing needs. We do not have the direct ability to control the servicer’s compliance with such covenants and tests and the failure of SA Buyer, the securitization entity, or the servicer to satisfy any such covenants or tests could result in a partial or total loss on our investment. The financial covenants of SA Buyer included in this servicer advance financing are further described below under the heading “Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”

Subordinate Securities Financing Facilities. Another source of long-term debt financing is through subordinate securities financing facilities providing non-mark-to-market recourse debt financing on a portfolio of subordinate securities. Financing for the securities was obtained under these facilities by our transfer of securities to the counterparty in exchange for cash proceeds (in an amount less than 100% of the fair value of the transferred securities), and our covenant to reacquire those securities from the counterparty for the same amount plus a financing charge. These financing facilities are fully and unconditionally guaranteed by Redwood.

One financing facility that became eligible to be terminated, at our option, in September 2022, has a final maturity in September 2024, and includes step-ups in the interest rate on amounts outstanding under the facility between October 2022 and September 2024. At December 31, 2023, we had borrowings under this facility totaling $125 million and the fair value of real estate securities pledged as collateral under this long-term debt facility was $175 million and included securities retained from our Sequoia securitizations.

Another financing facility became eligible to be terminated, at our option, in February 2023, has a final maturity in February 2025, and includes step-ups in that interest rate on amounts outstanding under the facility increases between March 2023 and February 2025. At December 31, 2023, we had borrowings under this facility totaling $101 million and the fair value of real estate securities pledged as collateral under this long-term debt facility was $125 million and included securities retained from our consolidated CAFL® securitizations.

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Another financing facility that became eligible to be terminated, at our option, in June 2023, has a final maturity in June 2026, and includes step-ups in the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026. At December 31, 2023, we had borrowings under this facility totaling $58 million and the fair value of real estate securities pledged as collateral under this long-term debt facility was $113 million and included securities retained from our consolidated CAFL® securitizations.

In addition to the subordinate securities financing facilities described above, in the ordinary course of business we may seek to establish additional long-term securities repurchase facilities that may be of a similar or greater size and may have similar or more restrictive terms.

Similar to the uncommitted warehouse and securities repurchase facilities described herein, under these facilities we make various representations and warranties and have agreed to certain covenants, events of default, and other terms that if breached or triggered can result in our being required to immediately repay all outstanding amounts borrowed under a facility and such facility being unavailable to use for future financing needs. In particular, outstanding amounts borrowed under a facility could become immediately due and payable if there is a failure to pay any amounts due under such facility, the failure to repurchase the securities by the final maturity date, or upon the insolvency of Redwood, as guarantor. If we breach or trigger the representations and warranties, covenants, events of default, or other terms of this subordinate securities financing facility, we are exposed to liquidity and other risks, including of the type described in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors,” and in Part II, Item 7A of this Annual Report on Form 10-K under the heading “Market Risks.”

Financial Covenants Associated With Short-Term Debt and Other Debt Financing

Set forth below is a summary of the financial covenants associated with our short-term debt and other debt financing facilities.

•Residential Consumer and Residential Investor Loan and HEI Warehouse Facilities. As noted above, one source of our debt financing is secured borrowings under residential and business purpose loan and HEI warehouse facilities we have established and, as of December 31, 2023, were in place with several different financial institution counterparties. Financial covenants included in these warehouse facilities are as follows and at December 31, 2023, and through the date of this Annual Report on Form 10-K, we were in compliance with each of these financial covenants:

•Maintenance of a minimum dollar amount of stockholders’ equity/tangible net worth at Redwood.

•

•Maintenance of a minimum dollar amount of cash and cash equivalents at Redwood.

•Maintenance of a maximum ratio of consolidated recourse indebtedness to stockholders’ equity or tangible net worth at Redwood.

•Securities Repurchase Facilities. As noted above, another source of our short-term debt financing is through secured borrowings under securities repurchase facilities we have established with various financial institution counterparties. Financial covenants included in these securities repurchase facilities are as follows and at December 31, 2023, and through the date of this Annual Report on Form 10-K, we were in compliance with each of these financial covenants:

•Maintenance of a minimum dollar amount of stockholders’ equity/tangible net worth at Redwood.

•Maintenance of a minimum dollar amount of cash and cash equivalents at Redwood.

•Maintenance of a maximum ratio of consolidated recourse indebtedness to consolidated adjusted tangible net worth at Redwood.

•Servicer Advance Financing. As noted above, servicer advance financing consists of non-recourse short-term securitization debt, secured by servicing advances. Financial covenants associated with this financing facility are as follows and at December 31, 2023, and through the date of this Annual Report on Form 10-K, we were in compliance with each of these financial covenants:

•Maintenance of a minimum dollar amount of stockholders’ equity/tangible net worth at SA Buyer.

•Maintenance of a minimum dollar amount of cash and cash equivalents at SA Buyer.

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As noted above, at December 31, 2023, and through the date of this Annual Report on Form 10-K, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at December 31, 2023 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at December 31, 2023 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur at least $4 billion in additional recourse indebtedness.

Margin Call Provisions Associated With Short-Term Debt and Other Debt Financing

•Residential Consumer and Residential Investor Loan and HEI Warehouse Facilities. As noted above, one source of our debt financing is secured borrowings under residential consumer and residential investor loan and HEI warehouse facilities we have established and, as of December 31, 2023, were in place with several different financial institution counterparties. These warehouse facilities include the margin call provisions described below and during the twelve months ended December 31, 2023, and through the date of this Annual Report on Form 10-K, we complied with any margin calls received from creditors under these warehouse facilities:

•Under our marginable residential consumer loan warehouse facilities, if at any time the market value of any residential mortgage loan financed under a facility declines (as determined by the creditor), then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional residential mortgage loans) with a value equal to the amount of the decline. If we receive any such demand, (i) under two of our residential consumer loan warehouse facilities, we would generally be required to transfer the additional collateral on the same day (although demands received after a certain time would only require the transfer of additional collateral on the following business day) and (ii) under two of our residential consumer loan warehouse facilities and our MSR financing facility, we would generally be required to transfer the additional collateral on the following business day. The value of additional residential mortgage loans transferred as additional collateral is determined by the creditor.

•Under certain non-marginable residential consumer and residential investor loan and HEI warehouse facilities, if the value of the property securing a mortgage loan or HEI financed under a facility declines (as determined by an appraisal, broker price opinion, or home price appreciation index, as applicable), then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional mortgage loans or HEI) with a value equal to the amount of the decline. The conditions precedent to which the creditor may request updated valuation reports varies by agreement, including, for example, based on an agreed schedule, or based on the number of days the loan has been financed under such facility. If we receive any such demand as a result of a margin deficit based on an updated valuation report, we would generally be required to transfer the additional collateral as soon as the same day to within three business days depending on the terms of the agreement. The value of additional residential consumer and residential investor mortgage loans or HEI transferred as additional collateral is determined by the creditor.

•Securities Repurchase Facilities. Another source of our short-term debt financing is through secured borrowings under securities repurchase facilities we have established with various financial institution counterparties. These repurchase facilities include the margin call provisions described below and during the twelve months ended December 31, 2023, and through the date of this Annual Report on Form 10-K, we complied with any margin calls received from creditors under these repurchase facilities:

•If at any time the market value (as determined by the creditor) of any securities financed under a facility declines, then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations, or additional securities) with a value equal to the amount of the decline. If we receive any such demand, we would generally be required to transfer the additional collateral on the same day (although demands received after a certain time would only require the transfer of additional collateral on the following business day). The value of additional securities transferred as additional collateral is determined by the creditor.

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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 II, Item 8 of this Annual Report on Form 10-K. Management discusses the ongoing development and selection of these critical accounting policies with the Audit Committee of the Board of Directors.

Following is a description of our critical accounting estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

Assets and Liabilities Accounted for at Fair Value

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 5 in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our assets and liabilities accounted for at fair value at December 31, 2023, 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 5 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022, incorporated herein by reference, for the same information on these assets and liabilities as of December 31, 2022. 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. Below, we provide additional information regarding the critical accounting estimates for these assets and liabilities.

Consolidated Entities Accounted for under the Consolidated Financing Entities Election

We have elected to account for most of our consolidated securitization VIEs as collateralized financing entities and use the fair value of the liabilities issued by these entities (comprised of the ABS issued and the securities we retain in the entities, which we determined to be more observable) to determine the fair value of the assets held at these entities (generally residential, business purpose and multifamily loans, and HEI). Significant inputs used to estimate the fair value of these liabilities include certain unobservable inputs (e.g., those requiring our own data or assumptions) that require significant judgment to develop, and changes in these estimates have had and are reasonably likely to have a material effect on our reported earnings and financial condition.

Changes in the Fair Value of Loans Held at Fair Value

We have elected the fair value option for our residential loans, business purpose loans, and multifamily loans. As such, these loans are carried on our consolidated balance sheets at their estimated fair value and changes in the fair values of these loans are recorded in Mortgage banking activities, net or Investment fair value changes, net on our consolidated statements of income (loss) in the period in which the valuation change occurs. Significant inputs used to estimate the fair value of these assets include certain unobservable inputs (e.g., those requiring our own data or assumptions) that require significant judgment to develop, and changes in these estimates have had and are reasonably likely to have a material effect on our reported earnings and financial condition.

Changes in Fair Values of Securities

Our securities are classified as either trading or AFS securities, and in both cases are carried on our consolidated balance sheets at their estimated fair values. In addition, we invest in securities of certain securitization entities that we are required to consolidate for GAAP reporting purposes and account for under the consolidated financing entity election, as previously described. For trading securities and collateralized financing entities, changes in fair values are recorded in Investment fair value changes, net on our consolidated statements of income (loss) in the period in which the valuation change occurs. For AFS securities, changes in fair value are generally recorded in Accumulated other comprehensive income in our consolidated balance sheets (as discussed further below). Periodic fluctuations in the values of our securities can be caused by changes in the discount rate assumptions used to value the securities, as well as actual and anticipated prepayments, delinquencies, losses and other factors on the loans underlying the securitizations in which we own securities. Significant inputs used to estimate the fair value of these assets include certain unobservable inputs (e.g., those requiring our own data or assumptions) that require significant judgment to develop, and changes in these estimates have had and are reasonably likely to have a material effect on our reported earnings and financial condition.

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For AFS securities, cumulative unrealized gains and losses are recorded as a component of Accumulated other comprehensive income in our consolidated balance sheets. Unrealized gains are not credited to current earnings and unrealized losses are not charged against current earnings to the extent they are temporary in nature. Certain factors may require us, however, to recognize a decline in the value of AFS securities as an allowance for credit losses recorded through our current earnings. Factors that determine other-than-temporary-impairment include a change in our ability or intent to hold AFS securities, adverse changes to projected cash flows of assets, or the likelihood that declines in the fair values of assets would not return to their previous levels within a reasonable time. Estimates used to determine other-than-temporary-impairments on AFS securities require significant judgment and changes in these estimates have had and are reasonably likely to have a material effect on our reported earnings and financial condition.

Changes in Fair Values of Servicer Advance Investments

Servicer advance investments are carried on our consolidated balance sheets at their estimated fair values, with changes in fair values recorded in our consolidated statements of income (loss) in Investment fair value changes, net. Periodic fluctuations in the values of our servicer advance investments can be caused by changes in the actual and anticipated balance of servicing advances outstanding, actual and anticipated prepayments on the underlying loans, and changes in the discount rate assumptions used to value servicer advance investments. Significant inputs used to estimate the fair value of these assets include certain unobservable inputs (e.g., those requiring our own data or assumptions) that require significant judgment to develop, and changes in these estimates have had and are reasonably likely to have a material effect on our reported earnings and financial condition.

Changes in Fair Values of MSRs and Excess MSRs

MSRs and excess MSRs are carried on our consolidated balance sheets at their estimated fair values, with changes in fair values recorded in our consolidated statements of income (loss) in Other income, net or Investment fair value changes, net. Periodic fluctuations in the values of our MSRs and excess MSRs can be caused by actual prepayments on the underlying loans, changes in assumptions regarding future projected prepayments on the underlying loans, actual or anticipated changes in delinquencies, and changes in the discount rate assumptions used to value MSRs and excess MSRs. Significant inputs used to estimate the fair value of these assets include certain unobservable inputs (e.g., those requiring our own data or assumptions) that require significant judgment to develop, and changes in these estimates have had and are reasonably likely to have a material effect on our reported earnings and financial condition.

Changes in Fair Values of HEI

HEI are carried on our consolidated balance sheets at their estimated fair values, with changes in fair values recorded in our consolidated statements of income (loss) in Investment fair value changes, net. Periodic fluctuations in the values of our HEI can be caused by changes in the discount rate assumptions used to value HEI, changes in assumptions regarding future projected home values, changes in assumptions regarding future projected prepayment rates of residential mortgage loans, as well as changes in the rate and magnitude of defaults on the portfolio. Significant inputs used to estimate the fair value of these assets include certain unobservable inputs (e.g., those requiring our own data or assumptions) that require significant judgment to develop, and changes in these estimates have had and are reasonably likely to have a material effect on our reported earnings and financial condition.

Changes in Fair Values of Strategic Investments

Several of our strategic investments are carried on our consolidated balance sheets at their estimated fair values (or at historical cost under the measurement alternative for equity investments), with changes in fair values recorded in our consolidated statements of income (loss) in Investment fair value changes, net. All of our strategic investments are in private companies that do not have readily determinable fair values and estimates of their fair value require significant judgment to develop. Changes in the estimates used to determine their fair value are reasonably likely to have a material effect on our reported earnings and financial condition.

Changes in Fair Values of Derivative Financial Instruments

We generally use derivatives as part of our mortgage banking activities (e.g., to manage risks associated with loans we plan to acquire and subsequently sell or securitize), in relation to our residential investments (to manage risks associated with our securities, MSRs, and held-for-investment loans), and to manage variability in debt interest expense indexed to adjustable rates, and cash flows on assets and liabilities that have different coupon rates (fixed rates versus floating rates, or floating rates based on different indices). Significant inputs used to estimate the fair value of certain of our derivatives include unobservable inputs (e.g., those requiring our own data or assumptions) that require significant judgment to develop, and changes in these estimates have had and are reasonably likely to have a material effect on reported earnings and our financial condition.

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Additionally, the nature of the instruments we use and the accounting treatment for the specific assets, liabilities, and derivatives may therefore lead to volatility in our periodic earnings, even when we are meeting our hedging objectives. Most of our derivatives are accounted for as trading instruments with associated changes in value recorded through our consolidated statements of income (loss). Changes in value of the assets and liabilities we manage by using derivatives may not be accounted for similarly. This could lead to reported income and book values in specific periods that do not necessarily reflect the economics of our risk management strategy. Even when the assets and liabilities are similarly accounted for as trading instruments, periodic changes in their values may not coincide as other market factors (e.g., supply and demand) may affect certain instruments and not others at any given time.

Changes in Values of Real Estate Owned

REO property acquired through, or in lieu of, foreclosure is initially recorded at fair value, and subsequently reported at the lower of its carrying amount or fair value (less estimated costs to sell). We generally obtain third-party valuations to assist in determining the initial fair value of REO properties, and will obtain updated valuations when we believe market conditions may have meaningfully changed. While third-party valuations offer strong support for estimated values, we may record REO property at different values if, for instance, we believe a property's value differs or if we are willing to sell the property at a lower price. Additionally, estimates of value may not prove to be accurate, and market conditions can also change rapidly, whereby estimated values could decline in subsequent periods. As such, changes in our estimates of the fair value of REO could have a material effect on our reported earnings and financial condition.

Impairments of Goodwill and Intangible Assets

In connection with our acquisitions of Riverbend, CoreVest and 5 Arches, a portion of the purchase price of each acquisition was allocated to goodwill and intangible assets. During 2020, we impaired our entire balance of goodwill associated with the acquisitions of CoreVest and 5 Arches, and our goodwill balance at December 31, 2022 was related entirely to the Riverbend acquisition. Accounting standards require that we routinely assess goodwill and intangible assets for indicators of impairment, and if indicators are present, we must review them for impairment. The assessments to determine if goodwill and intangible assets are impaired requires significant judgement to develop assumptions and estimates. If we determine that goodwill or intangible assets are impaired, we will be required to write down the value of these assets, up to their entire balance. Any write-down would have a negative effect on our consolidated financial statements.

Changes in Yields for Securities

The yields we project on AFS real estate securities can have a significant effect on the periodic interest income we recognize for financial reporting purposes. Yields can vary as a function of credit results, prepayment rates, interest rates and call assumptions. If estimated future credit losses are less than our prior estimate, credit losses occur later than expected, prepayment rates are faster than expected (meaning the present value of projected cash flows is greater than previously expected for assets acquired at a discount to principal balance), or securities are called (or called sooner than expected) the yield over the remaining life of the security may be adjusted upwards. If estimated future credit losses exceed our prior expectations, credit losses occur more quickly than expected, prepayments occur more slowly than expected (meaning the present value of projected cash flows is less than previously expected for assets acquired at a discount to principal balance) or securities are not called (or called later than expected), the yield over the remaining life of the security may be adjusted downward.

Changes in the actual maturities of real estate securities may also affect their yields to maturity. Actual maturities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, and prepayments of principal. Therefore, actual maturities of AFS securities are generally shorter than stated contractual maturities. Stated contractual maturities are generally greater than 10 years. The assumptions we use to estimate future cash flows and the resulting effective yields and interest income, require significant judgement to develop, and changes in these estimates have had and are reasonably likely to have a material effect on our reported earnings and financial condition.

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Changes in Loss Contingency Reserves

We may be exposed to various loss contingencies, including, without limitation, those described in Note 17 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. In accordance with FASB guidance on accounting for contingencies, we review the need for any loss contingency reserves and establish them when, in the opinion of management, it is probable that a matter would result in a liability, and the amount of loss, if any, can be reasonably estimated. The establishment of a loss contingency reserve, the subsequent increase in a reserve or release of reserves previously established, or the recognition of a loss in excess of previously established reserves, can occur as a result of various factors and events that affect management’s opinion of whether the standard for establishing, increasing, or continuing to maintain, a reserve has been met. Changes in our estimates of required loss contingency reserves could have a material effect on our reported earnings and financial condition.

Changes in Provision for Taxes

Our provision for income taxes is primarily the result of GAAP income or losses generated at our TRS. Deferred tax assets/liabilities are generated by temporary differences in GAAP income and taxable income at our taxable subsidiaries and are a significant component of our GAAP provision for income taxes. We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering, among other things, all available positive and negative evidence, historical operating results and cumulative earnings analysis, forecasts of future profitability, and the duration of statutory carryforward periods. The estimate of net deferred tax assets and associated valuation allowances could change in future periods to the extent that actual or revised estimates of future taxable income during the carry-forward periods change from current expectations. Any such changes to our estimates could have a material effect on our reported earnings and financial condition.

MARKET AND OTHER RISKS

Market 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 under the caption “Risk Factors” of this Annual Report on Form 10-K, under the caption "Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities" within this MD&A, and under the caption "Quantitative and Qualitative Disclosures About Market Risk" of this Annual Report on Form 10-K.

Other Risks

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” of this Annual Report on Form 10-K.

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