REDWOOD TRUST INC

One Belvedere Place, Suite 300 · 2028

Mill Valley, CA 94941

8310 South Valley Highway, Suite 425 · 2031

Englewood, CO 80112

4 Park Plaza, Suite 900 · 2027

Irvine, CA 92614

45 Rockefeller Plaza, Suite 2630 · 2030

New York, NY 10111

1111 Metropolitan Avenue, Suite 1040 · 2027

Charlotte, North Carolina 28204

• Our use of financial leverage exposes us to heightened liquidity risks, including margin calls and acceleration of repayment from defaults and cross-defaults.
• Maintaining information security and complying with data-privacy and technology laws are critical; a cybersecurity or data incident, or a violation of such laws, could materially harm us.
• Public health events (including pandemics such as COVID-19) have adversely affected, and may again affect, our business, liquidity, and results.
• The nature of our assets and investments exposes us to credit risk that could adversely affect asset values, earnings, dividends, cash flows, liquidity, and our business.
• Credit Risk Overview
• Tranche Position and Servicing-Advance Risk
• Whole-Loan and Risk-Sharing Exposures
• Small-Business Borrower Risk
• Product-Feature Risk
• Geographic Concentration and Catastrophe Risk
• Limits of Risk Management
• Credit-Rating Limitations
• Payment Forbearance Risk—Residential Consumer
• Payment Risk—Multifamily and Residential Investor
• Changes in mortgage or HEI prepayments, and HEI payment amounts, could reduce our earnings, dividends, cash flows, and liquidity.
• Interest-rate fluctuations may reduce earnings and increase earnings volatility.
• We have significant investment and reinvestment risks.
• New assets we acquire or originate may not generate yields as attractive as yields on our current assets, which could result in a decline in our earnings per share or stockholders’ equity over time.
• Our growth may be limited if assets are not available or not available at attractive prices.
• Investments in diverse types of assets and businesses could expose us to new, different, or increased risks.
• We may change our investment strategy or financing plans, which may result in riskier investments and diminished returns.
• The performance of the assets we own and the investments we make will vary and may not meet our earnings or cash flow expectations. In addition, the cash flows and earnings from, and market values of, securities, loans, and other assets we own may be volatile.
• Changes in the fair values of our assets, liabilities, and derivatives can have various negative effects on us, including reduced earnings, increased earnings volatility, and volatility in our book value.
• Our calculations of the fair value of the securities, loans, HEI, MSRs, derivatives, and certain other assets we own or consolidate are based upon assumptions that are inherently subjective and involve a high degree of management judgment.
• Investments we make, hedging transactions that we enter into, and the manner in which we finance our investments and operations expose us to various risks, including liquidity risk, risks associated with the use of leverage, market risks, and counterparty risk.
• Many of our investments have limited liquidity.
• Our level of indebtedness and liabilities could limit cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations, and impair our ability to satisfy our obligations under our convertible notes and other debt instruments.
• Our use of financial leverage could expose us to increased risks.
• The inability to access financial leverage through warehouse and repurchase facilities, credit facilities, or other forms of debt financing may inhibit our ability to execute our business plan, which could have a material adverse effect on our financial results, financial condition, and business.
• Hedging activities may reduce earnings, may fail to reduce earnings volatility, and may fail to protect our capital in difficult economic environments.
• We enter into derivative contracts that may expose us to contingent liabilities and those contingent liabilities may not appear on our balance sheet. We may invest in synthetic securities, credit default swaps, and other credit derivatives, which expose us to additional risks.
• Hedging activities may subject us to increased regulation.
• Our results could be adversely affected by counterparty credit risk.
• Through certain of our wholly-owned subsidiaries we have engaged in the past and plan to continue to engage in acquiring residential consumer and residential investor mortgage loans and originating residential investor mortgage loans and HEI with the intent to sell these loans to third parties or hold them as investments. Similarly, we have engaged in the past, and may continue to engage, in acquiring residential MSRs and in originating and acquiring HEI. These types of transactions and investments expose us to potentially material risks.
• Our portfolio of residential investor loans and, to a lesser extent, HEI held for investment represents a substantial portion of our overall investment portfolio, and such loans and HEI expose us to new and different risks from our traditional investments in residential consumer mortgage loans.
• Through certain of our wholly-owned subsidiaries we have engaged in the past, and expect to continue to engage in, securitization transactions relating to real estate mortgage loans and HEI. In addition, we have invested in and continue to invest in MBS and other ABS issued in securitization transactions sponsored by other companies. These types of transactions and investments expose us to potentially material risks.
• Adverse economic conditions have at times negatively impacted, and could again negatively impact, our operating platforms including our residential investor loan origination and residential consumer loan purchase activities.
• In connection with our operating and investment activity, we rely on third parties to perform certain services, comply with applicable laws and regulations, and carry out contractual covenants and terms, the failure of which by any of these third parties may adversely impact our business and financial results.
• Our ability to execute or participate in future securitization transactions could be delayed, limited, or precluded by legislative and regulatory reforms applicable to asset-backed securities and the institutions that sponsor, service, rate, or otherwise participate in or contribute to the successful execution of a securitization transaction.
• Our ability to profitably execute or participate in future securitization transactions, including, in particular, securitizations of residential consumer and residential investor mortgage loans is dependent on numerous factors and if we are not able to achieve our desired level of profitability or if we incur losses in connection with executing or participating in future securitizations it could have a material adverse impact on our business and financial results.
• Our past and future loan and HEI origination, investment, and securitization activities or other past and future business or operating activities or practices could expose us to litigation, which may adversely affect our business and financial results.
• Litigation of the type initiated during 2017 against various trustees of residential mortgage-backed securitization transactions issued prior to financial crisis of 2007-2008 (“RMBS trustee litigation”) negatively impacted, and could further negatively impact, the value of securities we hold, could expose us to indemnification claims, and could impact the profitability of our participation in future securitization transactions.
• Our acquisitions of 5 Arches, CoreVest, and Riverbend, or future acquisitions, could fail to improve our business or result in diminished returns, could expose us to new or increased risks, and could increase our cost of doing business.
• Originating, transacting in and funding HEI has exposed us to new and different business and operational risks.
• Our cash balances and cash flows may be insufficient relative to our cash needs.
• Initiating new business activities or significantly expanding or reorganizing our existing business activities may expose us to new risks, could fail to result in the expected benefits, and could increase our cost of doing business.
• Our future success depends on our ability to attract and retain key personnel.
• Our technology infrastructure and systems are important and any significant disruption or breach of the security of this infrastructure or these systems could have an adverse effect on our business. We also rely on technology infrastructure and systems of third parties who provide services to us and with whom we transact business.
• We may not be able to make technological improvements as quickly as demanded by our loan sellers, borrowers, and customers, which could harm our ability to attract loan sellers, borrowers, and customers, and adversely affect our results of operations, financial condition and liquidity.
• Our business could be adversely affected by deficiencies in our disclosure controls and procedures or internal controls over financial reporting.
• Our risk management efforts may not be effective.
• We could be harmed by misconduct or fraud that is difficult to detect.
• Inadvertent errors, including, for example, errors in the implementation of information technology systems, could subject us to financial loss, litigation, or regulatory action.
• Our business may be adversely affected if our reputation is harmed. Our brand recognition is important to the success of our business and we are exposed to intellectual property-related risks associated with our brands.
• Our financial results are determined and reported in accordance with generally accepted accounting principles (and related conventions and interpretations), or GAAP, and are based on estimates and assumptions made in accordance with those principles, conventions, and interpretations. Furthermore, the amount of dividends we are required to distribute as a REIT is driven by the determination of our income in accordance with the Internal Revenue Code rather than GAAP.
• Our reported GAAP financial results differ from the taxable income results that drive our dividend distribution requirements and, therefore, our GAAP results may not be an accurate indicator of taxable income and dividend distributions.
• Over time, accounting principles, conventions, rules, and interpretations change, which could affect our reported GAAP and taxable earnings and stockholders’ equity.
• The future realization of our deferred tax assets is uncertain, and the amount of valuation allowance we may apply against our deferred tax assets may change materially in future periods.
• Changes to the U.S. federal income tax laws could have an adverse impact on the U.S. housing market, mortgage finance markets, and our business.
• HEI are subject to regulatory risk at the federal, state, and local levels and may be subject to recharacterization or regulated as mortgage loans, reverse mortgages, or other forms of “credit.”
• State and local rent control or rent stabilization regulations may reduce the value of single-family rental or multifamily properties collateralizing mortgage loans we own, or those underlying the securities or other investments we own. As a result, the value of these types of mortgage loans, securities, and other investments may be negatively impacted, which impacts could be material.
• We may not be able to obtain or maintain the governmental licenses or registrations required to operate our business and we may fail to comply with various state and federal laws and regulations applicable to our business, which could harm our business.
• With respect to residential mortgage loans or HEI we own or originate, or which we have purchased and subsequently sold, we may be subject to liability for potential violations of the CFPB’s TILA-RESPA Integrated Disclosure rule (also referred to as “TRID”) or other similar consumer protection laws and regulations, which could adversely impact our business and financial results.
• Environmental protection laws that apply to properties that secure or underlie our loan and investment portfolio could result in losses to us. We may also be exposed to environmental liabilities with respect to properties of which we become direct or indirect owners or to which we take title, which could adversely affect our business and financial results.
• We have elected to be taxed as a REIT and, as such, are required to meet certain tests in order to maintain our REIT status. This adds complexity and costs to running our business and exposes us to additional risks.
• Failure to qualify as a REIT could adversely affect our net income and dividend distributions and could adversely affect the value of our stock.
• Maintaining REIT status and avoiding the generation of excess inclusion income at Redwood Trust, Inc. and certain of our subsidiaries may reduce our flexibility and could limit our ability to pursue certain opportunities. Failure to appropriately structure our business and transactions to comply with laws and regulations applicable to REITs could have adverse consequences.
• To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions, and the unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could adversely affect our financial condition, results of operations, cash flow and per-share trading price of our stock.