GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.

At June 30, 2019, we consolidated our Legacy Sequoia and Sequoia Choice securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Additionally, beginning in the second half of 2018, we consolidated certain Freddie Mac K-Series securitization entities and the Freddie Mac SLST securitization entity that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for the consolidated Sequoia entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. At June 30, 2019, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia Choice, Freddie Mac SLST and Freddie Mac K-Series entities was $11 million, $220 million, $244 million, and $207 million, respectively.

Beginning in the fourth quarter of 2018, we consolidated two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At June 30, 2019, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s interest. Additionally, beginning in the fourth quarter of 2018, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing. At June 30, 2019, the estimated fair value of our investment in the Servicing Investment entities was $67 million.



June 30, 2019	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
Residential loans, held-for-investment	$	457,750	$	2,147,356	$	1,235,089	$	—	$	—	$	3,840,195
Multifamily loans, held-for-investment	—		—		—		3,749,657		—		3,749,657
Other investments	—		—		—		—		274,617		274,617
Cash and cash equivalents	—		—		—		—		19,393		19,393
Restricted cash	144		14		—		—		23,650		23,808
Accrued interest receivable	771		8,946		3,786		11,317		3,747		28,567
REO	1,448		—		—		—		—		1,448
Total Assets	$	460,113	$	2,156,316	$	1,238,875	$	3,760,974	$	321,407	$	7,937,685
Short-term debt	$	—	$	—	$	—	$	—	$	236,231	$	236,231
Accrued interest payable	519		7,322		2,774		10,822		321		21,758
Accrued expenses and other liabilities	—		14		—		—		17,954		17,968
Asset-backed securities issued	448,862		1,929,444		991,766		3,543,057		—		6,913,129
Total Liabilities	$	449,381	$	1,936,780	$	994,540	$	3,553,879	$	254,506	$	7,189,086

Number of VIEs	20		7		1		4		3		35



December 31, 2018	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
Residential loans, held-for-investment	$	519,958	$	2,079,382	$	1,222,669	$	—	$	—	$	3,822,009
Multifamily loans, held-for-investment	—		—		—		2,144,598		—		2,144,598
Other investments	—		—		—		—		312,688		312,688
Restricted cash	146		1,022		—		—		25,363		26,531
Accrued interest receivable	822		8,988		3,926		6,595		1,091		21,422
REO	3,943		—		—		—		—		3,943
Total Assets	$	524,869	$	2,089,392	$	1,226,595	$	2,151,193	$	339,142	$	6,331,191
Short-term debt	$	—	$	—	$	—	$	—	$	262,740	$	262,740
Accrued interest payable	571		7,180		2,907		6,239		483		17,380
Accrued expenses and other liabilities	—		1,022		—		—		18,592		19,614
Asset-backed securities issued	512,240		1,885,010		993,748		2,019,075		—		5,410,073
Total Liabilities	$	512,811	$	1,893,212	$	996,655	$	2,025,314	$	281,815	$	5,709,807

Number of VIEs	20		6		1		3		3		33

We consolidate the assets and liabilities of certain Sequoia securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia entities in accordance with GAAP.

We consolidate the assets and liabilities of certain Freddie Mac K-Series securitization trusts and a Freddie Mac SLST securitization trust resulting from our investment in subordinate securities issued by these trusts. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.

Since 2012, we have transferred residential loans to 44 Sequoia securitization entities sponsored by us that are still outstanding as of June 30, 2019, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.

During the first quarter of 2019, the master servicer for one of our unconsolidated Sequoia entities exercised their right to call the securitization and paid off the underlying securities. We realized a $4 million gain related to the called securities, which was recognized through Realized gains, net on our consolidated statements of income. In connection with this called securitization, Redwood acquired $39 million of residential real estate loans that were held in both our held-for-sale and held-for-investment portfolios at Redwood at June 30, 2019.



	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2019		2018		2019		2018
Principal balance of loans transferred	$	400,836	$	1,127,665	$	749,093	$	2,408,133
Trading securities retained, at fair value	1,792		33,757		3,508		46,248
AFS securities retained, at fair value	1,069		2,047		1,954		5,952



	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2019			2018			2019			2018
Proceeds from new transfers	$	410,281		$	1,104,094		$	762,652		$	2,393,781
MSR fees received	3,105			3,397			6,165			6,811
Funding of compensating interest, net	(47		)	(31		)	(137		)	(56		)
Cash flows received on retained securities	6,743			7,410			14,289			14,453



	Three Months Ended June 30, 2019				Three Months Ended June 30, 2018
At Date of Securitization	Senior IO Securities		Subordinate Securities		Senior IO Securities		Subordinate Securities
Prepayment rates	16	%	15	%	10	%	10	%
Discount rates	14	%	7	%	14	%	5	%
Credit loss assumptions	0.20	%	0.20	%	0.20	%	0.20	%



	Six Months Ended June 30, 2019				Six Months Ended June 30, 2018
At Date of Securitization	Senior IO Securities		Subordinate Securities		Senior IO Securities		Subordinate Securities
Prepayment rates	16	%	15	%	9	%	10	%
Discount rates	14	%	7	%	14	%	5	%
Credit loss assumptions	0.20	%	0.20	%	0.20	%	0.20	%



(In Thousands)	June 30, 2019		December 31, 2018
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	121,825	$	129,111
Subordinate securities, classified as AFS	136,310		162,314
Mortgage servicing rights	45,010		58,572
Maximum loss exposure ⁽¹⁾	$	303,145	$	349,997
Assets transferred:
Principal balance of loans outstanding	$	10,586,480	$	10,580,216
Principal balance of loans 30+ days delinquent	24,749		21,805



June 30, 2019	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at June 30, 2019	$	45,010		$	49,014		$	209,121
Expected life (in years)⁽²⁾	6			6			14
Prepayment speed assumption (annual CPR)⁽²⁾	11		%	12		%	13		%
Decrease in fair value from:
10% adverse change	$	1,898		$	1,905		$	158
25% adverse change	4,513			4,857			1,124
Discount rate assumption⁽²⁾	11		%	13		%	5		%
Decrease in fair value from:
100 basis point increase	$	1,624		$	1,310		$	20,756
200 basis point increase	3,135			2,758			38,452
Credit loss assumption ⁽²⁾	N/A			0.21		%	0.21		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,645
25% higher losses	N/A			—			4,112



December 31, 2018	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at December 31, 2018	$	58,572		$	61,178		$	230,247
Expected life (in years)⁽²⁾	8			7			15
Prepayment speed assumption (annual CPR)⁽²⁾	7		%	10		%	9		%
Decrease in fair value from:
10% adverse change	$	1,668		$	2,151		$	201
25% adverse change	4,027			5,127			1,372
Discount rate assumption⁽²⁾	11		%	12		%	6		%
Decrease in fair value from:
100 basis point increase	$	2,323		$	2,190		$	21,982
200 basis point increase	4,493			4,226			40,641
Credit loss assumption ⁽²⁾	N/A			0.20		%	0.20		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,387
25% higher losses	N/A			—			3,471

Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at June 30, 2019 and December 31, 2018, grouped by asset type.



(In Thousands)	June 30, 2019		December 31, 2018
Mortgage-Backed Securities
Senior	$	166,184	$	185,107
Mezzanine	679,908		547,249
Subordinate	373,260		428,713
Total Mortgage-Backed Securities	1,219,352		1,161,069
Excess MSR	18,224		15,092
Total Investments in Third-Party Sponsored VIEs	$	1,237,576	$	1,176,161

We determined that we are not the primary beneficiary of these third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.