# REDWOOD TRUST INC (RWT) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from REDWOOD TRUST INC's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/930236/000093023623000008/rwt-20221231.htm Accession: 0000930236-23-000008 Filing date: 2023-03-01 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/RWT/ All MD&A years: /company/RWT/mda/ Previous year: /company/RWT/mda/fy2021/ (FY 2021) Next year: /company/RWT/mda/fy2023/ (FY 2023) 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 five main sections: •    Overview •    Results of Operations –Consolidated Results of Operations –Results of Operations by Segment –Income Taxes •    Liquidity and Capital Resources •    Critical Accounting Estimates •Market and Other risks Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part 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. 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, business purpose and multifamily 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 Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio. 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. 62 Business Update The turn of the calendar from 2022 brought sudden changes to the mortgage markets in a manner that was different from downturns in past housing cycles. The Federal Reserve’s efforts to slow inflation during 2022 by rapidly increasing front-end benchmark interest rates resulted in a steep decline in mortgage refinance activity and profoundly affected consumer behavior in the housing market. In response, we slowed the pace of our mortgage banking activities in the fourth quarter and reviewed our positioning in the market. This included rationalization of the size of our operating platforms and our cost structure in light of persistent market volatility, resulting in an approximately 24% reduction in the size our workforce since July 1, 2022. We also undertook efforts to strengthen our balance sheet, holding $259 million of unrestricted cash at December 21, 2022, and generated additional cash in early 2023 through a preferred stock issuance, as well as through asset sales. For the fourth quarter 2022 overall, we reported GAAP earnings of $(0.40) per diluted share and book value per share of $9.55. We paid a quarterly dividend of $0.23 per share, consistent with our dividend level throughout 2022. With a challenging year behind us, we worked to quickly build momentum towards our 2023 priorities, taking advantage of more favorable market conditions to start the year to execute on various capital and financing activities. We completed a preferred stock offering in early January 2023, which was undertaken after consideration of the financing cost relative to unsecured debt alternatives, the prospect of deleveraging our balance sheet with equity capital, and the potential opportunity to access sources of perpetual capital more readily in the future. While the cost of any capital has increased significantly over the past year, reflective of the acute rise in benchmark interest rates, we believe this capital raising transaction is accretive to our common equity based on the returns we currently project could be realized on new investments. In January 2023, we also sold $213 million of business purpose lending (“BPL”) loans to an institutional partner at accretive terms for both parties. BPL is a type of “non-QM” residential loan program, and liquidity for this segment of the market was significantly impacted in 2022 as it was with respect to our jumbo residential “QM” mortgage banking business. The sale of this pool of loans created forward momentum for our BPL platform as it freed up capital for the business, and is a positive data point for execution which impacts the terms we can offer for new loans in our origination pipeline. In contrast to some of the headwinds facing the residential mortgage sector, our BPL platform continues to see resilient demand from our borrowers that supported the $2.8 billion of loan origination volume we generated in 2022. The rental market is providing alternatives for households, including multifamily, build-for-rent, and workforce housing segments supported by CoreVest. We remain focused on originating loans secured by assets with strong credit attributes and business plans with experienced sponsorship teams. We continue to review and update our underwriting guidelines in light of with market conditions and trends, most recently reducing loan-to-value (LTV) and loan-to-cost (LTC) limits on our BPL bridge loan products and continuing to originate lower LTV BPL term loans, including Single-Family Rental loans. Historically, more of our production came from BPL term loans, which reversed course in 2022 as sponsors preferred shorter term financing options amidst higher borrowing costs. However, in the fourth quarter of 2022, our loan origination mix between BPL bridge and term loans has once again rebalanced as sponsors begin to accept locking in current long-term rates in lieu of shorter-term floating-rate bridge debt. We believe these factors will support our BPL operations, despite the prospect of a potential recession in 2023. In January 2023, our Residential platform completed our first Sequoia securitization in more than a year. The completion of our transaction helped reset the securitization market and has positively influenced RMBS issuance by other market participants. Investor demand on our securitization was strong, enabling us to increase bond prices and our GAAP gain on sale. We believe this was one data point supporting better prospects for a rebound in residential mortgage banking activity, but there is more we need to see from the market - namely, the steepening of the yield curve, sustained lower interest rate volatility, and continued strength in securitization execution to begin driving additional volume through our aggregation channel. In the meantime, our total residential loan exposure was reduced by approximately 50% as a result of this securitization, to just over $300 million at the beginning of February, freeing up cash to reinvest across our business platforms. The rapid rise in interest rates caused the cost to own and finance a home to increase notably in 2022. Over-capacity, or the amount of excess loan production capability relative to borrower demand, weighed on the mortgage finance industry in 2022. We observed similar conditions following the Great Financial Crisis when residential lending volumes were low for an extended period as the economy slowly recovered. Today we believe the overall economy is in better health, but the size of the addressable consumer mortgage market, particularly with respect to refinances, is unlikely to regain its recent levels for some time. 63 In response to these structural factors, we reduced capital allocated to our Residential Mortgage Banking segment by 70% throughout 2022 and expect to maintain a lower allocation to this segment for the foreseeable future. Relationship management with our seller base remains a strategic focus of ours, including ensuring we have mortgage banking programs that meet their needs as market conditions evolve. This includes continued refinement of our expanded prime programs, as well as investor programs that target consumers who own second homes or a single rental property. As borrower demand in these market segments crystallizes, we remain focused on operating efficiency and preserving financial flexibility. This includes ongoing rationalization of our broader cost structure, with a primary focus to lower variable costs that can adjust with loan volumes and performance, while protecting our brand and maintaining optionality to engage more aggressively when market conditions improve. At the same time, as benchmark interest rates have risen, we have seen continued consumer demand for home equity investments ("HEIs") as an alternative for homeowners to access equity in their homes and for home buyers to fund a portion of a home purchase down payment. From a strategic perspective, we continue to focus on the HEI market, the HEI origination platforms we have invested in, and potential additional investment in internal or third-party HEI platforms. Our investment portfolio remains a primary driver of our book value and GAAP earnings. The fourth quarter mirrored the conditions we saw throughout 2022 with significant spread widening and ongoing bouts of volatility. To date in 2023, interest rate volatility has come off the high levels we saw throughout the fall of 2022 and therefore, market prices for securities have begun to stabilize. The majority of the mark-to-market declines we incurred on our investment portfolio in 2022 were largely driven by technical market factors (interest rate volatility and spread widening) and were largely detached from the fundamentals impacting underlying cash flows, with our portfolio assets continuing to display strong fundamental credit quality and stable delinquencies. With a weighted average year-end carrying value of $0.62 per $1.00 of face value, and a projected forward loss-adjusted economic yield of 15%(1), we estimate our Investment Portfolio had approximately $500 million (or $4.33 per share) of net discount at year-end 2022. Our ability to earn back this discount to book value over time starts with the underlying fundamentals of our loans. While the direction of home prices and its impact on mortgage credit, combined with the potential for a broader market recession, remain questions for 2023, we believe the composition of our portfolio will help mitigate these potential headwinds. We have many seasoned assets that have experienced significant home price appreciation (HPA), leading to historically low LTV ratios for these assets, supporting their ability to withstand a wider range of scenarios for the economy. Though we expect home prices to decline moderately this year overall, with potentially meaningful variation across geographies, we believe that a more pronounced decline would have to be predicated on the emergence of a larger group of consumers forced to sell their homes. With many homeowners having obtained low mortgage rates underwritten to tight credit standards, continued low inventory of homes, and affordability constraining purchase volume, a high volume of forced selling would likely require additional outside market forces. With many homeowners enjoying substantial equity in their homes, we have an opportunity to leverage our structuring expertise and market access to offer products allowing consumers to access equity in their homes and differentiate our mortgage banking product offerings. Overall, we remain focused on allocating capital and resources towards market segments that we believe will perform better in this environment and assets we view as undervalued, including Redwood’s corporate debt and equity. As valuations of our stock and convertible debt became volatile in 2022, particularly in the second half of the year, we were active in buying back our securities at attractive prices. We ultimately repurchased a total of approximately $88 million of our own common stock and convertible debt throughout 2022, and, as we progress into 2023, we have remained active in repurchasing our convertible debt with approaching maturities. We intend to use our unrestricted cash position and other sources of available liquidity to address the remainder of our 2023 convertible bond maturity and expect to be opportunistic in repurchasing other series of our outstanding convertible bonds. In addition, our capital strategy continues to include a focus on initiatives to enter into joint ventures or form investment vehicles or funds with third-party investors to purchase loans, HEIs, or other assets originated by our operating platforms or sourced through our mortgage banking and investment activities and, where applicable, to earn fees, incentives or other income in connection with these initiatives. Footnote to Business Update _________________________________________________________________________________________________________ (1) The projected forward loss-adjusted economic yield is calculated using December 31, 2022 market values of the assets and associated financing in our investment portfolio and management’s projection of future cash flows from these investments. Projections are based on management’s current market observations, estimates, and assumptions, including our assumptions regarding credit losses, prepayment speeds, market interest rates, and discount rates, all of which are subject to significant uncertainty. Actual results may vary materially. 64 2022 Financial Overview This section includes an overview of our 2022 financial results. A detailed discussion of our results of operations is presented in the next section of this MD&A. The following table presents selected financial highlights from 2022 and 2021. Table 1 – Key Financial Results and Metrics [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(In Thousands, except per Share Data)","","2022","","2021"],["Net income (loss)","","$","(163,520)","","","$","319,613"],["Earnings (loss) per share (diluted EPS)","","$","(1.43)","","","$","2.37"],["Return on equity","","(16)","%","","25","%"],["Book value per share","","$","9.55","","","$","12.06"],["Dividends per share","","$","0.92","","","$","0.78"],["Economic return on book value (1)","","(13)","%","","30","%"]] [[/GREPCENT_TABLE]] (1)    Economic return on book value is based on the period change in GAAP book value per common share plus dividends declared per common share in the period. We conduct our business in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. Following is an overview of key financial and operational results at each of our segments during 2022. Residential Mortgage Banking In line with the rapid rise in benchmark interest rates, mortgage rates increased during 2022 to their highest levels since 2008. Given the abrupt move higher in rates, many participants in mortgage finance markets were left trying to sell loan inventory at levels far below prevailing mortgage rates. Ultimately, this dynamic drastically impacted the profitability of distribution efforts in 2022 and distribution activity was down considerably year over year; securitization markets saw limited activity while whole loan sale activity also declined as the year progressed. We distributed $4.5 billion of loans in total in 2022: $0.7 billion of loans through one securitization in January 2022 and $3.8 billion of loans through whole loan sales. This compared to $11.2 billion of loan distribution activity in 2021; $4.2 billion in securitization and $7.0 billion in whole loan sales. Higher rates also significantly impacted industry volumes overall, which declined 49% year over year (as measured by the Mortgage Banker’s Association). Industry-wide origination volumes for purchase-money mortgages were down an estimated 15% and refinance volumes were down an estimated 74%. As of year-end, less than 1% of residential mortgages had at least a 50 basis-point incentive to refinance, with nearly two-thirds of homeowners currently benefiting from a long-term financing rate of 4% or lower (according to Locus Analytics). A combination of low industry volumes, significant market volatility across the year and intentional defensive posturing ultimately impacted Redwood’s overall 2022 volumes. As distribution channels were largely closed in the second half of the year, we further pulled back on our lock volumes and focused on managing our pipeline. Ultimately, we locked $4.1 billion of loans in 2022, 88% of which was locked in the first two quarters of 2022. This compares to $16.0 billion of lock volume in 2021. During the year, our Residential team continued to focus on expanded prime product guidelines to complement our core offerings, including launching a bank statement program with terms and underwriting designed to meet the CFPB’s Qualified Mortgage definition. Business Purpose Mortgage Banking During 2022, our Business Purpose Mortgage Banking segment, through activities at our wholly owned subsidiary, CoreVest, continued to grow, scale and gain market share. As affordability remained challenged and housing inventory was low in 2022, there was continued demand for investor rental, or business purpose lending, products. Our BPL team ultimately funded $2.8 billion of loans in 2022, compared to $2.3 billion in 2021. Given higher rates, investors in 2022 favored short-term, floating rate loans over locking into longer fixed-term loans with stronger prepayment protection features. Funded loans were comprised of 39% BPL term loans and 61% BPL bridge loans. This compared to 58% BPL term loans and 42% BPL bridge loans in 2021. In light of this dynamic in late 2022, we launched a new BPL term product with a 3-year maturity, to complement our existing 5, 7, 10 and 30 year products. 65 As the reality of a higher rate environment became clearer in the fourth quarter, we saw a resurgence of demand for our BPL term product, more in line with the historical balance of BPL term and bridge loan volumes that we have witnessed. In light of evolving market dynamics across the year, we also adjusted our underwriting guidelines, 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. The BPL industry faced some of the same challenges as the residential mortgage market in terms of distribution throughout 2022 attributable to spread widening from a significant risk-off sentiment in markets. Despite these challenges, we still distributed $1.3 billion of loans in 2022, compared to $1.5 billion in 2021. This included three securitizations backed by $0.8 billion of loans and $0.5 billion of whole loan sales. Though distribution volumes were down year over year, we made progress in growing our BPL distribution efforts through expanding our whole loan buyer base and issuing a bespoke private securitization to one investor in the third quarter of 2022. In April 2022, we announced the acquisition of Riverbend Finance, LLC ("Riverbend") a private mortgage lender to investors in transitional residential and multifamily real estate. The acquisition, an all-cash transaction, was completed in July 2022. The addition of Riverbend complemented Redwood’s existing business purpose mortgage banking platform, CoreVest, enhancing CoreVest’s suite of products, geographic and production footprint, and client base. In particular, the Riverbend platform added single asset bridge origination and distribution to CoreVest’s existing product offering. Investment Portfolio As of year end 2022, Redwood had $3.7 billion of housing credit investments in our Investment Portfolio, compared to $2.7 billion as of year end 2021 (in each case reflecting our economic interests – see Table 11 that follows for additional details). Of these, 76% were organically created through Redwood’s Residential and Business Purpose Mortgage Banking platforms, while the remaining 24% were purchased from third-parties. This compared to 70% organically created investments and 30% third-party investments as of year end 2021. We were active deploying capital across the year, with $521 million of capital deployed within our Investment Portfolio in 2022, including approximately 60% into organically created investments and the remainder into third-party investments. Capital deployed into organically created investments was predominantly deployed into BPL bridge loans while capital deployed into third-party assets was predominantly deployed into HEI. Spread widening and the selloff in interest rates during 2022 ultimately impacted the fair values of our Investment Portfolio. Negative fair value changes primarily reflected unrealized mark-to-market losses, while fundamental credit performance, including delinquencies and LTVs, remained stable across our portfolio. At year end 2022, 90 day+ delinquencies for our SLST investments ranged from 10.9% to 13.3% throughout 2022, 1.2% to 1.8% for our SEMT investments, 2.1% to 2.5% for our CAFL securities and 2.1% to 4.2% for our bridge loans (including those that are securitized). At year end 2022, we estimate that our Investment Portfolio had a net discount to par of $4.33 per share, compared to an estimated $2.22 per share of net discount at December 31, 2021. RWT Horizons During 2022, we continued to expand RWT Horizons, our investment initiative focused on early-stage technology companies with business plans focused on innovations that 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. 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. While we had anticipated growing our capital allocated to RWT Horizons up to $50 million in 2022, the market backdrop in the second half of the year caused us to slow our capital deployment into new RWT Horizons investments and re-focus on current yielding investments core to our other business segments. As of year-end 2022, we had over $27 million of capital committed to RWT Horizons, representing 28 investments across 24 portfolio companies. During 2022, we made 13 investments, though these investments were at significantly smaller average investment sizes than we deployed in 2021, and three of these were follow-on investments in existing RWT Horizons portfolio companies. These follow-on investments were made at valuations at or above initial investments. Overall, six RWT Horizons portfolio companies raised incremental growth capital in 2022. 66 RESULTS OF OPERATIONS Within this Results of Operations section, we provide commentary that compares results year-over-year for 2022, 2021, and 2020. Most tables include "changes" columns that show the amounts by which the year's results are greater or less than the results from the prior year. Unless otherwise specified, references in this section to increases or decreases in 2022 refer to the change in results from 2021 to 2022, and increases or decreases in 2021 refer to the change in results from 2020 to 2021. Consolidated Results of Operations The following table presents the components of our net income for the years ended December 31, 2022, 2021, and 2020. Table 2 – Net Income (Loss) [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","Changes"],["(In Thousands)","","2022","","2021","","2020","","","'22/'21","","'21/'20"],["Net Interest Income","","$","155,454","","","$","148,177","","","$","123,911","","","","$","7,277","","","$","24,266"],["Non-interest Income"],["Mortgage banking activities, net","","(13,659)","","","235,744","","","78,472","","","","(249,403)","","","157,272"],["Investment fair value changes, net","","(175,558)","","","128,049","","","(588,438)","","","","(303,607)","","","716,487"],["Other income","","21,204","","","12,018","","","4,188","","","","9,186","","","7,830"],["Realized gains, net","","5,334","","","17,993","","","30,424","","","","(12,659)","","","(12,431)"],["Total non-interest income (loss), net","","(162,679)","","","393,804","","","(475,354)","","","","(556,483)","","","869,158"],["General and administrative expenses","","(140,908)","","","(165,218)","","","(113,498)","","","","24,310","","","(51,720)"],["Portfolio management costs","","(7,951)","","","(5,758)","","","(4,204)","","","","(2,193)","","","(1,554)"],["Loan acquisition costs","","(11,766)","","","(16,219)","","","(8,525)","","","","4,453","","","(7,694)"],["Other expenses","","(15,590)","","","(16,695)","","","(108,785)","","","","1,105","","","92,090"],["Net income (loss) before income taxes","","(183,440)","","","338,091","","","(586,455)","","","","(521,531)","","","924,546"],["(Provision for) benefit from income taxes","","19,920","","","(18,478)","","","4,608","","","","38,398","","","(23,086)"],["Net Income (Loss)","","(163,520)","","","319,613","","","(581,847)","","","","(483,133)","","","901,460"],["Other comprehensive loss, net","","$","(59,941)","","","$","(4,706)","","","$","(45,734)","","","","(55,235)","","","41,028"],["Total Comprehensive (Loss) Income","","$","(223,461)","","","$","314,907","","","$","(627,581)","","","","$","(538,368)","","","$","942,488"]] [[/GREPCENT_TABLE]] Net Interest Income Net interest income from our Investment Portfolio increased in 2022 by $26 million, and 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. We recognized $11 million and $23 million of discount accretion on AFS securities in 2022 and 2021, respectively. Further, while net interest income benefited from $16 million of yield maintenance income on CAFL term securities in 2022, the amount received diminished throughout the year as interest rates rose, and we would expect to receive reduced amounts going forward while interest rates remain elevated. Additionally, while most of our fixed-rate investments are financed with fixed-rate debt, rising benchmark interest rates and wider spreads on variable-rate financing lines in 2022 increased our borrowing costs, negatively impacting net interest income in 2022. See the Investment Portfolio sub-section of the "Results of Operations by Segment” section that follows for additional detail on the composition of, and activity within, our investment portfolio. 67 We also earn net interest income on the inventory we carry in each of our mortgage banking businesses, which decreased overall in 2022 as residential loan acquisition volumes declined throughout the year and we carried a lower average balance of residential loan inventory in 2022 than 2021. This decrease was partially offset by increased net interest income earned on our business purpose loan inventory as we carried a higher average balance of loans in 2022 (see Table 5 that follows for additional detail on changes in net interest income by segment). Additionally, all of our mortgage banking loan inventory is financed with floating-rate debt and net interest income for both of our mortgage banking businesses was negatively impacted by rising benchmark interest rates and higher borrowing spreads in 2022, particularly in the second half of 2022 as our inventory sat longer on our balance sheet. These increases in net interest income were offset by a $16 million 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. Continued increases in benchmark interest rates and borrowing spreads could negatively impact our future net interest income in relation to the portion of our fixed-rate assets that are financed with floating-rate debt, as well as in relation to fixed-rate debt that matures in the near-term that is refinanced with new debt at current market rates. Additionally, to the extent we add incremental leverage to our investment portfolio, net interest income could decrease while proceeds from those financings are redeployed into other assets or if additional capital is deployed into HEIs for which we do not report interest income for GAAP purposes. Net interest income increased in 2021 from 2020, primarily due to a $16 million increase in net interest income earned on loans held in inventory during the year at our residential mortgage banking operations and a $5 million increase in net interest income earned from our investment portfolio. The increase from residential mortgage banking operations primarily resulted from higher loan acquisition volumes and average balances of loans outstanding in 2021 as compared to 2020. The increase from our investment portfolio was primarily attributable to an increase in the average balance of our BPL bridge loans, Sequoia securities and CAFL securities driven by new assets transferred from our mortgage banking operations, as well as higher discount accretion on our available-for-sale securities driven by an increase in expected call activity. Additional detail on net interest income is provided in the “Net Interest Income” section that follows. Mortgage Banking Activities, Net The decrease in income from mortgage banking activities during 2022 was attributable to a decrease of $148 million from our Residential Mortgage Banking operations and a decrease of $101 million from our Business Purpose Mortgage Banking operations. The decrease from Residential 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 contributed to an industry-wide decrease in residential mortgage origination activity. Additionally, given market conditions, we focused on risk management and were deliberate in moderating volume, particularly during the second half of 2022. Margins and profitability for Residential Mortgage Banking during 2022 were also negatively impacted by widening credit spreads for securitizations and whole loan sales throughout the year, as well as increased rate volatility, which resulted in higher hedging costs. Our continued reduction in capital allocation to this segment is attributable to the fact that continued interest rate volatility creates further uncertainty for gain on sale economics, and thus margins. Should the Federal Reserve provide more confidence about terminal rates and the trajectory of interest rates, we would expect to see margins stabilize which would likely lead us to more proactively increase acquisition volumes off of current historical lows. Despite increased volumes during 2022, Business Purpose Mortgage Banking income declined year-over-year, as continued market volatility and extreme credit spread widening in 2022 negatively impacted profitability. We saw the pace of originations decline from the first half of 2022 to the second half, as market conditions impacted margins and our ability to distribute loans deteriorated. We expect to build off the volumes originated in 2022, as we are beginning to see some signs of stability in securitization and whole loan markets, which is supporting an increase in activity from our origination teams. The increase in income from mortgage banking activities during 2021 was attributable to a $123 million increase from our residential mortgage banking operations and a $34 million increase from our business purpose mortgage banking operations. The increase in income at both of our mortgage banking operations was primarily driven by higher loan production volumes in 2021 as compared to 2020, when volumes and margins were adversely impacted by disruptions following the onset of the pandemic. A more detailed analysis of the changes in this line item is included in the “Results of Operations by Segment” section that follows. 68 Investment Fair Value Changes, Net Investment fair value changes, net, is primarily comprised of the change in fair value of our investment portfolio assets that are accounted for under the fair value option and interest rate hedges associated with these investments. During 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, MSRs, and interest rate hedges, which benefited from rising interest rates. While our HEIs experienced price increases in the first half of 2022 due to home price appreciation, in the second half of 2022, they saw some moderation in prices as the outlook for home price appreciation deteriorated. Negative fair value changes primarily reflected unrealized mark-to-market losses, while fundamental credit performance, including delinquencies and LTVs, remained relatively stable across our portfolio. During the year ended December 31, 2021, positive investment fair value changes reflected improvements in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained CAFL Term securities. Additional detail on our investment fair value changes is included in the “Results of Operations by Segment” section that follows. Other Income The increase in other income for the year primarily resulted from $12 million of higher income on our MSR investments, which was primarily due to positive valuation changes resulting from a slowdown in prepayment speeds during 2022 as interest rates rose. 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. The increase in other income for 2021 was primarily the result of a $12 million increase in income from our MSR investments, which experienced a more moderate rise in prepayment speeds during 2021 as compared to 2020, when prepayment speeds rose sharply after the onset of the pandemic when benchmark interest rates declined. This increase was partially offset by: lower risk share income, as our risk share investments experienced accelerated prepayments during the second half of 2020 and throughout 2021; lower FHLBC capital stock dividends, as we redeemed most of our FHLBC stock in 2020 when we repaid our FHLBC borrowings; and lower income from loan administration fees, as the BPL loans associated with those fees were paid off in 2020. Realized Gains, Net During the year ended December 31, 2022, we realized gains of $5 million, primarily resulting from calls associated with third-party available-for-sale ("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. In 2021, we realized gains of $18 million, including $16 million of gains resulting from calls of seven seasoned Sequoia securitizations, and $1.5 million of net gains from the sale of $11 million of AFS securities. General and Administrative Expenses The decrease in general and administration expenses in 2022 was primarily due to a $46 million decrease in variable compensation expense associated with the decrease in earnings from 2021 to 2022. Additionally, 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. Certain of our long-term incentive awards are indexed to our stock price but settleable in cash and, under the liability method of accounting, each quarter we adjust the expense associated with these awards based on the quarter-end stock price. We expect continued variability in this expense line item as our stock price fluctuates. 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, we incurred $1 million of direct transaction costs in 2022 related to the acquisition of Riverbend. These increases in fixed compensation expense were partially offset by a $2 million benefit from a payroll tax refund related to a prior year that was realized during the second quarter of 2022. Additionally, during the third and fourth quarters of 2022, we initiated various expense management initiatives, including the restructuring of our Business Purpose Mortgage Banking management team, and incurred $7 million of employee severance and related transition expenses. These expense management initiatives continued into the first quarter of 2023, including additional reductions in headcount across our business, which should further reduce our going forward run-rate for fixed compensation expenses into 2023. 69 The increase in general and administrative expenses for 2021 primarily resulted from increased accruals of variable compensation expense associated with improved financial results and a higher headcount in 2021 as compared to 2020, as well as higher long-term incentive award expense from awards granted in the second half of 2020, including retention-related awards, and awards granted in early 2021 as part of our regular annual compensation process. We also incurred higher systems and consulting costs in 2021, as we re-engineered and implemented new systems and processes to drive longer-term efficiencies throughout our business. 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 In 2022, we changed the presentation of our Consolidated Statements of Income (Loss) to include a new line item "Portfolio management costs," for which amounts included in this line item were previously included in the "General and Administrative expenses" and "Loan acquisition costs" line items. All prior period amounts presented in this document were conformed to this presentation for this change. The increases in portfolio management costs in 2022 and 2021 resulted from growth in our investment portfolio during both years. These costs are primarily associated with the management of our BPL bridge loans and also include loan sub-servicing costs. Loan Acquisition Costs The decrease in loan acquisition costs in 2022 was primarily driven by a reduction in loan acquisition volumes in our residential mortgage banking operations in 2022 and was partially offset by an increase in costs at our business purpose mortgage banking operations, which experienced higher loan origination volumes in 2022. The increase in loan acquisition costs for 2021 was primarily due to higher origination volumes throughout 2021 as compared to 2020. Other Expenses The decrease in other expenses for 2022 was primarily due to lower expenses associated with the amortization of intangible assets from the 5 Arches and CoreVest acquisitions in 2019, partially offset by increased expenses associated with the amortization of new intangible assets resulting from the acquisition of Riverbend. The decrease in other expenses for 2021 was primarily related to $89 million of goodwill impairment expense at our Business Purpose Mortgage Banking segment recorded in the first quarter of 2020 that was taken as a result of the onset of the COVID pandemic and economic downturn that ensued. 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 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 2021, the tax provision is reflective of the positive income earned at our taxable subsidiaries and higher state income taxes, partially offset by a $19 million benefit from the release of valuation allowance on deferred tax assets. For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows. Other Comprehensive Loss, net     Other comprehensive loss, net in 2022 was primarily comprised of net unrealized losses on available-for-sale securities. Consistent with the changes in values for our trading securities, as described above under the investment fair value changes, net line item, extreme levels of credit spread widening and slowing prepayment speeds negatively impacted the values of our available-for-sale securities in 2022. Other comprehensive loss, net in 2021 was primarily comprised of the reclassification of net unrealized gains on available-for-sale securities to net income, partially offset by increase in net unrealized gains on available-for-sale securities, which were generally driven by spread tightening on our available-for-sale securities in 2021. For additional detail on other comprehensive loss, net, see Note 18 in Part II, Item 8 of this Annual Report on Form 10-K. 70 Net Interest Income The following tables present the components of net interest income for the years ended December 31, 2022, 2021, and 2020. Table 3 – Net Interest Income [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2022","","2021","","2020"],["(Dollars in Thousands)","","Interest Income/ (Expense)","","Average Balance (1)","","Yield","","Interest Income/ (Expense)","","Average Balance (1)","","Yield","","Interest Income/ (Expense)","","Average Balance (1)","","Yield"],["Interest Income"],["Residential loans, held-for-sale","","$","52,897","","","$","1,256,532","","","4.2","%","","$","49,779","","","$","1,635,663","","","3.0","%","","$","19,985","","","$","538,580","","","3.7","%"],["Residential loans - HFI at Redwood (2)","","\u2014","","","\u2014","","","\u2014","%","","\u2014","","","\u2014","","","\u2014","%","","21,000","","","494,097","","","4.3","%"],["Residential loans - HFI at Legacy Sequoia (2)","","5,663","","","205,909","","","2.8","%","","4,709","","","254,830","","","1.8","%","","9,059","","","316,844","","","2.9","%"],["Residential loans - HFI at Sequoia (2)","","126,120","","","3,596,640","","","3.5","%","","74,025","","","1,983,936","","","3.7","%","","87,093","","","1,883,855","","","4.6","%"],["Residential loans - HFI at Freddie Mac SLST (2)","","65,822","","","1,651,215","","","4.0","%","","76,288","","","2,067,313","","","3.7","%","","85,609","","","2,209,182","","","3.9","%"],["BPL loans - HFS","","28,915","","","492,759","","","5.9","%","","14,443","","","294,634","","","4.9","%","","20,415","","","378,293","","","5.4","%"],["BPL loans - HFI","","118,624","","","1,552,745","","","7.6","%","","54,510","","","719,907","","","7.6","%","","60,252","","","842,296","","","7.2","%"],["BPL term loans - HFI at CAFL","","214,942","","","3,049,569","","","7.0","%","","201,838","","","3,404,933","","","5.9","%","","136,950","","","2,544,738","","","5.4","%"],["Multifamily loans - HFI at Freddie Mac K-Series","","18,938","","","445,062","","","4.3","%","","19,266","","","486,095","","","4.0","%","","54,813","","","1,404,068","","","3.9","%"],["Trading securities","","17,446","","","142,027","","","12.3","%","","22,783","","","146,328","","","15.6","%","","33,940","","","286,382","","","11.9","%"],["Available-for-sale securities","","20,262","","","136,898","","","14.8","%","","31,921","","","129,261","","","24.7","%","","15,665","","","140,783","","","11.1","%"],["Other interest income","","38,225","","","924,629","","","4.1","%","","25,364","","","817,808","","","3.1","%","","27,135","","","775,386","","","3.5","%"],["Total interest income","","707,854","","","13,453,985","","","5.3","%","","574,926","","","11,940,708","","","4.8","%","","571,916","","","11,814,504","","","4.8","%"],["Interest Expense"],["Short-term debt facilities","","(69,898)","","","1,651,503","","","(4.2)","%","","(37,714)","","","1,670,279","","","(2.3)","%","","(44,454)","","","1,188,487","","","(3.7)","%"],["Short-term debt - servicer advance financing","","(9,570)","","","234,173","","","(4.1)","%","","(4,867)","","","183,335","","","(2.7)","%","","(6,441)","","","201,175","","","(3.2)","%"],["Promissory notes","","(1,040)","","","15,376","","","(6.8)","%","","\u2014","","","\u2014","","","\u2014","%","","\u2014","","","\u2014","","","\u2014","%"],["Short-term debt - convertible notes, net","","(3,835)","","","72,787","","","(5.3)","%","","\u2014","","","\u2014","","","\u2014","%","","\u2014","","","\u2014","","","\u2014","%"],["ABS issued - Legacy Sequoia (2)","","(5,207)","","","204,372","","","(2.5)","%","","(3,040)","","","251,855","","","(1.2)","%","","(5,945)","","","312,351","","","(1.9)","%"],["ABS issued - Sequoia (2)","","(111,060)","","","3,361,050","","","(3.3)","%","","(59,949)","","","1,755,124","","","(3.4)","%","","(73,643)","","","1,681,490","","","(4.4)","%"],["ABS issued - Freddie Mac SLST (2)","","(52,901)","","","1,373,679","","","(3.9)","%","","(64,633)","","","1,805,744","","","(3.6)","%","","(66,859)","","","1,897,194","","","(3.5)","%"],["ABS issued - Freddie Mac K-Series","","(17,407)","","","413,223","","","(4.2)","%","","(17,686)","","","456,353","","","(3.9)","%","","(51,521)","","","1,324,678","","","(3.9)","%"],["ABS issued - CAFL","","(183,644)","","","3,115,246","","","(5.9)","%","","(160,493)","","","3,173,576","","","(5.1)","%","","(101,740)","","","2,363,624","","","(4.3)","%"],["Long-term debt facilities","","(51,456)","","","1,140,820","","","(4.5)","%","","(40,516)","","","794,144","","","(5.1)","%","","(45,318)","","","708,611","","","(6.4)","%"],["Long-term debt - FHLBC","","\u2014","","","\u2014","","","\u2014","%","","(2)","","","279","","","(0.7)","%","","(10,411)","","","589,269","","","(1.8)","%"],["Long-term debt - corporate","","(46,382)","","","694,991","","","(6.7)","%","","(37,849)","","","651,156","","","(5.8)","%","","(41,673)","","","693,838","","","(6.0)","%"],["Total interest expense","","(552,400)","","","12,277,220","","","(4.5)","%","","(426,749)","","","10,741,845","","","(4.0)","%","","(448,005)","","","10,960,717","","","(4.1)","%"],["Net Interest Income","","$","155,454","","","","","","","$","148,177","","","","","","","$","123,911"]] [[/GREPCENT_TABLE]] (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 available-for-sale 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 from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our consolidated Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia and the interest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia entities. Interest income from residential loans - HFI at Freddie Mac SLST and the interest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities. 71 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 [[GREPCENT_TABLE]] [["","","Change in Net Interest Income"],["","","For the Years Ended December 31,"],["","","2022","","2021"],["(In Thousands)","","Volume","","Rate","","Total","","Volume","","Rate","","Total"],["Net Interest Income for the Beginning of the Year","","","","","","$","148,177","","","","","","","$","123,911"],["Impact of Changes in Interest Income"],["Residential loans - HFS","","$","(11,538)","","","$","14,656","","","3,118","","","$","40,708","","","$","(10,915)","","","29,793"],["Residential loans - HFI at Redwood","","\u2014","","","\u2014","","","\u2014","","","(21,001)","","","\u2014","","","(21,001)"],["Residential loans - HFI at Legacy Sequoia","","(904)","","","1,858","","","954","","","(1,774)","","","(2,577)","","","(4,351)"],["Residential loans - HFI at Sequoia","","60,174","","","(8,079)","","","52,095","","","4,627","","","(17,695)","","","(13,068)"],["Residential loans - HFI at Freddie Mac SLST","","(15,355)","","","4,889","","","(10,466)","","","(5,498)","","","(3,824)","","","(9,322)"],["BPL loans - HFS","","9,712","","","4,760","","","14,472","","","(4,515)","","","(1,458)","","","(5,973)"],["BPL loans - HFI","","36,032","","","167","","","36,199","","","(14,192)","","","3,086","","","(11,106)"],["BPL term loans - HFI at CAFL","","(21,065)","","","34,169","","","13,104","","","46,293","","","18,595","","","64,888"],["BPL bridge loans - HFI at CAFL","","25,459","","","2,456","","","27,915","","","\u2014","","","5,364","","","5,364"],["Multifamily loans - HFI at Freddie Mac K-Series","","(1,626)","","","1,298","","","(328)","","","(35,836)","","","289","","","(35,547)"],["Trading securities","","(670)","","","(4,667)","","","(5,337)","","","(16,598)","","","5,441","","","(11,157)"],["Available-for-sale securities","","1,886","","","(13,545)","","","(11,659)","","","(1,282)","","","17,538","","","16,256"],["Other interest income","","3,313","","","9,548","","","12,861","","","1,485","","","(3,255)","","","(1,770)"],["Net changes in interest income","","85,418","","","47,510","","","132,928","","","(7,583)","","","10,589","","","3,006"],["Impact of Changes in Interest Expense"],["Short-term debt facilities","","424","","","(32,608)","","","(32,184)","","","(18,021)","","","24,764","","","6,743"],["Short-term debt - servicer advance financing","","(1,350)","","","(3,353)","","","(4,703)","","","571","","","1,003","","","1,574"],["Short-term debt - promissory note","","\u2014","","","(1,040)","","","(1,040)","","","\u2014","","","\u2014","","","\u2014"],["Short-term debt - convertible notes, net","","\u2014","","","(3,835)","","","(3,835)","","","\u2014","","","\u2014","","","\u2014"],["ABS issued - Legacy Sequoia","","573","","","(2,740)","","","(2,167)","","","1,151","","","1,754","","","2,905"],["ABS issued - Sequoia","","(54,853)","","","3,742","","","(51,111)","","","(3,225)","","","16,919","","","13,694"],["ABS issued - Freddie Mac SLST","","15,465","","","(3,733)","","","11,732","","","3,223","","","(997)","","","2,226"],["ABS issued - Freddie Mac K-Series","","1,671","","","(1,392)","","","279","","","33,772","","","63","","","33,835"],["ABS issued - CAFL","","2,950","","","(26,101)","","","(23,151)","","","(34,864)","","","(23,888)","","","(58,752)"],["Long-term debt facilities","","(17,687)","","","6,747","","","(10,940)","","","(5,470)","","","10,272","","","4,802"],["Long-term debt - FHLBC","","2","","","\u2014","","","2","","","10,406","","","3","","","10,409"],["Long-term debt - corporate","","(2,548)","","","(5,985)","","","(8,533)","","","2,564","","","1,260","","","3,824"],["Net changes in interest expense","","(55,353)","","","(70,298)","","","(125,651)","","","(9,893)","","","31,153","","","21,260"],["Net changes in interest income and expense","","30,065","","","(22,788)","","","7,277","","","(17,476)","","","41,742","","","24,266"],["Net Interest Income for the Year Ended","","","","","$","155,454","","","","","","","$","148,177"]] [[/GREPCENT_TABLE]] 72 Net Interest Income by Segment The following table presents the components of net interest income by segment for the years ended December 31, 2022, 2021, and 2020. Table 5 – Net Interest Income by Segment [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","Changes"],["(In Thousands)","","2022","","2021","","2020","","","'22/'21","","'21/'20"],["Net Interest Income by Segment"],["Residential Mortgage Banking","","$","12,467","","","$","21,990","","","$","5,861","","","","$","(9,523)","","","$","16,129"],["Business Purpose Mortgage Banking","","10,633","","","6,824","","","6,055","","","","3,809","","","769"],["Investment Portfolio","","181,980","","","155,538","","","150,479","","","","26,442","","","5,059"],["Corporate/Other","","(49,626)","","","(36,175)","","","(38,484)","","","","(13,451)","","","2,309"],["Net Interest Income","","$","155,454","","","$","148,177","","","$","123,911","","","","$","7,276","","","$","24,266"]] [[/GREPCENT_TABLE]] 73 Results of Operations by Segment Overview We report on our business using three segments: Residential Mortgage Banking, Business Purpose 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, 2022, 2021, and 2020. Table 6 – Segment Results Summary [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","Changes"],["(In Thousands)","","2022","","2021","","2020","","","'22/'21","","'21/'20"],["Segment Contribution from:"],["Residential Mortgage Banking","","$","(21,578)","","","$","82,414","","","$","(8,989)","","","","$","(103,992)","","","$","91,403"],["Business Purpose Mortgage Banking","","(44,285)","","","38,528","","","(67,726)","","","","(82,813)","","","106,254"],["Investment Portfolio","","(9,131)","","","293,230","","","(438,883)","","","","(302,361)","","","732,113"],["Corporate/Other","","(88,526)","","","(94,559)","","","(66,249)","","","","6,033","","","(28,310)"],["Net Income (Loss)","","$","(163,520)","","","$","319,613","","","$","(581,847)","","","","$","(483,133)","","","$","901,460"]] [[/GREPCENT_TABLE]] The sections that follow provide further detail on our three business segments and their results of operations for the year ended December 31, 2022. Corporate/Other 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. The $28 million increase in net expense from Corporate/Other in 2021 was primarily due to a $24 million increase in general and administrative expense in 2021 and a $25 million gain associated with the repurchase of $125 million of convertible debt in the second quarter of 2020, partially offset by a $19 million benefit from income taxes in 2021. The increase in general and administrative expenses primarily resulted from increased accruals of variable compensation expense associated with improved financial results and a higher headcount in 2021 as compared to 2020, as well as higher long-term incentive award expense from awards granted in the second half of 2020, including retention related awards, and awards granted in early 2021 as part of our regular annual compensation process. 74 Residential Mortgage Banking Segment Net income from this segment is primarily comprised of net interest income earned on loans while they are held in inventory, mortgage banking activities income (including mark-to-market adjustments on loans from the time they are purchased to when they are sold or securitized, mark-to-market adjustments on new and outstanding loan purchase commitments and gains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate securities that we retain from our Sequoia securitizations (many of which we consolidate for GAAP purposes) are transferred to and held in our Investment Portfolio segment. The following table provides the activity of residential loans held in inventory for sale at our mortgage banking business during the years ended December 31, 2022 and 2021. Table 7 – Loan Inventory for Residential Mortgage Banking Operations — Activity [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(In Thousands)","","2022","","2021"],["Balance at beginning of period","","$","1,673,236","","","$","176,641"],["Acquisitions","","3,590,055","","","12,939,263"],["Sales","","(3,781,560)","","","(8,449,329)"],["Transfers between segments(1)","","(684,491)","","","(3,035,095)"],["Principal repayments","","(93,917)","","","(41,458)"],["Changes in fair value, net","","(75,164)","","","83,214"],["Balance at End of Period","","$","628,160","","","$","1,673,236"]] [[/GREPCENT_TABLE]] (1)Represents the fair value of loans transferred from held-for-sale at our Residential 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, 2022, our residential mortgage loan conduit locked $4.14 billion of loans, ($2.75 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), including $3.62 billion of Select loans and $526 million of Choice loans, and purchased $3.59 billion of loans. During the year ended December 31, 2022, we distributed $3.81 billion of loans (unpaid principal balance) through whole loan sales and completed one securitization backed by $687 million of loans (unpaid principal balance). At December 31, 2022, our Residential Mortgage Banking operations had total net jumbo loan exposure of $659 million, with an average gross mortgage rate of 5.1%. This balance included $658 million (principal value) of loans in inventory on our balance sheet and $12 million of loans identified for purchase (locked loans, unadjusted for fallout), net of $9 million of forward loan sale agreements and $3 million of loans paid in full. Given the evolving market conditions over the past year, we reduced capital allocated to our Residential Mortgage Banking segment by 70% throughout 2022 and expect to maintain a lower allocation to this segment for the foreseeable future. As we look ahead, we expect conditions in the consumer residential sector to remain challenging as industry volumes continue to be affected by elevated mortgage rates, which, along with record home price appreciation in recent years, has pushed housing affordability to new lows. 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, 2022, we had residential warehouse facilities outstanding with seven different counterparties, with $2.55 billion of total capacity and $1.85 billion 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 $1.38 billion of total capacity and marginable facilities with $1.18 billion of total capacity. 75 The following table presents key earnings and operating metrics for our Residential Mortgage Banking segment for the years ended December 31, 2022, 2021 and 2020. Table 8 – Residential Mortgage Banking Earnings Summary and Operating Metrics [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(In Thousands)","","2022","","2021","","2020"],["Mortgage banking (loss) income","","$","(8,815)","","","$","149,141","","","$","9,582"],["Operating expenses","","(25,577)","","","(40,950)","","","(23,138)"],["Benefit from (provision for) income taxes","","12,814","","","(25,777)","","","4,567"],["Segment Contribution","","$","(21,578)","","","$","82,414","","","$","(8,989)"],["Loan purchase commitments entered into (loan locks, adjusted for expected fallout)","","$","2,751,117","","","$","11,520,508","","","$","4,817,150"]] [[/GREPCENT_TABLE]] Residential 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. 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 2022 for this segment. These decreases were partially offset by lower operating expenses, including primarily lower variable compensation expenses associated with lower earnings in 2022 compared to 2021. As part of our expense management initiatives, we reduced headcount in this segment in the fourth quarter of 2022 and have made further headcount reductions in the first quarter of 2023, which along with other reductions in variable expenses, should reduce our going-forward run rate expenses for this segment into 2023. Activity at this segment is performed within our taxable REIT subsidiary, and the benefit for income taxes in 2022 reflects the losses incurred by this segment during the year. 76 Business Purpose Mortgage Banking Segment Net income from this segment is primarily comprised of net interest income earned on loans while they are held in inventory, mortgage banking activities income (comprised of mark-to-market adjustments on loans from the time they are originated or purchased until they are sold, securitized or transferred into our investment portfolio, gains/losses from associated hedges, and other miscellaneous income/expenses), and all direct expenses associated with these activities. Subordinate securities that we retain from our CAFL securitizations (which we consolidate for GAAP purposes) and most BPL bridge loans we originate in this segment are transferred to and held in our Investment Portfolio segment. On July 1, 2022, we closed the acquisition of Riverbend, a private mortgage lender to investors in transitional residential and multifamily real estate. This acquisition added capacity, product breadth and geographic footprint to our existing bridge loan origination platform. See Note 2 in Part II, Item 8 of this Annual Report on Form 10-K, for additional detail on this acquisition. The following table provides the business purpose loan origination activity at Redwood during the years ended December 31, 2022 and 2021. Table 9 – Business Purpose Loans — Funding Activity [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2022","","Year Ended December 31, 2021"],["(In Thousands)","","BPL Term","","BPL Bridge (1)","","Total","","BPL Term","","BPL Bridge (1)","","Total"],["Fair value at beginning of period","","$","358,309","","","$","\u2014","","","$","358,309","","","$","245,394","","","$","\u2014","","","$","245,394"],["Fundings","","1,101,846","","","1,736,038","","","2,837,884","","","1,327,001","","","960,223","","","2,287,224"],["Sales","","(415,656)","","","(77,536)","","","(493,192)","","","(201,629)","","","(2,484)","","","(204,113)"],["Transfers between segments (2)","","(561,218)","","","(1,707,084)","","","(2,268,302)","","","(1,023,988)","","","(962,573)","","","(1,986,561)"],["Principal repayments","","(38,564)","","","(7,749)","","","(46,313)","","","(62,209)","","","\u2014","","","(62,209)"],["Riverbend loans acquired at acquisition","","\u2014","","","59,748","","","59,748","","","\u2014","","","\u2014","","","\u2014"],["Changes in fair value, net","","(85,926)","","","1,865","","","(84,061)","","","73,740","","","4,834","","","78,574"],["Fair Value at End of Period","","$","358,791","","","$","5,282","","","$","364,073","","","$","358,309","","","$","\u2014","","","$","358,309"]] [[/GREPCENT_TABLE]] (1)We originate BPL bridge loans at our TRS and then transfer them to our REIT. 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). For BPL bridge loans held at our REIT that are transferred into our CAFL bridge securitizations, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income. Once loans are transferred into a securitization, any changes in fair value are 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)For BPL term loans, amounts represent transfers of loans from held-for-sale at our Business Purpose Mortgage Banking segment to held-for-investment at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP. BPL Bridge loan amounts represent the transfer of loans originated or acquired by our Business Purpose 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, 2022, we funded $1.10 billion of BPL term loans, sold $416 million of such loans to third parties and securitized $588 million of loans through two separate transactions, including a private securitization of $274 million of loans with a large global institutional investor. During the year ended December 31, 2022, we funded $1.74 billion of BPL bridge loans, including $60 million of loans assumed through the Riverbend acquisition, sold $78 million of loans to third parties and transferred the remaining loans to our Investment Portfolio segment. During the year ended December 31, 2022, we completed one business purpose loan securitization backed by approximately $250 million of BPL bridge loans that includes a 24-month revolving feature. At December 31, 2022, we had $359 million of BPL term loans and $5 million of BPL bridge loans held-for-sale on our balance sheet. 77 BPL term loan funding volumes declined through most of 2022 and bridge loan funding volumes increased in 2022, as borrowers preferred to utilize shorter-term fully prepayable BPL bridge loans given the higher rate environment. However, we did see a recovery in term loan volumes from the third to fourth quarters of 2022 driven by renewed demand for longer-term fixed rate financing. Given the changing market conditions, we reduced our capital allocation to Business Purpose Mortgage Banking to $100 million during the third quarter of 2022, down from $150 million at the end of the end of 2021 (excluding capital associated with goodwill and intangibles), and held it there through the end of 2022. 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, 2022, we had business purpose warehouse facilities outstanding with six different counterparties, with $3.24 billion of total capacity (used for both BPL term and BPL bridge loans) and $1.78 billion of available capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent). The following table presents an earnings summary for our Business Purpose Mortgage Banking segment for the years ended December 31, 2022, 2021 and 2020. Table 10 – Business Purpose Mortgage Banking Earnings Summary [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(In Thousands)","","2022","","2021","","2020"],["Mortgage banking income","","$","21,765","","","$","116,463","","","$","83,804"],["Operating expenses","","(79,207)","","","(69,813)","","","(147,467)"],["Benefit from income taxes","","13,157","","","(8,122)","","","(4,063)"],["Segment Contribution","","$","(44,285)","","","$","38,528","","","$","(67,726)"]] [[/GREPCENT_TABLE]] Business purpose 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), 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 for this segment. The decrease in contribution from our Business Purpose Mortgage Banking segment in 2022 was attributable to lower mortgage banking income and higher operating expenses. In the preceding Consolidated Results of Operations section, we discussed the major factors impacting the change in net interest income and mortgage banking activities for our Business Purpose Mortgage Banking segment in 2022. While we have observed an improvement in market conditions to begin 2023, including increased demand for business purpose loan products and spread tightening, further rate volatility could cause a re-widening of spreads, which would negatively impact our margins and profitability at this business. General and administrative expenses increased during 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 business. 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 $7 million of employee severance and transition-related expenses at this segment in the second half of 2022, associated with the previously discussed expense management initiatives. As previously discussed, our expense management initiatives continued into the first quarter of 2023, including additional reductions in headcount at this segment, which should reduce our going-forward run-rate expenses for this segment into 2023. Activity at this segment is performed within our taxable REIT subsidiary, and the benefit from income taxes in 2022 was due to an overall GAAP loss incurred by this segment in 2022. 78 Investment Portfolio Segment Net income from this segment is primarily comprised of net interest income and other income earned on our investments and all direct expenses associated with these activities. The following table presents details of our Investment Portfolio at December 31, 2022 and December 31, 2021 organized by investments organically created through our mortgage banking segments and acquired from third-parties. Amounts presented in the table represent our retained economic interests in consolidated Sequoia, CAFL Term, Freddie Mac SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted. Table 11 – Investment Portfolio - Detail of Economic Interests [[GREPCENT_TABLE]] [["(In Thousands)","","December 31, 2022","","December 31, 2021"],["Organic Residential Investments"],["Residential loans at Redwood (1)","","$","152,621","","","$","172,047"],["Residential securities at Redwood","","103,089","","","143,838"],["Residential securities at consolidated Sequoia entities (2)","","219,299","","","245,417"],["Other investments (3)","","48,972","","","12,438"],["Organic Business Purpose Investments"],["BPL Bridge loans","","2,023,529","","","944,606"],["BPL term loan securities at consolidated CAFL Term entities (4)","","303,897","","","301,506"],["Other investments","","705","","","5,935"],["Third-Party Investments"],["Residential securities at Redwood","","124,567","","","195,930"],["Residential securities at consolidated Freddie Mac SLST entities (5)","","322,803","","","444,751"],["Multifamily securities at Redwood","","12,674","","","32,715"],["Multifamily securities at consolidated Freddie Mac K-Series entities (6)","","31,767","","","31,657"],["Servicing investments (7)","","90,120","","","102,540"],["HEIs (8)","","283,897","","","43,638"],["Other investments","","7,081","","","10,400"],["Total Segment Investments","","$","3,725,021","","","$","2,687,418"]] [[/GREPCENT_TABLE]] (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 $3.19 billion of loans and $2.97 billion of ABS issued associated with these investments at December 31, 2022. We consolidated $3.63 billion of loans and $3.38 billion of ABS issued associated with these investments at December 31, 2021. (3)Organic residential other investments at December 31, 2022 includes net risk share investments of $24 million, representing $30 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 $2.94 billion of loans and $2.64 billion of ABS issued associated with these investments at December 31, 2022. We consolidated $3.49 billion of loans and $3.21 billion of ABS issued associated with these investments at December 31, 2021. (5)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $1.46 billion of loans and $1.14 billion of ABS issued associated with these investments at December 31, 2022. We consolidated $1.89 billion of loans and $1.45 billion of ABS issued associated with these investments at December 31, 2021. (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 $393 million of ABS issued associated with these investments at December 31, 2022. We consolidated $474 million of loans and $442 million of ABS issued associated with these investments at December 31, 2021. (7)Represents our economic investment in consolidated Servicing Investment variable interest 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. At December 31, 2021, for GAAP purposes, we consolidated $385 million of servicing investments and $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. (8)At December 31, 2022, represents HEIs owned at Redwood of $271 million and our retained economic investment in securities issued by the consolidated HEI securitization entity of $13 million. At December 31, 2021, for GAAP purposes, we consolidated $160 million of HEIs and $137 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity. 79 The growth in our investment portfolio during 2022 was primarily attributable to a net increase in BPL bridge loans, and incremental investments in HEIs through our third-party flow purchase agreements. See the "Investments Detail and Activity" section that follows for additional detail on our portfolio investments and their associated borrowings. The following table presents an earnings summary for our Investment Portfolio segment for the years ended December 31, 2022, 2021 and 2020. Table 12 – Investment Portfolio Earnings Summary [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(In Thousands)","","2022","","2021","","2020"],["Net interest income","","$","181,980","","","$","155,538","","","$","150,479"],["Investment fair value changes, net (1)","","(191,148)","","","129,614","","","(586,204)"],["Other income, net","","18,596","","","10,021","","","(1,725)"],["Realized gains, net","","3,174","","","17,993","","","5,242"],["Operating expenses","","(15,682)","","","(16,074)","","","(10,779)"],["Benefit from (Provision for) income taxes","","(6,051)","","","(3,862)","","","4,104"],["Segment Contribution","","$","(9,131)","","","$","293,230","","","$","(438,883)"]] [[/GREPCENT_TABLE]] (1)Investment fair value changes 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)). The decrease in contribution from this segment during 2022 was primarily attributable to negative investment fair value changes, as discussed in the preceding Consolidated Results of Operations section of this MD&A. We note our consolidated investment fair value changes include positive fair value changes from our strategic investments, which are not included within our investment portfolio segment. These decreases were partially offset by higher net interest income in 2022, as discussed in the Consolidated Results of Operations section of this MD&A, as well as from higher other income in 2022, which was primarily driven by higher income on our MSR investments as previously discussed. As previously discussed, during 2022, negative investment fair value changes primarily reflected spread widening across our investment portfolio, as credit performance of assets underlying our investments generally improved or remained stable. In addition to our excess MSR investments, we also own interest-only securities within our trading securities, and in consolidated Sequoia, Freddie Mac SLST, and CAFL entities. As a matter of course, these investments experience negative fair value changes each quarter for the reduction in their basis from the receipt of regular cash interest payments. During 2022, this negative fair value change was partially or completely offset by positive valuation changes from rising interest rates and slower current and expected prepayment speeds. Other income within this segment is primarily comprised of income (loss) from our MSR investments, bridge loan fees, risk share investment income and FHLBC capital stock dividends. 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. In 2022, we realized gains of $3 million from calls of AFS securities. For 2021, we realized gains of $18 million, including $16 million of gains resulting from calls of seven seasoned Sequoia securitizations, and $1.5 million of net gains from the sale of $11 million of AFS securities. The decrease in operating expenses in 2022 at this segment was primarily attributable to lower general and administrative expenses resulting from a decrease in variable compensation expense associated with the decline in financial results in 2022. We hold certain investments, primarily our MSRs, at our taxable REIT subsidiary. Our provision for (benefit from) income taxes changes in relation to the amount of income earned from these assets, and for 2022 and 2021 generally reflects positive income earned in those years. 80 Investments Detail and Activity This section presents additional details on our investment assets and their activity during 2022 and 2021. Real Estate Securities Portfolio The following table sets forth our real estate securities activity by collateral type for the years ended December 31, 2022 and 2021. Table 13 – Real Estate Securities Activity by Collateral Type (1) [[GREPCENT_TABLE]] [["Year Ended December 31, 2022","","Residential","","Multifamily","","Total"],["(In Thousands)","","Senior","","Mezzanine","","Subordinate","","Mezzanine"],["Beginning fair value","","$","21,787","","","$","\u2014","","","$","322,909","","","$","32,715","","","$","377,411"],["Acquisitions","","5,006","","","\u2014","","","10,000","","","\u2014","","","15,006"],["Sales","","(14,334)","","","\u2014","","","(14,541)","","","(2,854)","","","(31,729)"],["Gains on sales and calls, net","","\u2014","","","\u2014","","","1,914","","","594","","","2,508"],["Effect of principal payments (2)","","\u2014","","","\u2014","","","(16,281)","","","(14,321)","","","(30,602)"],["Change in fair value, net","","16,408","","","\u2014","","","(105,067)","","","(3,460)","","","(92,119)"],["Ending Fair Value","","$","28,867","","","$","\u2014","","","$","198,934","","","$","12,674","","","$","240,475"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Year Ended December 31, 2021","","Residential","","Multifamily","","Total"],["(In Thousands)","","Senior","","Mezzanine","","Subordinate","","Mezzanine"],["Beginning fair value","","$","28,464","","","$","5,663","","","$","260,743","","","$","49,255","","","$","344,125"],["Acquisitions","","8,737","","","\u2014","","","60,350","","","8,930","","","78,017"],["Sales","","\u2014","","","(5,724)","","","(33,863)","","","\u2014","","","(39,587)"],["Gains on sales and calls, net","","\u2014","","","60","","","17,033","","","\u2014","","","17,093"],["Effect of principal payments (2)","","\u2014","","","(26)","","","(34,365)","","","(23,209)","","","(57,600)"],["Change in fair value, net","","(15,414)","","","27","","","53,011","","","(2,261)","","","35,363"],["Ending Fair Value","","$","21,787","","","$","\u2014","","","$","322,909","","","$","32,715","","","$","377,411"]] [[/GREPCENT_TABLE]] (1)Amounts presented in this table include securities reported on our balance sheet and do not include securities we own in consolidated entities. See the following table for a presentation of all securities we own, including those in consolidated entities. (2)Effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security. At December 31, 2022, our securities consisted of fixed-rate assets (93%), adjustable-rate assets (4%) and hybrid assets that reset within the next year (3%). 81 The following table sets forth activity in our real estate securities portfolio for the year ended December 31, 2022 organized by investments organically created through our mortgage banking segments and acquired from third-parties. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP. Table 14 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities [[GREPCENT_TABLE]] [["For the Year Ended December 31, 2022","","Residential Organic","","Business Purpose Organic","","Third-Party Investments","","Total"],["","Sequoia Securities on Balance Sheet","","Consolidated Sequoia Securities","","Consolidated CAFL Securities","","Consolidated SLST Securities","","Consolidated Multifamily Securities","","Other Third-Party Securities"],["(In Thousands)"],["Beginning fair value (1)","","$","145,757","","","$","245,417","","","$","301,506","","","$","444,751","","","$","31,657","","","$","231,654","","","$","1,400,742"],["Acquisitions","","\u2014","","","3,742","","","37,290","","","\u2014","","","\u2014","","","15,006","","","56,038"],["Sales","","(3,854)","","","(612)","","","\u2014","","","\u2014","","","\u2014","","","(27,875)","","","(32,341)"],["Gains on sales and calls, net","","284","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","2,224","","","2,508"],["Effect of principal payments (2)","","(10,839)","","","(5,198)","","","\u2014","","","(44,740)","","","\u2014","","","(19,763)","","","(80,540)"],["Change in fair value, net","","(28,259)","","","(24,050)","","","(34,899)","","","(77,208)","","","110","","","(63,860)","","","(228,166)"],["Ending Fair Value","","$","103,089","","","$","219,299","","","$","303,897","","","$","322,803","","","$","31,767","","","$","137,386","","","$","1,118,241"]] [[/GREPCENT_TABLE]] (1)At December 31, 2021, $5 million of securities used as hedges for our residential mortgage banking operations are included within the "Sequoia Securities on balance sheet" and "Other third-party securities" column of this table. These same securities are presented as a component of securities within our residential lending segment on our segment balance sheet. These securities were sold during 2022. (2)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. During 2022, we retained $37 million of securities from two BPL term loan securitizations and $4 million of securities from one Sequoia securitization. At December 31, 2022, our securities owned at Redwood and in consolidated entities consisted of fixed-rate assets (98%), adjustable-rate assets (1%), and hybrid assets that reset within the next year (1%). We directly finance our holdings of real estate securities with a combination of non-recourse debt, non-marginable term debt and marginable debt in the form of repurchase (or “repo”) financing. At December 31, 2022, real estate securities with a fair value of $416 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with $301 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities, re-performing loan securities with a fair value of $323 million (including securities owned in consolidated securitization entities) were financed with $85 million of non-recourse securitization debt, and real estate securities with a fair value of $178 million (including securities owned in consolidated securitization entities) were financed with $125 million of short-term debt incurred through repurchase facilities with seven different counterparties. The remaining $202 million of securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital. 82 The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at December 31, 2022. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP. Table 15 – Credit Statistics of Real Estate Securities Owned at Redwood and in Consolidated Entities [[GREPCENT_TABLE]] [["December 31, 2022","","","","","","","","Weighted Average Values"],["","Market Value - IO Securities","","Market Value - Non-IO Securities","","Principal Balance - Non-IO Securities","","Coupon","","90+ Delinquency","","3-Month Prepayment Rate","","Investment Thickness(1)"],["(Dollars in Thousands)"],["Sequoia securities on balance sheet","","$","28,722","","","$","74,367","","","$","140,050","","","3.8","%","","0.4","%","","7","%","","7","%"],["Consolidated Sequoia securities","","25,615","","","193,684","","","245,130","","","4.7","%","","1.5","%","","7","%","","42","%"],["Total Sequoia Securities","","54,337","","","268,051","","","385,180","","","4.4","%","","1.2","%","","7","%","","31","%"],["Consolidated Freddie Mac SLST securities","","18,963","","","303,840","","","487,572","","","4.5","%","","12.3","%","","6","%","","29","%"],["RPL securities on balance sheet","","143","","","29,002","","","142,556","","","4.3","%","","3.5","%","","6","%","","2","%"],["Total RPL Securities","","19,106","","","332,842","","","630,128","","","4.5","%","","11.6","%","","6","%","","26","%"],["Consolidated Freddie Mac K-Series securities","","\u2014","","","31,767","","","36,468","","","4.3","%","","\u2014","%","","\u2014","%","","10","%"],["Multifamily securities on balance sheet","","86","","","12,588","","","13,778","","","4.5","%","","0.1","%","","2","%","","8","%"],["Total Multifamily Securities","","86","","","44,355","","","50,246","","","4.3","%","","\u2014","%","","1","%","","10","%"],["Consolidated CAFL securities","","31,813","","","272,084","","","423,266","","","5.3","%","","2.5","%","","4","%","","17","%"],["Other third-party securities","","14","","","95,553","","","141,142","","","3.5","%","","0.6","%","","7","%","","3","%"],["Total Securities","","$","105,356","","","$","1,012,885","","","$","1,629,962"]] [[/GREPCENT_TABLE]] (1)Investment thickness represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. We generally own first loss positions in Sequoia, RPL and CAFL securities. We own both first loss and mezzanine positions (positions credit enhanced by subordinate securities) in multifamily and other third-party securities. We primarily target investments that have a sensitivity to housing credit risk, typically sourced through our operating businesses where we control the underwriting and review of underlying collateral, or investments sourced through third-parties that support our long-term thesis on the outlook for housing credit. During 2022, our investment portfolio continued to demonstrate solid performance across a range of credit metrics, including loan delinquencies which generally remained stable, and loan-to-value ratios (LTVs), which declined or remained stable. Given the seasoned nature of our investments (particularly within our RPL securities and Sequoia securities), many of these investments are supported by substantial home price appreciation and borrower equity in the underlying homes. 83 BPL Bridge Loans Held-for-Investment The following table provides the activity of BPL bridge loans held-for-investment at Redwood during the years ended December 31, 2022 and 2021. Table 16 – BPL Bridge Loans Held-for-Investment - Activity [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(In Thousands)","","2022","","2021"],["Fair value at beginning of period","","$","944,606","","","$","641,765"],["Sales","","(2,280)","","","(7,000)"],["Transfers between portfolios (1)","","1,707,084","","","962,573"],["Transfers to REO","","(3,974)","","","(15,424)"],["Principal repayments","","(615,401)","","","(639,479)"],["Changes in fair value, net","","(6,506)","","","2,171"],["Fair Value at End of Period","","$","2,023,529","","","$","944,606"]] [[/GREPCENT_TABLE]] (1)We originate BPL bridge loans at our TRS and then transfer them to our REIT. 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). For BPL bridge loans held at our REIT that are transferred into our CAFL bridge securitizations, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into these securitizations, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). Our $2.02 billion of BPL bridge loans held-for-investment at December 31, 2022 were comprised of first-lien, interest-only loans with a weighted average coupon of 9.63% and original maturities of six to 36 months. At origination, the weighted average FICO score of borrowers backing these loans was 743 and the weighted average LTV ratio of these loans was 66%. At December 31, 2022, of the 3,476 loans in this portfolio, 48 of these loans with an aggregate fair value of $29 million and an aggregate unpaid principal balance of $34 million were in foreclosure, of which 49 loans with an aggregate fair value of $30 million and an unpaid principal balance of $34 million were greater than 90 days delinquent. 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, 2022, we had two bridge loan securitizations with a combined total borrowing capacity of $550 million, which included respective original 24-month and 30-month revolving features that allow us to add additional loans into the entities to be financed, as loans within the entities pay down. At December 31, 2022, we had $478 million of debt outstanding in these securitization entities, secured by $561 million of loans and other assets, $424 million of debt incurred through short-term warehouse facilities with four different counterparties, which was secured by $580 million of loans, and $723 million of debt incurred through long-term facilities with three different counterparties, which was secured by $898 million of loans. The following table provides the composition of BPL bridge loans held-for-investment by product type as of December 31, 2022 and 2021. Table 17 – BPL Bridge Loans Held-for-Investment - By Product Type [[GREPCENT_TABLE]] [["(In Thousands)","","December 31, 2022","","December 31, 2021"],["Multifamily","","$","1,055,533","","","$","326,004"],["Renovate / Build to rent","","736,368","","","375,729"],["Fix and Flip","","105,157","","","150,928"],["Other","","126,471","","","91,945"],["Fair Value at End of Period","","$","2,023,529","","","$","944,606"]] [[/GREPCENT_TABLE]] 84 Residential Loans During 2021 and 2022, we called several of our unconsolidated Sequoia securitizations and purchased loans from the associated securitization trusts and held those loans for sale within our Investment Portfolio segment. The following table provides the activity of residential loans held at our investment portfolio during the years ended December 31, 2022 and 2021. Table 18 – Investment Portfolio Residential Loans - Activity [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(In Thousands)","","2022","","2021"],["Fair value at beginning of period","","$","172,048","","","$","\u2014"],["Acquisitions","","102,258","","","200,890"],["Sales","","(48,759)","","","\u2014"],["Principal repayments","","(56,238)","","","(31,654)"],["Changes in fair value, net","","(16,688)","","","2,812"],["Fair Value at End of Period","","$","152,621","","","$","172,048"]] [[/GREPCENT_TABLE]] At December 31, 2022, we had entered into a commitment to sell $135 million of the outstanding loans, for which the sale settled in January 2023. Home Equity Investments The following table provides the activity of HEI held at our investment portfolio during the years ended December 31, 2022 and 2021. Table 19 – HEI - Activity [[GREPCENT_TABLE]] [["Home Equity Investments(1)","","","","Years Ended December 31,"],["(In Thousands)","","2022","","2021"],["Balance at beginning of period","","","","$","192,740","","","$","42,440"],["New/additional investments","","","","248,218","","","155,023"],["Sales/distribution","","","","\u2014","","","\u2014"],["Repayments","","","","(42,744)","","","(19,396)"],["Changes in fair value, net","","","","5,248","","","14,673"],["Balance at End of Period","","","","$","403,462","","","$","192,740"]] [[/GREPCENT_TABLE]] (1)Our home equity investments presented in this table as of December 31, 2022, included $271 million of HEIs owned directly at Redwood and $133 million of HEIs owned in our consolidated HEI securitization entity. At December 31, 2022, our economic investment in the consolidated HEI securitization entity was $13 million (for GAAP purposes, we consolidated $133 million of HEIs and $101 million of ABS issued, as well as other assets and liabilities for this entity). Changes in fair value, net for HEIs primarily reflect changes in actual and expected home price appreciation (HPA). While home prices generally increased during the first half of 2022, in the second half of 2022, some geographic regions began experiencing home price declines leading to a downward adjustment of our HPA assumptions, which negatively affected HEI valuations. Additional details on our HEIs is included in Note 10 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Annual Report on Form 10-K. In the fourth quarter of 2022, we entered into a recourse, non-marginable warehouse facility to finance HEI. At December 31, 2022, we had $112 million of debt outstanding on this warehouse facility, secured by $191 million of HEI. 85 Other Investments The following table sets forth our other investments activity by significant asset type for the years ended December 31, 2022 and December 31, 2021. Table 20 – Other Investments at Investment Portfolio Segment - Activity (1) [[GREPCENT_TABLE]] [["For the Year Ended December 31, 2022"],["","","ServicingInvestments(2)","","MSRs andExcessServicing(2)","","Other","","Total"],["(In Thousands)"],["Balance at beginning of period","","$","350,923","","","$","56,669","","","$","5,935","","","$","413,527"],["New/additional investments","","\u2014","","","4,638","","","\u2014","","","4,638"],["Sales/distributions/repayments","","\u2014","","","\u2014","","","(5,995)","","","(5,995)"],["Servicer advances (repayments), net","","(70,589)","","","\u2014","","","\u2014","","","(70,589)"],["Changes in fair value, net","","(11,075)","","","3,358","","","765","","","(6,952)"],["Other","","\u2014","","","(209)","","","\u2014","","","(209)"],["Balance at End of Period","","$","269,259","","","$","64,456","","","$","705","","","$","334,420"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["For the Year Ended December 31, 2021"],["","","ServicingInvestments(2)","","MSRs andExcessServicing(2)","","Other","","Total"],["(In Thousands)"],["Balance at beginning of period","","$","231,489","","","$","43,233","","","$","26,563","","","$","301,285"],["New/additional investments","","196,583","","","24,896","","","\u2014","","","221,479"],["Sales/distributions/repayments","","\u2014","","","\u2014","","","(21,947)","","","(21,947)"],["Servicer advances (repayments), net","","(76,223)","","","\u2014","","","\u2014","","","(76,223)"],["Changes in fair value, net","","(926)","","","(11,204)","","","1,242","","","(10,888)"],["Other","","\u2014","","","(256)","","","77","","","(179)"],["Balance at End of Period","","$","350,923","","","$","56,669","","","$","5,935","","","$","413,527"]] [[/GREPCENT_TABLE]] (1)Excludes $57 million of Strategic investments which are included in Corporate/Other. (2)Our servicing investments are owned through our consolidated Servicing Investment 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). At December 31, 2021, our economic investment in these entities was $103 million (for GAAP purposes, we consolidated $385 million of servicing investments, $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities). 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, which in 2022, was more than offset by a positive impact to fair value from a decrease in actual and forecasted prepayment speeds, and in 2021 saw further negative fair value changes resulting from an increase 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. 86 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 2022, our Board of Directors declared a regular dividend of $0.23 per share for the fourth quarter of 2022, which was paid on December 28, 2022 to shareholders of record on December 20, 2022. At December 31, 2021, our full-year dividend distributions of $0.92 per share 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 2022 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 $4.06 billion and $2.94 billion, respectively, at December 31, 2022. The GAAP basis in assets and liabilities at the REIT was $11.33 billion and $10.25 billion, respectively, at December 31, 2022. 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 2022 dividend distributions are expected to be characterized for federal income tax purposes as 58% ordinary dividend income and 42% qualified dividends. Under the federal income tax rules applicable to REITs, none of the 2022 dividend distributions are expected to be characterized as a return of capital or long-term capital gain dividend income. The income or loss generated at our TRS does not directly affect the tax characterization of our 2022 dividends; however, the $45 million dividend paid from our TRS to our REIT allowed a portion of our REIT’s dividends to be classified as qualified dividends. Tax Provision under GAAP For the years ended December 31, 2022, 2021, and 2020, we recorded a tax benefit of $20 million, a tax provision of $18 million and a tax benefit of $5 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 2022 slightly exceeded the federal statutory corporate tax rate due to state taxes. Realization of our deferred tax assets ("DTAs") 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, 2021, we reported net federal ordinary and capital DTAs with no valuation allowance recorded against them. As we experienced full-year 2022 GAAP losses at our TRS, 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 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. 87 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 business, financial results, or liquidity. 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, 2022. Table 21 - Net Operating and Capital Loss Carryforwards [[GREPCENT_TABLE]] [["","","Loss Carryforward Expiration by Period"],["","","1 to 3","","3 to 5","","5 to 15","","After 15","","No"],["(In Thousands)","Years","Years","Years","Years","Expiration","","Total"],["REIT Loss Carryforwards"],["Net operating loss","","$","\u2014","","","$","\u2014","","","$","(28,684)","","","$","\u2014","","","$","(8,757)","","","$","(37,441)"],["Capital loss","","(289,806)","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(289,806)"],["Total REIT Loss Carryforwards","","$","(289,806)","","","$","\u2014","","","$","(28,684)","","","$","\u2014","","","$","(8,757)","","","$","(327,247)"],["TRS Loss Carryforwards"],["Net operating loss","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","(88,841)","","","$","(88,841)"],["Capital loss","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total TRS Loss Carryforwards","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","(88,841)","","","$","(88,841)"],["California Combined Loss Carryforwards"],["Net operating loss","","$","\u2014","","","$","\u2014","","","$","(1,110,664)","","","$","(89,719)","","","$","\u2014","","","$","(1,200,383)"],["Capital loss","","(201,371)","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(201,371)"],["Total California Combined Loss Carryforwards","","$","(201,371)","","","$","\u2014","","","$","(1,110,664)","","","$","(89,719)","","","$","\u2014","","","$","(1,401,754)"]] [[/GREPCENT_TABLE]] 88 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 operating activities. 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, and to fund our operations. At December 31, 2022, our total capital was $1.93 billion and included $1.08 billion of equity capital and $843 million of convertible notes and long-term debt on our consolidated balance sheet, including $177 million of convertible debt due in 2023, $150 million of convertible debt due in 2024, $162 million of exchangeable debt due in 2025, $215 million of convertible debt due in 2027 and $140 million of trust-preferred securities due in 2037. As of December 31, 2022, our unrestricted cash was $259 million. In January 2023, we issued Preferred Stock for net proceeds of approximately $67 million (See Note 25 in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on this issuance), closed an SEMT securitization backed by $333 million of loans and sold $213 million of BPL term loans to a large institutional investor, generating additional cash. 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, investments and internal initiatives, including acquisitions of, investments in, and initiatives related to, internal and third-party residential and business purpose mortgage origination platforms and home equity investment origination platforms, 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 and, therefore, our stockholders. 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 is 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 or security being financed, a decline in the value of the underlying asset securing the collateral, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of loans, or a change in the interest rate of a specified reference security relative to a base interest rate amount, among other reasons. 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 or home equity investment that is financed by us under a 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 between recourse and non-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, or any other entity or person (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, 2022, in aggregate, we had $1.99 billion of secured recourse debt outstanding, financing our mortgage banking operations and investment portfolio, of which $372 million was marginable and $1.62 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, and other short- and long-term debt facilities and other risks relating to our 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. 89 Repurchase Authorization In August 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. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. This common stock repurchase authorization replaced the $100 million common stock repurchase authorization approved by the Board of Directors in 2018, has no time limit, may be modified, suspended or discontinued at any time, and does not obligate us to acquire any specific number of shares or securities. The Board of Directors also continued its previous authorization for the repurchase of outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above. 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. During the year ended December 31, 2021, we did not repurchase any shares of our common stock or convertible notes. At December 31, 2022, $101 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities. Cash Flows and Liquidity for the Year Ended December 31, 2022 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 operations or investments. Cash Flows from Operating Activities Cash flows from operating activities were negative $139 million in 2022. 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. Purchases of loans 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. 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. As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during 2022, 2021, and 2020, we transferred loans between held-for-sale and held-for-investment classification and retained securities from Sequoia and CAFL® securitizations we sponsored, which represent significant non-cash transactions that were not included in cash flows from operating activities. Cash Flows from Investing Activities During 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. 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. Because many of our investment securities, loans and HEIs 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 HEIs at consolidated securitization entities would generally be used to repay ABS issued by those entities. As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during 2022, 2021 and 2020, we transferred residential loans between held-for-sale and held-for-investment classification, retained securities from SEMT® (Sequoia), CAFL®, and HEI-backed securitizations we sponsored and deconsolidated certain multifamily securitization trusts, which represent significant non-cash transactions that were not included in cash flows from investing activities. 90 Cash Flows from Financing Activities During 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 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® (Sequoia) 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. On December 8, 2022, the Board of Directors declared a regular dividend of $0.23 per share for the fourth quarter of 2022, which was paid on December 28, 2022 to shareholders of record on December 20, 2022. In total, during the year ended December 31, 2022, we declared dividends of $0.92 per common share. In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units and 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, and restricted stock unit. Cash Flows and Liquidity for the Year Ended December 31, 2021 Cash Flows from Operating Activities Cash flows from operating activities were negative $5.69 billion in 2021. 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. Purchases of loans 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. Excluding cash flows from the purchase, origination, sale and principal payments of loans classified as held-for-sale, as well as the settlement of associated derivatives, cash flows from operating activities were negative $17 million in 2021. As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during 2021, 2020, and 2019, we transferred loans between held-for-sale and held-for-investment classification, retained securities from SEMT® (Sequoia) and CAFL® securitizations we sponsored, which represent significant non-cash transactions that were not included in cash flows from operating activities. Cash Flows from Investing Activities During 2021, our net cash provided by investing activities was $1.40 billion and primarily resulted from proceeds from principal payments on loans and real estate securities. 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. Because many of our investment securities and loans 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 HEIs at consolidated securitization entities would generally be used to repay ABS issued by those entities. As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during 2021, 2020, and 2019, we transferred residential loans between held-for-sale and held-for-investment classification, retained securities from SEMT® (Sequoia), CAFL® and HEI-backed securitizations we sponsored, consolidated certain multifamily and re-performing residential securitization trusts, and deconsolidated certain multifamily securitization trusts, which represent significant non-cash transactions that were not included in cash flows from investing activities. 91 Cash Flows from Financing Activities During 2021, our net cash provided by financing activities was $4.28 billion. This primarily resulted from $2.48 billion of net issuance of asset-backed securities and $1.83 billion of net borrowings under short-term debt facilities. During the year ended December 31, 2021, we declared dividends of $0.78 per common share. In accordance with the terms of our outstanding deferred stock units and restricted stock units, which are stock-based compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent payment in that same per share amount on each outstanding deferred stock unit, cash-settled deferred stock unit, and restricted stock unit. Material Cash Requirements In the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on our balance sheet, while others are off-balance sheet or recorded on the balance sheet in amounts different from the full contractual or notional amount of the transaction. Our material cash requirements from known contractual and other obligations during the twelve months following December 31, 2022 include maturing short-term debt, interest payments on short-term and long-term debt, payments on operating leases, funding commitments for BPL bridge loans and under HEI flow purchase agreements and other current payables. Our material cash requirements from known contractual and other obligations beyond the twelve months following December 31, 2022 include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for BPL bridge loans and under HEI flow purchase agreements. The following table presents our material contractual and other obligations at December 31, 2022, as well as the obligations of the securitization entities that we consolidate for financial reporting purposes. Table 22 – Contractual and Other Obligations [[GREPCENT_TABLE]] [["December 31, 2022","","Payments Due or Commitment Expiration by Period"],["(In Millions)","","Next Twelve Months","","Beyond Next Twelve Months"],["Short-term debt","","$","2,033","","","$","\u2014"],["Long-term debt","","\u2014","","","1,746"],["Accrued interest payable","","47","","","\u2014"],["Other current payables","","150","","","\u2014"],["Anticipated interest payments on long-term debt","","122","","","272"],["Operating leases","","5","","","16"],["Bridge loan commitments","","293","","611"],["HEI flow purchase commitments(1)","","69","","","\u2014"],["Commitment to fund partnerships","","10","","","\u2014"],["Consolidated ABS(2)","","$","\u2014","","","$","8,944"],["Total Obligations and Commitments","","$","2,729","","","$","11,589"]] [[/GREPCENT_TABLE]] (1)    Subsequent to December 31, 2022, we exercised our contractual option to reduce our HEI purchase commitments and, as of February 28, 2023, we had $14 million of remaining HEI purchase commitments. (2)    Obligations of Consolidated ABS are collateralized by real estate loans or other real estate-related assets, are not legal obligations of Redwood and do not represent contractual obligations requiring cash or liquidity from Redwood. Although the stated maturity is as shown, the ABS obligations will pay down as the principal balances of these real estate loans or securities pay down. The amount shown is the principal balance of the ABS issued and not necessarily the value reported in our consolidated financial statements. We expect to meet our obligations coming due in less than one year from December 31, 2022, 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, or incremental borrowings under existing, new or amended financing arrangements. At December 31, 2022, we had over $300 million of pledgeable assets that were unencumbered. 92 At December 31, 2022, we had commitments to fund up to $904 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 (e.g., funding is dependent on actual progress on a project and we retain the option to conduct due diligence with respect to each draw request to confirm conditions have been met). Approximately 70% of the commitments are for longer-term build-for-rent loans (which in many cases have funding caps below their full commitment amount) and are expected to fund over the next eleven quarters. Additionally, at December 31, 2022, we had $1.78 billion of available warehouse capacity for business purpose loans and the majority of our $2.0 billion balance of BPL bridge loans outstanding matures over the next 12 to 24 months, which will provide an additional source of cash that can be used to fund our commitments. At December 31, 2022, we had outstanding flow purchase agreements with multiple third parties, with aggregate purchase commitments of $69 million outstanding. These purchase agreements specify monthly minimum and maximum amounts of HEIs subject to such purchase commitments. Subsequent to December 31, 2022, we exercised our contractual option to reduce our HEI purchase commitments and, as of February 28, 2023, we had $14 million of remaining HEI purchase commitments. In the fourth quarter of 2022, we entered into a repurchase agreement providing financing for HEIs. The committed amount and maximum borrowing limit under the facility is $150 million and the facility has a one-year term. At December 31, 2022, there were $112 million of borrowings outstanding under this facility. For additional information on commitments and contingencies as of December 31, 2022 that could impact our liquidity and capital resources, see Note 17 in Part II, Item 8 of this Annual Report on Form 10-K. Most of our loan warehouse facilities were established with initial one-year terms and are regularly amended on an annual basis to extend the terms for an additional year ahead of their maturity. We successfully renewed all of our facilities that were scheduled to mature in 2022 and have scheduled maturities of such facilities during the next twelve months. While there is no assurance of our ability to renew these facilities, given current market conditions we would expect to extend these in the normal course of business. Throughout 2022, benchmark interest rates increased, increasing the borrowing costs on our outstanding variable rate debt and new financing agreements we entered into, including to refinance fixed-rate debt that matured. Given current market expectations for continued interest rate increases, we expect our borrowing costs could continue to increase in 2023. Additionally, certain of our borrowing agreements have interest rate step-up provisions that come into effect in 2023 and beyond if we do not repay the debt under optional redemption provisions. Depending on when we choose to repay this debt, our borrowing costs could increase. During 2022, the highest balance of our short-term debt outstanding was $2.39 billion. See Note 14 of the Notes to Consolidated Financial Statements included in 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 this Annual Report on Form 10-K for additional information on our long-term debt. Liquidity Needs for our Mortgage Banking Activities We generally use loan warehouse facilities to finance the residential loans we acquire and the business purpose loans we originate or acquire 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, 2022, we had residential loan warehouse facilities outstanding with seven different counterparties, with $2.55 billion of total capacity and $1.85 billion of available capacity. These included non-marginable facilities with $1.38 billion of total capacity and marginable facilities with $1.18 billion of total capacity. At December 31, 2022, we had business purpose loan warehouse facilities outstanding with five different counterparties, with $3.24 billion of total capacity and $1.78 billion of available capacity. We note that several of these facilities used to finance our business purpose mortgage banking loan inventory are also used to finance bridge loans held in our investment portfolio. All of these facilities are non-marginable. 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. 93 Liquidity Needs for our Investment Portfolio We use various forms of secured recourse and non-recourse debt to finance assets in our investment portfolio. We distinguish our debt between recourse and non-recourse, as our non-recourse debt is mostly comprised of ABS issued, which 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, or any other entity or person (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. ABS issued 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. See Note 4 in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our principles of consolidation and Note 15 in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our asset-backed securities issued. Separately, we use non-recourse debt in the form of non-marginable term 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. The remainder of the debt we use to finance our investments is recourse debt. For securities we have financed, the majority of our financing is in the form of recourse non-marginable secured term debt, with the remainder being marginable securities repurchase debt. Additionally, a portion of our business purpose bridge loan portfolio is financed with recourse non-marginable secured term debt. At December 31, 2022, in aggregate, we had $2.86 billion of secured recourse debt outstanding, financing our investment portfolio, of which $372 million was marginable and $2.30 billion was non-marginable. Corporate Capital In addition to secured recourse and non-recourse leverage 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 debt securities we issue in the public markets and also includes trust preferred securities and promissory notes. See Note 14 and Note 16 in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our short-term and long-term debt, respectively. 94 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 (including those we acquire and/or originate in anticipation of sale or securitization), and finance investments in HEIs, 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 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 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 loan warehouse facilities were in place with seven different financial institution counterparties as of December 31, 2022. In addition, as of December 31, 2022, we had business purpose loan warehouse facilities secured by BPL term and BPL bridge loans, in place with five financial institution counterparties. As of December 31, 2022, we also had in place one warehouse facility secured by HEIs. Under our residential loan warehouse facilities, we had an aggregate borrowing limit of $2.55 billion at December 31, 2022, under our business purpose loan warehouse facilities we had an aggregate borrowing limit of $3.24 billion at December 31, 2022, and under our HEI warehouse facility we had an aggregate borrowing limit of $150 million at December 31, 2022. 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 or business purpose mortgage loans or HEIs is obtained under these facilities by our transfer of mortgage loans or HEIs to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred mortgage loans or HEIs), and our covenant to reacquire those loans or HEIs from the counterparty for the same amount plus a financing charge. In order to obtain financing for a residential or business purpose 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, if it meets specified conditions). In addition, under these warehouse facilities, residential or business purpose loans can only be financed for a maximum period, which period may be limited to 364 days for our short-term warehouse facilities, and we may be subject to geographic concentration limits of underlying assets 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 residential 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 or security being financed, a decline in the value of the underlying asset securing the collateral, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of 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 HEIs 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 HEIs become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility. 95 Under our residential and business purpose 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 and business purpose 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.” In addition to the residential and business purpose 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 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. 96 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. Other Short-Term Debt Facility. We also maintain a $10 million committed line of short-term credit from a bank, which is secured by our pledge of certain mortgage-backed securities we own. At December 31, 2022, the securities pledged to secure this credit line had a fair market value of $1 million, thereby limiting our ability to fully utilize this facility until we pledge additional assets to this lender. This bank line of credit is an additional source of short-term financing for us. Similar to the uncommitted warehouse and securities repurchase facilities described herein, under this committed line 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 this facility and this facility being unavailable to use for future financing needs. The margin call provisions and financial covenants included in this committed line are further described below under the headings “Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing” and “Financial Covenants Associated with Short-Term Debt and Other Debt Financing.” When we use this committed line to incur short-term debt we are exposed to the market, credit, liquidity, and other types of risks described above with respect to residential loan warehouse and securities repurchase facilities. 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, 97 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 became eligible to be terminated, at our option, in September 2022, and has a final maturity in September 2024, provided that the interest rate on amounts outstanding under the facility increases between October 2022 and September 2024. At December 31, 2022, we had borrowings under this facility totaling $130 million and the fair value of real estate securities pledged as collateral under this long-term debt facility was $178 million and included securities retained from our Sequoia securitizations. Another financing facility may be terminated, at our option, in February 2023, and has a final maturity in February 2025, provided that the interest rate on amounts outstanding under the facility increases between March 2023 and February 2025. At December 31, 2022, we had borrowings under this facility totaling $102 million and $0.1 million of unamortized deferred issuance costs, for a net carrying value of $102 million. At December 31, 2022, the fair value of real estate securities pledged as collateral under this long-term debt facility was $121 million and included securities retained from our consolidated CAFL® securitizations. Another financing facility may be terminated, at our option, in June 2023, and has a final maturity in June 2026, provided that the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026. At December 31, 2022, we had borrowings under this facility totaling $69 million and $0.1 million of unamortized deferred issuance costs, for a net carrying value of $69 million. At December 31, 2022, the fair value of real estate securities pledged as collateral under this long-term debt facility was $143 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 this facility and this facility being unavailable to use for future financing needs. In particular, outstanding amounts borrowed under this facility could become immediately due and payable if there is a failure to pay any amounts due under the 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 and Business Purpose 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, 2022, were in place with several different financial institution counterparties. Financial covenants included in 98 these warehouse facilities are as follows and at December 31, 2022, 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. •With respect to residential loan warehouse facilities, maintenance of uncommitted residential loan warehouse facilities with a specified level of available borrowing capacity. •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, 2022, 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. •Committed Line of Credit. As noted above, we also maintain a $10 million committed line of short-term credit from a bank, which is secured by our pledge of certain mortgage-backed securities we own. The types of financial covenants included in this bank line of credit are a subset of the covenants summarized above. •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, 2022, 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. As noted above, at December 31, 2022, 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, 2022 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, 2022 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 and Business Purpose 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, 2022, 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, 2022, 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: 99 •Under our marginable residential loan warehouse facilities, if at any time the market value of any residential mortgage loan 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 (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 one of our residential 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 one of our residential loan warehouse facilities, 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 and business purpose 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 HEIs) 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 five business days depending on the terms of the agreement. The value of additional residential and business purpose mortgage loans or HEIs 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, 2022, 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. The value of additional securities transferred as additional collateral is determined by the creditor. •Committed Line of Credit. As noted above, we also maintain a $10 million committed line of short-term credit from a bank, which is secured by our pledge of certain mortgage-backed securities we own. Margin call provisions included in this bank line of credit are as follows and during the twelve months ended December 31, 2022, and through the date of this Annual Report on Form 10-K, we complied with any margin calls received from this creditor under this line of credit: •If at any time the total market value (as determined by two broker-dealers) of the securities that are pledged as collateral under this facility declines to a value less than the outstanding amount of borrowings under this facility, 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 difference. If we receive any such demand, we would generally be required to transfer the additional collateral within two business days. The value of additional collateral pledged is determined by the creditor. 100 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, 2022, 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, 2021, incorporated herein by reference, for the same information on these assets and liabilities as of December 31, 2021. 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 available-for-sale 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. 101 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 HEIs HEIs 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 HEIs can be caused by changes in the discount rate assumptions used to value HEIs, 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. 102 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. 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 available-for-sale 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. 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. 103 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. 104