Redwood Trust, Inc. (RWT) Earnings

Management highlights

- **Overall Strategic Positioning** * Redwood recorded over $8 billion in mortgage banking volume for the second consecutive quarter, with 20 total securitizations completed in the first half of 2026. This is the first time the firm priced three securitizations (one per operating platform) in a single week, marking a major operational milestone after historically only completing 2-4 securitizations annually. * Management is positioning the firm to outperform in the current high interest rate environment, which is the first period in over 40 years without a long-term interest rate bull market. The company is prioritizing operational efficiency and capital turnover to grow despite multi-decade lows in home sale activity. - **Technology and AI Initiatives** * The firm is rebuilding as an AI-native housing finance platform with proprietary, in-house developed AI systems embedded directly into core workflows. Multi-agent AI tools support complex tasks including financial reviews, guideline comparisons, and contract analysis, delivering faster consistent reviews and improved scalability with human oversight retained for all key decisions. * Early operating leverage gains are already visible: direct expenses fell to 64 basis points as a percentage of volume for the first half of 2026, a 28% improvement from full-year 2025. 2026 AI automation initiatives have delivered annualized time savings of approximately 23,600 hours, reducing costs across due diligence, pricing, and guideline analysis. * The RwQ Horizons venture fund, which represents less than 2% of firm capital, provides access to over 25 early-stage mortgage and AI ecosystem companies, accelerating internal growth. In Q2, the fund invested in artificial general intelligence developer Prometheus, and one portfolio company completed a financing round that valued Redwood's initial seed investment at 27x its original cost. - **Product and Distribution Diversification** * Newly launched products now represent over 30% of Sequoia's quarterly lock volume. Aspire grew 31% sequentially, and Corvus is building momentum in small-balance offerings for experienced housing investors. The diversified product portfolio reduces dependence on any single product or mortgage rebuy cycle, differentiating Redwood's earnings model from monoline operators tied to MSR values. * Redwood acts as a dedicated capital partner to 70% of the top 50 U.S. banks, enabling banks to retain client relationships and generate fee income while transferring interest rate convexity risk to Redwood. * Key recent product launches include a medical professional loan program (which already completed a second oversubscribed securitization in early July) and a new HELOC product for Sequoia. * Aspire entered a dedicated $8 billion joint venture with Crayhill Capital Management in Q3 2026, providing recurring revenue and performance fees while validating market demand for its non-QM products. Corvus completed its first term securitization since 2023, a $268 million transaction priced accretively and placed with 24 discrete investors. - **Capital Reallocation** * The firm has delivered eight consecutive quarters of mortgage banking returns above 20%, driving accelerated capital reallocation away from non-core legacy holdings. Early in Q3, the firm began formal marketing of a large portion of remaining legacy bridge loans and completed a new financing arrangement for the remaining home equity investment portfolio, which is expected to bring legacy segment capital below 10% of total firm capital.

Guidance

- Management reaffirms prior guidance to reduce allocated capital in the legacy investment segment to below 5% of total firm capital by the end of 2026. - Aspire expects to increase its non-QM market share from the current 5% to 6% run rate to 10% by the end of 2026, supported by product innovation and new capital partnerships. - Management expects the adjusted expense-to-production ratio to continue declining, with the next 10 to 15 basis points of improvement driven primarily by AI and technology enhancements, after 24 basis points of improvement from full-year 2025 to the first half of 2026. - Management estimates that every $100 million of capital successfully redeployed from legacy holdings to core mortgage banking or share repurchases could improve consolidated return on equity by 200 to 400 basis points.

Segment performance

1. **Sequoia**: Generated $32 million GAAP net income (down from $38 million in Q1 2026). Second quarter lock volume totaled $5.6 billion, with deal-on-sale margins of 92 basis points, over 65% of production as purchase money loans. It contributes the largest share of core mortgage banking revenue for the firm. 2. **Aspire**: Generated $7 million GAAP net income, up $5 million sequentially from Q1. Block volume grew 31% quarter-over-quarter to a record $2.1 billion, with organic sale margins increasing to 101 basis points from 73 basis points in Q1. Delivered a 33% annualized return on capital, and holds approximately 5% to 6% current non-QM market share. 3. **Corvus (VEST)**: Generated $1 million GAAP net income, improving from a $3 million net loss in Q1 (which included $5 million in restructuring charges). Excluding acquisition-related expenses, earnings contribution rose to $3 million. Funded $410 million of loans, down 5% quarter-over-quarter, with net cost to originate of 96 basis points, up from 79 basis points in Q1. 4. **Redwood Investments**: Generated approximately $1 million GAAP net income, improving from an $8 million loss in Q1. Deployed $72 million of capital into investments from Q2 securitizations, with earnings contribution expected to increase in Q3. 5. **Legacy Investments**: Generated a $23 million GAAP loss, including $12 million in negative fair value changes primarily on legacy bridge loans. Allocated capital fell to 12% of total firm capital at quarter end, down from 15% at the end of Q1 and 63% lower than one year prior.

Risks & headwinds

- The ongoing high interest rate environment creates macro headwinds for mortgage origination volume, reduces home affordability, and limits overall market size, which is down 50% from 2021 levels. - High interest rate volatility and geopolitical uncertainty create uncertainty for mortgage volume and margins, requiring the firm to maintain a flexible, responsive operating posture. - Increased bank competition for mortgage volume, driven by new Basel III capital rules, could create future margin pressure for Redwood's origination platforms. - Disposition of remaining legacy assets depends on market conditions, with potential friction and continued negative carry during the wind-down process. - Legislative and regulatory uncertainty for institutional single-family rental housing previously suppressed activity in Corvus' target market, though this uncertainty has largely been resolved with the passage of recent housing legislation.

Analyst Q&A

• Q: With the legacy investment segment heading to below 10% of capital after the recent Q3 HEI transaction, how much of the remaining $195 million in legacy capital can be realized and redeployed to core business? /

  A: Management reaffirms they remain on track to bring legacy allocated capital below 5% by the end of 2026. All remaining legacy assets have already been fair valued at June 30 consistent with expected execution pricing. The negative carry and opportunity cost of holding legacy capital creates immediate incentive to dispose of assets quickly and redeploy capital to higher-return mortgage banking activities.

• Q: How sensitive is Redwood's mortgage volume to current high rates and rate volatility, and what is your outlook for volume? /

  A: Management took a more cautious posture in early Q2 amid high volatility and geopolitical uncertainty, but volume rebounded strongly in June, which represented 40% of total Q2 volume. July volume has also been fairly strong, and management feels confident in the firm's position to continue growing volumes despite the high rate environment, while remaining responsive to on-the-ground market conditions.

• Q: Where do you see the adjusted expense-to-production ratio trending, and how much more improvement can come from AI investment? /

  A: The 28 basis point improvement from 2025 to the first half of 2026 came mostly from volume scalability and a variable expense structure. Going forward, management expects the next 10 to 15 basis points of improvement to come primarily from AI, as the firm built foundational AI platforms that reengineer core operating models rather than bolt on incremental changes. The AI infrastructure is designed to scale with volume, driving greater efficiency as the business grows.

• Q: How has Redwood maintained resilient gain-on-sale margins despite aggressive bank competition in Q2, and how will margins evolve as banks further increase activity? /

  A: Redwood prioritized margin preservation over chasing volume during Q2, which allowed the firm to maintain stable margins even as large banks gained market share at lower margins to front-run capital rule changes. Redwood's franchise is built on holistic bank partnerships that support two-way loan flow, so the firm can serve bank partners whether they are looking to buy or sell loans. The company does not expect a meaningful near-term increase in overall housing or refinance activity, so any market share gains from banks will likely come at the expense of other originators.

• Q: What is your outlook for non-QM growth for Aspire, and what are your expectations for margins and credit quality? /

  A: Management expects the overall non-QM market to grow 20% in 2026, driven by rising consumer awareness for borrowers who do not fit traditional W-2 underwriting. Aspire benefits from existing long-term seller relationships from Sequoia and an $8 billion joint venture with Crayhill Capital that provides outside capital to drive growth, so the firm remains on track to reach 10% market share by end of 2026. Credit quality across Aspire's loan portfolio has remained very stable, with low delinquency rates consistent with management's underwriting expectations.