Commitments and Contingencies

12 Months Ended

Dec. 31, 2023

Commitments and Contingencies Disclosure [Abstract]

Lease Commitments

At December 31, 2023, we were obligated under 10 non-cancelable operating leases with expiration dates through 2031 for $16 million of cumulative lease payments. Our operating lease expense was $5 million, $5 million, and $4 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The following table presents our future lease commitments at December 31, 2023.

Table 17.1 – Future Lease Commitments by Year


(In Thousands)	December 31, 2023
2024	$	4,656
2025	3,687
2026	3,520
2027	2,588
2028	1,122
2029 and thereafter	869
Total Lease Commitments	16,442
Less: Imputed interest	(1,717)
Operating Lease Liabilities	$	14,725

Leasehold improvements for our offices are amortized into expense over the lease term. There were $2 million of unamortized leasehold improvements at December 31, 2023. For each of the years ended December 31, 2023, 2022, and 2021, we recognized $0.5 million of leasehold amortization expense.

During the year ended December 31, 2023, we entered into two new office leases. At December 31, 2023, our operating lease liabilities were $15 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $13 million, which were a component of Other assets.

We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the lease commencement date. At December 31, 2023, the weighted-average remaining lease term and weighted-average discount rate for our leases was 4 years and 5.3%, respectively.

Commitment to Fund BPL Bridge Loans

As of December 31, 2023, we had commitments to fund up to $542 million of additional advances on existing BPL bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At December 31, 2023 and 2022, we carried a $1 million and $2 million contingent liability, respectively, related to these commitments to fund construction advances. During the years ended December 31, 2023 and 2022, we recorded a net market valuation gain of $1.0 million and a net market valuation loss of $0.5 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).

Commitment to Fund Partnerships

In 2018, we invested in two partnerships created to acquire and manage certain mortgage servicing related assets. See Note 11 for additional detail on these investments. In connection with these investments, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.

Commitments to Fund Strategic Investments

In the first quarter of 2022, we entered into a $25 million commitment to an investment fund with the mission of providing quality workforce housing opportunities in several California urban communities, including the San Francisco Bay Area. At December 31, 2023, we had funded $16 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

In 2021, we entered into a commitment to fund a $5 million RWT Horizons investment. At December 31, 2023, we had funded $2 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

Commitment to Fund Joint Venture

In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. In accordance with the terms of the joint venture, we will offer to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices. Additionally, we have a commitment to contribute up to $17 million to the joint venture to fund the joint venture's purchase of BPL bridge loans, under the updated terms of the joint venture. At December 31, 2023, we had contributed $3 million of capital to the joint venture.

Riverbend Contingent Consideration

As part of the consideration for our acquisition of Riverbend, we may make earnout payments payable in cash, based on generating specified revenues over a threshold amount during the two-year period ending July 1, 2024, up to a maximum potential amount payable of $25.3 million. These contingent earnout payments are classified as a contingent consideration liability on our consolidated balance sheets and carried at fair value. At December 31, 2023, our estimated fair value of this contingent liability was zero.

Loss Contingencies — Risk-Sharing

During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At December 31, 2023, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was partially collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At December 31, 2023, we had incurred less than $100 thousand of cumulative losses under these arrangements. For the years ended December 31, 2023, 2022, and 2021, other income related to these arrangements was $1 million, $1 million and $3 million, respectively, and was included in Other income on our consolidated statements of income (loss).

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at December 31, 2023, the loans had an unpaid principal balance of $397 million, a weighted average FICO score of 761 (at origination) and LTV ratio of 74% (at origination). At December 31, 2023, $7 million of the loans were 90 or more days delinquent, of which five of these loans with an unpaid principal balance of $1.0 million were in foreclosure. At December 31, 2023, the carrying value of our guarantee obligation was $6 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to us. At December 31, 2023 and 2022, assets of such SPEs totaled $28 million and $30 million, respectively, and liabilities of such SPEs totaled $6 million and $6 million, respectively.

Loss Contingencies — Repurchase Reserves

We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential and business purpose loans we have sold to securitization trusts or third parties and for conforming residential loans associated with MSRs that we have purchased from third parties. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation.

At December 31, 2023 and 2022, our repurchase reserve associated with our residential loans and MSRs was $5 million and $6 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. We received one and fourteen repurchase requests during the years ended December 31, 2023 and 2022, respectively. During the years ended December 31, 2023, 2022, and 2021, we repurchased five loans, one loan, and two loans, respectively. During the years ended December 31, 2023, 2022, and 2021, we recorded a net reversal of repurchase provision of $1 million, a net reversal of repurchase provision of $3 million, and a repurchase provision expense of $1 million, respectively, that were recorded in Mortgage banking activities, net and Other income on our consolidated statements of income (loss) and had charge-offs of $77 thousand, $43 thousand, and $0.2 million, respectively.

At December 31, 2023 and 2022, our repurchase reserve associated with our business purpose loans was zero and $1 million, respectively. We received fifteen and eight repurchase requests for business purpose loans during the years ended December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, we repurchased twelve and zero business purpose loans, respectively. During the years ended December 31, 2023 and 2022, we a recorded repurchase provision expense of zero and $1 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss) and had no charge-offs in either year.

Loss Contingencies — Litigation, Claims and Demands

From time to time and in the ordinary course of business, we may submit or receive demand letters to or from counterparties relating to breaches of representations and warranties, be named in lawsuits brought by mortgage borrowers relating to foreclosure proceedings initiated by the servicers of the related mortgage loans or seeking to establish that their mortgage notes and/or mortgages are unenforceable as a matter of law due to defects in the transfer and assignment of those notes and mortgages, or be named in lawsuits brought by mortgage borrowers seeking remedies against the originator of the mortgage for fraud or defects in the originator's origination process, including defects in the disclosure of mortgage terms at the time of origination (in these cases we may be named in connection with the origination of the loan, in the case of business purpose loans we originate, or on a theory of assignee liability in the case of residential loans we acquire). Additionally, following our acquisitions of the 5 Arches, CoreVest, and Riverbend business purpose loan origination platforms, there are litigation matters that relate to these platforms that represent a level of litigation activity that we believe is generally consistent with the ordinary course of business of a loan originator, which had not been associated with Redwood historically.

In accordance with GAAP, we review the need for any loss contingency reserves related to litigation, claims or demands and establish reserves 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. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review. Regarding the FHLB-Seattle or Schwab litigation matters referenced in Note 17 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading "Loss Contingencies – Litigation, Claims and Demands," based on our review as of December 31, 2023, we no longer maintain loss contingency reserves in respect of these matters.

In the ordinary course of any litigation matter, we may engage in formal or informal settlement communications with the plaintiffs or co-defendants. Any settlement communications we engage in are one of the factors that may result in our determination to establish a loss contingency reserve. We cannot be certain that any matters will be resolved through a settlement prior to litigation and we cannot be certain that the resolution any litigation matter, whether through trial, settlement, or otherwise, will not have a material adverse effect on our financial condition or results of operations in any future period. With respect to any litigation, claims or demands, future developments (including resolution of substantive pre-trial motions, receipt of additional information and documents (such as through pre-trial discovery), new or additional settlement communications with plaintiffs, or resolutions of similar claims against other defendants in these matters) could result in our concluding in the future to establish new or additional loss contingency reserves or to disclose an estimate of reasonably possible losses in excess of any previously-established reserve. Our actual losses with respect to any litigation matters may be materially higher than the aggregate amount of loss contingency reserves we have established, including in the event that any litigation matter proceeds to trial and the plaintiff prevails. Other factors that could result in our concluding to establish new or additional loss contingency reserves or estimate additional reasonably possible losses, or could result in our actual losses with respect to litigation matters being materially higher than the aggregate amount of loss contingency reserves we have established include that: there are significant factual and legal issues to be resolved; information obtained or rulings made during the lawsuits could affect the methodology for calculation of the available remedies; and we may have additional obligations pursuant to indemnity agreements, representations and warranties, and other contractual provisions with other parties relating to litigation matters that could increase our potential losses.