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# System prepended metadata

title: Sequoia RMBS

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![](https://hackmd.io/_uploads/BJKK28e7j.png)
> October 12, 2022 <br><br>
Dear MakerDAO Community,<br><br>Since its founding in 1994, Redwood Trust, Inc. (NYSE: RWT) ("Redwood", "we" or "our") has been a leader in the United States' housing finance industry.  By transacting and investing in mortgages for single family and rental properties, we seek to fulfill our mission to make quality housing - whether rented or owned - accessible to all Americans.  Over our 25+-year history, Redwood has built a reputation for excellence in evaluating housing credit, with a deep and experienced management team.  We have also become the nation's largest non-bank issuer of private label mortgage-backed securities through our Sequoia securitization platform.<br><br>Though our roots extend deep in the traditional finance ecosystem, a commitment to technology is an integral part of our ethos and strategic focus.  Technology-enabled solutions allow us to serve more homeowners, and through our in-house venture investment arm, we invest in early-stage fin-tech and prop-tech companies strategically aligned with our business.<br><br>We believe that technology represents the future not just of housing finance, but of the financial services industry as a whole.  By partnering with innovators like Oasis Pro Markets LLC (“Oasis Pro Markets”), we seek to further our corporate mission by developing the capability to serve the evolving needs of investors.<br><br>In furtherance of that objective, we are pleased to submit for your consideration a proposal for MakerDAO to onboard prime and super-prime jumbo residential mortgage-backed securities (“RMBS”) issued through Redwood's Sequoia platform (the “Sequoia RMBS”).  We hope the information included in the proposal below will (i) assist you in evaluating Redwood’s experience in the mortgage finance industry and (ii) offer an overview of the payment mechanics, market liquidity and strategic benefits associated with onboarding Sequoia RMBS.  We have also included certain information to allow you to assess performance of prior issuances of Sequoia RMBS.   We believe that, through this specific project opportunity and other potential areas of collaboration outlined further below, Redwood is well positioned to assist MakerDAO to build a diversified portfolio of assets. We look forward to your questions and feedback as you consider these materials *(1)*.

# Sequoia RMBS
## Proposal & Considerations 

## 1. Introduction to key proposal parties 

### a. Redwood Trust, Inc.  
This proposal is respectfully submitted by Redwood Trust, Inc. (“Redwood”, “we”, or “our”). Redwood is a specialty finance company focused on housing credit. Our common stock is publicly traded on the New York Stock Exchange under the ticker “RWT.” For more information and to review quarterly, annual and other reports filed with the U.S. Securities and Exchange Commission (“SEC”), please visit our website [here](https://www.redwoodtrust.com/). Redwood’s business is organized into three primary segments: 

* Our Residential Mortgage Banking segment is an aggregation platform focused on purchasing primarily prime jumbo residential mortgage loans from a large cohort of mortgage loan originators. These loans are held for subsequent sale or for securitization through our Sequoia (SEMT) platform, as further described below.  Our Residential Mortgage Banking business is licensed in thirty-three (33) states to carry out its mortgage business.  More information on these licenses may be found on our website here.  Since Redwood’s founding, we have purchased over $70 billion in loans, with $12.8 billion purchased in 2021 alone. 
* Our Business Purpose Mortgage Banking, operating as CoreVest American Finance Lender, LLC (“CoreVest”), is one of the nation’s leading direct lenders to single-family and multi-family housing investors.  CoreVest was founded in 2014 and has since funded more than $16 billion in loans representing 125,000 housing units.  CoreVest is the largest issuer of business purpose mortgage-backed securities, having issued over $5.1 billion across 19 securitizations. 
* Our Investment Portfolio focuses on mortgage loans and other real estate- related assets sourced through our Residential Mortgage Banking and Business Purpose Mortgage Banking segments and from third parties. 

In carrying out our business, Redwood relies on advanced, technology-enabled solutions to serve our customers accurately, efficiently and at scale, and to provide greater transparency and insight to investors in our securitizations.  In 2020, we launched our first app (available [here](https://apps.apple.com/us/app/redwoodlive/id1502628722)) to deliver near real-time data to the mortgage loan originators that sell jumbo mortgage loans to us.  Our Residential Mortgage Banking business is currently focused on integrating blockchain technology into all aspects of its operations and, in an industry first, in 2021, we launched a blockchain reporting framework for loans securitized in Sequoia transactions (available [here](https://www.liquidmortgage.io/)).  We strive to serve as a resource to investors and the businesses we transact with as they consider the benefits of adopting technology into their business models.  Our recently published white papers discussing potential use cases for blockchain (available for review [here](https://www.redwoodtrust.com/about-redwood/primers-and-white-papers/detail/8267/building-a-mortgage-blockchain-ecosystem)) and tokenization technology (available for review [here](https://www.redwoodtrust.com/about-redwood/primers-and-white-papers/detail/8271/tokenization-in-structured-finance)) reflect our perspective on the role technology may play in our industry’s future and are intended to advance the industry’s dialogue on these topics.  Through our in-house venture investment arm, RWT Horizons, we invest in early-stage technology companies across the lending, real estate and fin-tech sectors. Through Q2 2022, we have invested over $25 million in 21 portfolio companies, including Oasis Pro Markets. 

Redwood’s workforce consists of approximately 350 employees.  Redwood is headquartered in Mill Valley, California and maintains primary offices in cities including but not limited to Denver, Colorado, New York, New York and Irvine, California.  Our [Code of Ethics](https://d1io3yog0oux5.cloudfront.net/_7d5da9a86df9fdb1b334dc8d8568b512/redwoodtrust/db/874/7794/file/Code-of-Ethics_RWT.pdf) establishes high standards of conduct for our employees, officers and directors as they conduct business on behalf of Redwood.  As an employer, Redwood is committed to creating, advancing and embracing diversity, equity and inclusion across the organization and fostering a culture of belonging where employees feel connected, engaged and comfortable expressing their identities.  We view our strong, positive culture as a driving factor in our success, and more information on our culture may be found on our website [here](https://www.redwoodtrust.com/corporate-responsibility/human-capital).  At the corporate level, Redwood has maintained a longstanding, meaningful commitment to various environmental, social and governance (“ESG”) practices across all aspects of our business, culture and investments.  We believe that all of these factors are important to delivering on our mission to make quality housing – whether rented or owned – accessible to all American households, and we were proud to publish our inaugural [ESG tear sheet](https://d1io3yog0oux5.cloudfront.net/redwoodtrust/files/pages/redwoodtrust/db/973/content/Redwood-ESG-Tear-Sheet-2021_.pdf) detailing these values earlier this year. 

### b. Sequoia Platform 

The Sequoia platform is a seasoned issuer of RMBS.  This section provides an overview of Sequoia’s history and certain data relating to the performance of previously issued Sequoia RMBS, as we believe this may be relevant to the community’s evaluation of our proposal to onboard RMBS issued in an upcoming Sequoia transaction. 

Since its inception in 1997, Redwood has issued over $60 billion in RMBS across 118 Sequoia (SEMT) securitizations, including ten (10) transactions in the last two years alone.  In fact, in this time our Sequoia platform has become the nation’s largest non-bank sponsored issuance platform for prime jumbo RMBS.  As the table below illustrates, since the RMBS market restarted in 2010, Redwood’s Sequoia platform is, by deal count and issuance, the second largest issuance platform overall, and the largest that is not sponsored by a major bank. 

![](https://hackmd.io/_uploads/Hk2VQPlXj.png)
*\*Data Calculated as of September 7, 2022 based on information available via Bloomberg and Wells Fargo Securities, LLC.* 

When evaluating the relative strength of Sequoia RMBS relative to other RMBS in the prime jumbo category, two metrics commonly used to evaluate relative performance of RMBS, the conditional prepayment rate (“CPR”) and loan delinquency (“DQ”) statistics, may be useful.  CPR is the percentage of a transaction’s total principal balance that is paid ahead of schedule.  In RMBS transactions generally, CPR is used to measure the amount by which paydown of principal on a mortgage loan pool in a given month exceeds its scheduled amortization for that month.  When a mortgage loan pays off and the principal has been paid in full, the mortgagor is no longer obligated to continue making monthly interest payments and, depending on the class of securities they hold and the specific structure of the transaction, an investor may receive less interest over time. This is called prepayment risk. Generally speaking, a high prepayment rate means the debt associated with the security is being paid back at a faster rate than the required minimum.  While this may indicate that the investment is lower risk, since the amount that is owed is being paid back, it also may mean that the overall return on the investment could be lower than expected.  DQ statistics refer to the number of mortgage loans in a transaction that are delinquent (i.e., the related mortgagor has not been timely in making payments of principal and interest on a mortgage loan).  DQ statistics are often grouped by the number of days payments are delinquent, typically in 30-day increments.  Investors often refer to DQ statistics as a way to evaluate the creditworthiness of loans included in an RMBS transaction.    

The Sequoia platform has, over its twenty (20) plus year history, built a reputation on the strong performance of the mortgage loans collateralizing the RMBS it has previously issued.  As an example and as the table below illustrates, mortgage loans included in Sequoia RMBS transactions from 2018 – 2021 have experienced a relatively low CPR and DQ rates when compared to those of other RMBS transactions over the same period:  

 ![](https://hackmd.io/_uploads/HJODQvl7o.png)
*\*Data Calculated as of August 2022 based on information available via Bloomberg and Wells Fargo Securities, LLC. Please see endnote (2) for additional information regarding the acronyms included in the table headings above*

Strong performance of Sequoia RMBS, such as illustrated above, has helped us attract and retain a base of over 200 institutional investors in Sequoia RMBS transactions, including some of the nation’s largest pension funds, insurance companies and professional asset managers. 

In addition to focusing on the quality of Sequoia RMBS and creating an RMBS product that attracts ongoing investor partnerships with large institutional buyers, Redwood also strives to distinguish the Sequoia platform as a leader in providing investors increasing transparency and meaningful disclosure.  In 2021, the Sequoia platform achieved two major milestones, as the first RMBS prime jumbo platform to integrate blockchain technology and the first such platform to include disclosure on certain ESG topics pursuant to SASB’s Mortgage Finance disclosure framework.  We were honored to be recognized by GlobalCapital as 2021 RMBS issuer of the year, thanks in part to these market-leading innovations and the Redwood team’s commitment to investors in Sequoia RMBS.   

![](https://hackmd.io/_uploads/HkZp7Dg7i.png)


### c. Certain Sequoia platform counterparties  

As an experienced issuer of RMBS, Sequoia has long-established relationships with third parties needed to support our issuance activity.  Our counterparties are selected for their expertise in RMBS and continue to receive invitations to participate based on our ongoing evaluation of their performance.  We anticipate selecting established counterparties for the project contemplated hereby, whose identities and experience are summized in the supplemental materials entitled [“Sequoia RMBS – Sequoia Counterparties”](https://hackmd.io/@allangiraf/RedwoodCounterparties). 

Additionally, we believe MakerDAO may wish to engage outside counsel to represent the community as an investor.  We would be glad to suggest options with suitable expertise for the MakerDAO community’s consideration in connection with any onboarding of Sequoia RMBS. 

## 2. Overview of Residential Mortgage-Backed Securities (“RMBS”) 

## a. General RMBS Characteristics 
Redwood is proposing that MakerDAO onboard one or more tranches of investment grade RMBS issued in an upcoming offering through our Sequoia platform.  Sequoia RMBS are backed by prime jumbo residential mortgage loans acquired by Redwood in accordance with our eligibility criteria.  This section is intended to provide an overview of RMBS generally.

For community members unfamiliar with residential mortgage-backed securities (“RMBS”), this term is used to describe a debt-based security secured by mortgages on residential properties.  Unlike a corporate bond offering, where investors are reliant on the ability of the issuing entity to make bond payments when they are due, these securities are ‘backed’ by a discrete pool of assets (in this case, mortgage loans) owned by the issuing entity.  RMBS investors are entitled to monthly distributions comprised of the principal and interest payments made by mortgage loan borrowers (or mortgagors) on the pool of mortgage loans and, in the event a mortgagor defaults, any funds realized through the foreclosure process.  The credit quality of loans included in any RMBS is therefore important to consider and, as we detail further below, Redwood has a demonstrated record of purchasing prime or super-prime loans from established mortgage loan originators.  Over the course of Redwood’s 25+ year history, many of these loans have been included in prior Sequoia securitizations we have sponsored, the historical performance of which has been strong.  As further detailed below, we generally invest in our own Sequoia securitizations and thereby “maintain skin in the game” and “eat our own cooking” with respect to the credit quality of the loans we securitize through our Sequoia platform. 

A typical RMBS transaction consists of several different classes, or ‘tranches’, of securities, each with a different priority in the monthly cashflow generated by the pool of mortgage loans.  As mortgagors make payments each month, those funds are allocated first to the most senior tranche of securities by virtue of that class’s higher priority in the transaction’s capital structure; only after all payments to which the most senior tranche is entitled have been made are excess funds then allocated to the next most senior tranche, and so on.  The lowest priority tranche is often referred to as the ‘first loss’ tranche, because investors in these securities are the first to be impacted by any shortfall in monthly payments by mortgagors.   

### b. Distributions on RMBS Generally 

Speaking generally, investors in RMBS such as the Sequoia RMBS are entitled to a monthly distribution of funds in accordance with the transaction’s flow of funds or “waterfall” (see below for general information on an RMBS waterfall).  Such payments are structured to include both interest amounts accrued on the securities held by an investor and principal amounts an investor’s securities are entitled to receive.  A number of factors determine the amount of payments made to an investor each month, including (but not limited to) payments received on the mortgage loans collateralizing the securities and the rules governing entitlements to funds and allocation of losses in the contracts documenting the transaction. 

* interest: on each payment date investors may be entitled, subject to certain limitations, to receive accrued and unpaid interest determined on the basis of the outstanding class principal amount of the security held by such investors, the applicable interest rate and the related accrual period.   

* principal: the amount of principal investors may receive is determined by many factors, including (but not limited to) (1) funds received on the mortgage loans, (2) rules provided in the transaction documents specifying how principal payments received on the mortgage loans must be allocated among different classes of securities and (3) certain expenses (including amounts reimbursed to certain transaction parties in respect of any previous advances of monthly payments pursuant to the documents governing the transaction).  Certain classes of securities are entitled to receive principal distributions from the senior principal distribution amount for the related distribution date. Other classes of securities generally will receive their share of scheduled principal collections, sequentially, as part of the subordinate principal distribution amount for the related distribution date.  Additionally, the manner of allocating payments of principal on the mortgage loans may differ depending upon a number of factors including (but not limited to) when a distribution date occurs, whether the delinquency and loss performance of the mortgage loans is worse than certain levels specified in the governing documents and described in the related offering materials and, with respect to the subordinate securities, depending upon the subordination levels available to the senior tranches of securities and each tranche of subordinate securities from classes with payment priorities subordinate to that tranche, and whether certain conditions have been satisfied. 

A common feature in RMBS transactions, including Sequoia RMBS, is a cashflow waterfall with detailed rules governing the distribution of money received on the related mortgage loans each month among the various classes of securities issued in that transaction.  The hypothetical waterfall below is intended to illustrate, at a high level, how the available distribution amount (described further below) will be distributed among various classes of securities *(3)*.

![](https://hackmd.io/_uploads/Sy3pNwgQo.png)

By way of illustration, the available distribution amount in an RMBS transaction may be calculated as described below *(4)*.

![](https://hackmd.io/_uploads/BkYJrwxXo.png)

## c. Strategic Benefits of Investing in RMBS 
We believe onboarding Sequoia RMBS would offer the MakerDAO community a number of attractive benefits.  In fact, by choosing to invest in Sequoia RMBS, MakerDAO would place itself in a cohort of investors that include some of the nation’s largest institutional investors, including many large pension funds, insurance companies and professional asset managers.  Generally speaking, investors such as these are attracted to RMBS because these securities generally offer higher yield opportunities than U.S. Government issued bonds.  Unlike corporate bonds, RMBS investors rely on the performance of the collateral supporting the securities (residential mortgage loans) and not on the operational or financial performance of the sponsor of the transaction.  Statistical information on the performance history of previously issued Sequoia RMBS is included in the information on the Sequoia platform provided above. 

We believe including RMBS such as the Sequoia RMBS in a portfolio of investments offers additional benefits, including: 

**I. addition of investment grade real world assets to MakerDAO’s investment portfolio**:  mortgage-backed securities (“MBS”) can play an important role in a diversified portfolio of fixed income assets *(5)*:  

* MBS has historically offered attractive yields relative to sovereign debt (i.e., U.S. or other government-issued bonds such as U.S. Treasury bills).  MBS may thus serve to improve the risk-return profile of fixed income portfolios, as they are similar in credit quality to sovereign debt but offer a higher historical yield. Over the last 10 years, yields on MBS have averaged 2.17% over U.S. Treasury bills: 

![](https://hackmd.io/_uploads/H1bwHvlXo.png)


* MBS has historically experienced low volatility compared to other fixed income asset classes.  As the table below demonstrates, the Sharpe ratio (a measure of volatility/risk) has been relatively high compared to most other fixed income asset classes over time.  The Sharpe ratio compares the return of an investment with its risk and is a mathematical expression of the insight that excess returns over a period of time may signify more volatility and risk, rather than investing skill. 

![](https://hackmd.io/_uploads/HyRRBPemj.png)
 
* Generally speaking, including MBS in a fixed income portfolio can help to diversify the risk profile of the portfolio.  By diversifying a fixed income portfolio to include MBS assets, an investor may thus lower the risk of the portfolio overall. For most fixed income securities, as interest rates rise, prices tend to decline, and as interest rates fall, prices tend to increase. However, mortgagors’ prepayments, and changes in the level and speed of repayment, can affect valuation on MBS.  The prices of these assets thus tend to rise as interest rates rise, when prepayment levels are low, and tend to decline when interest rates drop and prepayments are higher. As shown in the table below, MBS have also historically demonstrated a lower correlation to equity returns than most other fixed income asset classes. 

![](https://hackmd.io/_uploads/rJx7LPeXo.png)

**II. RMBS provides a more regular cashflow than U.S. Treasuries**: RMBS is typically structured to provide monthly remittances to investors, versus the semi-annual remittances expected on U.S. Treasuries *(6)*.   

**III. investment in a liquid asset with a well-developed secondary market**: as described further in our discussion of liquidity of RMBS generally below, the secondary market for RMBS is well-established, allowing parties to efficiently establish pricing and conduct post-issuance sales of securities. 
 
 ![](https://hackmd.io/_uploads/HyL0LwlQs.png)


**IV. development of a scalable relationship between Redwood and MakerDAO**: 
* the infrastructure for Sequoia RMBS issuance has been in place for decades, ensuring a professionally structured and orderly experience for investors like MakerDAO.     
* with an established loan acquisition platform and frequent issuance cadence, Redwood is positioned to engage with MakerDAO on future Sequoia issuance. 
* Redwood is also active in the secondary market for residential mortgage whole loans; should MakerDAO wish to consider acquiring exposure to loan assets, engaging with Redwood would offer a single point of contact and internal knowledge of MakerDAO’s structuring requirements and preferences.   

**V. establishment of MakerDAO as an investor in the structured products market** 

![](https://hackmd.io/_uploads/rJpgPwemi.png)
Source: J.P. Morgan Research.  

### d. Liquidity of RMBS Generally 
The Sequoia RMBS would be issued in an upcoming Sequoia RMBS issuance sponsored by Redwood.  As part of the transaction, an SEC-licensed broker dealer will be engaged by Redwood to place bonds with investors, including MakerDAO.  In accordance with customary practice in the RMBS market, the securities will receive CUSIP and ISIN identification numbers and are expected to, on the closing date of the transaction, be issued through the Depository Trust Company (“DTC”).   

The American market for RMBS is large and liquid, with $7.8 trillion in assets outstanding and an average daily trading volume of $332 billion (source: Securities Industry and Financial Markets Association, as of March 31, 2020).  The non-Agency RMBS market (the term used to describe RMBS issued by private issuers (i.e., not issued by government sponsored enterprises such as Fannie Mae and Freddie Mac) comprises a significant share of the total size of the residential mortgage sector and currently exceeds $400 billion.  In May 2022 alone, non-Agency RMBS issuance exceeded $9.24 billion. Given the volume of this market, many large institutional broker dealers maintain trading desks routinely making a secondary (or post-issuance) market for these securities, and the volume of trading activity facilitates efficient price discovery between prospective buyers and sellers in the secondary market. 

![](https://hackmd.io/_uploads/SJW8vwems.png)

Redwood is an established participant in the RMBS market, having to date issued over $60 billion in RMBS across 118 prior Sequoia RMBS transactions.  In the last nine years, Redwood has issued more than $22.2 billion of Sequoia RMBS, of which more than $7.4 billion is currently outstanding. 

## 3. Overview of the Sequoia RMBS 

### a. Alignment of Interests with MakerDAO 

We propose that MakerDAO onboard the most senior tranche or tranches of Sequoia RMBS in an upcoming Sequoia issuance.  In this initial transaction, we expect the capital structure to include several classes of subordinate tranches of securities providing credit enhancement to the senior tranche or tranches of securities proposed to be onboarded by MakerDAO.  These subordinate tranches of securities are not proposed to be onboarded by MakerDAO as they are not expected to carry an investment grade rating.  These subordinate tranches of securities are contemplated to be sold to third-party investors or, in the case of the most subordinate securities, to Redwood’s portfolio.  Redwood’s established practice with respect to the Sequoia RMBS we issue is to purchase and hold as an investment in our portfolio the transaction’s first loss tranche.  Through this practice of purchasing from each Sequoia transaction the tranche of securities most likely to be impacted if the loans do not perform (also known as maintaining “skin in the game” or “eating our own cooking”), we believe we closely align our interests with those of the MakerDAO community when they invest in Sequoia RMBS.   

### b. Rating Agency Review of Sequoia RMBS 

As is customary for RMBS Redwood issues through the Sequoia platform, Redwood will select and engage one or more nationally recognized statistical ratings organizations with established frameworks for evaluating RMBS to evaluate the Sequoia RMBS proposed to be onboarded by MakerDAO.  Ratings agencies consider many factors when reviewing RMBS securities, and ultimately deliver ratings with respect to their evaluation of the creditworthiness and risk of default of the securities issued in the transaction.  The ratings of senior securities by rating agencies address the likelihood of the ultimate payment of principal and the timely payment of interest on such securities, and the ratings of the subordinate securities that are rated by the rating agencies address the likelihood of the ultimate payment of principal and interest on such securities.  Rating agencies’ ratings do not address the frequency and timing of principal prepayments on the mortgage loans or the corresponding effect on the yield to securityholders. The ratings of securities should be evaluated independently from similar ratings on other types of securities. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization.  As MakerDAO has indicated a preference for investing in investment grade securities, Redwood will structure the transaction so that the RMBS securities proposed to be onboarded by MakerDAO achieve the highest ratings available for RMBS securities from each rating agency engaged to provide ratings for that transaction.    

### c. Blockchain reporting on the Sequoia Platform 

The Sequoia platform distinguishes itself as the only RMBS platform to include blockchain reporting on its securitization transactions closing after mid-2021.  Consistent with all Sequoia issuances after that date, loan level data reporting for the transaction will be provided on the blockchain by the transaction’s distributed ledger agent. The distributed ledger agent will maintain a digital asset platform through which end users (including MakerDAO community members) may view updated information on each business day relating to payments on the mortgage loans, which are mirrored through digital asset accounts on a blockchain.   

RMBS securities, including Sequoia RMBS, generally operate with no oversight required from investors or other parties not contractually engaged to perform duties for the transaction.  As is customary in the market for RMBS, information about any Sequoia RMBS collateral onboarded by MakerDAO is regularly made available to investors.  In addition to the loan level reporting provided on the blockchain by the distributed ledger agent detailed above, Redwood will structure the transaction to contain all reporting customarily provided to investors in Sequoia RMBS, including (without limitation): 
* each Sequoia RMBS security will be issued CUSIP numbers, allowing investors (including MakerDAO) to access information about the securities on standard investment banking services such as Bloomberg Finance L.P. and Intex Solutions, Inc.  
* on each distribution date, the transaction’s securities administrator will make available on its website, to any interested party who completes the required registration, a distribution statement containing, among other things, the amount of cashflow received, the amount of fees and expenses accrued and paid to the various transaction parties, the amount of distributions to each class of securities, the amount of such distribution allocable to interest and the amount of such distribution allocable to principal. 
* the transaction’s loan data agent will maintain an electronic portal interface through which approved users can view performance information, updated on a periodic basis, related to the mortgage loans.   

### d. ESG Disclosure on the Sequoia Platform 

Redwood is committed to providing enhanced transparency into environmental, social and governance, or “ESG”, attributes of loans in the mortgage loan pool related to its Sequoia platform.  In a first for the RMBS industry, Redwood in December 2021 began including disclosure on certain ESG standards for the Mortgage Finance industry promulgated by the Sustainability Accounting Standards Board (“SASB”).  We anticipate that any Sequoia RMBS proposed to be onboarded by MakerDAO would include ESG disclosure consistent with prior Sequoia RMBS transactions.  Neither Redwood nor any other party will obtain a third-party opinion or otherwise represent that any Sequoia RMBS are “green,” “social,” “sustainable” or equivalently labeled financial products or will meet any particular investor’s expectations concerning SASB standards or any other ESG or sustainability framework.   

### e. Counterparty Risk Monitoring on the Sequoia Platform 

With over twenty years of experience purchasing and securitizing residential mortgage loans through our Sequoia platform, Redwood has established robust risk monitoring mechanics, including policies and procedures related to collection of payments, charge-offs and data collection on the mortgage loan pools collateralizing each Sequoia RMBS transaction.  These policies and procedures are specified in the contracts used to document the transaction, and we anticipate using our established transaction documents in any Sequoia RMBS onboarded by MakerDAO.  With respect to risk monitoring and operations guidelines, our Sequoia platform documents generally include, but are not limited to, contractual obligations imposed on key transaction parties as follows: 

* mortgage loan servicers will have primary responsibility for servicing the mortgage loans collateralizing the transaction, including, but not limited to, all collection and loan-level reporting obligations, maintenance of custodial and escrow accounts, maintenance of insurance and enforcement of foreclosure proceedings with respect to the mortgage loans and the mortgaged properties, in accordance with the provisions of the servicing agreement; 
* a master servicer will have the authority to terminate the servicer for certain events of default which indicate that either the servicer is not performing, or is unable to perform, its duties and obligations under the transaction documents;   
* the servicing administrator will have the authority to terminate the servicer under the transaction documents, with or without cause, and appoint a successor servicer, with the consent of the master servicer (which may not be unreasonably withheld or delayed). In accordance with established practice for the Sequoia platform, a Redwood affiliate is expected to act as servicing administrator for the transaction contemplated by this MIP; and 
* the servicing administrator’s role also includes overseeing certain matters relating to the servicing of defaulted mortgage loans including, but not limited to, approving certain loan modifications, reviewing environmental reports relating to foreclosed properties to determine whether to proceed with a foreclosure, approving certain actions relating to the management of REO property and approving the release of the original mortgagor in connection with mortgage loan assumptions. 
 

### f. Certain Risks Relating to the Sequoia RMBS 
As with any investment, there are a variety of inherent legal risks associated with the Sequoia RMBS including, but not limited to, prepayment risk and credit risk.  Prepayment risk is the risk that the mortgage holder will pay back the mortgage before its maturity date, which reduces the amount of interest the investor would have otherwise received over the amortized life of the loan.  For further information related to prepayment risk, please see our overview of RMBS provided above. 

With respect to credit risk in the underlying assets, Sequoia RMBS are backed by residential mortgage loans that are generally secured by real property.  Losses on residential real estate loans can occur for many reasons, including: poor origination practices; fraud; poor underwriting; poor servicing practices; weak economic conditions; increases in payments required to be made by mortgagors; declines in the value of real estate; natural disasters, the effects of climate change (including flooding, drought, and severe weather) and other natural events; uninsured property loss; over-leveraging of the mortgagor; costs of remediation of environmental conditions, such as indoor mold; acts of war or terrorism; changes in legal protections for lenders and other changes in law or regulation; and personal events affecting mortgagors, such as reduction in income, job loss, divorce, or health problems.   

Prospective investors should also carefully consider, among other things, the transaction’s satisfaction of any exemptions relating to the U.S. Credit Risk Retention Rules, the federal tax treatment of the transaction, ERISA restrictions and bankruptcy, true sale and non-consolidation considerations.   

To the extent that the MakerDAO community approves Sequoia RMBS as being an eligible form of collateral for onboarding, offering materials will be prepared in connection with the subsequent offering of any securities (including any Sequoia RMBS).  Those offering materials will identify certain significant sources of risk associated with an investment in the securities (including any Sequoia RMBS).  These materials, including the risk factors set forth therein, should be carefully reviewed.  Additionally, MakerDAO may wish to consult with legal, tax, accounting and financial advisors prior to making an investment decision.   

Sequoia RMBS have not previously been offered in tokenized form.  As described elsewhere in this proposal, Redwood would be pleased to work in consultation with MakerDAO's legal, tax or other counsel to facilitate, at MakerDAO's option, tokenization of any securities ultimately onboarded by MakerDAO through the Sequoia platform via Oasis Pro Market's platform for digital asset securities.  MakerDAO should consider any additional risks associated with the tokenization of Sequoia RMBS. 

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###### (1) The information contained herein is provided solely for informational purposes to determine preliminary interest in investing in a transaction with the general characteristics described in these responses and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. If any offer of securities is made, it will be made pursuant to a preliminary offering memorandum (the “Preliminary Offering Memorandum”) and a final offering memorandum (the “Final Offering Memorandum”) in the future, prepared by or on behalf of an issuing entity which will contain material information not contained herein and which will supersede, as to any securities offered, the information provided herein in its entirety. Any decision to invest in the future in any securities offered in the future should be made after reviewing the Final Offering Memorandum, conducting such investigations as MakerDAO as an investor deems necessary and consulting the investor’s own legal, accounting, and tax advisors in order to make an independent determination of the suitability and consequences of an investment in the securities.  <br><br>We note that (i) any transaction in securities is subject to a risk of loss, and possibly total loss, of principal, (ii) the information contained herein and risks described herein do not purport to identify every possible risk (direct or indirect) or other material considerations, which may be associated with your entering into a transaction in the future for the purchase of securities and (iii) any securities offered in the future will not have been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any state or foreign jurisdiction and may not be offered, sold or otherwise transferred unless an exemption from registration under the Securities Act and all other applicable securities laws is available. <br><br>We note, furthermore, that our responses contain information accurate as of the date of this document.  While we welcome comments from and dialogue with the community as our proposal is evaluated, information in this response generally will not be updated and therefore may not reflect the most current information about the subject matter discussed herein. <br><br> Past performance is no guarantee of future results. 

###### (2) The table headings included in the table titled “2018-2021 Prime 2.0 Performance Summary by Shelf (August 2022 Remit)” above have the following general meanings: <br><br> Collat Cur Bal:  Collateral Current Balance. This is the aggregate current balance (notional) of all of the outstanding RMBS transactions for the particular issuer (i.e., the shelf name listed in the first column) during the specified time range. <br><br>WALA: Weighted Average Loan Age. This value is expressed in months and denotes the weighted average (based on outstanding principal balance of the mortgage loans) of how many months have elapsed since the mortgage loans in the related transactions were originated.  Because the outstanding principal balance of each mortgage loan in the related transactions is used as the weighting factor in the weighted average calculation, the WALA will change as the principal balances of the mortgage loans are paid down by the related mortgagors. <br><br> GWAC:  Gross Weighted Average Coupon.  This value shows the weighted average (based on outstanding principal balance of the mortgage loans) interest rate for the mortgage loans in the related transactions (i.e., the rate of interest the respective mortgagors are contractually obligated to repay). Because the outstanding principal balance of each mortgage loan in the related transactions is used as the weighting factor in the weighted average calculation, the GWAC will change as the principal balances of the mortgage loans are paid down by the related mortgagors.<br><br> CPR:  Conditional Prepayment Rate.  This value is expressed as a percentage and represents the total amount of principal of the mortgage loans in the related transactions that is paid by the respective mortgagors ahead of schedule.  CPR is often referred to as the “speed” at which the mortgage loans in the related transactions are being repaid; higher numbers here denote a faster paydown of principal by the respective mortgagors of the mortgage loans in the related transactions (i.e., additional payments of principal are being made by the respective mortgagors) relative to what was contemplated by the associated mortgage loan amortization schedule. <br><br>DQ: Delinquency.  This value is expressed as a percentage and represents the number of mortgage loans in the related transactions that are delinquent (i.e., the related mortgagor has not been timely in making payments of principal and interest on its mortgage loan).  The degree of delinquency is shown in this table in 30-day increments, meaning that 30+DQ represents mortgage loans that are 30 days or more delinquent, 60+ DQ represents mortgage loans that are 60 days or more delinquent and so on. <br><br> MoM:  Month-over-Month.  This value represents the change in the respective metric (i.e., CPR or DQ, as applicable) on a monthly basis (i.e., from one month to the next month) and is expressed as a percentage of the prior month’s value. 

###### (3) The information contained in this section is demonstrative only, and is provided solely for informational purposes to determine preliminary interest in approving Sequoia RMBS as an eligible type of collateral to be onboarded by MakerDAO as part of a future transaction (with general characteristics to be described in future offering materials), and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. The information contained below is at the initial structuring phase and there may be material changes to the structure prior to any securities being offered. 

###### (4) The information contained in this section is demonstrative only, and is provided solely for informational purposes to determine preliminary interest in approving Sequoia RMBS as an eligible type of collateral to be onboarded by MakerDAO as part of a future transaction with general characteristics to be described in future offering materials, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. The information contained below is at the initial structuring phase and there may be material changes to the structure prior to any securities being offered. 

###### (5) Please refer to our MIPXX for further discussion on Sequoia RMBS relative to U.S. Treasuries. 

###### (6) Please refer to our MIPXX for further discussion on Sequoia RMBS relative to U.S. Treasuries. 

 