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Redwood Trust profit grows despite stalling originations market

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Continued diversification of its business lines and better margins in its securitization activities helped Redwood Trust overcome steep mortgage origination declines and post nearly 14% annual growth in net income during the third quarter.

The real estate investment trust earned $41 million in net income during the third quarter, up from $36 million a year ago and $33 million during the second quarter. Although mortgage banking income dropped year-over-year to $11 million, from $21 million, it was essentially flat compared to the previous quarter.

“As many industry participants became more aggressive in pricing loans to preserve volumes in the third quarter, we remain focused on profitability,” Redwood CEO Chris Abate said during the company’s third-quarter earnings call. “This yielded strong mortgage banking margins in the third quarter, but we will have to navigate these challenging market conditions going forward.”

During the quarter, Redwood Trust closed three of its Sequoia securitizations for over $1.1 billion, bringing its 2018 total to 11 and its post-crisis total to 52. Redwood also expects its full-year jumbo mortgage purchases to “be near the lower end of our original $7 billion to $8 billion range for 2018,” Abate said.

“Our remaining capital deployment included $30 million into bonds issued from our Sequoia program and $92 million into third-party RMBS issuances,” Redwood President Dash Robinson said on the call. “Additionally, we remained active in optimizing our capital allocations in the third quarter, continuing to rotate out of lower yielding and less strategic assets. Specifically, we freed up approximately $106 million of capital for redeployment, capturing $15 million of previously unrealized gains.”

Overall, Redwood generated earnings of $0.42 per share in the third quarter, exceeding the quarterly dividend of $0.30 per share. The REIT’s book value grew for the 10th consecutive quarter. It also sold approximately $800 million of home loans during the quarter, its highest amount in nearly two years. Redwood anticipates additional future growth to accompany the significant changes coming to the secondary mortgage market.

“Most expect a new head of the FHFA early next year, as well as new CEOs at both Fannie Mae and Freddie Mac. These changes and appointments could have significant downstream effects with the potential for private sector participation to increase significantly,” said Abate. “It goes without saying that we view these developments as positives for companies like Redwood and would look to be part of any private capital solutions that may arise through agency based GSE reform.”

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