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Investments

Redwood Trust: Securitization game changer

Malleable enough to operate effectively in a difficult mortgage market

February 25, 2014
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Redwood Trust (RWT) gave its obligatory earnings call to investors yesterday.

In the call, there was actually some interesting news. Not only is the company moving to include conforming loans in its portfolio, but it is also coming up with new strategies to stay one step ahead.

For one, the decision to move away from bid-in-competition activities to favor fee-based transactions is a monumental shift in the way Redwood does business.

But does anyone appreciate it? Certainly the shareholders do.

Redwood is a securitization game-changer, always has been. As the first regular issuer of private-label securitizations via its Sequoia platform, the real estate investment trust often stood alone. Others eventually entered into the market, issuing securitization with many similarities.

Then, suddenly the regular issuance stopped, owing to more favorable wholesale market conditions.

It will start up again in the second half of this year, the executives predict.

The point here is that Redwood is malleable enough to operate effectively in a difficult mortgage market. This is not going unnoticed.

"While the company admitted securitizations for the coming year will likely be below the $6.9 billion level achieved in 2013, we believe consistently decent results in spite of what is otherwise a difficult operating environment has begun to increase investor confidence," said a follow-up research report from FBR Capital Markets.

"Ultimately, Redwood continues to be one of the only ways to play a return of private capital in the mortgage market, and we see significant upside to both earnings and dividends in the years to come even if the timeline is extended out," the note states.

But besides what it wishes to sell, it's important to note what the REIT is also willing to buy.

"We will buy high non-QM loans for securitizations," one exec said. This followed its strategy of buying millions in mortgage servicing rights this year.

This is the plan that Redwood will follow until there is more meaningful reform of the government-sponsored enterprises, Fannie Mae and Freddie Mac.

The executives indicated that the model of private investors taking the first-loss credit risk ahead of an implicit government guarantee is likely to replace the GSEs. They indicated that they would like to be a major player in the former portion of that reform.

So to bolster the angle of the FBR take-away, yes, Redwood continues to be one of the only ways to play the return of private capital to the mortgage markets.

They have, and will continue to be, a securitization game changer.

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