Lower acquisitions and loan adjustments squeeze Redwood profit

RMBS issuance expected to dwindle in 4Q

Redwood Trust (RWT) posted significantly weaker net income of $22 million in the third quarter, down from $66 million in the second quarter and also down from $40 million last year.

The moderate decline primarily reflects a combination of lower loan acquisition volumes and the realization of $0.17 per share of negative market valuation adjustments on residential loans.

The real estate investment trust loan losses on residential mortgage-backed securitization entities, accounting for $1 million in the third quarter, compared to $4 million in the second quarter.

As of September, Redwood’s residential securities portfolio had a market value of $1.3 billion. This a result of $223 million of securities acquisitions in the third quarter, which was largely offset by sales of $182 million and principal payments of $38 million.

The market value of the REIT’s mortgage servicing rights was $60 million, or 1.08% of the $5.6 billion principal amount of the associated mortgages, including $13 million of MSRs associated with $1.6 billion of loans acquired in the third quarter.

Interest rate volatility in recent months resulted in various setbacks for the nonagency RMBS market, Redwood pointed out.

Industry-wide $3.5 billion of new issuance occurred in the third quarter, down from $4.4 billion in the second quarter — Redwood sponsored three of the eight securitizations that took place during the quarter.

“With the fix income market expecting an eventual tapering of the Federal Reserve demand for agency MBS, and fixed income funds continuing to experience inflow, it is likely to be a quiet fourth quarter for new-issuance RMBS,” explained Redwood CEO Martin Hughes and president Brett Nicholas.

Going forward, the company expects to acquire between $500 million and $1 billion of jumbo residential loans in the fourth quarter.

Redwood established a goal earlier this year to obtain $8 billion of jumbo residential loans purchases. Given the market volatility, the REIT is concerned it will not meet its yearly goal.

Income for mortgage banking activities was negative $6 million for the third quarter, primarily reflecting losses realized on loans that were identified in June, but purchased during the third quarter.

The impact of risk management derivatives used to offset risk associated with mortgage banking activities, coupled with changes in the value of its RMBS, were more muted during the third quarter as interest rates stabilized.

Consequently, Redwood acquired $1.3 billion of loans in the third quarter, down from $2.6 billion in the second quarter.

In total, the company purchased $6.5 billion of loans through the first quarters of 2013. 

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