The decline is in sharp contrast with the real estate investment trust’s performance in the third quarter, when its net income nearly tripled, rising from $16 million in the second quarter to $45 million in the third quarter.
In the fourth quarter, the REIT also reported earnings of $0.31 per fully diluted share, compared to $0.50 per fully diluted share for the third quarter and $0.29 per fully diluted share for the fourth quarter of 2013.
Redwood also reported estimated REIT taxable income of $16 million, or $0.19 per share, for the fourth quarter of 2014. This compares to estimated REIT taxable income of $18 million, or $0.21 per share, for the third quarter of 2014 and REIT taxable income of $16 million, or $0.20 per share, for the fourth quarter of 2013.
At the end of 2014, Redwood reported a book value per share of $15.05, as compared to $15.21 at Sept. 30, 2014, and $15.10 at Dec. 31, 2013.
“Looking back, 2014 proved to be a challenging, yet highly productive year spent further developing and positioning our residential and commercial businesses,” Redwood’s CEO, Marty Hughes, and president, Brett Nichols, said in a letter to shareholders.
“Entering 2015, we believe we are well positioned to grow income by generating more fees from loan sales and additional interest income by creating proprietary investments for our portfolio.”
In the letter, Hughes and Nichols call 2014 a “tough” year for residential mortgage banking.
“Industry loan origination volumes declined by 39% from 2013 levels, as refinance activity waned and loan sale margins remained under pressure, with the industry adjusting to lower mortgage demand,” Redwood’s leaders said. “Additionally, mortgage servicing rights’ values were hit hard towards the end of the year as future prepayment expectations increased due to declining mortgage interest rates.”
Hughes and Nichols add that despite those headwinds, the REIT made “good” financial and operational progress in 2014, citing several specific examples, including:
- After obtaining GSE approval at the end of 2013, we successfully completed our first year of conforming residential business with acquisition volume of $4 billion in 2014. For all of 2014, our combined conforming and jumbo loan acquisition volume was $9.0 billion, a 27% increase from 2013
- We entered into two new key business relationships with the Federal Home Loan Bank of Chicago that should benefit Redwood and also contribute to the Federal Home Loan Bank system’s mission. The first relationship gives us a three-year period during which we will be the sole acquirer of high-balance loans through the FHLBC’s new Mortgage Partnership Finance Direct program. There are approximately 750 members of the FHLB system that are eligible to participate in the MPF Direct program and thereby become sellers of high-balance loans to Redwood
- In the other relationship, a Redwood subsidiary became a member of the FHLBC, giving it access to collateralized financing for mortgage loans and securities. Using FHLBC financing, this subsidiary can acquire residential mortgage loans to hold as long-term investments and we currently anticipate this subsidiary will have up to $1 billion of financing from the FHLBC outstanding at mid-year 2015
- We entered into our first risk-sharing arrangement with Fannie Mae, which has the potential to enhance our conforming loan profitability through our commitment to absorb up to the first one percent of losses on a designated pool of newly originated loans sold to Fannie Mae
- We completed four private label residential mortgage securitization transactions, bringing our total completed PLS transactions since April 2010 to 25 transactions, which represents a market-leading 36% market share
Hughes and Nichols also shared the company’s plans for 2015, specifically saying that the company plans to gain market share by utilizing the broader seller base and strategic relationships the company formed in 2014, while also focusing on increasing the “efficiency and operating leverage” of the company’s platform.
“Our expectation is to acquire $8 billion of conforming loans and $7 billion of jumbo loans in 2015, a 67% increase from total 2014 acquisitions,” Hughes and Nichols said.
“However, our primary focus will be to achieve our maximum purchase volume potential while maintaining loan sale profit margins within our long- term target range of 25-to-50 basis points,” they continued.
“With respect to MSRs, while existing MSRs have declined in value as rates have fallen, improved market yield profiles and reduced industry capacity could make this asset class a much more attractive place to deploy capital in the coming quarters.”
Hughes and Nichols closed by saying while recent market conditions have been challenging, they still plan to grow and “deliver value” for the REIT’s shareholders.
“We’re keeping the bar high in our efforts to deliver value for you, our shareholders. We believe that our established platforms have positioned us to improve both our operating and financial performance over the course of 2015, and beyond,” Hughes and Nichols said.
“Our confidence comes from the tremendous team we have in place, and the value they offer to our residential and commercial business counterparties,” they concluded. “We recognize that you make our business possible, and we thank you for your continued confidence.”