Redwood Trust reported a drop in its first quarter 2016 earnings, shedding light on the troubles in the market and what it will do to overcome them.  

In its first quarter earnings, Redwood Trust posted net income of $12 million, or $0.15 per fully diluted share, down from net income of $41 million, or $0.46 per fully diluted share, for the fourth quarter of 2015 and net income of $15 million, or $0.16 per fully diluted share, for the first quarter of 2015.

Redwood also reported non-GAAP core earnings for the first quarter of 2016 of $37 million, or $0.44 per fully diluted share, which is $0.13 better than the capital consensus.  This compares to core earnings of $40 million, or $0.45 per fully diluted share, for the fourth quarter of 2015.

Redwood Trust explained in its 8-K filing that over the past five years, the issuance market for private-label securitization has fluctuated between feast or famine, and unfortunately, it is currently in the latter state.

But regardless of the environment, Redwood said it continues to believe in the importance of its Sequoia securitization program, with expectations to complete a Sequoia transaction in the next few months.

Redwood explained that the primary obstacle to increasing PLS issuance volume is a lack of market liquidity, as many traditional issuers and many major triple-A investors remain on the sidelines, an opinion similar to a recent comment from the CEO of Fannie Mae.

For all the calls to reduce the roles Fannie Mae and Freddie Mac play in the mortgage finance world, Timothy Mayopoulos shared this point: Private capital is “unwilling to step in” to replace the government-sponsored enterprises as mortgage finance leaders in the secondary market.

Looking at the rest of the year, Redwood said in it 10-Q filing with the Securities and Exchange Commission, “Although our tactics have changed, our business strategy continues to be focused on creating attractive investments in residential and commercial mortgage credit.

Redwood said that in 2016 it plans to have approximately 95% of its capital deployed in investment activities, while moving forward with three key areas of focus:

1. Investment portfolio 

First, we expect our investment portfolio to generate attractive and reliable income in 2016 and beyond. A significant portion of this portfolio is funded with FHLB debt financing with attractive terms. We expect our investment portfolio to generate strong cash flows in 2016 and generate an increased amount of net interest income compared to 2015.

2. Core jumbo mortgage banking franchise

Second, our core jumbo mortgage banking franchise is well positioned and remains consistently profitable despite evolving market conditions. This business represents an engine for creating future investments, and contributes direct fee income and sourcing capabilities that cannot be easily replicated. While we expect our jumbo mortgage banking activities to focus primarily on whole loan acquisitions and sales in 2016, our flagship Sequoia securitization platform remains an active option and is positioned to efficiently create investments as opportunities arise. Our FHLB-funded captive insurance subsidiary continues to source loans for its investment portfolio through our jumbo mortgage-banking activities as its existing jumbo loan investments pay down.

3. Mortgage capital markets

Third, we expect that extended dislocation in the mortgage capital markets may result in significant opportunities to invest capital in high yielding assets. These may include traditional RMBS, CMBS, and credit-risk sharing transactions. We have taken the necessary steps to strengthen our liquidity and will be offensively-minded to the extent difficult markets force good assets to trade at distressed prices.

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