Earnings call: Redwood Trust reports Q3 2023 results, eyes growth in mortgage banking and business purpose lending

Redwood Trust, Inc. (NYSE:RWT) disclosed in its third quarter 2023 earnings call that its GAAP book value fell 5% due to mark-to-market adjustments triggered by a rise in the 10-year Treasury. Despite this, the company remains optimistic about its mortgage banking business and sees potential growth in the non-agency mortgage space. Redwood Trust also highlighted its intent to evolve its capital structure and foster long-term private capital partnerships.

Key takeaways from the call:

The company plans to focus on risk-minded production and expects a major shift in how mortgage-related assets are owned and financed.
Redwood Trust aims to solidify relationships and provide liquidity in an illiquid market.
The company reported progress in its residential mortgage banking business, expecting its capital allocation to this sector to continue growing.
Redwood Trust’s business purpose lending platform has seen opportunities, with strong demand for well-underwritten loans from quality sponsors.
The company distributed over $350 million of business purpose loans in Q3 and closed their fourth securitization of the year in Q4, bringing the total residential securitization activity for 2023 to over $1 billion.
Redwood Trust reported a rise in residential purchase volume of $815 million in the third quarter, up over 340% from the previous quarter, largely due to a 4% increase in salary base and deeper penetration with existing partners. The company also sold $391 million of loans in the third quarter through securitization and hold on dispositions, and funded $411 million of loans, with a slight increase in bridge volume offset by a decline in term production.

Despite a decrease in net interest income from bridge loans and the investment portfolio, Redwood Trust anticipates a recovery of associated interest going forward. The company also reported a decrease in G&A expenses and has an excess capacity of 2.2 billion to support the growth of its business. Redwood Trust sold $49 million of securities and has approximately $300 million of unencumbered assets as a potential source of capital.

In terms of the housing market, the company stated that it has remained stable with no disruption from home builders providing subsidized financing. Redwood Trust is open to partnering with home builders and has seen interest in business purpose lending (BPL) financing from them. The company also sees potential in unlocking loans that have been locked up since the financial crisis and plans to focus on scaling the business through joint ventures and capital partnerships.

During the earnings call, Redwood Trust also discussed the current state of the loan market, noting that there are fewer good loans available compared to previous quarters. However, the company remains focused on expanding relationships and exploring new products like credit risk transfer (CRT). Redwood Trust believes that the market is more accepting of these structures now and is open for business in this area, focusing on partnerships to fund these opportunities.

Lastly, the speaker discussed the performance of their mortgage banking income, highlighting the positive impact of hedging with TBA (To Be Announced) and strong interest rate risk management. The company expects to see a recovery in interest income in the fourth quarter and anticipates a shift in income generated from net interest income to noninterest income. Redwood Trust also mentioned their focus on the Aspire product, which is currently only an equity product flowing through investment fair value changes, and is considering closing seconds and other home equity products.