Redwood Trust sees opportunities emerge from banking troubles

Redwood Trust expects its residential mortgage business operations to see long-term benefits resulting from ongoing troubles at regional banks once the current disruption settles.

The company's first-quarter earnings improved from losses throughout much of last year, due in part to healthier mortgage banking activity. The trend should continue for the real estate investment trust, according to CEO Christopher Abate.

"A reckoning is now underway amongst the regional banks, something we expect to reset the competitive landscape in mortgage finance in the coming quarters," he said in the company's call with analysts last week.

With expectations for markets "to function more rationally" after the easing of monetary policy during the pandemic, businesses such as Redwood stood in a prime position to emerge as the leading mortgage finance partners to banks, Abate said.

"While nothing changes overnight, we are seeing early, but definitive signs of a fundamental shift in bank asset allocations that we believe will anchor our go-forward residential conduit strategy."

The real estate investment trust reported company wide net income of $5 million in the first quarter compared to a $44 million loss posted in the final three months of 2022, reflecting an increase of 111%. But the quarterly number was down almost 84% from a $31 million gain in the first quarter last year. 

Diluted earnings came out to 2 cents per share, missing estimates of analysts surveyed by Yahoo Finance. Redwood's Trust other business units include an investment portfolio, business-purpose lending operations and a technology-funding arm.

Analysts, many of whom previously said the company may see a boost after Wells Fargo's recent exit from correspondent lending, agreed regional banking worries should provide a tailwind for Redwood's business interests. The turmoil "is likely to raise the cost of capital for banks and make them price mortgage risk more appropriately," said researchers at Keefe, Bruyette & Woods in a research note.

Residential mortgage banking operations in the first quarter, though, still contributed to a $1 million loss to the bottom line with the company focused on reducing costs amid widespread industry volatility.

But whereas the REIT operated conservatively within residential mortgage banking while depositories gobbled up loans in previous quarters despite interest-rate risk that helped bring about current financial industry worries, "the music has now stopped," Abate said. 

"We expect an increased appetite by certain banks to sell newly originated loans, which would otherwise be held in their portfolios. This may also lead to more strategic dispositions that present us with scalable investment opportunities."

While Redwood has long served as a mortgage aggregator of jumbo and nonagency loans for many nonbanks, Abate stated depository institutions will figure more prominently in the mix over the next few quarters. Early discussions already were underway with some, Abate said. "More banks is a big opportunity for us."

Redwood purchased $52 million of jumbo loans between January and March compared to $106 million in the final quarter last year. And after three straight quarters when it distributed no securitizations of jumbo mortgages, the Mill Valley, California-based REIT issued two, worth a total of $657 million, as well as whole loan sales of $29 million. In the fourth quarter, Redwood offered $131 million in whole loan sales.  

The company's business purpose loan production platform stands to see a pick-up in market share as a result of regional banking woes as well, with company leaders indicating they would seek to "identify areas where our liquidity will be at the highest premium in coming months." The unit funded $424 million in business-purpose loans during the quarter, with 68% allocated to bridge financing and 32% term.