While its two mortgage banking segments made money during the second quarter, Redwood Trust lost $100.2 million for the period, related to businesses it is winding down.
This compared with net income of
The legacy investments are now its own reporting segment, consisting of the assets it is selling, allowing to run-off or otherwise be disposed of.
This segment lost $104 million in the second quarter, driven by fair value adjustments from realized and anticipated near-term resolutions on legacy bridge loans. It also was driven by changes in the underlying performance of those loans.
But both the Sequoia and Corevest mortgage banking segments reported GAAP net income. Redwood noted its combined mortgage banking GAAP returns have been over 20% for four consecutive quarters. It has increased the capital to this business by $200 million since the second quarter last year.
Updating Redwood's business focus shift
The company said it is expediting its transition to the "scalable and simplified operating model" it announced at a March 2024 investor day.
"This quarter marks a pivotal moment for Redwood as we further evolve toward a more scalable business underpinned by growing and durable fee streams," said Christopher Abate, CEO, in a press release. "By proactively reallocating capital from legacy investments into our high-performing platforms, we're enhancing our capacity to capitalize on growth opportunities in an evolving market landscape — unlocking greater long-term earnings potential while eliminating legacy overhangs that have impacted our current performance."
The shift should generate between $200 million and $250 million of incremental capital for Redwood Trust by the end of the year, complementing its existing $302 million of unrestricted cash as of June 30.
Redwood's pivot is to "a more capital light strategy, which emphasizes its loan origination/operating platforms, which remain relevant and competitive in meeting the evolving demands of non-agency borrowers (aka it's leaning into the asset 'moving business,' versus the 'storage business' which demands more capital and longer-term sources of leverage)," BTIG analyst Eric Hagen said in a report.
Performance of Redwood Trust's mortgage units
Sequoia had segment GAAP income of $22.2 million, down from $25.8 million versus the first quarter. But its gain on sale of 131 basis points was above the historic target range of between 75 basis points and 100 basis points.
Lock volume was lower versus the first quarter, $3.6 billion from $4 billion; however, that prior period also included at $1 billion purchase of a seasoned bulk pool. In the second quarter of 2024, Sequoia's lock volume was $2.7 billion.
Furthermore, current coupon jumbo lock volume was up 15% over the first quarter, to the highest level since 2021, Redwood Trust said.
The
Meanwhile, Corevest's segment income of $6.1 million, a little more than double the first quarter's $3 million.
During the second quarter, Corevest funded $509 million of loans, with the split 55% bridge and 45% terms. It is an increase of 6% versus the first quarter's $482 million and 11% over $459 million one year ago.
Redwood Trust
How the Fed decision helps or hurts Redwood Trust
The Federal Open Market Committee's decision from its July meeting on starting short-term rate reductions could also have an effect on the Redwood Trust stock price.
"For the most part, we don't expect further [net asset value] downside as the company completes the restructuring, but it could still overhang the stock somewhat, especially if rate volatility picks up and/or the Fed delays rate cuts," Hagen wrote in the report which came out prior to the decision announcement.
"So even on the back of this restructuring, the return profile is expected to remain lower than the Agency REITs and servicers, but we think it could begin to receive more credit in its stock valuation for also being 'lower risk' if rate cuts delivered by the Fed accelerate new loan growth (especially for prime jumbo), and it demonstrates good stewardship by directing a portion of the restructured capital towards repurchasing stock at 20-30% discounts to NAV."
