Exhibit 8.1

                     [Letterhead of Chapman and Cutler LLP]


                                 April 22, 2004


Redwood Trust, Inc.
One Belvedere Place
Suite 300
Mill Valley, CA 94941


      Re: Registration Statement on Form S-3 for Redwood Trust, Inc.'s
              Direct Stock Purchase and Dividend Reinvestment Plan

Dear Ladies and Gentlemen:

      You have requested our opinion in connection with the Registration
Statement on Form S-3, dated April 22, 2004 (the "Registration Statement") being
filed by Redwood Trust, Inc. (the "Company") on the date hereof with respect to
its Direct Stock Purchase and Dividend Reinvestment Plan (the "Plan").

      In connection with the Registration Statement, we have acted as your
special tax counsel and have assisted in the preparation of the tax summary for
such Registration Statement. In formulating our opinions, we have reviewed
(i)the Registration Statement, (ii) the Articles of Amendment and Restatement of
the Company, as amended and supplemented to date, (iii) the Bylaws of the
Company, as amended to date, and (iv) such resolutions, certificate, records,
and other documents provided by the Company and RWT Holdings, Inc. ("Holdings")
as we have deemed necessary or appropriate as a basis for the opinions set forth
below. In addition, the Company has provided us with a certificate (the
"Officer's Certificate"), executed by a duly appointed and knowledgeable officer
of the Company, and upon which we have relied, setting forth certain
representations relating to various factual and other matters, including the
prior, current and future methods of operation of the Company, Holdings and
their subsidiaries. We have also reviewed the opinion of Tobin and Tobin, a
professional corporation, dated the date hereof, with respect to certain
matters.

      In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or other copies, and the
authenticity of the originals of such copies.

      In rendering our opinions, we have assumed that the transactions described
in or contemplated by the foregoing documents have been or will be consummated
in accordance with such operative documents, and that such documents accurately
reflect the material facts of such
Redwood Trust, Inc.
April 22, 2004
Page 2


transactions. In addition, our opinions are based on the correctness of the
following specific assumptions: (i) each of the Company, Holdings and their
subsidiaries have been and will continue to be organized and operated in the
manner described in the Officer's Certificate, the Registration Statement and
the other relevant documents referred to above; and (ii) there have been no
changes in the applicable laws of the State of Maryland, the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder by
the Treasury Department (the "Treasury Regulations"), and the interpretations of
the Code and the Treasury Regulations by the courts and the Internal Revenue
Service, all as they exist on the date of this letter. With respect to these
assumptions, it should be noted that (x) in the case of the former assumption,
certain of the representations set forth in the Officer's Certificate are highly
factual in nature and reflect an intention with respect to the future conduct of
the business of the Company, Holdings and their subsidiaries which may not be
achievable if there are future changes in the circumstances of either and (y) in
the case of the latter assumptions, statutes, regulations, judicial decisions,
and administrative interpretations are subject to change at any time and, in
some circumstances, with retroactive effect. Any material change that is made
after the date hereof in any of the foregoing bases for our opinions could
adversely affect our conclusions.

      Based on the foregoing, we are of the opinion that:

      1.    The Company has been organized and operated in conformity with the
requirements for qualification as a "real estate investment trust" under the
Code since the commencement of its operations on August 19, 1994 through
December 31, 2003, the date of the most recent audited financial statements and
management reports of the Company reviewed by us, and the Company's current and
contemplated methods of operation, as described in the Registration Statement
and as represented by the Company, will enable it to continue to so qualify; and

      2.    Although the discussion set forth under the captions "Certain
Federal Income Tax Considerations" and "Federal Income Tax Considerations" in
the Form S-3 does not purport to discuss all possible federal income tax
consequences of the acquisition and ownership of the Company's common stock
acquired under the Plan, such discussion constitutes an accurate summary of the
United States federal income tax considerations that are likely to be material
to a participant in the Plan.

      Other than as expressly stated above, we express no opinion on any issue
relating to the Company, Holdings or any of their subsidiaries or to any
investment therein or under any other law.
Redwood Trust, Inc.
April 22, 2004
Page 3


      We are furnishing this opinion to you solely in connection with the filing
of the Registration Statement and it is not to be relied upon, used, circulated,
quoted or otherwise referred to for any other purpose without our express
written permission. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act or under the rules and regulations of the
Commission promulgated thereunder.

                                      Very truly yours,

                                      /s/ Chapman and Cutler LLP