Exhibit 8.1

                     [Letterhead of Chapman and Cutler LLP]

                                  June 10, 2004

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

      Re:   Registration Statement on Form S-8 relative to the 2002 Redwood
            Trust, Inc. Incentive Stock Plan, as Amended

Dear Ladies and Gentlemen:

      You have requested our opinion in connection with the Registration
Statement on Form S-8, dated June 8, 2004 (together with all exhibits thereto,
the "Registration Statement") being filed by Redwood Trust, Inc. (the "Company")
with respect to its 2002 Incentive Stock Plan, as recently amended (the "Plan").

     We have acted as your special tax counsel in connection with the
Registration Statement and Prospectus related thereto (the "Prospectus"), and
have assisted in the preparation of the tax summary for the Prospectus. In
formulating our opinions, we have reviewed (i) the Registration Statement and
the Prospectus, (ii) the Plan, as amended and (iii) such resolutions,
certificates, records, and other documents provided by the Company as we have
deemed necessary or appropriate as a basis for the opinions set forth below. We
have also reviewed the opinion of Tobin and Tobin, a professional corporation,
dated on or about the date hereof, with respect to certain matters of Maryland
law and the law of the United States.

      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.


Redwood Trust, Inc.
June 10, 2004
Page 2

      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 transactions. In addition, our opinions are
based on the correctness of the following specific assumptions: (i) the Plan
will be administered in accordance with its terms; 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 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 opinion could
adversely affect our conclusions.

     Based on the foregoing, we are of the opinion that although the discussion
set forth under the caption "Federal Income Tax Consequences" in the Prospectus
does not purport to discuss all possible Federal income tax consequences of the
grant and exercise of Awards made under the Plan, such discussion constitutes an
accurate summary of the basic Federal income tax considerations that are likely
to be material to employees participating in the Plan.

      Other than as expressly stated above, we express no opinion on any issue
relating to the Company, its stock or its employee compensation arrangements or
under any law other than the Federal income tax laws.

      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 letter as Exhibit 8.1 to the
Registration Statement and to and to its incorporation by reference as an
exhibit to the Registration Statement. In giving our consent, we do not hereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Act or the rules and regulations promulgated thereunder.

                                          Very truly yours,

                                          /s/ Chapman and Cutler LLP