ABOUT REDWOOD TRUST

Redwood Business and Strategy

This section of the Review is a broad introduction to Redwood Trust and provides a long-term overview of Redwood’s business and strategy. We review and edit it every quarter and as a result, the content may change over time as the company and market conditions evolve. We recommend that you review it periodically.

1. Redwood Trust is a financial institution with competitive advantages in the business of investing in real estate loans and securities.

Since Redwood was founded in 1994, our goal has been to create a company that is more efficient than banks, thrifts, insurance companies, and other financial institutions at investing in, financing, and managing residential and commercial real estate loans and securities.

Like many financial institutions, our primary source of income is net interest income, which equals the interest income we earn from our investments in loans and securities less the interest expenses we incur from our borrowed funds and other liabilities.

Most financial institutions fund their asset investments with borrowed money sourced by taking bank deposits, writing insurance policies, or issuing corporate debt. By contrast, securitization is the primary source of funding for our investments.

We also borrow money on a collateralized and uncollateralized basis, typically at very competitive rates. We do not, however, take deposits or raise money in any other way that would subject us to consumer lending or banking regulations. Since we are not regulated as a financial institution and do not deal directly with consumers, our operating costs are far lower than other financial institutions, and we have far greater freedom to use securitization as a source of funding.

In a securitization, we sell our assets to an independent securitization entity that creates securities backed by those assets (asset-backed securities, or ABS) and sells these newly created securities to both domestic and international investors. Most of the securities created and sold earn the highest credit rating of AAA, so the interest expense paid out is relatively low. We typically generate a profit from these securitization entities, consisting of the yield on the securitized assets less the interest expense payments made to the holders of the ABS securities sold.

Advances in securitization technology have enabled securitization to become increasingly competitive as a funding source relative to corporate debt, deposits, insurance contracts, and other borrowings. The cost of funds for ABS issued continues to improve relative to the cost of other borrowings. More importantly, the range of assets that can be efficiently securitized continues to broaden and the capital efficiency of securitization as a source of funding continues to improve.

As global capital markets continue to develop and evolve, we expect securitization to become an even more efficient source of funding. There are trillions of dollars of real estate loans and securities in the U.S. and the world, and the amount outstanding has been and is expected to continue to grow every year. We believe many of these assets would be better funded through securitization than by other means. Since we are highly efficient at using securitization as a source of funding, we believe we will continue to grow and diversify our business over time.

Our tax structure gives us an additional competitive advantage that cannot be easily replicated by most other financial institutions. We have structured our company for tax purposes as a real estate investment trust (REIT) because our primary business is investing in real estate assets. As a REIT, we are required to distribute the bulk of our profits as dividends. By doing so, we avoid paying corporate taxes on most of the income we generate. This lowers our costs, as taxes are one of the largest costs of doing business for most financial institutions.

ABOUT REDWOOD TRUST

Redwood Business and Strategy

2. In terms of capital employed, our largest area of investment is real estate credit-enhancement securities.

Typically, 1% to 15% of the principal value of the securities created in a securitization of real estate assets are credit-enhancement securities (CES). These securities bear most of the credit risk with respect to the underlying assets that were securitized. If the underlying loans or securities suffer a loss of principal due to default, that loss is passed on by reducing the principal value of the CES. As a result of the high level of assumed credit risks, CES carry credit ratings that are below investment-grade. Because the CES absorb most or all of the credit risk that would normally be expected to occur, they reduce the credit risk of the more senior securities, allowing them to earn investment-grade ratings and to be sold at higher prices.

We are a leading investor in CES issued from securitizations of prime-quality residential real estate loans and we are an increasingly important investor in CES issued from securitizations of commercial real estate loans made on income-producing properties. In the last year, we have also made small investments in CES issued from securitizations of alt-a and subprime quality residential loans (some of these assets are also referred to as residuals and are listed on our balance sheet under ‘other real estate investments’). In total, at March 31, 2007, we owned residential, commercial, and CDO CES and similar other real estate investments with a principal value of $2 billion and a market value of $1 billion. Many of these securities are deep discount securities where our cost is far less than the principal value. Since we receive interest payments based on the principal value of a CES security, our interest income cash flow returns are strong. In addition, if credit losses are low, we will receive principal payments in excess of our cost basis, thus generating additional investment returns. Conversely, larger than expected credit losses could rapidly reduce the principal value of our CES, causing our investment returns from CES to suffer.

At March 31, 2007, our CES were first in line to absorb credit losses from the $294 billion of real estate loans and securities that underlie the securitizations from which our CES investments were issued. However, our potential credit losses are limited to the capital we have invested in CES.

With respect to these CES investments, we have a high degree of structural leverage since the principal value of our CES equals only a small percentage of the underlying asset pools. We do not, however, use a high degree of financial leverage with respect to our CES assets. We use capital rather than debt to finance most of our investments in the more junior subordinated CES (the first-loss and second-loss securities, or equivalent) and we use capital plus a modest amount of securitization financing through our Acacia CDO issuance program to finance the more senior CES that are closer to investment-grade quality.

Recently we have been acquiring more investment-grade securities than CES. We are highly focused on finding good opportunities to acquire residential, commercial, and CDO CES, as well as residuals, but in the current environment, we remain cautious. Later in 2007, and especially in 2008, we believe acquisition opportunities in CES may improve because we expect residential and commercial underwriting quality to improve.

ABOUT REDWOOD TRUST

Redwood Business and Strategy

3. We are increasing our investment in investment-grade rated real estate securities.

We are increasing our investments in residential and commercial real estate investment-grade securities (IGS) rated AAA, AA, A, and BBB for three reasons. First, advances in securitization technology (such as CDOs) allow us to re-securitize portfolios of certain types of residential and commercial investment-grade securities and earn attractive returns on invested capital, as well as asset management fees. Secondly, in an environment of flat or falling housing prices and increased residential loan delinquencies and credit losses, we have for some time been tilting our investment focus towards assets that are credit-enhanced by others (investment-grade securities) rather than towards assets that cause us to carry concentrated credit risk (credit-enhancement securities). Finally, we are increasing our investment in AAA- and AA-rated residential real estate securities funded with short-term Redwood debt. We pursued this investment strategy on a large scale from 1994 to 2000, after which we focused our investment strategy almost exclusively on assets with highly concentrated credit risks such as CES. Debt-funding AAA and AA real estate securities can be a good investment strategy in most economic environments. In addition, it fits our current balance sheet needs well, as we believe it will help us increase our capital utilization rate in a flexible manner and also will offset some of the risks we have in our balance sheet. Currently, our balance sheet is set up to benefit somewhat more from rising short-term interest rates and faster prepayment speeds, whereas debt-funded AAA and AA asset strategies typically benefit from falling short-term interest rates and slower prepayment speeds.

4. We are increasing our investment in residential real estate loans.

We have been increasing our acquisitions of high-quality residential loans, and we are using both securitization proceeds and Redwood debt to fund these assets. Our residential loan portfolio declined in size over the last few years as we purchased fewer loans and the adjustable-rate residential loans in our portfolio prepaid at rapid rates. Because we have been increasing our loan purchases and our loan prepayment rate has slowed, we expect our loan portfolio size to start to stabilize. We are buying hybrid loans (fixed rate for 3-10 years, converting to adjustable rate thereafter) as well as adjustable-rate loans. Our interest in acquiring loans has increased because we have greater control over the underwriting quality of acquired loans than we do with respect to the loans underlying the residential CES we acquire. Quality control has become more important as residential underwriting standards have deteriorated. In addition, we are buying more loans because we want to hold a portion of our loan portfolio in whole loan form (unsecuritized) and use Redwood debt (including collateralized commercial paper) to fund the whole loans. Compared to the alternative of using securitization proceeds to fund these loans, using debt funding increases our flexibility in utilizing more of our capital. Debt-funding loans requires a much larger capital commitment (8% of loan value versus 3%), and it generates a somewhat lower expected return on that capital than would a securitization. This is a flexible capital commitment, however, as we can easily recycle the capital utilized in this debt-funded strategy into other investments by either securitizing or selling the loans. Employing capital in this manner is useful at a time when we want to build our capital base to take advantage of future growth opportunities but we also want to improve profits by increasing our capital utilization rate, which has been lower than optimal in the last few years as we cut back our acquisition of CES.

ABOUT REDWOOD TRUST

Redwood Business and Strategy

We are replacing some of our existing securitization funding with debt funding. In 2007 and 2008, we will exercise our rights to call many of our older “Sequoia” securitizations of residential loans. The terms of these securitizations generally allow us to call the deals when the current loan balance of the underlying loan pool pays down to 10% or 20% of its original balance. When calling a securitization, we pay off all the security holders at 100% of principal value and repurchase the underlying loans. We typically call our securitizations when we have the right to do so because the capital structure of a securitization becomes less efficient when the remaining balance of loans is small. It is better to call the deal so we can refinance the underlying loans more efficiently. We are financing a portion of the loans we acquire from called deals with Redwood debt and holding them as an ongoing investment. The remainder we either re-securitize or sell.

5. We buy most of our assets rather than originate them.

Our primary strategy for sourcing assets is to acquire closed loans and securities directly from other financial institutions or from the capital markets. We do not originate or service loans. Others create most of the real estate securities we invest in, some are created by us, but in both cases, others have originated the underlying loans. This role allows us to have an independent point of view on asset quality and attractiveness, as well as the flexibility to change investment strategies as markets evolve. In our experience over the years, many financial institutions that have origination operations have produced sub-optimal asset investment results. We believe this is because, in some cases, there may have been incentives to retain loans that might not be the best investment (in terms of price and/or quality) in order to maintain or boost origination volumes and fees. In addition, origination (especially residential loan origination) is a business that is highly cyclical, operations intensive, and increasingly fraught with lender liability. Residential origination is becoming concentrated in the hands of a few large companies that have either banking or brokerage operations as well. Rather than competing with these companies, we develop close relationships with them and help them build their businesses. They need companies like Redwood to buy their loans and credit-enhance their securitizations.

We previously built a successful commercial real estate loan origination operation at Redwood, and we may do so again in the future now that CDO securitization technology has improved the efficiency and ease of securitizing commercial real estate loans. We may also build a commercial real estate loan special servicing operation. However, we expect to continue to source most of our residential and commercial assets through acquisition rather than origination.

6. Competition for assets is strong, but we believe our operating efficiencies will allow us to remain competitive.

Our competitors are banks, thrifts, insurance companies, Fannie Mae, Freddie Mac, Wall Street brokerage firms, hedge funds, private equity firms, specialty finance companies, mortgage REITs, mortgage insurance companies, CDO securitization managers, asset management companies, foreign investors, and other financial institutions.

ABOUT REDWOOD TRUST

Redwood Business and Strategy

Our corporate structure and competitive strengths differ from most other financial institutions. With our differentiated capabilities, we interact not only as competitors, but also as customers and suppliers, with most of the institutions active in the vast and interconnected real estate capital markets.

We commenced operations in 1994, a period of turmoil in financial markets. This turmoil allowed us to acquire assets that produced very high returns in subsequent years. The level of competition increased dramatically through the end of 1997, at which time we generally sold assets as the prospective risk/reward relationships for assets did not seem that attractive. There were several financial dislocations in 1998, including a prepayment acceleration crisis and a liquidity crisis. This allowed us to use our excess capital to acquire assets, including our own stock, at attractive prices. The CES we acquired in 1999 - 2002 performed very well, allowing us to report high return on equity results and to pay special dividends of $4.75 and $6.00 per share in 2003 and 2004, as well as $3.00 per share in each of the last two years.

The competitive environment over the last year has been much like 1997 - new entrants and other investors were willing to buy assets at high prices (low yields) despite increased potential risks. We responded to this lower return/higher risk environment by selling CES assets and slowing our acquisitions. We increased our acquisitions of assets (such as investment-grade securities and loans) that carry less concentrated credit risks than CES. We fund most of these assets via securitization, a form of financing that does not expose us to liquidity risks once a securitization is completed. For these assets, high prices were less of a concern because these high prices (and the resulting narrow spreads) were offset by the high prices at which we sell the securities we create using these assets as collateral.

Now the financial markets are experiencing turmoil due to falling housing prices and rising residential loan defaults. In all likelihood, we will incur increased credit losses, but we are also in a position to acquire lower priced assets with higher return potential. We believe competition will remain strong, however, and that any extraordinary asset acquisition opportunities will be short-lived. With our operating efficiencies, funding strategy, corporate structure, permanent capital base, and investment discipline, we believe we are prepared to continue to compete effectively in the highly competitive market that we expect will be the norm going forward.

7. We maintain a strong balance sheet with risks that are largely segregated and limited.

Through our internal risk-adjusted capital policies, we seek to maintain a strong balance sheet with a large capital base, risks that are limited and segregated, and ample liquidity. Our $1.0 billion long-term capital base is primarily common equity but also includes $0.1 billion of unsecured junior subordinated notes (trust-preferred securities) that have a 30-year maturity.

We use capital, not debt, to fund assets such as first-loss credit-enhancement securities and residuals that carry concentrated credit risks. These assets have a high degree of structural credit risk, so we do not feel it would be prudent to employ financial leverage to acquire these assets. Our risk is limited to our investment in these securities. Since we fund these assets with capital rather than debt, high credit losses should not cause liquidity concerns. Similarly, our economic risk is limited and our liquid reserves are secure with respect to securitized assets, since the assets are sold to and the securities are issued by independent securitization entities, whose liabilities are not Redwood’s obligations. Our economic risk is limited to the value of any securities we may acquire as an investment from these entities. Typically, either we fund securities acquired from securitizations we sponsor with capital or we sell these securities to another securitization entity for re-securitization. In either case, the risk is segregated and limited.

ABOUT REDWOOD TRUST

Redwood Business and Strategy

We also use Redwood debt to fund assets. This funding strategy brings us a number of benefits, including allowing us to employ our excess capital in a flexible manner. It does, however, expose us to potential liquidity risks as well as potential credit risks that are not as limited as with other parts of our balance sheet. Accordingly, we use Redwood debt primarily to fund assets (such as investment-grade rated securities and prime-quality residential whole loans) that do not have concentrated credit risks and that typically can be liquidated quickly. Increasingly, we expect to use extendable collateralized commercial paper as a source of short-term Redwood debt for debt-funded asset strategies. We believe the potential liquidity risks of commercial paper are less than those of our debt facilities in the form of repurchase agreements. Finally, we allocate capital equal to 8% of assets to support our debt-funded asset strategies, an amount that is well in excess of the amount required by our lenders. We believe this gives us a margin for safety should liquidity, market value, or credit concerns arise.

With respect to interest rate and prepayment rate risks, we seek to maintain a balance sheet that is well balanced and that can generate cash flows to fund our regular dividend in a wide variety of scenarios. We believe we have achieved this - the net present value of our projected cash flows does not vary materially with respect to scenarios incorporating changes in interest rates or prepayment rates. Scenarios incorporating different degrees of potential credit losses, however, show a wide variation in the long-term net present value of our cash flows. In the near-term (one to three years), our results may vary as a function of changes in interest rates, prepayments, credit results, mark-to-market asset values, and other factors.

8. Our primary financial goal is to deliver an attractive sum of dividends per share over time.

Our financial goal is to distribute the highest sum of dividends per share over the next few decades as we can. We seek to do that while also remaining within our risk tolerance levels and while increasing the inherent value of the company by building competitive advantages, diversifying risks and opportunities, developing internal capabilities, maintaining our culture, keeping operations highly efficient, and increasing book value per share.

As a REIT, we are required to distribute to our shareholders as dividends at least 90% of our REIT profits as calculated for tax purposes. We distribute our profits as a regular quarterly dividend and also, in some years, in a year-end special dividend. The regular dividend rate for 2006 was $0.70 per share per quarter and the special dividend was $3.00 per share. Total dividends for 2006 were $5.80 per share.

We increased the regular dividend rate to $0.75 per share per quarter for the first quarter of 2007. We set the regular dividend rate at a level we believe is likely to be sustained over the next few years. Whether we pay a special dividend or not in 2007 will depend primarily on how much REIT taxable income we generate during the year. We expect that our total annual dividend payout amounts (regular plus special) will vary from year to year.

ABOUT REDWOOD TRUST

Redwood Business and Strategy

9. Growth is our mission.

In a manner consistent with our goal of distributing an attractive sum of dividends per share over time, our mission is to grow to become a larger company in terms of capital employed and market capitalization. We are targeting growth by building real estate investment, financing, and management operations with competitive advantages. Over the long term, growth should bring several advantages, including book value accretion and a diversified income stream.

We plan to grow organically as markets grow and as we gain long-term market share, rather than simply growing for growth’s sake or through short-term acquisition of market share, which would be irresponsible and inconsistent with our long-term goal of distributing attractive dividends per share. In addition, we do not expect growth to be linear, because, in cyclical markets, growth is not always the appropriate short-term strategy.

FINANCIAL REVIEW

GAAP Earnings and Core Earnings

What is this?

GAAP income is income calculated under Generally Accepted Accounting Principles (GAAP) in the United States.

Core earnings is a profitability measure that highlights earnings that are more likely to be ongoing in nature. In calculating core earnings, we start with GAAP earnings and then exclude realized gains and losses on calls and sales, unrealized market value adjustments, and one-time items that are unlikely to be repeated. Table 2 in the Appendix shows a reconciliation of core earnings to GAAP earnings.

Highlights

GAAP earnings per share for the first quarter of $0.66 per share were lower than recent quarters primarily due to $10 million negative unrealized mark-to-market valuation adjustments, a $3 million charge against a commercial real estate loan, and $2 million severance costs. Net interest income for the first quarter was strong.

·	For the past year and a half, quarterly core earnings have ranged from $0.97 to $1.20 per share. Our first quarter core earnings of $1.08 per share were near the middle of this range.

Tables & Graphs

FINANCIAL REVIEW

GAAP Earnings and Core Earnings

FINANCIAL REVIEW

GAAP Earnings and Core Earnings

Quarterly Update:

Net interest income for the first quarter of 2007 increased by $2 million over the fourth quarter of 2006 and $2 million over the first quarter of 2006. Higher net interest income earnings from our CES and IGS portfolios more than offset a decrease in net interest income from our residential loan portfolio and a $3 million charge related to a commercial real estate loan. The average balance of our residential loan portfolio continued to decline due to high prepayments on adjustable-rate residential loans acquired and securitized under our Sequoia program.

Ø	Our residential CES portfolio continues to benefit from strong credit performance and rapid prepayments on those securities backed by ARM loans. The yield for this portfolio was 22% in the first quarter of 2007, 22% in the fourth quarter of 2006, and 20% in the first quarter of 2006.

Ø	Operating expenses for the first quarter include $2 million of severance charges. Excluding this item, operating expenses increased by $2 million (or 11%) over the fourth quarter of 2006 as we have increased the number of our employees and increased pay levels at year-end.

The largest factor causing a decline in our GAAP earnings was $10 million of negative unrealized mark-to-market valuation adjustments. These adjustments were $9 million or $0.32 per share higher than the fourth quarter of 2006 and $7 million or $0.26 per share higher than the first quarter of 2006. The decrease in fair value reflects the overall market decline in prices for real estate securities (particularly, securities backed by subprime and alt-a loans) that occurred during the first quarter. Of the $10 million, $9 million related to securities accounted for as trading securities, for which quarterly mark-to-markets are a factor in GAAP net income. We had no securities classified as trading in the first quarter or fourth quarter of 2006.

As we expect to increase the amount of securities we classify as trading for accounting purposes, our quarterly GAAP earnings going forward will become increasingly volatile. Only certain types of market value changes are reported in our net income, so earnings changes will not reflect the net overall market value changes of our assets and liabilities.

FINANCIAL REVIEW

Taxable Income

What is this?

Total taxable income is our pre-tax income as calculated for tax purposes. Total taxable income differs materially from GAAP earnings. Table 3 in the Appendix reconciles these two profitability measures.

REIT taxable income is the primary determinant of the minimum amount of dividends we must distribute in order to maintain our tax status as a real estate investment trust (REIT). REIT taxable income is pre-tax profit, as calculated for tax purposes, excluding taxable income earned at our non-REIT taxable subsidiaries. Over time, we must distribute at least 90% of our REIT taxable income as dividends. A reconciliation of GAAP income to REIT taxable income appears in Table 3 of the Appendix.

Highlights

·	Total taxable income for the first quarter of 2007 was strong at $1.48 per share, an increase from the prior quarter due to reduced tax deductions from stock option exercises.

·	REIT taxable income remained strong at $1.29 per share and continues to exceed our regular quarterly dividend by a comfortable margin.

Tables & Graphs

FINANCIAL REVIEW

Taxable Income

Quarterly Update:

Ø	Total taxable income was $40 million, or $1.48 per share, in the first quarter of 2007. This was an increase from the total taxable income we generated in the prior quarter of $38 million or $1.42 per share. In the prior quarter, we had more tax deductions relating to stock option exercises.

Our REIT taxable income was $1.29 per share in the first quarter of 2007. This was lower than the fourth quarter of 2006 of $1.53 due primarily to the timing of the reallocation of expenses between REIT and taxable subsidiaries. We are working to further develop this process so it does not cause large quarter-to-quarter variations.

Our taxable income continues to be higher than our GAAP income as we are not permitted to establish credit reserves for tax. As a result, we amortize more of our CES discount into income for tax and recognize a higher yield until credit losses occur. The cumulative difference at March 31, 2007 in the discount amortization between tax and GAAP for residential, commercial, and CDO CES was $99 million.

Another reason for the difference between tax and GAAP income is that we do not recognize changes in market values of assets for tax until the asset is sold. Consequently, the negative $10 million of unrealized market valuation adjustments included in our GAAP earnings this quarter were not included in our tax earnings.

FINANCIAL REVIEW

Taxable Income

Total taxable income and REIT taxable income were reduced by $2.2 million ($0.08 per share) in the first quarter of 2007 as a result of deductions for actual credit losses. The components of the $2.2 million in losses were $1.8 million on residential assets and $0.4 million on commercial assets. These deductions were less than the actual principal losses incurred on the underlying loans of $5.9 million ($4.6 million residential and $1.3 million commercial), as we own most of our credit-sensitive assets at a tax basis that is substantially less than par (principal) value. We currently expect that realized credit losses will increase substantially relative to our recent experience. We believe there is a reasonable chance that cumulative losses could remain less than the assumptions we have used for our pricing, GAAP reserve, and effective yield calculations. All realized credit losses, after adjusting for our tax basis in the assets we own, will reduce our dividend distribution requirements

FINANCIAL REVIEW

Book Value per Share

What is this?

Book value per share is the amount of equity capital we have per share of common stock outstanding.

GAAP book value is our common equity as calculated for GAAP purposes. It includes mark-to-market valuation adjustments of some of our assets (principally the securities portfolio), but for none of our liabilities.

Core book value is GAAP book value excluding those mark-to-market valuation adjustments reflected on our GAAP balance sheets. Core book value more closely reflects historical amortized costs rather than current market values.

A reconciliation of GAAP book value to core book value appears in Table 7 of the Appendix.

Highlights

·	GAAP book value declined by 9%, or $3.45 per share, during the first quarter from $37.51 per share to $34.06 per share as a result of declining asset values for those particular assets we own that are marked-to-market for balance sheet purposes.

·	Core book value rose by 1% during the first quarter of 2007 from $34.02 per share to $34.29 per share.

The disruption in the capital markets also impacted liability spreads. Under GAAP, we are required to carry our real estate securities on our balance sheet at their current market value, but we are not permitted to adjust paired Acacia ABS issued liabilities or other liabilities to market value. We estimate that if we had reported our Acacia ABS issued at fair value, our book value at March 31, 2007 would have been higher than reported by $41 million (or $1.51 per share).

FINANCIAL REVIEW

Book Value per Share

Charts & Graphs

FINANCIAL REVIEW

Book Value per Share

Quarterly Update:

Ø	The difference between core book value of $34.29 per share and GAAP book value of $34.06 per share at March 31, 2007 was cumulative mark-to-market balance sheet adjustments for GAAP of negative $6 million at quarter-end.

Ø	For the $3.6 billion of assets that were marked-to-market for balance sheet purposes at March 31, 2007, market values declined by $93 million in the first quarter of 2007. This represents an average decline in value during the quarter of 2% of principal value.

Market spreads widened in March—the yields the market requires increased, so asset values dropped. For some assets, value declines reflect a decline in economic value due to an increase in credit loss expectations. For other assets (including most of our assets), value declines reflect an increase in potential risks rather than a change in expected cash flows. The table below summarizes the change in unrealized mark-to-market (MTM) adjustments during the first quarter.

On the positive side, our consolidated liabilities increased in value during the quarter, meaning we could buy back the securities we issued at a lower price than their issuance price. The interest expense we are incurring on the securities we issued is less than the interest expense we would have to pay if we had issued these liabilities in the first quarter of 2007.

Relative to the last few years, because asset prices are down, we earn more income on assets we buy today, but we also pay a higher interest expense on the securities we create and issue to finance our acquisitions. Overall, as of this writing, the resulting spread earning potential still appears attractive. The markets are volatile, however, and the cost to finance future asset acquisitions through securitization cannot be known until each transaction is completed. The overall situation is characterized by uncertainty, which, on average, we believe should benefit us relative to our competitors.

Changes in market values for our existing assets and liabilities have had little effect on our operations or actual and expected cash flows. On average, we see the increase in spreads (lower asset prices, more expensive liabilities) as a positive trend. Part of our business is being paid to assume credit risk, and it appears we are likely to be paid more in the future to take this risk than we have been in the recent past.

FINANCIAL REVIEW

Book Value per Share

Ø	At the end of our first quarter of operations in September 1994, GAAP book value was $11.67 per share. Since that time, we have paid $41.18 per share of dividends while also increasing GAAP book value by $22.39 per share.

Book value per share growth generally is not a direct indicator of our market value or an indicator of the returns available to our shareholders. If you had acquired Redwood stock at our initial public offering in August 1995 and had reinvested all dividends back into Redwood stock, your compounded return as a shareholder would have been 21% per year through March 31, 2007. Future results will vary.

FINANCIAL REVIEW

Return on Equity

What is this?

Return on equity (ROE) is the amount of profit we generate each year per dollar of equity capital.

GAAP ROE is GAAP earnings divided by GAAP equity.

Adjusted ROE is GAAP earnings divided by core equity. Core equity excludes balance sheet mark-to-market adjustments that are not included in earnings.

Core ROE is core earnings divided by core equity.

A reconciliation of GAAP ROE to Adjusted ROE and core ROE, and of GAAP equity to core equity, appears in Table 7 of the Appendix.

Highlights

·	During the first quarter of 2007, our adjusted return on equity dropped to 8% primarily due to the negative impact of unrealized market valuation adjustments on our GAAP earnings.

·	Over the long term, we expect to be able to generate annual adjusted returns on equity between 11% and 18%.

·	Core return on equity (core earnings divided by core equity) was 13% for the quarter.

FINANCIAL REVIEW

Return on Equity

Charts & Graphs

FINANCIAL REVIEW

Dividends

What is this?

We have established a regular quarterly dividend rate at a level we believe it is likely to be sustainable for the next few years. Distributions in excess of the regular dividend rate, if any, are typically paid in a fourth quarter special dividend.

Highlights

·	We increased our regular quarterly dividend rate to $0.75 per share in 2007.

Graphs

FINANCIAL REVIEW

Dividends

Quarterly Update:

Ø	Total dividend distributions over the last four quarters were $5.85 per share. Assuming the recent Redwood stock price of $51, the indicated dividend yield would be 11.5% based on the last twelve months of dividends and 5.9% based on the current regular dividend rate of $3.00 per share for 2007.

Ø	Based on our estimates of REIT taxable income through the first quarter of 2007, at quarter end, we had $60 million ($2.20 per share) undistributed REIT taxable income that we anticipate distributing in 2007 through our regularly quarterly dividend and a special dividend.

Ø	We generally distribute 100% of REIT capital gains income and 90% of REIT ordinary income, retaining 10% of the ordinary REIT income. We generally retain 100% of the after-tax income we generate in taxable subsidiaries.

RESIDENTIAL REVIEW

Residential Real Estate Securities

What is this?

We invest in securities that are backed by pools of residential real estate loans. These are shown on our balance sheet in real estate securities and in other real estate investments.

Highlights

Total residential securities increased by 15% in the first quarter, from $2.4 billion to $2.8 billion, as a result of $609 million acquisitions, $20 million discount amortization, $114 million sales, $4 million calls, $63 million principal pay downs, and $70 million market value declines. Our primary emphasis during the first quarter was acquiring investment-grade rated securities.

·	For the most part, we believe the trend towards lower market values is good for us - it allows us to buy new assets more cheaply while not affecting our business in a material way. We are much more concerned about the cash flows our assets will generate than we are about market value fluctuations.

We have had increasing concerns about the credit performance of the loan pools underlying a small number of our residential securities. We have sold most of these securities. In the second quarter through May 4, we sold $6 million residential securities generating a de minimis GAAP loss in the second quarter.

We own some assets that would appear to be higher risk assets in the current environment. Using March 31, 2007 values and adjusting for subsequent second quarter sales, we currently own $17 million subprime securities of the 2006 vintage rated BBB- or lower and $78 million alt-a securities of the 2006 vintage rated BB+ or lower. We bought some of these assets at very low prices, some have higher-than-average loan quality for their type, some have very short average lives, and others generate returns driven primarily by prepayment rates rather than credit losses. Most of these remaining higher-risk assets are currently performing better than or equal to our expectations. We expect that cash flow returns from many of these assets will be attractive relative to similar assets of the same vintage and rating. Although certainly not free from risk, for the most part they have the potential to generate reasonable investment returns in a housing environment even more difficult than currently appears to be indicated. The upside potential from some of these assets is quite large if the environment does not worsen. Market values will fluctuate.

Our credit reserves for residential securities were $393 million, or $14.48 per share, at March 31, 2007. Reserves associated with prime assets were $264 million; reserves associated with alt-a assets were $129 million; no reserves were associated with our $9 million investment in subprime BB-rated securities.

·	Of the $2.8 billion residential securities we owned at March 31, 2007, $1.8 billion were financed through re-securitization via Acacia CDO transactions and $1.0 billion were financed with Redwood debt and capital.

RESIDENTIAL REVIEW

Residential Real Estate Securities

We plan to continue to acquire new residential securities of all types. Although we expect to incur some credit losses, overall we believe the longer-term outlook for investing in residential securities is increasingly positive. We expect underwriting quality to improve and we expect pricing and spreads between assets and liabilities to become somewhat more attractive than they have been in the recent past.

In the short-term, our biggest issue with respect to investing in additional residential IGS securities is that our CDO financing costs are unknown because the CDO issuance market is experiencing substantial disruption. Nevertheless, we priced an option ARM CDO transaction in April at attractive economic levels. We expect to price another CDO transaction in the second quarter; if we can achieve currently indicated CDO pricing levels, this will also be a profitable transaction.

We have established and initiated the funding of a wholly-owned qualified REIT subsidiary - Cypress Trust, Inc. - to hold some of our investments in high-quality investment-grade residential securities and high-quality prime residential loans. These assets will be funded initially with debt, although Cypress will likely also utilize securitization as a form of financing in the future. We believe spread lending opportunities with high credit quality securities and loans are becoming increasingly attractive. In order to raise capital to accommodate growth in this low credit risk strategy, we may sell new shares in Cypress at some point. Our asset management subsidiary, Redwood Asset Management, Inc., would manage Cypress as an external REIT.

RESIDENTIAL REVIEW

Residential Real Estate Securities

Quarterly Update:

a)	Residential Investment-Grade Securities

Our residential IGS portfolio increased by 19% in the first quarter from $1.7 billion to $2.0 billion as a result of acquisitions of $535 million, market value declines of $54 million, sales of $108 million, calls of $2 million, transfers to other portfolios of $14 million, and principal pay downs of $30 million.

The majority of our residential IGS acquisitions for the quarter were designated investments for two upcoming Acacia securitizations. One of these securitizations is predominately focused on option ARMs; the other is our more typical mezzanine CDO with a broader range of underlying mortgage collateral types.

Ø	During the first quarter, our residential IGS acquisitions were 25% prime, 63% alt-a, and 12% subprime. By interest rate type, these acquisitions were 60% option ARMs, 20% hybrids, and 20% fixed.

Ø	At March 31, 2007, $1.3 billion residential IGS were financed via securitization in our Acacia CDO program and $0.7 billion were financed with Redwood debt and capital. We are holding most of these $0.7 billion of securities in anticipation of selling them to future Acacia securitizations.

Ø	At March 31, 2007, the interest rate characteristics of residential IGS were 46% adjustable-rate, 35% hybrid, and 19% fixed rate. We use interest rate agreements to generally match the interest rate characteristics of these assets to their corresponding funding sources.

Ø	We have never incurred a principal loss on residential IGS. We do not have credit reserves for these assets.

RESIDENTIAL REVIEW

Residential Real Estate Securities

Quarterly Update (Continued):

Ø	Interest income generated by residential IGS was $29 million for the first quarter. The yield for the first quarter was 6.56%, a decline from 6.77% the previous quarter as we purchased higher-rated securities with lower yields.

Ø	Net discount amortization income (which is included in interest income) for the first quarter was $1 million. At quarter-end, our net discount balance for these assets was $20 million, giving us an average amortized balance sheet cost basis for residential IGS of 99.06% of principal value.

Ø	We purchased $33 million residential IGS in April at significantly higher expected yields.

Ø	In the first quarter, our residential prime IGS portfolio grew by $66 million (or 9%) to $789 million. Our residential alt-a IGS portfolio grew by $311 million (or 68%) to $766 million as we acquired collateral for an option ARM CDO.

Our subprime IGS portfolio declined by $48 million (or 9%) to $471 million as sales exceeded new acquisitions of $66 million. We sold $84 million subprime IGS in the first quarter - $53 million of which was older subprime IGS that we reacquired through the call of Acacia 4. The remaining $31 million were credit risk sales of underperforming 2006 securities; sales of these securities generated a GAAP income statement loss of $1 million in the first quarter.

Ø	Additional information on our residential IGS can be found in Tables 9, 10, and 18 of the Appendix.

RESIDENTIAL REVIEW

Residential Real Estate Securities

Quarterly Update (Continued):

b)	Residential Credit-Enhancement Securities

The total value of our residential CES portfolio increased by 4% from $722 million to $752 million in the first quarter as a result of $74 million acquisitions, $15 million market value declines, $2 million EITF 99-20 impairment write-downs, $5 million sales, $1 million calls, $19 million discount amortization, $5 million transfers out to other portfolios, and $35 million principal pay downs.

Ø	The balance of residential loans underlying our residential CES increased by 13% from $210 billion to $237 billion during the first quarter.

Ø	During the quarter, the loans underlying our residential CES acquisitions were 45% prime, 49% alt-a, and 6% subprime. By interest rate type, the loans underlying these acquisitions were 58% option ARMs, 33% hybrids, and 9% fixed.

Interest income generated by residential CES was $38 million for the first quarter. The yield for the first quarter was 22%, the same as the previous quarter. Yields for the first quarter were 24% for prime CES, 19% for alt-a CES, and 10% for subprime CES. Interest income was $30 million, $7 million, and $1 million for these sub-portfolios, respectively. CES yields remain high due to fast prepayment speeds and continued good credit performance for underlying loans.

RESIDENTIAL REVIEW

Residential Real Estate Securities

Quarterly Update (Continued):

Ø	Overall, our alt-a and prime CES portfolios are performing well from a credit perspective. Our subprime CES portfolio has limited seasoning; early credit performance results are within our expectations.

Principal value credit losses for loans underlying CES were $3.8 million for the quarter, a decrease from $4.2 million in the previous quarter. As assets season, we expect losses to increase substantially in percentage terms, while perhaps remaining relatively low in absolute numbers. Cumulative losses and the current loss rate remain lower than our original pricing expectations.

For tax purposes, realized credit losses were $1.5 million ($0.06 per share) for residential CES for the first quarter. This deduction is less than the principal value losses incurred on the underlying loans of $3.8 million, as we own most of our credit-sensitive assets at a tax basis that is substantially less than par (principal) value.

Our GAAP credit reserves for residential CES were $393 million ($14.48 per share) at March 31, 2007, an increase of $21 million for the quarter. New acquisitions increased this reserve by $48 million. As a result of the strong credit performance of underlying loans, we transferred $22 million residential CES credit reserves to unamortized discount that will be amortized into income over time. Unamortized discount balances for residential CES were $159 million at quarter-end.

Ø	At March 31, 2007, $286 million residential CES were financed with equity and Redwood debt, and $466 million were financed through our Acacia CDO program.

Ø	Our total residential prime CES portfolio increased by $16 million (3%) to $571 million during the first quarter. Overall, our prime CES portfolio is performing well from a credit perspective and continues to benefit from fast prepayments.

The balance of seriously delinquent loans underlying prime residential CES increased from $381 million to $485 million during the quarter, an increase from 0.12% to 0.14% of original balances and 0.20% to 0.23% of current balances. These increases remain in line with normal seasoning and remain well below our initial modeling expectations.

Securities backed by option ARM and traditional ARM loans continued to prepay significantly faster than our original expectations at a weighted average CPR of 40%. These securities represent 50% of our prime CES, and they are priced and structured to benefit from fast prepayment speeds in addition to low losses.

Ø	The principal value of credit losses for loans underlying our prime CES was $2.5 million, which is less than one basis point (0.01%) per year.

RESIDENTIAL REVIEW

Residential Real Estate Securities

Quarterly Update (Continued):

Fifty percent of our prime portfolio is composed of securities backed by hybrid and fixed-rate mortgages. The loans underlying these securities prepaid at a weighted average CPR of 13% in the first quarter. This is slower than our original expectations. Cumulatively over time, however, prepayment rates for these assets have been more rapid than we originally assumed.

Ø	Our residential alt-a CES portfolio increased by $15 million (10%) to $172 million during the first quarter. Option ARM collateral makes up 92% of this portfolio. We sold $5 million underperforming alt-a CES in April for a minimal loss.

Ø	We generally acquire these alt-a securities backed by option ARMs with loss expectations that are six times greater than we expect for our prime hybrid CES. To date, the performance of our CES backed by option ARMs continues to exceed our expectations.

Ø	The balance of seriously delinquent loans underlying alt-a residential CES increased from $187 million to $296 million during the quarter, an increase from 0.60% to 0.82% of original balances and 1.03% to 1.51% of current balances. These increases remain below our initial modeling expectations.

Ø	Our subprime CES portfolio remained nearly flat for the quarter at $9 million, with $4 million acquisitions and $3 million of transfers from other portfolios. Our subprime CES portfolio has limited seasoning; however, the early credit performance continues to be within our expectations.

Ø	In April 2007, we purchased $21 million deep-discounted subprime BBB and BBB- securities.

We continue to search for subprime credit investment opportunities, and we expect to make additional investments in distressed assets as well as in assets backed by new loans as quality improves. In addition, we expect to create new assets by buying and securitizing loans. At this point, we believe the subprime sector is still far from recovery, so we currently expect the volume of our subprime CES and residual investments will remain limited for some time. We do not originate or service subprime loans, nor at this point, do we intend to.

The subprime markets are very large in terms of potential capital employed and we believe they offer ongoing opportunities for Redwood, potentially on a large scale. So as to not change the essential nature of Redwood as an investor in higher quality loans, we are considering raising capital though a separately managed vehicle in order to fund our future growth in the subprime markets.

Ø	Additional information on our residential CES can be found in Tables 9, 10, 11, and 12 of the Appendix.

RESIDENTIAL REVIEW

Residential Real Estate Securities

Quarterly Update (Continued):

c)	Other Residential Real Estate Investments

Other real estate investments (OREI) are assets that we mark-to-market for income statement purposes, in many cases because they may otherwise be deemed to contain embedded derivatives for accounting purposes under FAS 155. We expect to acquire additional OREI assets. Unrealized mark-to-market fluctuations will affect GAAP income but will not directly affect core or taxable income.

OREI are a new reporting category we established in the first quarter of 2007. We transferred $18 million of assets that were held in other portfolios at December 31, 2006 into this category. Total OREI at March 31, 2007 was $50 million. This included $19 million residuals, $29 million net interest margin securities (NIMs), and $2 million IOs.

Ø	The collateral type underlying our OREI was $2 million prime, $28 million alt-a, and $20 million subprime at March 31, 2007.

Our OREI portfolio generated a 26 % yield for the first quarter, producing $2 million interest income. Mark-to-market charges to income were negative $5 million for the quarter, as a result of the substantial bid-ask spread on these new purchases plus the general decline in market values towards quarter-end.

Residuals are first-loss securities that are not rated by a rating agency. The value of residual securities can vary widely and is highly dependent on prepayment speeds. The value is also dependent on the level and timing of credit losses, but often is not as sensitive to losses as it is to prepayment speeds. These securities perform poorly when prepayments are fast and losses are higher than expected.

Ø	Due to early, poor credit performance, we sold one residual security in April. We sold the security at the market value reflected in our first quarter financial statements.

Ø	Our NIMs are structured in such a way that they mature quickly (typically less than two years). The majority of the NIMs we have acquired have an investment-grade rating.

Ø	OREI at March 31, 2007 consisted of $8 million of investment-grade alt-a NIMs with an average life of 2.5 years.

RESIDENTIAL REVIEW

Additional Information - Residential Prime

Prime securities are mortgage-backed securities backed by high credit quality residential loans. The borrowers typically have high FICO credit scores. The loans have relatively low loan-to-value (LTV) ratios.

RESIDENTIAL REVIEW

Additional Information - Residential Prime

RESIDENTIAL REVIEW

Additional Information - Residential Prime

RESIDENTIAL REVIEW

Additional Information - Residential Alt-A

Alt-A securities are residential mortgage-backed securities backed by loans that generally have higher credit quality characteristics than subprime, but lower credit quality characteristics than prime.

RESIDENTIAL REVIEW

Additional Information - Residential Alt-A

RESIDENTIAL REVIEW

Additional Information - Residential Alt-A

RESIDENTIAL REVIEW

Additional Information - Residential Subprime

Subprime securities are residential mortgage-backed securities backed by lower-quality loans. Many subprime borrowers have impaired credit histories

RESIDENTIAL REVIEW

Additional Information - Residential Subprime

Explanation of Graph:

The graph above uses a base case prepayment and loss curve on generic 2007 subprime IGS to generate a cumulative deal loss where the selected IGS will suffer its first dollar of principal loss. For example, a generic 2007 subprime IGS with a rating of AA will take a principal loss when underlying cumulative credit losses approximate 19% of the original loan balance or higher using a base case prepayment and loss curve. Actual risk characteristics for individual subprime securitizations differ.

RESIDENTIAL REVIEW

Additional Information - Residential Subprime

RESIDENTIAL REVIEW

Residential Loans

What is this?

We invest in residential real estate loans that we acquire from mortgage origination companies. Most of the loans we acquire are prime-quality loans. We do not originate or service residential real estate loans. We fund our loan investments via securitization and with Redwood debt and capital.

Highlights

·	Our loan acquisition activity through our conduit is increasing. Our primary focus has been hybrids, as ARMs are out of favor in the current yield curve environment. We purchased $415 million residential hybrid loans this quarter. All our loans were prime-quality loans at origination.

·	Seriously delinquent loans and credit losses on residential loans are increasing due to normal seasoning, but remain well below our initial expectations.

·	Prepayment speeds on our loan portfolio, consisting mostly of ARM loans, continued to be fast, prepaying at a CPR of nearly 37% for the first quarter.

We completed one securitization in the first quarter, financing $885 million hybrid loans. In April, we priced another Sequoia securitization that will close in May. We called one older Sequoia securitization during the first quarter. The cost of financing loans has risen as market spreads for ABS have widened. Nevertheless, the two Sequoia transactions we have priced in 2007 have been profitable.

RESIDENTIAL REVIEW

Residential Loans

RESIDENTIAL REVIEW

Residential Loans

Quarterly Update:

In the first quarter, our residential loan portfolio declined from $9.3 billion to $8.7 billion. We acquired $415 million loans and had no sales. Principal pay downs were $1.0 billion. The average annual prepayment rate (CPR) was 37% for the first quarter versus 34% for all of 2006. Most of these loans are adjustable-rate loans that tend to prepay rapidly when the yield curve is flat or inverted.

Ø	Interest income was $129 million in the first quarter, a decrease from $138 million in the previous quarter. This portfolio yielded 5.93%. The yield in the previous two quarters was 5.97%.

Premium amortization expenses, a component of interest income, were $12 million for the first quarter. We ended the first quarter with $8.6 billion principal value of loans and a loan premium balance of $117 million for an average basis of 101.37% of principal value. For various technical accounting reasons, for several years we have not been able to amortize premium expense balances as quickly as the loans prepaid. If short-term interest rates decline, under these accounting rules we would expect premium amortization expenses to increase significantly. Largely because premium amortization expenses have not kept pace with prepayments in the past, we estimate the book value of residential loans exceeded their market value by $65 million at quarter-end.

Realized credit losses were $1.6 million for the first quarter, an annual loss rate of eight basis points (0.08%) of the reduced loan balances. The loss for tax purposes was $0.3 million. Cumulative losses have been far lower than our original expectations. We expect losses to continue to increase as these loans season. Credit reserves for this portfolio were $20 million (or 0.23%) at quarter-end.

Ø	The balance of seriously delinquent loans increased from $74 million to $79 million during the quarter, an increase from 0.24% to 0.26% of original balances and an increase from 0.81% to 0.92% of current balances.

Ø	At the end of the first quarter, $7.4 billion residential loans were financed via securitization (“Sequoia”) and $1.3 billion were financed with Redwood debt and equity.

Ø	We are planning to acquire and securitize alt-a and subprime loans in the future in addition to our current business of acquiring and securitizing prime-quality loans.

Ø	Additional information on our residential loans can be found in Tables 9, 10, 11, and 14 of the Appendix.

RESIDENTIAL REVIEW

Residential Loans

COMMERCIAL REVIEW

Commercial Real Estate Securities and Loans

What is this?

We invest in securities that are backed by pools of commercial real estate loans. These are represented on our balance sheet as part of real estate securities. We also invest in commercial real estate loans. These are represented on our balance sheet as part of real estate loans.

Highlights

·	Total commercial securities declined by 3% in the first quarter, from $568 million to $551 million, as a result of $6 million acquisitions, $6 million sales, $1 million principal pay downs, and $14 million negative market value changes. We did not acquire or sell any commercial loans.

Spreads for commercial securities widened (asset prices declined) somewhat in the first quarter as market participants became more risk-averse and markets became less liquid. Problems in subprime residential lending, developing problems in CDO markets, and record volumes of new CMBS issuance were part of the cause.

·	In the first quarter, we did not invest in any CMBS transactions as the first-loss buyer. We invested in a new transaction in the second quarter, making a new investment of $42 million in these commercial CES.

For 2007, we now expect to slow our pace of commercial CES acquisitions relative to last year. Although the commercial property market is healthy, our concerns for the longer-term are growing, given elevated property prices and increasingly aggressive underwriting. We are satisfied with our current assets, but we are not currently looking to add substantial new assets. Our current focus is primarily on building our surveillance and special servicing capabilities. Over time, we also expect to expand our capacity to acquire, originate, and finance commercial real estate loans.

·	We are committed to building a complete commercial real estate finance business with more fully developed capabilities and a broader product line. We are not in any hurry to do so, however. Given current market dynamics, building slowly seems the prudent course of action.

COMMERCIAL REVIEW

Commercial Real Estate Securities and Loans

Quarterly Update:

a)	Commercial Investment-Grade Securities

Our commercial IGS declined by $4 million (or 3%) in the first quarter. Acquisitions were $3 million, sales were $6 million, principal pay downs were $1 million, upgrades of commercial CES securities to IGS were $4 million, and market value declines were $2 million. Sales were the result of our call of Acacia 4 and the subsequent sale of some of Acacia 4’s assets. We recognized $0.1 million of gains from these sales of commercial IGS.

Ø	Anticipating spread widening, we have not been acquiring significant volumes of investment-grade CMBS for some time. We may seek to complete our second commercial real estate CDO (CRE CDO) in 2008, in which case we may acquire additional commercial IGS.

Interest income generated by commercial IGS was $2 million for the first quarter. The yield for the quarter was 6.14%, a decrease from 8.77% in the previous quarter. The decrease in yield was primarily the result of our sale of higher-yielding commercial interest-only securities during the fourth quarter of 2006.

Ø	The market value decline of $2 million in commercial IGS was largely the result of credit spread widening in BBB-rated securities, reflecting increased supply of CMBS amidst credit concerns across all mortgage ABS sectors.

Ø	The credit performance of our commercial IGS portfolio remains strong.

We have never incurred a principal loss on a commercial IGS security and we do not currently maintain GAAP credit reserves against our commercial IGS securities, as we expect external credit enhancement (primarily structural credit subordination) will sufficiently protect our investments from principal losses.

Ø	The interest rate characteristics of commercial IGS were 80% fixed rate and 20% floating rate. We use interest rate agreements to reduce interest rate mismatches that may occur between assets and their associated liabilities.

Ø	At March 31, 2007, 92% of our commercial IGS were financed via our Acacia CDO program.

Ø	Additional information on this portfolio can be found in Tables 9, 10, and 18 of the Appendix.

COMMERCIAL REVIEW

Commercial Real Estate Securities and Loans

b)	Commercial IGS Tables & Graphs

ABS ISSUED

Acacia CDO ABS Issued

What is this?

We finance a majority of our investments in securities using proceeds from collateralized debt obligation (CDO) securitizations. We sell a diverse pool of our residential, commercial, and CDO real estate securities (primarily rated investment-grade or BB) to an independent securitization entity (typically called Acacia) that creates CDO securities. The newly created CDO ABS securities that are rated investment-grade are sold to third-party investors. Redwood earns ongoing asset management fees for managing the Acacia entities. In addition, Redwood acquires most of the CDO CES that Acacia creates. By acquiring Acacia CDO CES, Redwood earns the net interest income created when the yield on the assets in the Acacia collateral pool exceeds the interest payments required and made to the buyers of the CDO ABS securities Acacia has sold. Acacia CDO ABS are not obligations of Redwood Trust. However, they are shown on our consolidated balance sheet as part of ABS issued liabilities.

Highlights

We believe we should be able to benefit from the current turmoil in the new issuance market for CDO securities. Our competitive advantages in the CDO business include a large permanent capital base, the ability to acquire and hold CDO CES, a well-developed real estate investment infrastructure, access to collateral, access to warehouse and other inventory financings, a strong track record, and a good reputation.

·	In addition, given our modeling and collateral evaluation capabilities, in the current environment we believe we will be able to source an new opportunities to invest in CDO assets issued from securitizations sponsored by others.

ABS ISSUED

Acacia CDO ABS Issued

ABS ISSUED

Acacia CDO ABS Issued

Quarterly Update:

Acacia CDO ABS outstanding increased from $2.3 billion to $2.8 billion during the first quarter of 2007, an increase of 19%. Acacia issued one new CDO ABS during the quarter, Acacia 11, which experienced very good investor participation and attractive funding costs for Redwood. Paydowns of Acacia CDO securities were $44 million for the first quarter.

In April, we priced Acacia Option ARM CDO 1, and we expect to close this $500 million transaction in May. These CDO bonds priced at wider spreads (higher cost of funds) than Acacia 11 and consequently the CDO CES securities Redwood acquired from this transaction will likely have lower returns than initially expected. Since we have acquired and continue to acquire investment-grade rated option ARM-backed assets at wide spreads as collateral for this transaction, we still expect to earn attractive returns on our investment in the CDO CES from this transaction (even though some of the collateral we acquired for this transaction was accumulated in a tighter spread environment and we have had to mark down the value of these assets for GAAP reporting).

We currently expect to price an additional $500 million CDO bonds in the second quarter. While our cost of funds for this transaction will not be known until pricing, we expect that our economics on this transaction will be favorable if we can price at today’s spreads (which already reflect substantial illiquidity and turmoil in the CDO markets), although it is possible that the transaction could be priced with wider spreads less favorable to Redwood, delayed, or even cancelled due unfavorable market conditions.

Ø	Spreads have widened (yields increased) for both collateral assets and CDO liabilities. We believe the resulting spread that can be earned for new assets and new liabilities is attractive, although there is substantial uncertainty as to where CDO liabilities will actually price.

Ø	The cost of funds of issued Acacia CDO ABS was 6.20% in the first quarter of 2007 as compared to 6.08% for the fourth quarter of 2006. Interest expense, net of interest rate agreements, for Acacia ABS issued was $39 million for the first quarter of 2007.

Ø	At March 31, 2007, the credit ratings for Acacia bonds outstanding were $2.2 billion AAA, $292 million AA, $172 million A, and $151 million BBB. In addition, Acacia has sold a portion of its unrated CDO CES (CDO equity) to third parties, of which $21 million was outstanding at March 31, 2007.

Ø	Our collateral rating history continues to be strong. To date, we have had 149 rating upgrades and four rating downgrades on all collateral within the existing Acacia program.

Relative to most other real estate CDO programs, Acacia has limited subprime risk. We have concentrated our subprime investments for Acacia collateral in AA and A rated securities, with limited exposure to BBB and BBB- rated securities from recent vintages. We sold some assets that appeared they might under-perform and losses related to these sales were de minimis. Overall, we believe Acacia’s CDO bonds are likely to perform well for their investors, on an absolute basis and also relative to other CDO bonds. This should allow us to continue to use the sale of Acacia bonds as a form of financing except in the most difficult markets.

ABS ISSUED

Acacia CDO ABS Issued

Quarterly Update (Continued):

The Acacia CDO CES Redwood has acquired from Acacia had a market value of $135 million at March 31, 2007. Redwood’s economic risk with respect to Acacia’s assets and liabilities is generally limited to our cost basis in these assets, which at March 31, 2007 totaled $82 million. For accounting purposes, we account for Acacia transactions as financings, so the assets owned by Acacia are consolidated with our assets and the CDO bonds issued by Acacia are consolidated with our liabilities. As a result, the Acacia CDO CES securities we issue and then acquire do not appear on our GAAP balance sheet, but rather are implicitly represented as the excess of consolidated Acacia assets over consolidated Acacia liabilities.

For GAAP balance sheet purposes, we mark-to-market most of the assets and derivatives owned by the Acacia entities, but none of Acacia’s liabilities. For GAAP purposes, if market values for Acacia’s $2.8 billion assets declined sufficiently, we could be required to record balance sheet charges in excess of the total maximum economic amount ($82 million) that Redwood actually has invested. Conversely, we would not be permitted to reflect an offsetting improvement in Acacia liability MTM results in our GAAP financials. None of these market value changes would affect the cash flows we expect to earn from our Acacia investments, however. The net balance sheet market value markdown for assets and derivatives in closed Acacia transactions was $49 million for the first quarter.

For managing the outstanding Acacia transactions, Redwood’s taxable asset management subsidiaries earned $1.2 million asset management fees in the first quarter of 2007. This income was sourced from the assets owned by Acacia, and these assets are consolidated on our GAAP balance sheet, for GAAP purposes so we currently include this asset management income as part of the interest income generated by those assets.

Ø	Additional information about Acacia CDO ABS issued can be found in Table 21 of the Appendix.

ABS ISSUED

Sequoia ABS Issued

What is this?

We finance a portion of our residential whole loans by securitizing them. We sell loans to an independent securitization entity (typically called Sequoia) that creates and issues asset-backed securities (ABS) backed by these loans. Most of the investment-grade rated Sequoia ABS are sold to third party investors. Redwood usually acquires most of the credit-enhancement securities (CES) and the interest-only securities (IO) that Sequoia creates, as well as a portion of Sequoia’s investment-grade securities. When Redwood acquires Sequoia IO, we earn the net interest income created when the yield on Sequoia’s loans exceeds cost of funds of Sequoia ABS issued. Sequoia ABS are not obligations of Redwood Trust, although they are shown on our consolidated balance sheet as part of ABS issued liabilities.

Highlights

·	We completed one Sequoia securitization in the first quarter and have priced another Sequoia securitization that will close in May.

·	Recent Sequoia ABS debt issued has been backed by prime hybrid mortgages, as prime ARMs have gone out of favor.

·	We called an older Sequoia transaction that was issued in 2004 and we expect to call more transactions in 2007 and 2008.

·	We expect to expand our residential conduit’s activities and commence acquiring alt-a and subprime loans to be funded primarily through securitization.

Graph

ABS ISSUED

Sequoia ABS Issued

Quarterly Update:

Sequoia ABS outstanding decreased from $7.7 billion to $7.2 billion in the first quarter, a decline of 6%. The primary reason for the decline in the outstanding balance was fast prepayment speeds on the underlying Sequoia loans. In the first quarter, the CPR for the loans owned by Sequoia entities was 37%.

We completed one securitization during the first quarter, financing $885 million prime hybrid mortgages. In conjunction with the securitization, Sequoia issued $850 million AAA-rated ABS debt and another $25 million of investment-grade ABS debt. The ABS debt had similar interest rate characteristics to the underlying loans, thus minimizing our interest rate risk. The cost of funds on the newly issued ABS debt was 5.91%.

We called and retired $0.3 billion ABS debt associated with a Sequoia securitization issued in early 2004. When we exercise the call option, Redwood acquires all the ABS debt that remains outstanding at the par value. This debt is canceled, the Sequoia entity is collapsed, and Redwood reacquires the underlying loans.

Ø	Interest expense for Sequoia ABS issued was $96 million for the first quarter for a cost of funds of 5.60%.

Redwood’s economic risk with respect to Sequoia’s assets and liabilities is generally limited to the value of Sequoia ABS we have acquired, which included $21 million market value IO securities rated AAA, $88 million CES, and $76 million investment-grade securities at March 31, 2007. For GAAP accounting purposes, we account for Sequoia transactions as financings, so the assets owned by Sequoia are consolidated with our assets and the ABS bonds issued by Sequoia are consolidated with our liabilities. As a result, the Sequoia ABS we acquire do not appear on our GAAP balance sheet, but rather are implicitly represented as the excess of consolidated Sequoia assets over consolidated Sequoia liabilities.

Ø	Total ABS issued on our March 31, 2007 balance sheet included $7.2 billion Sequoia ABS, $2.7 billion Acacia CDO ABS, and $5 million ABS issued by our Madrona CP issuance facility.

Ø	Additional information about Sequoia ABS issued can be found in Tables 19 and 20 of the Appendix.

APPENDIX

Glossary

NOTE: All companies and analysts do not calculate non-GAAP measures in the same fashion. As a result, certain measures as calculated by Redwood may not be comparable to similarly titled measures reported by other companies.

ACACIA

Acacia is the brand name for the collateralized debt obligation (CDO) securitizations Redwood sponsors. The underlying pool of assets for these CDO securitizations consists primarily of investment-grade and the more senior of the below investment-grade rated securities backed by residential prime, residential subprime, and commercial real estate loans. Acacia also owns related assets such as CDO securities issued by other real estate oriented CDOs, corporate debt issued by equity REITs, commercial real estate loans, and synthetic assets derived from commercial real estate assets. Redwood typically acquires a portion of the CDO credit-enhancement (or “equity”) securities issued by Acacia; these are the securities that are in the first-loss (highest risk) position with respect to absorbing any credit losses that may occur within the assets owned by the Acacia entities. Redwood also earns asset management fees for ongoing management of the Acacia entities.

ADJUSTABLE-RATE MORTGAGES (ARMs)

Adjustable-rate mortgages are loans that have coupons that adjust at least once per year. We make a distinction between ARMs (loans with a rate adjustment at least annually) and hybrids (loans that have a fixed-rate period of 3 to 10 years and then become adjustable rate).

ALT-A SECURITIES

Alt-a securities are residential mortgage-backed securities backed by loans that have higher credit quality than subprime and lower credit quality than prime. Alt-a originally represented loans with alternative documentation, but the definition has shifted over time to include loans with additional risk characteristics and a higher percentage of investor loans. For example, the borrower’s income may not be verified, and in some cases, may not be disclosed on the loan application. Expanded criteria also allows for higher debt-to-income ratios with higher accompanying LTV than otherwise would be permissible for prime loans.

ASSET-BACKED SECURITIES (ABS)

Securities backed by financial assets that generate cash flows. Each ABS security issued from an asset-backed securitization entity has a unique priority with respect to receiving principal and interest cash flows from the assets owned by the entity.

BOOK VALUE

Book value is the value of our common equity. As measured for GAAP, reported book value generally incorporates mark-to-market adjustments for securities and interest rate agreements, but not for loans or liabilities.

COLLATERALIZED DEBT OBLIGATIONS (CDO)

ABS securities issued from the securitization of a diverse pool of assets. See “Acacia”.

CDO EQUITY SECURITIES

CDO equity securities (or CDO CES) are credit-enhancement securities that bear the initial credit losses of the assets owned by CDO securitization entities.

COMMERCIAL B-NOTE LOANS

Commercial b-note loans are structured loans that are subordinated to the more senior portions of loans secured by the same income-producing commercial real estate.

APPENDIX

Glossary

COMMERCIAL MEZZANINE LOANS

Commercial mezzanine loans are junior subordinated loans that are not secured by a lien on income-producing commercial real estate; rather, they are secured by a pledge from an equity entity of its equity interests in the property.

COMMERCIAL WHOLE LOANS

Commercial whole loans are unsecuritized first-lien loans that are secured by income-producing commercial real estate.

CONDUIT

An entity that acquires closed loans from originators, accumulates loans over a period, and sells these loans, seeking to generate a gain on sale. Sales are usually made via securitization, but also can be made through bulk whole loan sales.

CORE EARNINGS

Core earnings is not a measure of earnings in accordance with GAAP. In calculating core earnings, we attempt to strip some of the elements out of GAAP earnings that are temporary, one-time, or non-economic in nature, or that primarily relate to the past with little relevance to the future. In calculating core earnings, we are trying to show the trend of underlying ongoing earnings. We exclude realized gains (and losses) resulting from asset sales and calls that are included in income. We sell assets from time to time as part of our ongoing portfolio management activities. These sales can produce material gains and losses that could obscure the underlying trend of our long-term portfolio earnings. Similarly, we exclude gains from calls of residential credit-enhancement securities, as these are essentially sales of assets that produce a highly variable stream of income that may obscure some underlying income generation trends. GAAP earnings also include mark-to-market income and expenses for certain of our assets and interest rate agreements. These are unrealized market value fluctuations, and we exclude them from core earnings.

Management believes that core earnings provide relevant and useful information regarding results from operations. This information can be used in conjunction with and in addition to GAAP measures of performance. Core earnings can be useful, in part, because market valuation adjustments on only a portion of our assets and none of our liabilities are recognized through the income statement under GAAP. Thus, GAAP valuation adjustments may not be fully indicative of changes in market values on the balance sheet as a whole and may not be a reliable guide to current operating performance. Furthermore, gains or losses realized upon sales of assets vary based on portfolio management decisions; a sale of an asset for a gain or a loss may or may not affect ongoing earnings from operations. A reconciliation of core earnings to GAAP income appears in Table 2 of the Appendix.

CORE EQUITY (CORE BOOK VALUE)

Core equity is not a measure calculated in accordance with GAAP. Core equity is GAAP equity with mark-to-market gains and losses (“accumulated other comprehensive income”) excluded. GAAP equity includes mark-to-market adjustments for certain of our assets and interest rate agreements. Core equity in some ways approximates what our equity value would be if we used historical amortized cost accounting exclusively. A reconciliation of core equity to GAAP equity appears in Table 7 of the Appendix.

CORE REIT TAXABLE INCOME

Core REIT taxable income is REIT taxable income before gains and losses on asset sales and calls and before certain other expenses such as tax deductions for stock option exercises. It represents that portion of our REIT taxable income that may be more ongoing in nature.

APPENDIX

Glossary

CORE TAXABLE INCOME

Core taxable income is total taxable income before gains and losses on asset sales and calls and before certain other expenses such as tax deductions for stock option exercises. It represents that portion of our total taxable income that may be more ongoing in nature.

CPR

Constant (or conditional) prepayment rate (CPR) is an industry-standard measure of the speed at which mortgage loans prepay. It approximates the annual percentage rate at which a pool of loans is paying down due to prepayments.

CREDIT-ENHANCEMENT SECURITIES (CES)

Credit-enhancement securities (CES) absorb the initial credit losses generated by a pool of securitized assets. As a result, the more senior securities issued from that securitization are credit-enhanced (have less credit risk). Our definition of CES includes all the below investment-grade rated bonds issued from a securitization. These securities are also referred to as subordinated securities and B-pieces. For a typical securitization of prime residential loans, there are three CES - the first-loss, second-loss, and third-loss bonds. The first-loss security takes the initial risk. If credit losses within the securitized asset pool exceed the principal value of the first-loss security, the second-loss security is at risk. If cumulative losses exceed the principal value of the first- and second-loss securities, then the third-loss security is at risk. Generally, for these securitizations, the third-loss security has a credit rating of BB, the second-loss has a credit rating of B, and the first-loss is not rated. Other types of securitizations, such as commercial, CDO, subprime residential, and some alt-a residential transactions, are structured differently. Nevertheless, the below-IGS issued from these securitizations function as credit-enhancement securities for these transactions.

GAAP

Generally Accepted Accounting Principles in the United States.

INTEREST-ONLY SECURITIES (IOs)

Interest-only securities (IOs) are specialized securities that are backed by real estate loans. They receive interest payments calculated by a formula wherein IO cash flows vary as a function of interest payments generated by the underlying loans within a securitization or as a function of the spread between the yield on the loans owned by a securitization entity and the cost of funds of the securities (ABS) issued by that entity. Typically, IO securities do not have a principal balance and they will not receive principal payments. Interest payments to IO securities usually equal the IO interest rate formula multiplied by a “notional” principal balance. The notional principal balance for an IO is typically reduced over time as the actual principal balance of the underlying pool of real estate loans pays down, thus reducing IO cash flows over time. IO cash flows are typically reduced more quickly if loan prepayments accelerate. The IO securities that Redwood has acquired from some Sequoia residential securitizations typically earn an interest amount that varies as a function of the remaining principal balance of Sequoia loans and the spread between the yield on the residential loans owned by Sequoia and the cost of the asset-backed securities issued by Sequoia.

LEVERAGE RATIOS

We use collateralized debt to finance on a temporary basis the accumulation of inventory assets prior to sale to a securitization entity and to finance ongoing investments in high-quality loans and investment-grade securities. As we increase these investments, Redwood debt is growing, although balances are still at what would be considered by many analysts to be low levels for financial institutions. However, because of the consolidation of independent securitization entities, it appears on our GAAP consolidated financial statements that Redwood is highly leveraged, with total liabilities significantly greater than equity. The obligations of these securitization entities are not obligations of Redwood. When determining the degree of financial leverage Redwood has, traditional leverage ratios may be misleading in some respects if consolidated ABS issued from securitization entities are included as part of Redwood’s obligations when calculating the ratio.

APPENDIX

Glossary

MARK-TO-MARKET ACCOUNTING

Mark-to-market accounting uses estimated current market values of assets, liabilities, and hedges to determine balance sheet values and/or income statement revenue recognition. For instance, many of our assets currently are carried on our balance sheet at their market value rather than historical amortized cost. For our income statement, mark-to-market accounting is used for some assets and hedges, and will be used for assets if they become impaired under various accounting definitions of that term. Increasingly in the future, we expect to use mark-to-market accounting for income statement purposes for a wider variety of assets and liabilities. This will likely make quarter-to-quarter GAAP earnings trends more volatile, although core earning and taxable income will not be affected to the same degree.

NEGATIVE AMORTIZATION ADJUSTABLE-RATE MORTGAGES (NEG AM ARMS, OPTION ARMS, OR MTA ARMS)

Negative amortization ARMs (neg am ARMs, option ARMs, pay option ARMs, or monthly treasury average (MTA) ARMs) are adjustable-rate mortgages that allow the borrower to choose between different payment options. One of these options allows the borrower to make a minimum payment. This minimum payment is less than the interest accrued on the mortgage during that period and, in this instance, the borrower’s loan balance will increase (causing negative amortization of the loan balance).

NET INTEREST MARGIN SECURITIES

Net interest margin securities (NIMs) are securities backed by cash flows that otherwise would be payable to the residual security. Through a new securitization, cash flows are diverted from the residual to amortize the NIM principal in addition to paying a coupon on the NIM. Since NIMs receive cash flows immediately or soon after securitization and tend to have short-averaged lives, they are rated by a rating agency. Rating can range from AAA down to single-B. NIMs are mostly an interest only (IO) security because residuals (which back the NIMs) are mostly an IO security. Effectively, the IO-like cash flow is transformed into coupon and principal payments on the NIM.

OPTION ARMS

See negative amortization adjustable-rate mortgages.

PRIME RESIDENTIAL REAL ESTATE LOANS

Prime loans are residential loans with high-quality characteristics such as borrowers with high FICO credit scores, lower loan-to-value ratios, lower debt-to-income ratios, greater reserves, and more documentation.

PRIME SECURITIES

Prime securities are residential mortgage-backed securities backed by high credit, quality loans, generally with balances greater than conforming loan limits. Prime securities are typically backed by loans that have relatively high weighted average FICO scores (700 or higher), low weighted averages LTVs (75% or less), limited concentrations of investor properties, and low percentages of loans with low FICO or high LTV.

PROFITABILITY RATIOS

Many financial institution analysts use asset-based profitability ratios such as interest rate spread and interest rate margin in their work analyzing financial institutions. These are asset-based measures. Because we consolidate the assets and liabilities of securitization entities for GAAP purposes, our total GAAP assets and liabilities may vary strongly over time, and may not be comparable in economic reality to assets typically used in these calculations for other financial institutions. As a result, we believe equity-based profitability ratios may be more appropriate than asset-based measures for some analyses of Redwood’s operations. We believe, for example, that net interest income as a percentage of equity is a useful measure of profitability. For operating expenses, we believe useful measures are operating efficiency ratio (operating expenses as a percentage of net interest income) and operating expenses as a percentage of equity.

APPENDIX

Glossary

REAL ESTATE INVESTMENT TRUST (REIT)

An entity that makes a tax election to be taxed as a REIT, invests in real estate assets, and meets other REIT qualifications. By meeting certain tests, including the distribution as dividends of at least 90% of REIT taxable income, profits are not taxed at the corporate level for a REIT to the extent that these profits are distributed as dividends to stockholders. This provides an operating cost savings, as most profits are not taxed at the entity level. On the other hand, the requirement to pay out as dividends most of the REIT profits means it can be harder for a REIT to grow if using only internally-generated funds (as opposed to issuing new stock).

REDWOOD DEBT

Redwood debt is all the debt that is an obligation of Redwood, with the exception of junior subordinated notes that we treat as part of our capital base. We obtain this debt from a variety of Wall Street firms, banks, and other institutions. As another form of Redwood debt, we issue collateralized commercial paper.

REIT RETAINED TAXABLE INCOME

REIT retained taxable income is not a measure calculated in accordance with GAAP. REIT retained taxable income is the taxable income earned at the REIT after dividend distributions to our shareholders, less corporate income taxes and excise taxes paid at the REIT level. A reconciliation of REIT retained taxable income to GAAP income appears in Table 3 of the Appendix.

REIT SUBSIDIARY

A REIT subsidiary is a subsidiary of a REIT that is taxed as a REIT.

REIT TAXABLE INCOME

REIT taxable income is not a measure calculated in accordance with GAAP. REIT taxable income is pre-tax income calculated for tax purposes at Redwood including only its qualified REIT subsidiaries (excluding its taxable subsidiaries). REIT taxable income is an important measure as it is the basis of our dividend distributions to shareholders. We must distribute at least 90% of REIT taxable income as dividends to shareholders over time. As a REIT, we are not subject to corporate income taxes on the REIT taxable income we distribute. We pay income tax on the REIT taxable income we retain (we can retain up to 10% of the total). A reconciliation of REIT taxable income to GAAP income appears in Table 3 of the Appendix.

RESIDUALS

Residuals are first-loss securities that are not rated by a rating agency. Residuals are called such because they get the last (or residual) claim on the cash flow from a securitization after ABS debt interest expense, losses, and servicing have been deducted from the interest due on the underlying mortgage loans. The value of residual securities can vary greatly and is highly dependent on prepayment speeds. The value is also dependent on the level and timing of credit losses, but often is not as sensitive to losses as it is to prepayment speeds. These securities perform poorly when prepayments are fast and losses are higher than expected.

RETURN ON EQUITY (ROE) AND ADJUSTED RETURN ON EQUITY

ROE is the amount of profit we generate each year per dollar of equity capital. Adjusted ROE is GAAP income divided by core equity. Core equity excludes those balance sheet mark-to-market adjustments that are not included in our income statement. Thus, only those asset market value changes that are included in our income statement will affect adjusted ROE. A reconciliation of GAAP ROE to adjusted ROE appears in Table 8 of the Appendix.

A-2

APPENDIX


Table 3: Taxable Income and GAAP / Tax Differences (in thousands, except per share data)
	Estimated			Estimated												Actual												Estimated			Actual
	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005			Full Year 2006			Full Year 2005

GAAP net income	$	18,309		$	35,691		$	32,416		$	31,410		$	28,015		$	42,495		$	55,899		$	40,915		$	60,563		$	127,532		$	199,872
Difference in Taxable Income Calculations
Amortization and credit losses (net interest income)		10,417			12,794			12,558			12,779			4,939			(1,314	)		202			(7,079	)		(19,302	)		43,070			(27,493	)
Operating expense differences		(1,713	)		(12,090	)		2,545			(288	)		1,604			396			576			2,438			2,019			(8,229	)		5,429
Realized gains on calls and sales		2,100			(5,073	)		(1,141	)		(699	)		(613	)		(5,959	)		(8,582	)		823			2,527			(7,526	)		(11,191	)
Unrealized market valuation adjustments		9,118			6,571			484			2,305			3,226			1,772			2,048			820			391			12,586			5,031
Income tax provisions		1,800			405			4,123			3,265			(703	)		4,096			5,013			3,035			134			7,090			12,278
Total differences in GAAP / Tax income		21,722			2,607			18,569			17,362			8,453			(1,009	)		(743	)		37			(14,231	)		46,991			(15,946	)

Taxable Income	$	40,031		$	38,298		$	50,985		$	48,772		$	36,468		$	41,486		$	55,156		$	40,952		$	46,332		$	174,523		$	183,926

REIT taxable income	$	35,112		$	40,829		$	45,751		$	45,040		$	35,382		$	39,793		$	47,118		$	39,237		$	45,161		$	167,002		$	171,309
Taxable income in taxable subsidiaries		4,919			(2,531	)		5,234			3,732			1,086			1,694			8,038			1,715			1,170			7,521			12,617
Total taxable income	$	40,031		$	38,298		$	50,985		$	48,772		$	36,468		$	41,487		$	55,156		$	40,952		$	46,331		$	174,523		$	183,926

Retained REIT taxable income (after-tax)	$	1,933		$	673		$	2,500		$	2,166		$	1,313		$	1,895		$	1,164		$	1,798		$	1,261		$	6,652		$	6,118
Retained taxable income in taxable subsidiaries (after-tax)		4,522			(953	)		3,156			2,032			556			1,238			4,386			845			340			4,791			6,809
Total retained taxable income (after-tax)	$	6,455			($280	)	$	5,656		$	4,198		$	1,869		$	3,133		$	5,550		$	2,643		$	1,601		$	11,443		$	12,927

Shares used for taxable EPS calculation		27,129			26,733			26,053			25,668			25,382			25,133			24,764			24,647			24,514			25,971			24,754

REIT taxable income per share	$	1.29		$	1.53		$	1.76		$	1.75		$	1.39		$	1.58		$	1.90		$	1.59		$	1.84		$	6.43		$	6.92
Taxable income in taxable subsidiaries per share	$	0.18			($0.11	)	$	0.20		$	0.16		$	0.04		$	0.07		$	0.32		$	0.07		$	0.05		$	0.29		$	0.51
Total taxable income per share	$	1.48		$	1.42		$	1.96		$	1.91		$	1.44		$	1.65		$	2.23		$	1.66		$	1.89		$	6.72		$	7.43

Total retained taxable income (after-tax)	$	0.24			($0.01	)	$	0.22		$	0.16		$	0.07		$	0.12		$	0.22		$	0.11		$	0.07		$	0.44		$	0.52

A-3

APPENDIX


Table 4: Retention and Distribution of Taxable Income (in thousands, except per share data)
																												Estimated			Actual
	Estimated			Estimated												Actual												Full Year			Full Year
	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005			2006			2005
Dividends declared	$	20,347		$	98,476		$	18,237		$	17,967		$	17,767		$	92,150		$	17,335		$	17,253		$	17,160		$	152,447		$	143,898
Dividend deduction on stock issued through DRIP		660			812			177			239			176			263			128			112			56			1,404			559
Total dividend deductions	$	21,007		$	99,288		$	18,414		$	18,206		$	17,943		$	92,413		$	17,463		$	17,365		$	17,216		$	153,851		$	144,457

Regular dividend per share	$	0.75		$	0.70		$	0.70		$	0.70		$	0.70		$	0.70		$	0.70		$	0.70		$	0.70		$	2.80		$	2.80
Special dividend per share		-			3.00			-			-			-			3.00			-			-			-			3.00			3.00
Total dividends per share	$	0.75		$	3.70		$	0.70		$	0.70		$	0.70		$	3.70		$	0.70		$	0.70		$	0.70		$	5.80		$	5.80

Undistributed REIT taxable income at beginning of period (pre-tax):	$	48,909		$	111,248		$	88,257		$	65,687		$	51,568		$	106,719		$	80,166		$	62,218		$	37,291		$	51,568		$	37,291
REIT taxable income (pre-tax)		35,112			40,829			45,751			45,040			35,382			39,793			47,118			39,237			45,161			167,002			171,309
Permanently retained (pre-tax)		(3,336	)		(3,879	)		(4,346	)		(4,263	)		(3,320	)		(2,531	)		(3,102	)		(3,924	)		(3,018	)		(15,808	)		(12,575	)
Dividend of 2004 income		-			-			-			-			-			-			(2,710	)		(17,365	)		(17,216	)		-			(37,291	)
Dividend of 2005 income		-			-			(15,418	)		(18,207	)		(17,943	)		(92,413	)		(14,753	)		-			-			(51,568	)		(107,166	)
Dividend of 2006 income		(21,007	)		(99,288	)		(2,996	)		-			-			-			-			-			-			(102,284	)		-
Dividend of 2007 income		-			-			-			-			-			-			-			-			-			-			-
Undistributed REIT taxable income at period end (pre-tax):	$	59,678		$	48,909		$	111,248		$	88,257		$	65,687		$	51,568		$	106,719		$	80,166		$	62,218		$	48,909		$	51,568

Undistributed REIT taxable income (pre-tax) at period end
From 2004's income	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	2,710		$	20,075		$	-		$	-
From 2005's income		-			-			-			15,418			33,625			51,568			106,719			77,456			42,143			-			51,568
From 2006's income		27,902			48,909			111,248			72,839			32,062			-			-			-			-			48,909			-
From 2007's income		31,776			-			-			-			-			-			-			-			-			-			-
Total	$	59,678		$	48,909		$	111,248		$	88,257		$	65,687		$	51,568		$	106,719		$	80,166		$	62,218		$	48,909		$	51,568

Shares outstanding at period end		27,129			26,733			26,053			25,668			25,382			25,133			24,764			24,647			24,514			26,733			25,133
Undistributed REIT taxable income (pre-tax)per share outstanding at period end	$	2.20		$	1.83		$	4.27		$	3.44		$	2.59		$	2.04		$	4.31		$	3.25		$	2.54		$	1.83		$	2.05

A-4

APPENDIX


Table 5: Assets (in millions)

	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005
Residential CES owned by Redwood	$	256		$	230		$	291		$	403		$	303		$	309		$	338		$	469		$	374
Residential CES consolidated from Acacia		496			492			424			274			292			284			305			215			214
Total GAAP residential CES	$	752		$	722		$	715		$	677		$	595		$	593		$	643		$	684		$	588

Residential loans owned by Redwood	$	1,256		$	1,339		$	520		$	351		$	87		$	45		$	17		$	300		$	256
Residential loans consolidated from Sequoia		7,424			7,985			9,323			10,102			11,903			13,830			16,539			19,330			21,516
Total GAAP residential loans	$	8,680		$	9,324		$	9,843		$	10,453		$	11,990		$	13,875		$	16,556		$	19,630		$	21,772

Residential IGS owned by Redwood	$	106		$	318		$	105		$	206		$	42		$	151		$	139		$	140		$	22
Residential IGS consolidated from Acacia		1,920			1,379			1,369			1,184			1,305			1,109			1,140			1,053			1,066
Total GAAP residential IGS	$	2,026		$	1,697		$	1,474		$	1,390		$	1,347		$	1,260		$	1,279		$	1,193		$	1,088

Commercial CES owned by Redwood	$	189		$	224		$	156		$	93		$	68		$	59		$	98		$	79		$	73
Commercial CES consolidated from Acacia		246			224			224			178			156			160			89			59			55
Total GAAP commercial CES	$	435		$	448		$	380		$	271		$	224		$	219		$	187		$	138		$	128

Commercial loans owned by Redwood	$	0		$	2		$	2		$	2		$	2		$	7		$	21		$	16		$	22
Commercial loans consolidated from securitization		26			26			30			36			53			53			35			26			35
Total GAAP commercial loans	$	26		$	28		$	32		$	38		$	55		$	60		$	56		$	42		$	57

Commercial IGS owned by Redwood	$	9		$	0		$	0		$	1		$	3		$	6		$	23		$	10		$	1
Commercial IGS consolidated from Acacia		107			120			135			130			182			179			200			208			205
Total GAAP commercial IGS	$	116		$	120		$	135		$	131		$	185		$	185		$	223		$	218		$	206

CDO CES owned by Redwood	$	4		$	9		$	10		$	5		$	5		$	5		$	12		$	2		$	2
CDO CES consolidated from Acacia		12			13			13			10			9			7			-			-			-
Total GAAP CDO CES	$	16		$	22		$	23		$	15		$	14		$	12		$	12		$	2		$	2

CDO IGS owned by Redwood	$	20		$	14		$	2		$	17		$	4		$	6		$	5		$	6		$	0
CDO IGS consolidated from Acacia		234			210			183			160			160			145			141			143			133
Total GAAP CDO IGS	$	254		$	224		$	185		$	177		$	164		$	151		$	146		$	149		$	133

Other real estate investments owned by Redwood	$	47		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
Other real estate investments consolidated from Acacia		3			-			-			-			-			-			-			-			-
Total other real estate investments	$	50		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0

Cash owned by Redwood	$	92		$	168		$	113		$	106		$	85		$	176		$	163		$	72		$	65
Restricted cash consolidated from entities		340			112			139			86			131			72			59			48			58
Accrued interest receivable		65			71			67			67			73			76			80			85			82
Principal receivable		7			4			1			1			2			-			2			-			-
Derivative assets		18			27			30			54			48			31			25			13			29
Deferred tax asset		6			5			3			5			5			5			8			7			8
Deferred asset-backed security issuance costs		41			42			47			46			52			54			56			59			63
Other assets		23			16			13			13			10			8			10			6			6
Total GAAP assets	$	12,947		$	13,030		$	13,200		$	13,530		$	14,979		$	16,777		$	19,505		$	22,346		$	24,285

Residential CES owned by Redwood	$	256		$	230		$	291		$	403		$	303		$	309		$	338		$	469		$	374
Residential loans owned by Redwood		1,256			1,339			520			351			87			45			17			300			256
Residential IGS owned by Redwood		106			318			105			206			42			151			139			140			22
Commercial CES owned by Redwood		189			224			156			93			68			59			98			79			73
Commercial loans owned by Redwood		-			2			2			2			2			7			21			16			22
Commercial IGS owned by Redwood		9			-			-			1			3			6			23			10			1
CDO CES owned by Redwood		4			9			10			5			5			5			12			2			2
CDO IGS owned by Redwood		20			14			2			17			4			6			5			6			-
Other real estate investments owned by Redwood		47			-			-			-			-			-			-			-			-
Cash owned by Redwood		92			168			113			106			85			176			163			72			65
Total assets owned by Redwood		1,979			2,304			1,199			1,184			599			764			816			1,094			815
Assets of securitizations for GAAP		10,468			10,449			11,701			12,074			14,060			15,767			18,449			21,034			23,224
ABS liabilities of entities for GAAP		(9,947	)		(9,979	)		(11,554	)		(11,898	)		(13,930	)		(15,585	)		(18,237	)		(20,815	)		(23,057	)
Redwood earning assets - GAAP basis	$	2,500		$	2,774		$	1,346		$	1,360		$	729		$	946		$	1,028		$	1,313		$	982

A-5

APPENDIX


Table 6: Liabilities and Equity (all $ in millions)

	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005

Redwood debt	$	1,630		$	1,556		$	510		$	529		$	-		$	170		$	162		$	453		$	199
Madrona commercial paper		250			300			-			-			-			-			-			-			-
Total Redwood debt		1,880			1,856			510			529			-			170			162			453			199

ABS issued, consolidated from entities		9,890			9,907			11,466			11,775			13,788			15,422			18,049			20,598			22,821
Unamortized IO issuance premium		62			75			90			106			124			143			163			186			202
Unamortized ABS issuance premium (discount)		(5	)		(3	)		(2	)		17			18			20			25			31			34
ABS obligations of entities		9,947			9,979			11,554			11,898			13,930			15,585			18,237			20,815			23,057

Junior subordinated notes		100			100			-			-			-			-			-			-			-

Accrued interest payable		52			50			51			47			43			41			42			43			38
Interest rate agreements		7			6			6			4			-			1			1			3			-
Accrued expenses and other liabilities		17			17			18			29			21			28			30			23			26
Dividends payable		20			19			18			18			18			17			17			17			17
Total GAAP liabilities		12,023			12,027			12,157			12,525			14,012			15,842			18,489			21,354			23,337


Common stock and paid-in capital		928			904			875			854			839			825			808			803			795
Accumulated other comprehensive income		(6	)		93			95			91			82			74			117			137			125
Cumulative GAAP earnings		827			809			773			740			709			681			639			583			542
Cumulative distributions to shareholders		(825	)		(803	)		(700	)		(681	)		(663	)		(645	)		(548	)		(531	)		(514	)
GAAP stockholders' equity		924			1,003			1,043			1,004			967			935			1,016			992			948

Total GAAP liabilities and equity	$	12,947		$	13,030		$	13,200		$	13,530		$	14,979		$	16,777		$	19,505		$	22,346		$	24,285

Total Redwood debt	$	1,880		$	1,856		$	510		$	529		$	0		$	170		$	162		$	453		$	199
Junior subordinated notes		100			100			-			-			-			-			-			-			-
Redwood obligations	$	1,980		$	1,956		$	510		$	529		$	0		$	170		$	162		$	453		$	199

GAAP stockholders' equity	$	924		$	1,003		$	1,043		$	1,004		$	967		$	935		$	1,016		$	992		$	948

Redwood obligations to equity		2.1			2.0			0.5			0.5			-			0.2			0.2			0.5			0.2
Redwood obligations to (equity + Redwood obligations)		68	%		66	%		33	%		35	%		0	%		15	%		14	%		31	%		17	%

Redwood obligations	$	1,980		$	1,956		$	510		$	529		$	0		$	170		$	162		$	453		$	199
ABS obligations of consolidated entities		9,947			9,979			11,554			11,898			13,930			15,585			18,237			20,815			23,057
GAAP debt	$	11,927		$	11,935		$	12,064		$	12,427		$	13,930		$	15,755		$	18,399		$	21,268		$	23,256

GAAP debt to equity		12.9			11.9			11.6			12.4			14.4			16.9			18.1			21.4			24.5
GAAP debt to (equity + GAAP debt)		93	%		92	%		92	%		93	%		94	%		94	%		95	%		96	%		96	%

A-6

APPENDIX


Table 7: Book Value and Profitability Ratios (all $ in thousands, except per share data)
																												Full Year			Full year
	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005			2006			2005

GAAP stockholders' equity	$	924,040		$	1,002,690		$	1,042,661		$	1,004,265		$	967,333		$	934,960		$	1,016,065		$	991,757		$	948,001		$	1,002,690		$	934,960
Balance sheet mark-to-market adjustments		(6,183	)		93,158			94,780			90,937			81,591			73,731			117,043			137,380			124,784			93,158			73,731
Core equity	$	930,223		$	909,532		$	947,881		$	913,328		$	885,742		$	861,229		$	899,022		$	854,377		$	823,217		$	909,532		$	861,229

Shares outstanding at quarter end		27,129			26,733			26,053			25,668			25,382			25,133			24,764			24,647			24,514			26,733			25,133

GAAP equity per share	$	34.06		$	37.51		$	40.02		$	39.13		$	38.11		$	37.20		$	41.03		$	40.24		$	38.67		$	37.51		$	37.20
Core equity per share	$	34.29		$	34.02		$	36.38		$	35.58		$	34.90		$	34.27		$	36.30		$	34.66		$	33.58		$	34.02		$	34.27

Net interest income	$	47,009		$	44,534		$	48,976		$	44,719		$	45,227		$	41,481		$	48,040		$	53,380		$	62,026		$	183,456		$	204,927
Net interest income / average core equity		20.3	%		19.3	%		21.0	%		19.9	%		20.6	%		18.8	%		21.8	%		25.4	%		31.2	%		20.2	%		24.1	%

Operating expenses (excluding severance expense)	$	15,402		$	13,851		$	13,455		$	16,037		$	12,582		$	12,765		$	12,364		$	11,456		$	11,798		$	55,925		$	48,382

Average total assets	$	12,865,979		$	13,041,794		$	13,480,361		$	14,168,755		$	15,839,483		$	18,348,681		$	20,991,299		$	23,365,553		$	24,563,184		$	14,123,149		$	21,797,922
Average total equity	$	1,008,688		$	1,008,863		$	1,011,609		$	980,402		$	952,230		$	999,313		$	1,014,329		$	970,344		$	895,462		$	988,495		$	970,268

Operating expenses / net interest income		32.8	%		31.1	%		27.5	%		35.9	%		27.8	%		30.8	%		25.7	%		21.5	%		19.0	%		30.5	%		23.6	%
Operating expenses / average total assets		0.48	%		0.42	%		0.40	%		0.45	%		0.32	%		0.28	%		0.24	%		0.20	%		0.19	%		0.40	%		0.22	%
Operating expenses / average total equity		6.1	%		5.5	%		5.3	%		6.5	%		5.3	%		5.1	%		4.9	%		4.7	%		5.3	%		5.7	%		5.0	%

GAAP net income	$	18,309		$	35,691		$	32,416		$	31,410		$	28,015		$	42,495		$	55,899		$	40,915		$	60,563		$	127,532		$	199,872
GAAP net Income / average total assets		0.57	%		1.09	%		0.96	%		0.89	%		0.71	%		0.93	%		1.07	%		0.70	%		0.99	%		0.90	%		0.92	%
GAAP net income / average equity (GAAP ROE)		7.3	%		14.2	%		12.4	%		12.5	%		11.6	%		18.2	%		22.0	%		16.5	%		25.6	%		12.7	%		21.4	%
GAAP net income / average core equity (adjusted ROE)		7.9	%		15.5	%		13.9	%		14.0	%		12.8	%		19.3	%		25.4	%		19.5	%		30.5	%		14.0	%		23.5	%

Core earnings		29,807			30,276			31,983			25,417			29,885			24,594			30,967			37,872			45,468			117,561			138,901
Average core equity		925,128			923,856			932,030			898,409			877,212			880,329			880,482			840,098			794,866			908,071			849,257
Core earnings / average core equity (core adjusted ROE)		12.9	%		13.1	%		13.7	%		11.3	%		13.6	%		11.2	%		14.1	%		18.0	%		22.9	%		12.9	%		16.4	%

Interest income	$	215,105		$	217,391		$	223,649		$	218,238		$	225,882		$	231,139		$	244,631		$	248,505		$	237,923		$	885,160		$	962,197
Average consolidated earning assets	$	12,279,814		$	12,498,889		$	12,860,488		$	13,581,710		$	15,229,790		$	17,542,352		$	20,085,392		$	22,606,037		$	24,042,561		$	13,533,367		$	21,048,582
Asset yield		7.01	%		6.96	%		6.96	%		6.43	%		5.93	%		5.27	%		4.87	%		4.40	%		3.96	%		6.54	%		4.57	%

Interest expense		($166,039	)		($172,434	)		($174,673	)		($173,519	)		($180,655	)		($189,657	)		($196,591	)		($195,125	)		($175,897	)		($701,281	)		($757,270	)
Average consolidated interest-bearing liabilities	$	11,526,614		$	11,815,316		$	12,332,390		$	13,055,417		$	14,800,315		$	17,194,545		$	19,840,201		$	22,283,915		$	23,601,534		$	12,990,908		$	20,710,057
Cost of funds		5.76	%		5.84	%		5.67	%		5.32	%		4.88	%		4.41	%		3.96	%		3.50	%		2.98	%		5.40	%		3.66	%

Asset yield		7.01	%		6.96	%		6.96	%		6.43	%		5.93	%		5.27	%		4.87	%		4.40	%		3.96	%		6.54	%		4.57	%
Cost of funds		-5.76	%		-5.84	%		-5.67	%		-5.32	%		-4.88	%		-4.41	%		-3.96	%		-3.50	%		-2.98	%		-5.40	%		-3.66	%
Interest rate spread		1.24	%		1.12	%		1.29	%		1.11	%		1.05	%		0.86	%		0.91	%		0.89	%		0.98	%		1.14	%		0.91	%

Net interest income	$	47,009		$	44,534		$	48,976		$	44,719		$	45,227		$	41,481		$	48,040		$	53,380		$	62,026		$	183,456		$	204,927
Average consolidated earning assets	$	12,279,814		$	12,498,889		$	12,860,488		$	13,581,710		$	15,229,790		$	17,542,352		$	20,085,392		$	22,606,037		$	24,042,561		$	13,533,367		$	21,048,582
Net interest margin		1.53	%		1.43	%		1.52	%		1.32	%		1.19	%		0.95	%		0.96	%		0.94	%		1.03	%		1.36	%		0.97	%

A-7

APPENDIX


Table 8: Average Balance Sheet (in thousands)
																			Full Year		Full Year
	Q1:2007		Q4:2006		Q3:2006		Q2:2006		Q1:2006		Q4:2005		Q3:2005		Q2:2005		Q1:2005		2006		2005
*Average GAAP balances*
Residential CES	$	673,114	$	654,909	$	641,694	$	573,253	$	516,962	$	517,138	$	567,689	$	531,456	$	473,562	$	597,206	$	522,704
Residential loans		8,704,147		9,212,346		9,947,068		10,789,275		12,542,519		14,821,587		17,597,906		20,312,485		21,925,643		10,611,827		18,642,020
Residential IGS		1,795,130		1,513,794		1,404,281		1,358,453		1,299,933		1,263,277		1,219,034		1,122,945		1,030,406		1,393,736		1,158,785
Commercial CES		426,121		364,405		328,211		253,429		215,769		191,586		152,641		123,390		102,699		290,964		142,850
Commercial loans		28,186		29,571		32,194		42,912		56,777		59,049		47,703		45,214		56,080		40,267		52,008
Commercial IGS		122,099		106,902		128,355		132,154		181,549		188,445		215,109		204,247		198,437		138,425		202,594
CDO CES		18,348		19,539		20,999		13,950		14,709		12,231		11,892		2,816		6,302		17,245		8,155
CDO IGS		230,684		198,749		174,363		171,687		157,570		149,660		138,996		138,777		124,747		175,358		138,207
Other real estate investments		37,169		-		-		-		-		-		-		-		-		-		-
Cash and cash equivalents		244,816		398,674		183,323		246,597		244,002		339,379		134,422		124,707		124,685		268,340		181,259
Earning assets		12,279,814		12,498,889		12,860,488		13,581,710		15,229,790		17,542,352		20,085,392		22,606,037		24,042,561		13,533,367		21,048,582
Other assets		586,165		542,905		619,873		587,045		609,693		806,329		905,907		759,516		520,623		589,782		749,342
Total assets	$	12,865,979	$	13,041,794	$	13,480,361	$	14,168,755	$	15,839,483	$	18,348,681	$	20,991,299	$	23,365,553	$	24,563,184	$	14,123,149	$	21,797,922

Redwood debt	$	2,188,561	$	1,090,480	$	647,978	$	85,616	$	137,181	$	253,302	$	297,788	$	216,639	$	277,423	$	493,357	$	261,322
Junior subordinated notes		97,013		21,401		-		-		-		-		-		-		-		5,336		-
ABS obligations of entities		9,338,053		10,724,837		11,684,412		12,969,801		14,663,134		16,941,243		19,542,413		22,067,276		23,324,111		12,497,551		20,448,735
Other liabilities		233,664		196,214		136,362		132,936		86,938		154,823		136,769		111,294		66,188		138,409		117,597
Total liabilities		11,857,291		12,032,931		12,468,752		13,188,353		14,887,253		17,349,368		19,976,970		22,395,209		23,667,722		13,134,653		20,827,654

Core equity		925,128		923,856		932,030		898,409		877,212		880,329		880,482		840,098		794,866		908,071		849,257
Balance sheet mark-to-market adjustments		83,560		85,007		79,579		81,993		75,018		118,984		133,847		130,246		100,596		80,424		121,011
Total equity		1,008,688		1,008,863		1,011,609		980,402		952,230		999,313		1,014,329		970,344		895,462		988,495		970,268
Total liabilities and equity	$	12,865,979	$	13,041,794	$	13,480,361	$	14,168,755	$	15,839,483	$	18,348,681	$	20,991,299	$	23,365,553	$	24,563,184	$	14,123,149	$	21,797,922

A-8

APPENDIX


Table 9 - Balances & Yields by Portfolio (In Thousands)

Residential IGS
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	2,094,494		$	1,708,607		$	1,484,095		$	1,406,195		$	1,361,245		$	1,273,985		$	1,282,132		$	1,189,207		$	1,084,556
Unamortized premium/ (discount)		(19,617	)		(16,382	)		(17,362	)		(18,788	)		(19,874	)		(11,595	)		(13,970	)		(12,165	)		(9,054	)
Credit protection		-			-			-			-			-			-			-			-			-
Unrealized market value gains		(49,027	)		5,025			8,270			2,609			5,304			(2,300	)		11,082			16,252			11,895
Net book value	$	2,025,850		$	1,697,250		$	1,475,003		$	1,390,016		$	1,346,675		$	1,260,090		$	1,279,244		$	1,193,294		$	1,087,397

Average balance	$	1,795,130		$	1,513,794		$	1,404,281		$	1,358,453		$	1,299,933		$	1,263,277		$	1,219,034		$	1,122,945		$	1,030,406
Interest income	$	29,420		$	25,626		$	24,961		$	22,287		$	20,180		$	18,148		$	16,942		$	13,909		$	12,865
Yield		6.56	%		6.77	%		7.11	%		6.56	%		6.21	%		5.75	%		5.56	%		4.95	%		4.99	%


Residential CES
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	1,259,446		$	1,180,605		$	1,183,142		$	1,168,602		$	1,034,069		$	1,013,793		$	1,029,786		$	1,079,323		$	952,925
Unamortized premium/ (discount)		(158,664	)		(144,842	)		(140,585	)		(116,702	)		(108,371	)		(121,824	)		(84,084	)		(90,716	)		(83,263	)
Credit protection		(392,768	)		(372,247	)		(384,397	)		(425,578	)		(373,781	)		(354,610	)		(382,862	)		(404,180	)		(365,998	)
Unrealized market value gains		44,263			58,015			57,495			50,854			43,522			55,193			80,867			99,380			84,096
Net book value	$	752,277		$	721,531		$	715,655		$	677,176		$	595,439		$	592,552		$	643,707		$	683,807		$	587,760

Average balance	$	673,114		$	654,909		$	641,694		$	573,253		$	516,962		$	517,138		$	567,689		$	531,456		$	473,562
Interest income	$	37,664		$	35,650		$	34,585		$	28,059		$	26,245		$	22,556		$	23,640		$	18,778		$	18,850
Yield		22.38	%		21.77	%		21.56	%		19.58	%		20.31	%		17.45	%		16.66	%		14.13	%		15.92	%


Other Real Estate Investments
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	38,670		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
Unamortized premium/ (discount)		16,375			-			-			-			-			-			-			-			-
Credit protection		-			-			-			-			-			-			-			-			-
Unrealized market value gains		(4,988	)		-			-			-			-			-			-			-			-
Net book value	$	50,057		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
-								-			-			-			-			-			-			-
Average balance	$	37,169			-			-			-			-			-			-			-			-
Interest income	$	2,465			-			-			-			-			-			-			-			-
Yield		26.53	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%


Residential Real Estate Loans
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	8,582,964		$	9,212,002		$	9,718,985		$	10,318,641		$	11,846,454		$	13,719,242		$	16,386,833		$	19,443,387		$	21,579,671
Unamortized premium/ (discount)		117,477			132,052			143,135			155,101			166,134			178,206			191,513			210,137			217,852
Credit protection		(19,954	)		(20,119	)		(19,326	)		(19,450	)		(22,372	)		(22,656	)		(22,029	)		(22,959	)		(24,827	)
Unrealized market value gains		-			-			-			-			-			-			-			-			-
Net book value	$	8,680,487		$	9,323,935		$	9,842,794		$	10,454,292		$	11,990,216		$	13,874,792		$	16,556,317		$	19,630,565		$	21,772,696

Average balance	$	8,704,147		$	9,212,346		$	9,947,068		$	10,789,275		$	12,542,519		$	14,821,587		$	17,597,906		$	20,312,485		$	21,925,643
Interest income	$	129,143		$	137,568		$	148,494		$	154,160		$	165,664		$	176,599		$	193,621		$	206,263		$	197,701
Yield		5.93	%		5.97	%		5.97	%		5.72	%		5.28	%		4.77	%		4.40	%		4.06	%		3.61	%

A-9

APPENDIX


Table 9 - Balances & Yields by Portfolio (In Thousands)

Commercial CES
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	792,240		$	793,743		$	667,512		$	486,622		$	407,466		$	383,334		$	323,724		$	222,522		$	218,991
Unamortized premium/ (discount)		(71,455	)		(71,424	)		(48,712	)		(28,184	)		(20,473	)		(28,993	)		(2,428	)		(8,062	)		(7,241	)
Credit protection		(294,466	)		(295,340	)		(258,382	)		(192,134	)		(167,772	)		(141,806	)		(138,530	)		(87,210	)		(88,671	)
Unrealized market value gains		9,063			21,081			19,449			4,939			4,081			6,321			4,462			10,779			4,608
Net book value	$	435,382		$	448,060		$	379,867		$	271,243		$	223,302		$	218,856		$	187,228		$	138,029		$	127,687

Average balance	$	426,121		$	364,405		$	328,211		$	253,429		$	215,769		$	191,586		$	152,641		$	123,390		$	102,699
Interest income	$	10,140		$	8,170		$	7,381		$	5,581		$	4,268		$	3,927		$	2,747		$	2,811		$	1,987
Yield		9.52	%		8.97	%		9.00	%		8.81	%		7.91	%		8.20	%		7.20	%		9.11	%		7.74	%


Commercial IGS
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	121,737		$	122,869		$	133,361		$	134,244		$	182,041		$	180,213		$	209,524		$	199,957		$	192,551
Unamortized premium/ (discount)		(3,172	)		(3,367	)		701			727			5,295			8,100			13,303			14,129			14,561
Credit protection		-			-			-			-			-			-			-			-			-
Unrealized market value gains		(2,071	)		111			577			(3,937	)		(2,936	)		(3,281	)		(44	)		3,762			(522	)
Net book value	$	116,494		$	119,613		$	134,639		$	131,034		$	184,400		$	185,032		$	222,783		$	217,848		$	206,590

Average balance	$	122,099		$	106,902		$	128,355		$	132,154		$	181,549		$	188,445		$	215,109		$	204,247		$	198,437
Interest income	$	1,875		$	2,344		$	2,342		$	2,133		$	2,880		$	3,102		$	3,398		$	3,036		$	2,922
Yield		6.14	%		8.77	%		7.30	%		6.46	%		6.35	%		6.58	%		6.32	%		5.95	%		5.89	%


Commercial Loans
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	38,394		$	38,360		$	42,384		$	46,959		$	65,508		$	70,091		$	66,348		$	51,778		$	67,365
Unamortized premium/ (discount)		(2,022	)		(2,047	)		(2,073	)		(2,096	)		(2,200	)		(2,258	)		(2,105	)		(1,843	)		(2,305	)
Credit protection		(10,489	)		(8,141	)		(8,141	)		(8,141	)		(8,141	)		(8,141	)		(8,141	)		(8,141	)		(8,456	)
Unrealized market value gains		-			-			-			-			-			-			-			-			-
Net book value	$	25,883		$	28,172		$	32,170		$	36,722		$	55,167		$	59,692		$	56,102		$	41,794		$	56,604

Average balance	$	28,186		$	29,571		$	32,194		$	42,912		$	56,777		$	59,049		$	47,703		$	45,214		$	56,080
Interest (loss) income		-$2,293		$	409		$	524		$	812		$	1,238		$	1,281		$	1,209		$	1,208		$	1,587
Yield		-32.54	%		5.53	%		6.51	%		7.57	%		8.72	%		8.68	%		10.14	%		10.69	%		11.32	%


CDO CES
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	23,731		$	28,731		$	29,231		$	22,226		$	23,226		$	20,226		$	20,226		$	10,184		$	10,184
Unamortized premium/ (discount)		(7,004	)		(6,889	)		(7,298	)		(7,978	)		(8,048	)		(8,004	)		(7,907	)		(7,232	)		(7,113	)
Credit protection		-			-			-			-			-			-			-			-			-
Unrealized market value gains		(575	)		122			326			470			(436	)		(484	)		144			(187	)		(287	)
Net book value	$	16,152		$	21,964		$	22,259		$	14,718		$	14,742		$	11,738		$	12,463		$	2,765		$	2,784

Average balance	$	18,348		$	19,539		$	20,999		$	13,950		$	14,709		$	12,231		$	11,892		$	2,816		$	6,302
Interest income	$	497		$	570		$	609		$	236		$	439		$	125		$	131		$	127		$	246
Yield		10.84	%		11.67	%		11.60	%		6.77	%		11.94	%		4.09	%		4.41	%		18.04	%		15.61	%

A-10

APPENDIX


Table 9 - Balances & Yields by Portfolio (In Thousands)

CDO IGS
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	263,237		$	222,413		$	182,352		$	175,586		$	162,844		$	149,812		$	144,246		$	145,933		$	130,686
Unamortized premium/ (discount)		(945	)		(238	)		(236	)		(241	)		(249	)		(257	)		(264	)		(470	)		(485	)
Credit protection		-			-			-			-			-			-			-			-			-
Unrealized market value gains		(7,985	)		2,174			2,826			1,718			944			1,092			2,362			3,221			2,922
Net book value	$	254,307		$	224,349		$	184,942		$	177,063		$	163,539		$	150,647		$	146,344		$	148,684		$	133,123

Average balance	$	230,684		$	198,749		$	174,363		$	171,687		$	157,570		$	149,660		$	138,996		$	138,777		$	124,747
Interest income	$	3,862		$	3,335		$	2,881		$	2,099		$	2,491		$	2,571		$	1,953		$	1,569		$	1,184
Yield		6.70	%		6.71	%		6.61	%		4.89	%		6.32	%		6.87	%		5.62	%		4.52	%		3.80	%


Cash & Equivalents
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	91,656		$	168,016		$	112,926		$	106,491		$	85,466		$	175,885		$	163,160		$	72,193		$	64,714
Unamortized premium/ (discount)		-			-			-			-			-			-			-			-			-
Credit protection		-			-			-			-			-			-			-			-			-
Unrealized market value gains		-			-			-			-			-			-			-			-			-
Net book value	$	91,656		$	168,016		$	112,926		$	106,491		$	85,466		$	175,885		$	163,160		$	72,193		$	64,714

Average balance	$	244,816		$	398,674		$	183,323		$	246,597		$	244,002		$	339,379		$	134,422		$	124,707		$	124,685
Interest income	$	2,332		$	3,719		$	1,872		$	2,871		$	2,477		$	2,830		$	990		$	804		$	580
Yield		3.81	%		3.73	%		4.08	%		4.66	%		4.06	%		3.34	%		2.95	%		2.58	%		1.86	%


Total Earning Assets (GAAP)
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Current face	$	13,306,569		$	13,475,346		$	13,553,988		$	13,865,566		$	15,168,319		$	16,986,581		$	19,625,979		$	22,414,484		$	24,301,643
Unamortized premium/ (discount)		(129,027	)		(113,137	)		(72,430	)		(18,161	)		12,214			13,375			94,058			103,778			122,952
Credit protection		(717,677	)		(695,847	)		(670,246	)		(645,303	)		(572,066	)		(527,213	)		(551,562	)		(522,490	)		(487,952	)
Unrealized market value gains		(11,320	)		86,528			88,943			56,653			50,479			56,541			98,873			133,207			102,712
Net book value	$	12,448,545		$	12,752,890		$	12,900,255		$	13,258,755		$	14,658,946		$	16,529,284		$	19,267,348		$	22,128,979		$	24,039,355

Average balance	$	12,279,814		$	12,498,889		$	12,860,487		$	13,581,710		$	15,229,790		$	17,542,352		$	20,085,392		$	22,606,037		$	24,042,561
Interest income	$	215,105		$	217,391		$	223,649		$	218,238		$	225,882		$	231,139		$	244,631		$	248,505		$	237,922
Yield		7.01	%		6.96	%		6.96	%		6.43	%		5.93	%		5.27	%		4.87	%		4.40	%		3.96	%

A-11

APPENDIX


Table 10: Portfolio Activity (in thousands)

Residential IGS
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Beginning balance	$	1,697,250		$	1,475,002		$	1,390,015		$	1,346,674		$	1,260,089		$	1,279,243		$	1,193,293		$	1,087,396		$	973,884
Acquisitions		535,346			352,292			120,316			179,115			80,970			116,987			114,699			128,708			120,709
Upgrades / downgrades		-			-			-			-			30,667			-			-			-			23,701
Transfer to other portfolios		(13,816	)		-			-			-			-			-			-			-			-
Sales		(108,372	)		(97,124	)		(12,669	)		(104,442	)		(3,984	)		(95,328	)		4,000			(3,012	)		(11,488	)
Principal payments		(32,248	)		(31,398	)		(29,997	)		(31,136	)		(25,445	)		(29,834	)		(27,627	)		(22,961	)		(22,345	)
Discount / (premium) amortization		1,321			1,023			1,943			1,446			853			790			761			347			547
Net mark-to-market adjustment		(53,631	)		(2,545	)		5,394			(1,642	)		3,524			(11,769	)		(5,883	)		2,815			2,388
Ending Balance	$	2,025,850		$	1,697,250		$	1,475,002		$	1,390,015		$	1,346,674		$	1,260,089		$	1,279,243		$	1,193,293		$	1,087,396


Residential CES
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Beginning balance	$	721,531		$	715,655		$	677,176		$	595,439		$	592,552		$	566,450		$	470,403		$	510,503		$	561,658
Acquisitions		73,725			20,870			87,305			89,217			52,822			67,796			87,864			57,479			54,664
Upgrades / downgrades		-			-			-			-			(30,667	)		(23,701	)		-			-			-
Transfer to other portfolios		(4,480	)		-			-			-			-			-			-			-			-
Sales		(5,214	)		(962	)		(47,585	)		(4,035	)		(9,650	)		(27,293	)		-			(98,775	)		(81,292	)
Principal payments		(35,672	)		(32,639	)		(28,835	)		(23,302	)		(14,110	)		(23,156	)		(18,931	)		(17,013	)		(21,523	)
Discount / (premium) amortization		18,892			17,412			15,917			11,684			12,391			8,252			7,424			10,766			10,098
Net mark-to-market adjustment		(16,505	)		1,195			11,677			8,173			(7,899	)		24,204			19,690			7,443			(13,102	)
Ending balance	$	752,277		$	721,531		$	715,655		$	677,176		$	595,439		$	592,552		$	566,450		$	470,403		$	510,503


Other Real Estate Investments
	Q1: 2007			Q4: 2006		Q3: 2006		Q2: 2006		Q1: 2006		Q4: 2005		Q3: 2005		Q2: 2005		Q1: 2005
Beginning balance	$	0		$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Acquisitions		40,790			-		-		-		-		-		-		-		-
Upgrades / downgrades		-			-		-		-		-		-		-		-		-
Transfer from other portfolios		18,296			-		-		-		-		-		-		-		-
Sales		-			-		-		-		-		-		-		-		-
Principal payments		(3,079	)		-		-		-		-		-		-		-		-
Discount / (premium) amortization		(532	)		-		-		-		-		-		-		-		-
Net mark-to-market adjustment		(5,418	)		-		-		-		-		-		-		-		-
Ending balance	$	50,057		$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

A-12

APPENDIX


Table 10: Portfolio Activity (in thousands)

Real Estate Loans
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Beginning balance	$	9,323,935		$	9,842,794		$	10,454,292		$	11,990,216		$	13,874,792		$	16,556,317		$	19,630,565		$	21,772,696		$	22,504,765
Acquisitions		415,283			725,695			966,673			272,627			52,691			271,875			332,049			426,933			832,383
Sales		-			-			-			-			-			(240,987	)		(263,079	)		(3,378	)		-
Principal payments		(1,047,170	)		(1,230,545	)		(1,567,041	)		(1,799,401	)		(1,925,475	)		(2,698,500	)		(3,129,492	)		(2,557,675	)		(1,555,752	)
Discount / (premium) amortization		(11,726	)		(13,298	)		(11,254	)		(12,073	)		(12,075	)		(13,334	)		(14,438	)		(9,758	)		(7,644	)
Credit provision		(1,481	)		(1,505	)		(465	)		2,507			(141	)		(877	)		805			1,527			(1,210	)
Net charge-offs / (recoveries)		1,646			794			589			416			424			250			125			(34	)		154
Net mark-to-market adjustment		-			-			-			-			-			48			(218	)		254			-
Ending balance	$	8,680,487		$	9,323,935		$	9,842,794		$	10,454,292		$	11,990,216		$	13,874,792		$	16,556,317		$	19,630,565		$	21,772,696


Commercial CES
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Beginning balance	$	448,060		$	379,867		$	271,243		$	223,302		$	218,856		$	187,228		$	138,029		$	127,687		$	87,250
Acquisitions		2,743			76,496			99,065			51,978			11,130			30,293			55,941			4,263			41,072
Upgrades / downgrades		(3,501	)		-			-			-			(3,966	)		-			-			-			(2,192	)
Sales		-			(9,914	)		(4,216	)		(2,820	)		-			-			-			-			-
Principal payments		-			(13	)		(9	)		(9	)		(10	)		(9	)		(8	)		(8	)		(10	)
Discount / (premium) amortization		(9	)		(289	)		(451	)		(257	)		(564	)		(276	)		(416	)		68			(174	)
Net mark-to-market adjustment		(11,911	)		1,913			14,235			(951	)		(2,144	)		1,620			(6,318	)		6,019			1,741
Ending Balance	$	435,382		$	448,060		$	379,867		$	271,243		$	223,302		$	218,856		$	187,228		$	138,029		$	127,687


Commercial Loans
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Beginning balance	$	28,172		$	32,170		$	36,722		$	55,167		$	59,692		$	56,102		$	41,794		$	56,604		$	54,479
Acquisitions		-			-			-			-			-			4,248			14,219			-			6,732
Sales		-			-			-			(8,408	)		-			-			(17	)		(11,192	)		-
Principal payments		38			(4,024	)		(4,574	)		(10,049	)		(4,583	)		(506	)		158			(3,769	)		(5,267	)
Discount / (premium) amortization		21			26			22			27			93			(152	)		(69	)		(99	)		(30	)
Credit provision		(2,348	)		-			-			-			(35	)		-			-			-			185
Net mark-to-market adjustment		-			-			-			(14	)		-			-			17			250			505
Ending Balance	$	25,883		$	28,172		$	32,170		$	36,722		$	55,167		$	59,692		$	56,102		$	41,794		$	56,604

A-13

APPENDIX


Table 10: Portfolio Activity (in thousands)

Commercial IGS
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Beginning balance	$	119,613		$	134,639		$	131,034		$	184,400		$	185,032		$	222,783		$	217,848		$	206,590		$	220,357
Acquisitions		2,964			8,999			(3	)		-			2,177			29,684			17,179			7,845			3,500
Upgrades / downgrades		3,501			-			-			-			3,966			-			-			-			2,192
Sales		(6,464	)		(24,007	)		-			(51,501	)		-			(56,292	)		(4,000	)		-			(8,790	)
Principal payments		(938	)		(737	)		(883	)		(998	)		(5,006	)		(8,560	)		(4,174	)		(594	)		(5,298	)
Discount / (premium) amortization		67			51			(14	)		(90	)		(159	)		(145	)		(269	)		(281	)		(244	)
Net mark-to-market adjustment		(2,249	)		668			4,505			(777	)		(1,610	)		(2,438	)		(3,801	)		4,288			(5,127	)
Ending Balance	$	116,494		$	119,613		$	134,639		$	131,034		$	184,400		$	185,032		$	222,783		$	217,848		$	206,590


CDO CES
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Beginning balance	$	21,964		$	22,259		$	14,718		$	14,742		$	11,738		$	12,463		$	2,765		$	2,784		$	3,052
Acquisitions		(149	)		-			7,714			(87	)		3,000			(97	)		9,970			(119	)		(71	)
Upgrades / downgrades		(5,000	)		-			-			-			-			-			-			-			430
Sales		-			-			(722	)		-			-			-			-			-			-
Principal payments		-			(769	)		(29	)		(1,017	)		(44	)		-			42			-			35
Discount / (premium) amortization		-			-			-			-			-			-			36			-			48
Net mark-to-market adjustment		(663	)		474			578			1,080			48			(628	)		(350	)		100			(710	)
Ending Balance	$	16,152		$	21,964		$	22,259		$	14,718		$	14,742		$	11,738		$	12,463		$	2,765		$	2,784


CDO IGS
	Q1: 2007			Q4: 2006			Q3: 2006			Q2: 2006			Q1: 2006			Q4: 2005			Q3: 2005			Q2: 2005			Q1: 2005
Beginning balance	$	224,349		$	184,942		$	177,063		$	163,539		$	150,647		$	146,344		$	148,684		$	133,123		$	110,032
Acquisitions		35,496			45,388			7,000			13,000			13,500			5,900			9,553			15,485			23,913
Upgrades / downgrades		5,000			-			-			-			-			-			-			-			(430	)
Sales		-			(5,350	)		-			-			-			-			-			-			-
Principal payments		(376	)		(338	)		(235	)		(257	)		(468	)		(335	)		(11,240	)		(237	)		(227	)
Discount / (premium) amortization		(3	)		9			5			7			8			7			10			18			(41	)
Net mark-to-market adjustment		(10,159	)		(302	)		1,109			774			(148	)		(1,269	)		(663	)		295			(124	)
Ending Balance	$	254,307		$	224,349		$	184,942		$	177,063		$	163,539		$	150,647		$	146,344		$	148,684		$	133,123

A-14

APPENDIX


Table 11A: Managed Residential Loans Credit Performance (in thousands)

			Managed Loans		Internally-Designated Credit Reserve		External Credit Enhancement		Total Credit Protection (1)		Total Credit Protection as % of Loans			Seriously Delinquent Loans		Seriously Delinquent Loan % of Current Balance			Total Credit Losses			Losses To Securities Junior to Redwood's Interest		Redwood's Share of Net Charge-offs/(Recoveries)			Total Credit Losses As % of Loans (Annualized)

Total Managed		Q1: 2005		175,450,637		390,825		65,116		455,941		0.26	%		217,894		0.12	%		1,377			0		1,377			<0.01	%
Resi Portfolio		Q2: 2005		192,291,401		427,139		139,847		566,986		0.29	%		230,538		0.12	%		740			196		544			<0.01	%
		Q3: 2005		192,368,457		404,891		133,080		537,971		0.28	%		268,341		0.14	%		1,812			220		1,592			<0.01	%
		Q4: 2005		190,570,193		377,266		139,129		516,395		0.27	%		349,068		0.18	%		1,175			0		1,175			<0.01	%
		2005		190,570,193		377,266		139,129		516,395		0.27	%		349,068		0.18	%		5,104			416		4,688			<0.01	%
		Q1: 2006		198,252,684		396,153		126,376		522,529		0.26	%		467,352		0.24	%		3,002			0		3,002			<0.01	%
		Q2: 2006		227,928,505		445,028		126,264		571,292		0.25	%		441,430		0.19	%		1,464			0		1,464			<0.01	%
		Q3: 2006		235,127,925		403,723		215,285		619,008		0.26	%		658,262		0.28	%		2,748			155		2,593			<0.01	%
		Q4: 2006		219,178,838		392,365		302,072		694,437		0.32	%		850,761		0.39	%		5,058			196		4,862			<0.01	%
		2006	$	219,178,838	$	392,365	$	302,072	$	694,437		0.32	%	$	850,761		0.39	%	$	12,272		$	351	$	11,921			<0.01	%
		Q1: 2007	$	245,080,031	$	412,717	$	272,613	$	685,330		0.28	%	$	1,086,341		0.44	%	$	5,776		$	325	$	5,451			<0.01	%

Residential Real		Q1: 2005		21,579,671		24,827		0		24,827		0.12	%		16,066		0.07	%		154			0		154			<0.01	%
Estate Loans		Q2: 2005		19,443,387		22,959		0		22,959		0.12	%		16,514		0.08	%		(34	)		0		(34	)		<0.01	%
		Q3: 2005		16,386,833		22,029		0		22,029		0.13	%		22,956		0.14	%		90			0		90			0.00	%
		Q4: 2005		13,719,242		22,656		0		22,656		0.17	%		37,335		0.27	%		251			0		251			<0.01	%
		2005		13,719,242		22,656		0		22,656		0.17	%		37,335		0.27	%		461			0		461			<0.01	%
		Q1: 2006		11,846,454		22,372		0		22,372		0.19	%		48,677		0.41	%		425			0		425			<0.01	%
		Q2: 2006		10,318,641		19,450		0		19,450		0.19	%		47,162		0.46	%		423			0		423			<0.01	%
		Q3: 2006		9,718,985		19,326		0		19,326		0.20	%		61,447		0.63	%		589			-		589			0.02	%
		Q4: 2006		9,212,002		20,119		0		20,119		0.22	%		74,236		0.79	%		711			-		711			0.02	%
		2006		9,212,002		20,119		0		20,119		0.22	%		74,236		0.79	%		2,148			-		2,148			0.03	%
		Q1: 2007	$	8,582,964	$	19,954	$	0	$	19,954		0.23	%	$	79,290		0.92	%	$	1,646		$	0	$	1,646			0.08	%

Residential CES		Q1: 2005		153,870,966		365,998		65,116		431,114		0.28	%		201,828		0.13	%		1,223			0		1,223			<0.01	%
		Q2: 2005		172,848,014		404,180		139,847		544,027		0.31	%		214,024		0.12	%		774			196		578			<0.01	%
		Q3: 2005		175,981,624		382,862		133,080		515,942		0.29	%		245,385		0.14	%		1,722			220		1,502			<0.01	%
		Q4: 2005		176,850,951		354,610		139,129		493,739		0.28	%		311,733		0.18	%		924			0		924			<0.01	%
		2005		176,850,951		354,610		139,129		493,739		0.28	%		311,733		0.18	%		4,643			416		4,227			<0.01	%
		Q1: 2006		186,406,230		373,781		126,376		500,157		0.27	%		418,675		0.22	%		2,577			0		2,577			<0.01	%
		Q2: 2006		217,609,864		425,578		126,264		551,842		0.25	%		394,268		0.18	%		1,041			0		1,041			<0.01	%
		Q3: 2006		225,408,940		384,397		215,285		599,682		0.27	%		596,815		0.26	%		2,159			155		2,004			<0.01	%
		Q4: 2006		209,966,836		372,246		302,072		674,318		0.32	%		777,675		0.37	%		4,347			196		4,151			<0.01	%
		2006		209,966,836		372,246		302,072		674,318		0.32	%		777,675		0.37	%		10,124			351		9,773			<0.01	%
		Q1: 2007	$	236,497,067	$	392,763	$	272,613	$	665,376		0.28	%	$	1,007,051		0.43	%	$	4,130		$	325	$	3,805			<0.01	%

	(1)The credit reserve on residential real estate loans is only available to absorb losses on our residential real estate loans. Internally-designated credit reserves and external credit enhancement are only available to absorb losses on our residential CES.

A-15

APPENDIX


Table 11B: Managed Residential Loans Credit Performance (in thousands)

		Managed Loans (1)		Internally-Designated Credit Reserve		Total Credit Reserve as % of Loans			Seriously Delinquent Loans		Seriously Delinquent Loan % of Current Balance			Redwood's Share of losses			Total Credit Losses As % of Loans (Annualized)

Total Managed	Q1: 2005	$	117,121,507	$	390,475		0.33	%	$	185,027		0.16	%	$	1,377			0.00	%
Resi Portfolio	Q2: 2005		130,690,357		426,834		0.33	%		194,431		0.15	%		544			0.00	%
	Q3: 2005		125,971,360		404,191		0.32	%		230,263		0.18	%		1,592			0.00	%
	Q4: 2005		129,833,862		377,259		0.29	%		318,112		0.25	%		1,175			0.00	%
	2005		129,833,862		377,259		0.29	%		318,112		0.25	%		4,688			0.00	%
	Q1: 2006		150,039,853		433,658		0.29	%		432,120		0.29	%		3,002			0.00	%
	Q2: 2006		159,800,662		444,323		0.28	%		402,617		0.25	%		1,464			0.00	%
	Q3: 2006		141,357,008		402,655		0.28	%		463,911		0.33	%		2,593			0.00	%
	Q4: 2006		134,696,897		392,366		0.29	%		549,860		0.41	%		4,862			0.00	%
	2006		134,696,897		392,366		0.29	%		549,860		0.41	%		11,921			0.01	%
	Q1: 2007	$	114,624,260	$	412,717		0.36	%	$	682,892		0.60	%	$	5,451			0.02	%

Residential Alt A CES	Q1: 2005	$	11,612,670	$	51,791		0.45	%	$	26,578		0.23	%	$	5			0.00	%
	Q2: 2005		15,865,802		67,319		0.42	%		28,293		0.18	%		225			0.01	%
	Q3: 2005		14,615,816		58,323		0.40	%		34,698		0.24	%		271			0.01	%
	Q4: 2005		15,778,989		58,241		0.37	%		58,614		0.37	%		53			0.00	%
	2005		15,778,989		58,241		0.37	%		58,614		0.37	%		554			0.00	%
	Q1: 2006		15,660,444		68,077		0.43	%		86,641		0.55	%		174			0.00	%
	Q2: 2006		19,960,837		115,170		0.58	%		106,953		0.54	%		225			0.00	%
	Q3: 2006		19,200,967		107,140		0.56	%		132,968		0.69	%		178			0.00	%
	Q4: 2006		18,127,353		115,315		0.64	%		187,465		1.03	%		1,311			0.03	%
	2006		18,127,353		115,315		0.64	%		187,465		1.03	%		1,887			0.01	%
	Q1: 2007	$	18,577,577	$	128,772		0.69	%	$	278,021		1.50	%	$	1,331			0.03	%

Residential Prime CES	Q1: 2005	$	83,929,166	$	313,857		0.37	%	$	142,383		0.17	%	$	1,218			0.01	%
	Q2: 2005		95,381,168		336,556		0.35	%		149,624		0.16	%		353			0.00	%
	Q3: 2005		94,968,711		323,839		0.34	%		172,609		0.18	%		1,231			0.01	%
	Q4: 2005		100,335,631		296,362		0.30	%		222,162		0.22	%		871			0.00	%
	2005		100,335,631		296,362		0.30	%		222,162		0.22	%		3,673			0.00	%
	Q1: 2006		122,532,955		343,209		0.28	%		296,802		0.24	%		2,403			0.01	%
	Q2: 2006		129,521,184		309,703		0.24	%		248,502		0.19	%		816			0.00	%
	Q3: 2006		112,437,056		276,189		0.25	%		269,496		0.24	%		1,826			0.01	%
	Q4: 2006		107,357,542		256,932		0.24	%		288,159		0.27	%		2,840			0.01	%
	2006		107,357,542		256,932		0.24	%		288,159		0.27	%		7,886			0.01	%
	Q1: 2007	$	87,463,719	$	263,991		0.30	%	$	325,581		0.37	%	$	2,474			0.01	%

Residential Real	Q1: 2005	$	21,579,671	$	24,827		0.12	%	$	16,066		0.07	%	$	154			<0.01	%
Estate Loans	Q2: 2005		19,443,387		22,959		0.12	%		16,514		0.08	%		(34	)		0.00	%
	Q3: 2005		16,386,833		22,029		0.13	%		22,956		0.14	%		90			<0.01	%
	Q4: 2005		13,719,242		22,656		0.17	%		37,335		0.27	%		251			<0.01	%
	2005		13,719,242		22,656		0.17	%		37,335		0.27	%		461			<0.01	%
	Q1: 2006		11,846,454		22,372		0.19	%		48,677		0.41	%		425			<0.01	%
	Q2: 2006		10,318,641		19,450		0.19	%		47,162		0.46	%		423			0.02	%
	Q3: 2006		9,718,985		19,326		0.20	%		61,447		0.63	%		589			0.02	%
	Q4: 2006		9,212,002		20,119		0.22	%		74,236		0.81	%		711			0.03	%
	2006		9,212,002		20,119		0.22	%		74,236		0.81	%		2,148			0.02	%
	Q1: 2007	$	8,582,964	$	19,954		0.23	%	$	79,290		0.92	%	$	1,646			0.08	%

(1) The credit reserve on residential real estate loans is only available to absorb losses on our residential real estate loan portfolio. The managed loans amout for residential CES prime and alt-a portfolios represents the loan balances for the securities were Redwood is first in line to absorb losses. The internally designated credit reserve is established to protect Redwood against losses suffered from these underlying loan balances.

A-16

APPENDIX


Table 12A: Residential CES Prime and Underlying Loan Characteristics (all $ in thousands)

*Residential Prime CES*	Q1 2007			Q4 2006			Q3 2006			Q2 2006			Q1 2006			Q4 2005			Q3 2005			Q2 2005			Q1 2005
Principal value	$	899,856		$	871,984		$	900,358		$	925,212		$	849,556		$	858,999		$	885,264		$	908,780		$	826,789
Unamortized premium		(115,563	)		(117,016	)		(113,398	)		(105,707	)		(52,906	)		(105,078	)		(76,264	)		(80,172	)		(74,657	)
Credit protection		(263,991	)		(256,932	)		(276,189	)		(309,703	)		(343,209	)		(296,362	)		(323,839	)		(336,556	)		(313,857	)
Unrealized market value		50,847			57,333			57,459			51,733			43,276			55,293			74,925			93,954			79,710
Market value (book value)	$	571,149		$	555,369		$	568,230		$	561,535		$	496,717		$	512,852		$	560,086		$	586,006		$	517,985
Market value / principal value	$	63.47		$	63.69		$	63.11		$	60.69		$	58.47		$	59.70		$	63.27		$	64.48		$	62.65

*Current Rating*
BB	$	315,865		$	307,713		$	314,279		$	286,321		$	255,488		$	271,389		$	270,770		$	259,922		$	233,505
B		131,224			118,836			119,458			133,410			108,574			107,091			156,951			194,911			167,554
Non Rated		124,060			128,820			134,493			141,804			132,655			134,372			132,365			131,173			116,926
Total market value	$	571,149		$	555,369		$	568,230		$	561,535		$	496,717		$	512,852		$	560,087		$	586,006		$	517,985

*Security Type*
Option ARM	$	235,959		$	226,014		$	227,349		$	202,377		$	188,202		$	197,411		$	178,816		$	156,537		$	136,237
ARM		48,424			48,610			53,596			72,806			65,937			76,658			93,613			94,983			77,557
Hybrid		226,520			221,094			227,093			223,716			183,392			174,886			216,545			254,741			226,543
Fixed		60,246			59,651			60,193			62,636			59,185			63,896			71,112			79,745			77,648
Total market value	$	571,149		$	555,369		$	568,230		$	561,535		$	496,717		$	512,852		$	560,087		$	586,006		$	517,985

Interest income	$	14,443		$	13,776		$	16,745		$	14,629		$	11,619		$	10,535		$	11,143		$	9,845		$	8,967
Discount amortization		15,644			14,084			13,987			10,205			10,957			9,523			10,311			7,051			7,603
Total interest income	$	30,087		$	27,860		$	30,732		$	24,834		$	22,576		$	20,058		$	21,454		$	16,896		$	16,570

Avg Balance	$	511,659		$	491,576		$	497,983		$	466,605		$	424,723		$	439,171		$	489,342		$	447,454		$	412,098

Interest income %		11.29	%		11.21	%		13.45	%		12.54	%		10.94	%		9.60	%		9.11	%		8.80	%		8.70	%
Discount amort %		12.23	%		11.46	%		11.23	%		8.75	%		10.32	%		8.67	%		8.43	%		6.30	%		7.38	%
Yield		23.52	%		22.67	%		24.69	%		21.29	%		21.26	%		18.27	%		17.54	%		15.10	%		16.08	%

*Underlying Loan Characteristics*
Number of loans		600,406			551,613			569,884			559,587			508,003			464,904			451,718			436,791			368,201
Total Loan Face	$	213,261,566		$	186,501,498		$	197,336,150		$	197,813,355		$	170,935,424		$	161,295,244		$	161,719,044		$	154,885,307		$	142,258,296
Average loan size	$	355		$	338		$	346		$	353		$	336		$	347		$	358		$	355		$	386

Southern CA		24	%		25	%		25	%		25	%		26	%		24	%		23	%		23	%		23	%
Northern CA		21	%		22	%		22	%		22	%		24	%		21	%		20	%		20	%		20	%
Florida		6	%		6	%		6	%		6	%		5	%		5	%		5	%		5	%		5	%
New York		5	%		5	%		5	%		5	%		5	%		5	%		5	%		5	%		5	%
Georgia		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%
New Jersey		3	%		3	%		4	%		4	%		3	%		4	%		4	%		4	%		4	%
Texas		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%
Arizona		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%
Illinois		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%
Colorado		2	%		2	%		2	%		2	%		2	%		2	%		3	%		3	%		3	%
Virginia		4	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%
Other states		25	%		23	%		22	%		22	%		21	%		25	%		26	%		26	%		26	%

A-17

APPENDIX


Table 12A: Residential CES Prime and Underlying Loan Characteristics (all $ in thousands)
	Q1 2007			Q4 2006			Q3 2006			Q2 2006			Q1 2006			Q4 2005			Q3 2005			Q2 2005			Q1 2005
Year 2007 origination		2	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Year 2006 origination		20	%		11	%		14	%		11	%		1	%		0	%		0	%		0	%		0	%
Year 2005 origination		28	%		28	%		27	%		29	%		32	%		23	%		16	%		7	%		1	%
Year 2004 origination and earlier		50	%		61	%		59	%		60	%		67	%		77	%		84	%		93	%		99	%

Wtd Avg Original LTV		68	%		68	%		68	%		68	%		68	%		67	%		67	%		67	%		68	%
Original LTV: 0 - 50		13	%		14	%		13	%		13	%		14	%		14	%		14	%		14	%		13	%
Original LTV: 50.01 - 60		12	%		12	%		12	%		12	%		12	%		13	%		13	%		12	%		12	%
Original LTV: 60.01 - 70		22	%		22	%		22	%		22	%		22	%		23	%		23	%		23	%		23	%
Original LTV: 70.01 - 80		50	%		49	%		50	%		50	%		49	%		47	%		47	%		48	%		49	%
Original LTV: 80.01 - 90		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%
Original LTV: 90.01 - 100		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%
Unknown		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Wtd Avg FICO		737			735			734			734			734			729			729			727			731
FICO: <= 600		1	%		1	%		1	%		1	%		1	%		0	%		0	%		0	%		0	%
FICO: 601 - 620		1	%		1	%		1	%		1	%		1	%		1	%		0	%		0	%		0	%
FICO: 621 - 640		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%
FICO: 641 - 660		3	%		3	%		3	%		3	%		3	%		4	%		4	%		4	%		4	%
FICO: 661 - 680		6	%		6	%		7	%		6	%		6	%		7	%		7	%		7	%		7	%
FICO: 681 - 700		10	%		10	%		10	%		10	%		11	%		11	%		11	%		11	%		11	%
FICO: 701 - 720		12	%		12	%		13	%		13	%		12	%		12	%		13	%		13	%		13	%
FICO: 721 - 740		14	%		13	%		13	%		13	%		13	%		14	%		14	%		14	%		14	%
FICO: 741 - 760		15	%		15	%		15	%		15	%		15	%		15	%		15	%		15	%		16	%
FICO: 761 - 780		18	%		18	%		17	%		17	%		17	%		17	%		18	%		18	%		18	%
FICO: 781 - 800		14	%		14	%		13	%		13	%		13	%		13	%		12	%		12	%		12	%
FICO: >= 801		4	%		4	%		4	%		4	%		4	%		3	%		3	%		3	%		2	%
Unknown		0	%		1	%		1	%		2	%		2	%		1	%		1	%		1	%		1	%

Conforming at Origination %		31	%		34	%		34	%		33	%		35	%		25	%		23	%		23	%		21	%
> $1 MM %		9	%		8	%		9	%		9	%		7	%		7	%		6	%		6	%		6	%

2nd Home %		7	%		6	%		6	%		6	%		6	%		6	%		6	%		5	%		5	%
Investment Home %		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%

Purchase		42	%		39	%		39	%		39	%		38	%		36	%		36	%		35	%		35	%
Cash Out Refi		27	%		27	%		29	%		30	%		28	%		27	%		26	%		25	%		25	%
Rate-Term Refi		30	%		33	%		31	%		31	%		33	%		36	%		37	%		39	%		39	%
Construction		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Other		1	%		1	%		1	%		0	%		1	%		1	%		1	%		1	%		1	%

Full Doc		45	%		46	%		44	%		44	%		47	%		47	%		53	%		52	%		54	%
No Doc		6	%		7	%		6	%		5	%		5	%		4	%		5	%		5	%		5	%
Other Doc (Lim, Red, Stated, etc)		49	%		47	%		50	%		51	%		48	%		49	%		42	%		43	%		41	%

2-4 Family		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%
Condo		9	%		8	%		8	%		8	%		8	%		4	%		3	%		3	%		3	%
Single Family		88	%		89	%		89	%		89	%		89	%		55	%		56	%		53	%		52	%
Other		1	%		1	%		1	%		1	%		1	%		39	%		39	%		42	%		43	%

A-18

APPENDIX


Table 12B: Residential CES Alt A and Underlying Loan Characteristics (all $ in thousands)
*Residential CES Alt A*	Q1 2007			Q4 2006			Q3 2006			Q2 2006			Q1 2006			Q4 2005			Q3 2005			Q2 2005			Q1 2005
Principal value	$	348,371		$	298,780		$	272,957		$	243,391		$	184,513		$	154,794		$	144,521		$	170,543		$	126,137
Unamortized premium		(41,680	)		(26,440	)		(26,849	)		(11,700	)		(17,960	)		(16,752	)		(8,520	)		(10,849	)		(8,956	)
Credit protection		(128,772	)		(115,315	)		(107,140	)		(115,170	)		(68,077	)		(58,241	)		(58,323	)		(67,319	)		(51,791	)
Unrealized market value		(5,932	)		(166	)		52			(879	)		246			(99	)		5,942			5,427			4,386
Market value (book value)	$	171,987		$	156,859		$	139,020		$	115,642		$	98,722		$	79,702		$	83,620		$	97,802		$	69,776
Market value / principal value	$	49.37		$	52.50		$	50.93		$	47.51		$	53.50		$	51.49		$	57.86		$	57.35		$	55.32

*Current Rating*
BB	$	100,895		$	94,239		$	85,874		$	62,063		$	63,244		$	51,175		$	55,065		$	50,983		$	35,752
B		30,989			22,861			19,722			22,122			13,377			7,969			8,451			27,370			20,756
Non Rated		40,103			39,759			33,424			31,457			22,101			20,558			20,104			19,449			13,268
Total market value	$	171,987		$	156,859		$	139,020		$	115,642		$	98,722		$	79,702		$	83,620		$	97,802		$	69,775

*Security Type*
Option ARM	$	158,116		$	133,411		$	117,908		$	92,209		$	76,868		$	60,635		$	59,978		$	53,459		$	34,575
ARM		837			990			4,483			7,318			6,457			2,671			6,823			23,549			19,191
Hybrid		10,701			21,835			16,012			15,589			14,867			15,741			16,000			18,871			13,654
Fixed		2,333			623			616			526			529			654			819			1,922			2,355
Total market value	$	171,987		$	156,859		$	139,019		$	115,642		$	98,721		$	79,701		$	83,620		$	97,801		$	69,775

Interest income	$	4,143		$	4,312		$	1,872		$	1,746		$	2,235		$	1,926		$	1,732		$	1,508		$	1,630
Discount amortization		3,197			3,307			1,915			1,479			1,434			575			455			373			649
Total interest income	$	7,340		$	7,619		$	3,787		$	3,225		$	3,669		$	2,501		$	2,187		$	1,881		$	2,279

Avg Balance	$	151,740		$	154,988		$	135,489		$	106,648		$	92,239		$	70,315		$	78,347		$	84,002		$	61,484

Interest income %		10.92	%		11.13	%		5.53	%		6.55	%		9.69	%		10.96	%		8.84	%		7.18	%		10.60	%
Discount amort %		8.43	%		8.53	%		5.65	%		5.55	%		6.22	%		3.27	%		2.32	%		1.78	%		4.22	%
Yield		19.35	%		19.66	%		11.18	%		12.10	%		15.91	%		14.23	%		11.17	%		8.96	%		14.83	%

*Underlying Loan Characteristics*
Number of loans		58,960			54,599			67,132			60,471			50,168			49,596			46,682			58,163			38,421
Total Loan Face	$	19,620,740		$	18,026,078		$	22,126,922		$	19,796,509		$	15,470,805		$	15,555,706		$	14,262,580		$	17,962,707		$	11,612,670
Average loan size	$	333		$	330		$	330		$	327		$	308		$	314		$	306		$	309		$	302

Southern CA		31	%		32	%		31	%		34	%		35	%		35	%		35	%		36	%		33	%
Northern CA		21	%		22	%		22	%		23	%		24	%		22	%		21	%		21	%		19	%
Florida		10	%		10	%		9	%		9	%		8	%		8	%		7	%		7	%		8	%
New York		2	%		2	%		2	%		1	%		1	%		1	%		1	%		1	%		1	%
Georgia		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%
New Jersey		3	%		3	%		3	%		2	%		2	%		2	%		3	%		2	%		2	%
Texas		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%
Arizona		4	%		4	%		4	%		3	%		3	%		2	%		2	%		2	%		2	%
Illinois		1	%		1	%		1	%		1	%		1	%		2	%		2	%		2	%		2	%
Colorado		3	%		3	%		3	%		3	%		3	%		3	%		4	%		3	%		4	%
Virginia		3	%		3	%		3	%		3	%		2	%		2	%		2	%		2	%		2	%
Other states		20	%		18	%		20	%		19	%		19	%		21	%		21	%		22	%		25	%

A-19

APPENDIX


Table 12B: Residential CES Alt A and Underlying Loan Characteristics (all $ in thousands)
	Q1 2007			Q4 2006			Q3 2006			Q2 2006			Q1 2006			Q4 2005			Q3 2005			Q2 2005			Q1 2005
Year 2007 origination		4	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Year 2006 origination		25	%		21	%		19	%		9	%		1	%		0	%		0	%		0	%		0	%
Year 2005 origination		39	%		38	%		41	%		45	%		39	%		35	%		21	%		19	%		0	%
Year 2004 origination and earlier		32	%		41	%		40	%		46	%		60	%		65	%		79	%		81	%		100	%

Wtd Avg Original LTV		75	%		75	%		75	%		75	%		74	%		75	%		75	%		74	%		74	%
Original LTV: 0 - 50		4	%		4	%		4	%		4	%		5	%		4	%		5	%		5	%		5	%
Original LTV: 50.01 - 60		6	%		6	%		6	%		6	%		7	%		6	%		6	%		7	%		7	%
Original LTV: 60.01 - 70		15	%		16	%		16	%		16	%		16	%		15	%		16	%		16	%		17	%
Original LTV: 70.01 - 80		61	%		61	%		58	%		59	%		59	%		62	%		60	%		62	%		64	%
Original LTV: 80.01 - 90		10	%		9	%		11	%		10	%		9	%		8	%		8	%		7	%		4	%
Original LTV: 90.01 - 100		4	%		4	%		5	%		5	%		4	%		5	%		5	%		3	%		3	%
Unknown		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Wtd Avg FICO		708			708			708			708			710			706			708			707			706
FICO: <= 600		2	%		1	%		3	%		2	%		2	%		0	%		0	%		0	%		0	%
FICO: 601 - 620		1	%		1	%		1	%		1	%		1	%		1	%		0	%		0	%		0	%
FICO: 621 - 640		5	%		5	%		5	%		5	%		5	%		5	%		5	%		5	%		5	%
FICO: 641 - 660		9	%		8	%		8	%		8	%		8	%		8	%		8	%		8	%		7	%
FICO: 661 - 680		14	%		14	%		13	%		13	%		12	%		13	%		12	%		12	%		12	%
FICO: 681 - 700		15	%		15	%		15	%		15	%		13	%		15	%		15	%		15	%		15	%
FICO: 701 - 720		13	%		13	%		13	%		13	%		12	%		14	%		15	%		15	%		15	%
FICO: 721 - 740		11	%		11	%		11	%		11	%		11	%		12	%		13	%		13	%		13	%
FICO: 741 - 760		9	%		10	%		10	%		10	%		9	%		11	%		11	%		11	%		12	%
FICO: 761 - 780		8	%		8	%		8	%		8	%		8	%		9	%		10	%		10	%		10	%
FICO: 781 - 800		5	%		5	%		5	%		5	%		5	%		5	%		5	%		5	%		5	%
FICO: >= 801		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%
Unknown		7	%		8	%		7	%		8	%		13	%		6	%		5	%		5	%		5	%

Conforming at Origination %		49	%		52	%		53	%		53	%		56	%		46	%		49	%		48	%		50	%
> $1 MM %		10	%		9	%		8	%		7	%		7	%		6	%		6	%		6	%		7	%

2nd Home %		6	%		6	%		5	%		5	%		5	%		5	%		5	%		5	%		6	%
Investment Home %		11	%		12	%		11	%		11	%		11	%		11	%		10	%		10	%		11	%

Purchase		37	%		41	%		42	%		40	%		41	%		45	%		47	%		48	%		53	%
Cash Out Refi		41	%		39	%		38	%		40	%		38	%		37	%		34	%		34	%		30	%
Rate-Term Refi		22	%		19	%		21	%		20	%		21	%		18	%		19	%		18	%		17	%
Construction		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Other		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Full Doc		18	%		23	%		24	%		22	%		22	%		19	%		19	%		19	%		16	%
No Doc		1	%		1	%		1	%		1	%		1	%		0	%		0	%		0	%		1	%
Other Doc (Lim, Red, Stated, etc)		71	%		67	%		64	%		67	%		62	%		81	%		81	%		81	%		83	%
Unknown/Not Categorized		10	%		9	%		11	%		10	%		15	%		0	%		0	%		0	%		0	%

2-4 Family		4	%		4	%		4	%		4	%		4	%		4	%		3	%		3	%		4	%
Condo		11	%		11	%		11	%		11	%		11	%		1	%		1	%		1	%		0	%
Single Family		85	%		85	%		85	%		85	%		85	%		6	%		6	%		4	%		0	%
Other		0	%		0	%		0	%		0	%		0	%		89	%		90	%		92	%		96	%

A-20

APPENDIX


Table 12C: Residential CES Subprime and Underlying Loan Characteristics (all $ in thousands)
*Residential CES Subprime*	Q1 2007			Q4 2006			Q3 2006			Q2 2006			Q1 2006			Q4 2005			Q3 2005			Q2 2005			Q1 2005
Principal value	$	11,219			9,841			9,841		$	0		$	0		$	0		$	0		$	0		$	0
Unamortized premium		(1,426	)		(1,387	)		(1,407	)		-			-			-			-			-			-
Credit protection		0			0			0			-			-			-			-			-			-
Unrealized market value		(652	)		849			(15	)		-			-			-			-			-			-
Market value (book value)	$	9,141			9,303			8,419		$	0		$	0		$	0		$	0		$	0		$	0
Market value / principal value	$	81.48		$	94.53		$	85.55		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00

*Current Rating*
BB	$	9,141		$	6,678		$	5,919		$	0		$	0		$	0		$	0		$	0		$	0
B		-			-			-			-			-			-			-			-			-
Non Rated		-			2,625			2,500			-			-			-			-			-			-
Total market value	$	9,141		$	9,303		$	8,419		$	0		$	0		$	0		$	0		$	0		$	0

*Security Type*
Option ARM	$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
ARM		-			-			-			-			-			-			-			-			-
Hybrid		1,013			4,127			4,064			-			-			-			-			-			-
Fixed		8,128			5,176			4,355			-			-			-			-			-			-
Total market value	$	9,141		$	9,303		$	8,419		$	0		$	0		$	0		$	0		$	0		$	0

Interest income	$	186		$	151		$	51		$	0		$	0		$	0		$	0		$	0		$	0
Discount amortization		51			22			15			-			-			-			-			-			-
Total interest income	$	237		$	173		$	66		$	0		$	0		$	0		$	0		$	0		$	0

Avg Balance	$	9,715		$	8,344		$	8,223		$	0		$	0		$	0		$	0		$	0		$	0

Interest income %		7.66	%		7.24	%		2.48	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Discount amort %		2.10	%		1.05	%		0.73	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Yield		9.76	%		8.29	%		3.21	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

*Underlying Loan Characteristics*
Number of loans		25,001			31,873			34,841			-			-			-			-			-			-
Total Loan Face	$	3,614,761		$	5,439,260		$	5,945,868		$	0		$	0		$	0		$	0		$	0		$	0
Average loan size	$	145		$	171		$	171		$	0		$	0		$	0		$	0		$	0		$	0

Southern CA		18	%		19	%		19	%		0	%		0	%		0	%		0	%		0	%		0	%
Northern CA		13	%		14	%		14	%		0	%		0	%		0	%		0	%		0	%		0	%
Florida		12	%		12	%		12	%		0	%		0	%		0	%		0	%		0	%		0	%
New York		4	%		4	%		4	%		0	%		0	%		0	%		0	%		0	%		0	%
Georgia		1	%		1	%		1	%		0	%		0	%		0	%		0	%		0	%		0	%
New Jersey		4	%		4	%		4	%		0	%		0	%		0	%		0	%		0	%		0	%
Texas		4	%		4	%		4	%		0	%		0	%		0	%		0	%		0	%		0	%
Arizona		5	%		4	%		4	%		0	%		0	%		0	%		0	%		0	%		0	%
Illinois		6	%		6	%		6	%		0	%		0	%		0	%		0	%		0	%		0	%
Colorado		2	%		2	%		2	%		0	%		0	%		0	%		0	%		0	%		0	%
Virginia		2	%		2	%		2	%		0	%		0	%		0	%		0	%		0	%		0	%
Other states		29	%		28	%		28	%		0	%		0	%		0	%		0	%		0	%		0	%

A-21

APPENDIX


Table 12C: Residential CES Subprime and Underlying Loan Characteristics (all $ in thousands)
	Q1 2007			Q4 2006			Q3 2006			Q2 2006			Q1 2006			Q4 2005			Q3 2005			Q2 2005			Q1 2005
Year 2007 origination		2	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Year 2006 origination		98	%		100	%		100	%		0	%		0	%		0	%		0	%		0	%		0	%
Year 2005 origination		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Year 2004 origination and earlier		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Wtd Avg Original LTV		75	%		73	%		73	%		0	%		0	%		0	%		0	%		0	%		0	%
Original LTV: 0 - 50		13	%		14	%		14	%		0	%		0	%		0	%		0	%		0	%		0	%
Original LTV: 50.01 - 60		2	%		3	%		3	%		0	%		0	%		0	%		0	%		0	%		0	%
Original LTV: 60.01 - 70		6	%		6	%		6	%		0	%		0	%		0	%		0	%		0	%		0	%
Original LTV: 70.01 - 80		43	%		47	%		47	%		0	%		0	%		0	%		0	%		0	%		0	%
Original LTV: 80.01 - 90		22	%		23	%		23	%		0	%		0	%		0	%		0	%		0	%		0	%
Original LTV: 90.01 - 100		14	%		7	%		7	%		0	%		0	%		0	%		0	%		0	%		0	%
Unknown		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Wtd Avg FICO		642			636			636			-			-			-			-			-			-
FICO: <= 600		25	%		25	%		25	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 601 - 620		12	%		13	%		13	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 621 - 640		16	%		17	%		17	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 641 - 660		12	%		13	%		13	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 661 - 680		10	%		10	%		10	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 681 - 700		9	%		8	%		8	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 701 - 720		6	%		5	%		5	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 721 - 740		4	%		4	%		4	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 741 - 760		3	%		2	%		2	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 761 - 780		2	%		2	%		2	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: 781 - 800		1	%		1	%		1	%		0	%		0	%		0	%		0	%		0	%		0	%
FICO: >= 801		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Unknown		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Conforming at Origination %		77	%		75	%		75	%		0	%		0	%		0	%		0	%		0	%		0	%
> $1 MM %		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

2nd Home %		2	%		1	%		1	%		0	%		0	%		0	%		0	%		0	%		0	%
Investment Home %		9	%		8	%		8	%		0	%		0	%		0	%		0	%		0	%		0	%

Purchase		52	%		50	%		50	%		0	%		0	%		0	%		0	%		0	%		0	%
Cash Out Refi		44	%		47	%		47	%		0	%		0	%		0	%		0	%		0	%		0	%
Rate-Term Refi		4	%		3	%		3	%		0	%		0	%		0	%		0	%		0	%		0	%
Construction		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Other		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Full Doc		49	%		53	%		53	%		0	%		0	%		0	%		0	%		0	%		0	%
No Doc		1	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Other Doc (Lim, Red, Stated, etc)		50	%		47	%		47	%		0	%		0	%		0	%		0	%		0	%		0	%

2-4 Family		7	%		7	%		7	%		0	%		0	%		0	%		0	%		0	%		0	%
Condo		7	%		7	%		7	%		0	%		0	%		0	%		0	%		0	%		0	%
Single Family		86	%		86	%		86	%		0	%		0	%		0	%		0	%		0	%		0	%
Other		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

A-22

APPENDIX


Table 13 - Other Real Estate Investments and Underlying Characteristics (all $ in thousands)
	Q1 2007			Q4 2006			Q3 2006			Q2 2006			Q1 2006			Q4 2005			Q3 2005			Q2 2005			Q1 2005

Market Value	$	50,057		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0

*Current Rating*
AAA	$	2,038		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
AA		0			0			0			0			0			0			0			0			0
A		18,699			0			0			0			0			0			0			0			0
BBB		5,729			0			0			0			0			0			0			0			0
BB		4,185			0			0			0			0			0			0			0			0
B		0			0			0			0			0			0			0			0			0
Non Rated		19,406			0			0			0			0			0			0			0			0
Total market value	$	50,057		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0

*Security Type*
ARM	$	422		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
Option ARM		3,198			0			0			0			0			0			0			0			0
Hybrid		43,969			0			0			0			0			0			0			0			0
Fixed		2,468			0			0			0			0			0			0			0			0
Total market value	$	50,057		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0

Interest income	$	2,997		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
Discount amortization		(532	)		0			0			0			0			0			0			0			0
Total interest income	$	2,465		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0

Avg Balance	$	37,169		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0

Interest income %		32.25	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Discount amort %		-5.73	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Yield		26.53	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

A-23

APPENDIX


Table 14: Residential Real Estate Loan Characteristics (all $ in thousands)

	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005
Residential Loans	$	8,582,964		$	9,212,002		$	9,718,985		$	10,318,641		$	11,846,454		$	13,719,242		$	16,386,833		$	19,443,387		$	21,579,671
Number of loans		25,579			27,695			31,744			34,013			37,458			33,863			51,593			58,941			62,060
Average loan size	$	336		$	333		$	306		$	303		$	316		$	405		$	318		$	330		$	348

Adjustable %		79	%		85	%		89	%		99	%		99	%		98	%		100	%		100	%		100	%
Hybrid %		20	%		15	%		11	%		1	%		1	%		2	%		0	%		0	%		0	%
Fixed %		1	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Amortizing %		4	%		3	%		3	%		1	%		1	%		1	%		0	%		0	%		0	%
Interest-only %		96	%		97	%		97	%		99	%		99	%		99	%		100	%		100	%		100	%
Negatively amortizing %		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%

Southern California		14	%		13	%		12	%		11	%		11	%		11	%		11	%		12	%		12	%
Northern California		10	%		10	%		10	%		10	%		10	%		12	%		11	%		12	%		12	%
Florida		13	%		12	%		12	%		13	%		12	%		13	%		12	%		11	%		11	%
New York		6	%		6	%		6	%		6	%		6	%		5	%		5	%		5	%		5	%
Georgia		5	%		5	%		5	%		5	%		5	%		5	%		5	%		5	%		5	%
New Jersey		4	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%
Texas		5	%		5	%		5	%		5	%		5	%		4	%		4	%		4	%		4	%
Arizona		4	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%
Illinois		3	%		3	%		3	%		2	%		2	%		2	%		3	%		3	%		3	%
Colorado		3	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%
Virginia		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%
Other states (none greater than 3%)		30	%		31	%		32	%		33	%		34	%		33	%		34	%		33	%		33	%

Year 2007 origination		3	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Year 2006 origination		19	%		17	%		10	%		0	%		0	%		0	%		0	%		0	%		0	%
Year 2005 origination		5	%		5	%		5	%		5	%		5	%		6	%		5	%		4	%		3	%
Year 2004 origination or earlier		73	%		78	%		85	%		95	%		95	%		94	%		95	%		96	%		97	%

Wtd Avg Original LTV		68	%		68	%		68	%		68	%		68	%		69	%		68	%		69	%		68	%
Original LTV: 0 - 50		15	%		16	%		15	%		15	%		15	%		13	%		14	%		13	%		13	%
Original LTV: 50 - 60		12	%		12	%		12	%		12	%		12	%		11	%		11	%		11	%		11	%
Original LTV: 60 - 70		20	%		20	%		20	%		21	%		21	%		21	%		20	%		20	%		20	%
Original LTV: 70 - 80		46	%		45	%		46	%		45	%		45	%		48	%		46	%		47	%		46	%
Original LTV: 80 - 90		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%
Original LTV: 90 - 100		5	%		5	%		5	%		5	%		5	%		5	%		7	%		7	%		8	%

Wtg Avg FICO		727			733			730			730			730			731			731			731			731
FICO: <= 600		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%
FICO: 601 -620		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%		1	%
FICO: 621 - 640		2	%		1	%		1	%		1	%		2	%		1	%		1	%		1	%		1	%
FICO: 641 -660		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%
FICO: 661 - 680		7	%		8	%		8	%		8	%		8	%		8	%		8	%		8	%		8	%
FICO: 681 - 700		12	%		12	%		12	%		12	%		12	%		12	%		12	%		12	%		12	%
FICO: 701 - 720		14	%		14	%		14	%		14	%		14	%		15	%		14	%		14	%		14	%
FICO: 721 - 740		13	%		13	%		14	%		13	%		13	%		13	%		14	%		14	%		14	%
FICO: 741 - 760		15	%		15	%		15	%		15	%		15	%		15	%		15	%		15	%		16	%
FICO: 761 - 780		17	%		17	%		17	%		17	%		17	%		17	%		17	%		17	%		17	%
FICO: 781 - 800		12	%		12	%		12	%		12	%		11	%		11	%		11	%		11	%		11	%
FICO: >= 801		3	%		3	%		2	%		3	%		3	%		3	%		3	%		3	%		2	%


Conforming balance at origination %		37	%		38	%		41	%		45	%		37	%		38	%		37	%		37	%		36	%
% balance in loans > $1mm per loan		16	%		18	%		14	%		14	%		14	%		13	%		14	%		13	%		13	%

2nd home %		11	%		11	%		11	%		11	%		11	%		10	%		10	%		10	%		10	%
Investment home %		3	%		3	%		3	%		3	%		3	%		2	%		2	%		2	%		2	%

Purchase		35	%		34	%		34	%		33	%		33	%		33	%		33	%		33	%		34	%
Cash out refinance		31	%		32	%		32	%		32	%		34	%		34	%		34	%		34	%		34	%
Rate-term refinance		32	%		32	%		32	%		34	%		32	%		32	%		32	%		32	%		31	%
Construction		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Other		2	%		2	%		2	%		1	%		1	%		1	%		1	%		1	%		1	%

A-24

APPENDIX


Table 15: Commercial Real Estate Loans Credit Performance (all $ in thousands)

		Managed Loans		Internally-Designated Credit Reserve		External Credit Enhancement		Total Credit Protection (1)		Total Credit Protection as % of Loans			Seriously Delinquent Loans		Seriously Delinquent Loan % of Current Balance			Total Credit Losses		Third Parties' Share of Net Charge-offs/ (Recoveries)		Redwood's Share of Net Charge-offs/ (Recoveries)		Total Credit Losses As % of Loans (Annualized)


Total Managed Commercial Portfolio	Q1: 2005	$	27,830,707	$	97,127	$	557,480	$	654,607		2.35	%	$	15,305		0.05	%	$	315	$	0	$	315		0.00	%
	Q2: 2005		31,324,563		95,351		681,133		776,484		2.48	%		35,971		0.11	%		1,213		1,213		-		0.02	%
	Q3: 2005		40,081,879		146,671		706,532		853,203		2.13	%		20,690		0.05	%		59		59		-		0.00	%
	Q4: 2005		46,825,453		149,947		714,168		864,115		1.85	%		40,916		0.09	%		-		-		-		0.00	%
	2005		46,825,453		149,947		714,168		864,115		1.85	%		40,916		0.09	%		1,587		1,272		315		0.00	%
	Q1: 2006		48,366,213		175,913		645,675		821,588		1.70	%		38,124		0.08	%		90		55		35		0.00	%
	Q2: 2006		51,635,796		200,275		653,476		853,751		1.65	%		44,632		0.09	%		1,463		1,463		-		0.01	%
	Q3: 2006		58,106,355		266,523		678,489		945,012		1.63	%		70,586		0.12	%		2,167		1,705		462		0.01	%
	Q4: 2006		57,789,159		303,481		472,669		776,150		1.34	%		64,367		0.11	%		1,156		1,132		24		0.01	%
	2006		57,789,159		303,481		472,669		776,150		1.34	%		64,367		0.11	%		4,876		4,355		521		0.03	%
	Q1: 2007	$	57,450,042	$	304,955	$	551,917	$	856,872		1.49	%	$	77,726		0.14	%	$	1,471	$	1,417	$	24		0.01	%

Commercial Real Estate Loans	Q1: 2005	$	67,365	$	8,456	$	0	$	8,456		12.55	%	$	0		0.00	%	$	315	$	0	$	315		1.87	%
	Q2: 2005		51,778		8,141		-		8,141		15.72	%		-		0.00	%		-		-		-		0.00	%
	Q3: 2005		66,348		8,141		-		8,141		12.27	%		-		0.00	%		-		-		-		0.00	%
	Q4: 2005		70,091		8,141		-		8,141		11.61	%		-		0.00	%		-		-		-		0.00	%
	2005		70,091		8,141		-		8,141		11.61	%		-		0.00	%		315		-		315		0.45	%
	Q1: 2006		65,508		8,141		-		8,141		12.43	%		-		0.00	%		35		-		35		0.21	%
	Q2: 2006		46,959		8,141		-		8,141		17.34	%		-		0.00	%		-		-		-		0.00	%
	Q3: 2006		42,384		8,141		-		8,141		19.21	%		-		0.00	%		-		-		-		0.00	%
	Q4: 2006		38,360		8,141		-		8,141		21.22	%		-		0.00	%		-		-		-		0.00	%
	2006		38,360		8,141		-		8,141		21.22	%		-		0.00	%		35		-		35		0.36	%
	Q1: 2007	$	38,394	$	10,489	$	0	$	10,489		27.32	%	$	0		0.00	%	$	0	$	0	$	0		0.00	%

Commercial CES	Q1: 2005	$	27,763,342	$	88,671	$	557,480	$	646,151		2.33	%	$	15,305		0.06	%	$	0	$	0	$	0		0.00	%
	Q2: 2005		31,272,785		87,210		681,133		768,343		2.46	%		35,971		0.12	%		1,213		1,213		-		0.02	%
	Q3: 2005		40,015,531		138,530		706,532		845,062		2.11	%		20,690		0.05	%		59		59		-		0.00	%
	Q4: 2005		46,755,362		141,806		714,168		855,974		1.83	%		40,916		0.09	%		-		-		-		0.00	%
	2005		46,755,362		141,806		714,168		855,974		1.83	%		40,916		0.09	%		1,272		1,272		-		0.00	%
	Q1: 2006		48,300,705		167,772		645,675		813,447		1.68	%		38,124		0.08	%		55		55		-		0.00	%
	Q2: 2006		51,588,837		192,134		653,476		845,610		1.64	%		44,632		0.09	%		1,463		1,463		-		0.01	%
	Q3: 2006		58,063,971		258,382		678,489		936,871		1.61	%		70,586		0.12	%		2,167		1,705		462		0.01	%
	Q4: 2006		57,750,799		295,340		472,669		768,009		1.33	%		64,367		0.11	%		1,156		1,132		24		0.01	%
	2006		57,750,799		295,340		472,669		768,009		1.33	%		64,367		0.11	%		4,841		4,355		486		0.01	%
	Q1: 2007	$	57,411,648	$	294,466	$	551,917	$	846,383		1.47	%	$	77,726		0.14	%	$	1,471	$	1,417	$	24		0.01	%

(1) The credit reserve on commercial real estate loans is only available to absorb losses on our commercial real estate loan portfolio. Internally-designated credit reserves and external credit enhancement are only available to absorb losses on the commercial CES. Much of the external credit enhancement will share loan losses with Redwood rather than protect Redwood from losses.

A-25

APPENDIX


Table 16: Commercial CES Underlying Loan Characteristics (all $ in thousands)

	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005
Commercial CES Loans	$	57,411,648		$	57,750,799		$	58,063,971		$	51,588,837		$	48,300,705		$	46,755,362		$	40,015,531		$	31,272,785		$	27,763,342
Number of loans		3,968			3,889			4,032			3,456			3,737			3,618			2,866			2,248			2,059
Average face value	$	14,469		$	14,850		$	14,401		$	14,927		$	12,925		$	12,923		$	13,962		$	13,911		$	13,484


State Distribution
CA		17	%		17	%		18	%		18	%		17	%		17	%		16	%		18	%		17	%
NY		13	%		13	%		11	%		12	%		12	%		13	%		13	%		14	%		16	%
TX		8	%		8	%		5	%		6	%		6	%		6	%		7	%		7	%		7	%
VA		4	%		4	%		2	%		2	%		2	%		2	%		3	%		1	%		1	%
FL		6	%		6	%		5	%		5	%		5	%		5	%		5	%		4	%		4	%
Other		52	%		52	%		59	%		57	%		58	%		57	%		56	%		56	%		55	%

Property Type Distribution
Office		35	%		37	%		30	%		36	%		32	%		37	%		39	%		40	%		40	%
Retail		30	%		31	%		32	%		32	%		33	%		33	%		34	%		34	%		34	%
Multi-family		12	%		12	%		11	%		11	%		16	%		12	%		10	%		10	%		12	%
Hospitality		7	%		7	%		6	%		5	%		7	%		3	%		5	%		4	%		3	%
Self-storage		3	%		3	%		0	%		0	%		0	%		0	%		0	%		0	%		0	%
Industrial		3	%		3	%		1	%		1	%		2	%		2	%		1	%		2	%		2	%
Other		10	%		7	%		20	%		15	%		10	%		13	%		11	%		10	%		9	%

Weighted average LTV		68	%		69	%		69	%		69	%		68	%		68	%		68	%		67	%		68	%

Weighted average debt service coverage ratio		1.73			1.60			1.72			1.75			1.99			2.05			1.88			1.79			1.86

A-26

APPENDIX


Table 17: Commercial Real Estate Loan Characteristics (all $ in thousands)

	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005
Commercial mortgage loans, reported value	$	25,883		$	28,172		$	32,170		$	36,722		$	55,167		$	59,692		$	56,102		$	41,794		$	56,604
Number of loans		7			7			8			9			12			13			12			9			12
Average loan size	$	3,698		$	4,025		$	4,021		$	4,080		$	4,597		$	4,592		$	4,675		$	4,644		$	4,717
Seriously delinquent loans		-			-			-			-			-			-			-			-			-
Realized credit losses		-			-			-			-			-			-			-			-			-
California % (based on reported value)		1	%		7	%		7	%		6	%		19	%		25	%		28	%		37	%		42	%

A-27

APPENDIX


Table 18: Securities Portfolios Credit Rating and Collateral Type (in millions)
	CURRENT RATING
*At March 31, 2007:*
	Total		AAA		AA		A		BBB		BB		B		Unrated
Residential prime	$	1,361	$	67	$	180	$	247	$	295	$	316	$	132	$	124
Residential alt-a		938		207		92		225		243		101		30		40
Residential sub-prime		480		8		152		173		138		9		-		-
Other real estate investments		50		2		-		19		6		4		-		19
Commercial		551		9		4		24		79		222		89		124
CDO		270		86		27		57		84		13		-		3
Total securities portfolio market value	$	3,650	$	379	$	455	$	745	$	845	$	665	$	251	$	310


	CURRENT RATING
*At December 31, 2006:*
	Total		AAA		AA		A		BBB		BB		B		Unrated
Residential prime	$	1,278	$	14	$	181	$	243	$	285	$	307	$	119	$	129
Residential alt-a		613		136		84		106		130		94		23		40
Residential sub-prime		528		8		127		209		174		7		-		3
Commercial		568		9		2		16		93		224		90		134
CDO		246		66		30		52		76		14		-		8
Total securities portfolio market value	$	3,233	$	233	$	424	$	626	$	757	$	648	$	232	$	313

A-28

APPENDIX


Table 19: Sequoia ABS Issued
(all $ in thousands)

									Outstanding
			Original				Estimated		Balance
Sequoia	Issue		Issue		Stated		Callable		March 31,
ABS Issued	Date		Amount		Maturity		Date		2007
Sequoia 1		07/29/97	$	534,347		2028		Called	$	-
Sequoia 2		11/06/97		749,160		2029		Called		-
Sequoia 3		06/26/98		635,288		2028		Called		-
Sequoia 1A		05/04/99		157,266		2028		Called		-
Sequoia 4		03/21/00		377,119		2024		2007		65,457
Sequoia 5		10/29/01		510,047		2026		2007		95,447
Sequoia 6		04/26/02		506,142		2027		2007		104,604
Sequoia 7		05/29/02		572,000		2032		Called		-
Sequoia 8		07/30/02		642,998		2032		Called		-
Sequoia 9		08/28/02		558,266		2032		2007		89,332
Sequoia 10		09/26/02		1,041,600		2027		2008		218,151
Sequoia 11		10/30/02		704,936		2032		2007		117,516
Sequoia 12		12/19/02		1,096,891		2033		Called		-
Sequoia 2003-1		02/27/03		1,012,321		2033		2007		199,260
Sequoia 2003-2		04/29/03		815,080		2022		2007		155,841
Sequoia 2003-3		06/26/03		538,452		2023		2007		101,944
MLCC 2003-C		06/26/03		984,349		2023		2008		212,945
MLCC 2003-D		07/29/03		1,003,591		2028		2008		226,783
Sequoia 2003-4		07/29/03		504,273		2033		2007		171,936
Sequoia 2003-5		08/27/03		840,248		2033		2007		136,923
Sequoia 2003-6		10/29/03		649,999		2033		Called		-
Sequoia 2003-7		11/25/03		811,707		2034		Called		-
Sequoia 2003-8		12/23/03		964,238		2034		2007		201,343
MLCC 2003-E		08/28/03		983,852		2028		2008		223,532
MLCC 2003-F		09/25/03		1,297,913		2028		2007		293,348
MLCC 2003-H		12/22/03		739,196		2029		2008		157,211

A-29

APPENDIX


Table 19: Sequoia ABS Issued
(all $ in thousands)

									Outstanding
			Original				Estimated		Balance
Sequoia	Issue		Issue		Stated		Callable		March 31,
ABS Issued	Date		Amount		Maturity		Date		2007
Sequoia 2004-1		01/28/04	$	616,562		2034		2007	$	120,444
Sequoia 2004-2		02/25/04		690,548		2034		2007		132,810
Sequoia 2004-3		03/30/04		917,673		2034		2007		164,666
Sequoia 2004-4		04/29/04		808,933		2010		2007		166,300
Sequoia 2004-5		05/27/04		831,540		2012		2008		176,121
Sequoia 2004-6		06/29/04		910,662		2012		2008		205,194
SEMHT 2004-01		06/29/04		317,044		2014		2008		85,244
Sequoia 2004-7		07/29/04		1,032,685		2034		2008		199,197
Sequoia 2004-8		08/27/04		807,699		2034		2008		192,160
Sequoia 2004-9		09/29/04		772,831		2034		2008		217,535
Sequoia 2004-10		10/28/04		673,356		2034		2008		183,412
Sequoia 2004-11		11/23/04		705,746		2034		2008		236,835
Sequoia 2004-12		12/22/04		821,955		2035		2008		221,569
Sequoia 2005-1		01/27/05		409,071		2035		2008		130,387
Sequoia 2005-2		02/24/05		338,481		2035		2008		93,055
Sequoia 2005-3		04/28/05		359,182		2035		2008		114,142
Madrona 2005-A		08/25/05		5,400		2008		2008		5,400
Sequoia 2005-4		09/29/05		324,576		2035		2009		205,212
Sequoia 2006-1		08/30/06		742,507		2046		2011		644,784
Sequoia 2007-1		03/30/07		864,089		2047		2015		864,089
Total Sequoia ABS Issuance			$	32,181,819					$	7,130,129

A-30

APPENDIX


Table 20: Sequoia IO ABS Issued
(all $ in thousands)

									Outstanding
			Original				Estimated		Balance At
Sequoia ABS	Issue		Issue		Stated		Callable		March 31,
IO's Issued	Date		Amount		Maturity		Date		2007
MLCC 2003-C X-A-2		06/26/03	$	12,662		2007		2007	$	144
MLCC 2003-D X-A-1		07/29/03		22,371		2007		2007		446
MLCC 2003-E X-A-1		08/28/03		16,550		2007		2007		593
MLCC 2003-F X-A-1		09/25/03		18,666		2007		2007		536
Sequoia 2003-6 X-1		10/29/03		8,220		2007		Called		-
SMFC 2003A AX1		10/31/03		70,568		2007		2007		1,052
Sequoia 2003-7 X-1		11/25/03		10,345		2007		Called		-
Sequoia 2003-8 X-1		12/23/03		12,256		2007		2007		277
Sequoia 2004-1 X-1		01/28/04		7,801		2007		2007		267
Sequoia 2004-2 X-1		02/25/04		8,776		2007		2007		-
SMFC 2004A AX1		02/26/04		10,626		2007		2007		451
MLCC 2003-H X-A-1		12/22/03		10,430		2007		2007		791
Sequoia 2004-4 X-1		05/28/04		9,789		2010		2007		567
Sequoia 2004-5 X-1		05/27/04		3,371		2012		2008		284
Sequoia 2004-6 X-A		06/29/04		10,884		2012		2008		3,504
Sequoia 2004-7 X-A		07/29/04		12,145		2034		2008		4,214
Sequoia 2004-8 X-A		08/27/04		18,270		2034		2008		6,361
Sequoia 2004-9 X-A		09/29/04		16,951		2034		2008		6,486
Sequoia 2004-10 X-A		10/28/04		14,735		2034		2008		5,672
Sequoia 2004-11 X-A-1		11/23/04		12,603		2034		2008		5,387
Sequoia 2004-11 X-A-2		11/23/04		4,697		2034		2008		2,197
Sequoia 2004-12 X-A-1		12/22/04		14,453		2035		2008		5,953
Sequoia 2004-12 X-A-2		12/22/04		5,081		2035		2008		5,081
Sequoia 2005-1 X-A		01/27/05		9,669		2035		2008		4,276
Sequoia 2005-2 X-A		02/24/05		7,484		2035		2008		3,218
Sequoia 2005-3 X-A		04/28/05		8,183		2035		2008		3,994
Total Sequoia Issuance			$	357,586					$	61,751

A-31

APPENDIX


Table 21: Acacia CDO ABS Issued
(all $ in thousands)

									Principal
			Original				Optional		Outstanding At
	Issue		Issue		Stated		Redemption		March 31,
CDO Issuance	Date		Amount		Maturity		Date		2007
Acacia CDO 1		12/10/02	$	285,000		2023		Called	$	-
Acacia CDO 2		05/13/03		283,875		2023		Called		-
Acacia CDO 3		11/04/03		284,250		2038		Called		-
Acacia CDO 4		04/08/04		293,400		2039		2007		241,651
Acacia CDO 5		07/14/04		282,125		2039		2007		262,752
Acacia CDO 6		11/09/04		282,000		2040		2007		270,641
Acacia CDO 7		03/10/05		282,000		2045		2008		281,112
Acacia CDO 8		07/14/05		252,000		2045		2008		251,444
Acacia CRE 1		12/14/05		261,750		2045		2010		261,543
Acacia CDO 9		03/09/06		277,800		2046		2009		277,788
Acacia CDO 10		08/02/06		436,500		2046		2009		436,500
Acacia CDO 11		02/15/07		476,660		2047		2010		476,660

Total Acacia CDO Issuance			$	3,697,360					$	2,760,091

A-32

APPENDIX

INTRODUCTION		2

SHAREHOLDER LETTER		3

REDWOOD BUSINESS AND STRATEGY		7

FINANCIAL MODULES

►	Financial	14

►	Residential	28

►	Commercial	49

►	CDO	57

►	Capital	61

►	Debt	63

►	ABS Issued	65

APPENDIX

►	Glossary	72

►	Financial Tables	78



	George E. Bull, III		Douglas B. Hansen
	Chairman and CEO		President


Table 1: GAAP Earnings (in thousands, except per share data)
																												Full Year			Full year
	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005			2006			2005

Interest income	$	207,906		$	213,504		$	217,504		$	214,544		$	224,795		$	234,531		$	246,810		$	248,786		$	237,714		$	870,347		$	967,840
Net securities discount amortization income		20,268			18,665			17,842			13,234			13,245			10,971			11,523			8,049			8,908			62,986			39,451
Other real estate investment interest income		2,465			-			-			-			-			-			-			-			-			-			-
Net loan premium amortization expense		(11,705	)		(13,272	)		(11,232	)		(12,046	)		(11,982	)		(13,486	)		(14,507	)		(9,857	)		(7,674	)		(48,532	)		(45,524	)
(Provision for) reversal of credit reserve		(3,829	)		(1,506	)		(465	)		2,506			(176	)		(877	)		805			1,527			(1,025	)		359			430
Total GAAP interest income		215,105			217,391			223,649			218,238			225,882			231,139			244,631			248,505			237,923			885,160			962,197

Interest expense on Redwood debt		(31,094	)		(16,520	)		(9,422	)		(1,822	)		(2,072	)		(3,521	)		(3,789	)		(1,789	)		(2,694	)		(29,836	)		(11,793	)

ABS interest expense consolidated from trusts		(131,392	)		(152,043	)		(165,177	)		(171,659	)		(178,183	)		(186,433	)		(190,996	)		(191,966	)		(173,146	)		(667,061	)		(742,541	)
ABS issuance expense amortization		(7,068	)		(7,897	)		(5,786	)		(6,079	)		(5,907	)		(6,069	)		(5,162	)		(5,386	)		(5,273	)		(25,669	)		(21,890	)
ABS interest agreement income		1,646			2,497			3,317			3,678			2,980			3,573			623			876			1,469			12,472			6,541
ABS issuance premium amortization income		1,869			1,529			2,395			2,363			2,527			2,793			2,733			3,140			3,747			8,813		$	12,413
Total consolidated ABS expense		(134,945	)		(155,914	)		(165,251	)		(171,697	)		(178,583	)		(186,136	)		(192,802	)		(193,336	)		(173,203	)		(671,445	)		(745,477	)

Junior subordinated notes interest expense		(2,057	)		(423	)		-			-			-			-			-			-			-			(423	)		-

GAAP net interest income		47,009			44,534			48,976			44,719			45,227			41,481			48,040			53,380			62,026			183,456			204,927

Fixed compensation expense		(4,616	)		(3,688	)		(3,437	)		(3,309	)		(3,437	)		(2,879	)		(2,802	)		(2,623	)		(2,778	)		(13,871	)		(11,082	)
Variable compensation expense		(2,251	)		(1,666	)		(2,630	)		(1,900	)		(1,514	)		(2,110	)		(1,980	)		(2,420	)		(2,240	)		(7,710	)		(8,750	)
Equity compensation expense		(3,349	)		(3,233	)		(2,579	)		(2,991	)		(2,694	)		(2,793	)		(2,145	)		(2,657	)		(2,214	)		(11,497	)		(9,809	)
Severance expense		(2,380	)		-			-			-			-			-			-			-			-			-			-
Other operating expense		(4,479	)		(4,732	)		(4,425	)		(5,150	)		(4,505	)		(4,685	)		(4,362	)		(3,639	)		(3,809	)		(18,812	)		(16,495	)
Due diligence expenses		(707	)		(532	)		(384	)		(2,687	)		(432	)		(298	)		(1,075	)		(117	)		(757	)		(4,035	)		(2,246	)
Total GAAP operating expenses		(17,782	)		(13,851	)		(13,455	)		(16,037	)		(12,582	)		(12,765	)		(12,364	)		(11,456	)		(11,798	)		(55,925	)		(48,382	)

Realized gains on sales		303			5,308			4,968			8,239			1,062			14,815			23,053			516			8,346			19,577			46,730
Realized gains on calls		843			1,511			722			747			-			4,265			2,914			4,421			7,548			2,980			19,149
Unrealized market valuation adjustments		(10,264	)		(1,404	)		(5,257	)		(2,993	)		(2,932	)		(1,205	)		(1,051	)		(1,892	)		(883	)		(12,586	)		(5,031	)
Net gains and valuation adjustments		(9,118	)		5,415			433			5,993			(1,870	)		17,875			24,916			3,045			15,011			9,971			60,848

Provision for income taxes		(1,800	)		(407	)		(3,538	)		(3,265	)		(2,760	)		(4,097	)		(4,693	)		(4,054	)		(4,677	)		(9,970	)		(17,521	)
GAAP net income	$	18,309		$	35,691		$	32,416		$	31,410		$	28,015		$	42,495		$	55,899		$	40,915		$	60,563		$	127,532		$	199,872

Diluted average shares		27,684			27,122			26,625			26,109			25,703			25,311			25,314			25,196			25,021			26,314			25,121
GAAP earnings per share	$	0.66		$	1.32		$	1.22		$	1.20		$	1.09		$	1.68		$	2.21		$	1.62		$	2.42		$	4.85		$	7.96


Table 2: Core Earnings (in thousands, except per share data)
																												Full Year			Full Year
	Q1:2007			Q4:2006			Q3:2006			Q2:2006			Q1:2006			Q4:2005			Q3:2005			Q2:2005			Q1:2005			2006			2005

GAAP net income	$	18,309		$	35,691		$	32,416		$	31,410		$	28,015		$	42,495		$	55,899		$	40,915		$	60,563		$	127,532		$	199,872
GAAP income items not included in core earnings
Severance expense		(2,380	)		-			-			-			-			-			-			-			-			-			-
Realized gains on sales		303			5,308			4,968			8,239			1,062			14,815			23,053			516			8,346			19,577			46,730
Realized gains on calls		843			1,511			722			747			-			4,265			2,914			4,421			7,548			2,980			19,149
Unrealized market valuation adjustments		(10,264	)		(1,404	)		(5,257	)		(2,993	)		(2,932	)		(1,205	)		(1,051	)		(1,892	)		(883	)		(12,586	)		(5,031	)
Variable stock option market value change		-			-			-			-			-			25			16			(2	)		84			-			123
Total GAAP / core earnings differences		(11,498	)		5,415			433			5,993			(1,870	)		17,900			24,932			3,043			15,095			9,971			60,971

Core earnings	$	29,807		$	30,276		$	31,983		$	25,417		$	29,885		$	24,594		$	30,967		$	37,872		$	45,468		$	117,561		$	138,901
Per share analysis
GAAP earnings per share	$	0.66		$	1.32		$	1.22		$	1.20		$	1.09		$	1.68		$	2.21		$	1.62		$	2.42		$	4.85		$	7.96
GAAP income items not included in core earnings
Severance expense		($0.09	)	$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00
Realized gains on sales		0.01			0.20			0.19			0.32			0.04			0.59			0.91			0.02			0.33			0.74			1.86
Realized gains on calls		0.03			0.05			0.03			0.03			-			0.17			0.12			0.18			0.30			0.11			0.76
Valuation adjustments		(0.37	)		(0.05	)		(0.20	)		(0.11	)		(0.11	)		(0.05	)		(0.04	)		(0.08	)		(0.04	)		(0.48	)		(0.20	)
Variable stock option market value change		-			-			-			-			-			-			-			-			-			-			-
GAAP / Core earnings differences per share		($0.42	)	$	0.20		$	0.02		$	0.23			($0.07	)	$	0.71		$	0.98		$	0.12		$	0.60		$	0.38		$	2.43

Core earnings per share	$	1.08		$	1.12		$	1.20		$	0.97		$	1.16		$	0.97		$	1.22		$	1.50		$	1.82		$	4.47		$	5.53