The Redwood Review
2nd Quarter 2007
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Table of Contents


Introduction
    
2
  
Shareholder Letter
    
3
  
Quarterly Overview
    
4
  
         
Financial and Business Modules
        
 
        
• Financial
    
6
  
• Residential
    
16
  
• Commercial
    
41
  
• CDO
    
47
  
• Capital
    
52
  
• Debt
    
54
  
• ABS Issued
    
56
  
         
Redwood Business and Strategy
    
64
  
         
Appendix
        
• Glossary
    
70
  
• Financial Tables
    
77
  

 
The Redwood Review
2nd Quarter 2007
1

Introduction
 
Note to Readers:

We file quarterly reports (on Form 10-Q) and annual reports (on Form 10-K) with the Securities and Exchange Commission. These filings and our earnings press releases provide information about our financial results in accordance with Generally Accepted Accounting Principles (GAAP). We urge you to review these documents, which are available through our web site, www.redwoodtrust.com.

This document, called Redwood Review, provides supplemental information about Redwood through a discussion of many GAAP as well as non-GAAP metrics, such as core earnings and taxable income. We believe that these figures provide additional insight into Redwood’s business and future prospects. In each case in which we discuss a non-GAAP metric, you will find an explanation of how it has been calculated and why we think the figure is important. In the Appendix, you will find reconciliations between GAAP and non-GAAP figures. We hope you find the Redwood Review to be helpful to your understanding of our business.

The form and content of the Redwood Review will likely change over time. We welcome your input and suggestions.
 
Selected Financial Highlights
Quarter:Year
GAAP
Earnings
per Share
Core
Earnings
per Share
Total Taxable
Earnings
per Share
Adjusted
Return on
Equity
GAAP Book
Value
per Share
Total
Dividends
per Share
Q2:05
$1.62
$1.50
$1.66
19%
$40.24
$0.70
Q3:05
$2.21
$1.22
$2.23
25%
$41.03
$0.70
Q4:05
$1.68
$0.97
$1.65
19%
$37.20
$3.70
Q1:06
$1.09
$1.16
$1.44
13%
$38.11
$0.70
Q2:06
$1.20
$0.97
$1.91
14%
$39.13
$0.70
Q3:06
$1.22
$1.20
$1.96
14%
$40.02
$0.70
Q4:06
$1.32
$1.12
$1.42
15%
$37.51
$3.70
Q1:07
$0.66
$1.08
$1.48
8%
$34.06
$0.75
Q2:07
$0.41
$1.35
$1.66
5%
$31.50
$0.75

 
CAUTIONARY STATEMENT: This Redwood Review contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, including the words “anticipated,” “estimated,” “should,” “expect,” “believe,” ”intend,” and similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our 2006 Annual Report on Form 10-K under Item 1A “Risk Factors.” Other risks, uncertainties and factors that could cause actual results to differ materially from those projected are detailed from time to time in reports filed by us with the Securities and Exchange Commission, including Forms 10-K, 10-Q, and 8-K. Important factors that may impact our actual results include changes in interest rates and fair market values; changes in prepayment rates; general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; the level of liquidity in the capital markets as it affects our ability to finance our real estate asset portfolio; and other factors not presently identified. In light of these risks, uncertainties, and assumptions, the forward-looking events mentioned in, discussed in, or incorporated by reference into this Review might not occur. Accordingly, our actual results may differ from our current expectations, estimates and projections. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
2
The Redwood Review
2nd Quarter 2007

 
 
Shareholder Letter
 
Dear Fellow Shareholders:

The aim of this quarter’s Redwood Review is to put your mind at ease, amid the uncertainty and volatility in the broader residential real estate sector.

In the pages that follow, you’ll find a great deal of data detailing our current financial position. But there is only one over-arching message that we want you to remember: Redwood Trust is okay.

Our vitals are strong. The vast majority of our credit-sensitive assets are performing well. They are high quality, seasoned, and have good upside potential. Our balance sheet is strong with a relatively low amount of recourse debt. We have based our business on permanent capital, which, unlike hedge funds, is not subject to redemption. We have had no liquidity issues and currently have $200 million of excess capital.

The residential real estate market, where we are a large, active, and long-term player, is inherently cyclical. Redwood benefited from some extraordinary times at the upper end of the cycle in 2003 through 2005. We are now going through the downside of the cycle. As we said last quarter, we have been expecting this, and preparing for it, for more than two years. For that reason, we believe we are in a good position to both weather the storm and profit from these cyclical developments.

Going forward, we are optimistic about potential investment opportunities in our core business, as loan quality continues to improve and investors once again demonstrate an appreciation for credit risk. Since our inception in 1994, we have been through several periods of market turbulence and have used those times to take advantage of favorable investment opportunities, helping to grow Redwood into the company it is today.

In closing, we want to reiterate that we remain committed to building a company that distributes the highest sum of dividends per share for years to come. That commitment requires us to continue to focus on successfully steering through today’s turbulence.

Your Redwood team is calm, disciplined, focused, and well prepared. We thank you for your continued support.

Sincerely,

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

 
The Redwood Review
2nd Quarter 2007
3

Quarterly Overview

Second Quarter 2007
 
We believe the current market turmoil will benefit our business in the long-run as competition will be less intense and assets will be less expensive to acquire. To benefit in the long-term, however, we need to get through the short-term. Let’s focus on how we intend to do that.

We gave a liquidity update in a press release dated August 1, 2007.  Our liquidity position continues to be strong. As of August 7, 2007, we had $231 million of unrestricted cash. In addition, we had $189 million principal value of unsecuritized prime residential whole loans and $330 million principal value of AAA-rated prime residential securities. We believe the current fair market values for these portfolios equal 95% to 100% of their principal value.  We also own other securities that are rated below AAA that are currently funded with equity and are unencumbered.  These include a portion of our residential and commercial credit-enhancement securities portfolios and retained assets from our Sequoia and Acacia securitizations. Total short-term borrowings as of August 7, 2007 were $472 million.  On August 3, 2007, we sold for future settlement $39.5 million of the $330 million principal value of AAA-rated securities for a price of 99.43% of principal value for proceeds of $39.3 million. This transaction will settle on August 30, 2007.  We will likely use the cash from this transaction to further reduce debt and increase our ability to buy high-yield assets in the future.
 
We believe we have the cash resources and collateral availability to sustain us through the current market liquidity crisis. Although we believe it is unlikely, if short-term borrowings were to become completely unavailable, we may need to sell additional assets at a time when prices are low.
 
We expect opportunities to acquire credit-enhancement securities at attractive levels will materialize over the next year. We currently believe that acquiring these assets will be the best use for our excess capital and cash. In order to free up even more cash for this purpose, we may continue to sell additional AAA-rated securities and residential loans on a measured basis as the year progresses.
 
We would consider repurchasing Redwood shares if they trade at attractive levels relative to our other uses for excess capital. In general, however, we would rather use our capital to acquire new assets that have the potential to create significant upside gains for Redwood shareholders.
 
The credit cycle is the next issue we face. So far, our securities and loans continue to perform as well as or better than expected, with only a few exceptions (most of which we have either sold or written down). Realized losses remain low relative to our reserves and our expectations. The credit-sensitive assets we own that are seasoned are producing high yields, and we expect to continue to realize good earnings and cash flows from these assets as the risk of credit loss has been mitigated due to housing price increases over the last few years. We own a relatively large amount of alt-a securities backed by option ARM loans made to generally credit-worthy borrowers. These assets continue to perform better than our expectations. We own a relatively small amount of lower-rated subprime securities, CDO securities backed by subprime securities, and alt-a securities backed by hybrid loans. Delinquencies on these assets are rising to levels exceeding our initial expectations; the jury is still out on whether these will ultimately prove to be good investments. Our commercial real estate assets continue to perform well.
 
4
The Redwood Review
2nd Quarter 2007

 
 
Quarterly Overview

Going forward, we will have to wait to see how bad this credit cycle gets. We have been more pessimistic than others on this topic, and we remain so, believing that the cycle will be more severe and will last longer than most others expect. We believe there are more “shoes to drop” and that problems in real estate markets (as well as the unwinding of other credit bubbles) are likely to spill over into the general economy. These thoughts make us both wary and hopeful, in equal parts. Wary because, although we like our assets and we expect to benefit in the end from this credit cycle, the cycle could carry on further and deeper than we expect. We are also hopeful, because the corrections resulting from this credit cycle are necessary developments to create a healthy real estate market, one that we can thrive in.

 
We continue to work on plans for developing our businesses, with plans for expanding asset management subsidiaries (such as Juniper), expanding our conduit activities (when appropriate) into subprime and alt-a securitizations, further developing our commercial real estate business, and expanding our use of credit derivatives. Some of these developments may be delayed by the current turmoil, but we remain committed to their long-term success. We are encouraged because the long-term prospects for these businesses seem to have improved as a result of the turbulence of the last few months due to reduced competition and increased awareness of risk.

 
In prior Reviews we have discussed some of the current issues surrounding the use of mark-to-market values in accounting. One issue we discussed arose again this quarter ─ we are required to mark down the value of our securities but are not allowed to mark up the value of paired liabilities. We expect continued mark-to-market earnings and book value volatility going forward, only some of which may be reflective of prospective changes in our real cash flows.
  
In the meantime, during the second quarter, net interest income was up and operating expenses down. GAAP earnings were $0.41 per share, reflecting asset market value declines (some of which were realized through our income statement accounts). Core earnings, as described later in this Review and which exclude market value adjustments, were $1.35 per share, our best quarter of core earnings in over two years. In addition, estimated total taxable earnings were $1.66 per share. None of these are a perfect measure of our results, and you can read in this Review about the details and caveats that go with these calculations. Putting it all together, however, the overall picture for the second quarter was a good one.
   
     
The Redwood Review
2nd Quarter 2007
5

GAAP Earnings and Core Earnings
 
Summary

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.

 
Insights

·
GAAP earnings per share for the second quarter of $0.41 per share were lower than recent quarters primarily due to $29 million negative unrealized mark-to-market valuation adjustments. Net interest income for the second quarter was strong.
 
·
For the past year and a half, quarterly core earnings have ranged from $0.97 to $1.35 per share. Our second quarter core earnings of $1.35 per share were at the top of this range.
 

   
For the Quarter Ended  
  
GAAP Earnings
  
Jun-07
  
Mar-07
  
Jun-06
  
               
Net interest income
  
$
53,901
  
$
47,009
  
$
44,719
  
 
                    
Operating expenses
    
(12,772
)
  
(17,782
)
  
(16,037
)
Gains on sales
    
1,428
   
303
   
8,241
 
Gains on calls
    
1,310
   
843
   
747
 
Valuation adjustments, net
    
(29,430
)
  
(10,264
)
  
(2,995
)
Provision for income taxes
    
(3,021
)
  
(1,800
)
  
(3,265
)
 
                    
GAAP earnings
  
$
11,416
  
$
18,309
  
$
31,410
  
 
                    
GAAP earnings per share
  
$
0.41
  
$
0.66
  
$
1.20
  
 

   
For the Quarter Ended  
  
Core Earnings
  
Jun-07
  
Mar-07
  
Jun-06
  
               
Net interest income
  
$
53,901
  
$
47,009
  
$
44,719
  
 
                    
Operating expenses
    
(12,772
)
  
(15,402
)
  
(16,037
)
Gains on sales
    
-
   
-
   
-
 
Gains on calls
    
-
   
-
   
-
 
Valuation adjustments, net
    
-
   
-
   
-
 
Provision for income taxes
    
(3,021
)
  
(1,800
)
  
(3,265
)
 
                    
Core earnings
  
$
38,108
  
$
29,807
  
$
25,417
  
 
                    
Core earnings per share
  
$
1.35
  
$
1.08
  
$
0.97
  

 
6
The Redwood Review
2nd Quarter 2007

 
 
GAAP Earnings and Core Earnings

Financial
 
Quarterly Update
 


Ø 
Net interest income for the second quarter of 2007 increased by $7 million over the first quarter of 2007 and $9 million over the second quarter of 2006. Higher net interest income earnings from our CES and IGS portfolios more than offset a decrease in net interest income from a decline in balance in our residential loan portfolio. 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 from rapid prepayments on those securities backed by ARM loans. The yield for the total CES portfolio was 24% in the second quarter of 2007, 22% in the first quarter of 2007, and 20% in the second quarter of 2006.
 
Ø
Operating expenses in the second quarter of 2007 were $5 million lower than the first quarter of 2007. The primary reason for this decline was lower severance charges and lower bonus accruals. In comparison to the second quarter of last year, operating expenses declined by $3 million primarily due to lower due diligence expenses as a result of lower commercial CES acquisitions activity.
 
Ø
The largest factor causing a decline in our GAAP earnings was $29 million of negative unrealized mark-to-market (MTM) valuation adjustments. These adjustments were $19 million higher than the first quarter of 2007 and $26 million higher than the second 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 low quality alt-a loans) that occurred during the second quarter. Of the $29 million income statement MTM write-downs taken during the second quarter, $19 million were impairments as defined by GAAP.

 
The Redwood Review
2nd Quarter 2007
7

Taxable Income
 
Summary
 

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.

 
Insights

·
Total taxable income for the second quarter of 2007 was strong at $1.66 per share, an increase from the prior quarter due to reduced tax deductions from stock option exercises and lower overall operating expenses.
 
·
REIT taxable income remained strong at $1.63 per share and continues to exceed our regular quarterly dividend by a comfortable margin.
 
 

 
8
The Redwood Review
2nd Quarter 2007

 
 
Taxable Income
 
Quarterly Update
 
Ø  
Total taxable income was $46 million, or $1.66 per share, in the second quarter of 2007. This was an increase from the total taxable income we generated in the prior quarter of $40 million, or $1.48 per share. In the prior quarter, we had more tax deductions relating to stock option exercises and higher overall operating expenses.
 
Ø  
Our REIT taxable income was $1.63 per share in the second quarter of 2007. This was higher than first quarter taxable income of $1.29 for the same reasons total taxable income was higher.
 
Ø  
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 June 30, 2007 in the discount amortization between tax and GAAP for residential, commercial, and CDO CES was $115 million.
 
Ø  
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 $29 million of unrealized market valuation adjustments included in our GAAP earnings this quarter were not included in our tax earnings.
 
Ø  
Total taxable income and REIT taxable income were reduced by $2 million ($0.08 per share) in the second quarter of 2007 as a result of deductions for actual credit losses. These deductions were less than the actual principal losses incurred on the underlying loans of $6 million, 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. All realized credit losses, after adjusting for our tax basis in the assets we own, will reduce our dividend distribution requirements.
 
 
The Redwood Review
2nd Quarter 2007
 9

Book Value per Share
 
Summary
 

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.

 
Insights
 
·
GAAP book value declined by 8%, or $2.56 per share, during the second quarter of 2007 from $34.06 per share to $31.50 per share primarily as a result of declining values for assets we own that are marked-to-market for balance sheet purposes.
 
·
Core book value rose by 0.3% during the second quarter of 2007 from $34.29 per share to $34.40 per share as a result of accretive stock issuance through our direct stock purchase and dividend reinvestment plan.
 
·
Under GAAP, we are required to carry our real estate securities on our balance sheet at their fair market value, but we are not permitted to adjust paired ABS issued liabilities to fair market value. Using the assumption described in footnote 14 of our June 30, 2007 quarterly financial statements, we estimate that if we had recorded our Acacia ABS issued at fair market value and adjusted for Acacia unamortized deferred bond issuance costs of $26 million, our book value as of June 30, 2007 would have been higher than reported by $75 million.
 

 
10
The Redwood Review
2nd Quarter 2007

 
 
Book Value per Share

Financial
 
Quarterly Update
 


Ø 
The difference between core book value of $34.40 per share and GAAP book value of $31.50 per share at June 30, 2007 was cumulative mark-to-market balance sheet adjustments for GAAP of negative $81 million at quarter-end.
 
Ø 
For the $3.7 billion of assets that were marked-to-market at June 30, 2007, market values declined by $124 million in the second quarter of 2007. This represents an average decline in value during the quarter of 3% of principal value.
 
Ø 
Market spreads widened in the second quarter; that is, the yields the market required increased, so asset values dropped. For some assets, value declines reflected 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 second quarter.
 
 
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 $41.93 per share of dividends while also increasing GAAP book value by $19.83 per share.

Ø
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 20% per year through June 30, 2007. Future results will vary.

 
The Redwood Review
2nd Quarter 2007
11

Return on Equity
 
Summary
 

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.
 
 
Insights
 
·
During the second quarter of 2007, our adjusted return on equity was 5%. The return was lower in the past two quarters primarily due to the amount of unrealized market valuation adjustments included our GAAP earnings.
 
·
Core return on equity (core earnings divided by core equity) was 16% for the second quarter.
 
·
Over the long term, we expect to be able to generate annual adjusted returns on equity between 11% and 18%.
 
 
12
The Redwood Review
2nd Quarter 2007

 
 
Return on Equity

Financial
 
Quarterly Update
 
 
The Redwood Review
2nd Quarter 2007
13

Dividends
 
Summary
 

What is this?
 
We have established a regular quarterly dividend rate at a level we believe it is likely to be sustainable unless realized credit losses rise dramatically or our business economics decline materially for some other reason. Distributions in excess of the regular dividend rate, if any, are typically paid in a fourth quarter special dividend.
 

Insights
 
·
Our current regular dividend rate is $0.75 per share per quarter. 
 
 
 
14
The Redwood Review
2nd Quarter 2007 

 
 
Dividends

Financial
 
Quarterly Update


Ø
Total dividend distributions over the last four quarters were $5.90 per share. Assuming the August 6, 2007 Redwood stock price of $36.04, the indicated dividend yield would be 16.4% based on the last twelve months of dividends and would be 8.3% based on the current regular dividend rate of $3.00 per share.
 
Ø
Based on our estimates of REIT taxable income through the second quarter of 2007, at quarter end, we had $80 million ($2.86 per share) undistributed REIT taxable income that we anticipate distributing in 2007 and 2008 through our regular quarterly dividend and a 2007 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.
 
Ø
As has been our recent policy, we currently intend to carry over two to three quarters worth of regular dividends into 2008.

 
15
 
The Redwood Review
2nd Quarter 2007

Residential Real Estate Securities
 
Summary
 

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 (OREI).
 

Insights

·
Total residential securities increased by 4% in the second quarter from $2.8 billion to $2.9 billion as a result of $307 million of acquisitions, $23 million of discount amortization, $56 million of sales, $89 million of calls and principal pay downs, and $59 million of market value declines. Our primary focus during the quarter was buying IGS for our two Acacia CDO securitizations that closed in May and June.
 
·
Of the $2.9 billion residential securities we owned at June 30, 2007, $2.4 billion were financed through re-securitization via Acacia CDO transactions and $0.5 billion were financed with Redwood debt and capital.
     
·
Future residential IGS investment will largely depend on the availability and pricing of future Acacia CDO financing. If today’s turbulent environment persists, it is unlikely that we would complete another CDO transaction this year. This will require us to look to other potential sources of financing, such as Redwood debt or capital, to fund acquisitions, or else slow the pace of our IGS acquisitions.

 
16
 
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Securities
 
Residential
 
Insights (cont.)


·
In light of generally rising residential mortgage delinquencies and the continued slide in home prices, we are closely monitoring the collateral performance underlying our CES and IGS portfolios. During the quarter we sold $49 million of subprime collateral. We may make additional targeted sales in the third quarter.
 
·
Our CES portfolio backed by prime assets as well as our alt-a option ARM loans continue to perform better than, or within, our range of expectations. Prime represents 74% and alt-a option ARMS represent 22% of our residential CES portfolio by market value. At June 30, our credit reserves associated with these securities were $293 million for prime and $151 million for alt-a.
 
·
Credit performance on alt-a securities backed by hybrids is now worse than we had projected. These securities represent 1% of our total residential portfolio. During the quarter we took a mark-to-market valuation charge against these assets of $7 million.
 
·
Prices for residential mortgage-backed securities (RMBS) declined across the credit spectrum with the most severe drops impacting 2006 and early 2007 vintage subprime and alt-a securities. Prices continued to fall further in July and August as the market continued to weaken amid increased supply and reduced demand for RMBS.
 
·
In the RMBS market, trading volume is light since willing buyers and sellers cannot agree on price. Until a market clearing level develops, it is difficult to accurately know true RMBS market values.
 
·
Overall we believe this disruption will be good for Redwood since the likely result will be an improvement in loan credit quality and heightened appreciation for credit risk. This would create more opportunities to invest capital in our core residential credit business over the next year and the disruption may also lead to exceptional distressed buying opportunities.
 
·
We are particularly pleased that Andy Sirkis, who has successfully led our CDO group for the past 5 years, will take on the added responsibility of leading our expanding high-grade investment efforts. Recently, we changed the name of our wholly-owned qualified REIT subsidiary to Juniper Trust due to potential identity confusion with another financial company using the prior name, Cypress. Juniper currently intends to expand in high-grade spread lending product lines such as high-quality residential whole loans funded through securitization, high-grade CDOs backed by AAA and AA rated collateral, and AAA securities funded with repo borrowings. We are pleased with our team’s progress in the development of business strategies and the establishment of supporting systems for Juniper. Initially, Juniper will be funded by Redwood. In the future, we may raise additional capital to accommodate growth for this strategy by selling new shares in Juniper. Our asset management subsidiary, Redwood Asset Management, Inc., would manage Juniper as an external REIT.

 
The Redwood Review
2nd Quarter 2007
17
 

Residential Real Estate Securities
 
Residential Investment-Grade Securities

Quarterly Update
 
 

RWT Residential IGS Portfolio
Activity
as of 06/30/07
(by market value, $ in millions)

 
Prime
Alt-A
Subprime
Total
Market Value 3/31/07
$789  
$766  
$471  
$2,026  
Acquisitions
114  
106  
47  
267  
Upgrades / Downgrades
2  
-   
-   
2  
Sales
(3) 
-   
(49) 
(52) 
Principal Payments
(29) 
(1) 
(16) 
(46) 
Discount / (Premium) Amortization
1  
-   
1  
2  
Gains on Sales/Calls
-  
-   
1  
1  
Net Mark-to-Market Adjustment
(4) 
(16) 
(17) 
(37) 
Market Value 6/30/07
$870  
$855  
$438  
$2,163  
 
 
18
 
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Securities
 
Residential
 
Residential Investment-Grade Securities

Quarterly Update

Ø  
Our residential IGS portfolio increased by 7% in the second quarter from $2.0 billion to $2.2 billion.
 
Ø  
Of the $37 million in market value declines, $13 million were related to interest rate increases that were largely offset by hedge gains.
 
Ø  
The majority of our residential IGS acquisitions for the quarter were designated investments for two Acacia securitizations that closed in May and June.
 
Ø  
During the second quarter, our residential IGS acquisitions were 43% prime, 40% alt-a, and 17% subprime. By interest rate type, these acquisitions were 33% option ARMs, 47% hybrids, and 20% fixed-rate.
 
Ø  
At June 30, 2007, $2.0 billion residential IGS were financed via securitization in our Acacia CDO program and $0.2 billion were financed with Redwood debt and capital.
 
Ø  
At June 30, 2007, the interest rate characteristics of our residential IGS portfolio 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  
Interest income generated by residential IGS was $36 million for the second quarter. The yield for the second quarter was 6.80%, an increase from 6.56% the previous quarter.
 
Ø  
Net discount amortization income (which is included in interest income) for the second quarter was $2 million. At quarter-end, our net discount balance for these assets was $32 million, giving us an average amortized balance sheet cost basis for residential IGS of 98.59% of principal value.
 
Ø  
In the second quarter, our residential prime IGS portfolio grew by $81 million (or 10%) to $870 million. Our residential alt-a IGS portfolio grew by $90 million (or 12%) to $856 million.
 
Ø  
Our subprime IGS portfolio declined by $33 million (or 7%) to $438 million. Sales of $49 million subprime IGS in the second quarter exceeded new acquisitions of $47 million. Although $36 million of these sales were due to increased credit risk of underperforming securities, $13 million were not credit related. The sales of these securities generated a GAAP income statement net gain of $2 million in the second quarter.
 
Ø  
Additional information on our residential IGS can be found in Tables 9, 10, and 18 of the Appendix.
 
 
The Redwood Review
2nd Quarter 2007
19
 

Residential Real Estate Securities
 
Residential Credit-Enhancement Securities
 
Quarterly Update



RWT Residential CES Portfolio
Activity
as of 06/30/07
(by market value, $ in millions)

 
Prime
Alt-A
Subprime
Total
Market Value 3/31/07
$571
$172
$9
$752
Acquisitions
25
15
-
40
Upgrades / Downgrades
-
-
-
-
Sales
(1)
(2)
-
(3)
Principal Payments
(35)
(7)
(1)
(43)
Discount / (Premium) Amortization
17
4
-
21
Net Mark-to-Market Adjustment
(8)
(10)
(5)
(23)
Market Value 6/30/07
$570
$173
$3
$745
 
 
20
 
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Securities
 
Residential
 
Residential Credit-Enhancement Securities

Quarterly Update

Ø  
Our residential CES portfolio decreased by 1% from $752 million to $745 million during the quarter.
 
Ø  
At June 30, 2007, $259 million residential CES were financed with equity and $486 million were financed through our Acacia CDO program.
 
Ø  
The balance of residential loans underlying our residential CES decreased by 7% from $237 billion to $220 billion during the second quarter.
 
Ø  
The loans underlying our residential CES acquisitions made during the quarter were 62% prime and 38% alt-a by market value. Option ARM CES represented 72% of our second quarter acquisitions while hybrids and fixed represented 13% and 15%, respectively, by market value.
 
Ø  
Interest income generated by residential CES was $41 million for the second quarter. The yield for the second quarter was 24%. Yields for the second quarter were 24% for prime CES, 22% for alt-a CES, and 16% for subprime CES. Interest income was $31 million, $10 million, and $0.3 million for these sub-portfolios, respectively. CES yields remain high due to fast prepayment speeds and continued good credit performance for underlying loans.
 
Ø  
Principal value credit losses for loans underlying CES were $6 million for the quarter, an increase from $4 million in the previous quarter. As assets season, we expect losses to increase substantially in percentage terms. Cumulative losses and the current loss rate remain lower than our original pricing expectations.
 
Ø  
For tax purposes, realized credit losses were $2 million ($0.08 per share) for residential CES for the second quarter. This deduction is less than the principal value losses incurred on the underlying loans of $6 million, as we own most of our credit-sensitive assets at a tax basis that is substantially less than par (principal) value.
 
Ø  
Our GAAP credit reserves for residential CES were $453 million ($16.29 per share) at June 30, 2007, an increase of $60 million for the quarter. New acquisitions increased this reserve by $46 million while the reallocation of $22 million of unamortized purchase discount to reserve as some loss expectations increased for some assets less $6 million of actual losses accounted for the remaining change.
 
Ø  
Our total residential prime CES portfolio decreased by $1 million (0.2%) to $570 million during the second quarter. Overall, our prime CES portfolio is performing well from a credit perspective and continues to benefit from fast prepayments.
 
Ø  
The balance of seriously delinquent loans underlying prime residential CES increased from $485 million to $589 million during the quarter, an increase from 0.14% to 0.17%, respectively, of original balances and 0.23% to 0.30% of current balances, respectively. These increases remain in line with normal seasoning and remain below our initial modeling expectations.
 
Ø  
Securities backed by option ARM and traditional ARM loans continued to prepay significantly faster than our original expectations at a weighted average CPR of 43%. 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 $3 million, which is an annualized rate of loss of less than one basis point per year.

The Redwood Review
2nd Quarter 2007
21
 

Residential Real Estate Securities
 
Residential Credit-Enhancement Securities
 
 
Quarterly Update (cont.)
 

Ø  
Fifty percent of our prime portfolio is composed of securities backed by hybrid and fixed-rate mortgages by market value. The loans underlying these securities prepaid at a weighted average CPR of 18% in the second quarter.
 
Ø  
Our residential alt-a CES portfolio held flat at $172 million during the second quarter. Option ARM collateral makes up 95% of this portfolio by market value.
 
Ø  
We acquire alt-a securities backed by option ARMs with loss expectations that are significantly 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 $296 million to $399 million during the quarter, an increase from 0.82% to 1.04% of original balances, respectively, and 1.51% to 1.95% of current balances, respectively.
 
Ø  
Our subprime CES portfolio decreased 69% from $9 million to $3 million for the quarter as a result of $5 million in market value declines and $1 million in principal repayments. Our subprime CES portfolio has limited seasoning; however, the early credit performance is disappointing.
 
Ø  
We continue to explore opportunities to invest in subprime residuals through joint venture partnerships or whole loan securitizations. We believe that once the market rationalization is complete the subprime business will be viable for the long term and presents an excellent opportunity to expand the Redwood franchise.
 
Ø  
For the foreseeable future we expect subprime originations to continue to decline in volume, however the nature of subprime residuals will provide sufficient opportunities for investment given the required size of CES created in each deal.
 
Ø  
Additional information on our residential CES can be found in Tables 9, 10, 11, and 12 of the Appendix.
 
 
22
 
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Securities
 
Residential
 
Other Real Estate Investments

 
Quarterly Update
 

Ø  
Other real estate investments (OREI) are assets that we mark-to-market for income statement purposes, because they may otherwise be deemed to contain embedded derivatives for accounting purposes under FAS 155. We expect to acquire additional OREI assets. Mark-to-market fluctuations affect GAAP income.
 
Ø  
OREI is a new reporting category we established in the first quarter of 2007. Total OREI at June 30, 2007 was $34 million. This included $22 million net interest margin securities (NIMs), $10 million residuals, and $2 million IOs.
 
Ø  
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, and 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  
By market value, our OREI was 4% prime, 50% alt-a, and 46% subprime at June 30, 2007.
 
Ø  
Mark-to-market charges in our OREI portfolio were negative $6 million for the quarter and were included in our income statement. Valuations decline were a result of credit performance below our expectations, and a general spread widening in the mortgage market. Although the reported yield has averaged 15% after the first two quarters, our total reported return equals the cash income and any change in market value, and will continue to be volatile.
 
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 June 30, 2007 consisted of $9 million of investment-grade NIMs with an average life of 0.6 years.
 
 
The Redwood Review
2nd Quarter 2007
23
 


Residential Real Estate Securities
 
Prime Securities Portfolio
 

What is this?
 
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.
 

 
24
 
The Redwood Review
2nd Quarter 2007
 
 
 
Residential Real Estate Securities
 
Residential
 
Prime Securities Portfolio
 

 
The Redwood Review
2nd Quarter 2007
25
 
Residential Real Estate Securities

Prime Securities Portfolio
 

 
26
 
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Securities
 
Residential
 
Prime Securities Portfolio

RWT Residential Prime Securities
Activity
as of June 30, 2007
(by market value, $ in millions)

 
IGS
CES
OREI
Total
Market Value 3/31/07
$789
$571
$2
$1,362
Acquisitions
114
25
-
139
Upgrades / Downgrades
2
(2)
-
-
Sales
(3)
(1)
-
(4)
Principal Payments
(29)
(35)
-
(63)
Discount / (Premium) Amortization
1
17
-
18
Net Mark-to-Market Adjustment
(4)
(7)
-
(11)
Market Value 6/30/07
$870
$570
$2
$1,442


RWT Residential Prime Securities
Underlying Loan Characteristics
as of June 30, 2007

         
Number of loans
554,494
 
Wtd Avg FICO
737
Total loan face ($ in millions)
195,757
  
FICO: <= 620
2%
Average loan size ($ in 1000's)
353
 
FICO: 621 - 660
4%
 
 
  
FICO: 661 - 700
16%
Southern CA
24%
 
FICO: 701 - 740
26%
Northern CA
21%
  
FICO: > 740
51%
Florida
6%
  
Unknown
1%
New York
5%
      
Georgia
2%
  
Conforming at origination %
31%
New Jersey
3%
  
> $1 MM %
9%
Other states
39%
  
 
 
 
 
  
2nd home %
7%
2007 origination
4%
 
Investment home %
3%
2006 origination
20%
  
 
 
2005 origination
27%
  
Purchase
41%
2004 origination and earlier
49%
  
Cash out refi
27%
 
 
  
Rate-term refi
30%
Wtd Avg Original LTV
68%
 
 
 
Original LTV: 0 - 50
13%
  
Full doc
45%
Original LTV: 50 - 60
12%
  
No doc
6%
Original LTV: 60. - 70
22%
  
Other (limited, etc)
49%
Original LTV: 70 - 80
51%
    
 
Original LTV: 80 - 90
2%
  
 
 
Original LTV: 90 - 100
1%
  
2-4 family
2%
     
Condo
9%
     
Single family
89%
 
 
The Redwood Review
2nd Quarter 2007
27
 

Residential Real Estate Securities
 
Alt-A Securities Portfolio
 
What is this?
 
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.
 

 
28
 
The Redwood Review
2nd Quarter 2007


 
 
Residential Real Estate Securities
 
Residential
 
Alt-A Securities Portfolio
 

 
The Redwood Review
2nd Quarter 2007
29
 

Residential Real Estate Securities
 
Alt-A Securities Portfolio
 


 
30
The Redwood Review
2nd Quarter 2007
 
 
 
 
Residential Real Estate Securities
 
Residential
 
Alt-A Securities Portfolio
  
RWT Residential Alt-A Securities
Activity
as of June 30, 2007
(by market value, $ in millions)

 
IGS
CES
OREI
Total
Market Value 3/31/07
$766
$172
$28
$966
Acquisitions
106
15
-
121
Sales
-
(2)
(2)
(4)
Principal payments
(1)
(7)
(1)
(9)
Discount / (premium) amortization
-
4
(3)
1
Net mark-to-market adjustment
(16)
(10)
(6)
(32)
Market Value 6/30/07
$856
$173
$16
$1,045
 

RWT Residential Alt-A Securities
Underlying Loan Characteristics
as of June 30, 2007

         
Number of loans
59,767
 
Wtd avg FICO
707
Total loan face ($ in millions)
20,523
  
FICO: <= 620
2%
Average loan size ($ in 1000's)
$343
 
FICO: 621 - 660
14%
     
FICO: 661 - 700
29%
Southern CA
31%
  
FICO: 701 - 740
24%
Northern CA
21%
  
FICO: > 740
23%
Florida
10%
  
Unknown
8%
New York
2%
    
 
Georgia
1%
  
Conforming at origination %
47%
New Jersey
3%
  
> $1 MM %
12%
Other states
32%
  
 
 
     
2nd home %
6%
2007 origination
14%
  
Investment home %
11%
2006 origination
23%
  
 
 
2005 origination
33%
  
Purchase
34%
2004 origination and earlier
30%
  
Cash out refi
43%
     
Rate-term refi
22%
Wtd avg original LTV
75%
  
 
 
Original LTV: 0 - 50
4%
  
Full doc
17%
Original LTV: 50 - 60
6%
  
No doc
1%
Original LTV: 60 - 70
16%
  
Other (limited, etc)
74%
Original LTV: 70 - 80
61%
  
Unknown/not categorized
8%
Original LTV: 80 - 90
9%
  
 
 
Original LTV: 90 - 100
3%
  
2-4 family
4%
     
Condo
11%
     
Single family
85%
 
 
The Redwood Review
2nd Quarter 2007
31
 

Residential Real Estate Securities

Subprime Securities Portfolio

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

RWT Subprime Securities
Portfolio Composition by Rating and Vintage
as of June 30, 2007
(by market value, $ in millions)

 
<=2004
2005
2006
2007
Grand Total
IGS
 
 
 
 
 
AAA
$ -
$5
$9
$ -
$14
AA
43
57
25
29
154
A
95
27
13
15
149
BBB+
36
-
39
9
85
BBB
-
-
8
6
15
BBB-
-
-
10
10
20
IGS Total
$174
$88
$106
$70
$438
CES
 
 
 
 
 
BB
-
-
1
2
3
CES Total
$ -
$ -
$1
$2
$3
OREI
 
 
 
 
 
Resid
-
-
2
-
2
NIM
-
-
-
13
13
OREI Total
$ -
$ -
$2
$13
$15
Total
$174
$88
$109
$85
$456
 
 
32
 
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Securities
 
Residential
 
Subprime Securities Portfolio
 

 
The Redwood Review
2nd Quarter 2007
33
 
 
Residential Real Estate Securities

Subprime Securities Portfolio
 
RWT Residential Subprime Securities
July 2007 Rating Agency Activity

 
7/10
7/13
7/19
 
 
1st Lien
1st Lien
2nd Lien
 
 
Moodys
S&P
S&P
Total
Total Activity
 
 
 
 
Negative Watch
32
26
0
58
Downgraded
399
498
418
1315
Redwood Exposure
 
 
 
 
Negative Watch
1
0
0
1
Downgrade
2
2
2
6*
 
* The same two bonds were downgraded by Moodys and by S&P (7/13). Redwood had a total of four bonds downgraded and one placed on negative watch

34
 
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Securities
 
Residential
 
Subprime Securities Portfolio

RWT Residential Subprime Securities
Activity
as of June 30, 2007
(by market value, $ in millions)

 
IGS
CES
OREI
Total
Market Value 3/31/07
$471
$9
$20
$500
Acquisitions
47
-
-
47
Sales
(49)
-
-
(49)
Principal payments
(16)
(1)
(4)
(21)
Discount / (premium) amortization
1
-
1
2
Net mark-to-market adjustment
(17)
(5)
-
(22)
Market Value 6/30/07
$438
$3
$17
$457


RWT Residential CES Subprime Securities
Underlying Loan Characteristics
as of June 30, 2007

         
Number of loans
23,662
 
Wtd avg FICO
640
Total loan face ($ in millions)
3,436
  
FICO: <= 620
36%
Average loan size ($ in 1000's)
145
  
FICO: 621 - 660
29%
 
    
FICO: 661 - 700
19%
Southern CA
19%
  
FICO: 701 - 740
10%
Northern CA
14%
  
FICO: > 740
6%
Florida
12%
  
Unknown
0%
New York
4%
      
Georgia
1%
  
Conforming at origination %
77%
New Jersey
3%
  
> $1 MM %
0%
Other states
47%
  
 
  
     
2nd Home %
2%
2007 origination
1%
  
Investment Home %
9%
2006 origination
98%
  
 
  
2005 origination
0%
  
Purchase
52%
2004 origination and earlier
0%
 
Cash out refi
44%
     
Rate-term refi
4%
Wtd avg original LTV
69%
  
 
  
Original LTV: 0 - 50
20%
  
Full doc
50%
Original LTV: 50 - 60
3%
  
No doc
1%
Original LTV: 60 - 70
6%
  
Other (limited, etc)
49%
Original LTV: 70 - 80
44%
  
Unknown/not categorized
0%
Original LTV: 80 - 90
22%
  
 
 
Original LTV: 90 - 100
6%
  
2-4 family
8%
     
Condo
7%
     
Single family
85%
 
 
The Redwood Review
2nd Quarter 2007
35
 
 
Residential Real Estate Loans
 
Summary
 

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.
 

 
Insights
 
·
Recently, our primary focus has been prime hybrids, as prime ARMs are out of favor among borrowers in the current yield environment. We purchased $675 million residential 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 second quarter.
 
·
We completed one securitization during the second quarter, financing $407 million prime hybrid mortgages and $654 million prime ARM mortgages and priced another Sequoia securitization that closed in July. We called one older Sequoia securitization during the second quarter. Although we completed this latest Sequoia transaction on overall favorable economic terms, in general the cost of financing loans through securitization has risen as market spreads for ABS have widened.

 
36
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Loans
 
Residential
 
Residential Loans

Quarterly Update

Ø  
In the second quarter, our residential loan portfolio declined from $8.7 billion to $8.4 billion. We acquired $675 million loans and sold $2 million seriously delinquent loans. Principal pay downs were $1.0 billion. The average CPR was 37% for the second quarter versus 44% for all of 2006. Most of these loans are ARM loans that tend to prepay rapidly when the yield curve is flat or inverted.
 
Ø  
Interest income on our residential loans was $119 million in the second quarter, a decrease from $129 million in the previous quarter. This portfolio yielded 5.79%. The yield in the previous quarter was 5.93%. The primary reason for the decrease in yields was an increase in the provision for credit losses.
 
Ø  
Premium amortization expenses, a component of interest income, were $11 million for the second quarter. We ended the second quarter with $8.3 billion principal value of loans and a loan premium balance of $99 million for an average basis of 101.19% of principal value. For 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 $82 million at quarter-end.
 
Ø  
Net charge-offs were $6 million for the second quarter. We reclassified $13 million of seriously delinquent loans from held-for-investment to held-for-sale. This increased our net charge-offs by $4 million and reduced our credit reserve by $4 million. Adjusting for this reclassification, net charge-offs would have otherwise been $2 million, an annual loss rate of ten basis points (0.10%) of the current loan balances.
 
Ø  
Cumulative losses have been far lower than our original expectations. We expect losses to continue to increase as loans season. Credit reserves for this portfolio were $16.4 million (or 0.20%) of current loan balances at quarter-end. In July, we had a recovery of $0.6 million of a previously realized loss on a loan we were able to put back to the originator. This event will be reflected in our Q3 financial statements.
 
Ø  
The balance of seriously delinquent loans decreased from $69 million to $56 million during the quarter, a decrease from 0.22% to 0.20% of original balances, and a decrease from 0.80% to 0.67% of current balances.
 
Ø  
At the end of the second quarter, $7.5 billion of residential loans were financed via Sequoia securitizations and $878 million were financed with Redwood debt and equity. As a result of the July Sequoia transaction, unsecuritized whole loans at the end of July were $195 million.
 
Ø  
Additional information on our residential loans can be found in Tables 9, 10, 11, and 14 of the Appendix. 
 
 
The Redwood Review
2nd Quarter 2007
37

Residential Real Estate Loans

Residential Loans

Quarterly Update
 

 
38
The Redwood Review
2nd Quarter 2007

 
 
Residential Real Estate Loans
 
Residential
 
Residential Loans

RWT Residential Loan Portfolio
Activity
as of June 30, 2007
(by market value, $ in millions)

   
Q207
Q107
Q206
Carrying Value Beginning
 
$8,680
$9,324
$11,990
Acquisitions
 
675
415
273
Sales
 
(2)
-
-
Principal Payments
 
(989)
(1,047)
(1,800)
Discount / (Premium) Amortization
 
(11)
(12)
(12)
Credit provision
 
(3)
(2)
3
Net charge-offs/(recoveries)
 
2
2
-
Carrying Value Ending
 
$8,352
$8,680
$10,454
 

RWT Residential Portfolio
Loan Characteristics
as of June 30, 2007

         
Number of loans
24,452
 
Wtd Avg FICO
732
Total loan face ($ in millions)
8,256
  
FICO: <= 620
2%
Average loan size ($ in 1000's)
338
  
FICO: 621 - 660
5%
     
FICO: 661 - 700
19%
Southern CA
14%
  
FICO: 701 - 740
27%
Northern CA
11%
  
FICO: > 740
47%
Florida
12%
      
New York
6%
  
Conforming at origination %
35%
Georgia
4%
  
> $1 MM %
15%
New Jersey
4%
  
 
 
Other states
48%
  
2nd home %
11%
     
Investment home %
3%
2007 origination
11%
  
 
 
2006 origination
18%
  
Purchase
35%
2005 origination
5%
  
Cash out refi
31%
2004 origination and earlier
66%
  
Rate-term refi
32%
     
Other
2%
Wtd avg original LTV
68%
  
 
  
Original LTV: 0 - 50
15%
  
Hybrid
28%
Original LTV: 50 - 60
11%
  
Adjustable
71%
Original LTV: 60 - 70
19%
  
Interest Only
95%
Original LTV: 70 - 80
47%
  
Fully-Amortizing
5%
Original LTV: 80 - 90
2%
      
Original LTV: 90 - 100
5%
      

 
The Redwood Review
2nd Quarter 2007
39

 

 
Page Intentionally Left Blank
 

 
40
The Redwood Review
2nd Quarter 2007

 
 
Commercial Real Estate Securities
 
Commercial
 
Summary

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.
 
Insights

·
Total commercial securities increased by 2% in the second quarter, from $552 million to $562 million, as a result of $49 million acquisitions and $39 million negative market value changes. Increases in interest rates accounted for $12 million of these negative adjustments, which were largely offset by our use of interest rate derivatives. Less than $1 million of the total market value decline was due to credit deterioration on CES, which we expensed as impairments through our GAAP income statement.
 
·
Turmoil in the CDO markets, as well as uncertainty surrounding credit rating agency methodology changes, has caused spreads for commercial securities to widen and asset prices to decline. Investor sentiment in the commercial capital markets has been clearly affected by defaults and credit rating downgrades in the residential subprime mortgage sector.
 
·
Commercial real estate fundamentals remain strong, with historically low delinquencies across all major property types. Total serious delinquencies in our commercial CES portfolio were $73 million, or 0.10% of the $70 billion in loans that we credit-enhance.
 
·
We have slowed the pace of our commercial CES acquisitions. We feel that underwriting standards for late 2006 and 2007 vintage commercial loans became overly aggressive, and that yields on recent issue CES are not commensurate with this risk. Though spread widening and forthcoming increases in subordination levels may make future commercial CES attractive, we do not anticipate deploying capital in this sector for the remainder of the year.
 
·
We continue to analyze new investments, especially commercial IGS and seasoned CES. Our focus will remain on underwriting quality and attractive pricing levels. We anticipate using CRE CDO financing to efficiently match-fund our investments once the CDO market stabilizes.
 
·
Our near-term objectives are to enhance our surveillance capabilities and to build an asset management business. Our long-term strategy is to establish a vertically integrated commercial real estate platform, enabling us to invest across a broader range of commercial product types. Though this will take time, we believe it will establish Redwood’s position as a strong long-term competitor in the commercial real estate markets.
 
 
The Redwood Review
2nd Quarter 2007
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Commercial Real Estate Securities

Commercial Investment-Grade Securities
  
Quarterly Update
   
 
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Commercial Real Estate Securities
 
Commercial
 
Commercial Investment-Grade Securities

Quarterly Update

Ø  
Our commercial IGS declined by $5 million (or 4%) to $111 million in the second quarter. This decrease was due to negative market value changes. There were no purchases or sales during the quarter.
 
Ø  
Interest income generated by commercial IGS was $2 million for the second quarter. The yield for the quarter was 6.18%, an increase from 6.14% in the previous quarter.
 
Ø  
The market value decline of $5 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  
We are exploring opportunities to take on synthetic exposure with derivatives that reference commercial IGS collateral. Through synthetic technology, we can seek out exposure to seasoned vintages that are not otherwise available.
 
Ø  
We have never incurred a principal loss on any commercial IGS. We do not maintain GAAP credit reserves against our commercial IGS, since we expect external credit-enhancement (primarily structural credit subordination) to protect our investments from principal losses.
 
Ø  
The interest rate characteristics of commercial IGS were 80% fixed-rate and 20% adjustable-rate. We use interest rate agreements to reduce interest rate mismatches that may occur between assets and their associated liabilities. Interest rate agreements offset $1 million, or 25%, of the market value declines on commercial IGS during the quarter.
 
Ø  
At June 30, 2007, 95% 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.
 
 
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2nd Quarter 2007
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Commercial Real Estate Securities
 
Commercial Credit-Enhancement Securities

Quarterly Update
   
 
 
 
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Commercial Real Estate Securities
 
Commercial
 
Commercial Credit-Enhancement Securities

Quarterly Update

Ø  
Our commercial CES increased by $15 million (or 4%) in the second quarter to $451 million. Acquisitions were $49 million and market value declines were $34 million. There were no sales during the quarter.
 
Ø  
The market value of our commercial CES declined by $34 million during the second quarter. Approximately $12 million of this decline was due to increases in interest rates, which was largely offset through our use of interest rate swaps. The remaining $22 million decline was due to widening credit spreads amidst declining market liquidity.
 
Ø  
Of the $34 million in total market value decline, $33 million was unrealized and recorded on our balance sheet, as the underlying credit performance of these securities remains strong. The remaining $1 million was recorded as an impairment to our income statement during the second quarter.
 
Ø  
Interest income generated by commercial CES was $11 million for the second quarter. The yield for the quarter was 9.75%, an increase from 9.52% in the previous quarter. The level of current yield we recognize on these assets is largely a function of the amount and timing of our future credit loss assumptions. All of our commercial CES pay fixed rate of interest.
 
Ø  
Seriously delinquent loans underlying commercial CES were $73 million, a decrease of $5 million from the previous quarter. Of the $73 million in serious delinquencies, $57 million are contained within one security that we deemed impaired during a prior period. We currently have a zero cost basis in this security, with no risk of future write-downs affecting our GAAP income statement.
 
Ø  
There were $0.1 million in realized credit losses during the quarter. Credit losses on this portfolio to date total less than one basis point (0.01%).
 
Ø  
Our GAAP credit reserves for commercial CES were $311 million ($11.17 per share) at June 30, 2007, or 0.44% of underlying loan balances. Total credit reserves increased by $26 million upon acquisition of new commercial CES during the second quarter, offset by reserve releases on seasoned CES totaling $10 million.
 
Ø  
Most of our commercial CES ($314 million or 70%) are in a second-loss or more senior position, and thus are protected from initial credit losses within the underlying loan pool. For the remaining $137 million of securities that are in a direct first-loss position, 42% share losses with other CES investors.
 
Ø  
The geographical distribution of our underlying loans is very diverse. The top five concentrations are in California (16%), New York (13%), Texas (8%), Florida (6%), and Virginia (4%).
 
Ø  
At June 30, 2007, $180 million (or 40%) commercial CES were funded with Redwood capital and $271 million (or 60%) were financed through our Acacia CDO program. We continue to seek financing facilities for our unsecuritized commercial CES that would allow us to recycle some of the Redwood capital currently employed by these assets.
 
Ø  
Additional information on commercial CES can be found in Tables 9, 10, 15, 16, and 18 of the Appendix.
 
 
The Redwood Review
2nd Quarter 2007
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Commercial Real Estate Loans

Summary

What is this?

We invest in commercial real estate loans. These are represented on our balance sheet as part of real estate loans.
 


 
Insights

·
Our commercial loan portfolio was unchanged during the second quarter, at $26 million. No new delinquencies occurred during the quarter. All of the $26 million of loans are structured as b-note loans.
 
·
Of our $26 million b-note investments, 99% are financed through Acacia CDO securitizations.
 
·
Additional information on our commercial loans can be found in Tables 9, 10, 15, and 17 of the Appendix.

 
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CDO Securities
 
CDO
 
Summary
 

What is this?
 
We invest in securities issued from collateralized debt obligation (CDO) securities sponsored by third parties. Typically, the collateral pool underlying these securities consists of a mixture of residential and commercial investment-grade and near IGS.
 

Insights

·
The CDO markets experienced dramatic volatility by the end of the second quarter and into the third quarter. This volatility was driven by severe problems with portfolio liquidations by over-leveraged CDO investors, further erosion in the subprime market, and unprecedented rating downgrades by the rating agencies.
 
·
Liquidity is extremely poor, actual trading activity is minimal, and prices for CDO securities have plummeted.
 
·
New issuance activity is minimal with few new CDOs coming to market. New CDOs backed by commercial assets are seeing better demand and better execution than residential backed CDOs.
 
·
The CDO securities experiencing the most dramatic price declines and related rating downgrades are those backed by collateral pools containing high concentrations of 2006 and 2007 vintage subprime securities rated BBB and BBB-. CDO securities backed by CMBS and earlier vintage (2005 and prior) RMBS do not, at this time, appear to have significant performance issues.
 
·
Our exposure to CDO transactions backed by 2006 and 2007 vintage BBB and BBB- subprime assets is limited. Approximately 75% of our CDO portfolio is comprised of securities backed by commercial real estate or residential real estate from vintages pre-dating 2006.
 
·
As of June 30, 2007, none of the CDO securities owned by Redwood were downgraded or placed on credit watch by the credit rating agencies. In July 2007, one CDO security owned by Redwood was placed on credit watch negative. We recorded impairments on three 2006 vintage CDO assets this quarter, resulting in a $6 million charge against income.
 
·
Should there be additional and severe downgrades of subprime collateral over the coming months and years, these CDO securities themselves may experience downgrades and potentially losses. Should this occur, we expect lower rated securities to be the most heavily impacted. However, rating downgrades and potential losses may extend up the capital structure and even impact AAA and AA rated securities.
 
·
We have no immediate plans to sell any CDO securities. However, we will continue to monitor our portfolio and take action to sell underperforming assets where appropriate.
 
·
We still believe that once the turmoil in the CDO and mortgage markets subsides there will be some very attractive buying opportunities. We have directed resources towards evaluating acquisition of CDO securities but until there is more certainty around the actual performance of residential assets backing CDOs, any new purchases will likely be minimal.

 
The Redwood Review
2nd Quarter 2007
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CDO Securities
 
CDO Investment-Grade Securities

Quarterly Update
 

 
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CDO Securities
 
CDO
 
CDO Investment-Grade Securities

Quarterly Update


Ø  
Our total investment in CDO IGS decreased 7% during the second quarter, to $235 million from $254 million as a result of market value decreases totaling $19 million. There were no sales or acquisitions during the quarter.
 
Ø  
At June 30, 2007, $219 million of our CDO IGS portfolio was financed via securitization in our Acacia CDO program and the remaining $16 million was funded with capital.
 
Ø  
Interest income generated by the CDO IGS portfolio during the second quarter was $4.6 million, an increase of 20% over the $3.9 million generated in the first quarter of 2007. The yield for the second quarter was 7.08%, consistent with the previous quarter, as LIBOR interest rates have remained relatively stable. Substantially all of these assets earn a floating rate of interest based on the LIBOR interest rate.
 
Ø  
We have never incurred a principal loss on a CDO IGS security and we do not currently have credit reserves for these assets. However, we did record impairment charges totaling $6 million related to three CDO IGS assets during the second quarter.
 
Ø  
We use interest rate agreements to reduce mismatches of interest rate characteristics between the fixed-rate CDO IGS we own and the floating-rate CDO securities issued by Acacia to finance these assets.
 
 
The Redwood Review
2nd Quarter 2007
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CDO Securities
 
CDO Credit-Enhancement Securities

Quarterly Update

 
 
50
The Redwood Review
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CDO Securities
 
CDO
 
CDO Credit-Enhancement Securities
 
Quarterly Update

Ø  
Our CDO CES portfolio increased by $5 million due to acquisitions during the second quarter to $21 million, or 31% over the first quarter of 2007.
 
Ø  
At June 30, 2007, $13 million of CDO CES was financed via our Acacia CDO program and $8 million was financed with capital.
 
Ø  
Approximately 69% of the $21 million of CDO CES was backed by commercial real estate collateral.
 
Ø  
Interest income generated by CDO CES was $0.7 million for the second quarter. The yield for the quarter was 14.38%, an increase over the previous quarter’s yield of 10.84%. The underlying securities supporting our CES CDO investments continue to perform well.
 
 
The Redwood Review
2nd Quarter 2007
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Redwood Capital
 
Summary
 

What is this?
 
Our capital base includes equity plus $150 million subordinated notes (trust preferreds).
 
We use capital to fund operations and working capital, investments in illiquid or credit-sensitive assets, and to meet lender capital requirements with respect to the collateralized borrowings we undertake. We also hold capital as a reserve to meet liquidity needs that may arise.
 
Through our internal risk-adjusted capital policies, we estimate the amount of capital we need to manage our current book of business, and to set aside a prudent level of reserve capital. Any capital that exceeds our risk-adjusted capital guideline amount is excess capital that can be used to support business growth.
 

 

Insights

·
We had $158 million excess capital at June 30, 2007, an increase from $114 million at the beginning of the quarter. In part as a result of a successful Sequoia securitization of prime residential whole loans, our excess capital at the end of July increased to $200 million.
 
·
At the beginning of 2007, we anticipated net capital absorption of $200 million to $400 million for 2007. At this point, the outlook for capital absorption is uncertain due to market turmoil. The amount of capital we deploy will depend on the level of expected returns from possible acquisitions. Given our current acquisition plans, it is possible that we will finish the year at, or below, the lower end of that range.
 
·
It is also possible that large and exceptional opportunities may develop during the remainder of the year. If that occurs, we may utilize our current excess capital and also elect to raise additional capital, through the issuance of long-term debt or equity. Alternatively, if our stock price were to decline to a level that we deemed attractive relative to our opportunities to acquire new real estate assets, we would consider using some of our excess capital to repurchase shares.

 
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Redwood Capital
 
Capital
 
Quarterly Update

 

Ø  
Excess capital increased by $44 million to $158 million during the quarter. In the second quarter of 2007, uses of capital included asset acquisitions ($143 million) and dividends ($21 million). Sources of capital included asset sales ($22 million), principal payments ($45 million), debt issuance ($50 million), equity issuance ($37 million), earnings ($11 million), and other factors including recycling of capital ($43 million).
 
Ø  
Capital employed decreased in the first quarter from $910 million to $877 million as a result of market value changes that were recognized for GAAP.
 
Ø  
Market declines did not have a large effect on excess capital, since, for the most part, asset value declines result in an equal reduction of both total capital and also of capital required under our internal risk-adjusted capital guidelines.
 
Ø  
Some of the capital utilized during the quarter is currently used on a temporary basis in an inefficient manner to fund assets that would be more efficiently financed with debt or via securitization or to fund delinquent loans from called Sequoia securitizations. Over time, we hope to employ this capital more efficiently, freeing capital to support future growth.
 
Ø  
Our total capital base remained flat at $1.0 billion between March 31 and June 30. Issuance of new equity ($37 million) and subordinated debt ($50 million) offset market valuation adjustments ($75 million) and dividends ($21 million) and earnings ($11 million) for assets and derivatives that were recorded for GAAP.

 
The Redwood Review
2nd Quarter 2007
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Redwood Debt

Summary
 

What is this?
 
Redwood debt is all the debt incurred by Redwood Trust, with the exception of subordinated notes that we count as part of our capital base.
 

 
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Redwood Debt
 
Debt
 
Quarterly Update

Ø  
Redwood debt balances finished the second quarter of 2007 at $0.8 billion.
 
Ø  
At June 30, 2007, Redwood debt funded $0.7 billion residential whole loans and $0.1 billion securities.
 
Ø  
Interest expense for Redwood debt was $23 million for the second quarter. The cost of funds for Redwood’s debt was 5.99% for the second quarter and 5.68% for the first quarter. Our debt expense varies, due to short-term interest rates, the type of facility used, and the type of collateral financed.
 
Ø  
At June 30, 2007, all Redwood debt was short-term debt collateralized by the pledge of assets. Maturities are generally one year or less, and the interest rate usually adjusts to market levels each month.
 
Ø  
When we fund fixed-rate or hybrid-rate assets with Redwood debt, we may use interest rate agreements to reduce the interest rate mismatch between the asset and the liability.
 
Ø  
Commercial paper (CP) borrowings under our Madrona program are rated the highest CP rating of A1+/P1 and represent our lowest cost borrowings. At June 30, 2007, CP outstanding was $191 million. We had no CP outstanding at the end of July.
 
Ø  
Redwood’s debt obligations of $1.0 billion (including $150 million of subordinated notes) were 1.1 times Redwood’s equity of $876 million at June 30, 2007.
 
Ø  
At June 30, 2007, we had $83 million of unrestricted cash. We also had $878 million unsecuritized prime residential loans and $168 million of AAA-rated prime residential securities. Total short-term borrowings against these assets were $849 million. Since the end of the second quarter, we completed a securitization of residential loans through our Sequoia program. As a result of this and other activity, as of August 7, 2007, we had $231 million of unrestricted cash, $189 million unsecuritized residential loans, $330 million AAA-rated securities, and short-term borrowings of $472 million. We also owned other assets on an unencumbered basis, including CES, OREI, and retained assets from our Sequoia and Acacia securitizations.
 
 
The Redwood Review
2nd Quarter 2007
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Acacia CDO ABS Issued

Summary
 

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.
 

Insights

·
The market for new issuance CDO ABS securities is currently distressed. Dealer inventory has swelled and pricing on new securities has weakened in order to accommodate the lack of demand and increased risk associated with new deals backed by 2006 and 2007 vintage assets.
 
·
During the very difficult market conditions of the second quarter we successfully priced and issued two CDO ABS deals, Acacia Option ARM 1 and Acacia 12, with equity returns that are expected to meet or exceed our internal hurdle rates. Relative to other real estate CDO issuance in the second quarter, our Acacia CDO ABS securities were priced at lower, more attractive yields than other comparable CDO securities that priced during the quarter.
     
·
CDO ABS issuance comprised of commercial, mezzanine, and high grade backed collateral slowed dramatically during the second quarter. Total issuance decreased by 50% with issuance in the mezzanine sector being impacted most dramatically and posting a 75% decrease over the previous quarter.
     
·
Subsequent to the end of the second quarter, the credit rating agencies have been issuing credit watch and downgrade actions to reflect the recent deterioration in the mortgage markets. Additionally, the credit rating agencies have revised their rating criteria, which will put additional pressure on the new issuance markets.
 
·
In the short term, the continued dislocation within the mortgage sector, poor performance of 2006 vintage subprime collateral and related CDOs, credit rating agency actions, and lack of liquidity for CDO ABS could hinder our ability to issue new Acacia CDO ABS deals. However, we believe we should be able to continue to leverage our competitive advantages in the CDO business. These include the ability to acquire and hold CDO CES, a well-developed real estate investment and credit management infrastructure, access to collateral, access to warehouse and other inventory financings, a strong track record, and an excellent reputation. These competitive advantages should enable us to maintain our status as a market participant and quality issuer in the CDO ABS markets.
 
 
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Acacia CDO ABS Issued
 
ABS Issued
 
Insights (cont.)


·
Within our Acacia CDOs, we limited our exposure to the riskier 2006 and 2007 vintage subprime collateral. In the limited incidents where we did acquire subprime securities issued in 2006 and 2007, we focused our purchases in AA and A rated securities, with small exposure to BBB and BBB- rated securities.
 
·
Going forward, we believe Acacia’s issued CDO bonds are likely to perform well on an absolute basis and also relative to other CDO bonds.
 
 
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2nd Quarter 2007
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Acacia CDO ABS Issued
 
Quarterly Update
 

 
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Acacia CDO ABS Issued
 
ABS Issued
 
Quarterly Update


Ø  
Acacia CDO ABS outstanding increased from $2.8 billion to $3.5 billion during the second quarter of 2007, an increase of 25%. Acacia issued two new CDO ABS during the quarter, Acacia Option ARM 1 and Acacia 12, which experienced good investor participation and provided attractive funding costs for Redwood. Paydowns of Acacia CDO ABS issued were $259 million for the second quarter; of this amount, $242 million was attributable to the retirement of debt related to the Acacia 4 call.
 
Ø  
Spreads have continued to widen (yields increased) for both collateral assets and CDO liabilities beyond levels seen at the end of the first quarter of 2007. Uncertainty remains regarding the ultimate cost of new ABS CDO liabilities we might issue in the future.
 
Ø  
The cost of funds of issued Acacia CDO ABS was 6.00% in the second quarter of 2007 as compared to 6.20% for the first quarter of 2007. Interest expense, net of interest rate agreements, for Acacia ABS issued was $43 million for the second quarter of 2007.
 
Ø  
At June 30, 2007, the credit ratings for Acacia bonds outstanding were $2.7 billion AAA, $320 million AA, $201 million A, and $145 million BBB. In addition, Acacia has sold a portion of its unrated CDO CES (CDO equity) to third parties, of which $20 million was outstanding at June 30, 2007.
 
Ø  
During the quarter, two Acacia CDO 5 ABS were placed on credit watch positive, giving further credence to our reputation as a quality issuer in the CDO ABS market.
 
Ø  
Our collateral rating history continues to be strong. As of June 30, 2007, we have had 117 rating upgrades and three rating downgrades on all collateral within the existing Acacia program. In July 2007, there were 50 additional rating upgrades, two rating downgrades, and one credit watch negative.
 
Ø  
The Acacia CDO CES Redwood has acquired from Acacia had a market value of $117 million at June 30, 2007. 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 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.
 
Ø  
For GAAP financial reporting 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 $3.5 billion assets declined sufficiently, we could be required to record balance sheet charges in excess of the total amount that Redwood actually has invested. Conversely, we are not permitted to reflect an offsetting mark-to-market improvement in Acacia liability 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 valuation adjustment for assets and derivatives in closed Acacia transactions was $57 million for the second quarter.
 
Ø  
For managing the outstanding Acacia transactions, Redwood’s taxable asset management subsidiaries earned $1.5 million of asset management fees during the second quarter of 2007. This income was sourced from the assets owned by Acacia, and these assets are consolidated on our GAAP balance sheet. Thus, for GAAP purposes we currently include this asset management income as part of interest income.
 
Ø  
Additional information about Acacia CDO ABS issued can be found in Table 21 of the Appendix.
 
 
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Acacia CDO ABS Issued
 
Quarterly Update
 

 
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Acacia CDO ABS Issued
 
ABS Issued
 
Quarterly Update
 


 
The Redwood Review
2nd Quarter 2007
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Sequoia ABS Issued
 
Summary
 

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 IGS. When Redwood acquires Sequoia IO, we earn the net interest income created when the yield on Sequoia’s loans exceeds the 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.
 


Insights

·
We completed one Sequoia securitization in the second quarter and completed another Sequoia securitization that closed in July 2007.
 
·
Recent Sequoia ABS issued has been backed by prime hybrid and ARM mortgages.
 
·
In the second quarter, we called an older Sequoia transaction that was issued in 2004 and we may call more transactions in 2007 and 2008.
 
·
We expect to expand our residential conduit’s activities and to acquire alt-a and subprime loans, when appropriate, to be funded primarily through securitization.
 

 
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Sequoia ABS Issued
 
ABS Issued
 
Quarterly Update


Ø  
Sequoia ABS issued and outstanding remained flat at $7.2 billion in the second quarter. In the second quarter, the CPR for the loans owned by Sequoia entities was 37%.
 
Ø  
We completed one securitization during the second quarter, financing $407 million prime hybrid mortgages and $654 million prime ARM mortgages. In conjunction with the securitization, Sequoia issued $1 billion AAA-rated ABS and another $15 million of investment-grade ABS. The ABS had similar interest rate characteristics to the underlying loans, thus minimizing our interest rate risk. The current cost of funds on the newly issued ABS was 5.68%.
 
Ø  
In the second quarter, we called and retired $133 million ABS associated with a Sequoia securitization issued in early 2004. When we exercise the call option, Redwood acquires all the ABS that remains outstanding at par value. This securitization was canceled, the Sequoia entity was collapsed, and Redwood reacquired the underlying loans. Some of these loans were included in the 2007 Sequoia securitizations.
 
Ø  
Interest expense for Sequoia ABS issued was $98 million for the second quarter for a cost of funds of 5.42%.
 
Ø  
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 at June 30, included $54 million market value IO securities rated AAA, $52 million CES, and $12 million IGS. 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  
Additional information about Sequoia ABS issued can be found in Tables 19 and 20 of the Appendix.
 
 
The Redwood Review
2nd Quarter 2007
63

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.
 
 
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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 June 30, 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 June 30, 2007, our CES were first in line to absorb credit losses from the $290 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 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 IGS 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.
 

3.
We are increasing our investment in investment-grade rated real estate securities.
 
We have been 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 IGS 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 (IGS) rather than towards assets that cause us to carry concentrated credit risk (credit-enhancement securities).

 
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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.
 
Give recent market turmoil we may shift strategies over the next year to acquire more CES and credit-sensitive assets, especially if we can acquire assets at distressed pricing levels.
 

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% to 10% 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.
 
We are replacing some of our existing securitization funding with debt funding. In 2007 and 2008, we may 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 sometimes finance a portion of the loans we acquire from called deals with Redwood debt and hold them as an ongoing investment. The remainder we either re-securitize or sell.

 
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Redwood Business and Strategy


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.
 
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 IGS 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.

 
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Now the financial markets are experiencing turmoil due to falling housing prices and rising residential loan defaults. We will incur increased credit losses, but we are also in a position to acquire lower priced assets with higher return potential. We believe some competitors 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 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 $150 million of unsecured subordinated notes 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.
 
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% to 10% 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.
 
 
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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 barring significantly increased credit losses or material degradation of our business economics for another reason. 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.

 
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.
 
 
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Glossary


NOTE: Not all companies and analysts 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 generally consists of IGS and, in some pools, some 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 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 two 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, in an alt-a loan the borrower’s income may not be verified, and in some cases, may not be disclosed on the loan application. Alt-a loans may also have expanded criteria that allow for higher debt-to-income ratios with higher accompanying LTV than would otherwise be permissible for prime loans.
 
 
ASSET-BACKED SECURITIES (ABS)
 
ABS are securities backed by financial assets that generate cash flows. Each ABS issued from a securitization entity has a unique priority with respect to receiving principal and interest cash flows from the assets, and absorbing any credit losses, 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.

 
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Glossary
 
 
COLLATERALIZED DEBT OBLIGATION (CDO) SECURITIZATIONS
 
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 commercial real estate.
 
 
COMMERCIAL MEZZANINE LOANS
 
Commercial mezzanine loans are junior subordinated loans that are not secured by a lien on commercial real estate; rather, they are secured by a pledge from an equity entity of its equity interests in commercial real estate.
 
 
COMMERCIAL WHOLE LOANS
 
Commercial whole loans are unsecuritized first-lien loans that are secured by 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. For example, we sell assets from time to time as part of our ongoing portfolio management activities. These sales can produce material gains and losses that can obscure the underlying trend of our long-term portfolio earnings. Thus, we exclude realized gains (and losses) resulting from asset sales and calls that are included in GAAP income. Similarly, we exclude gains from calls of residential credit-enhancement securities, as these are essentially sales of assets. 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. Core earnings also exclude other, one-time expenses such as severance.
 
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 in the Appendix.
 
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Glossary
 
 
CORE EQUITY (CORE BOOK VALUE)
 
Core equity is not a measure calculated in accordance with GAAP. GAAP equity includes mark-to-market adjustments for certain of our assets and interest rate agreements (“accumulated other comprehensive income”). Core equity excludes these mark-to-market adjustments. 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.
 
 
CONSTANT (OR CONDITIONAL) PREPAYMENT RATE (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 because they carry 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 unrated. Other types of securitizations, such as commercial, CDO, subprime residential, and some alt-a residential transactions, are structured differently. Nevertheless, the non-investment rated securities 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 income-producing assets. They receive interest payments calculated by a formula wherein IO cash flows vary as a function of interest payments generated by the underlying assets 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 issued by that entity. Typically, IOs do not have a principal balance and they will not receive principal payments. Interest payments to IOs usually equal an 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 assets pays down, thus reducing the cash flows to the IO over time. IO cash flows are typically reduced more quickly if asset prepayments accelerate.
 

 
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Glossary
 
 
LEVERAGE RATIOS
 
We use collateralized debt to finance on the accumulation of inventory assets prior to sale to a securitization entity and to finance investments in high-quality loans and IGS. 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 Redwood’s financial leverage, 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.
 
 
MARK-TO-MARKET ACCOUNTING
 
Mark-to-market accounting uses estimated current fair market values of assets, liabilities, and hedges. Many of our assets currently are carried on our balance sheet at their market value rather than historical amortized cost. The changes in the fair market value of some of our assets and hedges are reported through our income statement. 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. As a result of this feature, the borrower’s loan balance may increase (causing negative amortization of the loan balance).
 
 
NET INTEREST MARGIN SECURITIES (NIMs)
 
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.

 
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Glossary

 
OPTION ARMS
 
See Negative Amortization Adjustable-rate mortgages
 
 
OTHER 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.

 
PRIME RESIDENTIAL REAL ESTATE LOANS
 
Prime loans are residential loans with high quality credit 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.

 
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Glossary

 
REAL ESTATE INVESTMENT TRUST (REIT)
 
A REIT is an entity that makes a tax election to be taxed as a REIT, invests in real estate assets, and meets other REIT qualifications, including the distribution as dividends of at least 90% of REIT taxable income. A REIT’s profits are not taxed at the corporate level 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 in 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 (up to 10% of total REIT taxable income). A reconciliation of REIT taxable income to GAAP income appears in Table 3 in 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 paid by 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.

 
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Glossary
 
 
RETURN ON EQUITY (ROE) AND ADJUSTED RETURN ON EQUITY
 
ROE is the amount of profit we generate each year per dollar of equity capital and equals GAAP income divided by GAAP equity. Adjusted ROE is GAAP income divided by core equity. Core equity excludes balance sheet mark-to-market adjustments. Thus, only those asset market value changes that are included in our income statement will affect adjusted ROE. A reconciliation of ROE to adjusted ROE appears in Table 8 in the Appendix.
 
 
SEQUOIA
 
Sequoia is the brand name for most of the securitizations of residential real estate loans we have sponsored.
 
 
SUBPRIME SECURITIES
 
Subprime securities are residential mortgage-backed securities backed by loans to borrowers who have impaired credit histories, but who appear to exhibit the ability to repay the current loan. Typically, these borrowers have lower credit scores and/or other credit deficiencies that prevent them from qualifying for prime or alt-a mortgages and may have experienced credit problems in the past, such as late payments or bankruptcies.. To compensate for the greater risks and higher costs to service the loans, subprime borrowers pay higher interest rates, points, and origination fees.
 
 
Typical characteristics of subprime loan pools include more than 60% of loans with FICO scores below 680; weighted average LTV over 85%; more than 70% of loans with LTV over 75%; loans with LTV over 80% with no mortgage insurance.
 
 
TAXABLE SUBSIDIARY
 
A taxable subsidiary is a subsidiary of a REIT that is not taxed as a REIT and thus pays taxes on its income. A taxable subsidiary is not limited to investing in real estate and it can choose to retain all of its after-tax profits.
 
 
TOTAL RETAINED TAXABLE INCOME
 
Total retained taxable income is not a measure calculated in accordance with GAAP. Total retained taxable income is the taxable income earned at the REIT after dividend distributions to shareholders, plus all of the taxable income earned at our taxable subsidiaries, less corporate income taxes and excise taxes paid. A reconciliation of total retained taxable income to GAAP income appears in Table 3 in the Appendix.
 
 
TOTAL TAXABLE INCOME
 
Total taxable income is not a measure calculated in accordance with GAAP. Total taxable income is pre-tax income for Redwood and all its subsidiaries as calculated for tax purposes. Taxable income calculations differ significantly from GAAP income calculations. The remainder of our total taxable income is income we earn in taxable subsidiaries. We pay income tax on this income and we generally retain the after-tax income at the subsidiary level. A reconciliation of total taxable income to GAAP income appears in Table 3 in the Appendix.
 
 
76
 
The Redwood Review
2nd Quarter 2007
 
 
Financial Tables
2nd Quarter 2007
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Page Intentionally Left Blank
 

 
78
 
The Redwood Review
2nd Quarter 2007
 

  
 
    
 
    
 
      
Six Months
Six Months
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
2007
2006
 
    
 
    
 
      
 
 
Interest income
$208,039
$207,906
$213,504
$217,504
$214,544
$224,795
$234,531
$246,810
$248,786
$415,945
$439,339
Net securities discount amortization income
23,849
20,268
18,665
17,842
13,234
13,245
10,971
11,523
8,049
44,117
26,479
Other real estate investment interest income
669
2,465
-
-
-
-
-
-
-
3,134
-
Non real estate investment interest income
464
-
-
-
-
-
-
-
-
464
-
Net loan premium amortization expense
(10,863)
(11,705)
(13,272)
(11,232)
(12,046)
(11,982)
(13,486)
(14,507)
(9,857)
(22,568)
(24,028)
(Provision for) reversal of credit reserve
(2,500)
(3,829)
(1,506)
(465)
2,506
(176)
(877)
805
1,527
(6,329)
2,330
Total GAAP interest income
219,658
215,105
217,391
223,649
218,238
225,882
231,139
244,631
248,505
434,763
444,120
 
    
 
    
 
      
 
 
Interest expense on Redwood debt
(22,700)
(31,094)
(16,520)
(9,422)
(1,822)
(2,072)
(3,521)
(3,789)
(1,789)
(53,794)
(3,894)
 
    
 
    
 
      
 
 
ABS interest expense consolidated from trusts
(140,512)
(131,391)
(152,043)
(165,177)
(171,659)
(178,183)
(186,433)
(190,996)
(191,966)
(271,903)
(349,842)
ABS issuance expense amortization
(5,681)
(7,068)
(7,897)
(5,786)
(6,079)
(5,907)
(6,069)
(5,162)
(5,386)
(12,749)
(11,986)
ABS interest rate agreement income
3,358
1,646
2,497
3,317
3,678
2,980
3,573
623
876
5,004
6,658
ABS issuance premium amortization income
2,294
1,869
1,529
2,395
2,363
2,527
2,793
2,733
3,140
4,163
4,890
Total consolidated ABS expense
(140,541)
(134,944)
(155,914)
(165,251)
(171,697)
(178,583)
(186,136)
(192,802)
(193,336)
(275,485)
(350,280)
 
    
 
    
 
      
 
 
Subordinated notes interest expense
(2,516)
(2,057)
(423)
-
-
-
-
-
-
(4,573)
-
 
    
 
    
 
      
 
 
GAAP net interest income
53,901
47,010
44,534
48,976
44,719
45,227
41,481
48,040
53,380
100,911
89,946
 
    
 
    
 
      
 
 
Fixed compensation expense
(4,286)
(4,616)
(3,688)
(3,437)
(3,310)
(3,437)
(2,879)
(2,802)
(2,623)
(8,902)
(6,747)
Variable compensation expense
(198)
(2,251)
(1,666)
(2,630)
(1,900)
(1,514)
(2,110)
(1,980)
(2,420)
(2,449)
(3,414)
Equity compensation expense
(3,540)
(3,349)
(3,233)
(2,579)
(2,991)
(2,694)
(2,793)
(2,145)
(2,657)
(6,889)
(5,685)
Severance expense
-
(2,380)
-
-
-
-
-
-
-
(2,380)
-
Other operating expense
(4,670)
(4,479)
(4,732)
(4,425)
(5,149)
(4,505)
(4,685)
(4,362)
(3,639)
(9,149)
(9,654)
Due diligence expenses
(78)
(707)
(532)
(384)
(2,687)
(432)
(298)
(1,075)
(117)
(785)
(3,119)
Total GAAP operating expenses
(12,772)
(17,782)
(13,851)
(13,455)
(16,037)
(12,582)
(12,765)
(12,364)
(11,456)
(30,554)
(28,619)
 
    
 
    
 
      
 
 
Realized gains on sales
1,428
303
5,308
4,968
8,241
1,062
14,815
23,053
516
1,731
9,303
Realized gains on calls
1,310
843
1,511
722
747
-
4,265
2,914
4,421
2,153
747
Unrealized market valuation adjustments
(29,430)
(10,264)
(1,404)
(5,257)
(2,995)
(2,932)
(1,205)
(1,051)
(1,892)
(39,694)
(5,927)
Net gains and valuation adjustments
(26,692)
(9,118)
5,415
433
5,993
(1,870)
17,875
24,916
3,045
(35,810)
4,123
 
    
 
    
 
      
 
 
Provision for income taxes
(3,021)
(1,801)
(407)
(3,538)
(3,265)
(2,760)
(4,097)
(4,693)
(4,054)
(4,822)
(6,025)
GAAP net income
$11,416
$18,309
$35,691
$32,416
$31,410
$28,015
$42,495
$55,899
$40,915
$29,725
$59,425
 
    
 
    
 
      
 
 
Diluted average shares
28,165
27,684
27,122
26,625
26,109
25,703
25,311
25,314
25,196
27,918
25,910
GAAP earnings per share
$0.41
$0.66
$1.32
$1.22
$1.20
$1.09
$1.68
$2.21
$1.62
$1.06
$2.29
 
 
The Redwood Review
2nd Quarter
Appendix
Table 1 - GAAP Earnings
79
 

  
 
  
 
      
 
      
Six Months
Six Months
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
2007
2006
 
  
 
      
 
      
 
 
GAAP net income
$11,416
$18,309
$35,691
$32,416
$31,410
$28,015
$42,495
$55,899
$40,915
$29,725
$59,425
GAAP income items not included in core earnings
  
 
      
 
      
 
 
Severance expense
-
(2,380)
-
-
-
-
-
-
-
(2,380)
-
Realized gains on sales
1,428
303
5,308
4,968
8,241
1,062
14,815
23,053
516
1,731
9,303
Realized gains on calls
1,310
843
1,511
722
747
-
4,265
2,914
4,421
2,153
747
Unrealized market valuation adjustments
(29,430)
(10,264)
(1,404)
(5,257)
(2,995)
(2,932)
(1,205)
(1,051)
(1,892)
(39,694)
(5,927)
Variable stock option market value change
-
-
-
-
-
-
25
16
(2)
-
-
Total GAAP / core earnings differences
(26,692)
(11,498)
5,415
433
5,993
(1,870)
17,900
24,932
3,043
(38,190)
4,123
 
    
 
 
 
 
 
 
 
 
 
 
Core earnings
$38,108
$29,807
$30,276
$31,983
$25,417
$29,885
$24,594
$30,967
$37,872
$67,915
$55,302
Per share analysis
  
 
      
 
      
 
 
GAAP earnings per share
$0.41
$0.66
$1.32
$1.22
$1.20
$1.09
$1.68
$2.21
$1.62
$1.06
$2.29
GAAP income items not included in core earnings
  
 
      
 
      
 
 
Severance expense
-
(0.09)
-
-
-
-
-
-
-
(0.09)
-
Realized gains on sales
0.05
0.01
0.20
0.19
0.32
0.04
0.59
0.91
0.02
0.06
0.36
Realized gains on calls
0.05
0.03
0.05
0.03
0.03
-
0.17
0.12
0.18
0.08
0.03
Valuation adjustments
(1.04)
(0.37)
(0.05)
(0.20)
(0.11)
(0.11)
(0.05)
(0.04)
(0.08)
(1.42)
(0.23)
Variable stock option market value change
-
-
-
-
-
-
-
-
-
-
-
GAAP / Core earnings differences per share
(0.94)
(0.42)
0.20
0.02
0.23
(0.07)
0.71
0.98
0.12
(1.37)
0.16
 
    
 
 
 
 
 
 
 
 
 
  
Core earnings per share
$1.35
$1.08
$1.12
$1.20
$0.97
$1.16
$0.97
$1.22
$1.50
$2.43
$2.13
 
 
 
 
 
 
 
 
 
 
 
 

 
The Redwood Review
2nd Quarter
Appendix
Table 2 - Core Earnings
80




  
 
Estimated
Estimated
 
Estimated
Estimated
Actual
Six Months
Six Months
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
2007
2006
 
  
 
 
    
 
 
  
 
 
 
GAAP net income
$11,416
$18,309
$35,691
$32,416
$31,410
$28,015
$42,495
$55,899
$40,915
$29,725
$59,425
Difference in Taxable Income Calculations
  
 
 
    
 
 
  
 
 
 
Amortization and credit losses (net interest income)
10,298
10,417
12,794
12,558
12,779
4,939
(1,314)
202
(7,079)
20,715
17,718
Operating expense differences
(2,921)
(1,713)
(12,090)
2,545
(288)
1,604
396
576
2,438
(4,634)
1,316
Realized gains on calls and sales
(4,735)
2,100
(5,073)
(1,141)
(699)
(613)
(5,959)
(8,582)
823
(2,635)
(1,312)
Unrealized market valuation adjustments
30,576
9,118
6,571
484
2,305
3,226
1,772
2,048
820
39,694
5,531
Income tax provisions
1,662
1,800
405
4,123
3,265
(703)
4,096
5,013
3,035
3,462
2,562
Total differences in GAAP / Tax income
34,880
21,722
2,607
18,569
17,362
8,453
(1,009)
(743)
37
56,602
25,815
 
 
 
 
 
 
 
 
 
 
 
 
Taxable Income
$46,296
$40,031
$38,298
$50,985
$48,772
$36,468
$41,486
$55,156
$40,952
$86,327
$85,240
 
  
 
 
    
 
 
  
 
 
 
 
  
 
 
    
 
 
  
 
 
 
 
  
 
 
    
 
 
  
 
 
 
REIT taxable income
$45,233
$35,112
$40,829
$45,751
$45,040
$35,382
$39,793
$47,118
$39,237
$80,345
$80,422
Taxable income in taxable subsidiaries
1,063
4,919
(2,531)
5,234
3,732
1,086
1,694
8,038
1,715
5,982
4,818
Total taxable income
$46,296
$40,031
$38,298
$50,985
$48,772
$36,468
$41,487
$55,156
$40,952
$86,327
$85,240
 
  
 
 
    
 
 
  
 
 
 
Retained REIT taxable income (after-tax)
$2,490
$1,933
$673
$2,500
$2,166
$1,313
$1,895
$1,164
$1,798
$4,423
$3,479
Retained taxable income in taxable subsidiaries (after-tax)
677
3,133
(953)
3,156
2,032
556
1,238
4,386
845
3,811
2,588
Total retained taxable income (after-tax)
$3,167
$5,066
($280)
$5,656
$4,198
$1,869
$3,133
$5,550
$2,643
$8,234
$6,067
 
  
 
      
 
 
  
 
 
 
Shares used for taxable EPS calculation
27,816
27,129
26,733
26,053
25,668
25,382
25,133
24,764
24,647
27,816
25,668
 
  
 
      
 
 
  
 
 
 
REIT taxable income per share
$1.63
$1.29
$1.53
$1.76
$1.75
$1.39
$1.58
$1.90
$1.59
$2.92
$3.14
Taxable income in taxable subsidiaries per share
$0.03
$0.19
($0.11)
$0.20
$0.16
$0.04
$0.07
$0.32
$0.07
$0.22
$0.20
Total taxable income per share
$1.66
$1.48
$1.42
$1.96
$1.91
$1.44
$1.65
$2.23
$1.66
$3.14
$3.35
 
  
 
      
 
 
  
 
 
 
Total retained taxable income (after-tax)
$0.11
$0.19
($0.01)
$0.22
$0.16
$0.07
$0.12
$0.22
$0.11
$0.30
$0.23
 
 
 
 
 
 
 
 
 
 
 
 

 
The Redwood Review
2nd Quarter
Appendix
Table 3 - Table Taxable Income and GAAP/Tax Differences
81




  
 
 
 
 
 
 
 
 
 
 
Estimated
Estimated
 
Estimated
Estimated
Actual
Six Months
Six Months
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
2007
2006
                       
Dividends declared
$20,862
$20,347
$97,665
$18,237
$17,967
$17,767
$92,150
$17,335
$17,253
$41,209
$35,734
Dividend deduction on stock issued through DRIP
933
660
812
177
239
176
263
128
112
1,593
415
Total dividend deductions
$21,795
$21,007
$98,477
$18,414
$18,206
$17,943
$92,413
$17,463
$17,365
$42,802
$36,149
 
  
 
      
 
      
 
 
Regular dividend per share
$0.75
$0.75
$0.70
$0.70
$0.70
$0.70
$0.70
$0.70
$0.70
$1.50
$1.40
Special dividend per share
-
-
3.00
-
-
-
3.00
-
-
-
-
Total dividends per share
$0.75
$0.75
$3.70
$0.70
$0.70
$0.70
$3.70
$0.70
$0.70
$1.50
$1.40
 
  
 
      
 
      
 
 
Undistributed REIT taxable income at beginning of period (pre-tax):
$60,490
$49,721
$111,248
$88,257
$65,687
$51,568
$106,719
$80,166
$62,218
$49,721
$51,568
REIT taxable income (pre-tax)
45,233
35,112
40,829
45,751
45,040
35,382
39,793
47,118
39,237
80,345
80,422
Permanently retained (pre-tax)
(4,297)
(3,336)
(3,879)
(4,346)
(4,263)
(3,320)
(2,531)
(3,102)
(3,924)
(7,633)
(7,583)
Dividend of 2004 income
-
-
-
-
-
-
-
(2,710)
(17,365)
-
-
Dividend of 2005 income
-
-
-
(15,418)
(18,207)
(17,943)
(92,413)
(14,753)
-
-
(36,150)
Dividend of 2006 income
(21,795)
(21,007)
(98,477)
(2,996)
-
-
-
-
-
(42,802)
-
Dividend of 2007 income
-
-
-
-
-
-
-
-
-
-
-
Undistributed REIT taxable income at period end (pre-tax):
$79,631
$60,490
$49,721
$111,248
$88,257
$65,687
$51,568
$106,719
$80,166
$79,631
$88,257
 
  
 
      
 
      
 
 
Undistributed REIT taxable income (pre-tax) at period end
  
 
      
 
      
 
 
From 2004's income
$-
$-
$-
$-
$-
$-
$-
$-
$2,710
$-
$-
From 2005's income
-
-
-
-
15,418
33,625
51,568
106,719
77,456
-
15,418
From 2006's income
6,919
28,714
49,721
111,248
72,839
32,062
-
-
-
6,919
72,839
From 2007's income
72,712
31,776
-
-
-
-
-
-
-
72,712
-
Total
$79,631
$60,490
$49,721
$111,248
$88,257
$65,687
$51,568
$106,719
$80,166
$79,631
$88,257
 
  
 
      
 
      
 
 
Shares outstanding at period end
27,816
27,129
26,733
26,053
25,668
25,382
25,133
24,764
24,647
27,816
25,668
Undistributed REIT taxable income (pre-tax)
  
 
      
 
      
 
 
per share outstanding at period end
$2.86
$2.23
$1.86
$4.27
$3.44
$2.59
$2.04
$4.31
$3.25
$2.86
$3.44

 
The Redwood Review
2nd Quarter
Appendix
Table 4 - Retention and Distribution of Taxable Income
82


  
 
 
 
    
 
 
    
 
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
Residential CES owned by Redwood
$259
$256
$230
$291
$403
$303
$309
$338
$469
Residential CES consolidated from Acacia
486
496
492
424
274
292
284
305
215
Total GAAP residential CES
$745
$752
$722
$715
$677
$595
$593
$643
$684
 
  
 
      
 
    
 
Residential loans owned by Redwood
$878
$1,256
$1,339
$520
$351
$87
$45
$17
$300
Residential loans consolidated from Sequoia
7,473
7,424
7,985
9,323
10,102
11,903
13,830
16,539
19,330
Total GAAP residential loans
$8,351
$8,680
$9,324
$9,843
$10,453
$11,990
$13,875
$16,556
$19,630
 
  
 
      
 
    
 
Residential IGS owned by Redwood
$204
$106
$318
$105
$206
$42
$151
$139
$140
Residential IGS consolidated from Acacia
1,958
1,920
1,379
1,369
1,184
1,305
1,109
1,140
1,053
Total GAAP residential IGS
$2,162
$2,026
$1,697
$1,474
$1,390
$1,347
$1,260
$1,279
$1,193
 
  
 
      
 
    
 
Commercial CES owned by Redwood
$180
$189
$224
$156
$93
$68
$59
$98
$79
Commercial CES consolidated from Acacia
271
246
224
224
178
156
160
89
59
Total GAAP commercial CES
$451
$435
$448
$380
$271
$224
$219
$187
$138
 
  
 
      
 
    
 
Commercial loans owned by Redwood
$0
$0
$2
$2
$2
$2
$7
$21
$16
Commercial loans consolidated from securitization
26
26
26
30
36
53
53
35
26
Total GAAP commercial loans
$26
$26
$28
$32
$38
$55
$60
$56
$42
 
  
 
      
 
    
 
Commercial IGS owned by Redwood
$6
$9
$0
$0
$1
$3
$6
$23
$10
Commercial IGS consolidated from Acacia
105
107
120
135
130
182
179
200
208
Total GAAP commercial IGS
$111
$116
$120
$135
$131
$185
$185
$223
$218
 
  
 
      
 
    
 
CDO CES owned by Redwood
$8
$4
$9
$10
$5
$5
$5
$12
$2
CDO CES consolidated from Acacia
13
12
13
13
10
9
7
-
-
Total GAAP CDO CES
$21
$16
$22
$23
$15
$14
$12
$12
$2
 
  
 
      
 
    
 
CDO IGS owned by Redwood
$16
$20
$14
$2
$17
$4
$6
$5
$6
CDO IGS consolidated from Acacia
219
234
210
183
160
160
145
141
143
Total GAAP CDO IGS
$235
$254
$224
$185
$177
$164
$151
$146
$149
 
  
 
      
 
    
 
Other real estate investments owned by Redwood
$32
$47
$0
$0
$0
$0
$0
$0
$0
Other real estate investments consolidated from Acacia
2
3
-
-
-
-
-
-
-
Total other real estate investments
$34
$50
$0
$0
$0
$0
$0
$0
$0
 
  
 
      
 
    
 
Non-real estate investments owned by Redwood
$0
$0
$0
$0
$0
$0
$0
$0
$0
Non-real estate investments consolidated from Acacia
80
-
-
-
-
-
-
-
-
Total non-real estate investments
$80
$0
$0
$0
$0
$0
$0
$0
$0
 
  
 
      
 
    
 
Cash owned by Redwood
$83
$92
$168
$113
$106
$85
$176
$163
$72
Restricted cash consolidated from entities
207
340
112
139
86
131
72
59
48
Accrued interest receivable
57
65
71
67
67
73
76
80
85
Principal receivable
4
7
4
1
1
2
-
2
-
Derivative assets
41
18
27
30
54
48
31
25
13
Deferred tax asset
5
6
5
3
5
5
5
8
7
Deferred asset-backed security issuance costs
49
41
42
47
46
52
54
56
59
Other assets
19
23
16
13
13
10
8
10
6
Total GAAP assets
$12,681
$12,947
$13,030
$13,200
$13,530
$14,979
$16,777
$19,505
$22,346
 
  
 
      
 
    
 
Residential CES owned by Redwood
$259
$256
$230
$291
$403
$303
$309
$338
$469
Residential loans owned by Redwood
878
1,256
1,339
520
351
87
45
17
300
Residential IGS owned by Redwood
204
106
318
105
206
42
151
139
140
Commercial CES owned by Redwood
180
189
224
156
93
68
59
98
79
Commercial loans owned by Redwood
-
-
2
2
2
2
7
21
16
Commercial IGS owned by Redwood
6
9
-
-
1
3
6
23
10
CDO CES owned by Redwood
8
4
9
10
5
5
5
12
2
CDO IGS owned by Redwood
16
20
14
2
17
4
6
5
6
Other real estate investments owned by Redwood
32
47
-
-
-
-
-
-
-
Cash owned by Redwood
83
92
168
113
106
85
176
163
72
Total assets owned by Redwood
1,666
1,979
2,304
1,199
1,184
599
764
816
1,094
Assets of securitizations for GAAP
10,553
10,468
10,449
11,701
12,074
14,060
15,767
18,449
21,034
ABS liabilities of entities for GAAP
(10,675)
(9,947)
(9,979)
(11,554)
(11,898)
(13,930)
(15,585)
(18,237)
(20,815)
Redwood earning assets - GAAP basis
$1,544
$2,500
$2,774
$1,346
$1,360
$729
$946
$1,028
$1,313

 
The Redwood Review
2nd Quarter
Appendix
Table 5 - Assets
83




  
 
 
 
 
 
 
 
 
 
 
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
 
    
 
    
 
    
 
Redwood debt
$658
$1,630
$1,556
$510
$529
$0
$170
$162
$453
Madrona commercial paper
191
250
300
-
-
-
-
-
-
Total Redwood debt
849
1,880
1,856
510
529
-
170
162
453
 
    
 
    
 
    
 
ABS issued, consolidated from entities
10,630
9,890
9,907
11,466
11,775
13,788
15,422
18,049
20,598
Unamortized IO issuance premium
51
62
75
90
106
124
143
163
186
Unamortized ABS issuance premium (discount)
(6)
(5)
(3)
(2)
17
18
20
25
31
ABS obligations of entities
10,675
9,947
9,979
11,554
11,898
13,930
15,585
18,237
20,815
 
    
 
    
 
    
 
Subordinated notes
150
100
100
-
-
-
-
-
-
 
    
 
    
 
    
 
Accrued interest payable
48
52
50
51
47
43
41
42
43
Interest rate agreements
6
7
6
6
4
0
1
1
3
Accrued expenses and other liabilities
56
17
17
18
29
21
28
30
23
Dividends payable
21
20
19
18
18
18
17
17
17
Total GAAP liabilities
11,805
12,023
12,027
12,157
12,525
14,012
15,842
18,489
21,354
 
    
 
    
 
    
 
 
    
 
    
 
    
 
Common stock and paid-in capital
965
928
904
875
853.9
839
825
808
803
Accumulated other comprehensive income
(81)
(6)
93
95
91
82
74
117
137
Cumulative GAAP earnings
839
827
809
773
740.41
709
681
639
583
Cumulative distributions to shareholders
(847)
(825)
(803)
(700)
(681)
(663)
(645)
(548)
(531)
GAAP stockholders' equity
876
924
1,003
1,043
1,004
967
935
1,016
992
 
    
 
    
 
    
 
Total GAAP liabilities and equity
$12,681
$12,947
$13,030
$13,200
$13,530
$14,979
$16,777
$19,505
$22,346
 
    
 
    
 
    
 
Total Redwood debt
$849
$1,880
$1,856
$510
$529
$0
$170
$162
$453
Subordinated notes
150
100
100
-
-
-
-
-
-
Redwood obligations
$999
$1,980
$1,956
$510
$529
$0
$170
$162
$453
 
    
 
    
 
    
 
GAAP stockholders' equity
$876
$924
$1,003
$1,043
$1,004
$967
$935
$1,016
$992
 
    
 
    
 
    
 
Redwood obligations to equity
1.1
2.1
2.0
0.5
0.5
-
0.2
0.2
0.5
Redwood obligations to (equity + Redwood obligations)
53%
68%
66%
33%
35%
0%
15%
14%
31%
 
    
 
    
 
    
 
Redwood obligations
$999
$1,980
$1,956
$510
$529
$0
$170
$162
$453
ABS obligations of consolidated entities
10,675
9,947
9,979
11,554
11,898
13,930
15,585
18,237
20,815
GAAP debt
$11,674
$11,927
$11,935
$12,064
$12,427
$13,930
$15,755
$18,399
$21,268
 
    
 
    
 
    
 
GAAP debt to equity
13.3
12.9
11.9
11.6
12.4
14.4
16.9
18.1
21.4
GAAP debt to (equity + GAAP debt)
93%
93%
92%
92%
93%
94%
94%
95%
96%
 
 
 
 
 
 
 
 
 
 

 
The Redwood Review
2nd Quarter
Appendix
Table 6 - Liabilities and Equity
84

     
  
 
    
 
      
 
 
 
Six Months
Six Months
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
2007
2006
 
    
 
      
 
  
 
 
 
GAAP stockholders' equity
$876,084
$924,040
$1,002,690
$1,042,661
$1,004,265
$967,333
$934,960
$1,016,065
$991,757
$876,084
$1,004,265
Balance sheet mark-to-market adjustments
(80,913)
(6,183)
93,158
94,780
90,937
81,591
73,731
117,043
137,380
(80,913)
90,937
Core equity
$956,997
$930,223
$909,532
$947,881
$913,328
$885,742
$861,229
$899,022
$854,377
$956,997
$913,328
 
    
 
      
 
  
 
 
 
Shares outstanding at quarter end
27,816
27,129
26,733
26,053
25,668
25,382
25,133
24,764
24,647
27,816
25,668
 
    
 
      
 
  
 
 
 
GAAP equity per share
$31.50
$34.06
$37.51
$40.02
$39.13
$38.11
$37.20
$41.03
$40.24
31.50
$39.13
Core equity per share
$34.40
$34.29
$34.02
$36.38
$35.58
$34.90
$34.27
$36.30
$34.66
34.40
$35.58
 
    
 
      
 
  
 
 
 
Net interest income
$53,901
$47,010
$44,534
$48,976
$44,719
$45,227
$41,481
$48,040
$53,380
$100,911
$89,946
Net interest income / average core equity
22.66%
20.33%
19.28%
21.02%
19.91%
20.62%
18.85%
21.82%
25.42%
21.51%
20.26%
 
    
 
      
 
  
 
 
 
Operating expenses (excluding severance expense)
$12,772
$15,402
$13,851
$13,455
$16,037
$12,582
$12,765
$12,364
$11,456
$28,174
$28,619
 
    
 
      
 
  
 
 
 
Average total assets
$12,688,468
$12,865,979
$13,041,794
$13,480,361
$14,168,755
$15,839,483
$18,348,681
$20,991,299
$23,365,553
$12,779,089
$14,999,505
Average total equity
$946,454
$1,008,688
$1,008,863
$1,011,609
$980,402
$952,230
$999,313
$1,014,329
$970,344
$977,068
$966,394
 
    
 
      
 
  
 
 
 
Operating expenses / net interest income
23.70%
32.76%
31.10%
27.47%
35.86%
27.82%
30.77%
25.74%
21.46%
27.92%
31.82%
Operating expenses / average total assets
0.40%
0.48%
0.42%
0.40%
0.45%
0.32%
0.28%
0.24%
0.20%
0.44%
0.38%
Operating expenses / average total equity
5.40%
6.11%
5.49%
5.32%
6.54%
5.29%
5.11%
4.88%
4.72%
5.77%
5.92%
 
    
 
      
 
  
 
 
 
GAAP net income
$11,416
$18,309
$35,691
$32,416
$31,410
$28,015
$42,495
$55,899
$40,915
$29,725
$59,425
GAAP net income / average total assets
0.36%
0.57%
1.09%
0.96%
0.89%
0.71%
0.93%
1.07%
0.70%
0.47%
0.79%
GAAP net income / average equity (GAAP ROE)
4.82%
7.26%
14.15%
12.44%
12.51%
11.58%
18.18%
22.01%
16.50%
6.08%
12.30%
GAAP net income / average core equity (adjusted ROE)
4.80%
7.92%
15.45%
13.91%
13.98%
12.77%
19.31%
25.39%
19.48%
6.34%
13.39%
 
    
 
      
 
  
 
 
 
Core earnings
$38,108
$29,807
$30,276
$31,983
$25,417
$29,885
$24,594
$30,967
$37,872
$67,915
$55,302
Average core equity
$951,378
$925,128
$923,856
$932,030
$898,409
$877,212
$880,329
$880,482
$840,098
$938,212
$887,870
Core earnings / average core equity (core ROE)
16.02%
12.89%
13.11%
13.73%
11.32%
13.63%
11.18%
14.07%
18.03%
14.48%
12.46%
 
 
 
 
      
 
  
 
 
 
Interest income
$219,658
$215,105
$217,391
$223,649
$218,238
$225,882
$231,139
$244,631
$248,505
$434,763
$444,120
Average consolidated earning assets
$12,301,562
$12,279,814
$12,498,889
$12,860,488
$13,581,710
$15,229,790
$17,542,352
$20,085,392
$22,606,037
$12,291,559
$14,401,199
Asset yield
7.14%
7.01%
6.96%
6.96%
6.43%
5.93%
5.27%
4.87%
4.40%
7.07%
6.17%
 
    
 
      
 
  
 
 
 
Interest expense
($165,757)
($168,095)
($172,434)
($174,673)
($173,519)
($180,655)
($189,657)
($196,591)
($195,125)
($333,852)
($354,174)
Average consolidated interest-bearing liabilities
$11,580,196
$11,623,627
$11,836,717
$12,332,390
$13,055,417
$14,800,315
$17,194,545
$19,840,201
$22,283,915
$11,603,779
$13,923,046
Cost of funds
5.73%
5.78%
5.83%
5.67%
5.32%
4.88%
4.41%
3.96%
3.50%
5.75%
5.09%
 
    
 
      
 
  
 
 
 
Asset yield
7.14%
7.01%
6.96%
6.96%
6.43%
5.93%
5.27%
4.87%
4.40%
7.07%
6.17%
Cost of funds
-5.73%
-5.78%
-5.84%
-5.67%
-5.32%
-4.88%
-4.41%
-3.96%
-3.50%
-5.75%
-5.09%
Interest rate spread
1.42%
1.22%
1.12%
1.29%
1.11%
1.05%
0.86%
0.91%
0.89%
1.32%
1.08%
 
    
 
      
 
  
 
 
 
Net interest income
$53,901
$47,010
$44,534
$48,976
$44,719
$45,227
$41,481
$48,040
$53,380
$100,911
$89,946
Average consolidated earning assets
$12,301,562
$12,279,814
$12,498,889
$12,860,488
$13,581,710
$15,229,790
$17,542,352
$20,085,392
$22,606,037
$12,291,559
$14,401,199
Net interest margin
1.75%
1.53%
1.43%
1.52%
1.32%
1.19%
0.95%
0.96%
0.94%
1.64%
1.25%
 
 
 
 
 
 
 
 
 
 
 
 

 
The Redwood Review
2nd Quarter
Appendix
Table 7 - Book Value and Profitability Ratios
85




  
 
 
 
 
 
 
  
 
 
 
Six Months
Six Months
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
2007
2006
Average GAAP balances
    
 
      
 
  
 
 
 
Residential CES
$695,709
$673,114
$654,909
$641,694
$573,253
$516,962
$517,138
$567,689
$531,456
$684,474
$545,108
Residential loans
8,232,476
8,704,147
9,212,346
9,947,068
10,789,275
12,542,519
14,821,587
17,597,906
20,312,485
8,467,009
11,661,054
Residential IGS
2,119,280
1,795,130
1,513,794
1,404,281
1,358,453
1,299,933
1,263,277
1,219,034
1,122,945
1,958,101
1,329,514
Commercial CES
456,039
426,121
364,405
328,211
253,429
215,769
191,586
152,641
123,390
441,163
234,599
Commercial loans
25,846
28,186
29,571
32,194
42,912
56,777
59,049
47,703
45,214
27,009
49,807
Commercial IGS
118,231
122,099
106,902
128,355
132,154
181,549
188,445
215,109
204,247
120,154
156,852
CDO CES
18,365
18,348
19,539
20,999
13,950
14,709
12,231
11,892
2,816
18,357
14,330
CDO IGS
262,005
230,684
198,749
174,363
171,687
157,570
149,660
138,996
138,777
246,431
164,629
Other real estate investments
44,061
37,169
-
-
-
-
-
-
-
40,634
-
Non real Estate Investments
38,681
-
-
-
-
-
-
-
-
19,448
-
Cash and cash equivalents
290,869
244,816
398,674
183,323
246,597
244,002
339,379
134,422
124,707
268,779
245,306
Earning assets
12,301,562
12,279,814
12,498,889
12,860,488
13,581,710
15,229,790
17,542,352
20,085,392
22,606,037
12,291,559
14,401,199
Other assets
386,906
586,165
542,905
619,873
587,045
609,693
806,329
905,907
759,516
487,530
598,306
Total assets
$12,688,468
$12,865,979
$13,041,794
$13,480,361
$14,168,755
$15,839,483
$18,348,681
$20,991,299
$23,365,553
$12,779,089
$14,999,505
 
    
 
      
 
  
 
 
 
 
    
 
      
 
  
 
 
 
Redwood debt
$1,515,988
$2,188,561
$1,090,480
$647,978
$85,616
$137,181
$253,302
$297,788
$216,639
$1,850,144
$111,256
Subordinated notes
117,934
97,013
21,401
-
-
-
-
-
-
107,531
-
ABS obligations of entities
9,946,274
9,338,053
10,724,837
11,684,412
12,969,801
14,663,134
16,941,243
19,542,413
22,067,276
9,646,104
13,811,790
Other liabilities
161,819
233,664
196,214
136,362
132,936
86,938
154,823
136,769
111,294
198,242
110,065
Total liabilities
11,742,015
11,857,291
12,032,931
12,468,752
13,188,353
14,887,253
17,349,368
19,976,970
22,395,209
11,802,021
14,033,111
 
    
 
      
 
  
 
 
 
Core equity
951,378
925,128
923,856
932,030
898,409
877,212
880,329
880,482
840,098
938,212
887,870
Balance sheet mark-to-market adjustments
(4,924)
83,560
85,007
79,579
81,993
75,018
118,984
133,847
130,246
38,856
78,525
Total equity
946,454
1,008,688
1,008,863
1,011,609
980,402
952,230
999,313
1,014,329
970,344
977,068
966,394
Total liabilities and equity
$12,688,468
$12,865,979
$13,041,794
$13,480,361
$14,168,755
$15,839,483
$18,348,681
$20,991,299
$23,365,553
$12,779,089
$14,999,505

 
The Redwood Review
2nd Quarter
Appendix
Table 8 Average Balance Sheet
86


Table 9 - Balances & Yields by Portfolio ($ in thousands)

    
Residential IGS
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$2,276,704
$2,094,494
$1,708,607
$1,484,095
$1,406,195
$1,361,245
$1,273,985
$1,282,132
$1,189,207
  
Unamortized discount
(32,187)
(19,617)
(16,382)
(17,362)
(18,788)
(19,874)
(11,595)
(13,970)
(12,165)
  
Credit protection
-
-
-
-
-
-
-
-
-
 
Unrealized market value gains/(losses)
(81,571)
(49,027)
5,025
8,270
2,609
5,304
(2,300)
11,082
16,252
 
Net book value
$2,162,946
$2,025,850
$1,697,250
$1,475,002
$1,390,016
$1,346,675
$1,260,090
$1,279,244
$1,193,294
 
                     
Average balance
$2,119,280
$1,795,130
$1,513,794
$1,404,281
$1,358,453
$1,299,933
$1,263,277
$1,219,034
$1,122,945
  
Interest income
$36,061
$29,420
$25,626
$24,961
$22,287
$20,180
$18,148
$16,942
$13,909
  
Yield
6.80%
6.56%
6.77%
7.11%
6.56%
6.21%
5.75%
5.56%
4.95%
  
                     
Residential CES
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$1,291,193
$1,259,446
$1,180,605
$1,183,142
$1,168,602
$1,034,069
$1,013,793
$1,029,786
$1,079,323
  
Unamortized discount
(125,948)
(158,664)
(144,842)
(140,585)
(116,702)
(108,371)
(121,824)
(84,084)
(90,716)
  
Credit protection
(453,076)
(392,768)
(372,247)
(384,397)
(425,578)
(373,781)
(354,610)
(382,862)
(404,180)
  
Unrealized market value gains/(losses)
32,806
44,263
58,015
57,495
50,854
43,522
55,193
80,867
99,380
 
Net book value
$744,975
$752,277
$721,531
$715,655
$677,176
$595,439
$592,552
$643,707
$683,807
 
                     
Average balance
$695,709
$673,114
$654,909
$641,694
$573,253
$516,962
$517,138
$567,689
$531,456
  
Interest income
$40,885
$37,664
$35,650
$34,585
$28,059
$26,245
$22,556
$23,640
$18,778
  
Yield
23.51%
22.38%
21.77%
21.56%
19.58%
20.31%
17.45%
16.66%
14.13%
  
                     
Other Real Estate Investments
                    
Other Real Estate Investments
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$33,340
$38,670
-
-
-
-
-
-
-
 
Unamortized premium
-
-
-
-
-
-
-
-
-
 
Credit protection
-
-
-
-
-
-
-
-
-
 
Unrealized market value gains/(losses)
828
11,387
-
-
-
-
-
-
-
 
Net book value
$34,168
$50,057
-
-
-
-
-
-
-
 
     
-
-
-
-
-
-
-
 
Average balance
$44,061
$37,169
-
-
-
-
-
-
-
 
Interest income
$669
$2,465
-
-
-
-
-
-
-
 
Yield
6.07%
26.53%
-
-
-
-
-
-
-
 
                     
 
The Redwood Review
2nd Quarter
Appendix
Table 9 - Balances and Yields by Portfolio
87



Table 9 - Balances & Yields by Portfolio ($ in thousands)
 
  
Residential Real Estate Loans
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$8,269,306
$8,582,964
$9,212,002
$9,718,985
$10,318,641
$11,846,454
$13,719,242
$16,386,833
$19,443,387
  
Unamortized premium
98,757
117,477
132,052
143,135
155,101
166,134
178,206
191,513
210,137
 
Credit protection
(16,416)
(19,954)
(20,119)
(19,326)
(19,450)
(22,372)
(22,656)
(22,029)
(22,959)
  
Unrealized market value gains/(losses)
-
-
-
-
-
-
-
-
-
 
Net book value
$8,351,647
$8,680,487
$9,323,935
$9,842,794
$10,454,292
$11,990,216
$13,874,792
$16,556,317
$19,630,565
 
                     
Average balance
$8,232,476
$8,704,147
$9,212,346
$9,947,068
$10,789,275
$12,542,519
$14,821,587
$17,597,906
$20,312,485
  
Interest income
$119,157
$129,143
$137,568
$148,494
$154,160
$165,664
$176,599
$193,621
$206,263
  
Yield
5.79%
5.93%
5.97%
5.97%
5.72%
5.28%
4.77%
4.40%
4.06%
  
                     
Commercial CES
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$880,987
$792,240
$793,743
$667,512
$486,622
$407,466
$383,334
$323,724
$222,522
  
Unamortized discount
(95,346)
(71,455)
(71,424)
(48,712)
(28,184)
(20,473)
(28,993)
(2,428)
(8,062)
  
Credit protection
(310,745)
(294,466)
(295,340)
(258,382)
(192,134)
(167,772)
(141,806)
(138,530)
(87,210)
  
Unrealized market value gains/(losses)
(23,955)
9,063
21,081
19,449
4,939
4,081
6,321
4,462
10,779
 
Net book value
$450,941
$435,382
$448,060
$379,867
$271,243
$223,302
$218,856
$187,228
$138,029
 
                     
Average balance
$456,039
$426,121
$364,405
$328,211
$253,429
$215,769
$191,586
$152,641
$123,390
  
Interest income
$11,119
$10,140
$8,170
$7,381
$5,581
$4,268
$3,927
$2,747
$2,811
  
Yield
9.75%
9.52%
8.97%
9.00%
8.81%
7.91%
8.20%
7.20%
9.11%
  
                     
Commercial IGS
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$121,131
$121,737
$122,869
$133,361
$134,244
$182,041
$180,213
$209,524
$199,957
  
Unamortized premium/ (discount)
(3,103)
(3,172)
(3,367)
701
727
5,295
8,100
13,303
14,129
 
Credit protection
-
-
-
-
-
-
-
-
-
 
Unrealized market value gains/(losses)
(6,884)
(2,071)
111
577
(3,937)
(2,936)
(3,281)
(44)
3,762
 
Net book value
$111,144
$116,494
$119,613
$134,639
$131,034
$184,400
$185,032
$222,783
$217,848
 
                     
Average balance
$118,231
$122,099
$106,902
$128,355
$132,154
$181,549
$188,445
$215,109
$204,247
  
Interest income
$1,827
$1,875
$2,344
$2,342
$2,133
$2,880
$3,102
$3,398
$3,036
  
Yield
6.18%
6.14%
8.77%
7.30%
6.46%
6.35%
6.58%
6.32%
5.95%
  
                     

 
The Redwood Review
2nd Quarter
Appendix
Table 9 Balances and Yields by Portfolio
88



Table 9 - Balances & Yields by Portfolio ($ in thousands)

  
Commercial Loans
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$38,311
$38,394
$38,360
$42,384
$46,959
$65,508
$70,091
$66,348
$51,778
  
Unamortized discount
(1,995)
(2,022)
(2,047)
(2,073)
(2,096)
(2,200)
(2,258)
(2,105)
(1,843)
  
Credit protection
(10,489)
(10,489)
(8,141)
(8,141)
(8,141)
(8,141)
(8,141)
(8,141)
(8,141)
  
Unrealized market value gains/(losses)
-
-
-
-
-
-
-
-
-
 
Net book value
$25,827
$25,883
$28,172
$32,170
$36,722
$55,167
$59,692
$56,102
$41,794
 
                     
Average balance
$25,846
$28,186
$29,571
$32,194
$42,912
$56,777
$59,049
$47,703
$45,214
  
Interest (loss) income
$419
(2,293)
$409
$524
$812
$1,238
$1,281
$1,209
$1,208
  
Yield
6.48%
-32.54%
5.53%
6.51%
7.57%
8.72%
8.68%
10.14%
10.69%
  
                     
CDO CES
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$31,381
$23,731
$28,731
$29,231
$22,226
$23,226
$20,226
$20,226
$10,184
  
Unamortized discount
(9,955)
(7,004)
(6,889)
(7,298)
(7,978)
(8,048)
(8,004)
(7,907)
(7,232)
  
Credit protection
-
-
-
-
-
-
-
-
-
 
Unrealized market value gains/(losses)
(293)
(575)
122
326
470
(436)
(484)
144
(187)
  
Net book value
$21,133
$16,152
$21,964
$22,259
$14,718
$14,742
$11,738
$12,463
$2,765
 
                     
Average balance
$18,365
$18,348
$19,539
$20,999
$13,950
$14,709
$12,231
$11,892
$2,816
  
Interest income
$660
$497
$570
$609
$236
$439
$125
$131
$127
  
Yield
14.38%
10.84%
11.67%
11.60%
6.77%
11.94%
4.09%
4.41%
18.04%
  
     
 
 
            
CDO IGS
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$262,881
$263,237
$222,413
$182,352
$175,586
$162,844
$149,812
$144,246
$145,933
  
Unamortized discount
(7,096)
(945)
(238)
(236)
(241)
(249)
(257)
(264)
(470)
  
Credit protection
-
-
-
-
-
-
-
-
-
 
Unrealized market value gains/(losses)
(21,152)
(7,985)
2,174
2,826
1,718
944
1,092
2,362
3,221
 
Net book value
$234,633
$254,307
$224,349
$184,942
$177,063
$163,539
$150,647
$146,344
$148,684
 
                     
Average balance
$262,005
$230,684
$198,749
$174,363
$171,687
$157,570
$149,660
$138,996
$138,777
  
Interest income
$4,641
$3,862
$3,335
$2,881
$2,099
$2,491
$2,571
$1,953
$1,569
  
Yield
7.08%
6.70%
6.71%
6.61%
4.89%
6.32%
6.87%
5.62%
4.52%
  
                     

 
The Redwood Review
2nd Quarter
Appendix
Table 9 Balances and Yields by Portfolio
89



Table 9 - Balances & Yields by Portfolio ($ in thousands)

  
Non Real Estate Investments
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$80,000
-
-
-
-
-
-
-
-
 
Unamortized premium/ (discount)
-
-
-
-
-
-
-
-
-
 
Credit protection
-
-
-
-
-
-
-
-
-
 
Unrealized market value gains/(losses)
-
-
-
-
-
-
-
-
-
 
Net book value
$80,000
-
-
-
-
-
-
-
-
 
                     
Average balance
$38,681
$0
$0
$0
$0
$0
$0
$0
$0
  
Interest income
$464
$0
$0
$0
$0
$0
$0
$0
$0
  
Yield
4.80%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
  
                     
Cash & Equivalents
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$82,626
$91,656
$168,016
$112,926
$106,491
$85,466
$175,885
$163,160
$72,193
  
Unamortized premium/ (discount)
-
-
-
-
-
-
-
-
-
 
Credit protection
-
-
-
-
-
-
-
-
-
 
Unrealized market value gains/(losses)
-
-
-
-
-
-
-
-
-
 
Net book value
$82,626
$91,656
$168,016
$112,926
$106,491
$85,466
$175,885
$163,160
$72,193
 
                     
Average balance
$290,869
$244,816
$398,674
$183,323
$246,597
$244,002
$339,379
$134,422
$124,707
  
Interest income
$3,756
$2,332
$3,719
$1,872
$2,871
$2,477
$2,830
$990
$804
  
Yield
5.17%
3.81%
3.73%
4.08%
4.66%
4.06%
3.34%
2.95%
2.58%
  
                     
Total Earning Assets (GAAP)
                    
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Current face
$13,367,860
$13,306,569
$13,475,346
$13,553,988
$13,865,566
$15,168,319
$16,986,581
$19,625,979
$22,414,484
  
Unamortized premium/ (discount)
(176,873)
(129,027)
(113,137)
(72,430)
(18,161)
12,214
13,375
94,058
103,778
 
Credit protection
(790,726)
(717,677)
(695,847)
(670,246)
(645,303)
(572,066)
(527,213)
(551,562)
(522,490)
  
Unrealized market value gains/(losses)
(100,221)
(11,320)
86,528
88,943
56,653
50,479
56,541
98,873
133,207
 
Net book value
$12,300,040
$12,448,545
$12,752,890
$12,900,255
$13,258,755
$14,658,946
$16,529,284
$19,267,348
$22,128,979
 
                     
Average balance
$12,301,562
$12,279,814
$12,498,889
$12,860,487
$13,581,710
$15,229,790
$17,542,352
$20,085,392
$22,606,037
  
Interest income
$219,658
$215,105
$217,391
$223,649
$218,238
$225,882
$231,139
$244,631
$248,505
  
Yield
7.14%
7.01%
6.96%
6.96%
6.43%
5.93%
5.27%
4.87%
4.40%
  
                     
 
 
The Redwood Review
2nd Quarter
Appendix
Table 9 Balances and Yields by Portfolio
90
 
Table 10: Portfolio Activity (in thousands)

  
  
Residential IGS
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning 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
  
Acquisitions
267,695
535,346
352,292
120,316
179,115
80,970
116,987
114,699
128,708
 
Upgrades / downgrades
-
-
-
-
-
30,667
-
-
-
 
Transfer to other portfolios
-
(13,816)
-
-
-
-
-
-
-
 
Sales
(52,217)
(108,372)
(97,124)
(12,669)
(104,442)
(3,984)
(95,328)
4,000
(3,012)
  
Principal payments
(45,857)
(32,248)
(31,398)
(29,997)
(31,136)
(25,445)
(29,834)
(27,627)
(22,961)
  
Discount amortization
2,449
1,321
1,023
1,943
1,446
853
790
761
347
 
Net mark-to-market adjustment
(34,974)
(53,631)
(2,545)
5,394
(1,642)
3,524
(11,769)
(5,883)
2,815
 
Ending Balance
$2,162,946
$2,025,850
$1,697,250
$1,475,002
$1,390,015
$1,346,674
$1,260,089
$1,279,243
$1,193,293
  
  
Residential CES
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning balance
$752,277
$721,531
$715,655
$677,176
$595,439
$592,552
$643,707
$683,807
$587,760
  
Acquisitions
39,381
73,725
20,870
87,305
89,217
52,822
54,664
57,479
87,864
 
Upgrades / downgrades
-
-
-
-
-
(30,667)
-
-
-
 
Transfer to other portfolios
-
(4,480)
-
-
-
-
-
-
-
 
Sales
(3,292)
(5,214)
(962)
(47,585)
(4,035)
(9,650)
(81,292)
(98,775)
-
 
Principal payments
(43,556)
(35,672)
(32,639)
(28,835)
(23,302)
(14,110)
(21,523)
(17,013)
(18,931)
  
Discount amortization
21,065
18,892
17,412
15,917
11,684
12,391
10,098
10,766
7,424
 
Net mark-to-market adjustment
(20,900)
(16,505)
1,195
11,677
8,173
(7,899)
(13,102)
7,443
19,690
 
Ending balance
$744,975
$752,277
$721,531
$715,655
$677,176
$595,439
$592,552
$643,707
$683,807
  
  
Other Real Estate Investments
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning balance
$50,057
$0
-
-
-
-
-
-
-
 
Acquisitions
-
40,790
-
-
-
-
-
-
-
 
Upgrades / downgrades
-
-
-
-
-
-
-
-
-
 
Transfer from other portfolios
-
18,296
-
-
-
-
-
-
-
 
Sales
(2,237)
-
-
-
-
-
-
-
-
 
Principal payments
(5,301)
(3,079)
-
-
-
-
-
-
-
 
Premium amortization
(2,104)
(532)
-
-
-
-
-
-
-
 
Net mark-to-market adjustment
(6,247)
(5,418)
-
-
-
-
-
-
-
 
Ending balance
$34,168
$50,057
-
-
-
-
-
-
-
 
                     
 
The Redwood Review
2nd Quarter
Appendix
Table 10 Portfolio Activity
91



Table 10: Portfolio Activity (in thousands)
 
  
Real Estate Loans
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning 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
  
Acquisitions
674,932
415,283
725,695
966,673
272,627
52,691
271,875
332,049
426,933
 
Sales
(2,191)
-
-
-
-
-
(240,987)
(263,079)
(3,378)
  
Principal payments
(983,557)
(1,047,170)
(1,230,545)
(1,567,041)
(1,799,401)
(1,925,475)
(2,698,500)
(3,129,492)
(2,557,675)
  
Premium amortization
(10,889)
(11,726)
(13,298)
(11,254)
(12,073)
(12,075)
(13,334)
(14,438)
(9,758)
  
Credit provision
(2,500)
(1,481)
(1,505)
(465)
2,507
(141)
(877)
805
1,527
 
Net charge-offs / (recoveries)
(4,635)
1,646
794
589
416
424
250
125
(34)
  
Net mark-to-market adjustment
-
-
-
-
-
-
48
(218)
254
 
Ending balance
$8,351,647
$8,680,487
$9,323,935
$9,842,794
$10,454,292
$11,990,216
$13,874,792
$16,556,317
$19,630,565
  
  
Commercial CES
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning balance
$435,382
$448,060
$379,867
$271,243
$223,302
$218,856
$187,228
$138,029
$127,687
  
Acquisitions
49,177
2,743
76,496
99,065
51,978
11,130
30,293
55,941
4,263
 
Upgrades / downgrades
-
(3,501)
-
-
-
(3,966)
-
-
-
 
Sales
-
-
(9,914)
(4,216)
(2,820)
-
-
-
-
 
Principal payments
-
-
(13)
(9)
(9)
(10)
(9)
(8)
(8)
  
Discount / (premium) amortization
200
(9)
(289)
(451)
(257)
(564)
(276)
(416)
68
 
Net mark-to-market adjustment
(33,818)
(11,911)
1,913
14,235
(951)
(2,144)
1,620
(6,318)
6,019
 
Ending Balance
$450,941
$435,382
$448,060
$379,867
$271,243
$223,302
$218,856
$187,228
$138,029
  
  
Commercial Loans
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning balance
$25,883
$28,172
$32,170
$36,722
$55,167
$59,692
$56,102
$41,794
$56,604
  
Acquisitions
-
-
-
-
-
-
4,248
14,219
-
 
Sales
-
-
-
-
(8,408)
-
-
(17)
(11,192)
  
Principal payments
(82)
38
(4,024)
(4,574)
(10,049)
(4,583)
(506)
158
(3,769)
  
Discount / (premium) amortization
26
21
26
22
27
93
(152)
(69)
(99)
  
Credit provision
-
(2,348)
-
-
-
(35)
-
-
-
 
Net mark-to-market adjustment
-
-
-
-
(14)
-
-
17
250
 
Ending Balance
$25,827
$25,883
$28,172
$32,170
$36,722
$55,167
$59,692
$56,102
$41,794
  
                     
 
The Redwood Review
2nd Quarter
Appendix
Table 10 Portfolio Activity
92



Table 10: Portfolio Activity (in thousands)
 
  
Commercial IGS
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning balance
$116,494
$119,613
$134,639
$131,034
$184,400
$185,032
$222,783
$217,848
$206,590
  
Acquisitions
-
2,964
8,999
(3)
-
2,177
29,684
17,179
7,845
 
Upgrades / downgrades
-
3,501
-
-
-
3,966
-
-
-
 
Sales
-
(6,464)
(24,007)
-
(51,501)
-
(56,292)
(4,000)
-
 
Principal payments
(607)
(938)
(737)
(883)
(998)
(5,006)
(8,560)
(4,174)
(594)
  
Discount / (premium) amortization
69
67
51
(14)
(90)
(159)
(145)
(269)
(281)
  
Net mark-to-market adjustment
(4,812)
(2,249)
668
4,505
(777)
(1,610)
(2,438)
(3,801)
4,288
 
Ending Balance
$111,144
$116,494
$119,613
$134,639
$131,034
$184,400
$185,032
$222,783
$217,848
  
   
CDO CES
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning balance
$16,152
$21,964
$22,259
$14,718
$14,742
$11,738
$12,463
$2,765
$2,784
  
Acquisitions
4,804
(149)
-
7,714
(87)
3,000
(97)
9,970
(119)
  
Upgrades / downgrades
-
(5,000)
-
-
-
-
-
-
-
 
Sales
-
-
-
(722)
-
-
-
-
-
 
Principal payments
(105)
-
(769)
(29)
(1,017)
(44)
-
42
-
 
Discount amortization
-
-
-
-
-
-
-
36
-
 
Net mark-to-market adjustment
282
(663)
474
578
1,080
48
(628)
(350)
100
 
Ending Balance
$21,133
$16,152
$21,964
$22,259
$14,718
$14,742
$11,738
$12,463
$2,765
  
  
CDO IGS
 
Q2: 2007
Q1: 2007
Q4: 2006
Q3: 2006
Q2: 2006
Q1: 2006
Q4: 2005
Q3: 2005
Q2: 2005
  
Beginning balance
$254,307
$224,349
$184,942
$177,063
$163,539
$150,647
$146,344
$148,684
$133,123
  
Acquisitions
-
35,496
45,388
7,000
13,000
13,500
5,900
9,553
15,485
 
Upgrades / downgrades
-
5,000
-
-
-
-
-
-
-
 
Sales
-
-
(5,350)
-
-
-
-
-
-
 
Principal payments
(356)
(376)
(338)
(235)
(257)
(468)
(335)
(11,240)
(237)
  
Discount / (premium) amortization
66
(3)
9
5
7
8
7
10
18
 
Net mark-to-market adjustment
(19,384)
(10,159)
(302)
1,109
774
(148)
(1,269)
(663)
295
 
Ending Balance
$234,633
$254,307
$224,349
$184,942
$177,063
$163,539
$150,647
$146,344
$148,684
  
 
The Redwood Review
2nd Quarter
Appendix
Table 10 Portfolio Activity
93

  

    
 
 
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
Q2: 2005
$192,291,401
$427,139
$139,847
$566,986
0.29%
$230,538
0.12%
$740
$196
$544
<0.01%
  
Residential Portfolio
Q3: 2005
192,368,457
404,891
133,080
537,971
0.28%
268,341
0.14%
1,812
220
1,592
<0.01%
  
Portfolio
Q4: 2005
190,570,193
377,266
139,129
516,395
0.27%
349,068
0.18%
1,175
-
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
-
3,002
0.01%
  
 
Q2: 2006
227,928,505
445,028
126,264
571,292
0.25%
441,430
0.19%
1,464
-
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%
842,746
0.39%
5,058
196
4,862
0.01%
  
 
2006
219,178,838
392,365
302,072
694,437
0.32%
842,746
0.39%
12,272
351
11,921
0.01%
  
 
Q1: 2007
245,080,031
412,717
355,855
768,572
0.31%
1,075,683
0.44%
5,776
325
5,451
0.01%
  
 
Q2: 2007
$227,973,546
$469,492
$356,374
$825,866
0.36%
$1,431,963
0.63%
$12,157
$471
$11,686
0.02%
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Residential Real
Q2: 2005
$19,443,387
$22,959
-
$22,959
0.12%
$16,514
0.08%
($34)
-
($34)
<0.01%
  
Estate Loans
Q3: 2005
16,386,833
22,029
-
22,029
0.13%
22,956
0.14%
90
-
90
<0.01%
  
 
Q4: 2005
13,719,242
22,656
-
22,656
0.17%
37,335
0.27%
251
-
251
<0.01%
  
 
2005
13,719,242
22,656
-
22,656
0.17%
37,335
0.27%
461
-
461
<0.01%
  
 
Q1: 2006
11,846,454
22,372
-
22,372
0.19%
48,677
0.41%
425
-
425
<0.01%
  
 
Q2: 2006
10,318,641
19,450
-
19,450
0.19%
47,162
0.46%
423
-
423
<0.01%
  
 
Q3: 2006
9,718,985
19,326
-
19,326
0.20%
61,447
0.63%
589
-
589
0.02%
  
 
Q4: 2006
9,212,002
20,119
-
20,119
0.22%
65,071
0.79%
711
-
711
0.02%
  
 
2006
9,212,002
20,119
-
20,119
0.22%
65,071
0.79%
2,148
-
2,148
0.02%
  
 
Q1: 2007
8,582,964
19,954
-
19,954
0.23%
68,632
0.92%
1,646
-
1,646
0.08%
  
 
Q2: 2007
$8,256,759
$16,416
-
$16,416
0.20%
$55,674
0.67%
$6,038
-
$6,038
0.29%
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Residential CES
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
355,855
748,618
0.32%
1,007,051
0.43%
4,130
325
3,805
<0.01%
  
 
Q2: 2007
$219,716,787
$453,076
$356,374
$809,450
0.37%
$1,376,289
0.63%
$6,119
$471
$5,648
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.   
    
 
  
The Redwood Review
2nd Quarter
Appendix
Table 11A - Managed Residential Loans Credit Performance
94

        
 
 
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
Q2: 2005
$130,690,357
$426,834
0.33%
$194,431
0.15%
$544
0.00%
  
Residential Loans and
Q3: 2005
125,971,360
404,191
0.32%
230,263
0.18%
1,592
0.00%
  
Non-Rated Securities
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%
3,465
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%
540,695
0.40%
4,862
0.00%
  
 
2006
134,696,897
392,366
0.29%
540,695
0.40%
11,921
0.01%
  
 
Q1: 2007
114,624,260
412,717
0.36%
672,234
0.59%
5,451
0.02%
  
 
Q2: 2007
$115,584,033
$460,152
0.40%
$816,092
0.71%
$11,687
0.04%
  
 
 
 
 
 
 
 
 
 
  
Residential Alt-A Non-Rated
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%
549
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%
  
 
Q2: 2007
$19,580,134
$150,801
0.77%
$376,151
1.92%
$2,408
0.05%
  
 
 
 
 
 
 
 
 
 
  
Residential Prime Non-Rated
Q2: 2005
$95,381,168
$336,556
0.35%
$149,624
0.16%
$353
<0.01%
  
  
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%
2,455
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
<0.01%
  
 
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%
  
 
Q2: 2007
$87,747,140
$292,935
0.33%
$384,267
0.44%
$3,241
0.01%
  
 
 
 
 
 
 
 
 
 
  
Residential Real
Q2: 2005
$19,443,387
$22,959
0.12%
$16,514
0.08%
($34)
0.00%
  
Estate Loans
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%
65,071
0.71%
711
0.03%
  
 
2006
9,212,002
20,119
0.22%
65,071
0.71%
2,148
0.02%
  
 
Q1: 2007
8,582,964
19,954
0.23%
68,632
0.80%
1,646
0.08%
  
 
Q2: 2007
$8,256,759
$16,416
0.20%
$55,674
0.67%
$6,038
0.29%
  
               
 
  
(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 amount for residential CES prime and alt-a portfolios represents the loan balances for the securities where 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.  
    

 
 
The Redwood Review
2nd Quarter
Appendix
Table 11B - Managed Residential Loans Credit Performance
95
 
 
  
Table 12A: Residential Prime CES and Underlying Loan Characteristics ($ in thousands)
  
Residential Prime CES
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
Principal value
$915,731
$899,856
$871,984
$900,358
$925,212
$849,556
$858,999
$885,264
$908,780
Unamortized premium
(98,787)
(115,563)
(117,016)
(113,398)
(105,707)
(52,906)
(105,078)
(76,264)
(80,172)
Credit protection
(292,934)
(263,991)
(256,932)
(276,189)
(309,703)
(343,209)
(296,362)
(323,839)
(336,556)
Unrealized market value
45,779
50,847
57,333
57,459
51,733
43,276
55,293
74,925
93,954
Market value (book value)
$569,789
$571,149
$555,369
$568,230
$561,535
$496,717
$512,852
$560,086
$586,006
Market value / principal value
$62.22
$63.47
$63.69
$63.11
$60.69
$58.47
$59.70
$63.27
$64.48
 
  
 
 
 
 
 
 
 
 
Current Rating
  
 
 
 
 
 
 
 
 
BB
$317,589
$315,865
$307,713
$314,279
$286,321
$255,488
$271,389
$270,770
$259,922
B
131,015
131,224
118,836
119,458
133,410
108,574
107,091
156,951
194,911
Non Rated
121,185
124,060
128,820
134,493
141,804
132,655
134,372
132,365
131,173
Total market value
$569,789
$571,149
$555,369
$568,230
$561,535
$496,717
$512,852
$560,087
$586,006
 
  
 
 
 
 
 
 
 
 
Security Type
  
 
 
 
 
 
 
 
 
Option ARM
$238,728
$235,959
$226,014
$227,349
$202,377
$188,202
$197,411
$178,816
$156,537
ARM
44,470
48,424
48,610
53,596
72,806
65,937
76,658
93,613
94,983
Hybrid
220,043
226,520
221,094
227,093
223,716
183,392
174,886
216,545
254,741
Fixed
66,548
60,246
59,651
60,193
62,636
59,185
63,896
71,112
79,745
Total market value
$569,789
$571,149
$555,369
$568,230
$561,535
$496,717
$512,852
$560,087
$586,006
 
 
 
 
 
 
 
 
 
 
Interest income
$13,973
$14,443
$13,776
$16,745
$14,629
$11,619
$10,535
$11,143
$9,845
Discount amortization
16,926
15,644
14,084
13,987
10,205
10,957
9,523
10,311
7,051
Total interest income
$30,899
$30,087
$27,860
$30,732
$24,834
$22,576
$20,058
$21,454
$16,896
 
  
 
 
 
 
 
 
 
 
Average Balance
$510,835
$511,659
$491,576
$497,983
$466,605
$424,723
$439,171
$489,342
$447,454
 
  
 
 
 
 
 
 
 
 
Interest income %
10.94%
11.29%
11.21%
13.45%
12.54%
10.94%
9.60%
9.11%
8.80%
Discount amort %
13.25%
12.23%
11.46%
11.23%
8.75%
10.32%
8.67%
8.43%
6.30%
Yield
24.19%
23.52%
22.67%
24.69%
21.29%
21.26%
18.27%
17.54%
15.10%
 
  
 
 
 
 
 
 
 
 
Underlying Loan Characteristics
  
 
 
 
 
 
 
 
 
Number of loans
554,494
600,406
551,613
569,884
559,587
508,003
464,904
451,718
436,791
Total loan face
$195,757,045
$213,261,566
$186,501,498
$197,336,150
$197,813,355
$170,935,424
$161,295,244
$161,719,044
$154,885,307
Average loan size
$353
$355
$338
$346
$353
$336
$347
$358
$355
 
  
 
 
 
 
 
 
 
 
Southern CA
24%
24%
25%
25%
25%
26%
24%
23%
23%
Northern CA
21%
21%
22%
22%
22%
24%
21%
20%
20%
Florida
6%
6%
6%
6%
6%
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%
3%
4%
4%
3%
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%
2%
3%
3%
Virginia
4%
4%
4%
4%
4%
4%
4%
4%
4%
Other states
25%
25%
23%
22%
22%
21%
25%
26%
26%
 
The Redwood Review
2nd Quarter
Appendix
Table 12A - Residential CES Prime and Underlying Loan Characteristics
96

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

    
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
Year 2007 origination
4%
2%
0%
0%
0%
0%
0%
0%
0%
Year 2006 origination
20%
20%
11%
14%
11%
1%
0%
0%
0%
Year 2005 origination
27%
28%
28%
27%
29%
32%
23%
16%
7%
Year 2004 origination and earlier
48%
50%
61%
59%
60%
67%
77%
84%
93%
 
  
 
 
 
 
 
 
 
 
Wtd Avg Original LTV
68%
68%
68%
68%
68%
68%
67%
67%
67%
Original LTV: 0 - 50
13%
13%
14%
13%
13%
14%
14%
14%
14%
Original LTV: 50.01 - 60
12%
12%
12%
12%
12%
12%
13%
13%
12%
Original LTV: 60.01 - 70
22%
22%
22%
22%
22%
22%
23%
23%
23%
Original LTV: 70.01 - 80
50%
50%
49%
50%
50%
49%
47%
47%
48%
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
737
735
734
734
734
729
729
727
FICO: <= 600
1%
1%
1%
1%
1%
1%
0%
0%
0%
FICO: 601 - 620
1%
1%
1%
1%
1%
1%
1%
0%
0%
FICO: 621 - 640
2%
2%
2%
2%
2%
2%
2%
2%
2%
FICO: 641 - 660
3%
3%
3%
3%
3%
3%
4%
4%
4%
FICO: 661 - 680
6%
6%
6%
7%
6%
6%
7%
7%
7%
FICO: 681 - 700
10%
10%
10%
10%
10%
11%
11%
11%
11%
FICO: 701 - 720
13%
12%
12%
13%
13%
12%
12%
13%
13%
FICO: 721 - 740
14%
14%
13%
13%
13%
13%
14%
14%
14%
FICO: 741 - 760
15%
15%
15%
15%
15%
15%
15%
15%
15%
FICO: 761 - 780
18%
18%
18%
17%
17%
17%
17%
18%
18%
FICO: 781 - 800
14%
14%
14%
13%
13%
13%
13%
12%
12%
FICO: >= 801
5%
4%
4%
4%
4%
4%
3%
3%
3%
Unknown
1%
0%
1%
1%
2%
2%
1%
1%
1%
 
  
 
 
 
 
 
 
 
 
Conforming at Origination %
31%
31%
34%
34%
33%
35%
25%
23%
23%
> $1 MM %
9%
9%
8%
9%
9%
7%
7%
6%
6%
 
  
 
 
 
 
 
 
 
 
2nd Home %
7%
7%
6%
6%
6%
6%
6%
6%
5%
Investment Home %
2%
2%
2%
2%
2%
2%
2%
2%
2%
 
  
 
 
 
 
 
 
 
 
Purchase
42%
42%
39%
39%
39%
38%
36%
36%
35%
Cash Out Refi
27%
27%
27%
29%
30%
28%
27%
26%
25%
Rate-Term Refi
30%
30%
33%
31%
31%
33%
36%
37%
39%
Construction
0%
0%
0%
0%
0%
0%
0%
0%
0%
Other
1%
1%
1%
1%
0%
1%
1%
1%
1%
 
  
 
 
 
 
 
 
 
 
Full Doc
45%
45%
46%
44%
44%
47%
47%
53%
52%
No Doc
6%
6%
7%
6%
5%
5%
4%
5%
5%
Other Doc (Lim, Red, Stated, etc)
49%
49%
47%
50%
51%
48%
49%
42%
43%
 
  
 
 
 
 
 
 
 
 
2-4 Family
2%
2%
2%
2%
2%
2%
2%
2%
2%
Condo
9%
9%
8%
8%
8%
8%
4%
3%
3%
Single Family
88%
88%
89%
89%
89%
89%
55%
56%
53%
Other
1%
1%
1%
1%
1%
1%
39%
39%
42%

 
The Redwood Review
2nd Quarter
Appendix
Table 12A - Residential CES Prime and Underlying Loan Characteristics
97

Table 12B: Residential Alt-A CES and Underlying Loan Characteristics ($ in thousands)

    
Residential CES Alt A
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
Principal value
$365,837
$348,371
$298,780
$272,957
$243,391
$184,513
$154,794
$144,521
$170,543
Unamortized premium
(30,054)
(41,680)
(26,440)
(26,849)
(11,700)
(17,960)
(16,752)
(8,520)
(10,849)
Credit protection
(150,801)
(128,772)
(115,315)
(107,140)
(115,170)
(68,077)
(58,241)
(58,323)
(67,319)
Unrealized market value
(12,626)
(5,932)
(166)
52
(879)
246
(99)
5,942
5,427
Market value (book value)
$172,356
$171,987
$156,859
$139,020
$115,642
$98,722
$79,702
$83,620
$97,802
Market value / principal value
$47.11
$49.37
$52.50
$50.93
$47.51
$53.50
$51.49
$57.86
$57.35
 
 
 
 
 
 
 
 
 
 
Current Rating
 
 
 
 
 
 
 
 
 
BB
$103,717
$100,895
$94,239
$85,874
$62,063
$63,244
$51,175
$55,065
$50,983
B
33,911
30,989
22,861
19,722
22,122
13,377
7,969
8,451
27,370
Non Rated
34,728
40,103
39,759
33,424
31,457
22,101
20,558
20,104
19,449
Total market value
$172,356
$171,987
$156,859
$139,020
$115,642
$98,722
$79,702
$83,620
$97,802
 
 
 
 
 
 
 
 
 
 
Security Type
 
 
 
 
 
 
 
 
 
Option ARM
$162,924
$158,116
$133,411
$117,908
$92,209
$76,868
$60,635
$59,978
$53,459
ARM
720
837
990
4,483
7,318
6,457
2,671
6,823
23,549
Hybrid
6,664
10,701
21,835
16,012
15,589
14,867
15,741
16,000
18,871
Fixed
2,048
2,333
623
616
526
529
654
819
1,922
Total market value
$172,356
$171,987
$156,859
$139,019
$115,642
$98,721
$79,701
$83,620
$97,801
 
 
 
 
 
 
 
 
 
 
Interest income
$5,632
$4,143
$4,312
$1,872
$1,746
$2,235
$1,926
$1,732
$1,508
Discount amortization
4,013
3,197
3,307
1,915
1,479
1,434
575
455
373
Total interest income
$9,645
$7,340
$7,619
$3,787
$3,225
$3,669
$2,501
$2,187
$1,881
 
 
 
 
 
 
 
 
 
 
Average Balance
$176,130
$151,740
$154,988
$135,489
$106,648
$92,239
$70,315
$78,347
$84,002
 
 
 
 
 
 
 
 
 
 
Interest income %
12.79%
10.92%
11.13%
5.53%
6.55%
9.69%
10.96%
8.84%
7.18%
Discount amort %
9.11%
8.43%
8.53%
5.65%
5.55%
6.22%
3.27%
2.32%
1.78%
Yield
21.90%
19.35%
19.66%
11.18%
12.10%
15.91%
14.23%
11.17%
8.96%
 
 
 
 
 
 
 
 
 
 
Underlying Loan Characteristics
 
 
 
 
 
 
 
 
 
Number of loans
59,767
58,960
54,599
67,132
60,471
50,168
49,596
46,682
58,163
Total loan face
$20,523,349
$19,620,740
$18,026,078
$22,126,922
$19,796,509
$15,470,805
$15,555,706
$14,262,580
$17,962,707
Average loan size
$343
$333
$330
$330
$327
$308
$314
$306
$309
 
  
 
 
 
 
 
 
 
 
Southern CA
31%
31%
32%
31%
34%
35%
35%
35%
36%
Northern CA
21%
21%
22%
22%
23%
24%
22%
21%
21%
Florida
10%
10%
10%
9%
9%
8%
8%
7%
7%
New York
2%
2%
2%
2%
1%
1%
1%
1%
1%
Georgia
1%
1%
1%
1%
1%
1%
1%
1%
1%
New Jersey
3%
3%
3%
3%
2%
2%
2%
3%
2%
Texas
1%
1%
1%
1%
1%
1%
1%
1%
1%
Arizona
4%
4%
4%
4%
3%
3%
2%
2%
2%
Illinois
1%
1%
1%
1%
1%
1%
2%
2%
2%
Colorado
3%
3%
3%
3%
3%
3%
3%
4%
3%
Virginia
3%
3%
3%
3%
3%
2%
2%
2%
2%
Other states
20%
20%
18%
20%
19%
19%
21%
21%
22%
 
 
 
 
 
 
 
 
 
 
 
The Redwood Review
2nd Quarter
Appendix
Table 12B - Residential CES Alt-A and Underlying Loan Characteristics
98



Table 12B: Residential Alt-A CES and Underlying Loan Characteristics ( $ in thousands)

    
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
Year 2007 origination
14%
4%
0%
0%
0%
0%
0%
0%
0%
Year 2006 origination
23%
25%
21%
19%
9%
1%
0%
0%
0%
Year 2005 origination
33%
39%
38%
41%
45%
39%
35%
21%
19%
Year 2004 origination and earlier
30%
32%
41%
40%
46%
60%
65%
79%
81%
 
  
 
 
 
 
 
 
 
 
Wtd Avg Original LTV
75%
75%
75%
75%
75%
74%
75%
75%
74%
Original LTV: 0 - 50
4%
4%
4%
4%
4%
5%
4%
5%
5%
Original LTV: 50.01 - 60
6%
6%
6%
6%
6%
7%
6%
6%
7%
Original LTV: 60.01 - 70
15%
15%
16%
16%
16%
16%
15%
16%
16%
Original LTV: 70.01 - 80
61%
61%
61%
58%
59%
59%
62%
60%
62%
Original LTV: 80.01 - 90
10%
10%
9%
11%
10%
9%
8%
8%
7%
Original LTV: 90.01 - 100
4%
4%
4%
5%
5%
4%
5%
5%
3%
Unknown
0%
0%
0%
0%
0%
0%
0%
0%
0%
 
  
 
 
 
 
 
 
 
 
Wtd Avg FICO
707
708
708
708
708
710
706
708
707
FICO: <= 600
1%
2%
1%
3%
2%
2%
0%
0%
0%
FICO: 601 - 620
1%
1%
1%
1%
1%
1%
1%
0%
0%
FICO: 621 - 640
5%
5%
5%
5%
5%
5%
5%
5%
5%
FICO: 641 - 660
9%
9%
8%
8%
8%
8%
8%
8%
8%
FICO: 661 - 680
14%
14%
14%
13%
13%
12%
13%
12%
12%
FICO: 681 - 700
15%
15%
15%
15%
15%
13%
15%
15%
15%
FICO: 701 - 720
14%
13%
13%
13%
13%
12%
14%
15%
15%
FICO: 721 - 740
11%
11%
11%
11%
11%
11%
12%
13%
13%
FICO: 741 - 760
9%
9%
10%
10%
10%
9%
11%
11%
11%
FICO: 761 - 780
8%
8%
8%
8%
8%
8%
9%
10%
10%
FICO: 781 - 800
4%
5%
5%
5%
5%
5%
5%
5%
5%
FICO: >= 801
1%
1%
1%
1%
1%
1%
1%
1%
1%
Unknown
7%
7%
8%
7%
8%
13%
6%
5%
5%
 
  
 
 
 
 
 
 
 
 
Conforming at Origination %
47%
49%
52%
53%
53%
56%
46%
49%
48%
> $1 MM %
12%
10%
9%
8%
7%
7%
6%
6%
6%
 
  
 
 
 
 
 
 
 
 
2nd Home %
6%
6%
6%
5%
5%
5%
5%
5%
5%
Investment Home %
11%
11%
12%
11%
11%
11%
11%
10%
10%
 
  
 
 
 
 
 
 
 
 
Purchase
35%
37%
41%
42%
40%
41%
45%
47%
48%
Cash Out Refi
43%
41%
39%
38%
40%
38%
37%
34%
34%
Rate-Term Refi
22%
22%
19%
21%
20%
21%
18%
19%
18%
Construction
0%
0%
0%
0%
0%
0%
0%
0%
0%
Other
0%
0%
0%
0%
0%
0%
0%
0%
0%
 
  
 
 
 
 
 
 
 
 
Full Doc
17%
18%
23%
24%
22%
22%
19%
19%
19%
No Doc
1%
1%
1%
1%
1%
1%
0%
0%
0%
Other Doc (Lim, Red, Stated, etc)
74%
71%
67%
64%
67%
62%
81%
81%
81%
Unknown/Not Categorized
8%
10%
9%
11%
10%
15%
0%
0%
0%
 
  
 
 
 
 
 
 
 
 
2-4 Family
4%
4%
4%
4%
4%
4%
4%
3%
3%
Condo
11%
11%
11%
11%
11%
11%
1%
1%
1%
Single Family
85%
85%
85%
85%
85%
85%
6%
6%
4%
Other
0%
0%
0%
0%
0%
0%
89%
90%
92%

 
The Redwood Review
2nd Quarter
Appendix
Table 12B - Residential CES Alt-A and Underlying Loan Characteristics
99



Table 12C: Residential Subprime CES and Underlying Loan Characteristics ($ in thousands)
    
Residential CES Subprime
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
Principal value
$9,625
11,219
9,841
$9,841
-
-
-
-
-
Unamortized premium
2,893
(1,426)
(1,387)
(1,407)
-
-
-
-
-
Credit protection
(9,341)
0
0
-
-
-
-
-
-
Unrealized market value
(347)
(652)
849
(15)
-
-
-
-
-
Market value (book value)
$2,830
9,141
9,303
$8,419
-
-
-
-
-
Market value / principal value
$29.40
$81.48
$94.53
$85.55
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Current Rating
 
 
 
 
 
 
 
 
 
BB
$2,830
$9,141
$6,678
$5,919
-
-
-
-
-
B
-
-
-
-
-
-
-
-
-
Non Rated
-
-
2,625
2,500
-
-
-
-
-
Total market value
$2,830
$9,141
$9,303
$8,419
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Security Type
 
 
 
 
 
 
 
 
 
Option ARM
$0
$0
$0
$0
-
-
-
-
-
ARM
-
-
-
-
-
-
-
-
-
Hybrid
400
1,013
4,127
4,064
-
-
-
-
-
Fixed
2,430
8,128
5,176
4,355
-
-
-
-
-
Total market value
$2,830
$9,141
$9,303
$8,419
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Interest income
$215
$186
$151
$51
-
-
-
-
-
Discount amortization
126
51
22
15
-
-
-
-
-
Total interest income
$341
$237
$173
$66
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Average Balance
$8,744
$9,715
$8,344
$8,223
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Interest income %
9.84%
7.66%
7.24%
2.48%
-
-
-
-
-
Discount amort %
5.76%
2.10%
1.05%
0.73%
-
-
-
-
-
Yield
15.60%
9.76%
8.29%
3.21%
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Underlying Loan Characteristics
 
 
 
 
 
 
 
 
 
Number of loans
23,662
25,001
31,873
34,841
-
-
-
-
-
Total loan face
$3,436,393
$3,614,761
$5,439,260
$5,945,868
-
-
-
-
-
Average loan size
$145
$145
$171
$171
-
-
-
-
-
 
  
 
 
 
 
 
 
 
 
Southern CA
19%
18%
19%
19%
-
-
-
-
-
Northern CA
14%
13%
14%
14%
-
-
-
-
-
Florida
12%
12%
12%
12%
-
-
-
-
-
New York
4%
4%
4%
4%
-
-
-
-
-
Georgia
1%
1%
1%
1%
-
-
-
-
-
New Jersey
3%
4%
4%
4%
-
-
-
-
-
Texas
4%
4%
4%
4%
-
-
-
-
-
Arizona
5%
5%
4%
4%
-
-
-
-
-
Illinois
5%
6%
6%
6%
-
-
-
-
-
Colorado
2%
2%
2%
2%
-
-
-
-
-
Virginia
1%
2%
2%
2%
-
-
-
-
-
Other states
29%
29%
28%
28%
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
 
The Redwood Review
2nd Quarter
Appendix
Table 12B - Residential CES Subprime and Underlying Loan Characteristics
100

 
Table 12C: Residential Subprime CES and Underlying Loan Characteristics ($ in thousands)
  
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1: 2006
Q4:2005
Q3:2005
Q2:2005
Year 2007 origination
2%
2%
0%
0%
-
-
-
-
-
Year 2006 origination
98%
98%
100%
100%
-
-
-
-
-
Year 2005 origination
0%
0%
0%
0%
-
-
-
-
-
Year 2004 origination and earlier
0%
0%
0%
0%
-
-
-
-
-
 
  
 
 
 
 
 
 
 
 
Wtd Avg Original LTV
69%
75%
73%
73%
-
-
-
-
-
Original LTV: 0 - 50
20%
13%
14%
14%
-
-
-
-
-
Original LTV: 50.01 - 60
3%
2%
3%
3%
-
-
-
-
-
Original LTV: 60.01 - 70
6%
6%
6%
6%
-
-
-
-
-
Original LTV: 70.01 - 80
44%
43%
47%
47%
-
-
-
-
-
Original LTV: 80.01 - 90
22%
22%
23%
23%
-
-
-
-
-
Original LTV: 90.01 - 100
6%
14%
7%
7%
-
-
-
-
-
Unknown
0%
0%
0%
0%
-
-
-
-
-
 
  
 
 
 
 
 
 
 
 
Wtd Avg FICO
640
642
636
636
-
-
-
-
-
FICO: <= 600
24%
25%
25%
25%
-
-
-
-
-
FICO: 601 - 620
12%
12%
13%
13%
-
-
-
-
-
FICO: 621 - 640
17%
16%
17%
17%
-
-
-
-
-
FICO: 641 - 660
13%
12%
13%
13%
-
-
-
-
-
FICO: 661 - 680
10%
10%
10%
10%
-
-
-
-
-
FICO: 681 - 700
8%
9%
8%
8%
-
-
-
-
-
FICO: 701 - 720
6%
6%
5%
5%
-
-
-
-
-
FICO: 721 - 740
4%
4%
4%
4%
-
-
-
-
-
FICO: 741 - 760
3%
3%
2%
2%
-
-
-
-
-
FICO: 761 - 780
2%
2%
2%
2%
-
-
-
-
-
FICO: 781 - 800
1%
1%
1%
1%
-
-
-
-
-
FICO: >= 801
0%
0%
0%
0%
-
-
-
-
-
Unknown
0%
0%
0%
0%
-
-
-
-
-
 
  
 
 
 
 
 
 
 
 
Conforming at Origination %
77%
77%
75%
75%
-
-
-
-
-
> $1 MM %
0%
0%
0%
0%
-
-
-
-
-
 
  
 
 
 
 
 
 
 
 
2nd Home %
2%
2%
1%
1%
-
-
-
-
-
Investment Home %
9%
9%
8%
8%
-
-
-
-
-
 
  
 
 
 
 
 
 
 
 
Purchase
52%
52%
50%
50%
-
-
-
-
-
Cash Out Refi
44%
44%
47%
47%
-
-
-
-
-
Rate-Term Refi
4%
4%
3%
3%
-
-
-
-
-
Construction
0%
0%
0%
0%
-
-
-
-
-
Other
0%
0%
0%
0%
-
-
-
-
-
 
  
 
 
 
 
 
 
 
 
Full Doc
50%
49%
53%
53%
-
-
-
-
-
No Doc
1%
1%
0%
0%
-
-
-
-
-
Other Doc (Lim, Red, Stated, etc)
49%
50%
47%
47%
-
-
-
-
-
 
  
 
 
 
 
 
 
 
 
2-4 Family
8%
7%
7%
7%
-
-
-
-
-
Condo
7%
7%
7%
7%
-
-
-
-
-
Single Family
85%
86%
86%
86%
-
-
-
-
-
Other
0%
0%
0%
0%
-
-
-
-
-
 
The Redwood Review
2nd Quarter
Appendix
Table 12B - Residential CES Subprime and Underlying Loan Characteristics
101

 

   
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
 
 
 
 
 
 
 
 
 
 
Market Value
$34,168
$50,057
-
-
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Current Rating
 
 
 
 
 
 
 
 
 
AAA
$1,804
$2,038
-
-
-
-
-
-
-
AA
-
-
-
-
-
-
-
-
-
A
13,958
18,699
-
-
-
-
-
-
-
BBB
4,437
5,729
-
-
-
-
-
-
-
BB
3,775
4,185
-
-
-
-
-
-
-
B
-
-
-
-
-
-
-
-
-
Non-rated
10,194
19,406
-
-
-
-
-
-
-
Total market value
$34,168
$50,057
-
-
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Security Type
 
 
 
 
 
 
 
 
 
ARM
$398
$422
-
-
-
-
-
-
-
Option ARM
2,597
3,198
-
-
-
-
-
-
-
Hybrid
29,245
43,969
-
-
-
-
-
-
-
Fixed
1,928
2,468
-
-
-
-
-
-
-
Total market value
$34,168
$50,057
-
-
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Interest income
$669
$2,465
-
-
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Avg Balance
$44,061
$37,169
-
-
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 
Yield
6.07%
26.53%
-
-
-
-
-
-
-
 
 
 
 
 
 
 
 
 
 

 
The Redwood Review
2nd Quarter
Appendix
Table 13 - OREI and Underlying Characteristics
102




    
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
                   
Residential Loans
$8,256,759
$8,582,964
$9,212,002
$9,718,985
$10,318,641
$11,846,454
$13,719,242
$16,386,833
$19,443,387
Number of loans
24,452
25,579
27,695
31,744
34,013
37,458
33,863
51,593
58,941
Average loan size
$338
$336
$333
$306
$303
$316
$405
$318
$330
  
Adjustable %
71%
79%
85%
89%
99%
99%
98%
100%
100%
Hybrid %
29%
20%
15%
11%
1%
1%
2%
0%
0%
Fixed %
0%
1%
0%
0%
0%
0%
0%
0%
0%
  
Amortizing %
5%
4%
3%
3%
1%
1%
1%
0%
0%
Interest-only %
95%
96%
97%
97%
99%
99%
99%
100%
100%
Negatively amortizing %
0%
0%
0%
0%
0%
0%
0%
0%
0%
  
Southern California
14%
14%
13%
12%
11%
11%
11%
11%
12%
Northern California
11%
10%
10%
10%
10%
10%
12%
11%
12%
Florida
12%
13%
12%
12%
13%
12%
13%
12%
11%
New York
6%
6%
6%
6%
6%
6%
5%
5%
5%
Georgia
4%
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%
5%
4%
4%
4%
Arizona
4%
4%
4%
4%
4%
4%
4%
4%
4%
Illinois
3%
3%
3%
3%
2%
2%
2%
3%
3%
Colorado
3%
3%
4%
4%
4%
4%
4%
4%
4%
Virginia
3%
3%
3%
3%
3%
3%
3%
3%
3%
Other states (none greater than 3%)
31%
30%
31%
32%
33%
34%
33%
34%
33%
 
Year 2007 origination
11%
3%
0%
0%
0%
0%
0%
0%
0%
Year 2006 origination
18%
19%
17%
10%
0%
0%
0%
0%
0%
Year 2005 origination
5%
5%
5%
5%
5%
5%
6%
5%
4%
Year 2004 origination or earlier
66%
73%
78%
85%
95%
95%
94%
95%
96%
  
Wtd Avg Original LTV
68%
68%
68%
68%
68%
68%
69%
68%
69%
Original LTV: 0 - 50
15%
15%
16%
15%
15%
15%
13%
14%
13%
Original LTV: 50 - 60
11%
12%
12%
12%
12%
12%
11%
11%
11%
Original LTV: 60 - 70
20%
20%
20%
20%
21%
21%
21%
20%
20%
Original LTV: 70 - 80
47%
46%
45%
46%
45%
45%
48%
46%
47%
Original LTV: 80 - 90
2%
2%
2%
2%
2%
2%
2%
2%
2%
Original LTV: 90 - 100
5%
5%
5%
5%
5%
5%
5%
7%
7%
 
Wtg Avg FICO
732
727
733
730
730
730
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%
2%
1%
1%
1%
2%
1%
1%
1%
FICO: 641 -660
3%
3%
3%
3%
3%
3%
3%
3%
3%
FICO: 661 - 680
7%
7%
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%
14%
15%
14%
14%
FICO: 721 - 740
13%
13%
13%
14%
13%
13%
13%
14%
14%
FICO: 741 - 760
15%
15%
15%
15%
15%
15%
15%
15%
15%
FICO: 761 - 780
17%
17%
17%
17%
17%
17%
17%
17%
17%
FICO: 781 - 800
13%
12%
12%
12%
12%
11%
11%
11%
11%
FICO: >= 801
4%
3%
3%
2%
3%
3%
3%
3%
3%
 
  
Conforming balance at origination %
35%
37%
38%
41%
45%
37%
38%
37%
37%
% balance in loans > $1mm per loan
15%
16%
18%
14%
14%
14%
13%
14%
13%
  
2nd home %
11%
11%
11%
11%
11%
11%
10%
10%
10%
Investment home %
3%
3%
3%
3%
3%
3%
2%
2%
2%
  
Purchase
35%
35%
34%
34%
33%
33%
33%
33%
33%
Cash out refinance
32%
31%
32%
32%
32%
34%
34%
34%
34%
Rate-term refinance
31%
32%
32%
32%
34%
32%
32%
32%
32%
Construction
0%
0%
0%
0%
0%
0%
0%
0%
0%
Other
2%
2%
2%
2%
1%
1%
1%
1%
1%

 
The Redwood Review
2nd Quarter
Appendix
Table 14 - Residential Real Estate Loan Characteristics
103

Table 15: Commercial Real Estate 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
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
Q2: 2005
$31,324,563
$95,351
$681,133
$776,484
2.48%
$35,971
0.11%
$1,213
$1,213
$0
0.02%
  
Commercial
Q3: 2005
40,081,879
146,671
706,532
853,203
2.13%
20,690
0.05%
59
59
-
0.00%
  
Portfolio
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%
  
 
Q2: 2007
$70,009,123
$321,234
$584,706
$905,940
1.29%
$73,104
0.10%
$76
$30
$46
0.00%
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Commercial
Q2: 2005
$51,778
$8,141
$0
$8,141
15.72%
$0
0.00%
$0
$0
$0
0.00%
  
Real Estate
Q3: 2005
66,348
8,141
-
8,141
12.27%
-
0.00%
-
-
-
0.00%
  
Loans
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
-
10,489
27.32%
-
0.00%
-
-
-
0.00%
  
 
Q2: 2007
$38,311
$10,489
$0
$10,489
27.38%
$0
0.00%
$0
$0
$0
0.00%
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Commercial CES
Q2: 2005
$31,272,785
$87,210
$681,133
$768,343
2.46%
$35,971
0.12%
$1,213
$1,213
$0
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%
  
 
Q2: 2007
$69,970,812
$310,745
$584,706
$895,451
1.28%
$73,104
0.10%
$76
$30
$46
0.00%
  
                           
(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.
  
    
 
 
The Redwood Review
2nd Quarter
Appendix
Table 15 - Commercial Real Estate Loans Credit Performance
104




  
 
 
 
 
 
 
 
 
 
 
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Q2:2005
Commercial CES Loans
$69,970,812
$57,411,648
$57,750,799
$58,063,971
$51,588,837
$48,300,705
$46,755,362
$40,015,531
$31,272,785
Number of loans
4,648
3,968
3,889
4,032
3,456
3,737
3,618
2,866
2,248
Average face value
$15,054
$14,469
$14,850
$14,401
$14,927
$12,925
$12,923
$13,962
$13,911
 
    
 
    
 
    
 
 
    
 
    
 
    
 
State Distribution
   
 
    
 
    
 
CA
16%
17%
17%
18%
18%
17%
17%
16%
18%
NY
13%
13%
13%
11%
12%
12%
13%
13%
14%
TX
8%
8%
8%
5%
6%
6%
6%
7%
7%
VA
4%
4%
4%
2%
2%
2%
2%
3%
1%
FL
6%
6%
6%
5%
5%
5%
5%
5%
4%
Other
52%
52%
52%
59%
57%
58%
57%
56%
56%
 
    
 
    
 
    
 
Property Type Distribution
   
 
    
 
    
 
Office
38%
35%
37%
30%
36%
32%
37%
39%
40%
Retail
30%
30%
31%
32%
32%
33%
33%
34%
34%
Multi-family
15%
12%
12%
11%
11%
16%
12%
10%
10%
Hospitality
7%
7%
7%
6%
5%
7%
3%
5%
4%
Self-storage
2%
3%
3%
0%
0%
0%
0%
0%
0%
Industrial
4%
3%
3%
1%
1%
2%
2%
1%
2%
Other
4%
10%
7%
20%
15%
10%
13%
11%
10%
 
    
 
    
 
    
 
Weighted average LTV
70%
68%
69%
69%
69%
68%
68%
68%
67%
 
    
 
    
 
 
 
 
Weighted average debt service coverage ratio
1.59
1.73
1.60
1.72
1.75
1.99
2.05
1.88
1.79
 
 
 
 
 
 
 
 
 
 

 
The Redwood Review
2nd Quarter
Appendix
Table 16 - Commercial CES Loan Characteristics
105




  
 
 
 
 
 
 
 
 
 
 
Q2:2007
Q1:2007
Q4:2006
Q3:2006
Q2:2006
Q1:2006
Q4:2005
Q3:2005
Commercial mortgage loans, reported value
$25,827
$25,883
$28,172
$32,170
$36,722
$55,167
$59,692
$56,102
Number of loans
7
7
7
8
9
12
13
12
Average loan size
$3,690
$3,698
$4,025
$4,021
$4,080
$4,597
$4,592
$4,675
Seriously delinquent loans
-
-
-
-
-
-
-
-
Realized credit losses
-
-
-
-
-
-
-
-
California % (based on reported value)
1%
1%
7%
7%
6%
19%
25%
28%
 
 
 
 
 
 
 
 
 

 
The Redwood Review
2nd Quarter
Appendix
Table 17 - Commercial Real Estate Loan Characteristics
106



Table 18: Securities Portfolios Credit Rating and Collateral Type ($ in millions)
 
     
At June 30, 2007:
CURRENT RATING AT 6/30/2007
 
Total
AAA
AA
A
BBB
BB
B
Unrated
Residential prime
$1,440
$153
$180
$255
$282
$318
$131
$121
Residential alt-a
1,028
235
101
271
249
103
34
35
Residential sub-prime
440
14
154
149
120
3
-
-
Other real estate investments
34
2
-
14
4
4
-
10
Commercial
563
8
4
23
76
215
99
137
CDO
256
81
30
48
76
13
-
8
Total securities portfolio market value
$3,760
$493
$469
$760
$807
$656
$264
$311
 
At March 31, 2007:
CURRENT RATING AT 3/31/2007
 
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
 
At December 31, 2006:
CURRENT RATING AT 12/31/2006
 
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

 
The Redwood Review
2nd Quarter
Appendix
Table 18 - Securities Portfolios Credit Rating and Collateral Type
107

  
Sequoia
ABS Issued
 
Issue
Date
 
Original
Issue
Amount
 
Stated
Maturity
 
Estimated
Callable
Date
Outstanding
Balance
June 30,
2007
Sequoia 1
07/29/97
$534,347
2028
Called
$0
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
60,600
Sequoia 5
10/29/01
510,047
2026
2007
87,695
Sequoia 6
04/26/02
506,142
2027
2007
90,669
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
79,698
Sequoia 10
09/26/02
1,041,600
2027
2008
184,600
Sequoia 11
10/30/02
704,936
2032
2007
103,311
Sequoia 12
12/19/02
1,096,891
2033
Called
-
Sequoia 2003-1
02/27/03
1,012,321
2033
2007
170,783
Sequoia 2003-2
04/29/03
815,080
2022
2007
138,001
Sequoia 2003-3
06/26/03
538,452
2023
2007
93,673
MLCC 2003-C
06/26/03
984,349
2023
2008
183,670
MLCC 2003-D
07/29/03
1,003,591
2028
2008
198,365
Sequoia 2003-4
07/29/03
504,273
2033
2007
141,595
Sequoia 2003-5
08/27/03
840,248
2033
2007
117,566
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
166,344
MLCC 2003-E
08/28/03
983,852
2028
2008
194,514
MLCC 2003-F
09/25/03
1,297,913
2028
2007
251,942
MLCC 2003-H
12/22/03
739,196
2029
2008
134,184
 
The Redwood Review
2nd Quarter
Appendix
Table 19 Sequoia ABS Issued
108

Table 19: Sequoia ABS Issued ($ in thousands)
  
Sequoia
ABS Issued
 
Issue
Date
 
Original
Issue
Amount
 
Stated
Maturity
 
Estimated
Callable
Date
Outstanding
Balance
June 30,
2007
Sequoia 2004-1
01/28/04
$616,562
2034
2007
$105,125
Sequoia 2004-2
02/25/04
690,548
2034
Called
-
Sequoia 2004-3
03/30/04
917,673
2034
2007
130,677
Sequoia 2004-4
04/29/04
808,933
2010
2007
122,198
Sequoia 2004-5
05/27/04
831,540
2012
2008
137,030
Sequoia 2004-6
06/29/04
910,662
2012
2008
173,056
SEMHT 2004-01
06/29/04
317,044
2014
2008
75,571
Sequoia 2004-7
07/29/04
1,032,685
2034
2008
179,730
Sequoia 2004-8
08/27/04
807,699
2034
2008
176,976
Sequoia 2004-9
09/29/04
772,831
2034
2008
195,266
Sequoia 2004-10
10/28/04
673,356
2034
2008
160,143
Sequoia 2004-11
11/23/04
705,746
2034
2008
210,777
Sequoia 2004-12
12/22/04
821,955
2035
2008
195,459
Sequoia 2005-1
01/27/05
409,071
2035
2008
112,440
Sequoia 2005-2
02/24/05
338,481
2035
2008
81,427
Sequoia 2005-3
04/28/05
359,182
2035
2008
102,348
Madrona 2005-A
08/25/05
5,400
2008
2008
5,400
Sequoia 2005-4
09/29/05
324,576
2035
2009
195,074
Sequoia 2006-1
08/30/06
742,507
2046
2011
604,377
Sequoia 2007-1
03/30/07
864,089
2047
2015
821,307
Sequoia 2007-2
05/25/07
1,018,484
2038
2017
994,791
Total Sequoia ABS Issuance
 
$33,200,303
 
 
$7,176,382

 
The Redwood Review
2nd Quarter
Appendix
Table 19 Sequoia ABS Issued
109
 
 
  
Sequoia ABS
IO's Issued
Issue
Date
Original
Issue
Amount
Stated
Maturity
Estimated
Callable
Date
Outstanding
Balance At
June 30,
2007
MLCC 2003-C X-A-2
06/26/03
$12,662
2007
2007
$0
MLCC 2003-D X-A-1
07/29/03
22,371
2007
2007
-
MLCC 2003-E X-A-1
08/28/03
16,550
2007
2007
138
MLCC 2003-F X-A-1
09/25/03
18,666
2007
2007
-
Sequoia 2003-6 X-1
10/29/03
8,220
2007
Called
-
SMFC 2003A AX1
10/31/03
70,568
2007
2007
495
Sequoia 2003-7 X-1
11/25/03
10,345
2007
Called
-
Sequoia 2003-8 X-1
12/23/03
12,256
2007
2007
-
Sequoia 2004-1 X-1
01/28/04
7,801
2007
2007
-
Sequoia 2004-2 X-1
02/25/04
8,776
2007
Called
-
SMFC 2004A AX1
02/26/04
10,626
2007
2007
297
MLCC 2003-H X-A-1
12/22/03
10,430
2007
2007
469
Sequoia 2004-4 X-1
05/28/04
9,789
2010
2007
281
Sequoia 2004-5 X-1
05/27/04
3,371
2012
2008
154
Sequoia 2004-6 X-A
06/29/04
10,884
2012
2008
2,874
Sequoia 2004-7 X-A
07/29/04
12,145
2034
2008
3,590
Sequoia 2004-8 X-A
08/27/04
18,270
2034
2008
5,380
Sequoia 2004-9 X-A
09/29/04
16,951
2034
2008
5,642
Sequoia 2004-10 X-A
10/28/04
14,735
2034
2008
4,887
Sequoia 2004-11 X-A-1
11/23/04
12,603
2034
2008
4,732
Sequoia 2004-11 X-A-2
11/23/04
4,697
2034
2008
1,973
Sequoia 2004-12 X-A-1
12/22/04
14,453
2035
2008
5,158
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
3,748
Sequoia 2005-2 X-A
02/24/05
7,484
2035
2008
2,769
Sequoia 2005-3 X-A
04/28/05
8,183
2035
2008
3,518
Total Sequoia Issuance
 
$357,586
 
 
$51,187

 
The Redwood Review
2nd Quarter
Appendix
Table 20 - Sequoia IO ABS Issued
110

 
Table 21: Acacia CDO ABS Issued ($ in thousands)
 
  
CDO Issuance
Issue
Date
Original
Issue
Amount
Stated
Maturity
Optional
Redemption
Date
Principal
Outstanding At
June 30,
2007
Acacia CDO 1
12/10/02
$285,000
2023
Called
$0
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
Called
-
Acacia CDO 5
07/14/04
282,125
2039
2007
245,560
Acacia CDO 6
11/09/04
282,000
2040
2007
270,540
Acacia CDO 7
03/10/05
282,000
2045
2008
281,112
Acacia CDO 8
07/14/05
252,000
2045
2008
251,345
Acacia CRE 1
12/14/05
261,750
2045
2010
261,543
Acacia CDO 9
03/09/06
277,800
2046
2009
277,787
Acacia CDO 10
08/02/06
436,500
2046
2009
436,500
Acacia CDO 11
02/15/07
476,660
2047
2010
476,660
Acacia CDO 12
05/18/07
458,000
2047
2010
458,000
Acacia CDO OA 1 (1)
06/14/07
486,000
2052
2010
494,800
 
        
 
Total Acacia CDO Issuance
 
$4,641,360
   
$3,453,848
 
        
 

(1) The principal outstanding for Acacia CDO OA 1 includes $8.8 million of additional principal outstanding related to deal issuance costs.
 
 
The Redwood Review
2nd Quarter
Appendix
Table 21 - Sequoia CDO ABS Issued
111