TABLE OF CONTENTS
 
Introduction
    
2
  
Shareholder Letter
    
3
  
Quarterly Overview
    
4
  
Financial Insights
    
8
  
         
Financial & Investments Modules
        
Financial
    
13
  
- GAAP Income & Core Earnings
    
13
  
- Taxable Income
    
17
  
- Capital & Liquidity
    
19
  
- Dividends
    
21
  
Mark-to-Market Adjustments
    
23
  
Residential Real Estate Securities
    
28
  
Commercial Real Estate Securities
    
39
  
CDO Securities
    
42
  
Investments in Sequoia
    
43
  
Investments in Acacia
    
47
  
         
Appendix
        
Accounting Discussion
    
54
  
Glossary
    
57
  
Financial Tables
    
65
  
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
1
 
 
  
 
INTRODUCTION
  
 
Note to Readers:
 
We file annual reports (on Form 10-K) and quarterly reports (on Form 10-Q) 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 the Redwood Review, provides supplemental information about Redwood through a discussion of many GAAP as well as non-GAAP metrics, such as core earnings, taxable income, and economic book value. 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, and a reconciliation between the 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 continue to change over time. We welcome your input and suggestions.
 
Selected Financial Highlights
 
Quarter: Year
GAAP
Income
per Share
Core
Earnings
per Share
Total Taxable Earnings per
Share
Adjusted
Return on
Equity
GAAP Book
Value per
Share
Core Book
Value per Share
Total
Dividends
per Share
Q106
$1.09
$1.16
$1.44
13%
$38.11
$34.90
$0.70
Q206
$1.20
$0.97
$1.91
14%
$39.13
$35.58
$0.70
Q306
$1.22
$1.20
$1.96
14%
$40.02
$36.38
$0.70
Q406
$1.32
$1.12
$1.45
15%
$37.51
$34.02
$3.70
Q107
$0.66
$1.08
$1.48
8%
$34.06
$34.29
$0.75
Q207
$0.41
$1.35
$1.66
5%
$31.50
$34.40
$0.75
Q307
($2.18)
$1.43
$1.74
(26%)
$5.32
$31.58
$0.75
Q407*
($36.49)
$1.21
$0.91
(610%)
$23.18
$26.24
$2.75
Q108
($5.28)
$0.68**
$0.79
(83%)
$17.89
$20.74
$0.75

* The book values per share are after giving retroactive effect to the adoption of FAS 159 on January 1, 2008. Without giving retroactive effect to FAS 159, the GAAP book value per share and core book value per share were a negative $22.18 and a negative $4.46, respectively.
** Core earnings for this quarter are not directly comparable to core earnings for prior periods due to the adoption of FAS 159.
 
CAUTIONARY STATEMENT: This Redwood Review contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2007 under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission (SEC), including reports on Forms 10-K, 10-Q, and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Important factors, among others, that may affect our actual results include: changes in interest rates; changes in prepayment rates; general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; the availability of high quality assets for purchase at attractive prices; declines in home prices; increases in mortgage payment delinquencies; changes in the level of liquidity in the capital markets which may adversely affect our ability to finance our real estate asset portfolio; changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, rating agency downgrades of securities and increases in the supply of real estate securities available for sale, each of which may adversely affect the values of securities we own; the extent of changes in the values of securities we own and the impact of adjustments reflecting those changes on our income statement and balance sheet, including our stockholders’ equity; our ability to maintain the positive stockholders’ equity necessary to enable us to pay the dividends required to maintain our status as a real estate investment trust for tax purposes; and other factors not presently identified. This Redwood Review may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.
 
2
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
SHAREHOLDER LETTER
 
Dear Fellow Shareholders:

We continue to believe that the severe dislocations in the mortgage and financial markets will benefit Redwood and its shareholders in many ways in the longer run. We are on track to capitalize on the opportunities that are opening up for us – taking a balanced approach towards investing in today’s attractive assets while developing new ways to capitalize on our competitive advantages in the real estate markets of the future.

Meanwhile, short-term challenges and volatility remain. Delinquencies continue to grow. Default frequency and loss severities are higher, and realized credit losses are coming through more quickly than we had projected only a few months ago. Prime residential and commercial mortgage pools are sharing the pain, although of course to a far lesser degree than subprime and alt-a residential mortgage pools. Asset prices have continued their descent (although they bounced back somewhat in March and April).

While the near-term costs are higher than expected, they remain manageable given our strong balance sheet and liquidity. At March 31, 2008, we had $257 million of cash, only $2 million of short-term debt, and our investment cash flows remain strong. Unlike many other financial institutions that have been damaged in this credit and liquidity crisis, we do not need to raise capital under highly dilutive terms to survive or to restore our capital adequacy.

The potential for benefit is also greater than we expected, even recently. Since the beginning of the fourth quarter of 2007 through May 5th, we have put $272 million of capital to work at purchase prices that we believe will provide attractive long-term returns. We expect to see multi-year benefits from real estate moving to reasonable valuations, underwriting moving back to historical guidelines, securitization structures and rating agencies moving back to conservatism, competitors less adventurous, the supply of mortgage capital shrinking (making our capital more valuable), and asset pricing more attractive.

Our job is to make sure we invest prudently, develop our businesses, and harvest the benefits in the years ahead for our shareholders.

Thank you for your continued support.
 
 
  
  
  
  
 
George E. Bull, II
  
Douglas B. Hansen
  
 
Chairman and CEO
  
President
  
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
3
 
 
  
 
QUARTERLY OVERVIEW
  
 
First Quarter 2008
 
Our quarterly overview discussion is more extensive this quarter than in previous periods due to the many factors affecting the real estate and capital markets during the quarter and the impact of new accounting conventions on our reported results of operations. It is our objective in preparing the Redwood Review to promote transparency in our financial disclosure and provide you with information that will enhance your understanding of our complex business and enable you to analyze our performance more effectively. We hope you find this overview discussion and the material that follows informative.

In the first quarter of 2008, the public and private sectors finally began to acknowledge the full depth and complexity of problems in the real estate and capital markets. Initial positive steps have been taken – rate cuts, liquidity infusions, a stimulus package, increasing write-offs, and capital raising initiatives – to address the problems and bring financial stability.
 
Fixing the mortgage turmoil is not going to be easy and the road ahead will be bumpy. The forces that created this disarray were at work for several years and it is logical to expect that it will take at least a few years to resolve. It is going to be a drawn-out process, intertwined with legal, political, and regulatory issues, that will require structural changes in the credit and capital markets. The correction taking place is healthy and will benefit those companies, such as Redwood, that are prepared and have remained disciplined investors.

During the first quarter, we had several notable accomplishments despite extremely difficult market conditions. We remain challenged, however, by rising credit costs, primarily from residential loans originated in 2006 and 2007.

During the first quarter, we put $65 million of capital to work at what we believe are attractive yield rates. Our investments generated $52 million of cash flow in excess of operating and interest costs. Additionally, the Opportunity Fund described below, which we formed for the purpose of investing in distressed securities, received capital commitments of $46 million from new limited partners.

We invested $38 million in seasoned prime residential securities, $20 million in distressed subprime residential and CDO securities on behalf of the Opportunity Fund, and $7 million to acquire a portion of the investment-grade asset-backed securities (ABS) issued by Acacia entities in 2004 and 2005. Our weighted average cost for these Acacia ABS purchases was 21% of their principal value.

As we had forewarned in previous letters, delinquencies and credit losses increased during the first quarter. We believe we have adequate credit reserves for GAAP purposes, but we are not allowed to establish reserves for tax purposes. Our credit losses for tax purposes were $14 million in the first quarter, up from $5 million in the prior quarter. This increase was due in part to timing considerations as a higher level of short sales of residential mortgages has accelerated loss realization. Nevertheless, our estimates of cumulative losses are also increasing and we expect to realize higher levels of credit losses during the remainder of 2008 and, likely, into 2009. We believe a portion of these credit losses may be recoverable from third parties, including mortgage originators, due to breaches of representations and warranties regarding the mortgage loans underlying our investments in securities. We intend to pursue those remedies to the extent it is appropriate to do so.

Trading activity for real estate securities remained extremely light during the quarter. New residential jumbo securitization activity was at the lowest level in recent years. Origination volume dropped primarily due to rising mortgage rates, tightened underwriting, and declining home sales.
 
4
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
QUARTERLY OVERVIEW
 
First Quarter 2008 (continued)
 
Additionally, buyers of AAA-rated non-agency securities are currently requiring significantly higher yield premiums, thus rendering new securitization activity uneconomic. As a result, banks and other large originators have been forced to hold most of their non-agency residential loans on their balance sheets. Our residential team is working with banks to find innovative ways other than securitization to effect significant credit risk transfers.
 
We expect that attractive residential credit investment opportunities will come our way as financial institutions slowly restructure their balance sheets and the capital markets resume functioning. We are disciplined long-term investors, and we will invest only at the pace that will enable us to find or create truly attractive opportunities for our shareholders.

While it may take a few quarters for residential credit-sensitive investment opportunities to develop fully, we have recently increased our pace of less credit-sensitive residential investments. Since the end of the first quarter through May 5th, we invested $84 million of capital, primarily to acquire seasoned residential investment-grade securities. We acquired these securities at 72% of face value. Our base case returns, which assume no price appreciation or leverage, fall within our equity hurdle rate of 12% to 18%.

In the first quarter, the commercial real estate finance market was hit hard, after having been somewhat insulated from the severe price declines observed in the residential mortgage markets. Technical forces took hold during this quarter when bearish speculators began driving down prices for commercial securities and their derivatives. Yield spreads on commercial securities quickly rose, becoming more correlated with spreads on residential securities. This has severely affected the commercial securitization markets and originators that use securitization as a financing strategy have been unable to quote competitive new loans to income-property owners.

The economic headwinds facing commercial property owners and their tenants are becoming more severe. Property values continue to fall as capitalization rates on commercial real estate rise. Tightened underwriting standards have made it difficult for some borrowers to refinance their loans at maturity. Still, observable credit deterioration to date has been moderate. Serious delinquencies for U.S. commercial real estate securitizations hit record lows during the first quarter before trending upward in March. We expect that delinquencies will continue to rise and we expect more negative ratings actions and eventual credit losses. We believe wider market spread pricing levels are attractive for some CMBS, despite increased risks, especially for well-protected investment grade securities. There are good opportunities to acquire high-quality CMBS, commercial loans, and other commercial real estate assets producing good yields and bringing significant upside potential once the economy begins to strengthen.

On March 31, 2008, we completed an important step in the expansion of our asset management business by closing the Opportunity Fund with $96 million of capital commitments, including $46 million from new limited partner investors and $50 million from Redwood. From these commitments, actual fundings through quarter-end were $8 million from partners and $40 million from Redwood. The offer and sale of interests in this private fund were not registered under the federal securities laws. This fund was formed to capitalize on the dislocation in the subprime RMBS and CDO markets. Redwood will earn management and incentive fees on the third-party capital invested and earn a return on its direct capital investment. The fund invested $20 million in the first quarter of this year and $22 million during the fourth quarter of 2007. Expansion of our asset management business is an important part of our long-term growth strategy.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
5
 
 
  
 
QUARTERLY OVERVIEW
  
 
First Quarter 2008 (continued)
 
Moving on to quarterly results: Mark-to-market (MTM) accounting has, in our opinion, made our earnings under GAAP more difficult to interpret, more volatile, and more divergent from economics. In addition, our core earnings measure has become less meaningful due to FAS 159 and other MTM accounting issues. Alternative measures of results, such as cash flow, taxable income, and changes in economic book value are not simple and require careful analysis and cautious interpretation. 

Our reported GAAP loss for the first quarter of 2008 was $172 million (negative $5.28 per share). This loss includes $194 million ($5.96 per share) of net negative market valuation adjustments.

Core earnings were $22 million ($0.68 per share). Core earnings for this quarter are not directly comparable to prior quarters due to the adoption of FAS 159 for the Acacia assets and liabilities. Previously, purchase discount amortization on Acacia assets ($0.21 per share in the fourth quarter of 2007) was included in core income. This component of income is now excluded from core income. We no longer calculate purchase discount amortization for securities in the Acacia entities as it has become, in effect, one of the components of the FAS 159 market valuation adjustments.

Estimated taxable earnings for this quarter were $26 million ($0.79 per share). These taxable earnings included $14 million ($0.41 per share) of charges related to credit losses.

Our economic (total rate of return) earnings during the first quarter were a loss of $3.50 per share. This non-GAAP measure represents the change in our economic book value per share during the quarter after dividends. Economic book value per share reflects the MTM value of all our financial assets at the current bid-side of the market, net of the MTM value of our liabilities at the offer-side. Economic earnings are heavily influenced by short-term movements in market prices, which may or may not reflect changes in expected cash flows. Long-term cash flow generation remains our ultimate goal; unfortunately our progress towards this goal is difficult to measure on a quarterly basis.

Our GAAP book value at March 31, 2008 was $17.89 per share. Our quarter-end estimate of our economic book value was $18.04 per share. The market values of the assets and liabilities underlying our economic book value estimates can be thought of as the discounted net present value calculations of future loss-adjusted cash flows. Changes in market values can be driven by changes in the discount rate as well as by changes in projected cash flows. Based on our estimate of the future loss-adjusted cash flows underlying our calculation of economic book value at March 31, 2008, the overall implied yield for our financial assets (excluding cash) was 32% and for our financial liabilities was 14%.

Details and caveats regarding the use and determination of these calculations, and the reconciliation of non-GAAP measures to GAAP, are found later in this Review.

We expect that GAAP earnings will remain volatile. Early into the second quarter, prices for some real estate securities have increased. This is the first time in a year that prices and spreads have found support. It is still too early to project whether prices will hold, but if they do, GAAP and economic earnings could improve. We may still encounter MTM volatility from our consolidation of the Acacia entities, however, due to the technical valuation methodologies required under FAS 159. In addition, we may recognize additional GAAP impairment losses on residential, commercial, and CDO securities held at Redwood. Negative MTM balance sheet write-downs that have not yet been realized through the income statement totaled $67 million at March 31, 2008. Income statement impairment charges related to these unrealized losses will not affect GAAP book value, since these MTM losses were already deducted from stockholders’ equity at March 31, 2008.
 
6
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
QUARTERLY OVERVIEW
 
First Quarter 2008 (continued)
 
During the first quarter, we raised $10 million through equity sales under our direct stock purchase and dividend reinvestment plan. We ended the first quarter with reported capital of $735 million, including excess capital of $247 million available to make new investments. Our capital base consists of $585 million of common equity and $150 million of subordinated debt due in 2037. The calculation of our excess capital is discussed in the Capital and Liquidity module that follows later in this Review.

Our rate of capital deployment has increased significantly from first quarter levels as noted above. It is difficult to project with precision our rate of capital deployment for the remainder of 2008 as it will depend on the overall level of market trading activity, which could quickly accelerate due to forced liquidations or balance sheet re-structuring by other financial institutions. Our capital deployment will also depend on our success in designing and completing new forms of risk transfers from and credit-enhancements for banks. As we get more clarity around the size and likelihood of these investment opportunities, we will review our options for raising additional capital. Any new capital raised should be accretive to economic book value and should be deployed within a reasonable period of time. Our best estimate is that our current excess capital will take us through the third quarter of 2008.

Our REIT taxable income for 2008 will depend on, among other things, our ability to deploy our excess capital effectively and on the level of realized credit losses. We anticipate that credit losses, as measured for tax purposes, will increase substantially in 2008 relative to our recent experience. If the realization of credit losses becomes concentrated in any one quarter or series of quarters, taxable income may be less than our regular dividend rate. However, the board of directors has indicated it intends to maintain the regular quarterly dividend rate of $0.75 per share during 2008.

Although it is still early in the year and much could change, our best current estimate is that taxable income for 2008, plus taxable income carried over from 2007, will exceed our regular dividend rate for this year. We believe it is unlikely that we will pay a special dividend in 2008, since we currently estimate that any excess taxable income available at year-end is not likely to exceed the amounts that we customarily retain or defer distributing until the next year.

The capital markets appear to be slowly recovering. The fundamentals of loan quality, pricing, and competition have all tipped in our favor. Redwood’s capital and core expertise in credit enhancement has become more valuable in this recovery period. We believe it will continue to be valuable in the future because credit enhancement is necessary for the long-term efficiency and stability of the mortgage market. The capable professionals at Redwood are upbeat and determined. We are stepping forward and helping to rebuild the mortgage business. Every day, we are driven by the opportunities and possibilities that are in front of us.
 
 
  
  
  
  
 
Martin S. Hughes
  
Brett D. Nicholas
  
 
Chief Financial Officer
Co-Chief Operating Officer
  
Chief Investment Officer
Co-Chief Operating Officer
  
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
7
 
 
  
 
FINANCIAL INSIGHTS
  
 
Components of Book Value
 
►
The following supplemental non-GAAP balance sheet presents our assets and liabilities as calculated under GAAP and as adjusted to reflect our estimate of economic value. We show our investments in the Sequoia and Acacia securitization entities in separate line items, similar to the equity method of accounting, reflecting the reality that the underlying assets and liabilities owned by these entities are legally not ours. We own only the securities that we have acquired from these entities. This table, except for our estimates of economic value, is derived from the consolidating balance sheet presented on page 11.
 
Components of Book Value
March 31, 2008
($ in millions, except per share data)
 
   
 
       
Management’s
Estimated
Economic
  
   
As Reported
 
Adj
 
Value
  
Real estate securities (excluding Sequoia and Acacia)
                    
Residential
  
$
$126
        
$
126
  
Commercial
    
100
         
100
 
CDO
    
42
         
42
 
Subtotal real estate securities
    
268
         
268
 
Cash and cash equivalents
    
257
         
257
 
Investments in Sequoia
    
146
   
(54
)(a)
  
92
 
Investments in Acacia
   
68
    
(19
)(b)
  
49
 
Other assets/liabilities, net (d)
    
(4
)
  
   
   
(4
)
Subordinated notes
    
(150
)
  
78
 (c)  
(72
)
Stockholders' Equity
  
$
585
        
$
590
  
                     
Book Value Per Share
  
$
17.89
        
$
18.04
  
                     
 
(a)
Our actual Sequoia investments consist of CES, IGS, and IOs acquired by Redwood from the Sequoia entities. We calculated the $92 million estimate of economic value for these securities using the same valuation process that we followed to fair value all other real estate securities. In contrast, the $146 million of GAAP carrying value of these investments represents the difference between residential real estate loans owned by the Sequoia entities and the asset-backed securities (ABS) issued by those entities to third party investors. We account for these loans and ABS issued at cost, not at fair value. This is the primary reason for the $54 million disparity between the GAAP carrying value and our estimate of economic value.

(b)
Our actual Acacia investments consist of equity interests, and to a lesser extent ABS issued, that we acquired from the Acacia entities. The $49 million estimate of economic value of our investment interests in the Acacia entities represents the net present value of projected cash flows from our Acacia investments and management fees discounted at 45%, except for the CDO ABS that we recently repurchased at substantial discounts from face value, which are valued at cost. The reason for the difference between economic and GAAP carrying values is complex and relates to a significant difference in valuation methodology. This difference is discussed in detail in the Investments in Acacia section in this Review.

(c)
We have issued $150 million of 30-year subordinated notes at an interest rate of LIBOR plus 225 basis points. Under GAAP, these notes are carried at cost. Economic value is difficult to estimate with precision as the market of the notes is currently inactive. We estimated the $72 million economic value using the same valuation process used to fair value our other financial assets and liabilities. Estimated economic value is $78 million lower than our GAAP carrying value because given the significant overall contraction in credit availability and re-pricing of credit risk, if we had issued these subordinated notes at March 31, 2008, investors would have required a substantially higher interest rate.

(d)
Other assets/liabilities, net are comprised of real estate loans of $5 million, restricted cash of $11 million, and other assets of $24 million, less Redwood debt of $2 million, dividend payable of $25 million, and other liabilities of $17 million.
 
8
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
FINANCIAL INSIGHTS
 
Real Estate Securities
 
►
Total real estate securities (excluding our investments in Sequoia and Acacia) were $268 million at March 31, 2008, of which $232 million were held at Redwood and $36 million were held in the Opportunity Fund.

►
The table below provides product type and vintage information regarding the $232 million of securities at Redwood at March 31, 2008.
 
Real Estate Securities at Redwood
Excludes Investments in Sequoia and Acacia and Securities at Opportunity Fund
March 31, 2008
($ in millions)
 
 
  
2004 &
  
 
  
 
  
 
  
 
  
 
  
 
  
Earlier
  
2005
  
2006
  
2007
  
2008
  
Total
  
Residential
                                      
Prime
                                     
IGS
  
$
4
 
$
1
 
$
9
 
$
-
 
$
6
 
$
20
 
CES
    
48
   
15
   
5
   
8
   
2
   
78
 
Prime Total
    
52
   
16
   
14
   
8
   
8
   
98
 
Alt-a
                                      
IGS
    
-
   
-
   
1
   
4
   
-
   
5
 
CES
    
1
   
4
   
1
   
3
   
-
   
9
 
OREI
    
-
   
-
   
2
   
1
   
-
   
3
 
Alt-a Total
    
1
   
4
   
4
   
8
   
-
   
17
 
Subprime
                                      
IGS
    
1
   
-
   
-
   
-
   
-
   
1
 
CES
    
-
   
-
   
-
   
1
   
-
   
1
 
Subprime Total
    
1
   
-
   
-
   
1
   
-
   
2
 
Residential Total
  
$
54
 
$
20
 
$
18
 
$
17
 
$
8
 
$
117
 
                                       
Commercial CES
  
$
16
 
$
21
 
$
48
 
$
15
 
$
-
 
$
100
 
                                       
CDO IGS
 
$
7
 
$
7
 
$
-
 
$
1
 
$
-
 
$
15
 
Total at Redwood
  
$
77
 
$
48
 
$
66
 
$
33
 
$
8
 
$
232
 
 
►
In the first quarter, we acquired $38 million of securities for Redwood's portfolio. These included $10 million of prime residential credit-enhancement securities (CES) and $28 million of prime residential investment grade securities (IGS). We acquired these securities at attractive prices equal to an average of 37% of face value.

►
For GAAP balance sheet purposes, we are required to value securities using bid-side marks (an exit price). Bid/offer spreads are generally wide for these illiquid securities, and in today’s turbulent market, spreads are particularly wide. We reduced the carrying (market) value of the $38 million of our new investments by $11 million below our investment cost at March 31, 2008 primarily as a result of the bid/offer spread difference.

►
Over 80% of our investments in real estate securities at March 31, 2008 were residential and commercial CES. These securities bear most of the credit risk with respect to the underlying loans that were securitized. We acquire CES at a significant discount to principal value as credit losses could reduce or totally eliminate the principal value of these bonds. Our return on these investments is based on how much principal and interest we receive and how quickly we receive it. In an ideal environment we would experience fast prepayments and low credit losses allowing us to recover a substantial part of the discount as income. Conversely, in the least beneficial environment, we would experience slow prepayments and high credit losses.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
9
 
 
  
 
FINANCIAL INSIGHTS
  
 
Real Estate Securities (continued)
 
►
We provide additional discussion and analysis regarding the adequacy of our credit reserves and the potential earnings upside from an increase in prepayments in the residential and commercial real estate securities modules that follow.

►
The following table presents the components of GAAP carrying value (which equals fair value determined in accordance with GAAP) for residential and commercial CES at Redwood.
 
Excludes Investments in Sequoia and Acacia and Securities at Opportunity Fund
March 31, 2008
($ in millions)
 
 
  
Residential
 
 
  
 
  
Prime
 
Alt-a
 
Commercial
 
               
Current face                                                     
  
$
538
  
$
217
    
523
 
Unamortized discount, net
    
(61
)
  
(1
 )  
(37
)
Discount designated as credit reserve
    
(358
)
  
(205
)
  
(378
)
Amortized cost
    
119
   
11
   
108
  
Unrealized gains
    
3
   
0
   
2
  
Unrealized losses
    
(44
)
  
(2
)
  
(10
)
Total Carrying value of CES at Redwood
  
$
78
  
$
9
  
$
100
  
Carrying value as a percentage of face
    
14
%
  
4
%
  
19
%

► We also own $1 million subprime CES with a face value of $36 million.
   
►
The table below provides product type and vintage information regarding the $36 million of securities held by the Opportunity Fund at March 31, 2008.
 
Securities at Opportunity Fund
March 31, 2008
($ in millions)
 
 
  
2004 &
  
 
  
 
  
 
  
Earlier
  
2005
  
Total
  
Residential Subprime IGS
  
$
9
 
$
-
  
$
9
 
                     
CDO IGS
  
$
17
 
$
10
 
$
27
 
                     
Total at Opportunity Fund
  
$
26
 
$
10
 
$
36
 
 
►
In the first quarter, we acquired $20 million of IGS for the Opportunity Fund, which included $12 million CDO IGS and $8 million in subprime IGS. We acquired these securities at an average price of 43% of face value.
 
10
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
FINANCIAL INSIGHTS
 
Consolidating Balance Sheet
 
►
GAAP requires us to produce a balance sheet that consolidates the assets and liabilities of the Sequoia and Acacia securitization entities (which had a combined $8.1 billion of assets and $7.9 billion of liabilities) even though the assets are owned by the securitization entities and the liabilities are obligations of the securitization entities payable only from the cash flows generated by the assets owned by the entities.
 
►
The table below shows the consolidating components of our consolidated balance sheet at March 31, 2008. The purpose of this presentation is to show the effect each of the components had on our consolidated shareholders' equity at March 31, 2008. The Acacia and Sequoia components represent investments and are not separate business segments.
 
Consolidating Balance Sheet
March 31, 2008
($ in millions)
   
Redwood
                  
   
and
               
Redwood
  
   
Opportunity Fund
  
Sequoia
  
Acacia
  
Intercompany
  
Consolidated
  
Real estate loans
  
$
5
  
$
6,751
 
$
19
  
$
-
  
$
6,775
  
Real estate securities
    
268
   
-
   
1,014
   
(88
)
  
1,194
 
Non-real estate investments
    
-
   
-
   
79
   
-
   
79
 
Cash and cash equivalents
    
257
   
-
   
-
   
-
   
257
 
Total earning assets
    
530
   
6,751
   
1,112
   
(88
)
  
8,305
 
Investment in Sequoia
    
146
   
-
   
-
   
(146
)
  
-
 
Investment in Acacia
    
68
   
-
   
-
   
(68
)
  
-
 
Other assets
    
35
   
49
   
157
   
-
   
241
 
Total Assets
  
$
779
  
$
6,800
 
$
1,269
  
$
(302
)
$
8,546
  
Redwood debt
  
$
2
  
$
-
 
$
-
  
$
-
  
$
2
  
Asset-backed securities issued - Sequoia
    
-
   
6,632
   
-
   
(88
)
  
6,544
 
Asset-backed securities issued - Acacia
    
-
   
-
   
1,046
   
-
   
1,046
 
Other liabilities
    
42
   
22
   
155
   
-
   
219
 
Subordinated notes
    
150
   
-
   
-
   
-
   
150
 
Total Liabilities
    
194
   
6,654
   
1,201
   
(88
)
  
7,961
 
Total Stockholders’ Equity
    
585
   
146
   
68
   
(214
)
  
585
 
Total Liabilities and Stockholders’ Equity
  
$
779
  
$
6,800
 
$
1,269
  
$
(302
)
$
8,546
  
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
11
 
 
  
 
FINANCIAL INSIGHTS
  
 
Cash Flow
 
►
As a supplement to our Consolidated Statement of Cash Flows included in our Quarterly Report on Form 10-Q, we have included the table below that details the sources and uses of our cash for the first quarter. This table excludes the gross cash flows generated by our securitization entities, but does include the cash flow generated by our investments in those entities.
 
Redwood
Sources and Uses of Cash
First Quarter 2008 Activity
Sources:
        
Cash from investments
  
$
70
 
Equity raised
    
10
 
Acacia management fees
    
2
 
3rd party funds (Opp Fund)
   
8
 
Total Sources
    
90
 
Uses:
        
Acquisitions
    
(65
)
Dividends paid
    
(25
)
Operating expenses paid
    
(15
)
Subordinated notes interest expense
    
(3
)
Redwood debt paydown
    
(6
)
Changes in working capital
   
(3
)
Restricted cash held by Opp. Fund
    
(6
)
Total Uses
    
(123
)
Net Uses of Cash
  
$
(33
)
Beginning Cash Balance at 12/31/07
  
$
290
 
Ending Cash Balance at 03/31/08
  
$
257
 
 
►
The cash generated by our investments is one of the financial metrics on which we focus. In the first quarter our investments generated cash from principal and interest payments of $70 million. The net investment cash flow after deducting subordinated note interest expense of $3 million and cash operating expenses of $15 million was $52 million.
 
►
Our investments at Redwood generated $40 million of cash, and our direct investments in Sequoia and Acacia generated $23 million and $7 million of cash, respectively.
 
►
Other sources of cash included $10 million of equity sales under our direct stock purchase and dividend reinvestment plan, $2 million of management fees, and $8 million from the Opportunity Fund’s third-party investors.
 
►
The primary uses of cash this quarter were $65 million for acquisitions and $25 million for the payment of dividends.
 
12
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
GAAP INCOME & CORE EARNINGS
 
Summary
 
What is this?
 
GAAP income is income calculated under generally accepted accounting principles in the United States.
 
Core earnings is a profitability measure that highlights earnings that we believe are more likely to be ongoing in nature. In calculating core earnings, we start with GAAP income 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 income.

Quarterly Update
 
►
The GAAP loss of $172 million for the first quarter, or $5.28 per share, was primarily due to $194 million ($5.96 per share) of negative market valuation adjustments. Market valuation adjustments are discussed in detail in the Mark-to-Market Adjustments module later in this Review.
 
►
The table below provides a summary of our GAAP (loss) income for the first quarter of 2008, the fourth quarter of 2007, and the first quarter of 2007.
       
 
  
For the Quarter Ended
  
GAAP Income ($ millions)
  
Mar-08
  
Dec-07
  
Mar-07
  
               
Interest income
  
$
168
  
$
202
  
$
215
  
Interest expense
    
(128
)
  
(153
)
  
(168
)
Net interest income before market valuation adjustments
    
40
   
49
   
47
 
                     
Market valuation adjustments, net
    
(194
)
  
(1,119
)
  
(10
)
Net Interest (loss) Income
    
(154
)
  
(1,070
)
  
37
 
                     
Operating expenses
    
(16
)
  
(16
)
  
(18
)
Realized gains (losses) on sales
    
-
   
7
   
-
 
Realized gains on calls
    
-
   
-
   
1
 
Credit (provision) for taxes
    
(2
)
  
2
   
(2
)
                     
GAAP (loss) income
  
$
(172
)
$
(1,077
)
$
18
  
                     
GAAP (loss) income per share
  
$
(5.28
)
$
(36.49
)
$
0.66
  
 
►
Net interest income before market valuation adjustments for the first quarter decreased by $9 million from the previous quarter. The decline resulted from slower prepayments on residential loans underlying our CES, increased credit provisions on loans owned by Sequoia, and the impact of our adoption of a new accounting standard, FAS 159, on January 1, 2008.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
13
 
 
  
 
GAAP INCOME & CORE EARNINGS
  
 
Quarterly Update (continued)

►
Total market valuation adjustments were $194 million in the first quarter, down significantly from $1.1 billion in the fourth quarter. The primary reason for the reduction in the level of negative market valuation adjustments was the fair value option election under FAS 159 which now permits us to MTM both the assets and liabilities of Acacia.
 
►
Operating expenses remained at the same level as in the prior quarter.
 
►
We accrue for income taxes throughout the year based on our estimates of taxable income and our planned distribution and retention of this income.
 
►
The following tables detail the components of our consolidated income statements for the first quarter of 2008 and the fourth quarter of 2007.
 
Consolidating Income Statement
Three Months Ended March 31, 2008
($ in millions)
  
   
  
             
Redwood
  
  
 
Redwood
  
Sequoia
 
Acacia
 
Elimination
 
Consolidated
 
Interest income
  
$
24
 
$
94
 
$
48
 
$
(2
)
$
164
 
Net discount (premium) amortization
    
12
   
(7
)
  
-
   
-
   
5
 
Total interest income
    
36
   
87
   
48
   
(2
)
  
169
 
Management fees
    
-
   
-
   
1
   
-
   
1
 
Interest expense
    
(3
)
  
(83
)
  
(45
)
  
2
   
(129
)
Net interest income before market valuation adjustments
  
$
33
 
$
4
 
$
4
 
$
-
 
$
41
 
Market valuation adjustments, net
    
(167
)
  
-
   
(27
)
  
-
   
(194
)
Net interest (loss) income
    
(134
)
  
4
   
(23
)
  
-
   
(153
)
Operating expenses
    
(17
)
  
-
   
-
   
-
   
(17
)
Realized gains on sales and calls, net
    
-
   
-
   
-
   
-
   
-
 
Income from Sequoia
    
4
   
-
   
-
   
(4
)
  
-
 
Loss from Acacia
    
(23
)
  
-
   
-
   
23
   
-
 
Provision for income taxes
    
(2
)
  
-
   
-
   
-
   
(2
)
Net (Loss) Income
 
$
(172
)
$
4
 
$
(23
)
$
19
 
$
(172
)
 
 
Consolidating Income Statement
Three Months Ended December 31, 2007
($ in millions)
  
   
  
             
Redwood
  
  
 
Redwood
  
Sequoia
 
Acacia
 
Elimination
 
Consolidated
 
Interest income
  
$
26
 
$
110
 
$
55
 
$
(2
)
$
189
 
Net discount (premium) amortization
    
11
   
(7
)
  
7
   
-
   
11
 
Total interest income
    
37
   
103
   
62
   
(2
)
  
200
 
Management fees
    
-
   
-
   
2
   
-
   
2
 
Interest expense
    
(3
)
  
(96
)
  
(56
)
  
2
   
(153
)
Net interest income before market valuation adjustments
    
34
   
7
   
8
   
-
   
49
 
Market valuation adjustments, net
    
(130
)
  
-
   
(989
)
  
-
   
(1,119
)
Net interest (loss) income
    
(96
)
  
7
   
(981
)
  
-
   
(1,070
)
Operating expenses
    
(16
)
  
-
   
-
   
-
   
(16
)
Realized gains on sales and calls, net
    
9
   
-
   
(2
)
  
-
   
7
 
Income from Sequoia
    
7
   
-
   
-
   
(7
)
  
-
 
Loss from Acacia
    
(983
)
  
-
   
-
   
983
   
-
 
Provision for income taxes
    
2
   
-
   
-
   
-
   
2
 
Net (Loss) Income
 
$
(1,077
)
$
7
 
$
(983
)
$
976
 
$
(1,077
)
 
14
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
GAAP INCOME & CORE EARNINGS
 
Quarterly Update (continued)
 
►
Market valuation adjustments were greater in the first quarter on securities we hold as available-for-sale (AFS) than the prior quarter as credit performance continued to deteriorate and we no longer believe some of the valuations will return to cost on many of these illiquid securities within a reasonable period. We expect the amount of future impairments at Redwood to decline since we have permanently impaired the majority of our earning assets. Our CES have been written down to 15% of face value at March 31, 2008. More detailed information about our accounting impairments is found in the Mark-to-Mark Adjustments section of this Review.
 
►
Market valuation adjustments at Acacia were negative $27 million in the first quarter reflecting the net changes in the fair values of the assets and liabilities within these securitization entities. Under FAS 159 accounting, these changes flow through the income statement. In the fourth quarter of 2007, prior to the adoption of FAS 159, the market valuation adjustments of negative $1.0 billion consisted only of impairments on certain of Acacia's assets and did not reflect any offsetting change in value of the associated Acacia liabilities.
 
►
Net interest income from Sequoia securitization entities was $3 million lower in the first quarter than the prior quarter as a result of a $4 million increase in provisions for credit losses partially offset by lower premium amortization from slower prepayment speeds.
 
►
For Acacia, net interest income before market valuation adjustments in the first quarter declined by $4 million from the previous quarter, primarily as the result of the adoption of FAS 159. We now only include the cash coupon on the assets less the cash expense on the ABS issued in net interest income. Previously, net interest income included discount amortization, which in the fourth quarter of 2007, totaled $7 million. Under FAS 159, this amount is effectively included in the market valuation adjustments of these assets.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
15
 
 
  
 
GAAP INCOME & CORE EARNINGS
  
 
Quarterly Update (continued)
 
►
The table below provides a summary of our core earnings for the first quarter of 2008, the fourth quarter of 2007, and the first quarter of 2007.
       
 
  
For the Quarter Ended
  
Core Earnings
  
Mar-08
  
Dec-07
  
Mar-07
  
               
Interest income
  
$
168
  
$
202
  
$
215
  
Interest expense
    
(128
)
  
(153
)
  
(168
)
Net interest income
    
40
   
49
   
47
 
                     
Market valuation adjustments, net
    
-
   
-
   
-
 
Net interest (loss) income
    
40
   
49
   
47
 
                     
Operating expenses
    
(16
)
  
(15
)
  
(15
)
Realized gains (losses) on sales
    
-
   
-
   
-
 
Realized gains on calls
    
-
   
-
   
-
 
Credit (provision) for taxes
    
(2
)
  
2
   
(2
)
                     
Core earnings
  
$
22
  
$
36
  
$
30
  
                     
Core earnings per share
  
$
0.68
  
$
1.21
  
$
1.08
  
 
►
Our first quarter core earnings were $0.68 per share. The reasons for the decrease in the level of core earnings from prior periods include the impact of the adoption of FAS 159, higher loan loss provisions, and slower prepayments on residential loans underlying our CES.
 
►
Core earnings for this quarter of 2008 are not directly comparable to core earnings for prior quarters due to the adoption of FAS 159 for Acacia entities. Prior to the first quarter, purchase discount amortization on Acacia assets ($0.21 per share in the fourth quarter of 2007) was included in core income. This component of income is now excluded from core income. We no longer calculate purchase discount amortization for securities in the Acacia entities since it has become, in effect, one of the components of the FAS 159 mark-to-market adjustments.
 
16
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
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 income. 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.
 
For our quarterly taxable earnings estimates, we project our taxable earnings for the year based upon various assumptions of events that will occur during the year. However, some of the events that could have significant impact on our taxable earnings are difficult to project, including the amount and timing of credit losses, prepayments, and employee stock option exercises. Thus, our quarterly taxable earnings are likely to remain volatile.
 
Quarterly Update
 
►
Total taxable income for the first quarter of 2008 was $26 million, or $0.79 per share. REIT taxable income was $25 million, or $0.76 per share, in the first quarter of 2008.
 
►
Our taxable income decreased from the prior quarter by $3 million. Our first quarter taxable earnings included $14 million of charges related to credit losses, an increase of $9 million over the previous quarter. In addition, discount amortization for tax purposes decreased by $8 million from the fourth quarter to the first quarter primarily as the result of slower prepayments speeds. Offsetting these decreases in income was the fact that the fourth quarter included $14 million of write downs of assets for tax purposes.
 
►
Our REIT taxable income for 2008 will depend on, among other things, our ability to deploy our excess capital effectively and on the level of realized credit losses. We anticipate that credit losses, as measured for tax purposes, will increase substantially in 2008 relative to our recent experience. If the realization of credit losses becomes concentrated in time, taxable income alone in any one quarter or series of quarters may be less than our regular dividend rate.
 
►
Our taxable income continues to be higher than our GAAP income as we are not permitted to establish credit reserves for tax purposes and we do not generally recognize changes in market values of assets for tax purposes until the asset is sold. As a result of these differences at March 31, 2008, the tax basis of our residential, commercial, and CDO CES at Redwood was $377 million higher than our GAAP basis. Future credit losses will have a more significant impact on our taxable income than on our GAAP income.
 
►
The tax basis on Sequoia IOs we own is $55 million. Most of the underlying pools of loans have paid down or will pay down within the next year to levels where they are callable. When these are called, losses on these IOs will be incurred and our taxable income and dividend distribution requirements will decrease. The actual losses will depend on the tax basis at the time of any calls as the monthly cash flows received on these IOs in the interim will reduce their cost basis. At this time, we do not anticipate calling Sequoia deals in 2008.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
17
 
 
  
 
TAXABLE INCOME
  
 
Quarterly Update (continued)
 
►
The charts below provide a summary of our total taxable income per share and REIT taxable income per share for each for the nine most recently completed fiscal quarters.
 
  
 
  
 
18
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
CAPITAL & LIQUIDITY
 
Summary
 
What is this?
 
We use capital to fund our operations, invest in earning assets which are primarily credit sensitive and illiquid, fund working capital, and meet lender capital requirements with respect to collateralized borrowings.
 
Through our internal risk-adjusted capital policy, we allocate a prudent level of capital for our earning assets to meet liquidity needs that may arise. In most cases, the amount of allocated capital is equal to 100% of the fair value of the asset. Any capital that exceeds our risk-adjusted capital guideline amount is excess capital that can be invested to support business growth.
 
Our capital base includes common equity plus $150 million of subordinated notes.
 
Declines in the fair value of assets do not have a large effect on excess capital, as asset value declines reduce equally both available capital and capital required for these investments.
 
The chart below provides a summary of our aggregate capital at work and excess capital for each of the fiscal quarters noted.
 
  
 
Quarterly Update
 
►
At March 31, 2008, we had $247 million of excess capital, a decrease from $282 million at December 31, 2007, and an increase from the $114 million we had a year ago. The decrease in excess capital over the past quarter reflects our investment activity in the first quarter.
 
►
Our net liquid assets at March 31, 2008 totaled $263 million and included $257 of unrestricted cash, $4 million of unsecuritized residential real estate loans at fair value, and $4 million of AAA-rated securities at fair value, less $2 million of Redwood debt.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
19
 
 
  
 
CAPITAL & LIQUIDITY
  
 
Quarterly Update (continued)
 
►
At March 31, 2008, our total available capital, defined as the sum of our excess capital plus our invested capital, amounted to $660 million, compared to $793 million at January 1, 2008 upon the adoption of FAS 159. The decline reflects market value adjustments on our employed capital. Our total available capital of $660 million differs from our GAAP capital (equity plus long-term debt) of $735 million because we adjust our GAAP capital for "economic" value changes to our investments in Sequoia and Acacia (as discussed on page 8) and we deduct net other assets and liabilities.
 
►
Capital employed decreased in the first quarter by $83 million to $413 million mainly as a result of market value declines that were partially offset by $65 million of new acquisitions.
 
►
We are long-term investors and we fund most of our investments with equity. We acquire our securities at discounts, and in many cases substantial discounts to face value, and we model a range of expected cash flows that we expect to collect over the life of each security. To the extent the fair values of our investments are lower or higher from time to time is of little consequence to us provided the cash flows remain within our range of expectations.
 
►
The high level of excess capital and liquidity over the past several quarters reflects our intention to maintain a strong balance sheet during a time of market distress and our strategic decision to sell lower yielding, higher rated assets to position us to acquire higher yielding assets with the potential for more upside return. Over time, we expect our excess capital and net liquidity to decline as we fund new investments. However, as most of our investments are funded with equity, we have less need to maintain a large liquidity position.
 
20
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
DIVIDENDS
 
Summary 
 
What is this?
 
We have established a regular quarterly dividend rate at a level we believe 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.
 
Quarterly Update
 
►
On March 5, 2008, we declared a regular dividend of $0.75 per share for the second quarter payable on April 21, 2008 to shareholders of record on March 31, 2008.
 
  
* Projected
 
 
  
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
21
 
 
  
 
DIVIDENDS
  
 
Quarterly Update (continued)
 
►
Total dividend distributions over the last four quarters were $5.00 per share, which included a $2.00 special dividend paid to shareholders on December 7, 2008.
 
►
The amount of special dividends in 2008, if any, will depend upon the level of taxable income. With rising credit losses (for which there are no credit reserves for tax accounting), we do not currently anticipate paying a special dividend in 2008.
 
►
Our dividend yield at the current regular annual dividend rate of $3.00 per share at the close of the market on May 1, 2008, was 8.26%.
 
►
Over the past several years, we have distributed 100% of REIT capital gains income and 90% of REIT ordinary income, retaining 10% of the ordinary REIT income. We retain 100% of the after-tax income we generate in taxable subsidiaries. All of our dividend distributions in 2007 were ordinary income and we do not expect any capital gain distributions in 2008.
 
►
As in prior periods, we are currently planning to retain a portion and defer the distribution of all or a portion of any excess REIT taxable income earned in 2008.
 
At March 31, 2008, we had $47 million ($1.43 per outstanding share) of undistributed REIT taxable income that we anticipate distributing in 2008.
 
22
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
MARK-TO-MARKET ADJUSTMENTS
 
Market Conditions
 
►
During the first quarter of 2008, residential and commercial real estate prices remained under pressure and borrower delinquencies and defaults escalated. Additionally, banks and Wall Street firms substantially reduced their extension of credit and slashed advance rates for collateralized borrowings, even for repurchase borrowings backed by Fannie Mae and Freddie Mac securities. The combination of deteriorating credit fundamentals together with the contraction in market liquidity caused prices for real estate securities to record their steepest quarterly decline since the mortgage credit crisis began over a year ago.
 
►
The capital markets for non-agency residential and commercial mortgages essentially shut down during the quarter. New residential non-agency securitizations were at their lowest level in several years and trading activity of existing securities through the mortgage capital markets remained extremely light.
 
►
Market unrest peaked in early March. The actions by the Fed and the Treasury to reduce systemic financial risk, the 75 basis point rate cut in the federal funds rate, the opening of the Fed discount window to certain broker/dealers, and the reduction in the excess capital requirements for Fannie Mae and Freddie Mac appear to have reduced the substantial pressure that had built up and restored some stability to the markets. Trading remains light, but prices for real estate securities seem to be holding. We would caution that it is still early in this credit cycle and this stability may be temporary.
 
►
The table below illustrates the additional interest rate spread that investors have required to compensate for the perceived credit risk of various types of residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS).
 
  
 
►
For some assets, declines in fair values reflect the near-certainty of serious credit losses being realized. For others, significant future losses may not occur, but there is a perceived increase in the risk of loss resulting in a lower value. Finally, many assets are not at serious risk of loss but their declining value largely reflects a limited number of observed sales in the market. Many of the sales that did occur were by distressed sellers resulting in further downward pressure on market prices.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
23
 
 
  
 
MARK-TO-MARKET ADJUSTMENTS
  
 
Accounting Discussion
 
►
The accounting rules regarding MTM accounting are complex and may not clearly reflect the underlying economics. This topic is more fully discussed in the Accounting Discussion module in the Appendix.
 
►
At Redwood, where we hold most of our securities as available-for-sale for accounting purposes, MTM changes that are other-than-temporary flow through our income statement while MTM changes that are temporary are charged to equity.
 
►
For accounting purposes, we consolidate the balance sheets and income statements of the Acacia securitization entities. On January 1, 2008, we adopted a new accounting standard, FAS 159, and elected to fair value both the assets and liabilities of the Acacia entities. In accordance with FAS 159, we recorded a one-time, cumulative-effect adjustment to our January 1, 2008 opening balance sheet that decreased the carrying value of Acacia liabilities by $1.5 billion and increased equity. This new standard significantly reduces the disparity that existed between GAAP carrying value and our previous estimates of economic value.
 
►
For Sequoia, we are required to consolidate the assets and liabilities, which we report at amortized cost. Thus, there was no effect on our financial statements from changes in fair values of Sequoia's loans or ABS issued.
 
►
Financial Tables 19A, 19B, and 19C in the back of this Review detail the fair value of residential, commercial, and CDO securities at Redwood, the Opportunity Fund, and Acacia as a percentage of their face value as of March 31, 2008.
 
24
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
MARK-TO-MARKET ADJUSTMENTS
 
Impact on Redwood
 
►
The tables below detail the MTM adjustments on securities held at Redwood and the Opportunity Fund (excluding Sequoia and Acacia) by underlying collateral type and by vintage. Net MTM adjustments were a negative $146 million in the first quarter of 2008.
 
Mark-To-Market Adjustments on Securities
at Redwood and Opportunity Fund (Excluding Sequoia and Acacia)
By Underlying Collateral Type
Three Months Ended March 31, 2008
($ in millions)
             
Loans, OREI &
       
MTM
  
   
IGS
  
CES
  
Derivatives
  
Total
  
Percent (a)
  
Residential
                                
Prime
  
$
(10
)
$
(56
)
$
(1
)
$
(67
)
  
(40
)%
Alt-a
    
(5
)
  
(13
)
  
(2
)
  
(20
)
  
(53
)%
Subprime
    
(1
)
  
(1
)
  
(1
)
  
(3
)
  
(21
)%
Residential total
    
(16
)
  
(70
)
  
(4
)
  
(90
)
      
Commercial
    
-
   
(47
)
  
-
   
(47
)
  
(32
)%
CDO
    
(1
)
  
(2
)
  
-
   
(3
)
  
(6
)%
Interest rate agreements & other derivatives
     -     -    
(6
)
  
(6
)
      
Total mark-to-market adjustments
  
$
(17
)
$
(119
)
$
(10
)
$
(146
)
      
 
By Vintage & Equity
                           
Loans &
    
   
<= 2004
  
2005
  
2006
  
2007
  
2008
  
Derivatives
  
Total
  
                                    
Total mark-to-market adjustments
  
$
(35
)
$
(22
)
$
(34
)
$
(38
)
$
(10
)
$
(7
)
$
(146
)
                                             
MTM percent (a)
    
(22
)%
  
(22
)%
  
(27
)%
  
(34
)%
  
(43
)%
            
 
(a)
This percentage represents the MTMs taken as a percentage of the reported fair values at the beginning of the period, or purchase price if acquired during the period. It is intended to highlight the price declines by collateral type for the three months ended March 31, 2008. These price declines are specific to our portfolio and may not be indicative of price declines in the market in general.
 
►
Under GAAP, we value securities using bid-side markets (an exit price). Bid/offer spreads are generally wide for illiquid securities, and in today's turbulent market, spreads are especially wide. This difference in bid/offer spreads is the primary reason we recorded $11 million of negative MTM adjustments on purchases made in the first quarter.
 
► The following table shows the MTM impact on our balance sheet and income statement in the first quarter.
   
Mark-to-Market Adjustments on Securities
  
at Redwood and Opportunity Fund (Excluding Sequoia and Acacia)
  
Balance Sheet and Income Statement Effect
  
Three Months Ended March 31, 2008
  
($ in millions)
  
 
  
Redwood
  
Balance Sheet Effect
        
Adjustment to OCI
  
$
21
 
Income Statement Effect
        
Market valuation adjustments
        
FVO assets
    
(13
)
Impairment on AFS securities
    
(144
)
Changes in fair value on trading instruments
    
(10
)
Total income statement effect
    
(167
)
Total mark-to-market adjustments
  
$
(146
)
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
25
 
 
  
 
MARK-TO-MARKET ADJUSTMENTS
  
 
Impact on Redwood (continued)
 
►
During the first quarter, there were gross negative market value adjustments of $167 million, and net adjustments of negative $146 million after reversing $21 million of prior period temporary adjustments from equity (other comprehensive income) as shown in the table above.
 
►
The table below shows the first quarter MTM adjustments for the assets and liabilities at Acacia subesquent to the adoption of FAS 159 on January 1, 2008.
 
MTM Adjustments on Acacia Assets and Liabilities
Three Months Ended March 31, 2008
($ in millions)
 
Assets
        
Real estate securities and Loans
  
$
(787
)
Interest rate agreements and other derivatives
    
(50
)
Liabilities
        
ABS issued
    
810
  
Net mark-to-market adjustments
  
$
(27
)
 
►
During the first quarter, market prices for the assets collateralizing our CDOs and the related debt declined further due to elevating credit concerns and a market in which there was very light trading volume.
 
►
At Acacia, the entire net negative $27 million of MTM adjustments were reflected in the income statement as required by FAS 159.
 
►
As a result of the measurement techniques required by FAS 159, we expect to encounter some MTM earnings volatility in the future as a result of the consolidation of Acacia entities. We expect this volatility to be significantly less than we encountered in prior periods. This complex topic is more fully discussed in the Investments in Acacia module later in this Review.
 
26
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
MARK-TO-MARKET ADJUSTMENTS
 
Mark-to-Market Valuation Process
 
►
The fair values we use for our assets and liabilities reflect what we believe we would realize if we chose to sell our securities or would have to pay if we chose to buy back our asset-backed securities (ABS) issued liabilities. Establishing fair values is inherently subjective and is dependent upon many market-based inputs, including observable trades, information on offered inventories, bid lists, and indications of value obtained from dealers. Obtaining fair values for securities is especially difficult for illiquid securities (such as ours), and is made more difficult when there is limited trading visibility, as was the case in recent months. Where there are observable sales, many of them are from distressed sellers, and their sales tend to further depress asset prices. For these reasons, we expect market valuations to continue to be highly volatile.
 
►
Fair values for our securities and ABS issued are dependent upon a number of market-based assumptions, including future interest rates, prepayment rates, discount rates, credit loss rates, and the timing of credit losses. We use these assumptions to generate cash flow estimates and internal values for each individual security.
 
►
We request indications of value (marks) from dealers every quarter to assist in the valuation process. For March 31, 2008, we received dealer marks on 71% of the assets and 82% of our liabilities on our consolidated balance sheet. One major dealer that we have used in prior periods provided no marks.
 
►
One of the factors we consider in our valuation process is our assessment of the quality of the dealer marks we receive. Dealers remain inundated with requests for quarter-end marks, and there continues to be limited observable trading information for them to rely upon. Thus, their marks were most likely generated by their own pricing models for which they did not share their inputs and we had little insight into their assumptions.
 
►
Furthermore, the dealers continue to heavily qualify the information they send to us. The qualifications include statements to the effect that the markets are very volatile and are characterized by limited trading volume and poor price transparency, and in many cases, an increasing number of valuations are model-based due to a lack of observable trades.
 
►
Our valuation process relied on our internal values to estimate the fair values of our securities at March 31, 2008. In the aggregate, our internal valuations of the securities on which we received dealer marks were 29% lower than the aggregate dealer marks at March 31, 2008. Our internal valuations of our ABS issued on which we received dealer marks were 14% lower than the aggregate dealer marks at March 31, 2008.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
27
 
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
  
 
Summary
 
What is this?
 
Redwood invests in securities that are backed by pools of residential real estate loans. These  are primarily CES, and also include IGS and other real estate investments (OREI). Most of our  investments in residential real estate securities are backed by prime residential loans and some are backed by alt-a or subprime loans. The following discussion refers only to the residential securities owned by Redwood and the Opportunity Fund, exclusive of the loans and securities owned by Sequoia and Acacia and Redwood’s investments in Sequoia and Acacia.
 
Quarterly Update
 
►
Our residential securities portfolio declined by $48 million (or 30%) from $160 million to $112 million in the first quarter.This decrease was primarily due to negative market value adjustments partially offset by $38 million of residential prime securities acquisitions.
 
►
From a total market perspective, new securitizations of prime jumbo residential loans totaled $6 billion in the first quarter, a 71% decline from the fourth quarter, and a 91% decline from the year-ago period. Despite market conditions, we successfully worked with our banking partners to provide liquidity on three new prime securitizations. We purchased all of the CES securities ($5 million invested) and part of the IGS securities ($10 million invested) from these securitizations. Our base case returns, which assume no price appreciation or leverage, fall within our equity hurdle rate range of 12% to 18%.
 
►
We remained active participants in the secondary mortgage markets, although market liquidity was hindered by forced liquidations and systemic credit concerns. We acquired $10 million of prime CES and $7 million of prime IGS from seasoned vintages during the quarter. We also acquired $1 million of prime CES and $10 million of prime IGS from 2006 and 2007 vintages at significant discounts to face value. While we are focused on building our prime credit enhancement business, we plan to accelerate our investments in new and seasoned prime IGS.
 
►
The credit performance of our residential securities worsened during the first quarter. Prime and alt-a CES originated prior to 2005 continued to perform within our range of expectations, while newer vintage CES (acquired prior to the third quarter of 2007) continued to perform worse than expected. In almost all pools of loans, we are experiencing increases in loan delinquencies and losses. Our GAAP credit reserve balances are reassessed quarterly for changes in our loss expectations.
 
28
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
 
Quarterly Update (continued)
 
►
Turmoil in the housing markets remains a significant concern. Home prices, as measured by the S&P/Case-Shiller Home Price Index (composite-10), were down 13.6% at the end of February from a year ago, and the index has declined for 20 consecutive months. Foreclosure filings were up 57% in March from a year ago, according to Realty Trac, marking the 27th consecutive month of year-over-year increases.
 
►
Prepayment rates on the residential loans in our portfolio declined or remained at low levels during the first quarter. The overall slowdown in refinancing activity has been largely due to increases in mortgage rates, declines in housing values, and tightening in underwriting standards. Prepayment speeds on prime residential ARMs and negative amortization mortgages declined to a 23% rate in the first quarter, compared to 32% in the fourth quarter. Prime residential hybrid loans prepaid at a 12% rate in the first quarter, compared to 10% in the fourth quarter. Prime residential alt-a option ARMs prepaid at a 16% rate in the first quarter, down from 21% in the fourth quarter.
 
►
The new agency jumbo loan purchase programs (with loan limits of up to $729,750) began in April. Fannie Mae recently announced pricing of its jumbo loan product at 39 basis points over its conforming rate, as of April 17, 2008. This is encouraging, considering that recent premiums required by portfolio lenders have been about 150 basis points or more. It is still too early to assess the impact that these programs will have on new purchases and refinancings, however, as jumbo borrowers will face tighter underwriting guidelines, higher documentation standards, and declining home prices over the coming quarters.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
29
 
 
  
 
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. The following discussion refers only to the prime securities at Redwood, exclusive of any prime securities owned by Acacia and Redwood’s investments in Sequoia.
 
Quarterly Update
 
► The following table presents the activity in our prime securities portfolio during the first quarter of 2008.
 
 
First Quarter Activity
  
(by market value, $ in millions)
  
   
Market Value at December 31, 2007
  
$
129
 
Acquisitions
    
38
 
Transfers to / from other portfolios
    
1
 
Principal payments
    
(15
)
Discount amortization
    
10
 
Changes in fair value, net
    
(65
)
Market Value at March 31, 2008
  
$
98
 
 
►
Total interest income generated by our prime securities was $17 million in the first quarter. Annualized interest income over our average amortized cost for prime securities was 26%.
 
►
At March 31, 2008, our prime portfolio had an amortized cost of 25% of principal value and a fair value as reported on our balance sheet of 14% of principal value. The table below presents rating and vintage information of the prime securities in our portfolio at March 31, 2008.
   
Prime Securities at Redwood
  
By Rating and Vintage
  
March 31, 2008
  
(by market value, $ in millions)
  
 
  
 
  
<=2004
  
2005
  
2006
  
2007
  
2008
  
Total
  
IGS
    
AAA
  
$
1
 
$
-
 
$
-
 
$
-
 
$
-
 
$
1
 
   
AA
    
1
   
-
   
-
   
-
   
3
   
4
 
   
A
    
-
   
-
   
9
   
-
   
1
   
10
 
   
BBB
    
2
   
1
   
-
   
-
   
2
   
5
 
IGS
        
4
   
1
   
9
   
-
   
6
   
20
 
CES
    
BB
    
12
   
7
   
2
   
3
   
1
   
25
 
   
B
    
15
   
2
   
1
   
3
   
1
   
22
 
   
NR
    
21
   
6
   
2
   
2
   
-
   
31
 
CES Total
    
 
    
48
   
15
   
5
   
8
   
2
   
78
 
Total
         
$
52
 
$
16
 
$
14
 
$
8
 
$
8
 
$
98
 
   
By Loan Type and Vintage
  
 
  
<=2004
  
2005
  
2006
  
2007
  
2008
  
Total
  
ARM
  
$
4
 
$
-
 
$
-
 
$
-
 
$
-
 
$
4
 
Fixed
    
14
   
-
   
9
   
4
   
4
   
31
 
Hybrid
    
31
   
13
   
4
   
3
   
4
   
55
 
Option Arm
    
3
   
3
   
1
   
1
   
-
   
8
 
Total
  
$
52
 
$
16
 
$
14
 
$
8
 
$
8
 
$
98
 
 
30
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
 
Prime Securities Portfolio
 
Quarterly Update (continued)
 
►
Our prime CES portfolio is generally concentrated in more seasoned assets (62% of our portfolio by current market value) originated in 2004 and earlier. Although delinquencies are currently rising across all vintages, our seasoned CES are still performing within our original expectations.  Much of our invested principal has already been returned on these securities, diminishing the impact of rising loan delinquencies on overall performance. For 2005 and later vintages (38% of our portfolio), the performance of our investments is generally worse than our original expectations. These securities have not benefited from a period of high principal repayments and appreciating home prices, and are therefore more exposed to rising delinquencies. The delinquency chart on the following page illustrates delinquency rates on our prime CES by loan vintage.
 
►
The principal value credit losses on prime CES were $11 million during the quarter and were charged against our designated credit reserve. The losses were larger than expected and resulted from a combination of higher loss severities on foreclosed properties, shorter foreclosure periods, and increases in the number of short sales. The increase in short sales had the effect of accelerating losses, but the realized loss severity on short sales averaged 20% compared to 32% from foreclosure sales.
 
►
For tax purposes, losses on prime securities were $4 million ($0.13 per share). This deduction is less than the principal value of credit losses incurred on the underlying loans as we own most of our credit sensitive assets at a tax basis that is substantially less than par value.
 
►
For GAAP purposes, we designate credit reserves on CES that we classify as available-for-sale. Our designated GAAP credit reserves for prime CES were $357 million ($10.91 per share) at March 31, 2008, an increase of $69 million for the quarter. This increase was due to $23 million new acquisitions and $11 million of credit losses, and $57 million resulting from our reassessment of credit reserves on some recent vintage prime CES. The summary-level information below presents our weighted-average credit reserve balances on prime CES, as designated by loan vintage and credit rating.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
31
 
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
  
 
Prime Securities Portfolio
 
Quarterly Update (continued)
   
Credit Reserve Analysis - Prime CES at Redwood
By current rating, by vintage
March 31, 2008
($ in millions)
 
 
 
 
 
<=2004
 
2005
 
2006
 
2007
 
2008
 
Total
 
 
  
 
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
BB
    
 
                                                                          
     
Face
  
$
43
    
0.47
%
$
30
    
0.33
%
$
6
    
0.07
%
$
16
    
0.30
%
$
6
    
0.44
%
$
101
    
0.30
%
     
Unamortized discount
    
(13
)
        
(14
)
        
(1
)
        
3
         
(3
)
        
(28
)
      
     
Discount designated as credit reserve
    
(6
)
  
0.07
%
  
0
   
0.00
%
  
(2
)
  
0.03
%
  
(15
)
  
0.29
%
  
0
   
0.02
%
  
(23
)
  
0.07
%
 
    
Unrealized gains (losses)
 
  
(12
)
  
   
   
(9
)
  
   
   
(1
)
  
   
   
(1
)
  
   
   
(2
)
  
   
   
(25
)
  
   
 
     
Market value
  
$
12
        
$
7
        
$
2
        
$
3
        
$
1
        
$
25
        
                                                                                 
     
Overall credit protection to BB CES
          
0.73
%
        
0.43
%
        
1.00
%
        
0.39
%
        
0.59
%
        
0.66
%
     
 
                                                                          
B
    
 
                                                                          
     
Face
  
$
45
    
0.09
%
$
15
    
0.24
%
$
11
    
0.28
%
$
23
    
0.14
%
$
5
    
0.28
%
$
99
    
0.12
%
     
Unamortized discount
    
(11
)
        
(4
)
        
0
         
2
         
0
         
(13
)
      
     
Discount designated as credit reserve
    
(13
)
  
0.02
%
  
(8
)
  
0.14
%
  
(10
)
  
0.27
%
  
(22
)
  
0.13
%
  
(3
)
  
0.22
%
  
(56
)
  
0.07
%
 
    
Unrealized gains (losses)
 
  
(6
)
  
   
   
(1
)
  
   
   
0
   
   
   
0
   
   
   
(1
)
  
   
   
(8
)
  
   
 
     
Market value
  
$
15
        
$
2
        
$
1
        
$
3
        
$
1
        
$
22
        
                                                                                 
     
Overall credit protection to B CES
          
0.28
%
        
0.23
%
        
0.45
%
        
0.36
%
        
0.31
%
        
0.30
%
     
 
                                                                          
Unrated  
                                                                          
     
Face
  
$
151
    
0.51
%
$
91
    
0.40
%
$
51
    
0.24
%
$
41
    
0.22
%
$
4
    
0.31
%
$
338
    
0.36
%
     
Unamortized discount
    
(25
)
        
1
         
2
         
2
         
0
         
(20
)
      
     
Discount designated as credit reserve
    
(100
)
  
0.34
%
  
(82
)
  
0.37
%
  
(51
)
  
0.24
%
  
(41
)
  
0.22
%
  
(4
)
  
0.31
%
  
(278
)
  
0.30
%
 
    
Unrealized (losses) gains
    
(5
)
  
   
   
(4
)
  
   
   
0
   
   
   
0
   
   
   
0
   
   
   
(9
)
  
   
 
 
    
Market value
  
$
21
    
   
 
$
6
    
   
 
$
2
    
   
 
$
2
    
   
 
$
-
    
   
 
$
31
    
   
 
 
  
 
►
The above charts can be used to analyze our credit reserves relative to existing credit trends. For example, the chart above shows that serious delinquencies on 2004 and prior vintage CES are currently 0.40% of collateral loan balances. If we assume a default rate of seriously delinquent loans of 70% and a loss severity of 35%, total expected credit losses from these delinquencies would equal 0.10% of current collateral loan balances. Credit reserves on 2004 and prior vintage unrated CES currently total 0.34% of collateral balances (as shown in the table above). Under this scenario, our credit reserves could absorb the losses from the existing seriously delinquent loans at March 31, 2008, plus another 0.24% of future losses.
 
32
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
 
Prime Securities Portfolio
 
Quarterly Update (continued)
 
►
The following chart breaks out our prime portfolio loan types by weighted average interest rate, as well as our estimate of conforming and non-conforming (i.e., jumbo) balances as of March 31, 2008. This chart illustrates how our portfolio might be affected by refinancing activity from a reduction in interest rates, the temporary increases in GSE conforming loan limits, or a combination of both. The bottom two charts show current interest rates and are helpful when analyzing the loan rates in our portfolio. We estimate that approximately 40% of the principal amount of the jumbo loans in our portfolio will be eligible for purchase by the GSEs based only on the higher GSE conforming loan limit and that half of these would meet the underwriting criteria including loan-to-value ratios. The decision by these borrowers to refinance their loans will largely be dependent on their current mortgage rates relative to the new rates offered by the GSEs.
 
Prime CES at Redwood
Composition by Product Type, Vintage and Balance
March 31, 2008 (a)
  
  
  
<= 2004
   
2005
   
2006
   
2007
   
2008
   
Total
   
Product
  
% of Balance
  
Wtd Avg Loan Rate
  
% of Balance
  
Wtd Avg Loan Rate
  
% of Balance
  
Wtd Avg Loan Rate
  
% of Balance
  
Wtd Avg Loan Rate
  
% of Balance
  
Wtd Avg Loan Rate
  
% of Balance
  
Wtd Avg Loan Rate
  
Hybrid
    
48%
 
  
4.79%
 
  
55%
 
  
5.38%
 
  
39%
 
  
6.14%
 
  
27%
 
  
6.33%
 
  
12%
 
  
6.35%
 
  
46%
 
  
5.17%
 
ARM(b)
    
7%
 
  
6.30%
 
  
<1%
 
  
6.28%
 
  
2%
 
  
5.52%
 
  
<1%
 
  
6.43%
 
  
--
    
--
    
4%
 
  
6.27%
 
Fixed
    
5%
 
  
5.58%
 
  
7%
 
  
6.03%
 
  
11%
 
  
6.33%
 
  
43%
 
  
6.39%
 
  
88%
 
  
6.54%
 
  
11%
 
  
6.12%
 
Option-ARM
    
4%
 
  
6.63%
 
  
21%
 
  
6.84%
 
  
33%
 
  
7.09%
 
  
20%
 
  
7.32%
 
  
--
    
--
    
13%
 
  
6.96%
 
Jumbo(c)
    
63%
 
        
84%
 
    
   
 
85%
 
    
   
 
91%
 
        
100%
 
        
73%
 
    
                                                               
Hybrid
    
17%
 
  
6.63%
 
  
11%
 
  
6.53%
 
  
6%
 
  
5.61%
 
  
1%
 
  
6.41%
 
  
--
    
--
    
13%
 
  
6.61%
 
ARM(b)
    
6%
 
  
6.34%
 
  
<1%
 
  
6.01%
 
  
<1%
 
  
6.43%
 
  
<1%
 
  
6.47%
 
  
--
    
--
    
3%
 
  
6.32%
 
Fixed
    
12%
 
  
6.39%
 
  
2%
 
  
6.48%
 
  
<1%
 
  
7.28%
 
  
2%
 
  
7.56%
 
  
--
    
--
    
7%
 
  
6.90%
 
Option-ARM
    
2%
 
  
5.74%
 
  
3%
 
  
5.68%
 
  
8%
 
  
6.72%
 
  
6%
 
  
7.15%
 
  
--
    
--
    
3%
 
  
5.85%
 
Conforming
    
37%
 
        
16%
 
        
15%
 
        
9%
 
        
--
          
27%
 
      

(a) The product percentages differ from other tables as the table above represents our exposure on a loan balance basis and others are on a market value basis.
(b) ARMs are indexed to one or six month LIBOR and have a weighted average margin of 1.71%.
(c) We estimate that 40% of the jumbo bucket consists of loans that would become newly conforming based on size under the economic stimulus plan.
 
  
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
33
 
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
  
 
Prime Securities Portfolio
 
Quarterly Update (continued)
 
►
The chart below shows the trends in our residential prime CES prepayment speeds, which have been declining for our adjustable-rate mortgages and remain at low speeds for our fixed and hybrid loans.
 
  
 
►
The degree of refinancing activity is important to consider, since our credit reserves provide protection on securities that we have purchased at a substantial discount to principal face amounts. All things being equal, faster prepayments would benefit these investments by accelerating the collection of principal and potential recovery of credit reserves. Any resulting transfer of credit reserve amounts to unamortized discount status has the effect of increasing GAAP yields and interest income over time.
 
34
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
 
Prime Securities Portfolio
 
Quarterly Update (continued)
 
►
We believe the loan characteristics of our prime portfolio set forth below illustrate the high quality of these loans, including relatively low LTV ratios and high FICO scores. As the following table also illustrates, we have geographically diverse pools of prime loans that are generally seasoned over three years.
 
Residential Prime CES at Redwood
Underlying Loan Characteristics
as of March 31, 2008
         
Number of loans
303,657
 
Wtd Avg FICO
736
Total loan face ($ in millions)
127,183
  
FICO: 621 - 660
4%
Average loan size ($ in 1000's)
$419
 
FICO: 661 - 700
15%
 
 
  
FICO: 701 - 740
27%
Southern CA
26%
  
FICO: > 740
51%
Northern CA
23%
  
Unknown
3%
Florida
6%
    
 
New York
6%
  
Conforming at origination %
25%
Georgia
2%
  
> $1 MM %
10%
New Jersey
3%
    
 
Other states
34%
  
2nd home %
6%
 
 
  
Investment home %
2%
2008 origination
<1%
    
 
2007 origination
8%
  
Purchase
42%
2006 origination
14%
  
Cash out refi
25%
2005 origination
22%
  
Rate-term refi
33%
2004 origination and earlier
56%
    
 
 
 
  
Full doc
49%
Wtd Avg Original LTV
69%
  
No doc
7%
Original LTV: 0 - 50
13%
  
Other (limited, etc)
41%
Original LTV: 50 - 60
12%
  
Unknown
3%
Original LTV: 60. - 70
22%
  
2-4 family
1%
Original LTV: 70 - 80
50%
  
Condo
11%
Original LTV: 80 - 90
2%
  
Single family
88%
Original LTV: 90 - 100
1%
    
 
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
35
 
 
  
 
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. The following discussion reflects only the alt-a securities at Redwood, exclusive of any alt-a securities owned by Acacia.
 
Quarterly Update
 
►
The following table presents the activity in our alt-a securities portfolio during the first quarter of 2008.
   
Alt-a Securities at Redwood
  
First Quarter Activity
  
(by market value, $ in millions)
  
   
Market Value at December 31, 2007
  
$
41
 
Acquisitions
    
-
 
Principal payments
    
(5
)
Discount amortization
    
2
 
Changes in fair value, net
    
(21
)
Market Value at March 31, 2008
  
$
17
 
 
►
Our residential alt-a securities portfolio declined to $14 million in the first quarter, primarily due to negative market value changes. We acquired less than $1 million of alt-a securities during the quarter.
 
►
Total interest income generated by our alt-a securities was $8 million in the quarter, which produced an annualized yield of 85% based on our average amortized cost of the securities.
 
►
At March 31, 2008 our alt-a CES portfolio had an average basis amortized cost of 5% of principal value and a fair value as reported on our balance sheet of 4% of principal value. The table below provides information on the alt-a securities in our portfolio.
   
Alt-a Securities at Redwood
  
By Rating and Vintage
  
March 31, 2008
  
(by market value, $ in millions)
  
 
  
 
  
<=2004
  
2005
  
2006
  
2007
  
2008
  
Total
  
IGS
    
AAA
  
$
-
 
$
-
 
$
-
 
$
2
 
$
-
 
$
2
 
     
AA
    
-
   
-
   
-
   
-
   
-
   
-
 
     
A
    
-
   
-
   
-
   
1
   
-
   
1
 
     
BBB+
    
-
   
-
   
-
   
-
   
-
   
-
 
     
BBB
    
-
   
-
   
1
   
-
   
-
   
1
 
     
BBB-
    
-
   
-
   
-
   
1
   
-
   
1
 
IGS
        
-
   
-
   
1
   
4
   
-
   
5
 
CES
    
BB
    
-
   
-
   
-
   
-
   
-
   
-
 
     
B
    
-
   
-
   
-
   
2
   
-
   
2
 
     
NR
    
1
   
4
   
1
   
1
   
-
   
7
 
CES Total
        
1
   
4
   
1
   
3
   
-
   
9
 
OREI
    
RES
    
-
   
-
   
-
   
1
   
-
   
1
 
     
NIM
    
-
   
-
   
2
   
-
   
-
   
2
 
OREI
    
   
   
-
   
-
   
2
   
1
   
-
   
3
  
Total
    
   
 
$
1
 
$
4
 
$
4
 
$
8
 
$
-
 
$
17
 
   
By Loan Type and Vintage
  
 
  
<=2004
  
2005
  
2006
  
2007
  
2008
  
Total
  
ARM
  
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
Fixed
    
-
   
-
   
-
   
1
   
-
   
1
 
Hybrid
    
1
   
-
   
2
   
4
   
-
   
7
 
Option Arm
    
-
   
4
   
2
   
3
   
-
   
9
 
Total
  
$
1
 
$
4
 
$
4
 
$
8
 
$
-
 
$
17
 
 
36
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
 
Alt-a Securities Portfolio
 
Quarterly Update (continued)
 
►
Seriously delinquent loans underlying alt-a CES increased during the quarter from 2.75% to 4.49% of original balances and 5.59% to 9.51% of current balances. Delinquency trends on alt-a CES continue to increase at a rate more severe than we originally anticipated. Our credit reserves for these securities reflect our current loss assumptions.
 
►
Principal value credit losses on alt-a CES were $16 million during the quarter and were charged against our GAAP credit reserve. For tax purposes, losses on alt-a securities were $5 million ($0.15 per share). This deduction is less than the principal value of credit losses incurred on the underlying loans as we own most of our credit sensitive assets at a tax basis that is substantially less than par value.
 
►
Our designated GAAP credit reserves for alt-a CES was $206 million ($6.26 per share) at March 31, 2008, a net increase of $10 million for the quarter due to the credit losses ($16 million) and our reassessment of credit reserves on some recent vintage alt-a CES ($26 million).
 
►
The summary-level information below presents weighted-average credit reserve balances by principal value, segmented by loan vintage and credit rating. Since credit reserves are set on a security level basis, poorly performing securities can distort the aggregate balances and averages.
   
Credit Reserve Analysis - Alt-a Securities at Redwood
By current rating, by vintage
March 31, 2008
($ in millions)
 
 
 
 
 
<=2004
 
2005
 
2006
 
2007
 
2008
 
Total
 
 
  
 
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
BB
                                                                                
     
Face
  
$
1
    
1.12
%
$
-
    
-
  
$
-
    
-
  
$
3
    
0.37
%
$
-
    
-
  
$
4
    
0.49
%
     
Unamortized discount
    
(1
)
        
0
         
0
         
0
         
0
         
(1
)
      
      
Discount designated as credit reserve
    
0
   
0.33
%
  
0
         
0
         
(3
)
  
0.37
%
  
0
         
(3
)
  
0.36
%
      
Unrealized gains (losses)
 
  
0
         
0
   
-
    
0
   
-
    
0
   
-
    
0
   
-
    
0
       
      
Market value
  
$
-
        
$
-
        
$
-
        
$
-
        
$
-
        
$
-
        
     
 
                                                                          
     
Overall credit protection to BB CES
          
1.92
%
        
-
          
-
          
2.57
%
        
-
          
2.47
%
     
 
                                                                          
B
    
 
                                                                          
     
Face
  
$
-
    
-
  
$
2
    
0.94
%
$
16
    
1.34
%
$
39
    
0.54
%
$
-
    
-
  
$
57
    
0.67
%
      
Unamortized discount
    
0
         
(1
)
        
0
         
1
         
0
         
0
       
     
Discount designated as credit reserve
    
0
   
-
    
(1
)
  
0.39
%
  
(16
)
  
1.27
%
  
(39
)
  
0.54
%
  
0
   
-
    
(56
)
  
0.64
%
     
Unrealized gains (losses)
 
  
0
         
0
         
0
         
1
         
0
         
1
       
     
Market value
  
$
-
        
$
-
        
$
-
        
$
2
        
$
-
        
$
2
        
     
 
                                                                          
     
Overall credit protection to B CES
          
-
          
2.28
%
        
1.40
%
        
1.44
%
        
-
          
1.45
%
     
 
                                                                          
Unrated
                                                                          
     
Face
  
$
20
    
0.60
%
$
38
    
0.63
%
$
40
    
1.11
%
$
58
    
0.67
%
$
-
    
-
  
$
156
    
0.72
%
     
Unamortized discount
    
(3
)
        
1
         
0
         
1
         
0
         
(1
)
      
     
Discount designated as credit reserve
    
(16
)
  
0.48
%
  
(34
)
  
0.57
%
  
(39
)
  
1.07
%
  
(58
)
  
0.67
%
  
0
   
-
    
(147
)
  
0.68
%
     
Unrealized (losses) gains
    
0
         
(1
)
        
0
         
0
         
0
         
(1
)
      
     
Market value
  
$
1
        
$
4
        
$
1
        
$
1
        
$
-
        
$
7
        
 
  
 
►
Please see page 32 for an explanation of the table and chart above.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
37
 
  
 
RESIDENTIAL REAL ESTATE SECURITIES
  
 
Alt-a Securities Portfolio
 
Quarterly Update (continued)
 
►
Some poorly performing pools of loans underlying some of our securities are significantly increasing the aggregate delinquencies. The amount of losses that an alt-a security can absorb is limited to the principal face amount of that security. Since each pool of loans is independent, high losses from a particular pool will have no impact on the other pools of loans underlying other securities in our portfolio, but could have a significant impact on the aggregate delinquencies shown in our analysis.
 
►
Prepayment speeds for alt-a CES continued to decline in the first quarter, as shown in the following chart:
 
  
 
►
Below is a table that details the characteristics of the underlying alt-a loans that we credit enhance.
 
Residential Alt-A CES at Redwood
Underlying Loan Characteristics
as of March 31, 2008
Number of loans
44,860
 
Wtd avg FICO
705
Total loan face ($ in millions)
17,658
  
FICO: <= 620
1%
Average loan size ($ in 1000's)
$394
 
FICO: 621 - 660
15%
 
 
  
FICO: 661 - 700
32%
Southern CA
31%
  
FICO: 701 - 740
27%
Northern CA
21%
  
FICO: > 740
24%
Florida
11%
  
Unknown
1%
New York
3%
    
 
Georgia
1%
  
Conforming at origination %
43%
New Jersey
3%
  
> $1 MM %
16%
Other states
30%
  
 
 
 
 
  
2nd home %
7%
2008 origination
0%
  
Investment home %
11%
2007 origination
24%
  
 
 
2006 origination
24%
  
Purchase
35%
2005 origination
29%
  
Cash out refi
43%
2004 origination and earlier
23%
  
Rate-term refi
22%
 
 
  
 
 
Wtd avg original LTV
78%
  
Full doc
15%
Original LTV: 0 - 50
3%
  
No doc
1%
Original LTV: 50 - 60
5%
  
Other (limited, etc)
75%
Original LTV: 60 - 70
16%
  
Unknown/not categorized
9%
Original LTV: 70 - 80
64%
  
 
 
Original LTV: 80 - 90
9%
  
2-4 family
5%
Original LTV: 90 - 100
3%
  
Condo
11%
 
 
  
Single family
84%
 
38
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
COMMERCIAL REAL ESTATE SECURITIES
 
Commercial Securities Portfolio
 
What is this?
 
We invest in securities that are backed by pools of commercial real estate loans. The following discussion refers only to the commercial securities owned by Redwood, exclusive of any commercial securities owned by Acacia.
 
Quarterly Update
 
►
Our commercial securities portfolio declined by $47 million (or 30%) from $147 million to $100 million in the first quarter due to negative market value changes. We did not purchase any commercial securities in the first quarter of 2008, or during the last three quarters. We are carefully monitoring developments and trends in commercial real estate and positioning ourselves to expand our commercial business.
 
►
The commercial securitization market remained largely inactive during the first quarter, reflecting a substantial reduction in liquidity and a negative investor sentiment. Yields on fixed rate AAA-rated CMBS continued to rise through March, forcing issuers to raise loan interest rates offered to borrowers. A steady decline in origination volume resulted in new CMBS of less than $5 billion in the first quarter of 2008, compared to $61 billion in the first quarter of 2007.
 
►
Financing costs for property acquisitions have increased, resulting in higher capitalization rates and declining property values. Stricter underwriting standards and fewer refinance alternatives will likely result in more extensions and defaults on maturing loans. On the positive side, our commercial CES is primarily backed by longer term fixed-rate loans, with few loans scheduled to mature in the near term.
 
►
The credit performance of our commercial securities generally remained stable during the first quarter, but economic headwinds lie ahead for borrowers and corporate tenants. We experienced some deterioration in expected cash flows on commercial CES, as losses on certain loans in 2006 and 2007 vintage securities are likely to occur sooner than we originally expected.
 
►
According to Fitch, serious delinquencies (60+ days) for $562 billion of loans backing rated securitizations in the U.S. increased to 0.33% in March from a record low of 0.27% in January. We expect further increases in delinquency levels throughout the year. Rating agency downgrades outpaced upgrades in February 2008 for the first time since February 2003, with 63 bonds downgraded and 53 bonds upgraded. We believe negative ratings actions will continue throughout 2008 as the rating agencies reassess collateral performance for newer vintages.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
39
 
 
  
 
COMMERCIAL REAL ESTATE SECURITIES
  
 
Commercial Securities Portfolio
 
Quarterly Update (continued)
 
►
Our commercial securities portfolio consists of CES investments that we fund with equity. The types of loans backing these securities are typically fixed-rate with 10-year average lives. The following table presents our commercial securities portfolio by credit rating and vintage. The vintage shown is the year the securitization was completed and may include commercial real estate loans originated in an earlier year.
   
Commercial Securities at Redwood
  
Rating & Vintage
  
March 31, 2008
  
(by market value in $ millions)
  
 
  
<= 2004
  
2005
  
2006
  
2007
  
2008
  
Total
  
BB+
 
$
2
  
$
-
  
$
1
  
$
2
  
$
-
  
$
5
  
BB
   
2
   
-
   
2
   
-
   
-
   
4
 
BB-
   
1
   
-
   
3
   
1
   
-
   
5
 
B+
   
-
   
-
   
3
   
2
   
-
   
5
 
B
   
-
   
-
   
1
   
1
   
-
   
2
 
B-
   
-
   
-
   
3
   
3
   
-
   
6
 
NR
   
11
   
21
   
35
   
6
   
-
   
73
 
Total CES
 
$
16
  
$
21
  
$
48
  
$
15
  
$
-
  
$
100
  
 
► Total interest income generated by our commercial securities was $5 million for the first quarter, which resulted in an annualized yield on our average amortized cost of 10.9%.
 
►
The overall credit performance of commercial securities portfolio weakened slightly during the first quarter. Total serious delinquencies (60 days+) were $227 million, or 0.42% of the $55 billion of commercial loans that we credit enhance, an increase from 0.30% of the current balance at December 31, 2007. Included in these delinquencies are $129 million of loans contained within securities with a cumulative fair value of $9 million.
 
►
Principal credit losses on our commercial CES of $38,000 during the quarter were charged against our credit reserve. For tax purposes, realized losses on commercial securities were $14,000 in the first quarter. This deduction is less than the principal value of credit losses incurred on the underlying loans, as we own our commercial CES at a tax basis that is substantially less than par value.
 
►
Our GAAP credit reserve for commercial CES was $378 million ($11.56 per outstanding share) at March 31, 2008, an increase of $60 million for the quarter due to the reassessment of future credit losses on certain securities.
 
40
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
COMMERCIAL REAL ESTATE SECURITIES
 
Commercial Securities Portfolio
 
Quarterly Update (continued)
 
►
When assessing commercial credit reserves, it is important to consider that fixed rate commercial loans do not usually prepay like residential loans due to various early refinancing disincentives for borrowers. These loans typically perform very well in their early stages, while experiencing a greater risk of default near maturity when borrowers are forced to obtain new financing. Because of this dynamic, we maintain our initial credit reserve levels on commercial CES until we are confident that late-term defaults are highly unlikely. This leads to reported GAAP yields in the early years that may not accurately reflect the economic returns that will eventually be realized over the life of these investments.
 
►
The summary-level information below presents weighted-average credit reserve balances by principal value, designated by loan vintage and credit rating. Please see page 32 for an explanation of the table and chart below.
 
Credit Reserve Analysis - Commercial CES at Redwood
By current rating, by vintage
March 31, 2008
($ in millions)
 
 
 
 
 
<=2004
 
2005
 
2006
 
2007
 
2008
 
Total
 
 
  
 
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
Amount
  
% of loans
  
BB
                                                                                
     
Face
  
$
9
    
0.09
%
$
-
    
-
  
$
23
    
0.13
%
$
15
    
0.11
%
$
-
    
-
  
$
47
    
0.11
%
     
Unamortized discount
    
(1
)
        
0
         
(17
)
        
(12
)
        
0
         
(30
)
      
     
Discount designated as credit reserve
    
0
   
-
    
0
   
-
    
0
   
-
    
0
   
-
    
0
   
-
    
0
   
0.00
%
     
Unrealized gains (losses)
 
  
(3
)
        
0
         
0
         
0
         
0
         
(3
)
      
     
Market value
  
$
5
        
$
-
        
$
6
        
$
3
        
$
-
        
$
14
        
     
  
                                                                         
     
Overall credit protection to BB CES
          
3.37
%
        
-
          
2.14
%
        
2.00
%
        
-
          
2.36
%
     
  
                                                                         
B
    
  
                                                                         
     
Face
  
$
-
    
-
  
$
-
    
-
  
$
34
    
0.17
%
$
27
    
0.19
%
$
-
    
-
  
$
61
    
0.17
%
     
Unamortized discount
    
0
         
0
         
(27
)
        
(22
)
        
0
         
(49
)
      
     
Discount designated as credit reserve
    
0
   
-
    
0
   
-
    
0
   
0.00
%
  
0
   
0.00
%
  
0
   
-
    
0
   
0.00
%
     
Unrealized gains (losses)
 
  
0
         
0
         
0
         
1
         
0
         
1
       
     
Market value
  
$
-
        
$
-
        
$
7
        
$
6
        
$
-
        
$
13
        
     
  
                                                                         
     
Overall credit protection to B CES
          
-
          
-
          
1.42
%
        
1.27
%
        
-
          
1.36
%
     
  
                                                                         
Unrated
    
  
                                                                         
     
Face
  
$
49
    
0.58
%
$
124
    
0.61
%
$
204
    
1.10
%
$
37
    
1.01
%
$
-
    
-
  
$
414
    
0.81
%
     
Unamortized discount
    
(2
)
        
4
         
34
         
6
         
0
         
42
       
     
Discount designated as credit reserve
    
(36
)
  
0.44
%
  
(102
)
  
0.50
%
  
(203
)
  
1.10
%
  
(37
)
  
1.01
%
  
0
   
-
    
(378
)
  
0.75
%
     
Unrealized (losses) gains
    
0
         
(6
)
        
0
         
0
         
0
         
(6
)
      
     
Market value
  
$
11
        
$
20
        
$
35
        
$
6
        
$
-
        
$
72
        
 
  
 
►
As noted earlier, a few poorly performing loans are significantly increasing the aggregate delinquencies in our portfolio.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
41
 
 
  
 
CDO SECURITIES
  
 
Summary
 
What is this?
 
We invest in securities issued from CDO securitizations sponsored by third parties. Typically, the collateral pool underlying these securities consists of a mixture of residential and commercial investment-grade securities and near IGS. CDO securities from third parties are primarily owned by our Acacia entities, and, on a going forward basis, may be acquired for the Opportunity Fund; however, Redwood does, on occasion, and may continue to acquire certain CDO securities. This module addresses only the CDO securities held at Redwood.
 
Quarterly Update
 
►
We did not acquire any CDO securities for Redwood in the first quarter. At the end of the quarter, our CDO portfolio totaled $15 million after we recorded $6 million of impairments in the quarter.
 
►
Total interest income generated by CDO securities was $1 million for the first quarter and annualized interest income over our average amortized cost was 15%.
 
►
New issuance and secondary market trading activity was virtually nonexistent during the quarter for asset-backed securities CDOs. As a result, market pricing transparency for CDOs is extremely poor, making fair values for our CDO portfolio difficult to determine.
 
42
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
INVESTMENTS IN SEQUOIA
 
Summary

What is this?
 
Sequoia entities are independent securitization entities that acquire residential mortgage loans and create and issue ABS backed by these loans. Most of the loans that Sequoia entities acquire are prime-quality loans. Most of the investment-grade rated ABS created by Sequoia are sold to third party investors. Redwood usually acquires most of the CES and occasionally acquires the interest-only securities (IOs). Acacia also acquires some CES, IOs, and IGS issued by Sequoia. Although Redwood’s investment in Sequoia entities is relatively small and limited, the loans and ABS issued by Sequoia are shown on our consolidated financial statements. Redwood’s investments in these entities do not appear on our balance sheet as an asset – rather it is reflected as the difference between the consolidated assets of Sequoia and the consolidated Sequoia ABS issued to third parties.
 
Redwood’s credit risk is limited to its investment in the CES Redwood acquires from the Sequoia entities. Each Sequoia entity is independent from the others, thus the performance of any one Sequoia entity will not affect any other Sequoia entity.
 
Over the years, Sequoia securitizations have created significant profits for Redwood. These profits have two underlying economic components: the profit or loss created at the time of securitization on those ABS sold to investors and the returns earned over time on the securities that we retained as investments. For GAAP purposes, both of these components are recognized over time through net interest income.
 
For the past several years, approximately 97% of the ABS issued by Sequoia were sold to third parties, 2% were sold to Acacia, and 1% were sold to Redwood.
 
Quarterly Update
 
►
As of March 31, 2008, we had 38 Sequoia transactions outstanding.
 
►
Due to the turbulence in the mortgage markets and concerns over credit performance, AAA buyers are now requiring a much higher yield to compensate for actual or perceived risk. If we were to buy loans and securitize them at current AAA price levels, the transaction would result in a significant loss. Consequently, since July 2007, we have not acquired loans and have not completed new Sequoia securitizations. We do believe the prime non-agency securitization market will likely be one of the first structured markets to return; however, until the market stabilizes and the AAA bid improves, we do not anticipate completing any new Sequoia transactions.
 
►
The GAAP carrying value of Redwood’s investments in Sequoia is $146 million at March 31, 2008. This is reflected on our balance sheet as the difference between residential loans of $6.8 billion and ABS issued of $6.6 billion. Both the loans and ABS issued are carried at their cost basis.
 
►
Our estimated fair value of Sequoia securities that Redwood owns at March 31, 2008 was $92 million. This consists of $67 million of IOs, $19 million of CES, and $6 million of IGS. We used the same valuation process to value the Sequoia securities as we did for third party securities (as described on page 27). Our IOs are all rated AAA, the IGS we own are mostly AA-rated, and the CES are rated BB, B, and unrated.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
43
 
 
  
 
INVESTMENTS IN SEQUOIA
  
 
Quarterly Update (continued)
 
►
The primary difference between our GAAP carrying value and the fair value of our investments in Sequoia is that for several years the loan premium amortization expenses as calculated under GAAP have not kept pace with prepayments. For a portion of these loans, our GAAP amortization method is linked more closely to short-term interest rates. As short-term interest rates decline, which they did during the quarter, we expect premium amortization for this portion of the loan portfolio to increase. Loan premium amortization expenses, a component of interest income, was $8 million in the first quarter. We ended the quarter with a $6.8 billion carrying value of loans and a principal loan balance of $6.7 billion for an average basis of 100.81%.
 
►
Cash generated by our investments in Sequoia during this quarter totaled $23 million.
 
►
Net interest income for Sequoia was $4 million in the first quarter.
 
►
Seriously delinquent loans increased from $68 million to $84 million in the first quarter, an increase from 0.96% to 1.25% of current balances. The largest increases in delinquencies were from loans originated in 2006 and 2007 as displayed in the chart below. We expect delinquencies on residential loans to continue to increase.
 
  
 
►
At March 31, 2008, our loan loss reserve was $24 million, or 0.36% of the current loan balance, an increase of $6 million in the quarter. Our credit provision for loans was $8 million in the first quarter of 2008, compared to $5 million in the fourth quarter of 2007. The increase in the credit provision was attributable to higher delinquencies. We had net charge-offs of $2 million in each of the first quarter of 2008 and the fourth quarter of 2007.
 
►
As a result of rising delinquencies and concerns about future performance, certain of the ABS issued by Sequoia have been downgraded by credit rating agencies. Specifically, ABS issued by two Sequoia entities in 2006 and 2007 were downgraded and two are on negative watch. Redwood’s investment in these affected Sequoia entities totals $6 million.
 
44
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
INVESTMENTS IN SEQUOIA
 
Quarterly Update (continued)
 
►
Unlike our investments in Acacia, our investments in Sequoia are not subject to cash flow disruptions due to rating downgrades. However, many of our investments represent the first, second, and third loss securities and as such will absorb the initial losses in these pools of residential loans.
 
►
ARM loans held by Sequoia entities, representing 67% of the aggregate loan portfolio, are indexed to LIBOR. In the first quarter, prepayment rates on these loans declined to 25% constant prepayment rate (CPR) from the fourth quarter rate of 27% CPR.
 
  
 
►
Nearly all of the hybrid loans held by Sequoia entities, representing 33% of the aggregate loan portfolio, are still in their initial fixed-rate period. Prepayment rates on these loans increased slightly to 12% CPR in the first quarter from an average of 10% CPR in the fourth quarter.
 
►
For tax accounting, the Sequoia securities we own are treated like securities we purchase from third parties. Due to tax accounting rules, for many years we have not been able to expense IO premiums as quickly as the changes to their fair value. As of March 31, 2008, the tax basis of our IOs was $55 million. In 2008, we expect to recognize little taxable income from our IOs. However, the basis in these IOs will decline over time as cash flows are received and the remainder of the basis will be expensed at the time the IOs are called.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
45
 
 
  
 
INVESTMENTS IN SEQUOIA
  
 
Quarterly Update (continued)
 
►
We hold call option rights on all our Sequoia transactions. The call option gives us the right, but not the obligation, to retire the ABS issued at par and take possession of the underlying loans. Currently we have 15 Sequoias that are callable and one more will become callable by the end of the year. Given the current mortgage and securitization markets, we do not anticipate calling any Sequoias in the near future, and thus, there will likely be little economic or accounting gains or losses during this period.
 
►
The following table summarizes the high-quality characteristics of the loans owned by the Sequoia entities.

Residential Loans at Sequoia
Underlying Loan Characteristics
as of March 31, 2008
         
Number of loans
19,801
 
Wtd Avg FICO
732
Total loan face ($ in millions)
6,703
  
FICO: <= 620
2%
Average loan size ($ in 1000's)
$339
 
FICO: 621 - 660
5%
 
 
  
FICO: 661 - 700
19%
Southern CA
15%
  
FICO: 701 - 740
26%
Northern CA
11%
  
FICO: > 741
48%
Florida
13%
    
 
New York
6%
  
Conforming at origination %
34%
Georgia
4%
  
> $1 MM %
15%
New Jersey
4%
    
 
Other states
47%
  
2nd home %
11%
 
 
  
Investment home %
3%
2008 origination
0%
    
 
2007 origination
13%
  
Purchase
36%
2006 origination
20%
  
Cash out refi
32%
2005 origination
5%
  
Rate-term refi
30%
2004 origination and earlier
62%
  
Other
2%
 
 
    
 
Wtd Avg Original LTV
69%
  
Hybrid
33%
Original LTV: 0 - 50
15%
  
Adjustable
67%
Original LTV: 50 - 60
11%
    
 
Original LTV: 60. - 70
19%
  
Interest only
95%
Original LTV: 70 - 80
49%
  
Fully-amortizing
5%
Original LTV: 80 - 90
2%
    
 
Original LTV: 90 - 100
4%
    
 
 
46
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
INVESTMENTS IN ACACIA
 
Summary
 
What is this?
 
Under our Acacia program, we re-securitize real estate securities using bankruptcy remote collateralized debt obligation (CDO) entities that sell asset-backed securities (ABS) to independent third-party investors. We typically retain an equity interest in the Acacia CDO entities and receive asset management fees. We may also retain some of the other securities created by the Acacia entities. Our asset management fees typically equal ten basis points of the outstanding principal balance of Acacia assets. These fees are paid to us in a first or senior priority from the cash flows of the Acacia assets. Our equity interests in the Acacia entities entitle us to receive the net cash flows (i.e., the net cash flows generated by the assets after deducting asset management and other fees and the money owed to the ABS debt holders) of those entities. Our credit risk is limited to the amount we invested in our net equity interests, and the remainder of any losses will be borne by the holders of the more senior securities issued by Acacia. Cash distributions on our Acacia equity interests can be disrupted based on rating agency downgrades of the underlying collateral or due to a deterioration in collateral performance. Our investment in each entity is separate and independent, thus diminished performance on one of our CDO equity interests would have no effect on our other CDO equity interests.
 
Quarterly Update
 
►
As of March 31, 2008, ten Acacia CDO entities were outstanding. The market for new issuance CDO ABS is effectively shut down and will likely remain closed for some time. We do not foresee issuing new Acacia CDOs in 2008.
 
►
During the first quarter, we received investment cash distributions from Acacia entities of $7 million. We also received $2 million in management fees in the first quarter, the same amount we received in the prior quarter.
 
►
We invested $7 million in the first quarter to acquire a portion of the investment-grade ABS previously issued by Acacia entities. We invested $4 million to acquire a portion of the AA-rated ABS issued in 2004 by Acacia 6, $1 million to acquire a portion of the BBB-rated ABS issued in 2005 by Acacia 8, and $2 million to acquire a portion of the A- and BBB-rated ABS issued in 2005 by Acacia CRE1. We purchased these Acacia ABS issued at a combined weighted average of 21% of their face value. The collateral performance of these three Acacia entities remains strong. Through May 1, 2008, the underlying collateral owned by these three Acacia entities had collectively received 53 rating upgrades and 25 downgrades.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
47
 
 
  
 
INVESTMENTS IN ACACIA
  
 
Economic Value of our Investments in Acacia Entities
 
►
In our opinion, the best economic method of assessing the value of our investments in Acacia is to calculate the net present value (NPV) of the future expected cash flows of these investments. In our calculation of NPV, we use a 45% discount rate and adjust for expected credit losses on our equity investments and the receipt of management fees. For the Acacia ABS issued that we purchased from third parties, we value those investments at our cost. We believe our valuation method is consistent with how a potential buyer would likely value our Acacia investments.
 
►
Overall, we believe that $49 million is a reasonable approximation of the economic value of our investments in the Acacia entities at the end of the quarter. We caution that in this environment it is particularly difficult to model future cash flows with certainty given the potential for future rating agency downgrades and the uncertainties around credit performance. Additionally, there currently is no active market for CDO equity and a limited market for CDO ABS. Thus, if we were to sell our investments in Acacia, which is not our intention, we would likely receive substantially less than the NPV calculated in the manner described above.
 
►
Our estimate of the economic value of our investment in the Acacia entities of $49 million at March 31, 2008 compares to an estimate of $46 million at December 31, 2007. This increase is the result of $7 million in new investments in Acacias 6, 8, and CRE1, and a $8 million incraese in NPV in Acacias 5 – 8 and CRE1 offset by $9 million in cash distribution and a $3 million deterioration in NPVs in Acacia’s 9 – 12 and OA1.
   
Gross Expected Cash Flows and Net Present Values for Acacia Entities
March 31, 2008
($ in millions)
 
 
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Total
 
 
 
5
 
6
 
7
 
8
 
CRE1
 
9
 
10
 
11
 
OA1
 
12
 
Acacia
 
 
Gross Expected Cash Flows (not discounted)   
                                                              
Management fees
  
$
1
  
$
1
  
$
2
  
$
2
  
$
2
  
$
3
  
$
4
  
$
4
  
$
3
  
$
3
  
$
25
  
ABS retained or acquired
    
22
   
49
   
12
   
42
   
38
   
-
   
-
   
-
   
-
   
-
 
$
163
  
Preference shares
    
33
   
30
   
5
   
16
   
32
   
-
   
-
   
-
   
-
   
-
 
$
116
  
Total Gross Expected Cash Flows
  
$
56
  
$
80
  
$
19
  
$
60
  
$
72
  
$
3
  
$
4
  
$
4
  
$
3
  
$
3
  
$
304
  
                                                                     
Net Present Values
                                                                    
Management fees
  
$
-
  
$
-
  
$
1
  
$
-
  
$
1
  
$
1
  
$
1
  
$
1
  
$
1
  
$
1
  
$
7
  
ABS retained or acquired
    
6
   
11
   
1
   
3
   
4
   
-
   
-
   
-
   
-
   
-
 
$
25
  
Preference shares
    
4
   
3
   
3
   
3
   
4
   
-
   
-
   
-
   
-
   
-
 
$
17
  
Total Net Present Value
  
$
10
  
$
14
  
$
5
  
$
6
  
$
9
  
$
1
  
$
1
  
$
1
  
$
1
  
$
1
  
$
49
  
 
48
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
INVESTMENTS IN ACACIA
 
Cash Activity
 
►
Our net cash investment in the Acacia entities was $118 million at March 31, 2008. The following tables show our cash investment, cash distributions received, and management fees for each of the outstanding Acacia entities.
   
Historical Summary of Investment and Cash Activity for Acacia Entities
($ in millions)
 
 
 
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Total
  
 
  
5
  
6
  
7
  
8
  
CRE1
  
9
  
10
  
11
  
OA1
  
12
  
Acacia
  
Investment:
                                                                    
Investment as of September 30, 2007
  
$
8
  
$
8
  
$
11
  
$
18
  
$
14
  
$
11
  
$
29
  
$
5
  
$
14
  
$
22
  
$
140
  
Investment 3 months ended December 31, 2007
    
5
   
6
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
$
11
  
Investment 3 months ended March 31, 2008
          
4
         
1
   
2
                               
$
7
  
Total Investment
  
$
13
  
$
18
  
$
11
  
$
19
  
$
16
  
$
11
  
$
29
  
$
5
  
$
14
  
$
22
  
$
158
  
Cash Distributions Received:
                                                                    
2006 and prior
  
$
(5
)
$
(4
)
$
(2
)
$
(3
)
$
(2
)
$
(1
)
$
-
  
$
-
  
$
-
  
$
-
  
$
(17
)
2007 *
    
(2
)
  
(3
)
  
(1
)
  
(2
)
  
-
   
(1
)
  
(3
)
  
(1
)
  
(2
)
  
(1
)
  
(16
)
3 months ended March 31, 2008 **
    
(1
)
  
(1
)
  
(1
)
  
(1
)
  
(1
)
  
(1
)
  
(1
)
  
-
   
-
   
-
   
(7
)
Total Cash Received (ex. mgmt fees)
  
$
(8
)
$
(8
)
$
(4
)
$
(6
)
$
(3
)
$
(3
)
$
(4
)
$
(1
)
$
(2
)
$
(1
)
$
(40
)
Net Cash Investment as of March 31, 2008
  
$
5
  
$
10
  
$
7
  
$
13
  
$
13
  
$
8
  
$
25
  
$
4
  
$
12
  
$
21
  
$
118
  
 
* Cash distributions in 2007 included $5 million in Q1, $5 miilion in Q2, $5 miilion in Q3, and $7 million in Q4.
** Includes a one time distribution of $1 miilion on Acacia 8.
 
   
Historical Summary of Management Fees
($ in thousands)
 
 
 
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Total
  
 
 
5
  
6
  
7
  
8
  
CRE1
  
9
  
10
  
11
  
OA1
  
12
  
Acacia
  
2006 and prior
  
$
695
  
$
605
  
$
487
  
$
400
  
$
242
  
$
178
  
$
604
  
$
-
  
$
-
  
$
-
  
$
3,211
  
2007 *
    
283
   
294
   
300
   
297
   
300
   
302
   
1,753
   
1,431
   
197
   
549
   
5,706
 
3 months ended March 31, 2008
    
65
   
72
   
75
   
74
   
75
   
75
   
386
   
435
   
126
   
187
   
1,570
 
Cumulative Management Fees
  
$
1,043
  
$
971
  
$
862
  
$
771
  
$
617
  
$
555
  
$
2,743
  
$
1,866
  
$
323
  
$
736
  
$
10,487
  
 
* Management fees in 2007 included $0.9 million in Q1, $1.5 miilion in Q2, $1.3 miilion in Q3, and $2 million in Q4.
 
►
Cash distributions to the equity and ABS issued of Acacia entities can be disrupted due to actual losses or breaches of collateralization and interest coverage tests, which are heavily impacted by negative rating agency actions. The severe rating downgrades by Moody's, S&P, and Fitch over the last several quarters have placed considerable negative pressure on the collateralization tests in Acacias 10, 11, OA1, and 12. In fact, cash flows on our equity investment in Acacia 12 are now suspended; the equity cash flows have been diverted to pay down the most senior ABS issued. We expect the cash flows on our equity investments in Acacia 10, 11, and OA1 to be suspended in the second quarter, and we expect the cash flow on our equity investment in Acacia 9 to be suspended within a year. We took these likely events into consideration when we calculated the gross cash flows and NPV of our investments in Acacia.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
49
 
 
  
 
INVESTMENTS IN ACACIA
  
 
Income Statements
 
►
The following table shows the Acacia consolidated income statements for first quarter of 2008, fourth quarter of 2007, and first quarter of 2007.
 
Acacia Consolidated Income Statement
Three Months Ended
($ in millions)
   
3/31/2008
  
12/31/2007
  
3/31/2007
  
Interest income (cash)
  
$
48
 
$
55
 
$
52
 
Accretion of discount
    
-
   
7
   
8
 
Total interest income
    
48
   
62
   
60
 
Management fees
    
1
   
2
   
1
 
Interest expense
    
(45
)
  
(56
)
  
(48
)
Net interest income before MTM
    
4
   
8
   
13
 
MTM - Assets
    
(837
)
  
(989
)
  
(3
)
MTM - Liabilities
    
810
   
-
   
-
 
Net interest income
    
(23
)
  
(981
)
  
10
 
Realized (losses) gains on sales and calls, net
    
-
   
(2
)
  
(1
)
Net (Loss) Income
  
$
(23
)
$
(983
)
$
9
 
 
►
Cash received on assets within Acacia and cash paid out on ABS issued declined due to falling short-term interest rates.
 
►
As noted earlier, under FAS 159, there is no longer an accretion of discount included in interest income on Acacia assets. In the fourth quarter of 2007, we recognized $7 million of discount accretion in our interest income. The amount of discount accretion we would have recorded had we not adopted FAS 159 is now reflected as a component in the change in fair value of the Acacia assets.
 
►
All changes in the fair values of Acacia assets and liabilities flow through the income statement subsequent to the adoption of FAS 159. As more fully discussed in the accounting discussion in the Appendix, the application of FAS 159 for Acacia assets and liabilities may lead to significant quarterly MTM earnings volatility. In prior periods, only those assets deemed permanently impaired under GAAP had an effect on Acacia’s income.
 
►
The following tables show the individual income statement contributions of each of the Acacia entities for the three months ended March 31, 2008.
   
Net Interest Income Statement for Acacia Entities
Three Months Ended March 31, 2008
($ in millions)
 
 
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia
 
Acacia Total
 
 
 
5
 
6
 
7
 
8
 
CRE1
 
9
 
10
 
11
 
OA1
 
12
 
Consolidated
 
                                               
Total interest income
  
$
2
  
$
4
  
$
4
  
$
4
  
$
4
  
$
4
  
$
7
  
$
6
  
$
6
  
$
6
  
$
47
  
Management fees
    
0.1
   
0.1
   
0.1
   
0.1
   
0.1
   
0.1
   
0.3
   
0.4
   
0.1
   
0.1
   
1.5
 
Total interest expense
    
(2
)
  
(3
)
  
(3
)
  
(4
)
  
(4
)
  
(4
)
  
(7
)
  
(6
)
  
(6
)
  
(6
)
  
(45
)
Net interest income before MVAs
    
0
   
1
   
1
   
0
   
0
   
0
   
0
   
0
   
0
   
0
   
4
 
Market valuation adjustments, net
    
1
   
23
   
3
   
(7
)
  
(34
)
  
19
   
(3
)
  
23
   
(37
)
  
(15
)
  
(27
)
                                                                     
Net Interest Income (Loss) 
  
$
1
 
$
24
 
$
4
 
$
(7
)
$
(34
)
$
19
 
$
(3
)
$
23
 
$
(37
)
$
(15
)
$
(23
)
 
►
Acacias 5 – 8 and CRE1 continue to exceed our performance expectations. In our most recent cash flow modeling for these Acacia entities at March 31, 2008, we did not project future disruptions in cash flows.
 
►
If the cash distributions on our investments in Acacia 9 – 11 and OA1 are disrupted, the net interest income contribution arising from our investments in these entities will cease. In anticipation of the cash flows being disrupted, we did not record any net interest income before market value adjustments in the first quarter from these Acacia entities.
 
50
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
INVESTMENTS IN ACACIA
 
Balance Sheets
 
►
The following table shows the individual balance sheets of the Acacia entities at March 31, 2008. It also reflects the MTM impact of the most recent quarter's earnings in the retained earnings section (whereas previously the MTM was in OCI) after the adoption of FAS 159 on January 1, 2008.  
   
Acacia Balance Sheets
March 31, 2008
($ in millions)
  
  
 
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
 
  
  
 
5
  
6
  
7
  
8
  
CRE1
  
9
  
10
  
11
  
OA1
  
12
  
Total
 
Issue Date
  
Jul-04
  
Nov-04
  
Mar-05
  
Jul-05
  
Dec-05
  
Mar-06
  
Aug-06
  
Feb-07
  
May-07
  
Jun-07
  
Acacia
 
   
Real estate securities
                                                                    
Current face
  
$
221
  
$
266
  
$
266
  
$
276
  
$
299
  
$
296
  
$
488
  
$
492
  
$
423
  
$
498
  
$
3,525
  
Market value discount
    
(117
)
  
(130
)
  
(150
)
  
(194
)
  
(189
)
  
(219
)
  
(376
)
  
(372
)
  
(363
)
  
(382
)
  
(2,492
)
Other investments
    
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
79
   
-
   
79
 
Securities and other investments
    
104
   
136
   
116
   
82
   
110
   
77
   
112
   
120
   
139
   
116
   
1,112
 
Restricted cash and other assets
    
11
   
15
   
39
   
26
   
8
   
12
   
15
   
9
   
(11
)
  
33
   
157
 
Total Assets
  
$
115
  
$
151
  
$
155
  
$
108
  
$
118
  
$
89
  
$
127
  
$
129
  
$
128
  
$
149
  
$
1,269
  
ABS issued and other liabilities
                                                                    
Current face
    
200
   
229
   
281
   
248
   
248
   
278
   
427
   
477
   
458
   
494
   
3,340
 
Market value discount
    
(97
)
  
(95
)
  
(138
)
  
(129
)
  
(149
)
  
(190
)
  
(332
)
  
(372
)
  
(369
)
  
(423
)
  
(2,294
)
Other liabilities
    
4
   
2
   
4
   
4
   
12
   
7
   
13
   
12
   
18
   
79
   
155
 
Total Liabilities
    
107
   
136
   
147
   
123
   
111
   
95
   
108
   
117
   
107
   
150
   
1,201
 
                                                                     
Total investment
    
13
   
18
   
11
   
19
   
16
   
11
   
29
   
5
   
14
   
22
   
158
 
Retained earnings
    
(4
)
  
(2
)
  
(3
)
  
(36
)
  
(3
)
  
(14
)
  
(1
)
  
14
   
14
   
(23
)
  
(58
)
Balance sheet MTM adjustments
    
(1
)
  
(1
)
  
-
   
2
   
(6
)
  
(3
)
  
(9
)
  
(7
)
  
(7
)
  
-
   
(32
)
Total Equity
    
8
   
15
   
8
   
(15
)
  
7
   
(6
)
  
19
   
12
   
21
   
(1
)
  
68
 
Total Liabilities and Equity
  
$
115
  
$
151
  
$
155
  
$
108
  
$
118
  
$
89
  
$
127
  
$
129
  
$
128
  
$
149
  
$
1,269
  
 
►
The continued divergence between our estimate of economic value and GAAP carrying values even after the adoption of FAS 159 is highlighted by Acacia 8 and 10 in the table above. Our calculation of the economic value of Acacia 8 at March 31, 2008 was $6 million (see page 48). This compares to a GAAP value under FAS 159 of negative $15 million. In the worst case, the value of our investment cannot be worth less than zero. On the other side of the spectrum, our calculation of economic value in Acacia 10 is $1 million (which includes management fees), while our net GAAP value under FAS 159 is reported at $19 million.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
51
 
 
  
 
INVESTMENTS IN ACACIA
  
 
Acacia Collateral Detail
 
►
The following tables detail the different collateral types owned by Acacia entities and respective rating actions through May 1, 2008. The cash flows generated by the assets in each Acacia entity will ultimately determine the cash flows distributed to each ABS security (including equity) issued by the Acacia entity.
 
Securities at Acacia Entities
Underlying Collateral Type
March 31, 2008
(by market value, $ in millions)
   
   
 
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
  
 
   
 
5
  
6
  
7
  
8
  
CRE1
  
9
  
10
  
11
  
OA1
  
12
  
  
 
Issue Date
  
Jul-04
  
Nov-04
  
Mar-05
  
Jul-05
  
Dec-05
  
Mar-06
  
Aug-06
  
Feb-07
  
May-07
  
Jun-07
  
Total
  
Resi IGS
                                                                   
Prime Sequoia
  
$
12
  
$
13
  
$
9
  
$
5
  
$
1
  
$
3
  
$
3
  
$
3
  
$
7
  
$
14
  
$
70
  
Prime Other
    
22
   
35
   
28
   
22
   
13
   
37
   
40
   
20
   
2
   
15
   
234
 
Alt-a
    
13
   
9
   
5
   
7
   
1
   
6
   
19
   
50
   
43
   
52
   
205
 
Subprime
    
26
   
53
   
45
   
4
   
-
   
6
   
1
   
6
   
1
   
8
   
150
 
Resi CES
                                                                    
Prime Sequoia
    
2
   
3
   
3
   
5
   
-
   
2
   
3
   
-
   
-
   
-
   
18
 
Prime Other
    
11
   
7
   
4
   
11
   
-
   
7
   
24
   
8
   
-
   
5
   
77
 
Alt-a
    
-
   
-
   
-
   
1
   
-
   
1
   
1
   
5
   
5
   
2
   
15
 
Subprime
    
4
   
1
   
-
   
1
   
-
   
-
   
1
   
2
   
-
   
2
   
11
 
COMM IGS
    
6
   
6
   
5
   
8
   
32
   
2
   
-
   
-
   
-
   
3
   
62
 
COMM CES
    
1
   
3
   
9
   
13
   
46
   
7
   
14
   
12
   
-
   
8
   
113
 
COMM Loans
    
3
   
-
   
6
   
3
   
7
   
-
   
-
   
-
   
-
   
-
   
19
 
CDO: CMBS
    
2
   
3
   
1
   
-
   
10
   
5
   
5
   
12
   
2
   
4
   
44
 
CDO: RMBS
    
2
   
3
   
1
   
2
   
-
   
1
   
1
   
2
   
-
   
3
   
15
 
GIC
    
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
79
   
-
   
79
 
Totals
  
$
104
  
$
136
  
$
116
  
$
82
  
$
110
  
$
77
  
$
112
  
$
120
  
$
139
  
$
116
  
$
1,112
  
 
   
Ratings Upgrade/Downgrade Summary for Securities at Acacia Entities
May 1, 2008
   
   
 
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
Acacia
  
   
 
5
  
6
  
7
  
8
  
CRE1
  
9
  
10
  
11
  
OA1
  
12
  
Issuance Date
    
Jul-04
 
 
Nov-04
 
 
Mar-05
 
 
Jul-05
 
 
Dec-05
 
 
Mar-06
 
 
Aug-06
 
 
Feb-07
 
 
May-07
 
 
Jun-07
  
Upgrades
    
54
    
31
    
20
    
14
    
8
    
11
    
12
    
11
    
0
    
3
  
Downgrades
    
13
    
16
    
11
    
7
    
2
    
16
    
57
    
74
    
69
    
63
  
Positive Watch
    
0
    
0
    
0
    
0
    
0
    
0
    
0
    
0
    
0
    
0
  
Negative Watch
    
1
    
3
    
5
    
9
    
5
    
6
    
12
    
13
    
18
    
15
  
 
52
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
  
 
 
  
 
ACCOUNTING DISCUSSION
  
 
Accounting Discussion
 
►
The rules regarding MTM accounting are complex and may not clearly reflect the underlying economics. This accounting discussion is intended to provide investors with a better understanding of the impact of MTM adjustments on our reported results.
 
►
MTM adjustments can result from changes in fair values caused either by a change in expected cash flows (i.e. increased credit loss estimates reduce expected cash flows), or a change in market discount rates (i.e. the market requires a greater risk premium and/or interest rates rise), or a combination of both.
 
►
All changes in fair value for securities, derivatives, or liabilities accounted for as trading instruments or under the fair value option of FAS 159 flow through the income statement. These adjustments can be either positive or negative from period to period.
 
►
Our CES held at Redwood and the real estate securities held by the Opportunity Fund are accounted for as available-for-sale (AFS) securities. We carry AFS securities on our GAAP balance sheet at their fair value. Positive changes in the fair value of AFS securities from period to period are always accounted for as increases to stockholders’ equity and do not flow through our income statement. Accounting for negative changes in the fair value of AFS securities from period to period requires a three-step process involving a combination of quantitative and judgmental evaluations. The ultimate purpose of this process is to determine whether negative MTM adjustments represent “other-than-temporary” (permanent) impairments, which flow through our GAAP income statement, or represent “temporary” impairments, which are recorded as a reduction of stockholders’ equity and do not flow through our income statement.
 
►
The diagram below and the narrative discussion that follows address the three-step process for evaluating impairments on AFS securities.
 
  
 
54
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
ACCOUNTING DISCUSSION
 
Accounting Discussion (continued)
 
►
The first step is to determine whether there has been an adverse change in the underlying cash flows generated by the security. A security is considered permanently impaired even if the change in projected cash flows is small relative to the resulting MTM adjustment. It is difficult to separate with precision how much of the change in fair value is driven by changes in expected cash flows versus changes in market discount rates, but during periods of market illiquidity and uncertainty (as we have encountered since late 2007), the market discount rate impact can be significant.
 
►
The second step is to determine whether we have the ability and intention to hold the security.
 
►
The third step requires us to evaluate whether an impaired security will recover in value within a reasonable period of time. This step is very subjective and time consuming, particularly when there is turmoil and uncertainty in the capital markets.
 
►
AFS securities deemed permanently impaired for accounting purposes cannot be written back up through MTM adjustments in our income statement. This does not mean the underlying security could not recover in value. If the value of an impaired security does recover, we would recognize this benefit through higher interest yields over time. Therefore some of the securities classified as permanently impaired during the first quarter of 2008 may eventually prove to have significant value to us.
 
►
The consolidated Sequoia assets are accounted for on our GAAP balance sheet as held-for-investment and are carried at their unpaid principal balances adjusted for net amortized premiums or discounts and net of any allowances for credit losses. The consolidated Sequoia liabilities are accounted for at their unpaid principal balances net of any amortized premiums or discounts.
 
►
Prior to January 1, 2008, we accounted for the consolidated securities held at Acacia entities (the assets) as AFS and the consolidated ABS issued by Acacia entities (the liabilities) at cost. In our opinion, this difference in accounting treatment led to a significant discrepancy in the GAAP carrying value for our investment in Acacia entities and our estimate of economic value. On January 1, 2008, we adopted a new accounting standard, FAS 159, and elected to fair value both the assets and liabilities of the Acacia entities. In accordance with FAS 159, we recorded a one-time, cumulative-effect adjustment to our January 1, 2008 opening balance sheet that decreased the carrying value of Acacia liabilities by $1.5 billion and increased equity. This new standard significantly reduces the disparity that existed between GAAP carrying value and our previous estimates of economic value.
 
►
Under FAS 159, we are required to flow through our quarterly income statement any net change in the fair value of Acacia assets and liabilities. As a result of the measurement techniques required by FAS 159, we still expect to encounter some MTM earnings volatility in the future as a result of the consolidation of Acacia entities. We expect this volatility to be significantly less than we encountered in prior periods.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
55
 
 
  
 
ACCOUNTING DISCUSSION
  
 
Accounting Discussion (continued)
 
►
The net GAAP carrying value of our investments in Acacia in our financial statements is derived by subtracting the fair value of Acacia's liabilities from the fair value of Acacia’s assets. In theory, fair values of Acacia’s assets and liabilities should be reasonably correlated as they are paired within the same legal structure ABS issued by each Acacia entity will be repaid directly and solely from the cash flows generated by the assets owned by that entity. However, at any given moment, the capital markets may use different discount rates and valuation parameters for Acacia’s collateral assets relative to its ABS issued. On March 31, 2008, for instance, the fair values of Acacia’s liabilities were, in our view, depressed relative to the paired collateral assets. As a consequence of this market condition, the derived net GAAP carrying value of our retained Acacia investments was $68 million at March 31, 2008. This value is greater than our $49 million estimate of the fair value of our investments in Acacia based on the net present value of expected cash flows.
 
►
As a consequence of adopting FAS 159 as of January 1, 2008, we now also flow through our income statements the relative changes in the fair values of Acacia assets and liabilities as measured in their independent markets. During the first quarter of 2008, the fair value of our assets and derivatives declined by $837 million and the fair value of our paired liabilities declined by $810 million, for a net change of a negative $27 million. In the first quarter, the market re-priced Acacia assets downward at a slightly faster rate than the Acacia liabilities.
 
56
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
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. The securities are backed by residential prime, alt-a, and subprime real estate loans, 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 may also retain or acquire Acacia ABS issued. 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 ten 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. 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 loan-to-value ratios 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 and absorbing any credit losses from the assets owned by the entity.
 
BOOK VALUE

Book value is the value of our common equity. As measured for GAAP, through December 31, 2007, reported book value generally incorporates mark-to-market adjustments for securities and interest rate agreements, but not for loans or liabilities. Beginning January 1, 2008, book value as measured for GAAP will include mark-to-market adjustments on certain assets and liabilities. We may also report the estimated fair value of our book value which is management’s estimate of the fair value of its investments net of liabilities.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
57
 
 
  
 
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 property.
 
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 entity by 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 income that we believe 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 income also include mark-to-market income and expenses for some of our assets and interest rate agreements. These are unrealized fair 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.
 
58
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
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 some 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 principal 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 or 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 of credit loss. 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 security has a credit rating of B, and the first-loss security is unrated. Other types of securitizations, such as commercial, CDO, subprime residential, and some alt-a residential transactions, may be structured differently. Nevertheless, the non-investment rated securities issued from these securitizations function as credit-enhancement securities in these transactions.
 
GAAP

Generally Accepted Accounting Principles in the United States.
 
GSEs (GOVERNMENT-SPONSORED ENTERPRISES)

GSEs are government-sponsored enterprises, including the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan and Mortgage Corporation (Freddie Mac).
 
INTEREST-ONLY SECURITIES (IOs)

Interest-only securities (IOs) are specialized securities created by securitization entities where the projected cash flows generated by the underlying assets exceed the cash flows projected to be paid to the ABS issue that have principal balances. They receive interest payments calculated by a formula wherein cash flows on IOs 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 balances for IOs are typically reduced over time as the actual principal
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
59
 
 
  
 
GLOSSARY
  
 
balances of the underlying pools of assets pay down, thus reducing the cash flows to the IOs over time. Cash flows on IOs are typically reduced more quickly if asset prepayments accelerate.
 
LEVERAGE RATIOS

We use collateralized debt to finance the accumulation of assets prior to sale to a securitization entity and to finance investments in high-quality loans and IGS. We currently have very low levels of recourse debt. However, because of the consolidation of independent securitization entities, it appears on our GAAP consolidated financial statements that Redwood is highly leveraged, with total consolidated 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 this or similar ratios.
 
MARK-TO-MARKET ACCOUNTING

Mark-to-market accounting uses estimated fair values of assets, liabilities, and hedges. Many of our assets are carried on our balance sheet at their fair value rather than historical amortized cost. Through December 31, 2007, changes in the fair value of some of our assets and hedges are reported through our income statement. Beginning January 1, 2008, we will 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 income trends more volatile. Taxable income is generally not affected by market valuation adjustments.
 
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. These options allow the borrower to make minimum payments, or other payments that are 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 pay the NIM principal in addition to paying a coupon on the NIM, and thus, NIMs tend to have short-averaged lives. Ratings on NIMs can range from AAA down to single-B.
 
OPTION ARMS

See negative amortization adjustable-rate mortgages
 
OTHER REAL ESTATE INVESTMENTS

Other real estate investments (OREI) include IOs, NIMs, and residuals. We have elected to classify these investments as trading instruments under GAAP. These assets are reported at fair value with changes in fair values recognized in our income statements.
 
60
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
GLOSSARY
 
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 levels of other assets, 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 average 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 when 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 over time, and may not be comparable in economic reality to assets typically used in profitability calculations for other financial institutions. As a result, we believe equity-based profitability ratios may be more appropriate than asset-based measures for analyzing 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.
 
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 providing an operating cost savings. 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 have issued collateralized commercial paper in the past and may issue other forms of Redwood debt in the future.
 
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 paid at the REIT level. A reconciliation of REIT retained taxable income to GAAP income appears in Table 3 in the Appendix.
 
 
THE REDWOOD REVIEW 1ST QUARTER 2008
61
 
 
  
 
GLOSSARY
  
 
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 REIT subsidiaries (i.e., excluding its taxable subsidiaries). REIT taxable income is an important measure as it is the basis of our dividend distribution requirements. 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 fees have been deducted from the interest paid by the underlying assets. The value of residual securities can vary greatly and is highly dependent on prepayment speeds. The value is also dependent on the level and timing of credit losses, but often is not as sensitive to losses as it is to prepayment speeds. These securities perform poorly when prepayments are fast and losses are higher than expected.
 
RETURN ON EQUITY (ROE) AND ADJUSTED RETURN ON EQUITY

ROE is the amount of profit we generate each year per dollar of equity capital 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 market value changes that are included in our income statement will affect adjusted ROE. A reconciliation of ROE to adjusted ROE appears in Table 7 in the Appendix.
 
SEQUOIA

Sequoia is the brand name for securitizations of residential real estate loans Redwood sponsors.
 
SUBPRIME SECURITIES

Subprime securities are residential mortgage-backed securities backed by loans to borrowers who have impaired credit histories, and 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 LTVs over 85%, more than 70% of loans with LTVs over 75%, and loans with LTVs over 80% with no mortgage insurance.
 
62
THE REDWOOD REVIEW 1ST QUARTER 2008
 
 
 
 
  
 
GLOSSARY
 
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 and taxes. It also includes all of the taxable income earned at our taxable subsidiaries, less corporate income taxes paid as we generally retain the after-tax income at the subsidiary level. 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. A reconciliation of total taxable income to GAAP income appears in Table 3 in the Appendix.
 
 
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63
 
 
This Page Intentionally Left Blank
 
 
 
 
 
Table 1: GAAP Earnings ($ in thousands, except per share data)
66
                                               
                                       
Full
 
Full
 
   
2008
  
2007
  
2007
  
2007
  
2007
  
2006
  
2006
  
2006
  
2006
  
Year
  
Year
  
   
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
2007
  
2006
  
                                       
 
  
 
  
Interest income
    
$169,885
    
$192,375
    
$205,748
    
$208,039
    
$207,906
    
$213,504
    
$217,504
    
$214,544
    
$224,795
    
$814,068
    
$870,347
  
Net securities discount amortization income
    
10,864
   
18,869
   
20,514
   
23,849
   
20,268
   
18,665
   
17,842
   
13,234
   
13,245
   
83,500
   
62,986
 
Other real estate investment interest income
    
2,092
   
1,353
   
1,275
   
669
   
2,465
   
-
   
-
   
-
   
-
   
5,762
   
-
 
Non real estate investment interest income
    
732
   
984
   
1,143
   
464
   
-
   
-
   
-
   
-
   
-
   
2,591
   
-
 
Net loan premium amortization expense
    
(7,509
)
  
(6,656
)
  
(8,349
)
  
(10,863
)
  
(11,705
)
  
(13,272
)
  
(11,232
)
  
(12,046
)
  
(11,982
)
  
(37,573
)
  
(48,532
)
(Provision for) reversal of credit reserve
    
(8,058
)
  
(4,972
)
  
(1,507
)
  
(2,500
)
  
(3,829
)
  
(1,506
)
  
(465
)
  
2,506
   
(176
)
  
(12,808
)
  
359
 
Total GAAP interest income
    
168,006
   
201,953
   
218,824
   
219,658
   
215,105
   
217,391
   
223,649
   
218,238
   
225,882
   
855,540
   
885,160
 
                                                                     
Interest expense on Redwood debt
    
(182
)
  
(377
)
  
(5,858
)
  
(22,700
)
  
(31,094
)
  
(16,520
)
  
(9,422
)
  
(1,822
)
  
(2,072
)
  
(60,029
)
  
(29,836
)
                                                                     
ABS interest expense consolidated from trusts
    
(123,430
)
  
(147,799
)
  
(155,661
)
  
(140,512
)
  
(131,391
)
  
(152,043
)
  
(165,177
)
  
(171,659
)
  
(178,183
)
  
(575,363
)
  
(667,062
)
ABS issuance expense amortization
    
(2,093
)
  
(4,644
)
  
(4,616
)
  
(5,681
)
  
(7,068
)
  
(7,897
)
  
(5,786
)
  
(6,079
)
  
(5,907
)
  
(22,009
)
  
(25,669
)
ABS interest rate agreement income
    
(1,245
)
  
1,265
   
1,959
   
3,358
   
1,646
   
2,497
   
3,317
   
3,678
   
2,980
   
8,228
   
12,472
 
ABS issuance premium amortization income
   
2,183
   
1,930
   
2,096
   
2,294
   
1,869
   
1,529
   
2,395
   
2,363
   
2,527
   
8,189
   
8,814
 
Total consolidated ABS expense
    
(124,585
)
  
(149,248
)
  
(156,222
)
  
(140,541
)
  
(134,944
)
  
(155,914
)
  
(165,251
)
  
(171,697
)
  
(178,583
)
  
(580,955
)
  
(671,445
)
                                                                     
Subordinated notes interest expense
    
(2,533
)
  
(3,055
)
  
(3,150
)
  
(2,516
)
  
(2,057
)
  
(423
)
  
-
   
-
   
-
   
(10,778
)
  
(423
)
                                                                     
GAAP net interest income before market valuation adjustments
    
40,706
   
49,273
   
53,594
   
53,901
   
47,010
   
44,534
   
48,976
   
44,719
   
45,227
   
203,778
   
183,456
 
Market valuation adjustments, net
    
(193,932
)
  
(1,118,989
)
  
(102,766
)
  
(29,430
)
  
(10,264
)
  
(1,404
)
  
(5,257
)
  
(2,995
)
  
(2,932
)
  
(1,261,449
)
  
(12,588
)
Net interest income
    
(153,226
)
  
(1,069,716
)
  
(49,172
)
  
24,471
   
36,746
   
43130
    
43,719
   
41724
    
42295
    
($1,057,671
)
  
$170,868
  
                                                                     
Fixed compensation expense
    
(5,674
)
  
(4,316
)
  
(4,560
)
  
(4,286
)
  
(4,616
)
  
(3,688
)
  
(3,437
)
  
(3,310
)
  
(3,437
)
  
(17,778
)
  
(13,872
)
Variable compensation expense
    
(1,857
)
  
(434
)
  
1,096
   
(198
)
  
(2,251
)
  
(1,666
)
  
(2,630
)
  
(1,900
)
  
(1,514
)
  
(1,787
)
  
(7,710
)
Equity compensation expense
    
(3,306
)
  
(2,767
)
  
(2,593
)
  
(3,540
)
  
(3,349
)
  
(3,233
)
  
(2,579
)
  
(2,991
)
  
(2,694
)
  
(12,249
)
  
(11,497
)
Severance expense
    
-
   
(1,340
)
  
-
   
-
   
(2,380
)
  
-
   
-
   
-
   
-
   
(3,720
)
  
-
 
Other operating expense
    
(5,501
)
  
(7,337
)
  
(5,455
)
  
(4,670
)
  
(4,479
)
  
(4,732
)
  
(4,425
)
  
(5,149
)
  
(4,505
)
  
(21,941
)
  
(18,811
)
Due diligence expenses
    
(10
)
  
(75
)
  
(220
)
  
(78
)
  
(707
)
  
(532
)
  
(384
)
  
(2,687
)
  
(432
)
  
(1,080
)
  
(4,035
)
Total GAAP operating expenses
    
(16,348
)
  
(16,269
)
  
(11,732
)
  
(12,772
)
  
(17,782
)
  
(13,851
)
  
(13,455
)
  
(16,037
)
  
(12,582
)
  
(58,555
)
  
(55,925
)
                                                                     
Realized (losses) gains sales
    
(3
)
  
7,199
   
(1,460
)
  
1,428
   
303
   
5,308
   
4,968
   
8,241
   
1,062
   
7,470
   
19,579
 
Realized gains (losses) on calls
    
45
   
(126
)
  
3,284
   
1,310
   
843
   
1,511
   
722
   
747
   
0
   
5,311
   
2,980
 
Total realized gains, net
    
42
   
7,073
   
1,824
   
2,738
   
1,146
   
6,819
   
5,690
   
8,988
   
1,062
   
12,781
   
22,559
 
                                                                     
Credit (provision) for income taxes
    
(1,800
)
  
1,467
   
(1,837
)
  
(3,021
)
  
(1,801
)
  
(407
)
  
(3,538
)
  
(3,265
)
  
(2,760
)
  
(5,192
)
  
(9,970
)
Other
   
(255
)
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
GAAP net (loss) income
    
($171,587
)
  
($1,077,445
)
  
($60,917
)
  
$11,416
    
$18,309
    
$35,691
    
$32,416
    
$31,410
    
$28,015
    
($1,108,637
)
  
$127,532
  
                                                                     
Diluted average shares
    
32,511
   
29,531
   
27,892
   
28,165
   
27,684
   
27,122
   
26,625
   
26,109
   
25,703
   
27,928
   
26,314
 
GAAP net (loss) income per share
    
($5.28
)
  
($36.49
)
  
($2.18
)
  
$0.41
    
$0.66
    
$1.32
    
$1.22
    
$1.20
    
$1.09
    
($39.70
)
  
$4.85
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 1: GAAP Earnings
 
 
 
 
 
Table 2: Core Earnings ($ in thousands, except per share data)
 
                                               
                                       
Full
 
Full
 
   
2008
  
2007
  
2007
  
2007
  
2007
  
2006
  
2006
  
2006
  
2006
  
Year
  
Year
  
   
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
2007
  
2006
  
                                       
 
  
 
  
GAAP net (loss) income
   
$(171,587
)
  
$(1,077,445
)
  
$(60,917
)
  
$11,416
    
$18,309
    
$35,691
    
$32,416
    
$31,410
    
$28,015
    
$(1,108,637
)
  
$127,532
  
                                                                     
Not included in core earnings
                                                                    
Severance expense
    
-
   
(1,340
)
  
-
   
-
   
(2,380
)
  
-
   
-
   
-
   
-
   
(3,720
)
  
-
 
Realized (losses) gains on sales
    
(3
)
  
7,199
   
(1,460
)
  
1,428
   
303
   
5,308
   
4,968
   
8,241
   
1,062
   
7,470
   
19,579
 
Realized gains (losses) on calls
    
45
   
(126
)
  
3,284
   
1,310
   
843
   
1,511
   
722
   
747
   
0
   
5,311
   
2,980
 
Market valuation adjustments, net
    
(193,932
)
  
(1,118,989
)
  
(102,766
)
  
(29,430
)
  
(10,264
)
  
(1,404
)
  
(5,257
)
  
(2,995
)
  
(2,932
)
  
(1,261,449
)
  
(12,588
)
                                                                     
Total GAAP / core earnings differences
    
(193,890
)
  
(1,113,256
)
  
(100,942
)
  
(26,692
)
  
(11,498
)
  
5,415
   
433
   
5,993
   
(1,870
)
  
(1,252,388
)
  
9,971
 
Core earnings
    
$22,303
    
$35,811
    
$40,025
    
$38,108
    
$29,807
    
$30,276
    
$31,983
    
$25,417
    
$29,885
    
$143,751
    
$117,561
  
                                                                     
Per share analysis
                                                                    
GAAP net (loss) income
   
($5.28
)
  
($36.49
)
  
$(2.18
)
  
$0.41
    
$0.66
    
$1.32
    
$1.22
    
$1.20
    
$1.09
    
$(39.70
)
  
$4.85
  
                                                                     
Not included in core earnings
                                                                    
Severance expense
    
-
   
(0.05
)
  
-
   
-
   
(0.09
)
  
-
   
-
   
-
   
-
   
(0.13
)
  
-
 
Realized (losses) gains on sales
    
-
   
0.25
   
(0.05
)
  
0.05
   
0.01
   
0.20
   
0.19
   
0.32
   
0.04
   
0.26
   
0.74
 
Realized gains (losses) on calls
    
-
   
-
   
0.13
   
0.05
   
0.03
   
0.05
   
0.03
   
0.03
   
-
   
0.19
   
0.11
 
Market valuation adjustments, net
    
(5.96
)
  
(37.90
)
  
(3.69
)
  
(1.04
)
  
(0.37
)
  
(0.05
)
  
(0.20
)
  
(0.11
)
  
(0.11
)
  
(45.17
)
  
(0.48
)
GAAP / core earnings differences per share
    
(5.96
)
  
(37.70
)
  
(3.61
)
  
(0.94
)
  
(0.42
)
  
0.20
    
0.02
    
0.23
    
(0.07
)
  
(44.85
)
  
0.38
  
                                                                     
Core earnings per share
    
$0.68
    
$1.21
    
$1.43
    
$1.35
    
$1.08
    
$1.12
    
$1.20
    
$0.97
    
$1.16
    
$5.16
    
$4.47
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 2: Core Earnings
 
67
 
 
 
Table 3: Taxable Income and GAAP / Tax Differences 
($ in thousands, except per share data)
68
                       
   
Estimated
  
Estimated
  
Actual
  
Estimated
  
Actual
  
                                       
Full
 
Full
 
   
2008
  
2007
  
2007
  
2007
  
2007
  
2006
  
2006
  
2006
  
2006
  
Year
  
Year
  
   
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
2007
  
2006
  
                                       
 
  
 
  
GAAP net (loss) income
    
$(171,587
)
  
$(1,077,445
)
  
$(60,917
)
  
$11,416
    
$18,309
    
$35,691
    
$32,416
    
$31,410
    
$28,015
    
$(1,108,637
)
  
$127,532
  
Difference in taxable income calculations
                                                                
Amortization and credit losses
   
6,094
   
(14,330
)
  
10,426
   
10,298
   
10,417
   
13,740
   
12,558
   
12,779
   
4,939
   
16,811
   
44,016
 
Operating expenses
   
1,491
   
9,409
   
(2,080
)
  
(2,921
)
  
(1,713
)
  
(12,079
)
  
2,545
   
(288
)
  
1,604
   
2,695
   
(8,218
)
Gross realized (gains) losses on calls and sales
    
(5,266
)
  
(5,089
)
  
(3,073
)
  
(4,735
)
  
2,100
   
(5,499
)
  
(1,141
)
  
(699
)
  
(613
)
  
(10,797
)
  
(7,952
)
Market valuation adjustments, net
    
193,932
   
1,118,989
   
102,766
   
30,576
   
9,118
   
6,571
   
484
   
2,305
   
3,226
   
1,261,449
   
12,586
 
(Credit) provision for income taxes
    
1,158
   
(2,111
)
  
1,523
   
1,662
   
1,800
   
405
   
4,123
   
3,265
   
(703
)
  
2,874
   
7,090
 
Total differences in GAAP and taxable income
    
197,409
   
1,106,868
   
109,562
   
34,880
   
21,722
   
3,138
   
18,569
   
17,362
   
8,453
   
1,273,032
   
47,522
 
Taxable income
    
$25,822
    
$29,423
    
$48,645
    
$46,296
    
$40,031
    
$38,829
    
$50,985
    
$48,772
    
$36,468
    
$164,395
    
$175,054
  
                                                                     
REIT taxable income
    
$24,734
    
$32,028
    
$48,591
    
$45,233
    
$35,112
    
$41,555
    
$45,751
    
$45,040
    
$35,382
    
$160,964
    
$167,728
  
Taxable (loss) income in taxable subsidiaries
    
1,088
   
(2,605
)
  
54
   
1,063
   
4,919
   
(2,727
)
  
5,234
   
3,732
   
1,086
   
3,431
   
7,325
 
Total taxable income
    
$25,822
    
$29,423
    
$48,645
    
$46,296
    
$40,031
    
$38,828
    
$50,985
    
$48,772
    
$36,468
    
$164,395
    
$175,053
  
                                                                     
After-tax
                                                                
Retained REIT taxable income
    
$1,207
    
$759
    
$2,675
    
$2,490
    
$1,933
    
$2,010
    
$2,500
    
$2,166
    
$1,313
    
$7,857
    
$7,989
  
Retained taxable (loss) income in taxable subsidiaries
    
633
   
(1,768
)
  
34
   
663
   
3,068
   
(1,175
)
  
3,156
   
2,032
   
556
   
1,997
   
4,569
 
Total retained taxable income
    
$1,841
    
$(1,008
)
  
$2,709
    
$3,153
    
$5,001
    
$835
    
$5,656
    
$4,198
    
$1,869
    
$9,855
    
$12,558
  
                                                                     
Shares used for taxable EPS calculation
 
 
32,710
 
 
32,385
 
 
27,986
 
 
27,816
 
 
27,129
 
 
26,733
 
 
26,053
 
 
25,668
 
 
25,382
 
 
28,392
 
 
25,934
 
REIT taxable income per share *
 
 
$0.76
 
 
$0.99
 
 
$1.74
 
 
$1.63
 
 
$1.29
 
 
$1.55
 
 
$1.76
 
 
$1.75
 
 
$1.39
 
 
$5.65
 
 
$6.45
 
Taxable (loss) income in taxable subsidiaries per share
    
$0.03
    
$(0.08
)
  
$0.00
    
$0.03
    
$0.19
    
$(0.10
)
  
$0.20
    
$0.16
    
$0.04
    
$0.14
    
$0.30
  
Total taxable income per share *
    
$0.79
    
$0.91
    
$1.74
    
$1.66
    
$1.48
    
$1.45
    
$1.96
    
$1.91
    
$1.44
    
$5.79
    
$6.75
  
Total retained taxable (loss) income (after-tax)
    
$0.06
    
$(0.03
)
  
$0.10
    
$0.11
    
$0.18
    
$0.03
    
$0.22
    
$0.16
    
$0.07
    
$0.36
    
$0.48
  
 
* REIT taxable income per share and taxable income per share per quarter is based on the number of shares outstanding at the end of each quarter. REIT taxable income and taxable income per share for the year is the sum of the four quarterly per share amounts.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 3: Taxable Income and GAAP / Tax Differences
 
 
 
 
 
Table 4: Retention and Distribution of Taxable Income
($ in thousands, except per share data)
 
                       
   
Estimated
  
Estimated
  
Actual
  
Estimated
  
Actual
  
                                       
Full
 
Full
 
   
2008
  
2007
  
2007
  
2007
  
2007
  
2006
  
2006
  
2006
  
2006
  
Year
  
Year
  
   
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
2007
  
2006
  
                                                                     
Dividends declared
    
$24,532
    
$80,496
    
$20,989
    
$20,862
    
$20,347
    
$97,665
    
$18,237
    
$17,967
    
$17,767
    
$142,694
    
$151,636
  
Dividend deductions on stock issued through DSPP
    
192
   
2,605
   
81
   
933
   
660
   
812
   
177
   
239
   
176
   
4,279
   
1,404
 
Total dividend deductions
    
$24,724
    
$83,101
    
$21,070
    
$21,795
    
$21,007
    
$98,477
    
$18,414
    
$18,206
    
$17,943
    
$146,973
    
$153,040
  
                                                                     
Regular dividend per share
    
$0.75
    
$0.75
    
$0.75
    
$0.75
    
$0.75
    
$0.70
    
$0.70
    
$0.70
    
$0.70
    
$3.00
    
$2.80
  
Special dividend per share
    
-
   
2.00
   
-
   
-
   
-
   
3.00
   
-
   
-
   
-
   
2.00
   
3.00
 
Total dividends per share
    
$0.75
    
$2.75
    
$0.75
    
$0.75
    
$0.75
    
$3.70
    
$0.70
    
$0.70
    
$0.70
    
$5.00
    
$5.80
  
                                                                     
Undistributed REIT taxable income at beginning of period (pre-tax):
    
$49,182
    
$103,299
    
$80,394
    
$61,253
    
$50,484
    
$111,411
    
$88,420
    
$65,850
    
$51,731
    
$50,484
    
$51,731
  
REIT taxable income (pre-tax)
    
24,733
   
32,028
   
48,591
   
45,233
   
35,112
   
41,555
   
45,751
   
45,040
   
35,382
   
160,964
   
167,728
 
Permanently retained (pre-tax)
    
(2,350
)
  
(3,044
)
  
(4,616
)
  
(4,297
)
  
(3,336
)
  
(4,005
)
  
(4,346
)
  
(4,263
)
  
(3,320
)
  
(15,293
)
  
(15,934
)
Dividend of 2005 income
    
-
   
-
   
-
   
-
   
-
   
-
   
(15,581
)
  
(18,207
)
  
(17,943
)
  
-
   
(51,731
)
Dividend of 2006 income
    
-
   
-
   
(7,682
)
  
(21,795
)
  
(21,007
)
  
(98,477
)
  
(2,833
)
  
-
   
-
   
(50,484
)
  
(101,310
)
Dividend of 2007 income
    
(24,724
)
  
(83,101
)
  
(13,388
)
  
-
   
-
   
-
   
-
   
-
   
-
   
(96,489
)
  
-
 
Undistributed REIT taxable income at period end (pre-tax):
    
$46,841
    
$49,182
    
$103,299
    
$80,394
    
$61,253
    
$50,484
    
$111,411
    
$88,420
    
$65,850
    
$49,182
    
$50,484
  
                                                                 
Undistributed REIT taxable income (pre-tax) at period end
                                                                
From 2005's income
    
$  -
    
$  -
    
$  -
    
$  -
    
$  -
    
$  -
    
$  -
    
$15,581
    
$33,788
    
$  -
    
$  -
  
From 2006's income
    
-
   
-
   
-
   
7,682
   
29,477
   
50,484
   
111,411
   
72,839
   
32,062
   
-
   
50,484
 
From 2007's income
    
24,458
   
49,182
   
103,299
   
72,712
   
31,776
   
-
   
-
   
-
   
-
   
49,182
   
-
 
From 2008's income
    
22,383
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
    
$46,841
    
$49,182
    
$103,299
    
$80,394
    
$61,253
    
$50,484
    
$111,411
    
$88,420
    
$65,850
    
$49,182
    
$50,484
  
                                                                     
Shares outstanding at period end
    
32,710
   
32,385
   
27,986
   
27,816
   
27,129
   
26,733
   
26,053
   
25,668
   
25,382
   
32,385
   
26,733
 
Undistributed REIT taxable income (pre-tax) per share outstanding at period end
    
$1.43
    
$1.52
    
$3.69
    
$2.89
    
$2.26
    
$1.89
    
$4.28
    
$3.44
    
$2.59
    
$1.52
    
$1.89
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 4: Retention and Distribution of Taxable Income
 
69
 
 
 
Table 5: Components of Book Value ($ in millions)
70
                           
   
2008
  
January 1,
  
2007
  
2007
  
2007
  
2007
  
   
Q1
  
2008
  
Q4
  
Q3
  
Q2
  
Q1
  
                           
Assets at Redwood
                                      
Residential CES
                                      
Prime
    
$78
    
$128
    
$128
    
$132
    
$189
    
$181
  
Alt-A
    
9
   
22
   
22
   
44
    
68
    
72
  
Subprime
    
1
   
1
   
1
   
1
   
2
   
3
 
Total Residential CES at Redwood
    
$88
    
$151
    
$151
    
$177
    
$259
    
$256
  
                                       
Residential IGS
    
35
   
15
   
15
   
61
    
204
    
106
  
Commercial CES
    
100
   
148
   
148
   
159
    
186
    
198
  
Real estate loans
    
5
   
4
   
4
   
6
    
878
    
1256
  
CDO
   
42
   
33
   
33
   
9
    
24
    
24
  
Other real estate investments
    
3
   
12
   
12
    
24
    
32
    
47
  
Total securities & loans at Redwood
    
$273
    
$363
    
$363
    
$436
    
$1,583
    
$1,887
  
                                       
Cash and cash equivalents
    
257
   
290
   
$290
    
$310
    
$83
    
$92
  
Other assets (a)
    
35
    
67
   
67
   
118
   
109
   
120
 
Other liabilities (b)
    
(42
)
  
(41
)
  
(41
)
  
(89
)
  
(88
)
  
(65
)
                                       
Redwood debt
    
(2
)
  
(8
)
  
(8
)
  
(39
)
  
(849
)
  
(1,880
)
Madrona commercial paper
    
-
   
-
   
-
   
(5
)
  
(5
)
  
(5
)
Total Redwood debt
    
$(2
)
  
$(8
)
  
$(8
)
  
$(44
)
  
$(854
)
  
$(1,885
)
                                       
Investments in Sequoia
                                      
Total assets
    
6,800
   
7,205
   
7,205
   
$7,624
    
$7,473
    
$7,424
  
Total liabilities
    
(6,654
)
  
(7,059
)
  
(7,059
)
  
(7,376
)
  
(7,238
)
  
(7,203
)
Net investments in Sequoia
    
$146
    
$146
    
$146
    
$248
    
$235
    
$221
  
                                       
Investments in Acacia
                                      
Total assets
    
1,269
    
2,107
   
2,107
   
$2,795
    
$3,433
    
$3,424
  
Total liabilities
    
(1,201
)
  
(2,023
)
  
(3,492
)
  
(3,475
)
  
(3,475
)
  
(2,770
)
Net investments in Acacia
    
68
   
84
   
(1,385
)
  
(680
)
  
(42
)
  
654
 
                                       
Subordinated notes
    
(150
)
  
(150
)
  
(150
)
  
(150
)
  
(150
)
  
(100
)
                                       
Total GAAP equity
    
$585
    
$751
    
$(718
)
  
$149
    
$876
    
$924
  

(a) Other assets includes DBIC, derivative assets, accrued interest recievable, deferred tax assets, restricted cash, and other assets.
(b) Other liabilities include derivative liabilities, accrued interest payable, dividends payable, and accrued expenses, and other liabilities.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 5: Components of Book Value
 
 
 
 
 
Table 6 : Book Value and Other Ratios ($ in millions, except per share data)
 
                                           
   
2008
  
January 1,
  
2007
  
2007
  
2007
  
2007
  
2006
  
2006
  
2006
  
2006
  
   
Q1
  
2008 (1)
  
Q4
  
Q3
  
Q2
  
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
Total Redwood debt
    
$2
    
$8
    
$8
    
$39
    
$849
    
$1,880
    
$1,856
    
$510
    
$529
    
$  -
  
Subordinated notes
    
150
   
150
   
150
   
150
   
150
   
100
   
100
   
-
   
-
   
-
 
Redwood obligations
    
$152
    
$158
    
$158
    
$189
    
$999
    
$1,980
    
$1,956
    
$510
    
$529
    
$  -
  
                                                               
GAAP stockholders' equity
   
$585
    
$751
    
$(718
)
  
$149
    
$876
    
$924
    
$1,003
    
$1,043
    
$1,004
    
$967
  
                                                               
Redwood obligations to equity
    
0.3x
   
0.2x
    
(0.2)x
   
1.3x
   
1.1x
   
2.1x
   
2.0x
   
0.5x
   
0.5x
   
0.0x
 
Redwood obligations to (equity + Redwood obligations)
    
21
%
  
17
%
  
-28
%
  
56
%
  
53
%
  
68
%
  
66
%
  
33
%
  
35
%
  
0
%
                                                               
Redwood obligations
    
$152
    
$158
    
$158
    
$189
    
$999
    
$1,980
    
$1,956
    
$510
    
$529
    
$  -
  
ABS obligations of consolidated entities
    
7,591
   
8,839
   
10,329
   
10,803
   
10,675
   
9,947
   
9,979
   
11,554
   
11,898
   
13,930
 
GAAP debt
    
$7,743
    
$8,997
    
$10,487
    
$10,992
    
$11,674
    
$11,927
    
$11,935
    
$12,064
    
$12,427
    
$13,930
  
                                                               
GAAP debt to equity
    
13.2x
   
12.0x
   
(14.6)x
   
73.8x
   
13.3x
   
12.9x
   
11.9x
   
11.6x
   
12.4x
   
14.4x
 
GAAP debt to (equity + GAAP debt)
    
93
%
  
92
%
  
107
%
  
99
%
  
93
%
  
93
%
  
92
%
  
92
%
  
93
%
  
94
%
                                                               
GAAP stockholders' equity
   
$585
    
$751
    
$(718
)
  
$149
    
$876
    
$924
    
$1,003
    
$1,043
    
$1,004
    
$967
  
Balance sheet mark-to-market adjustments
   
(93
)
  
(99
)
  
(574
)
  
(735
)
  
(81
)
  
(6
)
  
93
    
95
    
91
    
82
  
Core equity
   
$678
    
$850
    
$(145
)
  
$884
    
$957
    
$930
    
$910
    
$948
    
$913
    
$886
  
                                                               
Shares outstanding at period end
    
32,710
    
32,385
    
32,385
    
27,986
    
27,816
    
27,129
    
26,733
    
26,053
    
25,668
    
25,382
  
                                                               
GAAP equity per share (2)
    
$17.89
    
$23.18
    
$(22.18
)
  
$5.32
    
$31.50
    
$34.06
    
$37.51
    
$40.02
    
$39.13
    
$38.11
  
Core equity per share
   
$20.74
    
$26.24
    
$(4.46
)
  
$31.58
    
$34.40
    
$34.29
    
$34.02
    
$36.38
    
$35.58
    
$34.90
  
 
(1) On January 1, 2008 we elected the fair value option for the assets and liabilities of Acacia and certain other assets.
(2) At March 31, 2008 we estimate the economic book value was $590 million, or $18.04 per share. This is the GAAP book value of $585 million ($17.89 per share) adjusted for our estimates of fair value of our investments in Acacia and Sequoia of negative $73 million (negative $2.23 per share), and an adjustment to the fair value of the subordinated notes issued of positive $78 million (positive $2.38 per share). This is reconciled to GAAP in the table on page 8 of this Review.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 6 : Book Value and Other Ratios
 
71
 
 
 
Table 7: Profitability Ratios ($ in thousands, except per share data)
72
                                               
                                       
Full
 
Full
 
   
2008
  
2007
  
2007
  
2007
  
2007
  
2006
  
2006
  
2006
  
2006
  
Year
  
Year
  
   
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
2007
  
2006
  
                                       
 
  
 
  
Interest income
    
$168,006
    
$201,952
    
$218,824
    
$219,658
    
$215,105
    
$217,391
    
$223,649
    
$218,238
    
$225,882
    
$855,540
    
$885,160
  
Average consolidated earning assets
    
$9,101,313
    
$11,521,330
    
$12,193,242
    
$12,301,562
    
$12,279,814
    
$12,498,889
    
$12,860,488
    
$13,581,710
    
$15,229,790
    
$12,072,657
    
$13,533,367
  
Asset yield
    
7.38
%
  
7.01
%
  
7.18
%
  
7.14
%
  
7.01
%
  
6.96
%
  
6.96
%
  
6.43
%
  
5.93
%
  
7.09
%
  
6.54
%
                                                                     
Interest expense
    
$(128,762
)
  
$(152,679
)
  
$(165,230
)
  
$(165,757
)
  
$(168,095
)
  
$(172,857
)
  
$(174,673
)
  
$(173,519
)
  
$(180,655
)
  
$(651,762
)
  
$(701,704
)
Average consolidated interest-bearing liabilities
    
$8,383,296
    
$10,716,433
    
$11,376,762
    
$11,580,196
    
$11,623,627
    
$11,836,717
    
$12,332,390
    
$13,055,417
    
$14,800,315
    
$11,322,898
    
$12,996,244
  
Cost of funds
    
6.14
%
  
5.70
%
  
5.81
%
  
5.73
%
  
5.78
%
  
5.84
%
  
5.67
%
  
5.32
%
  
4.88
%
  
5.76
%
  
5.40
%
 
                                                                    
Asset yield
    
7.38
%
  
7.01
%
  
7.18
%
  
7.14
%
  
7.01
%
  
6.96
%
  
6.96
%
  
6.43
%
  
5.93
%
  
7.09
%
  
6.54
%
Cost of funds
    
(6.14
)%
  
(5.70
)%
  
(5.81
)%
  
(5.73
)%
  
(5.78
)%
  
(5.84
)%
  
(5.67
)%
  
(5.32
)%
  
(4.88
)%
  
(5.76
)%
  
(5.40
)%
Interest rate spread
    
1.24
%
  
1.31
%
  
1.37
%
  
1.41
%
  
1.22
%
  
1.12
%
  
1.29
%
  
1.11
%
  
1.05
%
  
1.33
%
  
1.14
%
 
                                                                    
Net interest income before market valuation adjustments
    
$40,726
    
$49,273
    
$53,594
    
$53,901
    
$47,010
    
$44,534
    
$48,976
    
$44,719
    
$45,227
    
$203,778
    
$183,456
  
Average consolidated earning assets
    
$9,101,313
    
$11,521,330
    
$12,193,242
    
$12,301,562
    
$12,279,814
    
$12,498,889
    
$12,860,488
    
$13,581,710
    
$15,229,790
    
$12,072,657
    
$13,533,367
  
Net interest margin
    
1.79
%
  
1.71
%
  
1.76
%
  
1.75
%
  
1.75
%
  
1.43
%
  
1.52
%
  
1.32
%
  
1.19
%
  
1.69
%
  
1.36
%
                                                                     
Net interest income before market valuation adjustments
    
$40,726
    
$49,273
    
$53,594
    
$53,901
    
$47,010
    
$44,534
    
$48,976
    
$44,719
    
$45,227
    
$203,778
    
$183,456
  
Annualized net interest income / average core equity
    
19.66
%
  
27.91
%
  
22.48
%
  
22.66
%
  
20.33
%
  
19.28
%
  
21.02
%
  
19.91
%
  
20.62
%
  
23.06
%
  
20.32
%
                                                                     
Operating expenses (excluding severance expense)
    
$16,368
    
$14,929
    
$11,732
    
$12,772
    
$15,402
    
$13,851
    
$13,455
    
$16,037
    
$12,582
    
$54,835
    
$55,925
  
                                                                     
Average total assets
    
$9,222,284
    
$10,866,153
    
$12,232,304
    
$12,688,468
    
$12,865,979
    
$13,041,794
    
$13,480,361
    
$14,168,755
    
$15,839,483
    
$12,177,451
    
$14,123,149
  
Average total equity
    
$710,010
    
$97,534
    
$851,869
    
$946,454
    
$1,008,688
    
$1,008,863
    
$1,011,609
    
$980,402
    
$952,230
    
$723,807
    
$988,495
  
                                                                     
Operating expenses / net interest income
    
40.19
%
  
30.30
%
  
21.89
%
  
23.70
%
  
32.76
%
  
31.10
%
  
27.47
%
  
35.86
%
  
27.82
%
  
26.91
%
  
30.48
%
Operating expenses / average total assets
    
0.71
%
  
0.55
%
  
0.38
%
  
0.40
%
  
0.48
%
  
0.42
%
  
0.40
%
  
0.45
%
  
0.32
%
  
0.45
%
  
0.40
%
Operating expenses / average total equity annualized
    
9.22
%
  
61.23
%
  
5.51
%
  
5.40
%
  
6.11
%
  
5.49
%
  
5.32
%
  
6.54
%
  
5.29
%
  
7.58
%
  
5.66
%
                                                                     
GAAP net (loss) income
   
$(171,587
)
  
$(1,077,445
)
  
$(60,917
)
  
$11,416
    
$18,309
    
$35,691
    
$32,416
    
$31,410
    
$28,015
    
$(1,108,637
)
  
$127,532
  
GAAP net (loss) income / average total assets
    
(7.44
)%
  
(39.66
)%
  
(1.99
)%
  
0.36
%
  
0.57
%
  
1.09
%
  
0.96
%
  
0.89
%
  
0.71
%
  
(9.10
)%
  
0.90
%
GAAP net (loss) income / average equity (GAAP ROE)
    
(96.67
)%
  
(4418.75
)%
  
(28.60
)%
  
4.82
%
  
7.26
%
  
14.15
%
  
12.82
%
  
12.82
%
  
11.77
%
  
(153.17
)%
  
12.90
%
GAAP net (loss) income / average core equity (adjusted ROE)
    
(82.83
)%
  
(610.31
)%
  
(25.55
)%
  
4.80
%
  
7.92
%
  
15.45
%
  
13.91
%
  
13.98
%
  
12.77
%
  
(125.47
)%
  
14.04
%
                                                                     
Core earnings
    
$22,303
    
$35,811
    
$40,025
    
$38,108
    
$29,807
    
$30,276
    
$31,983
    
$25,417
    
$29,885
    
$143,751
    
$117,561
  
Average core equity
    
$828,618
    
$706,167
    
$953,602
    
$951,378
    
$925,128
    
$923,856
    
$932,030
    
$898,409
    
$877,212
    
$883,590
    
$908,071
  
Core earnings / average core equity (core ROE)
    
10.77
%
  
20.28
%
  
16.79
%
  
16.02
%
  
12.89
%
  
13.11
%
  
13.73
%
  
11.32
%
  
13.63
%
  
16.27
%
  
12.95
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 7: Profitability Ratios
 
 
 
 
Table 8: Average Balance Sheet ($ in thousands)
 
                           
                       
Full
 
   
2008
  
2007
  
2007
  
2007
  
2007
  
Year
  
   
Q1
  
Q4
  
Q3
  
Q2
  
Q1
  
2007
  
Amortized Cost at Redwood
                                      
                                       
Residential CES
                                      
Prime
    
$164,621
    
$159,699
    
$133,552
    
$141,226
    
$124,513
    
$139,747
  
Alt-A
    
24,637
   
37,882
   
79,139
   
70,431
   
66,606
   
63,515
 
Subprime
    
1,712
   
906
   
1,550
   
4,017
   
6,312
   
3,196
 
Residential CES at Redwood
    
190,970
   
198,487
   
214,241
   
215,675
   
197,431
   
206,458
 
                                       
Residential IGS
    
37,632
   
35,998
   
136,148
   
156,171
   
138,398
   
116,679
 
Commercial CES
    
183,446
   
184,491
   
185,358
   
188,672
   
199,302
   
189,456
 
Commercial loans
    
250
   
91
   
2,602
   
2,603
   
2,603
   
1,975
 
Residential loans
    
4,507
   
74,722
   
127,983
   
901,168
   
1,708,160
   
698,819
 
CDO
   
21,297
   
30,501
   
20,424
   
25,854
   
33,576
   
27,589
 
Other real estate investments
    
5,836
   
17,679
   
28,152
   
47,567
   
23,736
   
29,283
 
Real estate assets at Redwood
    
$443,938
    
$541,968
    
$714,908
    
$1,537,710
    
$2,303,207
    
$1,270,259
  
                                       
Earning assets at Acacia
    
1,439,913
   
3,339,339
   
3,326,899
   
3,141,675
   
2,735,805
   
3,137,798
 
Earning assets at Sequoia
    
6,895,529
   
7,254,340
   
7,745,341
   
7,331,308
   
6,995,987
   
7,331,744
 
Earning assets at Opportunity Fund
    
33,180
   
-
   
-
   
-
   
-
   
-
 
                                       
Cash and cash equivalents
    
402,584
   
385,683
   
406,094
   
290,869
   
244,816
   
332,856
 
Earning assets
   
9,215,144
   
11,521,330
   
12,193,242
   
12,301,562
   
12,279,814
   
12,072,657
 
Balance sheet mark-to-market adjustments
   
(113,832
)
  
(608,634
)
  
(101,733
)
  
(4,924
)
  
83,560
   
(195,757
)
Earning assets - reported value
    
9,101,312
   
10,912,696
   
12,091,509
   
12,296,638
   
12,363,374
   
11,876,900
 
Other assets
    
120,971
   
(46,543
)
  
140,795
   
391,830
   
502,605
   
300,550
 
Total assets
    
$9,222,283
    
$10,866,153
    
$12,232,304
    
$12,688,468
    
$12,865,979
    
$12,177,450
  
                                       
Redwood debt
    
$21,477
    
$26,871
    
$399,068
    
$1,515,988
    
$2,188,561
    
$1,024,829
  
Sequoia ABS issued
    
6,745,556
   
7,161,634
   
7,430,521
   
7,125,947
   
6,845,355
   
7,143,651
 
Acacia ABS issued
    
1,456,506
   
3,381,924
   
3,401,359
   
2,820,328
   
2,492,698
   
3,027,541
 
Other liabilities
    
142,491
   
52,187
   
3,673
   
161,819
   
233,664
   
130,745
 
'Subordinated notes
    
146,242
   
146,004
   
145,813
   
117,934
   
97,013
   
126,877
 
Total liabilities
    
8,512,272
   
10,768,620
   
11,380,435
   
11,742,015
   
11,857,291
   
11,453,643
 
                                       
Core equity
    
823,843
    
706,167
   
953,602
   
951,378
   
925,128
   
883,590
 
Balance sheet mark-to-market adjustments
    
(113,832
)
  
(608,634
)
  
(101,733
)
  
(4,924
)
  
83,560
   
(159,783
)
Total equity
    
714,786
   
97,533
   
851,869
   
946,454
   
1,008,688
   
723,807
 
                                       
Total liabilities and equity
    
$9,222,283
    
$10,866,153
    
$12,232,304
    
$12,688,469
    
$12,865,979
    
$12,177,450
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 8: Average Balance Sheet
73
 
 
 
Table 9A - Balances & Yields by Securities Portfolio at Redwood
($ in thousands)
74
           
   
2008
  
2007
  
   
Q1
  
Q4
  
Residential Prime CES
              
Current face
    
$537,214
    
$528,745
  
Unamortized discount
    
(60,335
)
  
(76,633
)
Discount designated as credit reserve
    
(358,334
)
  
(287,716
)
Unrealized losses
    
(40,739
)
  
(36,784
)
Reported value
    
$77,806
    
$127,612
  
               
Average amortized cost
    
$164,621
    
$159,699
  
Interest income
    
$16,600
    
$19,534
  
Annualized interest income / average amortized cost
    
40.34
%
  
48.93
%
               
Residential Alt-A CES
              
Current face
    
$217,109
    
$234,785
  
Unamortized discount
    
(1,401
)
  
(15,158
)
Discount designated as credit reserve
    
(204,681
)
  
(194,544
)
Unrealized losses
    
(1,914
)
  
(3,117
)
Reported value
    
$9,113
    
$21,966
  
               
Average amortized cost
    
$24,637
    
$37,882
  
Interest income
    
$5,210
    
$4,769
  
Annualized interest income / average amortized cost
    
84.59
%
  
50.36
%
               
Residential Subprime CES
              
Current face
    
$23,888
    
$27,899
  
Unamortized discount
    
37
   
1,349
 
Discount designated as credit reserve
    
(23,139
)
  
(27,872
)
Unrealized gains
    
152
   
55
 
Reported value
    
$938
    
$1,431
  
               
Average amortized cost
    
$1,135
    
$906
  
Interest income
    
$85
    
$478
  
Annualized interest income / average amortized cost
    
29.96
%
  
211.04
%
               
Residential IGS
              
Current face
    
$56,494
    
$56,125
  
Unamortized discount
    
(22,014
)
  
(17,660
)
Discount designated as credit reserve
    
(20
)
  
(12,013
)
Unrealized gains
    
(7,034
)
  
99
 
Reported value
    
$27,426
    
$26,551
  
               
Average amortized cost
    
$15,794
    
$35,999
  
Interest income
    
$629
    
$1,065
  
Annualized interest income / average amortized cost
    
15.94
%
  
11.83
%
   
 
  
 
  
Commercial CES
              
Current face
    
$523,118
    
$523,156
  
Unamortized discount
    
(36,955
)
  
(17,867
)
Discount designated as credit reserve
    
(378,388
)
  
(318,456
)
Unrealized losses
    
(8,252
)
  
(38,325
)
Reported value
    
$99,523
    
$148,508
  
               
Average amortized cost
    
$183,446
    
$184,491
  
Interest income
    
$5,000
    
$4,955
  
Annualized interest income / average amortized cost
    
10.90
%
  
10.74
%
               
CDO CES
              
Current face
    
$26,562
    
$26,501
  
Unamortized discount
    
(3,513
)
  
(3,096
)
Discount designated as credit reserve
    
(22,374
)
  
(21,855
)
Unrealized losses
    
10
   
822
 
Reported value
    
$685
    
$2,372
  
               
Average amortized cost
    
$1,576
    
$1,678
  
Interest income
    
$140
    
$129
  
Annualized interest income / average amortized cost
    
35.53
%
  
30.75
%
               
CDO IGS
              
Current face
    
$89,645
    
$121,800
  
Unamortized discount
    
(58,959
)
  
(55,776
)
Discount designated as credit reserve
              
Unrealized losses
    
(4,146
)
  
(35,499
)
Reported value
    
$26,540
    
$30,525
  
               
Average amortized cost
    
$27,743
    
$28,823
  
Interest income
    
$1,357
    
$807
  
Annualized interest income / average amortized cost
    
19.57
%
  
11.20
%
               
Securities Reported at Fair Value (1)
              
               
Reported fair value
    
$23,371
    
$-
  
               
Average fair value
    
$47,572
    
-
 
Interest income
    
$2,099
    
-
 
Annualized interest income / average fair value
    
17.65
%
  
-
 

(1) On January 1, 2008 we elected the fair value option for certain assets.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 9A - Balances & Yields by Securities Portfolio at Redwood
 
 
 
 
Table 9B - Balances & Yields by Securities Portfolio at Acacia
($ in thousands)
 
       
   
2008
  
   
Q1
  
Residential Prime CES
        
         
Reported fair value
    
$77,414
  
         
Average fair value
    
$135,694
  
Interest income
    
$5,877
  
Annualized interest income / average fair-value
    
17.32
%
         
Residential Alt-A CES
        
         
Reported fair value
    
$14,633
  
         
Average fair value
    
$31,243
  
Interest income
    
$2,940
  
Annualized interest income / average fair-value
    
37.64
%
         
Residential Subprime CES
        
         
Reported fair value
    
$10,877
  
         
Average fair value
    
$13,116
  
Interest income
    
$1,629
  
Annualized interest income / average fair-value
    
49.68
%
         
Residential IGS
        
         
Reported fair value
    
$588,738
  
         
Average fair value
    
$857,763
  
Interest income
    
$23,967
  
Annualized interest income / average fair-value
    
11.18
%
   
 
  
Commercial IGS
        
         
Reported fair value
    
$62,781
  
         
Average fair value
    
$73,878
  
Interest income
    
$1,431
  
Annualized interest income / average fair-value
    
7.75
%
         
Commercial CES
        
         
Reported fair value
    
$112,554
  
         
Average fair value
    
$150,421
  
Interest income
    
$4,542
  
Annualized interest income / average fair-value
    
12.08
%
         
CDO IGS
        
         
Reported fair value
    
$52,743
  
         
Average fair value
    
$69,991
  
Interest income
    
$2,527
  
Annualized interest income / average fair-value
    
14.44
%
         
CDO CES
        
         
Reported fair value
    
$6,027
  
         
Average fair value
    
$7,096
  
Interest income
    
$401
  
Annualized interest income / average fair-value
    
22.63
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 9B - Balances & Yields by Securities Portfolio at Acacia
75
 
 
 
Table 10A: Securities Portfolio Activity at Redwood (in thousands)
76
           
   
2008
  
2007
  
   
Q1
  
Q4
  
Residential Prime
              
Beginning balance
    
$128,971
    
$134,624
  
Acquisitions
    
38,207
   
63,663
 
Transfer between portfolios
    
1,183
   
(624
)
Sales
   
-
   
-
 
Principal payments
    
(14,810
)
  
(14,702
)
Discount amortization
    
9,554
   
12,544
 
Changes in fair value, net
    
(65,125
)
  
(66,534
)
Ending Balance
    
$97,980
    
$128,971
  
               
Residential Alt-A
              
Beginning balance
    
$31,353
    
$89,668
  
Acquisitions
    
451
   
-
 
Transfer between portfolios
    
2,874
   
(13,951
)
Sales
   
-
   
(18,255
)
Principal payments
    
(3,646
)
  
(3,410
)
Discount amortization
    
2,423
   
1,167
 
Changes in fair value, net
    
(18,607
)
  
(23,866
)
Ending balance
    
$14,850
    
$31,353
  
               
Residential Subprime
              
Beginning balance
    
$6,036
    
$13,089
  
Acquisitions
    
7,221
   
6,303
 
Transfer between portfolios
    
-
   
-
 
Sales
   
-
   
-
 
Principal payments
    
(1,170
)
  
(1,417
)
Discount amortization
    
(25
)
  
173
 
Changes in fair value, net
    
(1,745
)
  
(12,112
)
Ending balance
    
$10,317
    
$6,036
  
               
Other Real Estate Investments
              
Beginning balance
    
$11,521
    
$25,300
  
Acquisitions
    
-
   
-
 
Transfer between portfolios
    
(4,379
)
  
-
 
Sales
   
-
   
-
 
Principal payments
    
(1,008
)
  
(3,349
)
Premium amortization
    
-
   
(1,217
)
Changes in fair value, net
    
(2,697
)
  
(9,213
)
Ending balance
    
$3,437
    
$11,521
  
   
 
  
 
  
Residential Real Estate Loans
              
Beginning balance
    
$4,533
    
$6,049
  
Acquisitions
    
-
       
Principal payments
    
(16
)
  
(343
)
Premium amortization
    
-
   
(779
)
Credit provision
    
-
   
-
 
Transfers to REO
    
-
   
-
 
Changes in fair value, net
   
(74
)
  
(394
)
Ending balance
    
$4,443
    
$4,533
  
               
Commercial
             
Beginning balance
    
$148,508
    
$158,750
  
Acquisitions
    
-
   
-
 
Transfer between portfolios
    
-
   
20,835
 
Sales
   
-
   
(4,542
)
Principal payments
    
-
   
-
 
Premium amortization
    
(1,523
)
  
(1,579
)
Changes in fair value, net
    
(47,462
)
  
(24,956
)
Ending Balance
    
$99,523
    
$148,508
  
               
Commercial Real Estate Loans
              
Beginning balance
    
$253
    
$249
  
Acquisitions
    
-
   
-
 
Principal payments
    
(2
)
  
(2
)
Discount (premium) amortization
    
1
   
6
 
Credit provision
    
-
   
-
 
Changes in fair value, net
   
-
   
-
 
Ending Balance
    
$252
    
$253
  
               
CDO
             
Beginning balance
    
$32,897
    
$9,359
  
Acquisitions
    
12,336
   
42,113
 
Upgrades / downgrades
    
-
   
-
 
Transfer between portfolios
    
-
   
(1,526
)
Sales
   
-
   
-
 
Principal payments
    
20
   
(317
)
Discount amortization
    
435
   
-
 
Changes in fair value, net
    
(2,957
)
  
(16,732
)
Ending Balance
    
$42,731
    
$32,897
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 10A: Securities Portfolio Activity at Redwood
 
 
 
 
Table 10B: Portfolio Activity at Acacia (in thousands)
 
           
   
2008
  
2007
  
   
Q1
  
Q4
  
Residential Prime
              
   
$707,722
    
$947,475
  
Acquisitions
    
-
   
11,075
 
Transfer between portfolios
    
227
   
624
 
Sales
   
-
   
(3,159
)
Principal payments
    
(23,932
)
  
(23,000
)
Discount amortization
    
-
   
4,205
 
Changes in fair value, net
    
(372,984
)
  
(229,498
)
Ending Balance
    
$311,033
    
$707,722
  
               
Residential Alt-a
              
Beginning balance
    
$465,387
    
$724,896
  
Acquisitions
    
0
   
30,175
 
Transfer between portfolios
    
-
   
13,958
 
Sales
   
-
   
(1,056
)
Principal payments
    
(7,021
)
  
(9,222
)
Discount amortization
    
-
   
1,597
 
Changes in fair value, net
    
(238,842
)
  
(294,961
)
Ending balance
    
$219,524
    
$465,387
  
               
Residential Subprime
              
Beginning balance
    
$219,941
    
$324,926
  
Acquisitions
    
-
   
-
 
Transfer between portfolios
    
95
   
(6
)
Sales
   
-
   
-
 
Principal payments
    
(22,364
)
  
(11,341
)
Discount amortization
    
-
   
(771
)
Changes in fair value, net
    
(36,566
)
  
(92,867
)
Ending balance
    
$161,106
    
$219,941
  
   
 
  
 
  
Commercial
             
Beginning balance
    
$278,003
    
$341,047
  
Acquisitions
    
-
   
-
 
Transfer between portfolios
    
(5,482
)
  
(20,836
)
Sales
   
-
   
-
 
Principal payments
    
(658
)
  
(5,121
)
Discount (premium) amortization
    
-
   
1,669
 
Changes in fair value, net
    
(96,527
)
  
(38,757
)
Ending Balance
    
$175,336
    
$278,003
  
               
CDO
             
Beginning balance
    
$91,263
    
$182,554
  
Acquisitions
    
-
   
-
 
Transfer between portfolios
    
5,482
   
1,525
 
Sales
   
-
   
-
 
Principal payments
    
(647
)
  
(6,379
)
Premium amortization
    
-
   
(133
)
Changes in fair value, net
    
(37,328
)
  
(86,304
)
Ending Balance
    
$58,770
    
$91,263
  
               
Commercial Real Estate Loans
      
Beginning balance
    
$25,426
    
$25,517
  
Acquisitions
    
-
   
-
 
Transfer between portfolios
    
-
   
-
 
Principal payments
    
(115
)
  
(111
)
Discount (premium) amortization
    
-
   
20
 
Credit provision
    
-
   
-
 
Changes in fair value, net
    
(6,509
)
  
-
 
Ending Balance
    
$18,802
    
$25,426
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 10B: Portfolio Activity at Acacia
77
 
 
 
Table 10C: Portfolio Activity at Sequoia (in thousands)
78
           
   
2008
  
2007
  
   
Q1
  
Q4
  
Residential Real Estate Loans
              
Beginning balance
    
$7,173,940
    
$7,624,222
  
Acquisitions
    
-
   
-
 
Principal payments
    
(399,711
)
  
(430,612
)
Premium amortization
    
(7,510
)
  
(6,683
)
Credit provision
    
(8,058
)
  
(4,973
)
Transfers to REO
    
(7,170
)
  
(8,014
)
Changes in fair value, net
   
-
   
-
 
Ending balance
    
$6,751,491
    
$7,173,940
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 10C: Portfolio Activity at Sequoia
 
 
 
 
Table 11A: Managed Residential Loans Credit Performance
($ in thousands)
 
                                                   
       
Managed Loans
  
Internally-Designated Credit Reserve
  
External Credit Enhancement
  
Total Credit Protection
  
Total Credit Protection as % of Loans (1)
  
Seriously Delinquent Loans (2)
  
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)
  
Redwood Credit Losses As % of Loans (Annualized)
  
Total Managed
    
Q1: 2006
    
$198,252,684
    
$396,153
    
$126,376
    
$522,529
    
0.26
%
  
$467,352
    
0.24
%
  
$3,002
    
-
   
$3,002
    
0.01
%
Residential
    
Q2: 2006
    
227,928,505
   
445,028
   
126,264
   
571,292
   
0.25
%
  
441,430
   
0.19
%
  
1,464
   
-
   
1,464
   
<0.01
%
Portfolio
    
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
%
 
   
Q3: 2007
    
219,465,992
   
466,034
   
335,699
   
801,733
   
0.37
%
  
2,234,644
   
1.02
%
  
17,553
   
8,682
   
8,871
   
0.03
%
 
   
Q4: 2007
    
256,923,033
   
695,130
   
342,009
   
1,037,139
   
0.40
%
  
7,536,293
   
2.93
%
  
44,529
   
32,533
   
11,996
   
0.07
%
 
   
2007
    
256,923,033
   
695,130
   
342,009
   
1,037,139
   
0.40
%
  
7,536,293
   
2.93
%
  
$80,015
    
42,011
   
38,004
   
0.03
%
 
   
Q1: 2008 (3) 
    
$157,481,973
    
$610,598
    
$89,472
    
$700,070
    
0.44
%
  
$4,698,037
    
2.98
%
  
$57,354
    
$24,746
    
$32,608
    
0.15
%
                                                                           
Residential Real
    
Q1: 2006
    
$11,846,454
    
$22,372
    
-
   
$22,372
    
0.19
%
  
48,677
   
0.41
%
  
$425
    
-
   
$425
    
<0.01
%
Estate Loans
    
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
%
 
   
Q3: 2007
    
7,546,529
   
15,195
   
-
   
15,195
   
0.20
%
  
56,068
   
0.74
%
  
2,728
   
-
   
2,728
   
0.14
%
 
   
Q4: 2007
    
7,106,018
   
18,282
   
-
   
18,282
   
0.26
%
  
67,984
   
0.96
%
  
1,886
   
-
   
1,886
   
0.11
%
 
   
2007
    
7,106,018
   
18,282
   
-
   
18,282
   
0.26
%
  
67,984
   
0.96
%
  
12,298
   
-
   
12,298
   
0.17
%
 
   
Q1: 2008 (3) 
    
$6,697,241
    
$24,444
    
-
   
$24,444
    
0.36
%
  
$83,966
    
1.25
%
  
$1,896
    
-
   
$1,896
    
0.11
%
                                                                           
Residential CES
    
Q1: 2006
    
$186,406,230
    
$373,781
    
$126,376
    
$500,157
    
-
   
$418,675
    
0.22
%
  
$2,577
    
-
   
$2,577
    
<0.01
%
 
   
Q2: 2006
    
217,609,864
   
425,578
   
126,264
   
551,842
   
0.25
%
  
394,268
   
0.18
%
  
1,041
   
-
   
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
%
 
   
Q3: 2007
    
211,919,463
   
450,839
   
335,699
   
786,538
   
0.37
%
  
2,178,576
   
1.03
%
  
14,825
   
8,682
   
6,143
   
0.01
%
 
   
Q4: 2007
    
249,817,015
   
676,848
   
342,009
   
1,018,857
   
0.41
%
  
7,468,309
   
2.99
%
  
42,643
   
32,533
   
10,110
   
0.02
%
 
   
2007
    
249,817,015
   
676,848
   
342,009
   
1,018,857
   
0.41
%
  
7,468,309
   
2.99
%
  
67,717
   
42,011
   
25,706
   
0.01
%
 
   
Q1: 2008 (3) 
    
$150,784,732
    
$586,154
    
$89,472
    
$675,626
    
0.45
%
  
$4,614,071
    
3.06
%
  
55,458
   
$24,746
    
$30,712
    
0.08
%

(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 credit enhancement balances shown above do not include pari passu CES owned by others. If we had included these amounts, the total credit protection would increase to 0.54% for residential CES compared to the 0.45% shown in the table above.
(2) The seriously delinquent loans amount for residential real estate loans excludes loans in REO which is included in our consolidated other assets. At March 31, 2008, REO totaled $16 million.
(3) As of Q108, balances only include CES and loans held at Redwood and loans held by Sequoia.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 11A: Managed Residential Loans Credit Performance
79
 
 
 
Table 11B: Managed Residential Loans Underlying Unrated CES at Redwood 
($ in thousands)
80
                                   
       
Managed Loans (1)
  
Internally-Designated Credit Reserve
  
Total Credit Reserve as % of Loans (2)
  
Seriously Delinquent Loans
  
Seriously Delinquent Loan % of Current Balance
  
Redwood's Share of Losses
  
Total Credit Losses As % of Loans (Annualized)
  
                                   
Total managed residential
    
2005
    
$116,114,620
    
$354,603
    
0.31
%
  
$280,777
    
0.24
%
  
$3,004
    
0.00
%
loans underlying unrated
   
Q1: 2006
    
138,193,399
   
411,286
   
0.30
%
  
383,443
   
0.28
%
  
2,577
   
0.01
%
CES at Redwood
    
Q2: 2006
    
149,482,021
   
424,873
   
0.28
%
  
355,455
   
0.24
%
  
1,041
   
0.00
%
 
   
Q3: 2006
    
131,638,023
   
383,329
   
0.29
%
  
402,464
   
0.31
%
  
2,004
   
0.01
%
 
   
Q4: 2006
    
125,484,895
   
372,247
   
0.30
%
  
475,624
   
0.38
%
  
4,151
   
0.01
%
  
   
2006
    
125,484,895
   
372,247
   
0.30
%
  
475,624
   
0.38
%
  
9,773
   
0.01
%
  
   
Q1: 2007
    
106,041,296
   
392,763
   
0.37
%
  
603,602
   
0.57
%
  
3,805
   
0.01
%
  
   
Q2: 2007
    
107,327,274
   
443,736
   
0.41
%
  
760,418
   
0.71
%
  
5,649
   
0.02
%
  
   
Q3: 2007
    
102,309,905
   
436,484
   
0.43
%
  
1,140,185
   
1.11
%
  
6,143
   
0.02
%
  
   
Q4: 2007
    
105,346,188
   
482,260
   
0.46
%
  
1,925,858
   
1.83
%
  
9,795
   
0.04
%
  
   
2007
    
105,346,188
   
482,260
   
0.46
%
  
1,925,858
   
1.83
%
  
25,392
   
0.02
%
  
   
Q1: 2008
    
$104,143,788
    
$563,015
    
0.54
%
  
$3,078,034
    
2.96
%
  
$26,701
    
0.10
%
                                                   
Residential loans
   
2005
    
$100,335,631
    
$296,362
    
0.30
%
  
$222,162
    
0.22
%
  
$2,455
    
0.00
%
underlying prime unrated
   
Q1: 2006
    
122,532,955
   
343,209
   
0.28
%
  
296,802
   
0.24
%
  
2,403
   
0.01
%
CES at Redwood
    
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
%
  
   
Q3: 2007
    
82,672,812
   
260,191
   
0.31
%
  
555,257
   
0.67
%
  
2,816
   
0.01
%
  
   
Q4: 2007
    
86,979,610
   
287,716
   
0.33
%
  
898,336
   
1.03
%
  
4,418
   
0.02
%
  
   
2007
    
86,979,610
   
287,716
   
0.33
%
  
898,336
   
1.03
%
  
12,949
   
0.01
%
  
   
Q1: 2008
    
$86,486,014
    
$358,334
    
0.41
%
  
$1,399,063
    
1.62
%
  
$11,129
    
0.05
%
                                                   
Residential loans
   
2005
    
$15,778,989
    
$58,241
    
0.37
%
  
$58,614
    
0.37
%
  
$549
    
0.00
%
underlying alt - a unrated
   
Q1: 2006
    
15,660,444
   
68,077
   
0.43
%
  
86,641
   
0.55
%
  
174
   
0.00
%
CES at Redwood
    
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
%
  
   
Q3: 2007
    
19,637,093
   
176,293
   
0.90
%
  
584,928
   
2.98
%
  
3,327
   
0.07
%
  
   
Q4: 2007
    
18,366,578
   
194,544
   
1.06
%
  
1,027,522
   
5.59
%
  
5,377
   
0.12
%
  
   
2007
    
18,366,578
   
194,544
   
1.06
%
  
1,027,522
   
5.59
%
  
12,443
   
0.07
%
  
   
Q1: 2008
    
$17,657,774
    
$204,681
    
1.16
%
  
$1,678,971
    
9.51
%
  
$15,572
    
0.35
%
 
(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.
(2) The credit enhancement balances shown above do not include pari passu CES owned by others. If we had included these amounts, the total credit protection would be 0.53% for prime CES compared to 0.41% for prime CES shown in the table above. For alt-a CES, the total credit protection would be 1.43% compared to the 1.16% shown in the table above.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 11B: Managed Residential Loans Underlying Unrated CES at Redwood 
 
 
 
 
Table 12A: Residential Prime CES and Underlying Loan Characteristics at Redwood
($ in thousands)
 
           
   
2008
  
2007
  
   
Q1
 
Q4
 
AFS: Residential Prime CES
              
Principal value
    
$537,214
    
$528,745
  
Unamortized discount
    
$(60,335
)
  
$(76,633
)
Discount designated as credit reserve
    
$(358,334
)
  
$(287,716
)
Unrealized (loss) gain
    
$(40,739
)
  
$(36,784
)
Market value (reported value)
    
$77,806
    
$127,612
  
Market value / principal value
    
14.5
%
  
24.1
%
 
              
FVO: Residential Prime CES
              
Market value
    
$  -
    
$  -
  
 
              
Total Market Value (reported value)
    
$77,806
    
$127,612
  
 
              
Current Rating
              
BB
    
$24,647
    
$49,935
  
B
   
21,538
   
41,150
 
Unrated
    
31,621
   
36,527
 
Total market value
    
$77,806
    
$127,612
  
 
              
Security Type
              
Option ARM
    
$6,841
    
$16,827
  
ARM
    
4,370
   
16,180
 
Hybrid
    
47,858
   
72,704
 
Fixed
    
18,737
   
21,901
 
Total market value
    
$77,806
    
$127,612
  
 
              
AFS: Residential Prime CES
              
Coupon income
   
$7,110
    
$7,013
  
Discount amortization
    
9,490
   
12,521
 
Total interest income
    
$16,600
    
$19,534
  
 
              
Average amortized cost
    
$164,621
    
$159,699
  
 
              
Coupon income %
    
17.27
%
  
17.57
%
Discount amortization %
    
23.06
%
  
31.36
%
Annualized interest income / avg. amt. cost
    
40.34
%
  
48.93
%
 
              
FVO: Residential Prime CES
              
Coupon income
   
$  -
    
$  -
  
Average fair-value
    
$  -
    
$  -
  
Annualized interest income / avg. fair-value
    
-
   
-
 
 
              
Underlying Loan Characteristics (Total)
              
 
              
Number of loans
    
303,657
   
305,272
 
Total loan face
    
$127,183,501
    
$126,820,985
  
Average loan size
    
$419
    
$415
  
 
              
Year 2008 origination
    
0
%
  
0
%
Year 2007 origination
    
8
%
  
7
%
Year 2006 origination
    
13
%
  
13
%
Year 2005 origination
    
22
%
  
23
%
Year 2004 origination and earlier
    
56
%
  
57
%

Southern CA
    
26
%
  
26
%
Northern CA
    
23
%
  
23
%
Florida
    
6
%
  
6
%
New York
    
6
%
  
6
%
Georgia
    
2
%
  
2
%
New Jersey
    
3
%
  
3
%
Texas
    
2
%
  
2
%
Arizona
    
2
%
  
2
%
Illinois
    
3
%
  
3
%
Colorado
    
2
%
  
2
%
Virginia
    
4
%
  
4
%
Other states
    
22
%
  
21
%
               
Wtd Avg Original LTV
    
69
%
  
69
%
Original LTV: 0 - 50
    
13
%
  
13
%
Original LTV: 50.01 - 60
    
12
%
  
12
%
Original LTV: 60.01 - 70
    
22
%
  
22
%
Original LTV: 70.01 - 80
    
50
%
  
50
%
Original LTV: 80.01 - 90
    
2
%
  
2
%
Original LTV: 90.01 - 100
    
1
%
  
1
%
Unknown
    
0
%
  
0
%
 
              
Wtd Avg FICO
    
736
   
736
 
FICO: <= 600
    
0
%
  
0
%
FICO: 601 - 620
    
0
%
  
0
%
FICO: 621 - 640
    
1
%
  
1
%
FICO: 641 - 660
    
3
%
  
3
%
FICO: 661 - 680
    
5
%
  
7
%
FICO: 681 - 700
    
10
%
  
10
%
FICO: 701 - 720
    
13
%
  
13
%
FICO: 721 - 740
    
14
%
  
14
%
FICO: 741 - 760
    
16
%
  
16
%
FICO: 761 - 780
    
18
%
  
18
%
FICO: 781 - 800
    
13
%
  
14
%
FICO: >= 801
    
4
%
  
4
%
Unknown
    
3
%
  
0
%
 
              
Conforming at Origination %
    
25
%
  
26
%
> $1 MM %
    
10
%
  
10
%
 
              
2nd Home %
    
6
%
  
7
%
Investment Home %
    
2
%
  
2
%
 
              
Purchase
    
42
%
  
42
%
Cash Out Refi
    
24
%
  
25
%
Rate-Term Refi
    
33
%
  
32
%
Construction
    
0
%
  
0
%
Other
    
0
%
  
1
%
 
              
Full Doc
    
49
%
  
52
%
No Doc
    
7
%
  
7
%
Other Doc (Lim, Red, Stated, etc)
    
41
%
  
41
%
Unknown
    
3 
%
      
2-4 Family
    
1
%
  
0
%
Condo
    
11
%
  
2
%
Single Family
    
87
%
  
11
%
Other
    
0
%
  
87
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 12A: Residential Prime CES and Underlying Loan Characteristics at Redwood
81
 
 
 
Table 12B: Residential Alt-A CES and Underlying Loan Characteristics at Redwood 
($ in thousands)
82
           
 
  
2008
  
2007
  
   
Q1
 
Q4
 
AFS: Residential CES Alt A
              
Principal value
    
$217,109
    
$234,785
  
Unamortized discount
    
(1,401
)
  
(15,158
)
Discount designated as credit reserve
    
(204,681
)
  
(194,544
)
Unrealized (loss) gain
    
(1,914
)
  
(3,117
)
Market value (reported value)
    
$9,113
    
$21,966
  
Market value / principal value
    
4.2
%
  
9.4
%
 
              
FVO: Residential CES Alt A
              
Market value
    
$  -
    
$  -
  
 
              
Total market value (reported value)
    
$9,113
    
$21,966
  
 
              
Current Rating
              
BB
    
$427
    
$2,901
  
B
   
2,130
   
7,531
 
Unrated
    
6,556
   
11,534
 
Total market value
    
$9,113
    
$21,966
  
 
              
Security Type
              
Option ARM
    
$7,798
    
$19,644
  
ARM
    
116
   
151
 
Hybrid
    
822
   
1,660
 
Fixed
    
377
   
511
 
Total market value
    
$9,113
    
$21,966
  
 
              
AFS: Residential CES Alt A
              
Coupon income
   
$2,787
    
$3,588
  
Discount amortization
    
2,423
   
1,181
 
Total interest income
    
$5,210
    
$4,769
  
 
              
Average amortized cost
    
$24,637
    
$37,882
  
 
              
Coupon income %
    
45.25
%
  
37.89
%
Discount amortization %
    
39.34
%
  
12.47
%
Annualized interest income / avg. amt. cost
    
84.59
%
  
50.36
%
 
              
FVO: Residential CES Alt A
              
Coupon income
   
$  -
    
$  -
  
Average fair-value
    
$  -
    
$  -
  
Annualized interest income / avg. fair-value
    
-
   
-
 
 
              
Underlying Loan Characteristics
              
 
              
Number of loans
    
44,860
   
47,588
 
Total loan face
    
$17,657,774
    
$18,366,578
  
Average loan size
    
$393,622
    
$386
  
 
              
Year 2008 origination
    
0
%
  
0
%
Year 2007 origination
    
24
%
  
24
%
Year 2006 origination
    
24
%
  
24
%
Year 2005 origination
    
29
%
  
29
%
Year 2004 origination and earlier
    
22
%
  
23
%
 
           
   
2008
  
2007
  
   
Q1
 
Q4
 
Southern CA
    
31
%
  
30
%
Northern CA
    
21
%
  
20
%
Florida
    
11
%
  
11
%
New York
    
3
%
  
3
%
Georgia
    
1
%
  
1
%
New Jersey
    
3
%
  
3
%
Texas
    
1
%
  
1
%
Arizona
    
4
%
  
4
%
Illinois
    
1
%
  
1
%
Colorado
    
2
%
  
2
%
Virginia
    
3
%
  
3
%
Other states
    
20
%
  
21
%
               
Wtd Avg Original LTV
    
78
%
  
76
%
Original LTV: 0 - 50
    
3
%
  
4
%
Original LTV: 50.01 - 60
    
5
%
  
6
%
Original LTV: 60.01 - 70
    
16
%
  
16
%
Original LTV: 70.01 - 80
    
64
%
  
62
%
Original LTV: 80.01 - 90
    
9
%
  
9
%
Original LTV: 90.01 - 100
    
3
%
  
3
%
Unknown
    
0
%
  
0
%
 
              
Wtd Avg FICO
    
705
   
705
 
FICO: <= 600
    
0
%
  
0
%
FICO: 601 - 620
    
1
%
  
1
%
FICO: 621 - 640
    
5
%
  
5
%
FICO: 641 - 660
    
10
%
  
9
%
FICO: 661 - 680
    
16
%
  
16
%
FICO: 681 - 700
    
17
%
  
16
%
FICO: 701 - 720
    
15
%
  
14
%
FICO: 721 - 740
    
12
%
  
11
%
FICO: 741 - 760
    
10
%
  
9
%
FICO: 761 - 780
    
8
%
  
7
%
FICO: 781 - 800
    
5
%
  
4
%
FICO: >= 801
    
1
%
  
1
%
Unknown
    
1
%
  
7
%
 
              
Conforming at Origination %
    
43
%
  
44
%
> $1 MM %
    
16
%
  
16
%
 
              
2nd Home %
    
7
%
  
7
%
Investment Home %
    
11
%
  
11
%
 
              
Purchase
    
35
%
  
35
%
Cash Out Refi
    
43
%
  
43
%
Rate-Term Refi
    
22
%
  
22
%
Construction
    
0
%
  
0
%
Other
    
0
%
  
0
%
 
              
Full Doc
    
15
%
  
18
%
No Doc
    
1
%
  
1
%
Other Doc (Lim, Red, Stated, etc)
    
75
%
  
74
%
Unknown/Not Categorized
    
9
%
  
7
%
 
              
2-4 Family
    
5
%
  
0
%
Condo
    
11
%
  
5
%
Single Family
    
84
%
  
11
%
Other
    
0
%
  
84
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 12B: Residential Alt-A CES and Underlying Loan Characteristics at Redwood
 
 
 
 
Table 12C: Residential Subprime CES and Underlying Loan Characteristics at Redwood
($ in thousands)
 
           
`
  
2008
  
2007
  
   
Q1
 
Q4
 
Residential CES Subprime
              
Principal value
    
$23,888
    
$27,899
  
Unamortized premium (discount)
    
37
   
1,349
 
Discount designated as credit reserve
    
(23,139
)
  
(27,872
)
Unrealized gain (loss)
    
152
   
55
 
Market value (reported value)
    
$938
    
$1,431
  
Market value / principal value
    
3.9
%
  
5.1
%
 
              
FVO: Residential CES Subprime
              
Market value
    
$341
    
$  -
  
 
              
Total market value (reported value)
    
$1,279
    
$1,431
  
 
              
Current Rating
              
BB
   
$  -
    
$  -
  
B
    
90
   
111
 
Unrated
    
1,189
   
1,320
 
Total market value
    
$1,279
    
$1,431
  
 
              
Security Type
              
Option ARM
    
$  -
    
$  -
  
ARM
    
-
   
-
 
Hybrid
    
1,140
   
1,243
 
Fixed
    
139
   
188
 
Total market value
    
$1,279
    
$1,431
  
 
              
AFS: Residential CES Subprime
              
Coupon income
   
$429
    
$506
  
(Premium) discount amortization
    
(344
)
  
(28
)
Total net interest income
    
$85
    
$478
  
 
              
Average amortized cost
    
$1,135
    
$906
  
 
              
Interest income %
    
151.19
%
  
223.40
%
(Premium) discount amortization %
    
-121.23
%
  
-12.36
%
Annualized net interest income / avg. amt. cost
    
29.96
%
  
211.04
%
 
              
FVO: Residential CES Subprime
              
Coupon income
   
$128
    
$-
  
Average fair-value
    
$576
    
$-
  
Annualized interest income / avg. fair-value
    
88.89
%
  
-
 
 
              
Underlying Loan Characteristics
              
 
              
Number of loans
    
29,441
   
26,070
 
Total loan face
    
$5,943,456
    
$4,529,364
  
Average loan size
    
$201,876
    
$174
  
 
              
Year 2008 origination
    
0
%
  
0
%
Year 2007 origination
    
55
%
  
33
%
Year 2006 origination
    
44
%
  
66
%
Year 2005 origination
    
0
%
  
0
%
Year 2004 origination and earlier
    
0
%
  
1
%

           
   
2008
  
2007
  
   
Q1
 
Q4
 
Southern CA
    
18
%
  
21
%
Northern CA
    
13
%
  
16
%
Florida
    
11
%
  
11
%
New York
    
6
%
  
4
%
Georgia
    
2
%
  
1
%
New Jersey
    
3
%
  
3
%
Texas
    
5
%
  
5
%
Arizona
    
3
%
  
4
%
Illinois
    
4
%
  
4
%
Colorado
    
2
%
  
2
%
Virginia
    
1
%
  
2
%
Other states
    
32
%
  
27
%
               
Wtd Avg Original LTV
    
89
%
  
88
%
Original LTV: 0 - 50
    
2
%
  
2
%
Original LTV: 50.01 - 60
    
2
%
  
3
%
Original LTV: 60.01 - 70
    
5
%
  
6
%
Original LTV: 70.01 - 80
    
53
%
  
48
%
Original LTV: 80.01 - 90
    
25
%
  
26
%
Original LTV: 90.01 - 100
    
13
%
  
15
%
Unknown
    
0
%
  
0
%
 
              
Wtd Avg FICO
    
637
   
638
 
FICO: <= 600
    
23
%
  
23
%
FICO: 601 - 620
    
14
%
  
13
%
FICO: 621 - 640
    
17
%
  
17
%
 
              
FICO: 641 - 660
    
15
%
  
15
%
FICO: 661 - 680
    
11
%
  
11
%
FICO: 681 - 700
    
8
%
  
8
%
FICO: 701 - 720
    
5
%
  
5
%
FICO: 721 - 740
    
3
%
  
3
%
FICO: 741 - 760
    
2
%
  
2
%
FICO: 761 - 780
    
1
%
  
2
%
FICO: 781 - 800
    
1
%
  
1
%
FICO: >= 801
    
0
%
  
0
%
Unknown
    
0
%
  
0
%
 
              
Conforming at Origination %
    
72
%
  
72
%
> $1 MM %
    
0
%
  
0
%
 
              
2nd Home %
    
1
%
  
2
%
Investment Home %
    
6
%
  
8
%
 
              
Purchase
    
48
%
  
44
%
Cash Out Refi
    
45
%
  
48
%
Rate-Term Refi
    
7
%
  
8
%
Construction
    
0
%
  
0
%
Other
    
0
%
  
0
%
 
              
Full Doc
    
61
%
  
55
%
No Doc
    
0
%
  
1
%
Other Doc (Lim, Red, Stated, etc)
    
39
%
  
44
%
 
              
2-4 Family
    
8
%
  
0
%
Condo
    
6
%
  
8
%
Single Family
    
86
%
  
7
%
Other
    
0
%
  
85
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 12C: Residential Subprime CES and Underlying Loan Characteristics at Redwood
83
 
 
 
Table 12D: Residential Prime CES and Underlying Loan Characteristics at Acacia
($ in thousands)
84
       
   
2008
  
   
Q1
 
FVO: Residential Prime CES
        
Market value
    
$77,414
  
 
        
Current Rating
        
BB
    
$64,280
  
B
   
11,758
 
Unrated
    
1,376
 
Total market value
    
$77,414
  
 
        
Security Type
        
Option ARM
    
$20,475
  
ARM
    
5,321
 
Hybrid
    
33,629
 
Fixed
    
17,989
 
Total market value
    
$77,414
  
 
        
FVO: Residential Prime CES
        
Coupon income
    
$5,877
  
Average fair-value
    
$135,694
  
Annualized interest income / avg. fair-value
    
17.32
%
 
        
Underlying Loan Characteristics
        
Number of loans
    
447,407
 
Total loan face
    
$152,209,076
  
Average loan size
    
$340,203
  
 
        
Southern CA
    
23
%
Northern CA
    
21
%
Florida
    
6
%
New York
    
5
%
Georgia
    
2
%
New Jersey
    
3
%
Texas
    
3
%
Arizona
    
2
%
Illinois
    
3
%
Colorado
    
2
%
Virginia
    
4
%
Other states
    
26
%
 
        
Year 2008 origination
    
0
%
Year 2007 origination
    
2
%
Year 2006 origination
    
22
%
Year 2005 origination
    
31
%
Year 2004 origination and earlier
    
45
%

       
   
2008
  
   
Q1
 
       
Wtd Avg Original LTV
    
69
%
Original LTV: 0 - 50
    
13
%
Original LTV: 50.01 - 60
    
12
%
Original LTV: 60.01 - 70
    
22
%
Original LTV: 70.01 - 80
    
51
%
Original LTV: 80.01 - 90
    
2
%
Original LTV: 90.01 - 100
    
1
%
Unknown
    
0
%
 
        
Wtd Avg FICO
    
738
 
FICO: <= 600
    
0
%
FICO: 601 - 620
    
1
%
FICO: 621 - 640
    
2
%
 
        
FICO: 641 - 660
    
3
%
FICO: 661 - 680
    
6
%
FICO: 681 - 700
    
9
%
FICO: 701 - 720
    
12
%
FICO: 721 - 740
    
13
%
FICO: 741 - 760
    
15
%
FICO: 761 - 780
    
18
%
FICO: 781 - 800
    
14
%
FICO: >= 801
    
5
%
Unknown
    
1
%
 
        
Conforming at Origination %
    
32
%
> $1 MM %
    
8
%
 
        
2nd Home %
    
6
%
Investment Home %
    
2
%
 
        
Purchase
    
42
%
Cash Out Refi
    
27
%
Rate-Term Refi
    
29
%
Construction
    
0
%
Other
    
0
%
 
        
Full Doc
    
47
%
No Doc
    
6
%
Other Doc (Lim, Red, Stated, etc)
    
44
%
Unknown
 
 
3
%
 
        
2-4 Family
    
2
%
Condo
    
9
%
Single Family
    
89
%
Other
    
0
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 12D: Residential Prime CES and Underlying Loan Characteristics at Acacia
 
 
 
 
Table 12E: Residential Prime Alt-A and Underlying Loan Characteristics at Acacia
($ in thousands)
 
       
   
2008
  
   
Q1
 
FVO: Residential Prime CES
        
Market value
    
$14,633
  
 
        
Current Rating
        
BB
    
$11,758
  
B
   
2,808
 
Unrated
    
67
 
Total market value
    
$14,633
  
 
        
Security Type
        
Option ARM
    
$13,322
  
ARM
    
138
 
Hybrid
    
733
 
Fixed
    
440
 
Total market value
    
$14,633
  
 
        
FVO: Residential Prime CES
        
Coupon income
   
$2,940
  
Average fair-value
    
$31,243
  
Annualized interest income / avg. fair-value
    
37.64
%
 
        
Underlying Loan Characteristics
        
Number of loans
    
64,507
 
Total loan face
    
$25,671,374
  
Average loan size
    
$397,960
  
 
        
Southern CA
    
32
%
Northern CA
    
21
%
Florida
    
13
%
New York
    
2
%
Georgia
    
1
%
New Jersey
    
2
%
Texas
    
1
%
Arizona
    
4
%
Illinois
    
1
%
Colorado
    
2
%
Virginia
    
3
%
Other states
    
18
%
 
        
Year 2008 origination
    
0
%
Year 2007 origination
    
18
%
Year 2006 origination
    
58
%
Year 2005 origination
    
14
%
Year 2004 origination and earlier
    
10
%

       
   
2008
  
   
Q1
 
       
Wtd Avg Original LTV
    
79
%
Original LTV: 0 - 50
    
3
%
Original LTV: 50.01 - 60
    
5
%
Original LTV: 60.01 - 70
    
16
%
Original LTV: 70.01 - 80
    
66
%
Original LTV: 80.01 - 90
    
8
%
Original LTV: 90.01 - 100
    
3
%
Unknown
    
0
%
 
        
Wtd Avg FICO
    
702
 
FICO: <= 600
    
0
%
FICO: 601 - 620
    
1
%
FICO: 621 - 640
    
6
%
FICO: 641 - 660
    
10
%
FICO: 661 - 680
    
17
%
FICO: 681 - 700
    
18
%
FICO: 701 - 720
    
14
%
FICO: 721 - 740
    
12
%
FICO: 741 - 760
    
9
%
FICO: 761 - 780
    
7
%
FICO: 781 - 800
    
4
%
FICO: >= 801
    
1
%
Unknown
    
1
%
 
        
Conforming at Origination %
    
44
%
> $1 MM %
    
13
%
 
        
2nd Home %
    
6
%
Investment Home %
    
11
%
 
        
Purchase
    
29
%
Cash Out Refi
    
47
%
Rate-Term Refi
    
23
%
Construction
    
0
%
Other
    
0
%
 
        
Full Doc
    
13
%
No Doc
    
3
%
Other Doc (Lim, Red, Stated, etc)
    
83
%
Unknown     1 %
 
        
2-4 Family
    
6
%
Condo
    
10
%
Single Family
    
84
%
Other
    
0
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 12E: Residential Prime Alt-A and Underlying Loan Characteristics at Acacia
85
 
 
 
Table 12F: Residential Subprime and Underlying Loan Characteristics at Acacia
($ in thousands)
86
       
   
2008
  
   
Q1
 
FVO: Residential Subprime CES
        
Market value
    
$10,877
  
 
        
Current Rating
        
BB
    
$4,670
  
B
   
291
 
Unrated
    
5,916
 
Total market value
    
$10,877
  
 
        
Security Type
        
Option ARM
    
$  -
  
ARM
    
-
 
Hybrid
    
8,158
 
Fixed
    
2,719
 
Total market value
    
$10,877
  
 
        
FVO: Residential Subprime CES
        
Coupon income
   
$1,629
  
Average fair-value
    
$13,116
  
Annualized interest income / avg. fair-value
    
49.68
%
 
        
Underlying Loan Characteristics
        
Number of loans
    
153,344
 
Total loan face
    
$22,306,420
  
Average loan size
    
$145,467
  
 
        
Southern CA
    
17
%
Northern CA
    
10
%
Florida
    
12
%
New York
    
6
%
Georgia
    
2
%
New Jersey
    
4
%
Texas
    
5
%
Arizona
    
3
%
Illinois
    
3
%
Colorado
    
2
%
Virginia
    
2
%
Other states
    
33
%
 
        
Year 2008 origination
    
0
%
Year 2007 origination
    
3
%
Year 2006 origination
    
90
%
Year 2005 origination
    
3
%
Year 2004 origination and earlier
    
4
%

Wtd Avg Original LTV
    
89
%
Original LTV: 0 - 50
    
2
%
Original LTV: 50.01 - 60
    
3
%
Original LTV: 60.01 - 70
    
7
%
Original LTV: 70.01 - 80
    
41
%
Original LTV: 80.01 - 90
    
23
%
Original LTV: 90.01 - 100
    
24
%
Unknown
    
0
%
 
        
Wtd Avg FICO
    
633
  
FICO: <= 600
    
27
%
FICO: 601 - 620
    
14
%
FICO: 621 - 640
    
15
%
FICO: 641 - 660
    
15
%
FICO: 661 - 680
    
11
%
FICO: 681 - 700
    
7
%
FICO: 701 - 720
    
5
%
FICO: 721 - 740
    
3
%
FICO: 741 - 760
    
2
%
FICO: 761 - 780
    
1
%
FICO: 781 - 800
    
1
%
FICO: >= 801
    
0
%
Unknown
    
0
%
 
        
Conforming at Origination %
    
79
%
> $1 MM %
    
1
%
 
        
2nd Home %
    
1
%
Investment Home %
    
5
%
 
        
Purchase
    
49
%
Cash Out Refi
    
46
%
Rate-Term Refi
    
5
%
Construction
    
0
%
Other
    
0
%
 
        
Full Doc
    
60
%
No Doc
    
0
%
Other Doc (Lim, Red, Stated, etc)
    
40
%
 
        
2-4 Family
    
7
%
Condo
    
7
%
Single Family
    
86
%
Other
    
0
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 12F: Residential Subprime and Underlying Loan Characteristics at Acacia
 
 
 
 
Table 13A - Other Real Estate Investments and Underlying Characteristics at Redwood
($ in thousands)1
 
                       
   
2008
  
2007
  
2007
  
2007
  
2007
  
 
  
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
 
                      
Market value
   
$3,437
    
$11,199
    
$24,100
    
$32,204
    
$47,443
  
 
                                
Current Rating
                                
AAA
    
$  -
    
$1,386
    
$1,720
    
$1,667
    
$1,892
  
AA
   
-
   
-
   
-
   
-
   
-
 
A
    
-
   
1,061
   
7,468
   
12,131
   
16,260
 
BBB
    
-
   
1,610
   
2,953
   
4,437
   
5,700
 
BB
    
1,220
   
1,730
   
1,757
   
3,775
   
4,185
 
B
   
771
   
2,639
   
2,482
   
-
   
-
 
Non-rated
    
1,446
   
2,773
   
7,720
   
10,194
   
19,406
 
Total market value
    
$3,437
    
$11,199
    
$24,100
    
$32,204
    
$47,443
  
 
                                
Security Type
                                
ARM
    
$  -
    
$438
    
$466
    
$261
    
$276
  
Option ARM
    
-
   
1,488
   
2,051
   
2,597
   
3,198
 
Hybrid
    
2,613
   
8,409
   
19,812
   
27,418
   
41,501
 
Fixed
    
824
   
864
   
1,771
   
1,928
   
2,468
 
Total market value
    
$3,437
    
$11,199
    
$24,100
    
$32,204
    
$47,443
  
 
                                
Interest income
    
$2,092
    
$1,307
    
$1,236
    
$618
    
$2,336
  
 
                                
Average amortized cost
    
$5,836
    
$22,006
    
$29,708
    
$41,528
    
$35,228
  
 
                                
Annualized interest income / avg amt cost
    
143.38
%
  
23.76
%
  
16.64
%
  
5.95
%
  
26.53
%

(1) This category did not exist prior to 2007.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 13A - Other Real Estate Investments and Underlying Characteristics at Redwood
87
 
 
 
Table 13B- Other Real Estate Investments and Underlying Characteristics at Acacia
($ in thousands)1
88
                   
   
2007
  
2007
  
2007
  
2007
  
 
  
Q4
 
Q3
 
Q2
 
Q1
 
 
                  
Market value
    
$322
    
$1,200
    
$1,964
    
$2,614
  
 
                          
Current Rating
                          
AAA
    
$227
    
$241
    
$138
    
$146
  
AA
   
-
   
-
   
-
   
-
 
A
    
-
   
959
   
1,826
   
2,468
 
BBB
    
-
   
-
   
-
   
-
 
BB
    
-
   
-
   
-
   
-
 
B
   
95
   
-
   
-
   
-
 
Non-rated
          
-
   
-
   
-
 
Total market value
    
$322
    
$1,200
    
$1,964
    
$2,614
  
 
                          
Security Type
                          
ARM
    
$227
    
$241
    
$138
    
$146
  
Option ARM
    
-
   
-
   
-
   
-
 
Hybrid
    
95
   
959
   
1,826
   
2,468
 
Fixed
    
-
   
-
   
-
   
-
 
Total market value
    
$322
    
$1,200
    
$1,964
    
$2,614
  
 
                          
Interest income
    
$46
    
$39
    
$51
    
$129
  
 
                          
Average amortized cost
    
$633
    
$1,479
    
$2,533
    
$1,941
  
 
                          
Annualized interest income / avg amt cost
    
29.08
%
  
10.55
%
  
8.05
%
  
26.53
%

(1) This category did not exist prior to 2007. The FVO was adopted for IGS OREI and all OREI held at Acacia entities at January 1, 2008, so there are no longer any OREI at Acacia.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 13B- Other Real Estate Investments and Underlying Characteristics at Acacia
 
 
 
 
Table 14: Residential Real Estate Loan Characteristics ($ in thousands)
 
                                       
   
2008
  
2007
  
2007
  
2007
  
2007
  
2006
  
2006
  
2006
  
2006
  
   
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
                                       
Residential Loans
   
$6,702,726
    
$7,106,018
    
$7,546,529
    
$8,256,759
    
$8,582,964
    
$9,212,002
    
$9,718,985
    
$10,318,641
    
$11,846,454
  
Number of loans
   
19,801
   
21,000
   
21,981
   
24,452
   
25,579
   
27,695
   
31,744
   
34,013
   
37,458
 
Average loan size
   
$338,504
    
$338
    
$343
    
$338
    
$336
    
$333
    
$306
    
$303
    
$316
  
                                                         
Adjustable %
   
67
%
  
68
%
  
69
%
  
71
%
  
79
%
  
85
%
  
89
%
  
99
%
  
99
%
Hybrid %
   
33
%
  
32
%
  
31
%
  
29
%
  
20
%
  
15
%
  
11
%
  
1
%
  
1
%
Fixed %
   
0
%
  
0
%
  
0
%
  
0
%
  
1
%
  
0
%
  
0
%
  
0
%
  
0
%
                                                         
Amortizing %
   
5
%
  
5
%
  
5
%
  
5
%
  
4
%
  
3
%
  
3
%
  
1
%
  
1
%
Interest-only %
   
95
%
  
95
%
  
95
%
  
95
%
  
96
%
  
97
%
  
97
%
  
99
%
  
99
%
Negatively amortizing %
   
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
                                                         
Southern California
    
15
%
  
14
%
  
15
%
  
14
%
  
14
%
  
13
%
  
12
%
  
11
%
  
11
%
Northern California
    
11
%
  
10
%
  
10
%
  
11
%
  
10
%
  
10
%
  
10
%
  
10
%
  
10
%
Florida
    
13
%
  
13
%
  
12
%
  
12
%
  
13
%
  
12
%
  
12
%
  
13
%
  
12
%
New York
    
6
%
  
6
%
  
6
%
  
6
%
  
6
%
  
6
%
  
6
%
  
6
%
  
6
%
Georgia
    
4
%
  
4
%
  
4
%
  
4
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
New Jersey
    
4
%
  
4
%
  
4
%
  
4
%
  
4
%
  
4
%
  
4
%
  
4
%
  
4
%
Texas
    
4
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
Arizona
    
3
%
  
4
%
  
4
%
  
4
%
  
4
%
  
4
%
  
4
%
  
4
%
  
4
%
Illinois
    
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
2
%
  
2
%
Colorado
    
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
4
%
  
4
%
  
4
%
  
4
%
Virginia
    
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
Other states (none greater than 3%)
    
30
%
  
31
%
  
31
%
  
31
%
  
30
%
  
31
%
  
32
%
  
33
%
  
34
%
                                                         
Year 2008 origination
   
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
Year 2007 origination
   
13
%
  
13
%
  
12
%
  
11
%
  
3
%
  
0
%
  
0
%
  
0
%
  
0
%
Year 2006 origination
   
20
%
  
20
%
  
19
%
  
18
%
  
19
%
  
17
%
  
10
%
  
0
%
  
0
%
Year 2005 origination
   
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
Year 2004 origination or earlier
   
62
%
  
62
%
  
64
%
  
66
%
  
73
%
  
78
%
  
85
%
  
95
%
  
95
%
                                                         
Wtd Avg Original LTV
   
69
%
  
69
%
  
68
%
  
68
%
  
68
%
  
68
%
  
68
%
  
68
%
  
68
%
Original LTV: 0 - 50
   
15
%
  
15
%
  
15
%
  
15
%
  
15
%
  
16
%
  
15
%
  
15
%
  
15
%
Original LTV: 50 - 60
   
11
%
  
11
%
  
11
%
  
11
%
  
12
%
  
12
%
  
12
%
  
12
%
  
12
%
Original LTV: 60 - 70
   
19
%
  
19
%
  
19
%
  
20
%
  
20
%
  
20
%
  
20
%
  
21
%
  
21
%
Original LTV: 70 - 80
   
49
%
  
48
%
  
48
%
  
47
%
  
46
%
  
45
%
  
46
%
  
45
%
  
45
%
Original LTV: 80 - 90
   
2
%
  
2
%
  
2
%
  
2
%
  
2
%
  
2
%
  
2
%
  
2
%
  
2
%
Original LTV: 90 - 100
   
4
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
  
5
%
                                                         
Wtg Avg FICO
   
732
   
732
   
732
   
732
   
727
   
733
   
730
   
730
   
730
 
FICO: <= 600
   
1
%
  
1
%
  
1
%
  
1
%
  
1
%
  
1
%
  
1
%
  
1
%
  
1
%
FICO: 601 -620
   
1
%
  
1
%
  
1
%
  
1
%
  
1
%
  
1
%
  
1
%
  
1
%
  
1
%
FICO: 621 - 640
   
2
%
  
1
%
  
2
%
  
2
%
  
2
%
  
1
%
  
1
%
  
1
%
  
2
%
FICO: 641 -660
   
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
FICO: 661 - 680
   
7
%
  
7
%
  
7
%
  
7
%
  
7
%
  
8
%
  
8
%
  
8
%
  
8
%
FICO: 681 - 700
   
12
%
  
12
%
  
12
%
  
12
%
  
12
%
  
12
%
  
12
%
  
12
%
  
12
%
FICO: 701 - 720
   
13
%
  
14
%
  
13
%
  
14
%
  
14
%
  
14
%
  
14
%
  
14
%
  
14
%
FICO: 721 - 740
   
13
%
  
13
%
  
13
%
  
13
%
  
13
%
  
13
%
  
14
%
  
13
%
  
13
%
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
%
  
13
%
  
13
%
  
13
%
  
12
%
  
12
%
  
12
%
  
12
%
  
11
%
FICO: >= 801
   
4
%
  
3
%
  
4
%
  
4
%
  
3
%
  
3
%
  
2
%
  
3
%
  
3
%
                                                         
Conforming balance at origination %
   
34
%
  
34
%
  
35
%
  
35
%
  
37
%
  
38
%
  
41
%
  
45
%
  
37
%
% balance in loans > $1mm per loan
   
15
%
  
15
%
  
15
%
  
15
%
  
16
%
  
18
%
  
14
%
  
14
%
  
14
%
                                                         
2nd home %
   
11
%
  
11
%
  
11
%
  
11
%
  
11
%
  
11
%
  
11
%
  
11
%
  
11
%
Investment home %
   
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
  
3
%
                                                         
Purchase
   
36
%
  
36
%
  
36
%
  
35
%
  
35
%
  
34
%
  
34
%
  
33
%
  
33
%
Cash out refinance
   
32
%
  
32
%
  
32
%
  
32
%
  
31
%
  
32
%
  
32
%
  
32
%
  
34
%
Rate-term refinance
   
30
%
  
30
%
  
31
%
  
31
%
  
32
%
  
32
%
  
32
%
  
34
%
  
32
%
Construction
   
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
  
0
%
Other
   
2
%
  
2
%
  
2
%
  
2
%
  
2
%
  
2
%
  
2
%
  
1
%
  
1
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 14: Residential Real Estate Loan Characteristics
89
 
 
 
Table 15: Commercial Real Estate Loans Credit Performance ($ in thousands)
 
                                                   
       
Managed Loans
  
Internally-Designated Credit Reserve
  
External Credit Enhancement
  
Total Credit Protection (2)
  
Total Credit Protection as % of Loans
  
Seriously Delinquent Loans
  
Seriously Delinquent Loan % of Current Balance
  
Total Credit Losses
  
Third Parties' Share of Net Charge-offs/ (Recoveries)
  
Redwood's Share of Net Charge-offs/ (Recoveries)
  
Total Credit Losses As % of Loans (Annualized)
  
                                                   
Total Managed Commercial Portfolio
    
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
%
  
2,688
   
1,417
   
1,271
   
0.02
%
     
Q2: 2007
    
63,626,147
   
321,234
   
584,706
   
905,940
   
1.42
%
  
73,104
   
0.10
%
  
72
   
30
   
42
   
0.00
%
     
Q3: 2007
    
65,030,244
   
320,987
   
577,447
   
898,434
   
1.38
%
  
181,473
   
0.28
%
  
680
   
408
   
272
   
0.00
%
     
Q4: 2007
    
61,776,102
   
328,945
   
427,868
   
756,813
   
1.23
%
  
183,093
   
0.30
%
  
1,952
   
1,171
   
781
   
0.01
%
     
2007
  
$
61,776,102
  
$
328,945
  
$
427,868
  
$
756,813
    
1.23
%
$
183,093
    
0.30
%
$
5,392
  
$
3,026
  
$
2,366
    
0.01
%
     
Q1: 2008(1)
 
$
54,746,581
  
$
389,014
  
$
63,299
  
$
452,313
    
0.83
%
$
227,494
    
0.42
%
$
42
  
$
4
  
$
38
    
0.00
%
                                                                           
Commercial Real Estate Loans
    
2005
  
$
70,091
  
$
8,141
  
$
0
  
$
8,141
    
11.61
%
  
-
   
0.00
%
$
315
  
$
0
  
$
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
   
-
   
10,489
   
27.38
%
  
-
   
0.00
%
  
-
   
-
   
-
   
0.00
%
     
Q3: 2007
    
38,224
   
10,489
   
-
   
10,489
   
34.07
%
  
-
   
0.00
%
  
-
   
-
   
-
   
0.00
%
     
Q4: 2007
    
38,111
   
10,489
   
-
   
10,489
   
27.52
%
  
-
   
0.00
%
  
-
   
-
   
-
   
0.00
%
     
2007
  
$
38,111
  
$
10,489
  
$
0
  
$
10,489
    
27.52
%
$
0
    
0.00
%
$
0
  
$
0
  
$
0
    
0.00
%
     
Q1: 2008(1)
 
$
10,645
  
$
10,626
  
$
0
  
$
10,626
    
99.82
%
$
0
    
0.00
%
$
0
  
$
0
  
$
0
    
0.00
%
                                                                           
Commercial CES
    
2005
  
$
46,755,362
  
$
141,806
  
$
714,168
  
$
855,974
    
1.83
%
  
40,916
   
0.09
%
$
1,272
  
$
1,272
  
$
0
    
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
%
  
2,688
   
1,417
   
1,271
   
0.02
%
     
Q2: 2007
    
63,587,836
   
310,745
   
584,706
   
895,451
   
1.41
%
  
73,104
   
0.10
%
  
72
   
30
   
42
   
0.00
%
     
Q3: 2007
    
64,999,460
   
310,498
   
577,447
   
887,945
   
1.37
%
  
181,473
   
0.28
%
  
680
   
408
   
272
   
0.00
%
     
Q4: 2007
    
61,737,991
   
318,456
   
427,868
   
746,324
   
1.21
%
  
183,093
   
0.30
%
  
1,952
   
1,171
   
781
   
0.01
%
     
2007
  
$
61,737,991
  
$
318,456
  
$
427,868
  
$
746,324
    
1.21
%
$
183,093
    
0.30
%
$
5,392
  
$
3,026
  
$
2,366
    
0.01
%
     
Q1: 2008(1)
 
$
54,735,936
  
$
378,388
  
$
63,299
  
$
441,687
    
0.81
%
$
227,494
    
0.42
%
$
42
  
$
4
  
$
38
    
0.00
%
 
(1) As of Q108 balances includes loans and CES held by Redwood only.
(2) 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. The credit enhancement balances shown above do not include pari passu CES owned by others. If we had included these amounts, the total credit protection would increase to 1.19% for commercial CES compared to the 0.81% shown in the table above.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 15: Commercial Real Estate Loans Credit Performance
90
 
 
 
Table 16A: Commercial CES Underlying Loan Characteristics at Redwood
(all $ in thousands) 1
91
       
   
2008
  
   
Q1
 
       
Commercial CES Loans
   
$54,735,936
  
Number of loans
   
3,407
 
Average face value
   
$14,629
  
         
         
State Distribution
       
CA
   
15
%
NY
   
13
%
TX
   
9
%
VA
   
5
%
FL
   
6
%
Other
   
52
%
         
Property Type Distribution
       
Office
   
39
%
Retail
   
28
%
Multi-family
   
16
%
Hospitality
   
7
%
Self-storage
   
3
%
Industrial
   
4
%
Other
   
4
%
         
Weighted average LTV
    
70
%
         
Weighted average debt service coverage ratio
    
1.60
 

(1) Commercial real estate loan characteristics prior to first quarter 2008 were reported on a consolidated basis and are presented on Table 16 B.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 16A: Commercial CES Underlying Loan Characteristics at Redwood
 
 
 
 
Table 16B: Commercial CES Underlying Loan Characteristics
 
                                   
   
2007
  
2007
  
2007
  
2007
  
2006
  
2006
  
2006
  
2006
  
   
Q4
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
                                   
Commercial CES Loans
   
$61,737,991
    
$64,999,460
    
$63,587,836
    
$57,411,648
    
$57,750,799
    
$58,063,971
    
$51,588,837
    
$48,300,705
  
Number of loans
   
4,091
   
4,633
   
4,648
   
3,968
   
3,889
   
4,032
   
3,456
   
3,737
 
Average face value
   
$14,398
    
$14,030
    
$13,681
    
$14,469
    
$14,850
    
$14,401
    
$14,927
    
$12,925
  
                                                   
                                                   
State Distribution
                                                 
CA
   
16
%
  
16
%
  
16
%
  
17
%
  
17
%
  
18
%
  
18
%
  
17
%
NY
   
13
%
  
13
%
  
13
%
  
13
%
  
13
%
  
11
%
  
12
%
  
12
%
TX
   
8
%
  
8
%
  
8
%
  
8
%
  
8
%
  
5
%
  
6
%
  
6
%
VA
   
5
%
  
5
%
  
4
%
  
4
%
  
4
%
  
2
%
  
2
%
  
2
%
FL
   
6
%
  
6
%
  
6
%
  
6
%
  
6
%
  
5
%
  
5
%
  
5
%
Other
   
52
%
  
52
%
  
52
%
  
52
%
  
52
%
  
59
%
  
57
%
  
58
%
                                                   
Property Type Distribution
                                                 
Office
   
38
%
  
39
%
  
38
%
  
35
%
  
37
%
  
30
%
  
36
%
  
32
%
Retail
   
30
%
  
30
%
  
30
%
  
30
%
  
31
%
  
32
%
  
32
%
  
33
%
Multi-family
   
16
%
  
14
%
  
15
%
  
12
%
  
12
%
  
11
%
  
11
%
  
16
%
Hospitality
   
7
%
  
7
%
  
7
%
  
7
%
  
7
%
  
6
%
  
5
%
  
7
%
Self-storage
   
2
%
  
2
%
  
2
%
  
3
%
  
3
%
  
0
%
  
0
%
  
0
%
Industrial
   
4
%
  
4
%
  
4
%
  
3
%
  
3
%
  
1
%
  
1
%
  
2
%
Other
   
3
%
  
4
%
  
4
%
  
10
%
  
7
%
  
20
%
  
15
%
  
10
%
                                                   
Weighted average LTV
    
70
%
  
70
%
  
70
%
  
68
%
  
69
%
  
69
%
  
69
%
  
68
%
                                                   
Weighted average debt service coverage ratio
    
1.62
   
1.65
   
1.59
   
1.73
   
1.60
   
1.72
   
1.75
   
1.99
 
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 16B: Commercial CES Underlying Loan Characteristics
92
 
 
 
Table 17: Commercial Real Estate Loan Characteristics ($ in thousands)
93
           
Redwood
  
   
2008
  
2007
  
   
Q1
 
Q4
 
Commercial mortgage loans, reported value
   
$252
    
$93
  
Number of loans
   
2
   
2
 
Average loan size
   
$126
    
$47
  
Seriously delinquent loans
   
-
   
-
 
Realized credit losses
   
-
   
-
 
California % (based on reported value)
   
100
%
  
100
%
 
               
Acacia
     
2008
    
2007
  
 
     Q1    
Q4
 
Commercial mortgage loans, reported value
   
$18,801
    
$25,585
  
Number of loans
   
5
   
5
 
Average loan size
   
$3,760
    
$5,117
  
Seriously delinquent loans
   
-
   
-
 
Realized credit losses
   
-
   
-
 
California % (based on reported value)
   
0
%
  
0
%
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 17: Commercial Real Estate Loan Characteristics
 
 
 
 
Table 18A: Securities Portfolios Credit Rating and Collateral Type at Redwood
($ in millions)
 
                                   
Redwood
 
CURRENT RATING AT 3/31/2008
 
At March 31, 2008:
 
Total
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
Unrated
 
Residential prime
   
$98
    
$1
    
$4
    
$10
    
$5
    
$25
    
$22
    
$31
  
Residential alt-a
   
14
   
2
   
-
   
1
   
2
   
-
   
2
   
7
 
Residential sub-prime
   
2
   
-
   
-
   
-
   
1
   
-
   
-
   
1
 
Other real estate investments
   
3
   
-
   
-
   
-
   
-
   
1
   
1
   
1
 
Commercial
   
100
   
-
   
-
   
-
   
-
   
14
   
13
   
73
 
CDO
   
15
   
7
   
7
   
-
   
1
   
-
   
-
   
-
 
Total securities portfolio market value
   
$232
    
$10
    
$11
    
$11
    
$9
    
$40
    
$38
    
$113
  
 
       
Redwood
 
CURRENT RATING AT 12/31/2007
 
At December 31, 2007:
 
 Total
 
 AAA
 
 AA
 
 A
 
 BBB
 
 BB
 
 B
 
 Unrated
 
Residential prime
   
$128
    
$0
    
$1
    
$0
    
$0
    
$50
    
$40
    
$37
  
Residential alt-a
   
32
   
9
   
-
   
-
   
-
   
3
   
8
   
12
 
Residential sub-prime
   
3
   
-
   
-
   
-
   
2
   
-
   
-
   
1
 
Other real estate investments
   
12
   
1
   
-
   
1
   
2
   
2
   
3
   
3
 
Commercial
   
148
   
-
   
-
   
-
   
-
   
26
   
24
   
98
 
CDO
   
21
   
12
   
6
   
-
   
1
   
1
   
-
   
1
 
Total securities portfolio market value
   
$344
    
$22
    
$7
    
$1
    
$5
    
$82
    
$75
    
$152
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 18A: Securities Portfolios Credit Rating and Collateral Type at Redwood
94
 
 
 
Table 18B: Securities Portfolios Credit Rating and Collateral Type at Acacia 
($ in millions)
95
                                   
Acacia
 
CURRENT RATING AT 3/31/2008
 
At March 31, 2007:
 
Total
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
Unrated
 
Residential prime
   
$311
    
$26
    
$63
    
$74
    
$71
    
$64
    
$12
    
$1
  
Residential alt-a
   
220
   
126
   
23
   
34
   
22
   
12
   
3
   
-
 
Residential sub-prime
   
161
   
12
   
64
   
48
   
26
   
4
   
-
   
7
 
Other real estate investments
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Commercial
   
175
   
10
   
1
   
14
   
37
   
80
   
28
   
5
 
CDO
   
59
   
10
   
4
   
14
   
25
   
5
   
-
   
1
 
Total securities portfolio market value
   
$926
    
$184
    
$155
    
$184
    
$181
    
$165
    
$43
    
$14
  
 
       
Acacia
 
CURRENT RATING AT 12/31/2007
 
At December 31, 2007:
 
Total
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
Unrated
 
Residential prime
   
$708
    
$31
    
$151
    
$172
    
$160
    
$158
    
$35
    
$1
  
Residential alt-a
   
465
   
204
   
68
   
87
   
58
   
43
   
5
   
-
 
Residential sub-prime
   
220
   
15
   
90
   
64
   
42
   
1
   
5
   
3
 
Other real estate investments
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Commercial
   
427
   
11
   
1
   
18
   
60
   
162
   
77
   
98
 
CDO
   
124
   
35
   
23
   
23
   
33
   
8
   
1
   
1
 
Total securities portfolio market value
   
$1,944
    
$296
    
$333
    
$364
    
$353
    
$372
    
$123
    
$103
  
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 18B: Securities Portfolios Credit Rating and Collateral Type at Acacia
 
 
 
 
Table 18C: Securities Portfolios Collateral Type at the Opportunity Fund
($ in millions)
 

       
Opportunity Fund
     
At March 31, 2008:
 
 
  
Residential prime
 
$
0
  
Residential alt-a
   
-
 
Residential sub-prime
   
9
 
Other real estate investments
   
-
 
Commercial
   
-
 
CDO
   
27
 
Total securities portfolio market value
 
$
36
  

       
Opportunity Fund
     
At December 31, 2007:
 
 
  
Residential prime
 
$
0
  
Residential alt-a
   
-
 
Residential sub-prime
   
3
 
Other real estate investments
   
-
 
Commercial
   
-
 
CDO
   
12
 
Total securities portfolio market value
 
$
15
  
 
 
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 18C: Securities Portfolios Credit Rating and Collateral Type at the Opportunity Fund
96
 
 
 
Table 19A - Securities at Redwood excluding Acacia Market Value as a % of Principal
March 31, 2008 ($ in millions)
97

                                                   
 
 
<=2004
 
 
  
2005
  
 
  
2006
  
 
  
2007
  
 
  
2008
  
 
  
Total
  
 
  
 
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
                                                   
Prime
                                                                          
Resi - IGS
                                                                          
 AAA
    
$1
    
89
%
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
1
    
89
%
 AA
    
1
    
65
%
  
-
   
-
   
-
   
-
   
-
   
-
   
3
    
55
%
  
4
    
56
%
 A
    
-
   
-
   
-
   
-
   
9
    
50
%
  
-
   
-
   
1
    
40
%
  
10
    
49
%
 BBB
    
2
    
35
%
  
1
    
21
%
  
-
   
-
   
-
   
-
   
2
    
32
%
  
5
    
29
%
Resi - IGS Total
    
4
    
50
%
  
1
    
24
%
  
9
    
50
%
  
-
   
-
   
6
    
44
%
  
20
    
44
%
                                                                           
Resi - CES
                                                                          
 BB
    
12
    
29
%
  
7
    
22
%
  
2
    
28
%
  
3
    
17
%
  
1
    
18
%
  
25
    
24
%
 B
    
15
    
33
%
  
2
    
15
%
  
1
    
9
%
  
3
    
12
%
  
1
    
14
%
  
22
    
22
%
 NR
    
21
    
14
%
  
6
    
6
%
  
2
    
5
%
  
2
    
6
%
  
-
   
0
%
  
31
    
9
%
Resi - CES Total
    
48
    
20
%
  
15
    
11
%
  
5
    
8
%
  
8
    
10
%
  
2
    
15
%
  
78
    
14
%
                                                                           
Total Prime
    
$52
    
21
%
  
16
    
11
%
  
14
    
16
%
  
8
    
10
%
  
8
    
28
%
  
98
    
17
%
                                                                           
Alt-A
                                                                          
Resi - IGS
                                                                          
 AAA
    
$  -
    
-
   
-
   
-
   
-
   
-
   
2
    
30
%
  
-
   
-
   
2
    
30
%
 A
    
-
   
-
   
-
   
-
   
-
   
-
   
1
    
95
%
  
-
   
-
   
1
    
95
%
 BBB
    
-
   
-
   
-
   
-
   
1
    
60
%
  
1
    
27
%
  
-
   
-
   
2
    
34
%
Resi - IGS Total
    
-
   
-
   
-
   
-
   
1
    
60
%
  
4
    
33
%
  
-
   
-
   
5
    
35
%
                                                                           
Resi - CES
                                                                          
 B
    
-
   
-
   
-
   
-
   
-
   
-
   
2
    
3
%
  
-
   
-
   
2
    
4
%
 NR
    
1
    
5
%
  
4
    
9
%
  
1
    
2
%
  
1
    
2
%
  
-
   
-
   
7
    
4
%
Resi - CES Total
    
1
    
5
%
  
4
    
9
%
  
1
    
2
%
  
3
    
3
%
  
-
   
-
   
9
    
4
%
                                                                           
OREI
    
-
   
-
   
-
   
-
   
2
    
1
%
  
1
    
10
%
  
-
   
-
   
3
    
1
%
                                                                           
Total Alt-A
    
$1
    
5
%
  
4
    
9
%
  
4
    
8
%
  
8
    
7
%
  
-
   
-
   
17
    
8
%
                                                                           
Subprime
                                                                          
Resi - IGS
                                                                          
 BBB
    
1
    
50
%
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
1
    
50
%
Resi - IGS Total
    
1
    
50
%
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
1
    
50
%
                                                                           
Resi - CES
                                                                          
 NR
    
-
   
-
   
-
   
-
   
-
   
-
   
1
    
4
%
  
-
   
-
   
1
    
4
%
Resi - CES Total
    
-
   
-
   
-
   
-
   
-
   
-
   
1
    
4
%
  
-
   
-
   
1
    
4
%
                                                                           
Total Subprime
    
$1
    
50
%
  
-
   
-
   
-
   
-
   
1
    
4
%
  
-
   
-
   
2
    
18
%
                                                                           
CDO
                                                                          
CDO - IGS
                                                                          
AAA
    
$  -
    
-
   
7
    
36
%
  
-
   
-
   
-
   
-
   
-
   
-
   
7
    
36
%
AA
    
7
    
54
%
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
7
    
54
%
BBB
    
-
   
-
   
-
   
-
   
-
   
-
   
1
    
5
%
  
-
   
-
   
1
    
5
%
CDO - IGS Total
    
7
    
54
%
  
7
    
36
%
  
-
   
-
   
1
    
5
%
  
-
   
-
   
15
    
25
%
                                                                           
Total CDO
    
$7
    
54
%
  
7
    
36
%
  
-
   
-
   
1
    
5
%
  
-
   
-
   
15
    
25
%
                                                                           
CMBS
                                                                          
Comm - CES
                                                                          
BB
    
5
    
54
%
  
-
   
-
   
6
    
26
%
  
3
    
22
%
  
-
   
-
   
14
    
30
%
B
    
-
   
-
   
-
   
-
   
7
    
22
%
  
6
    
19
%
  
-
   
-
   
13
    
21
%
NR
    
11
    
22
%
  
21
    
17
%
  
35
    
17
%
  
6
    
17
%
  
-
   
-
   
73
    
18
%
                                                                           
Total CMBS
    
$16
    
27
%
  
21
    
17
%
  
48
    
18
%
  
15
    
19
%
  
-
   
-
   
100
    
19
%
                                                                           
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 19A - Securities at Redwood excluding Acacia Market Value as a % of Principal March 31, 2008
 
 
 
 
Table 19B - Securities at Acacia Market Value as a % of Principal March 31, 2008
($ in millions)
 
                                                   
 
 
<=2004
  
 
  
2005
  
 
  
2006
  
 
  
2007
  
 
  
2008
  
 
  
Total
  
 
  
 
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
                                                       
Prime
                                                                          
Resi - IGS
                                                                          
 AAA
    
$9
    
94
%
  
$12
    
83
%
  
$5
    
68
%
  
$  -
    
-
   
$  -
    
-
   
$26
    
83
%
 AA
    
33
    
53
%
  
18
    
23
%
  
10
    
26
%
  
2
    
20
%
  
-
   
-
   
63
    
33
%
 A
    
23
    
44
%
  
31
    
24
%
  
17
    
30
%
  
3
    
29
%
  
-
   
-
   
74
    
30
%
 BBB
    
12
    
36
%
  
33
    
23
%
  
10
    
19
%
  
16
    
27
%
  
-
   
-
   
71
    
25
%
Resi - IGS Total
    
77
    
49
%
  
94
    
26
%
  
42
    
27
%
  
21
    
26
%
  
-
   
-
   
234
    
31
%
                                                                           
Resi - CES
                                                                          
 BB
    
29
    
26
%
  
20
    
21
%
  
12
    
14
%
  
3
    
17
%
  
-
   
-
   
64
    
21
%
 B
    
3
    
22
%
  
5
    
11
%
  
4
    
13
%
  
-
   
-
   
-
   
-
   
12
    
13
%
 NR
    
-
   
-
   
-
   
-
   
1
    
9
%
  
-
   
-
   
-
   
-
   
1
    
9
%
Resi - CES Total
    
32
    
25
%
  
25
    
17
%
  
17
    
13
%
  
3
    
17
%
  
-
   
-
   
77
    
18
%
                                                                           
Total Prime
    
$109
    
38
%
  
$119
    
23
%
  
$59
    
21
%
  
$24
    
25
%
  
$  -
    
-
   
$311
    
27
%
                                                                           
Alt-A
                                                                          
Resi - IGS
                                                                          
 AAA
    
$6
    
58
%
  
$2
    
40
%
  
$75
    
59
%
  
$43
    
52
%
  
$  -
    
-
   
$126
    
56
%
 AA
    
6
    
39
%
  
2
    
18
%
  
9
    
19
%
  
6
    
16
%
  
-
   
-
   
23
    
21
%
 A
    
1
    
12
%
  
-
   
-
   
19
    
13
%
  
14
    
12
%
  
-
   
-
   
34
    
12
%
 BBB
    
1
    
26
%
  
2
    
7
%
  
11
    
24
%
  
8
    
23
%
  
-
   
-
   
22
    
22
%
Resi - IGS Total
    
14
    
35
%
  
6
    
15
%
  
114
    
26
%
  
71
    
22
%
  
-
   
-
   
205
    
24
%
                                                                           
Resi - CES
                                                                          
 BB
    
2
    
8
%
  
1
    
7
%
  
5
    
7
%
  
4
    
7
%
  
-
   
-
   
12
    
7
%
 B
    
-
   
8
%
  
1
    
3
%
  
2
    
4
%
  
-
   
5
%
  
-
   
-
   
3
    
4
%
 NR
    
-
   
-
   
-
   
-
   
-
   
-
   
-
   
4
%
  
-
   
-
   
-
   
4
%
Resi - CES Total
    
2
    
8
%
  
2
    
5
%
  
7
    
6
%
  
4
    
7
%
  
-
   
-
   
15
    
6
%
                                                                           
Total Alt-A
    
$16
    
23
%
  
$8
    
11
%
  
$121
    
22
%
  
$75
    
19
%
  
$  -
    
-
   
$220
    
20
%
                                                                           
Subprime
                                                                          
Resi - IGS
                                                                          
 AAA
    
$  -
    
-
   
$4
    
72
%
  
$  -
    
-
   
$8
    
78
%
  
$  -
    
-
   
$12
    
76
%
 AA
    
25
    
57
%
  
34
    
77
%
  
3
    
39
%
  
2
    
15
%
  
-
   
-
   
64
    
59
%
 A
    
35
    
61
%
  
12
    
44
%
  
1
    
16
%
  
-
   
-
   
-
   
-
   
48
    
50
%
 BBB
    
23
    
65
%
  
-
   
-
   
2
    
11
%
  
1
    
6
%
  
-
   
-
   
26
    
42
%
Resi - IGS Total
    
83
    
61
%
  
50
    
65
%
  
6
    
20
%
  
11
    
28
%
  
-
   
-
   
150
    
53
%
                                                                           
Resi - CES
                                                                          
 BB
    
4
    
49
%
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
4
    
49
%
 B
    
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
0
%
 NR
    
-
   
-
   
-
   
-
   
5
    
5
%
  
2
    
6
%
  
-
   
-
   
7
    
5
%
Resi - CES Total
    
4
    
49
%
  
-
   
-
   
5
    
5
%
  
2
    
6
%
  
-
   
-
   
11
    
8
%
                                                                           
Total Subprime
    
$87
    
60
%
  
$50
    
65
%
  
$11
    
8
%
  
$13
    
18
%
  
$  -
    
-
   
$161
    
38
%
                                                                           
CDO
                                                                          
CDO - IGS
                                                                          
AAA
    
$4
    
37
%
  
$4
    
28
%
  
$  -
    
-
   
$2
    
23
%
  
$  -
    
-
   
$10
    
30
%
AA
    
3
    
19
%
  
-
   
-
   
-
   
-
   
1
    
20
%
  
-
   
-
   
4
    
19
%
A
    
11
    
34
%
  
2
    
22
%
  
1
    
13
%
  
-
   
-
   
-
   
-
   
14
    
26
%
BBB
    
14
    
43
%
  
2
    
14
%
  
7
    
26
%
  
2
    
30
%
  
-
   
-
   
25
    
31
%
CDO - IGS Total
    
32
    
34
%
  
8
    
21
%
  
8
    
23
%
  
5
    
19
%
  
-
   
-
   
53
    
28
%
                                                                           
CDO - CES
                                                                          
BB
    
1
    
9
%
  
3
    
30
%
  
1
    
11
%
  
-
   
-
   
-
   
-
   
5
    
13
%
NR
    
-
   
-
   
-
   
-
   
1
    
3
%
  
-
   
-
   
-
   
-
   
1
    
3
%
CDO - CES Total
    
1
    
9
%
  
3
    
30
%
  
2
    
5
%
  
-
   
-
   
-
   
-
   
6
    
9
%
                                                                           
Total CDO
    
$33
    
32
%
  
$11
    
22
%
  
$10
    
14
%
  
$5
    
19
%
  
$0
    
0
%
  
$59
    
23
%
                                                                           
CMBS
                                                                          
Comm - IGS
                                                                         
AAA
   
$  -
    
-
   
$8
    
91
%
  
$2
    
88
%
  
$  -
    
-
   
$  -
    
-
   
$10
    
90
%
AA
   
1
   
65
%
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
1
   
65
%
A
   
12
   
69
%
  
2
   
49
%
  
-
   
-
   
-
   
-
   
-
   
-
   
14
   
65
%
BBB
   
13
   
70
%
  
23
   
47
%
  
1
   
40
%
  
-
   
-
   
-
   
-
   
37
   
53
%
Comm - IGS Total
   
26
   
69
%
  
33
   
53
%
  
3
   
62
%
  
-
   
-
   
-
   
-
   
62
   
59
%
                                                                           
Comm - CES
                                                                          
BB
    
20
    
43
%
  
29
    
37
%
  
29
    
29
%
  
2
    
22
%
  
0
    
-
   
80
    
34
%
B
    
3
    
35
%
  
12
    
32
%
  
13
    
25
%
  
-
   
-
   
-
   
-
   
28
    
29
%
NR
    
-
   
-
   
-
   
-
   
5
    
24
%
  
-
   
-
   
-
   
-
   
5
    
24
%
Comm - CES Total
    
23
    
42
%
  
41
    
36
%
  
47
    
27
%
  
2
    
22
%
  
-
   
-
   
113
    
32
%
                                                                           
Total CMBS
    
$49
    
53
%
  
$74
    
42
%
  
$50
    
28
%
  
$2
    
22
%
  
$0
    
0
%
  
$175
    
38
%
                                                                           
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 19B - Securities at Acacia Market Value as a % of Principal March 31, 2008
98
 
 
 
Table 19C - Securities at Opportunity Fund Market Value as a % of Principal
March 31, 2008 ($ in millions)
99
                
  
 
<=2004
  
  
 
2005
  
  
 
2006
  
  
 
2007
  
  
 
2008
  
  
 
Total
  
  
 
  
 
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
Value
  
%
  
                                                                           
Total Subprime - IGS
    
$9
    
71
%
  
$  -
    
-
   
$  -
    
-
   
$  -
    
-
   
$  -
    
-
   
$9
    
71
%
                                                                           
                                                                           
Total CDO - IGS
    
$17
    
30
%
  
$10
    
30
%
  
$  -
    
-
   
$  -
    
-
   
$  -
    
-
   
$27
    
30
%
                                                                           
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 19C - Securities at Opportunity Fund Market Value as a % of Principal March 31, 2008
 
 
 
 
Table 20: Sequoia ABS Issued ($ in thousands)
 
                       
 
  
 
  
Original
 
 
  
Estimated
  
Outstanding
 
Sequoia
 
Issue
  
Issue
 
Stated
  
Callable
  
Balance
 
ABS Issued
 
Date
  
Amount
 
Maturity
  
Date
  
March 31, 2008
  
 
  
 
  
 
  
 
  
 
  
 
  
Sequoia 1
    
07/29/97
    
$534,347
    
2029
    
Called
    
$  - -
 
Sequoia 2
    
11/06/97
    
749,160
   
2024
    
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
    
45,778
 
Sequoia 5
    
10/29/01
    
510,047
   
2026
    
2007
    
70,014
 
Sequoia 6
    
04/26/02
    
506,142
   
2027
    
2007
    
71,223
 
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
    
57,694
 
Sequoia 10
    
09/26/02
    
1,041,600
   
2027
    
2008
    
141,529
 
Sequoia 11
    
10/30/02
    
704,936
   
2032
    
2007
    
69,290
 
Sequoia 12
    
12/19/02
    
1,096,891
   
2033
    
Called
    
-
 
Sequoia 2003-1
    
02/27/03
    
1,012,321
   
2033
    
2007
    
139,225
 
Sequoia 2003-2
    
04/29/03
    
815,080
   
2033
    
2007
    
108,989
 
Sequoia 2003-3
    
06/26/03
    
538,452
   
2033
    
2007
    
79,833
 
MLCC 2003-C
    
06/26/03
    
984,349
   
2028
    
2008
    
126,232
 
MLCC 2003-D
    
07/29/03
    
1,003,591
   
2028
    
2008
    
144,088
 
Sequoia 2003-4
    
07/29/03
    
504,273
   
2033
    
2007
    
108,768
 
Sequoia 2003-5
    
08/27/03
    
840,248
   
2033
    
2007
    
91,369
 
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
    
133,579
 
MLCC 2003-E
    
08/28/03
    
983,852
   
2028
    
2008
    
148,660
 
MLCC 2003-F
    
09/25/03
    
1,297,913
   
2028
    
2007
    
181,739
 
MLCC 2003-H
    
12/22/03
    
739,196
   
2029
    
2008
    
102,059
 
Sequoia 2004-1
    
01/28/04
    
616,562
   
2034
    
2007
    
83,598
 
Sequoia 2004-2
    
02/25/04
    
690,548
   
2034
    
Called
    
-
 
Sequoia 2004-3
    
03/30/04
    
917,673
   
2034
    
2007
    
96,517
 
Sequoia 2004-4
    
04/29/04
    
808,933
   
2034
    
2007
    
95,416
 
Sequoia 2004-5
    
05/27/04
    
831,540
   
2034
    
2008
    
101,225
 
Sequoia 2004-6
    
06/29/04
    
910,662
   
2034
    
2008
    
117,904
 
SEMHT 2004-01
    
06/29/04
    
317,044
   
2014
    
2008
    
61,788
  
Sequoia 2004-7
    
07/29/04
    
1,032,685
   
2034
    
2008
    
125,966
 
Sequoia 2004-8
    
08/27/04
    
807,699
   
2034
    
2008
    
131,706
 
Sequoia 2004-9
    
09/29/04
    
772,831
   
2034
    
2008
    
141,417
 
Sequoia 2004-10
   
10/28/04
    
673,356
   
2034
    
2008
    
115,437
 
Sequoia 2004-11
    
11/23/04
    
705,746
   
2034
    
2008
    
150,692
 
Sequoia 2004-12
    
12/22/04
    
821,955
   
2035
    
2008
    
145,540
 
Sequoia 2005-1
    
01/27/05
    
409,071
   
2035
    
2008
    
91,072
 
Sequoia 2005-2
    
02/24/05
    
338,481
   
2035
    
2008
    
63,416
 
Sequoia 2005-3
    
04/28/05
    
359,182
   
2035
    
2008
    
80,033
 
Madrona 2005-A
    
08/25/05
    
5,400
   
2008
    
Called
    
-
 
Sequoia 2005-4
    
09/29/05
    
324,576
   
2035
    
2009
    
164,340
 
Sequoia 2006-1
    
08/30/06
    
742,507
   
2046
    
2011
    
539,250
  
Sequoia 2007-1
    
03/30/07
    
864,089
   
2047
    
2015
    
755,566
 
Sequoia 2007-2
    
05/25/07
    
1,018,484
   
2038
    
2017
    
872,474
 
Sequoia 2007-3
    
07/27/07
    
650,375
   
2037
    
2015
    
636,389
 
Sequoia 2007-4
    
08/30/07
    
129,713
   
2047
    
2017
    
121,334
 
 
                                
Total Sequoia ABS Issuance
          
$33,980,391
                
$6,511,149
  
 
                                
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 20: Sequoia ABS Issued
100
 
 
 
Table 21: Sequoia IO ABS Issued ($ in thousands)
101
                       
       
Original
     
Estimated
  
Outstanding
 
Sequoia ABS
 
Issue
  
Issue
 
Stated
  
Callable
  
Balance At
 
IO's Issued
 
Date
  
Amount
 
Maturity
  
Date
  
March 31, 2008
  
   
 
  
 
  
 
          
MLCC 2003-C X-A-2
   
06/26/03
    
$12,662
    
2007
    
Matured
    
$0
  
MLCC 2003-D X-A-1
   
07/29/03
    
22,371
   
2007
    
Matured
    
-
 
MLCC 2003-E X-A-1
   
08/28/03
    
16,550
   
2007
    
Matured
    
-
 
MLCC 2003-F X-A-1
   
09/25/03
    
18,666
   
2007
    
Matured
    
-
 
Sequoia 2003-6 X-1
   
10/29/03
    
8,220
   
2007
    
Called
    
-
 
SMFC 2003A AX1
   
10/31/03
    
70,568
   
2007
    
Called
    
-
 
Sequoia 2003-7 X-1
   
11/25/03
    
10,345
   
2007
    
Called
    
-
 
Sequoia 2003-8 X-1
   
12/23/03
    
12,256
   
2007
    
Matured
    
-
 
Sequoia 2004-1 X-1
   
01/28/04
    
7,801
   
2007
    
Matured
    
-
 
Sequoia 2004-2 X-1
   
02/25/04
    
8,776
   
2007
    
Called
    
-
 
MLCC 2003-H X-A-1
   
12/22/03
    
10,430
   
2007
    
Matured
    
-
 
SMFC 2004A AX1
   
02/26/04
    
10,626
   
2008
    
2008
        
Sequoia 2004-4 X-1
   
05/28/04
    
9,789
   
2010
    
Matured
    
-
 
Sequoia 2004-5 X-1
   
05/27/04
    
3,371
   
2012
    
Matured
    
-
 
Sequoia 2004-6 X-A
   
06/29/04
    
10,884
   
2012
    
2008
    
1,018
 
Sequoia 2004-7 X-A
   
07/29/04
    
12,145
   
2034
    
2008
    
1,672
 
Sequoia 2004-8 X-A
   
08/27/04
    
18,270
   
2034
    
2008
    
2,558
 
Sequoia 2004-9 X-A
   
09/29/04
    
16,951
   
2034
    
2008
    
3,082
 
Sequoia 2004-10 X-A
   
10/28/04
    
14,735
   
2034
    
2008
    
2,606
 
Sequoia 2004-11 X-A-1
   
11/23/04
    
12,603
   
2034
    
2008
    
2,987
 
Sequoia 2004-11 X-A-2
   
11/23/04
    
4,697
   
2034
    
2008
    
1,287
 
Sequoia 2004-12 X-A-1
   
12/22/04
    
14,453
   
2035
    
2008
    
3,058
 
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
    
2,376
 
Sequoia 2005-2 X-A
   
02/24/05
    
7,484
   
2035
    
2008
    
1,569
 
Sequoia 2005-3 X-A
   
04/28/05
    
8,183
   
2035
    
2008
    
2,222
 
                                 
Total Sequoia IO ABS Issuance
         
$357,586
                
$29,516
  
                                 
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 21: Sequoia IO ABS Issued
 
 
 
 
Table 22: Acacia CDO ABS Issued ($ in thousands)
 
                       
       
Original
     
Optional
 
Principal
  
   
Issue
  
Issue
 
Stated
  
Redemption
  
Outstanding At
  
CDO Issuance
 
Date
  
Amount
 
Maturity
  
Date
  
March 31, 2008
  
                       
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
    
200,070
 
Acacia CDO 6
   
11/09/04
    
282,000
   
2040
   
2007
    
229,480
 
Acacia CDO 7
   
03/10/05
    
282,000
   
2045
   
2008
    
280,815
 
Acacia CDO 8
   
07/14/05
    
252,000
   
2045
   
2008
    
247,838
 
Acacia CRE 1
   
12/14/05
    
261,750
   
2045
   
2010
    
247,543
 
Acacia CDO 9
   
03/09/06
    
277,800
   
2046
    
2009
    
277,787
 
Acacia CDO 10
   
08/02/06
    
436,500
   
2046
    
2009
    
427,208
 
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
   
06/14/07
    
486,000
   
2052
    
2010
    
494,182
 (1)
                                 
Total Acacia CDO Issuance
 
$4,641,360
                
$3,339,583
  
                                 

(1) The principal outstanding for Acacia CDO OA 1 includes $8.2 million of additional principal outstanding related to deal issuance costs.
 
THE REDWOOD REVIEW 
1ST QUARTER 2008
 
Table 22: Acacia CDO ABS Issued
102