FOR IMMEDIATE RELEASE
CONTACTS:    Mike McMahon
Redwood Trust, Inc.
(415) 384-3805
Wednesday, August 6, 2008
  
 
Martin S. Hughes
 
(415) 389-7373

REDWOOD TRUST REPORTS SECOND QUARTER 2008 RESULTS

MILL VALLEY, CA - August 6, 2008 - Redwood Trust, Inc. (NYSE: RWT) today reported a GAAP net loss for the second quarter of 2008 of $46 million, or a loss of $1.40 per share. This GAAP loss included $60 million, or $1.84 per share, of net negative mark-to-market (MTM) adjustments. This compares to a net loss of $5.28 per share for the first quarter of 2008, which reflected negative MTM adjustments of $5.96 per share and to net income of $0.41 per share for the second quarter of 2007, which reflected negative MTM of $1.04 per share.
 
Taxable income for the second quarter was $4 million, or $0.11 per share. This taxable income incorporated charges related to credit losses of $30 million, or $0.91 per share. This compares to taxable income of $26 million, or $0.79 per share, for the first quarter of 2008 and taxable income of $46 million, or $1.66 per share, for the second quarter of 2007.
 
During the quarter, Redwood’s investments generated $52 million of cash flow in excess of operating and interest costs. Redwood invested $152 million in new assets in the second quarter, including $147 million of residential investment-grade securities.

“Given the current state of turmoil in the mortgage credit markets, our acquisition activity during the quarter was focused on attractive, yet safe, investments,” said Brett Nicholas, Redwood’s Chief Investment Officer. “These investments have significant credit-enhancement to protect against credit loss and to provide a greater certainty of the range of expected cash flows.”

The accounting concepts and disclosures relating to our financial statements are complex. Today, we also released our “Redwood Review” covering the second quarter of 2008. The Redwood Review contains a more detailed discussion of our business performance and outlook. The Redwood Review is available on our website at www.redwoodtrust.com.

Additional information on our GAAP results is available in our Quarterly Report on Form 10-Q for the three months ended June 30, 2008 which we filed today with the Securities and Exchange Commission.  The Form 10-Q is available on our website at www.redwoodtrust.com. We strongly recommend reading the Redwood Review and 10-Q in conjunction with this press release.

CAUTIONARY STATEMENT: This press release 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, 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; legislative and regulatory actions affecting the mortgage industry; 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.
 
 
REDWOOD TRUST, INC.


Consolidated Income Statement
  
Second
  
First
  
Fourth
 
Third
 
Second
  
($ in millions, except share data)
  
Quarter
  
Quarter
 
Quarter
  
Quarter
 
Quarter
  
 
  
2008
  
2008
  
2007
 
2007
  
2007
  
                            
Interest income
  
$
127
 
$
167
 
$
202
 
$
219
 
$
220
 
Interest expense
    
(98
)
  
(127
)
  
(153
)
  
(165
)
  
(166
)
Net interest income before market valuation adjustments
    
29
   
40
   
49
   
54
   
54
 
Market valuation adjustments, net
    
(60
)
  
(194
)
  
(1,119
)
  
(103
)
  
(30
)
Net interest income
   
(31
)
  
(154
)
  
(1,070
)
  
(49
)
  
24
 
                                 
Operating expenses
   
(15
)
  
(15
)
  
(15
)
  
(12
)
  
(13
)
Severance expense
    
-
   
-
   
(1
)
  
-
   
-
 
Realized gains on sales and calls, net
    
3
   
-
   
7
   
2
   
3
 
Minority interest allocation
    
(2
)
  
(1
)
  
-
   
-
   
-
 
Credit (provision) for income taxes
    
(1
)
  
(2
)
  
2
   
(2
)
  
(3
)
GAAP net (loss) income
  
$
(46
)
$
(172
)
$
(1,077
)
$
(61
)
$
11
 
                                 
Average diluted shares (thousands)
    
32,871
   
32,511
   
29,531
   
27,892
   
28,165
 
GAAP earnings per share (diluted)
  
$
(1.40
)
$
(5.28
)
$
(36.49
)
$
(2.18
)
$
0.41
 
                                 
Regular dividends declared per common share
  
$
0.75
 
$
0.75
 
$
0.75
 
$
0.75
 
$
0.75
 
Special dividends declared per common share
    
-
   
-
   
2.00
   
-
   
-
 
Total dividends declared per common share
  
$
0.75
 
$
0.75
 
$
2.75
 
$
0.75
 
$
0.75
 

Please note that we no longer highlight core earnings as recent accounting changes incorporating mark-to-market values have rendered current results under that calculation that are not consistent across our asset classes and are not comparable to prior core earnings results. Consequently, core earnings are no longer particularly useful in our view.

2

REDWOOD TRUST, INC.
 

Consolidated Income Statement
  
Six Months Ended
  
($ in millions, except share data)
  
 June 30, 2008
  
 
  
2008
  
2007
  
             
Interest income
  
$
294
 
$
435
 
Interest expense
    
(225
)
  
(334
)
Net interest income before market valuation adjectments
    
69
   
101
 
Market valuation adjustments, net
    
(254
)
  
(40
)
Net interest income
   
(185
)
  
61
 
               
Operating expenses
   
(30
)
  
(28
)
Severance expense
    
-
   
(2
)
Realized gains on sales and calls, net
    
3
   
4
 
Minority interest allocation
    
(3
)
  
-
 
Provision for income taxes
    
(3
)
  
(5
)
GAAP net (loss) income
  
$
(218
)
$
30
 
               
Average diluted shares (thousands)
    
32,691
   
27,918
 
GAAP earnings per share (diluted)
  
$
(6.65
)
$
1.06
 
               
Regular dividends declared per common share
  
$
1.50
 
$
1.50
 
Special dividends declared per common share
    
-
   
-
 
Total dividends declared per common share
  
$
1.50
 
$
1.50
 
 
3
 
REDWOOD TRUST, INC.
 

Consolidated Balance Sheet
 
30-Jun
  
31-Mar
  
1-Jan (1)
  
31-Dec
  
30-Sep
  
30-Jun
 
($ in millions, except share data)
  
2008
  
2008
  
2008
  
2007
  
2007
 
2007
 
                                 
Real estate loans
  
$
6,377
 
$
6,775
 
$
7,204
 
$
7,204
 
$
7,656
 
$
8,377
 
Real estate securities, at fair value:
                                      
Trading securities
    
841
   
952
   
1,805
   
12
   
25
   
34
 
Available-for-sale securities
    
400
   
242
   
317
   
2,110
   
2,926
   
3,726
 
Other investments
    
79
   
79
   
79
   
79
   
80
   
80
 
Cash and cash equivalents
    
148
   
257
   
290
   
290
   
310
   
83
 
Other assets
    
201
   
241
   
223
   
244
   
286
   
381
 
Total consolidated assets
  
$
8,046
 
$
8,546
 
$
9,918
 
$
9,939
 
$
11,283
 
$
12,681
 
                                       
Short-term debt - Redwood
  
$
9
 
$
2
 
$
8
 
$
8
 
$
39
 
$
849
 
Asset-backed securities issued - Sequoia
    
6,175
   
6,544
   
6,946
   
6,946
   
7,382
   
7,243
 
Asset-backed securities issued - Acacia(2)
    
935
   
1,046
   
1,893
   
3,383
   
3,421
   
3,432
 
Other liabilities
    
166
   
211
   
170
   
170
   
142
   
131
 
Long-term debt - Redwood
    
150
   
150
   
150
   
150
   
150
   
150
 
Minority interest
   
47
   
8
   
-
   
-
   
-
   
-
 
Stockholders’ equity (deficit)
   
564
   
585
   
751
   
(718
)
  
149
   
876
 
Total liabilities and stockholders' equity
  
$
8,046
 
$
8,546
 
$
9,918
 
$
9,939
 
$
11,283
 
$
12,681
 
                                       
Shares outstanding at period end (thousands)
    
33,184
   
32,710
   
32,385
   
32,385
   
27,986
   
27,816
 
GAAP book value per share
  
$
17.00
 
$
17.89
 
$
23.18
 
$
(22.18
)
$
5.32
 
$
31.50
 
 
(1)
We adopted the fair value option under FAS 159 (FVO) for assets and liabilities of Acacia and certain other assets effective January 1, 2008.

(2)
Prior to 2008, ABS issued by Acacia were accounted for at cost.

4
 
REDWOOD TRUST, INC.
 

Consolidating Income Statement
                                
Three Months Ended June 30, 2008
                                
($ in millions)
       
Opportunity
            
Intercompany
  
 Redwood
 
 
  
Redwood
  
Fund
 
Sequoia
  
Acacia
 
Adjustments
  
Consolidated
 
                                 
Interest income
  
$
20
 
$
1
 
$
72
 
$
40
 
$
(2
)
$
131
 
Net discount (premium) amortization
    
5
   
1
   
(10
)
  
-
   
-
   
(4
)
Total interest income
    
25
   
2
   
62
   
40
   
(2
)
  
127
 
Management fees
    
1
   
-
   
-
   
-
   
-
   
1
 
Interest expense
    
(2
)
  
-
   
(67
)
  
(32
)
  
2
   
(99
)
Net interest income before
market valuation adjustments
  
$
24
 
$
2
 
$
(5
)
$
8
 
$
-
 
$
29
 
Market valuation adjustments, net
    
(31
)
  
-
   
(1
)
  
(28
)
  
-
   
(60
)
Net interest (loss) income
    
(7
)
  
2
   
(6
)
  
(20
)
  
-
   
(31
)
Operating expenses
    
(15
)
  
-
   
-
   
-
   
-
   
(15
)
Realized gains on sales and calls, net
    
1
   
2
   
-
   
-
   
-
   
3
 
Income from Opportunity Fund
    
2
   
-
   
-
   
-
   
(2
)
  
-
 
Loss from Sequoia
    
(6
)
  
-
   
-
   
-
   
6
   
-
 
Loss from Acacia
    
(20
)
  
-
   
-
   
-
   
20
   
-
 
Minority interest allocation
    
-
   
(2
)
  
-
   
-
   
-
   
(2
)
Provision for income taxes
    
(1
)
  
-
   
-
   
-
   
-
   
(1
)
Net (Loss) Income
 
$
(46
)
$
2
 
$
(6
)
$
(20
)
$
24
 
$
(46
)
 
5
 
REDWOOD TRUST, INC.
 
 
Consolidating Income Statement
                                
Six Months Ended June 30, 2008
                                
($ in millions)
       
Opportunity
 
  
  
  
  
Intercompany
 
Redwood
 
 
  
Redwood
 
Fund
  
Sequoia
  
Acacia
  
 Adjustments
 
 Consolidated
  
Interest income
  
$
42
 
$
2
 
$
166
 
$
87
 
$
(4
)
$
293
 
Net discount (premium) amortization
    
16
   
2
   
(17
)
  
-
   
-
   
1
 
Total interest income
    
58
   
4
   
149
   
87
   
(4
)
  
294
 
Management fees
    
3
   
-
   
-
   
-
   
-
   
3
 
Interest expense
    
(5
)
  
-
   
(150
)
  
(77
)
  
4
   
(228
)
Net interest income before market valution adjustments
  
$
56
 
$
4
 
$
(1
)
$
10
 
$
-
 
$
69
 
Market valuation adjustments, net
    
(198
)
  
-
   
(1
)
  
(55
)
  
-
   
(254
)
Net interest (loss) income
    
(142
)
  
4
   
(2
)
  
(45
)
  
-
   
(185
)
Operating expenses
    
(30
)
  
-
   
-
   
-
   
-
   
(30
)
Realized gains on sales and calls, net
    
1
   
2
   
-
   
-
   
-
   
3
 
Income from Opportunity Fund
    
3
   
-
   
-
   
-
   
(3
)
  
-
 
Loss from Sequoia
    
(2
)
  
-
   
-
   
-
   
2
   
-
 
Loss from Acacia
    
(45
)
  
-
   
-
   
-
   
45
   
-
 
Minority interest allocation
    
-
   
(3
)
  
-
   
-
   
-
   
(3
)
Provision for income taxes
    
(3
)
  
-
   
-
   
-
   
-
   
(3
)
Net (Loss) Income
 
$
(218
)
$
3
 
$
(2
)
$
(45
)
$
44
 
$
(218
)
 
6
 
REDWOOD TRUST, INC.
 

Consolidating Balance Sheet
                                
June 30, 2008
                                
($ in millions)
       
 Opportunity
            
 Intercompany
  
 Redwood
  
   
 Redwood
  
 Fund
  
 Sequoia
  
 Acacia
  
 Adjustments
  
 Consolidated
  
Real estate loans
  
$
4
  
$
-
  
$
6,354
  
$
19
  
$
-
  
$
6,377
  
Real estate securities, at fair value:
                                      
Trading securities
    
19
    
-
    
-
    
822
    
-
    
841
  
Available-for-sale securities
    
334
    
66
    
-
    
84
    
(84
)
  
400
  
Other investments
    
-
    
-
    
-
    
79
    
-
    
79
  
Cash and cash equivalents
    
148
    
-
    
-
    
-
    
-
    
148
  
Total earning assets
    
505
    
66
    
6,354
    
1,004
    
(84
)
  
7,845
  
Investment in Opportunity Fund
    
47
    
-
    
-
    
-
    
(47
)
  
-
  
Investment in Sequoia
    
140
    
-
    
-
    
-
    
(140
)
  
-
  
Investment in Acacia
    
41
    
-
    
-
    
-
    
(41
)
  
-
  
Restricted cash
    
2
    
29
    
-
    
72
    
-
    
103
  
Other assets
    
24
    
-
    
60
    
14
    
-
    
98
  
Total Assets
  
$
759
  
$
95
  
$
6,414
  
$
1,090
  
$
(312
)
$
8,046
  
                                       
Short-term debt - Redwood
  
$
9
  
$
-
  
$
-
  
$
-
  
$
-
  
$
9
  
Asset-backed securities issued - Sequoia
    
-
    
-
    
6,259
    
-
    
(84
)
  
6,175
  
Asset-backed securities issued - Acacia
    
-
    
-
    
-
    
935
    
-
    
935
  
Other liabilities
    
36
    
1
    
15
    
114
    
-
    
166
  
Long-term debt - Redwood
    
150
    
-
    
-
    
-
    
-
    
150
  
Total liabilities
    
195
    
1
    
6,274
    
1,049
    
(84
)
  
7,435
  
Minority interest
    
-
    
47
    
-
    
-
    
-
    
47
  
Total stockholders’ equity
    
564
    
47
    
140
    
41
    
(228
)
  
564
  
Total Liabilities and Stockholders’ Equity
  
$
759
  
$
95
  
$
6,414
  
$
1,090
  
$
(312
)
$
8,046
  
 
7
 
REDWOOD TRUST, INC.
 

Taxable Income & GAAP (Loss) Income Differences
  
Second
  
First
 
Fourth
  
Third
  
Second
  
($ in millions, except share data)
  
Quarter
  
Quarter
  
Quarter 
  
Quarter 
  
Quarter 
 
 
  
2008 
 
2008 
  
2007 
  
2007 
  
2007 
 
                            
GAAP net (loss) income
  
$
(46
)
$
(172
)
$
(1,077
)
$
(61
)
$
11
 
Difference in taxable income calculations
                                
Amortization and credit losses
    
(7
)
  
6
   
(15
)
  
10
   
10
 
Operating expenses
    
1
   
2
   
9
   
(2
)
  
(3
)
Gross realized gains on calls and sales
    
(6
)
  
(5
)
  
(5
)
  
(3
)
  
(3
)
Market valuation adjustments, net
    
61
   
194
   
1,119
   
103
   
29
 
Provision (credit) for income taxes
    
1
   
1
   
(2
)
  
2
   
2
 
Total differences in GAAP and taxable income
    
50
   
198
   
1,106
   
110
   
35
 
                                 
Taxable income
  
$
4
 
$
26
 
$
29
 
$
49
 
$
46
 
                                 
Total taxable income per share
 
$
0.11
 
$
0.79
 
$
0.91
 
$
1.74
 
$
1.66
 
 
8
 
REDWOOD TRUST, INC.
 

Taxable Income & GAAP (Loss) Income Differences
  
Six Months Ended
  
($ in millions, except share data)
  
June 30, 2008
  
 
  
2008
  
2007
  
             
GAAP net (loss) income
  
$
(218
)
$
30
 
Difference in taxable income calculations
              
Amortization and credit losses
   
(1
)
  
21
 
Operating expenses
   
2
   
(5
)
Gross realized gains on calls and sales
    
(11
)
  
(3
)
Market valuation adjustments, net
    
254
   
40
 
Provision for income taxes
    
3
   
3
 
Total differences in GAAP and taxable income
    
247
   
56
 
               
Taxable income
  
$
29
 
$
86
 
               
Total taxable income per share
 
$
0.90
 
$
3.14
 
 
9