UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A
(RULE 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

 

Check the appropriate box:

REDWOOD TRUST, INC.

(Name of Registrant as Specified in Its Charter)

___________________________________________________

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

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REDWOOD TRUST, INC.
One Belvedere Place, Suite 300
Mill Valley, California 94941
(415) 389-7373

NOTICE OF 2011 ANNUAL MEETING OF STOCKHOLDERS

To the Stockholders of Redwood Trust, Inc.:

You are cordially invited to attend the Annual Meeting of Stockholders of Redwood Trust, Inc., a Maryland corporation, to be held on May 17, 2011 at 10:30 a.m., local time, at the Acqua Hotel, 555 Redwood Highway, Mill Valley, California 94941, for the following purposes:

A Proxy Statement describing the matters to be considered at the Annual Meeting is attached to this notice. Our Board of Directors has fixed the close of business on March 31, 2011 as the record date for determination of stockholders entitled to notice of, and to vote at, the Annual Meeting and any adjournment or postponement of the Annual Meeting.

We would like your shares to be represented at the Annual Meeting. Whether or not you plan to attend the Annual Meeting, we respectfully request that you mark, date, sign, and promptly mail the enclosed proxy card in the accompanying postage-paid envelope or, pursuant to instructions on the enclosed proxy card, authorize a proxy to cast your votes by telephone or through the Internet.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held on May 17, 2011:

		By Order of the Board of Directors,
		/s/ Andrew P. Stone Secretary

March 16, 2011

YOUR VOTE IS IMPORTANT.
PLEASE PROMPTLY MARK, DATE, SIGN, AND
RETURN YOUR PROXY CARD IN THE ENCLOSED ENVELOPE
OR, PURSUANT TO INSTRUCTIONS ON YOUR PROXY CARD,
AUTHORIZE A PROXY TO CAST YOUR VOTES BY TELEPHONE
OR THROUGH THE INTERNET.

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REDWOOD TRUST, INC.

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Introduction			1
Information About the Annual Meeting			2
Who May Attend the Annual Meeting			2
Who May Vote			2
Voting by Proxy; Board of Directors’ Voting Recommendations			2
Quorum Requirement			2
Other Matters			3
Information About the Proxy Statement and the Solicitation of Proxies			3
Annual Report			3
Householding			3
Corporate Governance			4
Corporate Governance Standards			4
Process for Nominating Potential Director Candidates			4
Director Independence			4
Board Leadership Structure			5
Executive Sessions			5
Board of Directors’ Role in Risk Oversight			5
Communications with the Board of Directors			6
Director Attendance at Annual Meetings of Stockholders			6
Code of Ethics			6
Stock Ownership Requirements			7
Required Stock Ownership by Directors			7
Required Stock Ownership by Executive Officers			7
Item 1 — Election of Directors			8
Meetings and Committees of the Board of Directors			13
Director Compensation			14
Executive Officers			16
Security Ownership of Directors and Executive Officers			18
Security Ownership of Certain Beneficial Owners			20
Executive Compensation			21
Compensation Discussion and Analysis			21
Executive Compensation Tables			49
Other Compensation Matters			55
Additional Information About Directors and Executive Officers			60
Audit Committee Matters			61
Item 2 —  Ratification of Appointment of the Independent Registered Public Accounting Firm			63
Item 3 —  Advisory Vote on Executive Compensation			64
Item 4 —  Advisory Vote on the Frequency of an Advisory Vote on Executive Compensation			68
Item 5 —  Approval of the Amendment to Redwood’s Charter to Increase the Number of Shares Authorized for Issuance			69
Item 6 —  Stockholder Proposal Concerning Redwood’s Classified Board of Directors			71
Stockholder Proposals for the 2012 Annual Meeting			74
Information Incorporated by Reference			74

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REDWOOD TRUST, INC.
One Belvedere Place, Suite 300
Mill Valley, California 94941
(415) 389-7373

 

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 2011

 

INTRODUCTION

This Proxy Statement is being furnished in connection with the solicitation of proxies by the Board of Directors of Redwood Trust, Inc., a Maryland corporation (Redwood, we, or us), for exercise at the Annual Meeting of Stockholders (the Annual Meeting) to be held on Tuesday, May 17, 2011 at 10:30 a.m., local time, at the Acqua Hotel, 555 Redwood Highway, Mill Valley, California 94941, and at any adjournment or postponement thereof. This Proxy Statement, the accompanying proxy card, and the Notice of Annual Meeting are being mailed to stockholders of record as of the record date for the Annual Meeting beginning on or about April 12, 2011.

Redwood, together with its subsidiaries, is a financial institution that seeks to invest in real estate related assets that have the potential to provide attractive cash flows over a long period of time and support our goal of distributing attractive levels of dividends to our stockholders. For tax purposes, we are structured as a real estate investment trust, or REIT. We are able to pass through substantially all of our earnings generated at our REIT to our stockholders without paying income tax at the corporate level. We pay income tax on the REIT taxable income we retain and on the income we earn at our taxable subsidiaries. Redwood was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. Our executive offices are located at One Belvedere Place, Suite 300, Mill Valley, California 94941.

The address and telephone number of our principal executive office are as set forth above and our website is www.redwoodtrust.com.

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INFORMATION ABOUT THE ANNUAL MEETING

Who May Attend the Annual Meeting

Only stockholders who own our common stock as of the close of business on March 31, 2011, the record date for the Annual Meeting, will be entitled to attend the Annual Meeting. In the discretion of management, we may permit certain other individuals to attend the Annual Meeting, including members of the media and our employees.

Who May Vote

Each share of our common stock outstanding on the record date for the Annual Meeting is entitled to one vote. The record date for determining stockholders entitled to notice of, and to vote at, the Annual Meeting is the close of business on March 31, 2011. As of the record date, there were [78,132,878] shares of common stock issued and outstanding. You can vote in person at the Annual Meeting or by proxy. To vote by authorizing a proxy to cast your votes, please mark, date, sign, and mail the enclosed proxy card. You may also authorize a proxy to vote your shares by telephone or through the Internet as instructed on the proxy card.

If your shares are held in the name of a bank, broker, or other holder of record, you will receive instructions from the holder of record that you must follow in order for your shares to be voted. If your shares are not registered in your own name and you plan to cast your votes in person at the Annual Meeting, you should contact your broker or agent to obtain a broker’s proxy card and bring it to the Annual Meeting in order to vote.

Voting by Proxy; Board of Directors’ Voting Recommendations

If you vote by proxy, the individuals named on the proxy, or their substitutes, will cast your votes in the manner you indicate. If you date, sign, and return the proxy card without marking your voting instructions, your votes will be cast in accordance with the recommendations of Redwood’s Board of Directors, as follows:

You may revoke or change your proxy at any time before it is exercised by delivering to us a signed proxy with a date later than your previously delivered proxy, by submitting a new proxy by telephone or through the Internet, by voting in person at the Annual Meeting, or by sending a written revocation of your proxy addressed to Redwood’s Secretary at our principal executive office.

Quorum Requirement

The presence, in person or by proxy, of stockholders entitled to cast a majority of all the votes entitled to be cast at the Annual Meeting constitutes a quorum for the transaction of business. Abstentions and broker non-votes are counted as present for purposes of establishing a quorum. A broker non-vote occurs when a nominee holding shares for a beneficial owner returns a proxy card but does not vote on a matter because the nominee holder has not received instructions from the beneficial owner and does not have or chooses not to exercise discretionary authority to vote the shares.

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Other Matters

Our Board of Directors knows of no other matters that may be presented for stockholder action at the Annual Meeting. If other matters properly come before the Annual Meeting, however, it is intended that the persons named in the proxies will vote on those matters in their discretion.

Information About the Proxy Statement and the Solicitation of Proxies

The enclosed proxy is solicited by our Board of Directors and we will bear the costs of this solicitation. Proxy solicitations will be made by mail, and also may be made by our directors, officers, and employees in person or by telephone, facsimile transmission, e-mail, or other means of communication on our behalf by our directors and officers. Banks, brokerage houses, nominees, and other fiduciaries will be requested to forward the proxy soliciting material to the beneficial owners of shares of our common stock entitled to be voted at the Annual Meeting and to obtain authorization for the execution of proxies on behalf of beneficial owners. We will, upon request, reimburse those parties for their reasonable expenses in forwarding proxy materials to their beneficial owners.

Annual Report

Our 2010 Annual Report, consisting of our Annual Report on Form 10-K for the year ended December 31, 2010 is being mailed to stockholders together with this Proxy Statement and contains financial and other information about Redwood, including audited financial statements for our fiscal year ended December 31, 2010. Certain sections of our 2010 Annual Report are incorporated into this Proxy Statement by reference, as described in more detail under “Information Incorporated by Reference” below. Our 2010 Annual Report is also available on our website.

Householding

We have adopted a procedure approved by the Securities and Exchange Commission (SEC) called “householding.” Under this procedure, stockholders of record who have the same address and last name and do not participate in electronic delivery of proxy materials will receive only one copy of our Notice of Annual Meeting, Proxy Statement, and Annual Report, unless one or more of these stockholders notifies us that they wish to continue receiving individual copies. This procedure reduces our printing costs and postage fees.

Stockholders who participate in householding will continue to receive separate proxy cards. Also, householding will not in any way affect dividend check mailings.

If you are eligible for householding, but you and other stockholders of record with whom you share an address currently receive multiple copies of the Notice of Annual Meeting, Proxy Statement, and Annual Report, or if you hold stock in more than one account, and in either case you wish to receive only a single copy of each of these documents for your household, please contact our transfer agent, Computershare Trust Company, N.A. (in writing at: Computershare Investor Services, 250 Royall Street, Canton, MA 02021; or by telephone at: (888) 472-1955).

If you participate in householding and wish to receive a separate copy of this Notice of Annual Meeting, Proxy Statement, and 2010 Annual Report, or if you do not wish to participate in householding and prefer to receive separate copies of these documents in the future, please contact Computershare as indicated above.

Beneficial owners can request information about householding from their banks, brokers, or other holders of record.

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CORPORATE GOVERNANCE

Corporate Governance Standards

Our Board of Directors has adopted Corporate Governance Standards (Governance Standards). Our Governance Standards are available on our website as well as in print at the written request of any stockholder addressed to Redwood’s Secretary at our principal executive office. The Governance Standards contain general principles regarding the composition and functions of our Board of Directors and its committees.

Process for Nominating Potential Director Candidates

Identifying and Evaluating Nominees for Directors.  Our Board of Directors nominates director candidates for election by stockholders at each annual meeting and elects new directors to fill vacancies on our Board of Directors between annual meetings of the stockholders. Our Board of Directors has delegated the selection and initial evaluation of potential director nominees to the Governance and Nominating Committee with input from the Chief Executive Officer and President. The Governance and Nominating Committee makes the final recommendation of candidates to our Board of Directors for nomination. Our Board of Directors, taking into consideration the assessment of the Governance and Nominating Committee, also determines whether a nominee would be an independent director.

Stockholders’ Nominees.  Our Bylaws permit stockholders to nominate a candidate for election as a director at an annual meeting of the stockholders subject to compliance with certain notice and informational requirements, as more fully described below in this Proxy Statement under “Stockholder Proposals for the 2012 Annual Meeting.” A copy of the full text of our Bylaws may be obtained by any stockholder upon written request addressed to Redwood’s Secretary at our principal executive office. Among other matters required under our Bylaws, any stockholder nominations should include the nominee’s name and qualifications for Board membership and should be addressed to Redwood’s Secretary at our principal executive office.

The policy of the Governance and Nominating Committee is to consider properly submitted stockholder nominations for candidates for election to our Board of Directors. The Governance and Nominating Committee evaluates stockholder nominations in connection with its responsibilities set forth in its written charter and applies the qualification and diversity criteria set forth in the Governance Standards.

Director Qualifications.  Our Governance Standards contain Board membership criteria that apply to nominees for our Board of Directors. Each member of our Board of Directors must exhibit high standards of integrity, commitment, and independence of thought and judgment, and must be committed to promoting the best interests of Redwood. In addition, each director must devote the time and effort necessary to be a responsible and productive member of our Board of Directors. This includes developing knowledge about Redwood’s business operations and doing the work necessary to participate actively and effectively in Board and committee meetings.

Our Governance Standards also contain criteria that are intended to guide our Governance and Nominating Committee’s considerations of diversity in identifying nominees for our Board of Directors. In particular, our Governance Standards provide that the members of our Board of Directors should collectively possess a broad range of talent, skill, expertise, and experience useful to effective oversight of our business and affairs and sufficient to provide sound and prudent guidance with respect to our operations and interests. The self-assessments that are conducted each year by our Board of Directors and our Governance and Nominating Committee include an assessment of whether the Board’s then current composition represents the broad range of talent, skill, expertise, and experience that is called for by our Governance Standards.

Director Independence

As required under Section 303A of the New York Stock Exchange (NYSE) Listed Company Manual and our Governance Standards, our Board of Directors has affirmatively determined that none of the following directors has a material relationship (either directly or as a partner, shareholder, or officer of an organization that has a relationship) with us and that each of them qualifies as “independent” under Section 303A: Richard D. Baum, Thomas C. Brown, Mariann Byerwalter, Greg H. Kubicek, Jeffrey T. Pero, Georganne C. Proctor, and Charles J. Toeniskoetter. The Board of Directors’ determination was made with respect to Mr. Pero after

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consideration of the following: Mr. Pero is a retired partner of Latham & Watkins LLP and has been a director of Redwood since November 2009; Latham & Watkins LLP provides legal services to Redwood; and Mr. Pero’s retirement payments from Latham & Watkins LLP are adjusted to exclude any proportionate benefit received from the fees paid by Redwood to Latham & Watkins LLP.

Three of the members of our Board of Directors, George E. Bull, III, Douglas B. Hansen, and Martin S. Hughes, do not currently qualify as “independent” under Section 303A of the NYSE Listed Company Manual or our Governance Standards. Mr. Bull does not currently qualify as independent due to the fact that until his retirement in May 2010, he served as Redwood’s Chief Executive Officer. Mr. Hansen does not currently qualify as independent due to the fact that until his retirement in December 2008, he served as Redwood’s President. Mr. Hughes does not qualify as independent because he is Redwood’s current Chief Executive Officer and President.

Board Leadership Structure

The Chairman of the Board of Directors presides over meetings of the Board and serves as a liaison between the Board and management of Redwood. In addition, the Chairman provides input regarding Board agendas, materials, and areas of focus, and may represent Redwood to external constituencies such as investors, governmental representatives, and business counterparties. The Chairman is George E. Bull, III, who was one of the founders of Redwood in 1994 and who has continuously served as the Chairman since the inception of Redwood. Mr. Bull is a non-employee director, but is not an independent director due to the fact that he retired as our Chief Executive Officer in May 2010. As a result, at Redwood, there is a separation of the chairman and chief executive officer roles.

Under our Governance Standards, the Board of Directors also has a Presiding Director elected by the independent directors, who acts as a lead independent director and carries out certain other responsibilities, as described below. In addition, each of the Audit Committee, Compensation Committee, and Governance and Nominating Committee is chaired by an independent director.

Richard D. Baum serves as the Presiding Director. The Presiding Director is responsible for chairing executive sessions of our independent directors, as well as providing input regarding Board agendas, materials, and areas of focus, serving as one of the liaisons between management and the Board, working with the chair of each of the Board’s committees to ensure that each committee functions effectively, and performing other functions to facilitate effective communication and corporate governance.

The Board believes this leadership structure is appropriate for Redwood, as it provides for the Board to be led by non-employee directors. As a non-employee Chairman of the Board, Mr. Bull brings significant prior experience as the Chief Executive Officer to bear on his leadership responsibilities, while Mr. Baum, in his role as Presiding Director, brings the important perspective of an independent director.

Executive Sessions

Our Governance Standards require that our non-management directors (i.e., the nine of our ten directors that are not Redwood employees) meet in executive session at each regularly scheduled meeting of our Board of Directors and at such other times as determined by our Presiding Director. In addition, if any non-management director is not also an independent director, then our Governance Standards require that our independent directors meet at least annually without any such non-management directors.

Board of Directors’ Role in Risk Oversight

The Board of Directors takes an active role in risk oversight. At its regular meetings it reviews Redwood’s business and investment strategies and plans and seeks an understanding of the related risks as well as management’s approach to identifying and managing those risks. Because of the nature of Redwood’s business, the Board of Directors focuses on, among other things, establishing the appropriate philosophy with respect to investment risk and determining whether risks actually taken are in accordance with this philosophy. In carrying out its role in risk oversight, the Board of Directors receives and discusses quarterly reports from Redwood’s Chief Risk Officer and quarterly reports from the Audit Committee, which also carries out a risk oversight function delegated by the Board of Directors.

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Under its charter, the Audit Committee is specifically charged with (i) inquiring of management and Redwood’s independent registered public accounting firm about significant risks or exposures with respect to corporate accounting, reporting practices of Redwood, the quality and integrity of the financial reports and controls of Redwood, regulatory and accounting initiatives, and any off-balance sheet structures, and (ii) assessing the steps management has taken to minimize such risks. In addition, the Audit Committee is specifically charged with regularly discussing with management Redwood’s policies with respect to risk assessment and risk management, including identification of Redwood’s major financial and operational risk exposures and the steps management has taken to monitor and control those exposures.

The Audit Committee carries out this function by, among other things, receiving a quarterly risk management report from Redwood’s Chief Risk Officer and a quarterly internal audit report from Redwood’s head of internal audit, reviewing these reports, and discussing them by asking questions and providing direction to management. In addition, as noted below under “Audit Committee Matters — Audit Committee Report,” the Audit Committee also receives and discusses regular and required communications from Redwood’s independent registered public accounting firm regarding, among other things, Redwood’s internal controls. In addition to discussion of these reports during Audit Committee meetings, as circumstances merit, the Audit Committee holds separate executive sessions with one or more of the Chief Risk Officer, Redwood’s head of internal audit, and representatives of Redwood’s independent registered public accounting firm to discuss any matters that the Audit Committee or these persons believe should be discussed in the absence of other members of management.

In addition, when appropriate, the Board of Directors may delegate to other standing committees risk oversight responsibilities with respect to certain matters or request that other committees review certain risk oversight matters. For example, the Compensation Committee has been delegated to review, on an annual basis, whether Redwood’s compensation policies and practices are reasonably likely to have a material adverse effect on Redwood.

The Board of Directors believes that this manner of administering the risk oversight function effectively integrates such oversight into the Board of Directors’ leadership structure, because the risk oversight function is carried out both at the Board level as well as through delegation to the Audit Committee, which consists solely of independent directors, and when appropriate to the other standing committees of the Board of Directors, which also consist solely of independent directors.

Communications with the Board of Directors

Stockholders and other interested parties may communicate with our Board of Directors by e-mail addressed to [email protected]. The Presiding Director has access to this e-mail address and provides access to the other directors as appropriate. Communications that are intended specifically for non-management directors should be addressed to the Presiding Director.

Director Attendance at Annual Meetings of Stockholders

Pursuant to our Governance Standards, our directors are expected to attend annual meetings of stockholders. Nine of our then ten directors attended last year’s Annual Meeting of Stockholders in person. We currently expect all of our directors to attend this year’s Annual Meeting of Stockholders.

Code of Ethics

Our Board of Directors has adopted a Code of Ethics that applies to all of our directors, officers, and employees. Our Code of Ethics is available on our website as well as in print at the written request of any stockholder addressed to Redwood’s Secretary at our principal executive office.

We intend to post on our website and disclose in a Current Report on Form 8-K, to the extent required by applicable regulations, any change to the provisions of our Code of Ethics and any waiver of a provision of the Code of Ethics.

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STOCK OWNERSHIP REQUIREMENTS

Required Stock Ownership by Directors

Pursuant to our Governance Standards, non-employee directors are required to purchase from their own funds at least $50,000 (as measured on a purchase cost basis, including deferred stock units credited to our Executive Deferred Compensation Plan through the voluntary deferral of what otherwise would have been current cash compensation) of our common stock within three years from the date of commencement of their Board membership. Any director whose status has changed from being an employee director to being a non-employee director is not subject to this requirement if that director held at least $50,000 of our common stock at the time of that change in status (as measured on the purchase cost basis outlined in the prior sentence).

In addition, non-employee directors are required to own at least $280,000 of our common stock (as measured on a purchase cost basis, including deferred stock units acquired through both voluntary and involuntary deferred compensation) by the later of December 31, 2011 or five years from the date of commencement of their Board membership. Stock and deferred stock units acquired with respect to the $50,000 stock ownership requirement count toward the attainment of the $280,000 stock ownership requirement.

As of the date of this Proxy Statement, all of our non-employee directors were in compliance with these guidelines.

Required Stock Ownership by Executive Officers

The Compensation Committee of our Board of Directors has set the following executive stock ownership guidelines with respect to our executive officers, using original purchase/acquisition price as the basis for tracking compliance.

As of the date of this Proxy Statement, all of our executive officers were in compliance with these guidelines.

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ITEM 1 — ELECTION OF DIRECTORS

Our Charter and Bylaws provide for a classified Board of Directors consisting of Classes I, II, and III. Class II directors are scheduled to be elected at the 2011 Annual Meeting to serve for a three-year term and until their successors are duly elected and qualify. The nominees for the four Class II director positions are set forth below. In the event we are advised prior to the Annual Meeting that any nominee will be unable to serve or for good cause will not serve as a director if elected at the Annual Meeting, the proxies will cast votes for any person who shall be nominated by the present Board of Directors to fill the vacancy. As of the date of this Proxy Statement, we are not aware of any nominee who is unable or unwilling to serve as a director for the full three-year term. The nominees listed below currently are serving as directors of Redwood.

Vote Required

If a quorum is present, a plurality of the votes cast at the Annual Meeting is required for the election of a director. Cumulative voting in the election of directors is not permitted. Abstentions and broker non-votes will not be counted as votes cast and will have no effect on the results of the vote in the election of directors.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE NOMINEES IDENTIFIED BELOW.

Class II Nominees to Board of Directors

Name		Position with Redwood
Douglas B. Hansen		Director
Martin S. Hughes		Director, President, and Chief Executive Officer
Greg H. Kubicek		Director
Charles J. Toeniskoetter		Director

Certain biographical information regarding each nominee for election at the Annual Meeting is set forth below along with biographical information for other directors.

Douglas B. Hansen, age 53, is a founder of Redwood and served as President from 1994 through 2008. Mr. Hansen retired from his position as President of Redwood at the end of 2008. He remains a director of Redwood. From 1990 through 1997, Mr. Hansen was a Principal with GB Capital. GB Capital assisted banks, insurance companies, and savings and loans in managing portfolios of securitized and unsecuritized mortgage loans, in arranging collateralized borrowings, in hedging balance sheet risks, and with other types of capital markets transactions. Mr. Hansen holds a B.A. in Economics from Harvard College and an M.B.A. from Harvard Business School.

The Board of Directors concluded that Mr. Hansen should be nominated to continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

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Martin S. Hughes, age 53, has served as President since January 2009 and Chief Executive Officer since May 2010. Mr. Hughes served as Co-Chief Operating Officer from November 2007 to May 2010, Chief Financial Officer from 2006 to April 2010, Treasurer from 2006 to 2007 and Vice President from 2005 to 2007. Mr. Hughes has over 18 years of senior management experience in the financial services industry. From 2000 to 2004, Mr. Hughes was the President and Chief Financial Officer for Paymap, Inc. In addition, Mr. Hughes served as a Vice President and Chief Financial Officer for Redwood from 1998 to 1999. Mr. Hughes also served as Chief Financial Officer for North American Mortgage Company from 1992 to 1998. Prior to 1992, Mr. Hughes was employed for eight years at an investment banking firm and for four years at Deloitte & Touche. Mr. Hughes has a BS in accounting from Villanova University.

The Board of Directors concluded that Mr. Hughes should be nominated to continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

Greg H. Kubicek, age 54, has been a director of Redwood since 2002. Mr. Kubicek is President of The Holt Group, Inc., a real estate company that develops, owns, and manages commercial real estate properties and is a residential homebuilder. Mr. Kubicek currently serves as a director for Cadet Manufacturing Co. He has also served as Chairman of the Board of Cascade Corporation, an international manufacturing corporation. Mr. Kubicek holds a B.A. in Economics from Harvard College.

The Board of Directors concluded that Mr. Kubicek should be nominated to continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

Charles J. Toeniskoetter, age 66, has been a director of Redwood since 1994. Mr. Toeniskoetter is Chairman of Toeniskoetter & Breeding, Inc. Development, a company that has developed, owns, and manages over $250 million of commercial and industrial real estate properties, and Chairman & CEO of Toeniskoetter Construction, Inc. Mr. Toeniskoetter serves on the Board of Directors of SJW Corp. (NYSE: SJW) and Heritage Commerce Corp., (NASDAQ: HTBK) as well as a number of other community organizations. Mr. Toeniskoetter holds a B.S. in Mechanical Engineering from the University of Notre Dame and an M.B.A. from the Stanford University Graduate School of Business.

The Board of Directors concluded that Mr. Toeniskoetter should be nominated to continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

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Current Directors — Terms Expiring After 2011

George E. Bull, III, age 61, is a founder of Redwood and Chairman of the Board. Mr. Bull has served as Chairman of the Board of Redwood since 1994 and served as Chief Executive Officer from 1994 to May 2010. From 1983 through 1997, Mr. Bull was the President of GB Capital. GB Capital assisted banks, insurance companies, and savings and loans in managing portfolios of securitized and unsecuritized mortgage loans, in arranging collateralized borrowings, in hedging balance sheet risks, and with other types of capital markets transactions. Mr. Bull holds a B.A. in Economics from the University of California at Davis. Mr. Bull is a Class III director whose term expires in 2012.

The Board of Directors concluded that Mr. Bull should continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

Richard D. Baum, age 64, has been a director of Redwood since 2001. Mr. Baum is currently the President and Managing Partner of Atwater Retirement Village LLC (a private company). From 2008 to mid-2009, Mr. Baum served as Executive Director of the California Commission for Economic Development. He also served as the Chief Deputy Insurance Commissioner for the State of California from 1991 to 1994 and 2003 to 2007. Mr. Baum served from 1996 to 2003 as the President of Care West Insurance Company, a worker’s compensation insurance company, and prior to 1991 as Senior Vice President of Amfac, Inc., a diversified operating company engaged in various businesses, including real estate development and property management. Mr. Baum holds a B.A. from Stanford University, an M.A. from the State University of New York, and a J.D. from George Washington University, National Law Center, Washington, D.C. Mr. Baum is a Class I director whose term expires in 2013.

The Board of Directors concluded that Mr. Baum should continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

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Thomas C. Brown, age 62, has been a director of Redwood since 1998. Mr. Brown is currently CEO and Principal shareholder of Urban Bay Properties, Inc. and Chief Operating Officer for McGuire Real Estate. Mr. Brown has previously held CEO or senior officer positions with PMI Mortgage Insurance, Centerbank, and Merrill Lynch and Co., Inc. Mr. Brown’s experience encompasses over 25 years in mortgage finance, real estate, banking, and investment banking. Mr. Brown holds a B.S. from Boston University and an M.B.A. from the University of Buffalo. Mr. Brown is a Class III director whose term expires in 2012.

The Board of Directors concluded that Mr. Brown should continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

Mariann Byerwalter, age 50, has been a director of Redwood since 1998. Ms. Byerwalter is currently Chairman of JDN Corporate Advisory LLC (a privately held advisory services firm). Ms. Byerwalter served as the Chief Financial Officer and Vice President for Business Affairs of Stanford University from 1996 to 2001. She was a partner and co-founder of America First Financial Corporation from 1987 to 1996, and she served as Chief Operating Officer, Chief Financial Officer, and a director of America First Eureka Holdings, a publicly traded institution and the holding company for Eureka Bank, from 1993 to 1996. She serves on the Board of Directors of Pacific Life Corp., SRI International, Burlington Capital Corporation, WageWorks, Inc., the Lucile Packard Children’s Hospital, and the Stanford Hospital and Clinics. She also currently serves on the Board of Trustees of Stanford University and as a Trustee of certain investment companies affiliated with Charles Schwab Corporation. Ms. Byerwalter holds a B.A. from Stanford University and an M.B.A. from Harvard Business School. Ms. Byerwalter is a Class I director whose term expires in 2013.

The Board of Directors concluded that Ms. Byerwalter should continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

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Jeffrey T. Pero, age 64, has been a director of Redwood since 2009. Mr. Pero retired in October 2009, after serving as a partner for more than 23 years, from the international law firm of Latham & Watkins LLP. At Latham & Watkins LLP, Mr. Pero’s practice focused on advising clients regarding corporate governance matters, debt and equity financings, mergers and acquisitions, and compliance with U.S. securities laws; Mr. Pero also served in various firm management positions. Mr. Pero currently serves as a director of BRE Properties, Inc., a real estate investment trust. Mr. Pero holds a B.A. from the University of Notre Dame and a J.D. from New York University School of Law. Mr. Pero is a Class I director, whose term expires in 2013.

The Board of Directors concluded that Mr. Pero should continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

Georganne C. Proctor, age 54, has been a director of Redwood since 2006. Ms. Proctor is the former Chief Financial Officer of TIAA-CREF, and served in that position from 2006 to 2010. From 2003 to 2005, Ms. Proctor was Executive Vice President of Golden West Financial Corporation, a thrift institution. From 1994 to 1997, Ms. Proctor was Vice President of Bechtel Group, a global engineering firm, and also served as its Senior Vice President and Chief Financial Officer from 1997 to 2002 and as a director from 1999 to 2002. From 1991 to 1994, Ms. Proctor served as finance director of certain divisions of The Walt Disney Company, a diversified worldwide entertainment company. Ms. Proctor also served on the Board of Directors of Kaiser Aluminum Corporation from 2006 to 2009. Ms. Proctor holds a B.S. in Business Management from the University of South Dakota and an M.B.A. from California State University at Hayward. Ms. Proctor is a Class III director whose term expires in 2012.

The Board of Directors concluded that Ms. Proctor should continue to serve as a director on account of, among other things, the following experience, qualifications, attributes, and skills:

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MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

Our Board of Directors currently consists of ten directors. Our Board of Directors has established three standing committees of the Board: the Audit Committee, the Compensation Committee, and the Governance and Nominating Committee. The membership of each committee and the function of each committee are described below. Each of the committees has adopted a charter and the charters of all committees are available on our website and in print at the written request of any stockholder addressed to Redwood’s Secretary at our principal executive office.

Our Board of Directors held a total of six meetings during 2010. The independent directors of Redwood met in executive session at each of the four regularly scheduled meetings, for a total of four times during 2010. The Presiding Director, who was also the Chair of the Governance and Nominating Committee during 2010, presided at executive sessions of the independent directors. No director attended fewer than 75% of the meetings of the Board of Directors and the committees on which he or she served, and as noted above, nine of our then ten directors attended last year’s Annual Meeting of Stockholders in person.

Audit Committee

The Audit Committee provides oversight regarding accounting, auditing, risk management, and financial reporting practices of Redwood. The Audit Committee consists solely of non-management directors, all of whom our Board of Directors has determined are independent within the meaning of the listing standards of the NYSE and the rules of the SEC. Our Board of Directors has determined that all members of the Audit Committee are “financially literate” within the meaning of the applicable regulations and standards and has designated Ms. Proctor as an “audit committee financial expert” within the meaning of the applicable regulations and standards. The Audit Committee met four times in 2010 in order to carry out its responsibilities, as discussed below under “Audit Committee Matters — Audit Committee Report.”

Compensation Committee

The Compensation Committee reviews and approves Redwood’s compensation philosophy, reviews the competitiveness of Redwood’s compensation practices, as well as risks that may arise from those practices, determines and approves the annual base salaries and incentive awards paid to our executive officers, approves the terms and conditions of proposed incentive plans applicable to our executive officers and other key management employees, approves and administers Redwood’s employee benefit plans, and reviews and approves hiring and severance arrangements for our executive officers. The Compensation Committee consists solely of non-management directors, all of whom our Board of Directors has determined are independent within the meaning of the listing standards of the NYSE, are “non-employee directors” within the meaning of the rules of the SEC, and are “outside directors” within the meaning of the rules of the Internal Revenue Service (the IRS). The Compensation Committee met eight times in 2010 in order to carry out its responsibilities as more fully discussed below under “Executive Compensation — Compensation Discussion and Analysis.”

Governance and Nominating Committee

The Governance and Nominating Committee reviews and considers corporate governance guidelines and principles, evaluates potential director candidates and recommends qualified candidates to the full Board, reviews the management succession plan and executive resources, oversees the evaluation of the Board of Directors, and, in collaboration with the Compensation Committee, evaluates management. The Governance and Nominating Committee consists solely of non-management directors, all of whom our Board of Directors has determined are independent within the meaning of the listing standards of the NYSE. The Governance and Nominating Committee met four times in 2010 in order to carry out its responsibilities.

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Committee Members

The current members of each of the three standing committees are listed below, with the Chair appearing first.

Audit		Compensation		Governance and Nominating
Greg H. Kubicek		Georganne C. Proctor		Richard D. Baum
Thomas C. Brown		Richard D. Baum		Greg H. Kubicek
Mariann Byerwalter		Thomas C. Brown		Jeffrey T. Pero
Georganne C. Proctor		Mariann Byerwalter		Charles J. Toeniskoetter
Charles J. Toeniskoetter		Jeffrey T. Pero

DIRECTOR COMPENSATION

Information on our non-employee director compensation to be paid in 2011 is set forth below.

Annual Retainer		$	70,000*
Committee Meeting Fee (in person attendance)		$	2,000
Committee Meeting Fee (telephonic attendance)		$	1,000

Non-employee directors are also reimbursed for reasonable out-of-pocket expenses incurred in attending Board and committee meetings, as well as for their and, in some cases, their guest’s attendance at other Redwood-related meetings or events. Non-employee directors may also be reimbursed for out-of-pocket expenses incurred in attending conferences or educational seminars that relate to their Board service.

Non-employee directors are also granted deferred stock units each year at the time of the annual meeting of stockholders. The number of deferred stock units granted is determined by dividing $75,000 by the closing price of Redwood’s common stock on the NYSE on the day immediately prior to grant. Non-employee directors may also be granted equity awards upon their initial election to the Board. Deferred stock units are credited under our Executive Deferred Compensation Plan. These deferred stock units are fully vested upon grant, although they are subject to a mandatory holding period due to the fact that they are not distributed from our Executive Deferred Compensation Plan in shares of common stock until a date elected by the director (with the earliest distribution date being four years from the date of grant). Dividend equivalent rights on these deferred stock units are paid in cash to directors on each dividend distribution date.

Each director may elect to defer receipt of cash compensation or dividend equivalent rights on deferred stock units in our Executive Deferred Compensation Plan. Cash balances in the Executive Deferred Compensation Plan are unsecured liabilities of Redwood and are utilized by Redwood as available capital to fund investments and operations. Based on each director’s election, deferred compensation can either be deferred into a cash account and earn a rate of return that is equivalent to 120% of the applicable long-term federal rate published by the IRS compounded monthly or be deferred into deferred stock units which will, among other things, entitle them to receive dividend equivalent rights.

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The following table provides information on non-employee director compensation for 2010, which compensation was paid in accordance with the 2010 director compensation policy disclosed in Redwood’s 2010 annual proxy statement. Directors who are employed by Redwood do not receive any compensation for their Board activities.

Non-Employee Director Compensation — 2010⁽¹⁾

Name		Fees Earned or Paid in Cash ($)(2)				Stock Awards ($)(3)				All Other Compensation ($)(4)				Total ($)
Richard D. Baum		$	102,000			$	60,000			$	2,164			$	164,164
Thomas C. Brown		$	78,000			$	60,000			$	2,164			$	140,164
George E. Bull, III(5)		$	96,712			$	57,534				—			$	154,246
Mariann Byerwalter		$	78,728			$	60,000			$	2,164			$	140,892
Douglas B. Hansen		$	60,000			$	60,000				—			$	120,000
Greg H. Kubicek		$	96,000			$	60,000				—			$	156,000
Jeffrey T. Pero		$	79,000			$	60,000				—			$	139,000
Georganne C. Proctor		$	84,272			$	60,000				—			$	144,272
Charles J. Toeniskoetter		$	74,000			$	60,000			$	1,114			$	135,114
David L. Tyler(6)		$	33,093				—			$	1,114			$	34,207

The following table provides information on stock unit distributions to non-employee directors from our Executive Deferred Compensation Plan in 2010. With the exception of Ms. Byerwalter, there were no distributions to non-employee directors from the Plan. Stock units distributed represent compensation previously awarded in prior years and were reported as director compensation in those prior years.

Name		Stock Units Distributed				Aggregate Value of Stock Units Distributed ($)
Mariann Byerwalter(1)			1,348			$	22,480

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EXECUTIVE OFFICERS

Executive officers and their positions with Redwood as of December 31, 2010 are listed in the table below. Of these executive officers, for purposes of this Proxy Statement, the Named Executive Officers (NEOs) include Mr. Hughes, Mr. Nicholas, Ms. Merdian, Mr. Isbrandtsen, and Mr. Matera.

Name		Position with Redwood as of December 31, 2010		Age
Martin S. Hughes		President & Chief Executive Officer		53
Brett D. Nicholas		Executive Vice President, Chief Operating Officer &   Chief Investment Officer		42
Diane L. Merdian		Chief Financial Officer		51
Harold F. Zagunis		Chief Risk Officer		53
Scott M. Chisholm		Managing Director		45
John H. Isbrandtsen		Managing Director		49
Fred J. Matera		Managing Director		47
Andrew P. Stone		General Counsel		39

Executive officers of Redwood serve at the discretion of our Board of Directors. Biographical information regarding Mr. Hughes is provided in the preceding pages. Biographical information regarding Mr. Nicholas, Ms. Merdian, Mr. Zagunis, Mr. Chisholm, Mr. Isbrandtsen, Mr. Matera, and Mr. Stone is set forth below.

Brett D. Nicholas, age 42, has served as Executive Vice President and Chief Operating Officer since May 18, 2010 and Chief Investment Officer since November 2007. Mr. Nicholas served as Co-Chief Operating Officer from November 2007 to May 18, 2010 and Vice President of Redwood since 1996. Mr. Nicholas is responsible for managing Redwood’s day-to-day operations and investment activity. Prior to joining Redwood, he was Vice President of Secondary Marketing at California Federal Bank, FSB and Vice President of Secondary Marketing at Union Security Mortgage. Mr. Nicholas holds a B.A. in economics from the University of Colorado at Boulder and is a graduate of the Stanford University Executive Program.

Diane L. Merdian, age 51, has served as Chief Financial Officer and Managing Director of Redwood Trust, Inc. since April 2010. Ms. Merdian was a Class III Director of Redwood from August 2008 to November 2009. Ms. Merdian has 24 years of experience as an equity research analyst focused on the banking sector. From 2003 to April 2008, Ms. Merdian was a bank strategist and senior bank research analyst of Keefe, Bruyette & Woods, where she also served as a Managing Director and head of the large-cap bank group. Between 1984 and 2002, Ms. Merdian also held equity analyst positions at Morgan Stanley, Montgomery Securities, Wellington Management, Smith Barney, and Salomon Brothers. Ms. Merdian was an economic research associate for the Federal Reserve Bank of Kansas City from 1981 to 1983. Ms. Merdian holds a B.A. in Economics, with highest distinction, from the University of Kansas. Ms. Merdian also attended the Graduate School of Business at the University of Chicago as a Leon C. Marshal Scholar and New York University.

Harold F. Zagunis, age 53, has served as Chief Risk Officer since 2009, Managing Director since 2008, Vice President from 1995 to 2008, and additionally as Chief Financial Officer, Controller, Treasurer, and Secretary at different times between 1999 to 2006. Prior to joining Redwood, from 1986 to 1995, Mr. Zagunis was Vice President of Finance for Landmark Land Company, Inc. (a publicly traded company owning savings and loan and real estate development interests). Mr. Zagunis holds B.A. degrees in mathematics and economics from Willamette University and an M.B.A. from Stanford University Graduate School of Business.

Scott M. Chisholm, age 45, has served as Managing Director since 2009. Prior to joining Redwood, Mr. Chisholm was a Managing Director and managed the New York office of Prudential Mortgage Capital Company from 2001 until September 2009. Prior to 2001, Mr. Chisholm held various positions in the real estate finance departments at Deutsche Bank, Lehman Brothers and JPMorgan Chase. Mr. Chisholm holds a B.A. in history from Trinity College and an M.S. in real estate from Columbia University.

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John H. Isbrandtsen, age 49, is Managing Director, and has been employed by Redwood since 1999. Prior to joining Redwood, Mr. Isbrandtsen served as Residential Securitization Manager at Bank of America, Senior Vice President at Walsh Acquisition Corp., Vice President at Gruntal Financial Corp., Assistant Treasurer at Carteret Savings Bank, and an Analyst at City Federal Savings Bank. Mr. Isbrandtsen has a B.S. degree in finance and economics from Babson College.

Fred J. Matera, age 47, is Managing Director and has been employed by Redwood since 2008. Between 2001 and when he joined Redwood, Mr. Matera was a Managing Director and Co-Head of Structured Credit at RBS Greenwich Capital. Between 1989 and 2001, Mr. Matera had positions as a mortgage trader and has held a number of trading positions in financial services firms, including Goldman Sachs, DLJ, and First Boston and was an analyst at the Federal Reserve Bank of New York. Mr. Matera has a B.A. in economics from Tufts University, and an M.B.A. in finance from The Wharton School of the University of Pennsylvania.

Andrew P. Stone, age 39, has served as General Counsel and Managing Director since December 2008. Prior to joining Redwood, he served as Deputy General Counsel of Thomas Weisel Partners Group, Inc. from 2006 to 2008 and between 1996 and 2006 practiced corporate and securities law at Sullivan & Cromwell LLP and Brobeck, Phleger & Harrison LLP. Mr. Stone holds a B.A. in mathematics and history from Kenyon College and a J.D. from New York University School of Law.

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SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information, as of March 15, 2011, on the beneficial ownership of our common stock by our directors, executive officers, and by all of our directors and executive officers as a group. As indicated in the notes, the table includes common stock equivalents held by these individuals through Redwood-sponsored benefits programs. Except as otherwise indicated and for such power that may be shared with a spouse, each person has sole investment and voting power with respect to the shares shown to be beneficially owned. Beneficial ownership is determined in accordance with the rules of the SEC.

Executive Officers		Number of Shares of Common Stock Beneficially Owned(1)				Percent of Class(2)
Martin S. Hughes(3)			261,930				*
Brett D. Nicholas(4)			302,989				*
Diane L. Merdian(5)			16,148				*
Harold F. Zagunis(6)			158,478				*
Scott M. Chisholm(7)			12,041				*
John H. Isbrandtsen(8)			71,089				*
Fred J. Matera(9)			34,782				*
Andrew P. Stone(10)			14,560				*

Non-Management Directors
Richard D. Baum(11)			22,990				*
Thomas C. Brown(12)			17,387				*
George E. Bull, III(13)			1,143,792				1.4	%
Mariann Byerwalter(14)			17,566				*
Douglas B. Hansen(15)			468,787				*
Greg H. Kubicek(16)			110,177				*
Jeffrey T. Pero(17)			15,043				*
Georganne C. Proctor(18)			25,540				*
Charles J. Toeniskoetter(19)			38,159				*
All directors and executive officers as a group (17 persons)(20)			2,731,459				3.42	%

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth information as of the dates noted below, with respect to shares of our common stock owned by each person or entity known by us to be the beneficial owner of more than 5% of our common stock.

Name of Beneficial Owner		Number of Shares of Common Stock Beneficially Owned				Percent of Class(1)
BlackRock, Inc.(2)			5,118,414				6.55	%
Janus Capital Management LLC(3)			5,713,956				7.31	%
Wallace R. Weitz & Company(4)			6,232,674				8.27	%

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Compensation Committee

The Compensation Committee (the Committee) of Redwood’s Board of Directors consists exclusively of independent directors as defined by the New York Stock Exchange (NYSE). The Committee acts on behalf of Redwood’s Board of Directors in administering Redwood’s executive compensation plans and programs.

The Committee currently consists of Georganne C. Proctor (Chair), Richard D. Baum, Thomas C. Brown, Marianne Byerwalter, and Jeffrey T. Pero. The composition of the Committee changed on May 19, 2010 as follows: Mr. David Tyler ceased to serve on the Committee in connection with his retirement from service on the Redwood Board of Directors and Ms. Georganne C. Proctor was appointed to serve on the Committee and to serve as Chair of the Committee. The Committee met eight times in 2010 and has met two times to date in 2011.

The Committee is committed to providing disclosure within this Compensation Discussion and Analysis that gives insight into the process by which it arrives at determinations relating to executive compensation and the underlying rationale for those determinations. Among other things, this Compensation Discussion and Analysis describes:

Executive Summary

Redwood has adopted a performance-based compensation philosophy for its executive officers that seeks to provide incentives to achieve both short-term and long-term business objectives, align the interests of executive officers with the interests of Redwood’s long-term stockholders, and ensure that Redwood can hire and retain talented individuals in a competitive marketplace. Executive officers receive compensation through a combination of the following types of compensation: base salary; annual incentive bonus; long-term equity-based awards; and other non-cash benefits such as coverage for themselves and their families under Redwood’s medical, dental, and vision health insurance plans.

Executive officers of Redwood are designated by the Board of Directors and for 2010 included Redwood’s: President & Chief Executive Officer; Chief Operating Officer, Chief Investment Officer & Executive Vice President; Chief Financial Officer; Chief Risk Officer; General Counsel; and three other Managing Directors. In accordance with SEC regulations, this Compensation Discussion and Analysis is focused on the compensation of Redwood’s Named Executive Officers (NEOs) for 2010, although it also provides some general discussion and analysis of aspects of Redwood’s compensation programs, plans, and practices that apply to all of Redwood’s executive officers. Under SEC regulations, Redwood’s NEOs for 2010 are the following six executive officers: the former Chief Executive Officer (who retired from that position in May 2010); the President & Chief Executive Officer; the Chief Operating Officer, Chief Investment Officer & Executive Vice President; the Chief Financial Officer; and two other Managing Directors.

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Each year the Committee reviews Redwood’s compensation philosophy and its executive compensation plans and programs and makes compensation determinations and changes it believes are necessary or appropriate in light of its executive compensation objectives. Highlighted below are summaries of some of the key determinations and changes made by the Committee with respect to 2010 and/or 2011 and subsequent years. Each of these key items is discussed more fully within this Compensation Discussion and Analysis, as well as within the section of this Proxy Statement relating to stockholders’ advisory vote on executive compensation (pages 64 – 67).

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Overall Compensation Philosophy and Objectives

Redwood has adopted a performance-based compensation philosophy for its executive officers that seeks to provide incentives to achieve both short-term and long-term business objectives and ensure that Redwood can hire and retain talented individuals in a competitive marketplace. The Committee is generally responsible for evaluating and administering Redwood’s executive compensation programs, plans, and practices to ensure that they provide proper incentives and appropriately support corporate performance without creating risks that are likely to have a material adverse effect on Redwood.

Redwood’s executive compensation objectives are as follows:

Components of Compensation in 2010

In 2010, as in past years, cash compensation for Redwood’s NEOs included a base salary and an annual incentive bonus. The annual bonus was primarily determined based on a company performance bonus formula, with individual performance a secondary determinant. Redwood seeks to have an executive compensation structure that awards annual bonus compensation upon achievement of performance targets. It is generally intended that the annual compensation structure have compensation targets for each NEO that are similar to the median salary and target annual bonus compensation awarded by a peer group of companies consisting of companies with broadly similar size and complexity that are competitors for executive talent and capital. For 2010, this peer group was designated by the Committee during the first calendar quarter of the year after consultation with its independent compensation consultant, Frederic W. Cook & Co., Inc.

The target level for Redwood’s 2010 financial performance, which was used in determining 2010 annual company performance bonuses, was an 11% annual adjusted return on equity (Adjusted ROE). Adjusted ROE is a non-GAAP performance measure that is defined and described below under “2010 Performance-Based Compensation.” For annual Adjusted ROE performance above or below the target level, it is the intention that the compensation program results in total annual bonus compensation for NEOs that is above or below the median, as applicable, for the peer group. To a lesser degree, annual bonus compensation also varies as a function of individual performance.

With respect to long-term equity-based compensation, the Committee generally seeks to make regular annual awards to NEOs at levels that exceed the market median of Redwood’s peer group to supplement salary and annual bonuses, provide an incentive to create long-term stockholder value, encourage employment retention, and build executive ownership. In particular, for 2010 the value of the annual year-end long-term equity-based compensation granted to NEOs was determined after taking into account the Committee’s philosophy that:

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The peer group of companies most recently used by the Committee in 2010 for competitive benchmarking comparisons as well as other data used for benchmarking comparisons is described further below under “Compensation Benchmarking for 2010.”

Determination of Compensation for 2010

Each year the Committee makes determinations regarding the compensation of Redwood’s NEOs. For 2010, the NEOs consisted of the following individuals:

The process for determining NEO compensation is dynamic and compensation levels are evaluated throughout each year, with the Committee having the authority to re-examine and adjust any aspect of the compensation program or process it may determine to be necessary or appropriate to take into account changing circumstances throughout the year. As has been its practice for a number of years, for 2010 the Committee directly engaged and used the services of a nationally recognized independent compensation consultant, Frederic W. Cook & Co., Inc. (Cook & Co.), to assist it in determining the elements of compensation and to provide benchmarking analyses. Cook & Co. does no other work for Redwood or its management and the Committee has the sole authority to establish and terminate the relationship with Cook & Co.

On an annual basis, Cook & Co. reviews the compensation program for Redwood’s executive officers with the Committee and assesses the competitiveness of compensation levels and targets to evaluate whether the compensation program is aligned with Redwood’s compensation philosophy. Cook & Co. also provides the Committee with data regarding compensation practices among Redwood’s peer group and analyzes the compensation levels and targets of each executive officer. The analysis prepared by Cook & Co. includes tally sheets that show total cash compensation for each NEO (and year-to-year comparisons of total cash compensation), total equity ownership in Redwood by each NEO (and the value of those equity stakes at different prices per share), and total compensation in cash and equity-based grants for each NEO. Cook & Co.’s analysis assists the Committee in understanding the extent to which different components of each NEO’s compensation are above or below the median for Redwood’s peer group or other supplemental benchmarking data, and in understanding the year-to-year changes in awarded, realized, accumulated, and potential NEO compensation.

In addition, Cook & Co. assists the Committee in determining the amounts, form, and structure of the compensation programs adopted by Redwood. Based on the Committee’s judgment, and reflecting input from Cook & Co., the compensation package for each NEO consists of a fixed base salary and variable cash and equity-based incentive bonuses and awards, with a significant portion of compensation allocated to the variable and equity-based components to appropriately align total executive compensation with Redwood’s company performance and each NEO’s individual performance. Each of these compensation elements is reviewed by the Committee annually with respect to each NEO.

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As part of its process for determining 2010 NEO compensation, the Committee considered the following recommendations:

As noted below under “Compensation Benchmarking for 2010,” the Committee also noted and took into account that Redwood’s Chief Executive Officer believed that certain of the benchmarking data that had been provided to the Committee by Cook & Co. should be supplemented in order to provide for more relevant comparisons for the roles of certain executive officers and reviewed other data derived from the public filings of the peer group companies that the Chief Executive Officer believed was relevant to the compensation determinations the Committee would make regarding these executive officers.

In addition, on an annual basis, the Committee is provided with a self-assessment from each of the NEOs that addresses individual and collective performance over the prior year. The Committee reviewed these self-evaluations and took them into consideration when determining the level of compensation to be paid to each NEO for 2010.

Compensation Benchmarking for 2010

As in prior years, in 2010 the Committee asked Cook & Co. to conduct a market pay analysis of peer companies. The Committee considers the use of a peer group important for competitive positioning in attracting and retaining executive talent. In considering the market data provided by Cook & Co., the Committee recognized that the peer group did not include generally higher-paying externally-managed REITs, private equity firms, and hedge funds with which Redwood must compete for executive talent. Cook & Co. did not include those organizations in the peer group because they have different business economics and pay models than Redwood.

Following the completion of the competitive pay analysis prepared by Cook & Co., the Committee concluded that:

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The peer group of companies used by the Committee in 2010 was unchanged from that used by the Committee in 2009 and consisted of: Allied Capital Corporation, American Capital Strategies, Ltd., Annaly Capital Management, Inc., Anworth Mortgage Asset Corporation, CapitalSource Inc., Capital Trust Inc., Capstead Mortgage Corporation, iStar Financial Inc., MFA Financial, Inc., Northstar Realty Finance Corporation, Ocwen Financial Corporation, PHH Corporation, and RAIT Financial Trust. The Committee reviews the list of peer companies on an annual basis to confirm that they continue to meet the Committee’s criteria for inclusion. The Committee also takes into consideration changes in real estate and capital markets and changes in competitors. Accordingly, the companies included in the peer group may change from year to year as a result of this review.

In addition to peer group data, the competitive pay analysis prepared by Cook & Co. used supplemental data relating to certain executive officer positions that was obtained by Redwood from McLagan, a third party compensation consultant that is nationally recognized as qualified to provide such data. This supplemental data was provided to Cook & Co. and used in its benchmarking analysis due to the fact that not all of the peer group companies publicly disclose executive compensation information for officers with responsibilities comparable to some of Redwood’s executive officers. Redwood also uses data and consulting services from McLagan and its affiliates, including for determining compensation for employees who are not executive officers.

In Cook & Co.’s comparative review, which is based on prior year compensation (as that was the current publicly disclosed information then available), executive officer positions were matched against benchmarks for functionally similar positions as set forth below.

In addition, in reaching determinations regarding different components of 2010 compensation for executive officers, the Committee:

2010 Base Salaries

Redwood seeks to establish base salaries of NEOs around the median of amounts determined by reference to the peer group or other supplemental benchmarking data. The Committee reviews base salaries as one part of overall compensation for the NEOs annually. The Committee may make adjustments to base salary in connection with this annual review or at other times based on the executive’s experience and responsibilities and after consideration of other components of compensation.

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In December 2009, the Committee determined that the 2010 base salaries for each of Mr. Bull, Mr. Hughes, and Mr. Nicholas would remain unchanged from their 2009 base salary levels. However, subsequent to that determination, and in connection with the March 17, 2010 announcement of Mr. Bull’s retirement as Chief Executive Officer, the Committee determined that Mr. Hughes’ base salary for 2010 would be increased to $700,000 beginning on May 19, 2010, the date he was promoted to the role of Chief Executive Officer. Ms. Merdian’s 2010 base salary of $400,000 was determined by the Committee in December 2009 in connection with her being hired to serve as the Company’s Chief Financial Officer commencing in April 2010. Mr. Isbrandtsen’s 2010 base salary of $400,000 was determined prior to his being designated as an executive officer on March 31, 2010, and was subsequently ratified by the Committee. Similarly, Mr. Matera’s 2010 base salary of $400,000 was determined prior to his being designated as an executive officer on March 31, 2010, and was subsequently ratified by the Committee.

As a result, for 2010:

2010 Performance-Based Compensation

Redwood’s compensation program is designed to reward NEOs based on Redwood’s financial performance and each NEO’s individual performance, including his or her contribution to Redwood’s performance. As an integral part of this program, each NEO can earn an annual bonus based on the Committee’s review of the satisfaction of a specific pre-established target level of Redwood financial performance and specific individual performance measures.

In order to align the interests of Redwood’s NEOs with the interests of its long-term stockholders, the Committee determined during the first quarter of 2010, after consultation with Cook & Co., that 2010 target annual bonuses for NEOs would continued to be weighted:

This weighting has been used so that most of an NEO’s target annual bonus will depend directly on the achievement of the target level of company financial performance, while also providing incentives for achievement of individual goals that the Committee believes are in the interests of Redwood and its stockholders, but which may be difficult to quantitatively link directly to company financial performance. The Committee also determined that the individual performance component of the bonus could be earned up to 100% of the individual performance component of target annual bonus, subject to adjustment when circumstances warrant at the discretion of the Committee.

Also during the first quarter of 2010, after consultation with Cook & Co., the Committee determined to maintain the same company performance bonus formula as was in place for 2009 (but without incorporating into the 2010 formula the two one-time adjustments made to the 2009 company performance bonus formula). As noted above, the company performance bonus formula is based on Adjusted ROE, which is defined as

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income determined in accordance with GAAP divided by average core equity, subject to adjustment when circumstances warrant at the discretion of the Committee. Average core equity is defined as average GAAP equity excluding unrealized mark-to-market adjustments as reflected in accumulated other comprehensive income (loss). The Committee believes that Adjusted ROE generally provides an appropriate measurement of Redwood’s financial performance because, as a company whose primary source of earnings is income from real estate-related debt investments, the use of average core equity reflects the amount of capital Redwood has to invest (as it excludes the effect of unrealized market valuation adjustments).

Specifically, the company performance bonus formula the Committee continued to use in 2010 for NEOs was as follows:

The target company performance threshold of 11% Adjusted ROE that the Committee has used in previous years and which it continued to use in 2010 was selected because it has historically been determined as an attractive level of financial performance. Similarly, continuing to maintain a formula that resulted in a pro-rated portion of the company performance bonus being earned for Adjusted ROE between 7% and 11% was determined to be appropriate to reward good financial performance below the target level; and continuing to maintain a formula that resulted in a company performance bonus in excess of target for Adjusted ROE above 11% was determined as appropriate to reward financial performance that exceeded the target threshold.

In addition, during the first quarter of 2010, the Committee determined, after discussion with Cook & Co., that the target bonus percentages for 2010 for Mr. Bull, Mr. Hughes, and Mr. Nicholas (which are percentages of base salary) would remain the same as the percentages established for 2009 and that Ms. Merdian’s target bonus percentage for 2010 would be 75% of her base salary. Subsequent to that determination, and in connection with Mr. Hughes’ promotion to Chief Executive Officer, the Committee determined, after discussion with Cook & Co., that Mr. Hughes’ target bonus percentage for 2010 would be increased to 165% of base salary for the portion of 2010 during which he served as Chief Executive Officer. Mr. Isbrandtsen’s target bonus percentage for 2010 had been determined prior to his being designated as an executive officer on March 31, 2010, and was subsequently ratified by the Committee. Similarly, Mr. Matera’s target bonus percentage for 2010 had been determined prior to his being designated as an executive officer on March 31, 2010, and was subsequently ratified by the Committee.

The Committee also determined during the first quarter of 2010 that individual performance in 2010 for each NEO would be reviewed in the context of, among other things, the specific pre-determined goals and factors discussed below under “Performance-Based Compensation Awarded for 2010 — Individual Performance Component of Annual Bonuses Awarded for 2010.” As in past years, during 2010 these individual factors and goals were subject to adjustment if circumstances warranted, at the discretion of the Committee.

The Committee also established that the maximum annual bonus (i.e., the maximum sum of the two components of the annual bonus) in 2010 would be $5 million for each of Mr. Bull, Mr. Hughes, and

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Mr. Nicholas and $2 million for each of the other NEOs. These maximum amounts were determined after consultation with Cook & Co., and were considered appropriate by the Committee as maximum total annual bonuses for each of these NEOs based on their position, responsibilities, level of performance needed to reach the maximum, and peer companies’ annual bonus structures.

The table below sets forth the 2010 target annual bonuses that were established for each NEO assuming achievement of the criteria necessary to achieve 100% of the target annual bonus, together with the company performance and individual performance components of these target annual bonus amounts.

NEO		2010 Base Salary Paid				2010 Target Annual Bonus (%)				Company Performance Component of 2010 Target Annual Bonus ($)				Individual Performance Component of 2010 Target Annual Bonus ($)				Total 2010 Target Annual Bonus ($)
Mr. Bull		$	291,821	(1)			175	%		$	383,015	(1)		$	127,672	(1)		$	510,687	(1)
Mr. Hughes		$	624,680	(2)			160	%(2)		$	751,731	(2)		$	250,577	(2)		$	1,002,308	(2)
Mr. Nicholas		$	500,000				150	%		$	562,500			$	187,500			$	750,000
Ms. Merdian		$	297,179	(3)			75	%		$	167,163	(3)		$	55,721	(3)		$	222,884	(3)
Mr. Isbrandtsen		$	400,000				100	%		$	300,000			$	100,000			$	400,000
Mr. Matera		$	400,000				100	%		$	300,000			$	100,000			$	400,000

As in past years, the Committee also determined at the beginning of 2010, after consultation with Cook & Co., that if any NEO earned a 2010 annual bonus in excess of 300% of his or her 2010 base salary, the excess amount would be paid in deferred stock unit equity awards granted under Redwood’s Incentive Plan, the receipt of which would be mandatorily deferred under Redwood’s Executive Deferred Compensation Plan. The deferred stock unit equity awards would vest at the award date, receive cash dividend equivalent rights, and would be distributed in shares of Redwood common stock upon the earlier of (i) three years after the date of grant and (ii) termination of employment (unless the executive voluntarily deferred distribution for a longer period of time under the Executive Deferred Compensation Plan).

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Performance-Based Compensation Awarded for 2010

Annual performance-based compensation awarded to NEOs for 2010 (i.e., 2010 annual bonuses) consisted of both a company performance component as well as an individual performance component. A further discussion of the Committee’s process for determining each of these components is set forth below.

Company Performance Component of Annual Bonuses Awarded for 2010.  The company performance components of annual bonuses for NEOs for 2010 were determined by the Committee in the context of Redwood’s financial performance during the year. During 2010, Redwood reported annual net income of $110 million, resulting in a return-on-equity of 10.92% (based on 2010 financial results as reported under GAAP), and, over the course of 2010, Redwood’s book value per share increased by $1.12 per share (or 9%) while Redwood continued to pay a dividend of $0.25 per share per quarter.

Under the company performance bonus formula that was established by the Committee at the beginning of 2010, which is described above under “2010 Performance-Based Compensation,” Adjusted ROE for 2010 was 11.56%. Accordingly, the company performance component of annual bonuses awarded to NEOs for 2010 was determined by applying that Adjusted ROE to the previously established bonus formula, with the result that each NEO was awarded a company performance component of annual bonus that was equal to 124.99% of his or her target for the company performance component. The resulting 2010 company performance component of annual bonus for each NEO is set forth in the table below (which amounts were paid in cash on March 3, 2011), together with the target amount of this component of annual bonus and the percentage of that target amount that was awarded.

NEO		Company Performance Component of 2010 Target Annual Bonus ($)				% of Company Performance Component Awarded				2010 Company Performance Component of Annual Bonus Awarded ($)
Mr. Bull		$	383,015	(1)			124.99	%		$	478,731	(1)
Mr. Hughes		$	751,731	(2)			124.99	%		$	939,588	(2)
Mr. Nicholas		$	562,500				124.99	%		$	703,069
Ms. Merdian		$	167,163	(3)			124.99	%		$	208,938	(3)
Mr. Isbrandtsen		$	300,000				124.99	%		$	374,970
Mr. Matera		$	300,000				124.99	%		$	374,970

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Individual Performance Component of Annual Bonuses Awarded for 2010.  For 2010, the individual performance components of annual bonuses were determined after a review of the individual achievements of each NEO and his or her individual contribution to the collective achievements of the senior management team. The Committee’s review of individual performance included a review of each NEO’s self-assessment, the joint assessment by Mr. Hughes and Mr. Nicholas of the other NEOs (all of whom report directly to them), and input from Cook & Co. Among other factors, the Committee considered each of the company-wide goals noted below that the Committee had previously determined would be reviewed in assessing individual performance for 2010. With respect to each of these goals, the Committee noted various factors in evaluating the level of attainment of the goal and each NEO’s contribution to achieving the goal, including the principal factors described below and the related level of attainment (presented in italics after each listed factor). In considering these goals and factors, the Committee did not assign specific weightings to each factor and goal, but instead considered them together as part of a comprehensive review.

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Based on the above-described review of each NEO’s individual achievements and their contribution to the collective achievements of the executive team, the Committee determined the individual performance component of annual bonuses for each NEO for 2010, each of which is set forth in the table below, together with the target amount of such component and the percentage of that target amount that was awarded and paid in cash in March 2011.

NEO		Individual Performance Component of 2010 Target Annual Bonus ($)				% of Individual Performance Component Awarded				2010 Individual Performance Component of Annual Bonus Awarded ($)
Mr. Bull		$	127,672	(1)			90	%		$	114,905	(1)
Mr. Hughes		$	250,577	(2)			90	%		$	225,519	(2)
Mr. Nicholas		$	187,500				90	%		$	168,750
Ms. Merdian		$	55,721	(3)			100	%		$	55,721	(3)
Mr. Isbrandtsen		$	100,000				90	%		$	90,000
Mr. Matera		$	100,000				90	%		$	90,000

2010 Long-Term Equity-Based Compensation Awards

As discussed above, equity ownership in Redwood provides an important linkage between the interests of stockholders and executives by rewarding long-term stockholder value creation. To meet this objective, officers, directors, key employees, and other persons expected to contribute to the management, growth, and profitability of Redwood are eligible to receive long-term equity-based compensation awards. The Committee, in consultation with Cook & Co., determines guidelines and procedures for the issuance of those awards to NEOs. Guidelines are based upon a number of factors, including the NEO’s total compensation level, individual and Redwood financial performance, and comparison to executives in functionally similar positions at peer companies and based on other supplemental benchmarking data. The Committee also takes into consideration past awards and outstanding awards.

The Committee has typically made long-term equity-based awards to NEOs on the date of its regularly scheduled committee meeting in the fourth quarter and typically makes long-term equity-based awards to other executives and employees at the same time it does so for NEOs. However, with respect to 2007, the Committee determined long-term equity-based awards for the NEOs in January 2008 rather than the fourth quarter of 2007 in order to take into account its analysis of the market turmoil that developed in late 2007 and to take into account the transitioning of certain executive roles at that time. In addition, with respect to 2007, certain awards to NEOs were made in the form of deferred balances in Redwood’s Executive Deferred Compensation Plan pending conversion into deferred stock units following approval of additional Incentive Plan capacity by Redwood’s stockholders in May 2008.

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For 2008, 2009, and 2010, the Committee returned to its normal practice and made long-term equity-based awards to the NEOs (and to other executives and employees) in the fourth quarter at the regularly scheduled meeting of the Committee (which for 2010 occurred on November 30, 2010). The date of this meeting was determined more than six months in advance as part of the normal process for scheduling Board of Directors and Committee meetings. On November 30, 2010, the Compensation Committee made 2010 year-end long-term equity-based awards to NEOs in two forms: deferred stock units (DSUs) and performance stock units (PSUs). The terms of each of these two types of awards are summarized below.

The terms of the DSUs granted on November 30, 2010 are generally consistent with the terms of the 2009 year-end long-term equity-based compensation awards made to NEOs in 2009 and are established under a deferred stock unit award agreement and Redwood’s 2002 Incentive Plan, which terms include provisions relating to dividend equivalent rights, forfeiture, and change-in-control.

Under the terms of the PSUs, (i) “three-year TSR” is defined as the percentage by which the Per Share Price (defined below) as of November 30, 2013 has increased or decreased, as applicable, relative to the Per Share Price as of November 30, 2010 (which was $14.14), adjusted to include the impact on such increase or decrease that would be realized if all cash dividends paid on a share of Redwood common stock during such three-year period were reinvested in Redwood common stock on the applicable dividend payment dates, and (ii) “Per Share Price” is defined, as of any date, as the average of the closing prices of a share of Redwood common stock on the NYSE during the twenty (20) consecutive trading days ending on the trading day prior to such date. The TSR performance thresholds for determining whether 0%, 100%, or 200% (or some other percentage in between those levels) of the of underlying shares of Redwood common stock will vest were determined by the Committee based on a 25% TSR over three years being an attractive level of total stockholder return for investors, with the minimum and maximum vesting thresholds also reflecting an appropriate level of vesting for the related level of TSR over the three year period.

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Subject to vesting, the shares of Redwood common stock underlying these PSUs will be distributed to the recipients on May 1, 2014, unless distribution is electively deferred by a recipient under the terms of the Redwood’s Executive Deferred Compensation Plan. At the time of vesting, the value of any dividends paid during the vesting period will be reflected in the PSUs by increasing the target number of PSUs granted by an amount corresponding to the incremental number of shares of Redwood common stock that a stockholder would have acquired during the three-year TSR measurement period had all dividends during that period been reinvested in Redwood common stock on the applicable dividend payment dates. After the vesting of these PSUs in November 2013 (if any vest) and until the delivery of the underlying shares of Redwood common stock, the underlying vested award shares will have attached dividend equivalent rights, resulting in the payment of dividend equivalents each time Redwood pays a common stock dividend during that period.

The terms of the PSUs granted on November 30, 2010 are established under a performance stock unit award agreement and Redwood’s 2002 Incentive Plan, which terms include provisions relating to forfeiture and change-in-control.

The long-term equity-based awards granted to NEOs in the fourth quarter of 2010 were determined by the Committee after receiving input from Cook & Co., with each award being determined based on the Committee’s philosophy that total target annual compensation, inclusive of the grant date value of these year-end long-term equity-based awards, should approximate the 75^th percentile relative to the peer group companies or other supplemental benchmarking data, with the actual amount of compensation paid depending on Redwood and individual performance. The 2010 year-end long-term equity-based awards granted to NEOs are consistent with the Committee’s prior commitment regarding performance-based equity awards, as further described below under “Satisfaction of Prior-Year Commitment Regarding 2010 Performance-Based Equity Awards,” and the Committee believed that the awards reinforced the linkage between the interests of Redwood’s executives and its long-term stockholders by encouraging ownership of Redwood stock by executives and employees and rewarding stockholder value creation.

The number and grant date fair value of DSUs and PSUs comprising the 2010 year-end long-term equity-based awards granted to each NEO are set forth in the table below:

		Deferred Stock Units								Performance Stock Units
NEO(1)		#				Aggregate Grant Date Fair Value(2)				#				Aggregate Grant Date Fair Value(2)
Mr. Hughes			80,358			$	1,124,213				80,358			$	1,125,787
Mr. Nicholas			57,144			$	799,440				57,144			$	800,560
Ms. Merdian			18,750			$	262,316				18,750			$	262,684
Mr. Isbrandtsen			21,429			$	299,790				21,429			$	300,210
Mr. Matera			18,750			$	262,316				18,750			$	262,684

DSUs awarded in 2010 have attached dividend equivalent rights, resulting in the payment of dividend equivalents each time Redwood pays a common stock dividend. The value of dividend equivalent rights was taken into account in establishing the grant date fair value of these DSUs under FASB Accounting Standards Codification Topic 718 at the time the awards were granted. Therefore, current dividend equivalent right payments are not considered part of the compensation reported above in the table of non-employee director compensation under “Director Compensation” or below in the summary table of NEO compensation under “Executive Compensation Tables — Summary Compensation.”

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Other Long-Term Equity-Based Compensation Awards Made During 2010

In addition to the 2010 year-end long-term equity-based awards described above, the following long-term equity-based compensation awards were granted to NEOs during 2010, as described below:

Mandatory Holding Periods for 2010 Long-Term Equity-Based Compensation Awards

DSUs Granted in May 2010 and November 2010.  The long-term equity-based awards granted to NEOs in November 2010 that were in the form of DSUs have the four-year vesting schedule described above under “2010 Long-Term Equity-Based Compensation Awards.” Notwithstanding this vesting schedule, the NEOs are subject to a mandatory holding period with respect to all shares underlying the DSU awards made in November 2010 that vest prior to the distribution date. Consequently, assuming continued employment of the NEOs receiving those awards, the earliest these DSU awards will be distributed to recipients in shares of Redwood common stock (and, as a result, the earliest these shares could be sold or transferred) is May 1, 2015.

Similarly, the DSU award granted to Mr. Hughes in May 2010 in connection with his promotion to Chief Executive Officer has a four year vesting schedule and a mandatory holding period with respect to all shares underlying this deferred stock unit award that vest prior to the distribution date. Consequently, assuming continued employment of Mr. Hughes, the earliest this deferred stock unit award will be distributed to Mr. Hughes in shares of Redwood common stock (and, as a result, the earliest these shares could be sold or transferred) is May 1, 2015.

PSUs Granted in November 2010.  The long-term equity grants made to NEOs in November 2010 that were in the form of PSUs have the three-year cliff vesting schedule described above under “2010 Long-Term Equity-Based Compensation Awards.” Notwithstanding this vesting schedule, the NEOs are subject to a mandatory holding period with respect to all shares underlying the performance stock unit awards made in November 2010 that vest prior to the distribution date. Consequently, assuming continued employment of the NEOs receiving these awards, if any of these PSUs vest, the earliest these PSUs will be distributed to recipients in shares of Redwood common stock (and, as a result, the earliest these shares could be sold or transferred) is May 1, 2014.

DSUs Granted in February 2010.  As described above, in connection with the payment of 2009 annual bonuses (which payment occurred, as scheduled, in February 2010), and as described in Redwood’s 2010 annual proxy statement, approximately 60% of the company performance component of 2009 annual bonuses paid to Mr. Bull, Mr. Hughes, and Mr. Nicholas was paid in the form of DSUs, with 45% of these DSUs having a one-year vesting period and the remaining 55% of these DSUs having a two-year vesting period. Notwithstanding this vesting schedule, the NEOs are subject to a mandatory holding period with respect to all shares underlying the DSU awards made in February 2010 that vest prior to the distribution date. Consequently, assuming continued employment of the NEOs receiving these awards, the earliest these DSU awards will be distributed to recipients in shares of Redwood common stock (and, as a result, the earliest these shares could be sold or transferred) is May 1, 2012.

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Executive Stock Ownership Guidelines; Hedging of Shares Held by Executives Not Permitted

As described on page 7 of this Proxy Statement, the Committee has also established executive stock ownership guidelines with respect to Redwood’s executive officers. These guidelines are summarized below and the Committee believes that they reinforce the linkage between the interests of Redwood’s executives and its long-term stockholders by requiring ownership of Redwood stock by executives and rewarding stockholder value creation.

For purposes of determining compliance, the original purchase or acquisition price is used as the value of shares held and, as of the date of this Proxy Statement, all of Redwood’s executive officers were in compliance with these guidelines either because he or she owned the requisite number of shares or because he or she was within the time period during which the executive is permitted to attain the required level of ownership.

In addition, under Redwood’s Insider Trading Policy, executive officers of the Company may not engage in any of the following hedging or other transactions with respect to their ownership of Redwood common stock, each of which types of transaction the Committee believes would be inconsistent with the purposes and intent of the executive stock ownership guidelines:

Satisfaction of Prior-Year Commitment Regarding 2010 Performance-Based Equity Awards

In Redwood’s annual proxy statement for its 2010 annual meeting of stockholders, which was published and filed with the SEC on April 2, 2010, the Committee affirmed its performance-based compensation philosophy by committing to the following with respect to 2010 year-end long-term equity-based awards to NEOs (and, in the case of each aspect of this commitment, the manner in which that aspect has been satisfied is set forth in italics following the description of that aspect of the commitment):

In satisfaction of this aspect of the Compensation Committee’s commitment, as described above under “2010 Long-Term Equity-Based Compensation Awards,” 50% of the long-term equity-based awards granted in the fourth quarter of 2010 to NEOs were in the form of PSUs, which are performance-based equity awards that vest based on the achievement of metric-based performance

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targets established by the Committee at the time of grant (and the economic benefit of dividends paid on Redwood common stock during the vesting period accrue and are paid only to the extent such awards vest).

In satisfaction of this aspect of the Compensation Committee’s commitment, as set forth above under “2010 Long-Term Equity-Based Compensation Awards,” grants of long-term equity-based awards in the fourth quarter of 2010 to NEOs consisted of 50% performance-based equity awards based on the number of shares of common stock underlying such equity awards, assuming, in the case of performance-based equity awards, that target performance would be met.

In satisfaction of this aspect of the Compensation Committee’s commitment, the long-term equity-based awards granted in the fourth quarter of 2010 to NEOs were granted on November 30, 2010. On December 2, 2010, Redwood filed a Current Report on Form 8-K with the SEC detailing, among other things, (i) the performance metric used for the PSUs and (ii) the metric-based performance targets for the PSUs.

Compensation Determinations Relating to 2011 and Subsequent Years

In preparation for making determinations regarding 2011 compensation matters, beginning in August 2010 the Committee conducted its annual review of Redwood’s executive compensation programs and practices with a view to continuing to ensure that they provide proper incentives and appropriately support corporate performance without creating risks that are likely to have a material adverse effect on Redwood. This review was consistent with similar reviews performed in prior years, but also incorporated a fundamental review of two particular aspects of the executive compensation program; namely, the methodology used for determining the company performance component of annual bonuses and the structure of long-term equity-based awards. This fundamental review was prompted by, among other things, the commitment made by the Committee in 2010 regarding the future use of performance-based equity awards, changes in the business and financial environment in which the company operates and competes, and changes in management leadership of Redwood following Mr. Bull’s retirement in May 2010 from the chief executive officer position. This review encompassed input from and consultation with management and Cook & Co., as well as input from other members of the Board of Directors.

As part of this review, the Committee, among other things, reviewed:

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With respect each aspect of this review, the Committee considered, among other things, whether each alternative was consistent with Redwood’s compensation philosophy, including whether each alternative would align the interests of Redwood’s executives and employees with those of Redwood’s long-term shareholders, motivate executives and employees to enhance the performance and profitability of Redwood both on a short-term and long-term basis (with an emphasis on the long-term), allow Redwood to continue to attract and retain highly qualified and productive executives and employees, and maintain a compensation program that was competitive with the marketplace. In addition, the Committee was focused on how the design of a compensation program can be a factor that could promote business risk taking and focused on whether the design of the compensation program would introduce material risks to Redwood. In conducting its review, the Committee was aware that the design of each aspect of its compensation program was part of a comprehensive whole, and therefore, that each element needed to be analyzed in the context of how it contributed to the whole program and how risks associated with one aspect of the program could be balanced by other aspects of the program.

As a result of this process, during this annual review, not only did the Committee make certain determinations of the type it has traditionally made each year, such as determining base salary levels and target annual bonus amounts, but it also determined to make certain changes to aspects of the executive compensation program that had previously remained constant for several years. For example, the Committee established a performance measure, performance thresholds, and other terms of long-term equity awards with performance-based vesting (i.e., the PSUs referred to above under “2010 Long-Term Equity-Based Compensation Awards”) and determined to use PSUs not only in 2010 but also in subsequent years. In addition, the Committee determined that it would change the Company financial performance thresholds used in determining the Company performance component of annual bonuses for 2011 and subsequent years. As noted above, certain of these changes were implemented immediately (e.g., PSUs were used in making 2010 year-end long-term equity-based awards), while other changes (including changes to the performance thresholds used in determining the company performance component of annual bonuses) will be implemented over a two-year period.

With respect to each component of the executive compensation program, set forth below is a description of the determinations that were made as a result of the above-described review with respect to NEO compensation for 2011 and for 2012 and subsequent years. The Committee retains the discretion to make adjustments to these determinations if circumstances warrant.

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2011 Base Salaries.  In accordance with its above-described policy and practice relating to establishing base salaries (see “2010 Base Salaries” above), in November 2010, the Committee determined not to increase the base salaries of the NEOs for 2011. This determination was made after consultation with Cook & Co. and after review of peer group and other supplemental benchmarking data and analysis of the type described above under “Compensation Benchmarking for 2010.” The Committee retains the discretion to make adjustments to these base salaries prior to its annual year-end review in December 2011, although it does not currently contemplate any such intra-year adjustments.

As a result, for 2011:

2011 Target Annual Bonuses.  At its meeting held in November 2010, the Committee also made two determinations regarding 2011 target annual bonuses for the NEOs. First, the Committee determined, after consultation with Cook & Co., that 2011 target annual bonuses for each of these NEOs would continue to be weighted 75% on Redwood company performance (i.e., Adjusted ROE) and 25% on individual performance metrics. Second, in accordance with its above-described policy and practice relating to establishing target annual bonuses, and after consultation with Cook & Co., the Committee determined target annual bonus amounts for each of the NEOs, which target amounts are expressed as a percentage of base salary. Based on the Committee’s determinations, Ms. Merdian was the only NEO whose target annual bonus amount increased as a percentage of base salary.

The table below sets forth the 2011 target annual bonuses (expressed both as a percentage of base salary and in dollars) for each of the NEOs assuming achievement of the criteria necessary to achieve 100% of the target annual bonus, together with the company performance and individual performance components of the 2011 target annual bonus and a comparison to target annual bonuses for 2010.

NEO		2011 Base Salary				2011 Target Annual Bonus (%)				Company Performance Component of 2011 Target Annual Bonus ($)(1)				Individual Performance Component of 2011 Target Annual Bonus ($)(1)				Total 2011 Target Annual Bonus ($)(1)				Change from Total 2010 Target Annual Bonus (%)(2)
Mr. Hughes		$	700,000				165	%		$	866,250			$	288,750			$	1,155,000				0	%
Mr. Nicholas		$	500,000				150	%		$	562,500			$	187,500			$	750,000				0	%
Ms. Merdian		$	400,000				100	%		$	300,000			$	100,000			$	400,000				33	%
Mr. Isbrandtsen		$	400,000				100	%		$	300,000			$	100,000			$	400,000				0	%
Mr. Matera		$	400,000				100	%		$	300,000			$	100,000			$	400,000				0	%

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In addition, as was the case in 2010, the Committee determined that the maximum sum of the two bonus component awards (i.e., the maximum annual bonus) in 2011 will continue to be $5 million for each of Mr. Hughes and Mr. Nicholas, and $2 million for each of the other NEOs. These maximums were determined after consultation with Cook & Co., and were considered appropriate by the Committee as maximum annual bonuses for these NEOs based on their respective positions, responsibilities, and levels of performance needed to reach the maximum.

Form of Payment of Annual Bonuses in 2011 and Subsequent Years.  At its meeting in March 2011, the Committee also determined, after consultation with Cook & Co., that year-end annual bonuses paid to NEOs for 2011 and subsequent years that exceeded $250,000 would not be paid fully in cash, but would instead be paid in part in the form of vested DSUs with a mandatory three-year holding period. Altering the form of payment for annual bonuses amounts in this manner exposes a greater portion of NEOs’ annual bonuses to the future company financial performance of Redwood, which the Committee believes results in a greater alignment of executive and stockholder interests.

The following table sets forth the step function that would determine the amount of any annual bonus that would be paid in the form of vested DSUs with a mandatory three-year holding period and illustrates that, as the value of an NEO’s annual bonus increases, an increasingly smaller percentage of that bonus is paid in cash.

Incremental Annual          Bonus Amount ($)										Form of Payment of Incremental Annual Bonus Amount
										Cash				DSUs(1)
$       —			to			$	250,000				100	%			0	%
$  250,000			to			$	500,000				60	%			40	%
$  500,000			to			$	1,000,000				55	%			45	%
$1,000,000			to			$	1,500,000				50	%			50	%
$1,500,000			to			$	2,000,000				45	%			55	%
$2,000,000			to			$	5,000,000				40	%			60	%

Because of the application of the above-described step function, total 2011 target bonus amounts for each NEO, if earned, would not be fully paid in cash. Instead a portion of these 2011 target bonus amounts, if earned, would be paid in the form of vested DSUs with a mandatory three-year holding period. The table below sets forth total 2011 target bonus amounts for each NEO and the portions of such target amounts that, if earned, would be paid in cash and vested DSUs with a mandatory three-year holding period as a result of the application of the above-described step function.

NEO		Value of Total 2011 Target Bonus ($)				Portion of Total 2011 Target Bonus That Would be Paid in Cash ($/%)				Portion of Total 2011 Target Bonus That Would be Paid in DSUs(1) ($/%)
Mr. Hughes		$	1,155,000			$	752,500/(65%)			$	402,500/(35%)
Mr. Nicholas		$	750,000			$	537,500/(72%)			$	212,500/(28%)
Ms. Merdian		$	400,000			$	340,000/(85%)			$	60,000/(15%)
Mr. Isbrandtsen		$	400,000			$	340,000/(85%)			$	60,000/(15%)
Mr. Matera		$	400,000			$	340,000/(85%)			$	60,000/(15%)

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Individual Performance Component of 2011 Target Bonus.  At its meetings held in November 2010 and January 2011, the Committee reviewed and approved factors and goals that will be used over the course of 2011 to evaluate each of the NEOs’ individual performance in 2011 and which will be used at the end of 2011 as a basis for the Committee’s individual performance bonus determinations. As in past years, during 2011 these individual factors and goals will be subject to adjustment should circumstances warrant at the discretion of the Committee. As in past years, the Committee also determined that for 2011 the individual performance component of the bonus could be earned up to 100% depending on the Committee’s assessment of individual performance, subject to adjustment when circumstances warrant at the discretion of the Committee.

Company Performance Component of Target Bonus for 2011 and Subsequent Years.  As described above, during the second half of 2010 and the first quarter of 2011, the Committee undertook a review of Redwood’s compensation program, including a review of the formula used in determining the company performance component of annual bonuses for executive officers. This review included a review of the metric used to measure company financial performance and the performance threshold that establishes whether target company performance bonus will be paid, as well as a review of company performance threshold below which no company bonus would be paid, and the company performance bonuses that would be paid for various levels of company performance above and below target performance. As described above, this review encompassed input from and consultation with management and Cook & Co., as well as input from other members of the Board of Directors.

After completing its review, the Committee determined that Adjusted ROE continues to provide an appropriate measurement of Redwood’s financial performance because, as a company whose primary source of earnings is income from real estate-related debt investments, the use of average core equity reflects the amount of capital Redwood has to invest (as it excludes the effect of unrealized market valuation adjustments). Accordingly, for 2011 and subsequent years, the company performance bonus formula used for executive officers will continue to be based on the achievement of Adjusted ROE, which, as noted above, is defined as income determined in accordance with GAAP divided by average core equity, subject to adjustment when circumstances warrant at the discretion of the Committee. Average core equity is defined as average GAAP equity excluding unrealized mark-to-market adjustments as reflected in accumulated other comprehensive income (loss).

The Committee also decided, as a result of its review, to change its methodology for determining the performance thresholds at which different levels of company performance bonuses would be paid. In particular, the Committee decided to discontinue the use of the fixed performance thresholds that had been used in prior years and replace them with variable performance thresholds that could change each year, with the variable performance thresholds to be determined at the beginning of each year in an amount equal to a risk-free interest rate plus an incremental premium. As a result, the performance thresholds could vary from year to year both as the result of changes in the risk-free rate and changes to the incremental premium determined by the Committee to be appropriate. This decision was premised in large part on the nature of Redwood’s business model, which is primarily focused on investing in real-estate related debt instruments. One result of this business model is that returns that Redwood can earn on new investments are, to an extent, correlated with the market-driven interest rates being offered for these and other types of debt instruments (which rates depend on the perceived risk of these investments) which, in turn, are correlated to a certain extent with the market-driven risk-free interest rates being offered for investment in U.S. Treasury obligations (and other debt backed by the full faith and credit of the U.S.).

Over the past several years (including during 2010), Redwood’s financial performance thresholds were as follows for executive officers: no company performance bonus would be earned for Adjusted ROE below 7%; target company performance bonus would be earned when Adjusted ROE was 11%; and above-target company performance bonuses would be earned when Adjusted ROE was greater than 11%. In reviewing each of Redwood’s first eight years as a public company (1995 – 2002), the prior-year risk-free interest rate for U.S. Treasury obligations with a five year maturity remained relatively constant, with an average of 5.8% during that period. As a result, the target company performance threshold of an 11% Adjusted ROE that was used during this period in determining the company performance component of annual NEO bonuses reflected an average premium of 5.2% above the prior year risk-free rate for U.S. Treasury obligations with a five year

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maturity. Over the few years immediately subsequent to 2002, this risk-free rate dipped and then increased again. Then, beginning in 2008 and through the date of this Proxy Statement, the prior year risk-free rates on U.S. Treasury obligations with a five year maturity have declined to average levels significantly below the average for the prior decade. A five-year risk-free interest rate was used for this analysis because it generally corresponds to the weighted average duration of investments historically made by Redwood.

As a result of this recent significant decline in risk-free interest rates, maintaining a target level of company performance of 11% Adjusted ROE would require that Redwood seek returns much higher above the risk-free rate than it had in the past in order to achieve target company performance. Conversely, if risk-free interest rates were to rise significantly in future years, as some believe they may, maintaining a target level of company performance of 11% Adjusted ROE, would require that Redwood seek much lower incremental returns above the risk-free rate than it had in the past in order to achieve target company performance. The Committee was mindful that Redwood does not currently intend to significantly alter its business model. In addition, the Committee recognized that reaching for the same returns in a lower interest environment would necessitate taking greater investment or other risks and that accomplishing the same returns in a higher interest rate environment would only require seeking lower risk, lower yielding investments. Therefore, the Committee determined that as Redwood made new investments in the future, the target level of Redwood’s company performance should be structured to vary along with varying risk-free rates.

Setting a target Adjusted ROE performance threshold at an appropriate level above the risk-free rate is intended to provide executives with an incentive to achieve attractive investment returns for Redwood (and align the interests of executives and shareholders in seeking this level of return), without exposing Redwood to inappropriate risk. If interest rates return to a prolonged period of stability, the variable performance target will likely not vary significantly from year-to-year, and will effectively function much like the fixed performance target did in the past. Alternatively, if interest rates experience significant periods of volatility in the future or experience long-term upward or downwards trends, the variable performance target will provide the Committee with the ability to adjust compensation incentives in a manner consistent with a stable business model.

The Committee recognized that implementing a change from a fixed target of 11% to a variable target was significant and believed it should be done deliberately and over a time period that would allow for observation of the impact of the change and an opportunity to make any necessary adjustments. Accordingly, the Committee determined to fully implement this change in 2012 and to treat 2011 as a transition year, during which much of the change would be implemented, but certain aspects of the design of the company performance bonus formula would remain consistent with 2010 and prior years.

Company Performance Metric and Performance Thresholds for 2011.  Based on the comprehensive review of the Company performance bonus metric and performance thresholds, and after consultation with Cook & Co., the Committee made the following determinations with respect to company performance bonuses for executive officers for 2011, which, as noted above, is intended to be the year during which Redwood transitions from the fixed performance threshold methodology used in 2010 and prior years to the variable performance threshold methodology to be used in 2012 and subsequent years:

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As a result of the Committee’s determinations, including those described above, the company performance bonus formula for use in 2011 for executive officers will be as follows:

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Using a formula that resulted in a pro-rated portion of the company performance bonus being earned for Adjusted ROE between 7% and 9% was determined as appropriate to reward good financial performance below the target level; and continuing to maintain a formula that resulted in a company performance bonuses in excess of target for Adjusted ROE above 11% was determined as appropriate to reward financial performance that exceeded the target threshold. As in past years, during 2011 the company performance bonus formula will be subject to adjustment when circumstances warrant at the discretion of the Committee.

Company Performance Metric and Performance Thresholds for 2012 and Subsequent Years.  In accordance with the determinations made as part of the comprehensive review of the company performance bonus metric and performance thresholds, after consultation with Cook & Co., the Committee made the following determinations with respect to company performance bonuses for executive officers for 2012 and subsequent years:

As a result of the Committee’s determinations, including those described above, the company performance bonus formula for use in 2012 and subsequent years for executive officers will be as follows:

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In each of the three all cases set forth above:

Using a formula that resulted in a pro-rated portion of the company performance bonus being earned for Adjusted ROE between the target performance threshold and 4% below that threshold was determined as appropriate to reward good financial performance below the target level; and continuing to maintain a formula that resulted in a company performance bonuses in excess of target for Adjusted ROE above the target threshold was determined as appropriate to reward financial performance that exceeded the target threshold. As in past years, during 2012 and subsequent years the company performance bonus formula will be subject to adjustment when circumstances warrant at the discretion of the Committee.

Long-Term Equity-Based Compensation Awards for 2011 and Subsequent Years.  As described above, when the Committee made long-term equity-based compensation awards to NEOs in the fourth quarter of 2010, 50% of those awards (based on number of awards granted) were in the form of PSUs, which are performance-based equity awards that vest based on the achievement of metric-based performance targets established by the Committee at the time of grant and 50% of those awards were DSUs that vest on a pro rata basis over a four-year period. The Committee currently intends to continue this practice with respect to its year-end long-term equity-based compensation awards to NEOs in 2011 and subsequent years.

Deferred Compensation

Under Redwood’s Executive Deferred Compensation Plan, executive officers may elect to defer up to 100% of their cash compensation as well as dividend equivalent right payments on DSUs, options, and vested PSUs and under certain circumstances, can also elect to re-defer scheduled distributions of cash or stock from the Plan. Additionally, delivery of shares of Redwood common stock underlying DSUs and PSUs granted to executives under the Incentive Plan are automatically deferred under the Executive Deferred Compensation Plan. Deferred amounts may be deferred until a date chosen by the executive at the time of the initial deferral (subject to certain restrictions) or until retirement, at which time the balance in the executive’s account will be delivered in cash or common stock (as applicable), or will be paid out over a period of up to 15 years, depending upon the executive’s deferral elections. Cash amounts deferred under the Executive Deferred Compensation Plan are credited with interest at 120% of the long-term applicable federal rate as published by the IRS. Cash balances deferred under the Executive Deferred Compensation Plan remain available to Redwood for general corporate purposes pending the obligation to deliver the deferred amounts to the recipients (in cash or in shares of common stock) on the deferral date. The ability of recipients to elect to receive interest on deferred amounts is one incentive to participate in this Plan, thereby making funds available for Redwood’s use at a cost that is generally below Redwood’s normal cost of capital.

Redwood also matches 50% of cash compensation deferred by participants in the Executive Deferred Compensation Plan, provided that total matching payments and contributions made by Redwood to participants in the Executive Deferred Compensation Plan and the 401(k) Plan (discussed below) are limited

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to 6% of the participant’s base salary. Vesting of the matching payments is based on the employee’s tenure with Redwood, and over time, an employee becomes increasingly vested in both prior and new matching payments. Employees are fully vested in all prior and all new matching payments after six years of employment. Redwood believes the Executive Deferred Compensation Plan provides for, among other things, a vehicle for Redwood’s executives to plan for retirement and for tax planning.

Employee Stock Purchase Plan

Redwood offers all eligible employees the opportunity to participate in a tax-qualified Employee Stock Purchase Plan (ESPP). Through payroll deductions, employees can purchase shares of Redwood’s common stock at a discount from fair market value on a quarterly basis. The purchase price per share is the lower of (a) 85% of the fair market value per share on the first day of each 12-month offering period (January 1^st) or (b) 85% of the fair market value per share on the purchase date (the end of each calendar quarter, March 31^st, June 30^th, September 30^th, and December 31^st). An employee is eligible to participate in the ESPP after 90 consecutive days of employment.

401(k) Plan and Other Matching Contributions

Redwood offers a tax-qualified 401(k) Plan to all employees for retirement savings. Under this Plan, employees are allowed to defer and invest up to 100% of their cash earnings, subject to the maximum 401(k) contribution amount (which, in 2010, was $16,500 for those under 50 years of age and $22,000 for those 50 years of age or older). Contributions can be invested in a diversified selection of publicly-traded mutual funds.

In order to encourage participation and to provide a retirement planning benefit to employees, Redwood also provides a matching contribution of 50% of employees’ 401(k) Plan contributions, provided that matching contributions to the 401(k) Plan are limited to the lesser of 4% of an employee’s cash compensation and, in 2010, $8,250. Vesting of the 401(k) Plan matching contributions is based on the employee’s tenure with Redwood, and over time, an employee becomes increasingly vested in both prior and new matching contributions. Employees are fully vested in all prior and all new matching contributions after six years of employment.

As noted above, Redwood also matches up to 50% of cash compensation deferred by participants in its Executive Deferred Compensation Plan. Total matching payments made by Redwood to participants in the Executive Deferred Compensation Plan (including deferred compensation matching plus matches in the 401(k) Plan) are limited to 6% of the participant’s base salary.

There are no other retirement or pension plans at Redwood.

Other Benefits

In addition to cash and equity-based compensation, Redwood currently provides all employees with certain other benefits including medical, dental, vision, disability, and life insurance, a salary continuation program, an employee assistance program, and a flexible spending accounting program. The provision of these types of benefits is important in attracting and retaining employees. During 2010, Redwood paid approximately two-thirds of an employee’s monthly premium for medical and dental coverage, and 100% of an employee’s premiums for long-term disability and life insurance provided through Redwood plans.

Severance and Change of Control Arrangements

Prior to 2006, each of Mr. Bull, Mr. Hughes, and Mr. Nicholas entered into an employment agreement with Redwood, each of which provided for severance payments in the event Redwood terminates the executive’s employment without “cause” or the executive terminates his employment for “good reason.” Similarly, prior to 2006, Mr. Zagunis entered into an employment agreement with Redwood, which also provided for severance payments in the event Redwood terminates the executive’s employment without “cause” or the executive terminates his employment for “good reason.” These employment agreements also provide for payments and vesting of stock options and other equity-related awards in the event of the executive’s death or disability. In the event of a “change of control” in which the surviving or acquiring corporation does not assume outstanding stock options and equity-related awards or substitute equivalent

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awards, the executive’s outstanding options and equity-related awards will immediately vest and become exercisable. These agreements were entered into in order to attract and retain these executives in the competitive marketplace for executive talent.

The various levels of post-termination benefits for each of Mr. Bull, Mr. Hughes, Mr. Nicholas, and Mr. Zagunis were determined by the Committee to be appropriate for the individual based on that executive’s duties and responsibilities with Redwood and were the result of arms-length negotiations with these individuals. The different levels were also determined to be appropriate and reasonable when generally compared to post-termination benefits provided by Redwood’s peers to executives with similar titles and similar levels of responsibility. The different levels of benefit were also intended to take into account the expected length of time and difficulty the executive may experience in trying to secure new employment. The amount of the severance is balanced against Redwood’s need to be responsible to its stockholders and also takes into account the potential impact the severance payments may have on other potential parties to a change in control transaction.

The terms of these severance and change of control arrangements are described in more detail below under “Other Compensation Matters — Potential Payments upon Termination or Change of Control.” No other executive officer of Redwood is currently party to an employment agreement that provides for severance payments in the event of the termination of the executive’s employment or in the event of a change of control and, in connection with his retirement as Chief Executive Officer in May 2010, the employment agreement between Mr. Bull and Redwood was terminated.

The Committee reviews the terms of these employment agreements each year and seeks analysis from Cook & Co. to compare the terms of these agreements to competitive benchmarks. The Committee’s use of tally sheets also enables the Committee to analyze the expected payments should any of these agreements become applicable to the termination of an executive’s employment.

Elimination of Excise Tax Gross-Up Provisions From Executive Employment Agreements.  In March 2011, the Board of Directors approved an amendment to each of the outstanding employment agreements between an executive officer and Redwood (i.e., to the employment agreements with Mr. Hughes, Mr. Nicholas, and Mr. Zagunis) and Redwood and each of these executive officers subsequently entered into that amendment to eliminate the provisions of those agreements that provided for excise tax gross-ups with respect to excise taxes that may be imposed on change-in-control severance payments made under these agreements. The Committee does not intend to offer excise tax gross-up provisions in any future executive employment agreements.

Tax Considerations

Section 162(m) of the Internal Revenue Code (the Code) limits the tax deductibility by Redwood of annual compensation in excess of $1,000,000 paid to Redwood’s chief executive officer and Redwood’s three other most highly compensated executive officers employed at the end of the year other than the chief financial officer. However, certain performance-based compensation that is paid pursuant to a compensation plan that has been approved by stockholders (such as Redwood’s 2002 Incentive Plan) is excluded from the $1,000,000 limit if, among other requirements, the compensation is payable only upon the attainment of pre-established, objective performance goals and the committee of the board of directors that establishes those goals consists only of “outside directors.” All members of the Committee qualify as outside directors.

The Committee considers the anticipated tax treatment to Redwood and to executive officers when reviewing executive compensation and Redwood’s compensation programs. The deductibility of some types of compensation payments can depend upon the timing of an executive’s vesting or exercise of previously granted rights or termination of employment. Interpretations of and changes in applicable tax laws and regulations, as well as other factors beyond the Committee’s control, also can affect the deductibility of compensation.

While the tax impact of any compensation arrangement is one factor to be considered, that impact is evaluated in light of the Committee’s overall compensation philosophy and objectives. The Committee will consider the deductibility of executive compensation, while retaining the discretion it deems necessary to compensate officers in a manner commensurate with performance and the competitive environment for

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executive talent. The Committee may determine to award significant amounts of compensation to NEOs that are not fully tax deductible to Redwood because these compensation awards are consistent with its philosophy and are in Redwood’s best interests and that the compensation awards not being fully deductible is not significant enough to Redwood, due to its structure as a REIT, to outweigh these other factors.

Section 409A of the Code imposes significant additional taxes and interest on underpayment of taxes in the event an executive defers compensation under a plan that does not meet the requirements of Section 409A. Redwood has generally structured its programs and individual arrangements in a manner intended to comply with the requirements of Section 409A.

Clawback Policy with Respect to Bonus and Incentive Compensation

Redwood has adopted a “clawback” policy with respect to bonus and incentive payments made to executive officers whose fraud or misconduct resulted in a financial restatement. Pursuant to this policy, in the event of a significant restatement of Redwood’s financial results due to fraud or misconduct, the Board of Directors of Redwood will review all bonus and incentive compensation payments made on the basis of Redwood having met or exceeded specific performance targets during the period affected by the restatement. If any of the payments would have been lower if determined using the restated results, the Board of Directors will, in its discretion and to the extent permitted by law, seek to recoup from the executive officers whose fraud or misconduct materially contributed to the restatement the value or benefit of the prior payments made to the executive officers.

Compensation Committee Report

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis included in this Proxy Statement. Based on this review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

		Compensation Committee:
		Georganne C. Proctor, Chair Richard D. Baum Thomas C. Brown Mariann Byerwalter Jeffrey T. Pero

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Executive Compensation Tables

Summary Compensation

The following table includes information concerning compensation earned by the NEOs for the years ended December 31, 2010, 2009, and 2008. Titles shown in the table are those held by the executive officer on December 31, 2010, except in the case of Mr. Bull, who retired from the chief executive officer position in May 2010.

Name and Principal Position		Year				Salary(1)				Stock Awards(2)				Option Awards				Non-Equity Incentive Plan Compensation(3)				All Other Compensation(4)				Total
George E. Bull, III, Chairman and Former Chief Executive Officer			2010			$	291,821				—				—			$	593,635			$	8,250			$	893,706
			2009			$	700,000			$	4,344,391				—			$	1,136,371			$	8,250			$	6,189,012
			2008			$	700,000			$	2,649,994				—			$	218,750			$	42,000			$	3,610,744
Martin S. Hughes, President and Chief Executive Officer			2010			$	624,680			$	2,775,000				—			$	1,165,109			$	30,000			$	4,594,789
			2009			$	500,000			$	2,229,218				—			$	695,738			$	30,000			$	3,454,956
			2008			$	500,000			$	3,004,070				—			$	125,000			$	30,000			$	3,659,070
Brett D. Nicholas, Chief Operating Officer and Chief Investment Officer			2010			$	500,000			$	1,600,000				—			$	871,819			$	30,000			$	3,001,819
			2009			$	500,000			$	2,229,218				—			$	695,738			$	30,000			$	3,454,956
			2008			$	500,000			$	1,610,070				—			$	125,000			$	30,000			$	2,265,070
Diane L. Merdian, Chief Financial Officer			2010			$	297,179			$	1,025,000				—			$	264,658			$	224,000			$	1,810,837
John H. Isbrandtsen, Managing Director			2010			$	400,000			$	600,000				—			$	464,970			$	24,000			$	1,488,970
			2009			$	270,000			$	500,000				—			$	351,911			$	16,200			$	1,138,111
			2008			$	270,000			$	202,506				—			$	67,500			$	16,200			$	556,206
Fred J. Matera Managing Director			2010			$	400,000			$	525,000				—			$	464,970			$	24,000			$	1,413,970
			2009			$	400,000			$	400,000				—			$	391,013			$	8,250			$	1,199,263
			2008			$	200,000			$	700,000				—			$	150,000			$	2,000			$	1,052,000

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Grants of Plan-Based Awards

The following table reflects estimated possible payouts to the NEOs in 2010 under Redwood’s performance-based compensation plan as well as actual equity-related grants made in 2010 under Redwood’s Incentive Plan. Actual payouts for performance in 2010 are reflected in the “Summary Compensation” table above. As discussed above under “Executive Compensation — Compensation Discussion and Analysis — 2010 Performance-Based Compensation,” 2010 annual performance-based bonuses were weighted 75% on Adjusted ROE and 25% on achievement of pre-established individual goals. The individual component may be earned up to 100% of target. There is no cap on the amount that may be earned with respect to the Adjusted ROE component, subject to an overall maximum 2010 annual total incentive award of $5 million for each of Mr. Bull, Mr. Hughes, and Mr. Nicholas and $2 million for each of the other NEOs. If earned awards are in excess of 300% of salary, the excess is paid in deferred stock units under our Executive Deferred Compensation Plan.

														Estimated Possible Payouts Under Non-Equity Incentive Plan Awards ($)												Estimated Possible Payouts Under Equity Incentive Plan Awards (#)												All Other Stock Awards: Number of Shares of Stock or Units (#)(10)				Grant Date Fair Value of Stock and Option Awards ($)(10)
Name		Type of Award(1)				Grant Date				Approval Date				Threshold(6)				Target(7)				Maximum(8)				Threshold				Target				Maximum(9)
George E. Bull, III			—				—								—			$	510,417			$	875,000				—				—				276,289				—				—
Martin S. Hughes			—				—								—			$	1,155,000			$	2,100,000				—				—				194,240				—				—
			DSU				5/18/2010 (2)				3/17/2010				—				—				—				—				—				—				34,792			$	525,000
			DSU				11/30/2010 (3)								—				—				—				—				—				—				80,358			$	1,124,213
			PSU				11/30/2010 (4)								—				—				—				—				80,358				160,716				80,358			$	1,125,787
Brett D. Nicholas			—				—								—			$	750,000			$	1,500,000				—				—				234,427				—				—
			DSU				11/30/2010 (3)								—				—				—				—				—				—				57,144			$	799,440
			PSU				11/30/2010 (4)								—				—				—				—				57,144				114,288				57,144			$	800,560
Diane L. Merdian			—				—								—			$	300,000			$	1,200,000				—				—				53,585				—				—
			DSU				4/5/2010 (5)				12/9/2009				—				—				—				—				—				—				32,552			$	500,000
			DSU				11/30/2010 (3)								—				—				—				—				—				—				18,750			$	262,316
			PSU				11/30/2010 (4)								—				—				—				—				18,750				37,500				18,750			$	262,684
John H. Isbrandtsen			—				—								—			$	400,000			$	1,200,000				—				—				53,583				—				—
			DSU				11/30/2010 (3)								—				—				—				—				—				—				21,429			$	299,790
			PSU				11/30/2010 (4)								—				—				—				—				21,429				42,858				21,429			$	300,210
Fred J. Matera			—				—								—			$	400,000			$	1,200,000				—				—				53,583				—				—
			DSU				11/30/2010 (3)								—				—				—				—				—				—				18,750			$	262,316
			PSU				11/30/2010 (4)								—				—				—				—				18,750				37,500				18,750			$	262,684

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Three-Year TSR		Vesting/Crediting of Target Shares
Less than 0%			0	%
25%			100	%
125% or greater			200	%

For the Form of Performance Stock Unit Agreement under 2002 Incentive Plan, please refer Exhibit 10.2 in Form 8-K “Compensatory Arrangements for Certain Officers” filed on December 2, 2010. These performance stock units had a grant date fair value of $14.01 per share.

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Outstanding Equity Awards at Fiscal Year-End

Redwood does not currently award stock options, although new stock options may still be issued under the reload provisions of certain stock options that were granted in prior years. With the exception of options granted under reload provisions, all outstanding stock options were granted prior to 2005.

From 2005 to 2009, equity grants to the NEOs were made solely in the form of deferred stock units. Deferred stock units outstanding receive dividend equivalent rights each time Redwood pays a common stock dividend. In general, the deferred stock units represented in the table below were granted in December, follow a four year vesting schedule, under which 25% vest on January 1 following the first anniversary of the grant, thereafter 6.25% on the first day of each subsequent quarter.

In 2010, annual grants were made in the form of deferred stock units and performance stock units which are both reflected in the table below. Deferred stock units are included as unvested stock units in the table below whereas performance stock units are reflected as being unearned as of December 31, 2010.

The following table sets forth certain information regarding outstanding equity awards for each NEO as of December 31, 2010.

		Option Awards												Stock Awards
Name		Number of Securities Underlying Unexercised Options (#) Exercisable(1)				Option Exercise Price ($)(2)				Option Expiration Date				Number of Shares or Units of Stock That Have Not Vested (#)(3)				Market Value of Shares or Units of Stock That Have Not Vested ($)(4)				Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(5)				Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, That Have Not Vested ($)(6)
George E. Bull, III			33,871			$	41.09				12/17/2011				—				—				—				—
			39,769			$	56.18				12/19/2012				—				—				—				—
			60,000			$	52.46				12/10/2013				—				—				—				—
			31,496			$	58.23				12/1/2014				—				—				—				—
Martin S. Hughes			—				—				—				408,771			$	6,102,951				80,358			$	1,199,750
Brett D. Nicholas
			3,239			$	56.55				12/17/2011				—				—				—				—
			9,646			$	55.19				12/19/2012				—				—				—				—
			25,000			$	52.46				12/10/2013				—				—				—				—
			18,891			$	58.23				12/1/2014				—				—				—				—
			—				—				—				294,682			$	4,399,602				57,144			$	853,160
Diane L. Merdian			—				—				—				51,302			$	765,939				18,750			$	279,942
John H. Isbrandtsen			416			$	58.87				12/17/2011				—				—				—				—
			7,500			$	52.46				12/10/2013				—				—				—				—
			5,152			$	58.23				12/1/2014				—				—				—				—
			—				—				—				66,293			$	989,754				21,429			$	319,935
Fred J. Matera			—				—				—				70,200			$	1,048,086				18,750			$	279,942

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Options Exercised and Stock Vested

The following table sets forth information with respect to the options exercised by the NEOs during the fiscal year ended December 31, 2010. The table also shows the value of accumulated deferred stock unit awards that vested during 2010.

		Option Awards								Stock Awards
Name		Number of Shares Acquired on Exercise (#)				Value Realized upon Exercise ($)(1)				Number of Shares Acquired on Vesting (#)				Value Realized on Vesting ($)(2)
George E. Bull, III			—				—				456,373			$	6,892,806
Martin S. Hughes			—				—				112,324			$	1,644,620
Brett D. Nicholas			—				—				70,694			$	1,035,713
Diane L. Merdian			—				—				—				—
John H. Isbrandtsen			4,000			$	2,190				9,724			$	142,413
Fred J. Matera			—				—				17,886			$	261,816

Non-Qualified Deferred Compensation

Our Executive Deferred Compensation Plan permits eligible employees to voluntarily defer receipt of a portion or all of their salary, bonus, and/or dividend equivalent right payments on a tax deferred basis for distribution from the plan to the employee at a later date, and requires all deferred stock units awarded to be deferred into the plan for distribution from the plan to the employee at a later date.

Each of our NEOs is a participant in our Executive Deferred Compensation Plan. Each of our NEOs other than Mr. Bull voluntarily deferred a portion of his cash earnings during fiscal year 2010. In addition, deferred stock units awarded were deferred into this plan. Interest accrual in respect of amounts deferred in our Executive Deferred Compensation Plan is described above under “Executive Compensation — Compensation Discussion and Analysis — Deferred Compensation.” Our NEOs are also entitled to a Redwood match on all or a portion of their executive deferred compensation cash deferrals subject to vesting requirements and a matching contribution limit, as described above under “Executive Compensation — Compensation Discussion and Analysis — Deferred Compensation.” All of our NEOs, with the exception of Mr. Hughes, Mr. Matera, and Ms. Merdian, are fully vested in matching payments made to our Executive Deferred Compensation Plan and 401(k) Plan.

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The following table sets forth information with respect to our NEOs’ cash contributions, vested deferred stock unit contributions, cash and deferred stock unit withdrawals, earnings, and aggregate balances in our Executive Deferred Compensation Plan for the fiscal year ended December 31, 2010.

Name		Executive Contributions in 2010 ($)				Registrant Contributions in 2010 ($)				Aggregate Earnings in 2010 ($)(1)				Aggregate Withdrawals/ Distributions in 2010 ($)				Aggregate Balance at 12/31/2010 ($)(2)
George E. Bull, III(3)		$	6,892,806				—				—				—			$	7,443,030
Martin S. Hughes(4)		$	1,688,120			$	21,750			$	7,730			$	(381,851	)		$	2,406,956
Brett D. Nicholas(5)		$	1,079,213			$	21,750			$	5,826			$	(465,172	)		$	1,749,300
Diane L. Merdian(6)		$	31,500			$	15,750			$	542				—			$	100,579
John H. Isbrandtsen(7)		$	173,913			$	15,750			$	1,024				—			$	572,966
Fred J. Matera(8)		$	311,816			$	15,750			$	2,610				—			$	376,347

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OTHER COMPENSATION MATTERS

Review of Prior Commitment Regarding Volume of Awards Under Redwood’s 2002 Incentive Plan

In Redwood’s annual proxy statement for its 2010 annual meeting of stockholders, which proxy statement was published and filed with the SEC on April 2, 2010, the Compensation Committee made a commitment regarding its average annual rate of Incentive Plan usage over the course of the three-year period commencing on May 19, 2010. Each aspect of that commitment is set forth below, along with a review of the Compensation Committee’s satisfaction, to date, of that aspect of the commitment.

In satisfaction of this aspect of the commitment, based on an estimate of shares expected to be granted between the date of this Proxy Statement and May 18, 2011, the average annual rate of Incentive Plan usage during the period of May 19, 2010 through May 18, 2011 is expected to be 0.90% of shares of common stock outstanding. The table set forth below shows the estimated Incentive Plan usage during this one-year period and the calculation of the annual rate of usage over this one-year period.

The separate table referred to in this aspect of the commitment is set forth below.

To date, the Compensation Committee has not determined that this commitment is inconsistent with the best interests of Redwood.

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The following table sets forth the average rate of Incentive Plan usage for the 12 month period beginning on May 19, 2010 through May 18, 2011, based on actual Incentive Plan usage for the period beginning on May 19, 2010 and ending on the date of this Proxy Statement and an estimate of Incentive Plan usage for the period between the date of this Proxy Statement and May 18, 2011.

		Number of Equity-Based Awards Granted During Annual Period(1),(2)				Multiplier				Number of Securities Granted for Purposes of Determining Average Annual Rate of Plan Usage
Full Value Awards(3)
Actual			422,754				1.5				634,131
Estimated(4)			42,702				1.5				64,053
Options(5)			—				1				—
Total			465,456								698,184
Weighted Average Shares Outstanding(6)											77,980,320
Average Annual Rate of Plan Usage											0.90	%

Potential Payments upon Termination or Change of Control

Two of our Named Executive Officers, Mr. Hughes and Mr. Nicholas, and one of our other executive officers, Mr. Zagunis, had, as of December 31, 2010, an employment agreement with Redwood. These employment agreements provide for severance payments and benefits in the event the executive is terminated without “cause” or resigns with “good reason”, which are each defined in the applicable agreement. The employment agreements provide for one year terms ending on December 31 of each year and are subject to automatic one-year renewals if not terminated by either party. No other executive officers of Redwood are party to an employment agreement with Redwood. Mr. Bull also had an employment agreement with Redwood, however, it was terminated in connection with his retirement from the chief executive officer position in May 2010 and, therefore, is not described below.

Each employment agreement provides for the executive to receive severance payments in the event we terminate the executive’s employment without “cause” or the executive terminates for “good reason” (each as defined below). The severance payments would be in addition to payment of the executive’s base salary to the date of termination of the executive’s employment. If terminated without “cause” or if the executive had terminated for “good reason” on December 31, 2010, the aggregate amount of these severance payments would have been equal to:

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In addition, all outstanding stock options and equity-related awards granted to these executives would immediately vest upon either such type of termination. With respect to stock options granted before December 31, 2002, these executives would receive the sum of dividend equivalent rights that would have been payable over the one-year period following termination of employment. Dividend equivalent right payments related to stock options granted to these executives on or after December 31, 2002 would be treated in the same manner, unless the executive’s grant agreements for those stock options provide a different formula for the dividend equivalent right payments. In addition, for the one-year period following termination of employment, these executives would be entitled to receive all life insurance, disability insurance, and medical coverage fringe benefits as if the executive had not been terminated.

The employment agreements provide that 75% of severance amounts due will be paid in a lump sum six months following termination and the remaining 25% will be paid in equal monthly installments over the succeeding six months.

Sections 4999 and 280G of the Internal Revenue Code provide that executives could be subject to significant excise taxes if they receive payments or benefits that exceed certain limits in connection with a change in ownership or change in effective control, and that we or our successors could lose an income tax deduction with respect to the payments subject to those excise taxes.

As of December 31, 2010, under their employment agreements, Mr. Hughes, Mr. Nicholas, and Mr. Zagunis would have been entitled to payment of an excise tax gross-up if there had been excise taxes payable by the executive on the value of severance benefits related to a change of control, which gross up amount would have been paid at the same time as other severance amounts.

As discussed above within “Executive Compensation — Compensation Discussion and Analysis —  Severance and Change of Control Arrangements — Elimination of Excise Tax Gross-up Provisions,” in February 2011 the employment agreements with these executives were amended to eliminate the provisions of those agreements that provided for excise tax gross-ups with respect to excise taxes that may be imposed on change-in-control severance payments made under these agreements.

All severance benefits under each agreement are contingent on the executive agreeing to execute an agreement releasing all claims against Redwood and the executives are subject to non-solicitation restrictions for a year following a termination for which severance is paid.

“Cause” for Mr. Hughes, Mr. Nicholas, and Mr. Zagunis is defined as (i) the executive’s material failure to substantially perform the reasonable and lawful duties of his position for Redwood, which failure shall continue for 30 days after notice thereof; (ii) acts or omissions constituting gross negligence, recklessness, or willful misconduct in the performance of the executive’s duties, fiduciary obligations or otherwise relating to the business of Redwood; (iii) the habitual or repeated neglect of the executive’s duties; (iv) the executive’s conviction of a felony; (v) theft or embezzlement, or attempted theft or embezzlement, of money, tangible, or intangible assets or property of Redwood or its employees; (vi) any act of moral turpitude by the executive injurious to the interest, property, operations, business, or reputation of Redwood; or (vii) unauthorized use or disclosure of trade secrets or confidential or proprietary information pertaining to Redwood’s business.

“Good reason” for Mr. Hughes, Mr. Nicholas, and Mr. Zagunis is defined as the occurrence, without the executive’s written consent, of (i) a significant reduction in the executive’s responsibilities or title; (ii) a reduction in the executive’s base salary or a material reduction by Redwood in the value of the executive’s total compensation package if such a reduction is not made in proportion to an across-the-board reduction of

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all senior executives of Redwood and a change of control has not occurred; (iii) the relocation of the executive’s principal office to a location more than 25 miles from its location as of the effective date of the agreement; (iv) a failure at any time to renew the employment agreement; (v) the complete liquidation of Redwood; or (vi) in the event of a merger, consolidation, transfer, or closing of a sale of all or substantially all the assets of Redwood, the failure of the successor company to affirmatively adopt the employment agreement.

In the event of a “change of control” (as defined below) in which the surviving or acquiring corporation does not assume outstanding stock options and equity-related awards or substitute equivalent awards, the executive’s outstanding options and equity-related awards will immediately vest and become exercisable. If the awards are assumed or substituted, then acceleration only would occur upon a qualifying employment termination (involuntary without cause or voluntary for good reason).

In addition, in the event of termination due to the executive’s death or disability, the employment agreements provide for (i) the payment to the executive or his estate of (a) the executive’s base salary to the date of termination, and (b) the executive’s target annual bonus for the year, prorated to the date of termination, and (ii) vesting in full of all of the executive’s outstanding stock options and other equity-related awards.

“Change of control” is defined as the occurrence of any of the following:

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If any of Mr. Hughes, Mr. Nicholas, or Mr. Zagunis had been terminated as of December 31, 2010 either voluntarily with “good reason” or involuntarily without “cause”, the approximate value of the severance benefits payable to the executive would have been as follows, as calculated in accordance with the terms of the respective employment agreements in place on December 31, 2010. Any executive officer not entitled to severance benefits is not listed in the table below.

Name		Salary & Target Bonus ($)				Accelerated Vesting of Stock Options and Deferred Stock Units ($)(1)				Dividend Equivalent Rights for Options ($)(2)				Benefits ($)(3)				Excise Tax & Excise Tax Gross Up ($)(4)				Total Payment Involuntary Termination Without “Cause” or Voluntary Termination for “Good Reason” ($)
Martin S. Hughes		$	3,010,000			$	6,102,951				—			$	39,177			$	2,801,294			$	11,953,422
Brett D. Nicholas		$	2,000,000			$	4,399,602			$	73,152			$	38,173			$	1,628,723			$	8,139,650
Harold F. Zagunis		$	1,000,000			$	1,800,857			$	45,035			$	39,213				—			$	2,885,105

Compensation Risks

As noted above, the Compensation Committee reviews risks that may arise from Redwood’s compensation policies and practices. In particular, during the first quarter of 2011, management, in consultation with the Compensation Committee and Frederic W. Cook & Co., Inc. the Compensation Committee’s independent compensation consultant (Cook & Co.), prepared a framework for performing a compensation risk assessment, which framework provided for assessment of risks relating to, among other things, components of compensation, performance metrics, performance-based compensation leverage, the timing of compensation delivery, equity-based incentive compensation, stock ownership requirements, stock trading policies, methods for assessing performance, and performance culture. Subsequently, management utilized the framework to prepare a compensation risk assessment for review and consideration by the Compensation Committee and the Audit Committee. Following the review and discussion of this assessment by those Committees, as well as other reviews and discussions relating to risks that may arise from Redwood’s compensation policies and practices, the Compensation Committee determined, after consultation with Cook & Co., that it does not currently believe that Redwood’s compensation policies and practices are reasonably likely to have a material adverse effect on Redwood.

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ADDITIONAL INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than 10% of our common stock, to file reports of ownership of, and transactions in, our common stock with the SEC within certain time periods following events giving rise to such filing requirements. Their initial report must be filed using the SEC’s Form 3 and subsequent stock purchases, sales, option exercises and other changes must be reported on the SEC’s Form 4, which must be filed within two business days of most transactions. In some cases, such as changes in ownership arising from gifts and inheritances, the SEC allows delayed reporting at year-end on the SEC’s Form 5. Based solely on a review of the copies of such reports, we believe that all Section 16(a) filing requirements applicable to our directors, executive officers, and stockholders were complied with during 2010.

Compensation Committee Interlocks and Insider Participation

Our Compensation Committee currently consists of Ms. Proctor (the Chair), Mr. Baum, Mr. Brown, Ms. Byerwalter, and Mr. Pero. No member of our Compensation Committee has served as an officer or employee of Redwood at any time. None of our executive officers serve as a member of the compensation committee of any other company that has an executive officer serving as a member of our Board of Directors. None of our executive officers serve as a member of the board of directors of any other company that has an executive officer serving as a member of our Compensation Committee.

Certain Relationships and Related Transactions

Our Board of Directors monitors and reviews issues involving potential conflicts of interest and related party transactions. In this regard, the Board of Directors applies Redwood’s Code of Ethics, which provides that directors, officers, and all other employees are prohibited from taking actions, having interests, or having relationships that would cause a conflict of interest, and our directors, officers, and all other employees are expected to refrain from taking actions, having interests, or having relationships that would even appear to cause a conflict of interest. Except as described below, there were no relationships or related party transactions between Redwood and any affiliated parties that are required to be reported in this Proxy Statement.

Relationship with Latham & Watkins LLP.  Mr. Pero is a retired partner of Latham & Watkins LLP and has been a director of Redwood since November 2009. Latham & Watkins LLP provides legal services to Redwood. Mr. Pero’s retirement payments from Latham & Watkins LLP are adjusted to exclude any proportionate benefit received from the fees paid by Redwood to Latham & Watkins LLP.

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AUDIT COMMITTEE MATTERS

Audit Committee Report

The Audit Committee of the Board of Directors reports to and acts on behalf of the Board of Directors in providing oversight of the financial and risk management, independent registered public accounting firm, and financial reporting procedures of Redwood. Redwood’s management is responsible for internal controls and for preparing Redwood’s financial statements. The independent registered public accounting firm is responsible for performing an independent audit of Redwood’s consolidated financial statements in accordance with the Public Company Accounting Oversight Board (PCAOB) standards and issuing a report thereon. The Audit Committee is responsible for overseeing the conduct of these activities by Redwood’s management and the independent auditors.

In this context the Audit Committee met and held discussions during 2010 and 2011 with management and the independent registered public accounting firm (including private sessions with the independent registered public accounting firm, and Redwood’s head of internal audit, Chief Financial Officer, Controller, and Chief Risk Officer). During these meetings, the Audit Committee, among other things, reviewed and discussed with both management and the independent registered public accounting firm the quarterly and audited year-end financial statements and reports prior to their issuance. These meetings also included an overview of the preparation and review of these financial statements and a discussion of any significant accounting issues. Management and the independent registered public accounting firm advised the Audit Committee that these financial statements were prepared under generally accepted accounting principles in all material respects. The Audit Committee also discussed the quality, not just the acceptability, of the accounting principles used in preparing the financial statements, the reasonableness of significant accounting judgments and estimates, and the clarity of disclosures in the financial statements.

The Audit Committee discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, Communications with Audit Committees.

In addition, the Audit Committee received from the independent registered public accounting firm the written disclosures and the letter regarding the firm’s independence as required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees. The independent registered public accounting firm provided certain tax services and other services in 2010. These disclosures and other matters relating to the firm’s independence were reviewed by the Audit Committee and discussed with the independent registered public accounting firm.

The independent registered public accounting firm discussed the scope of its audit with the Audit Committee prior to the audit. The Audit Committee discussed the results of the audit with management and the independent registered public accounting firm. The Audit Committee also discussed with management and the independent registered public accounting firm the adequacy of Redwood’s internal controls, policies, and systems, and the overall quality of Redwood’s financial reporting.

Based on its review of the financial statements, and in reliance on its review and discussions with management and the independent registered public accounting firm, the results of internal and external audit examinations, evaluations by the independent registered public accounting firm of Redwood’s internal controls, and the quality of Redwood’s financial reporting, the Audit Committee recommended to the Board of Directors that Redwood’s audited financial statements be included in Redwood’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for filing with the SEC.

Audit Committee:
Greg H. Kubicek, Chair
Thomas C. Brown
Mariann Byerwalter
Georganne C. Proctor
Charles J. Toeniskoetter

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Fees to Independent Registered Public Accounting Firm for 2010 and 2009

Grant Thornton LLP audited Redwood’s financial statements and otherwise acted as Redwood’s independent registered public accounting firm with respect to the fiscal years ended December 31, 2010 and 2009. The following is a summary of the fees billed to us by Grant Thornton LLP for professional services rendered for 2010 and 2009:

		Fiscal Year 2010				Fiscal Year 2009
Audit Fees		$	1,324,377			$	1,929,422
Tax Fees			123,050				112,350
Total Fees		$	1,447,427			$	2,041,771

Audit Fees were for the audits of our annual consolidated financial statements included in our Annual Report on Form 10-K, reviews of the financial statements included in our Quarterly Reports on Form 10-Q, other assistance required to complete the year-end audits, costs associated with Sarbanes-Oxley attestation requirements, other services rendered for comfort letters, and consents.

Tax Fees were for services rendered related to tax compliance and reporting.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Registered Independent Accounting Firm

It is the Audit Committee’s policy to review and pre-approve the scope, terms, and related fees of all auditing services and permitted non-audit services provided by the auditors, subject to de minimis exceptions for non-audit services which are approved by the Audit Committee prior to the completion of the audit.

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ITEM 2 — RATIFICATION OF APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee has selected Grant Thornton LLP as the independent registered public accounting firm to audit the books of Redwood and its subsidiaries for the year ending December 31, 2011, to report on the consolidated financial statements of Redwood and its subsidiaries, and to perform such other appropriate accounting services as may be required by our Board of Directors. The Board of Directors recommends that the stockholders vote in favor of ratifying the appointment of Grant Thornton LLP for the purposes set forth above. If the stockholders do not ratify the appointment of Grant Thornton LLP, the Audit Committee will consider a change in auditors for the next year.

Grant Thornton LLP has advised the Audit Committee that they are independent accountants with respect to Redwood, within the meaning of standards established by the American Institute of Certified Public Accountants, the PCAOB, the Independence Standards Board and federal securities laws administered by the SEC. Representatives of Grant Thornton LLP will be present at the Annual Meeting. They will have the opportunity to make a statement if they so desire, and they will be available to respond to appropriate questions.

Vote Required

If a quorum is present, the affirmative vote of a majority of the votes cast at the Annual Meeting is required for ratification of the appointment of Grant Thornton LLP as our independent registered public accounting firm for the year ending December 31, 2011. Abstentions and broker non-votes will not be counted as votes cast and will have no effect on the results of the vote in ratifying the appointment of Grant Thornton LLP.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION OF GRANT THORNTON LLP AS REDWOOD’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2011.

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ITEM 3 — ADVISORY VOTE ON EXECUTIVE COMPENSATION

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which we refer to as the Dodd-Frank Act, provides our stockholders with an opportunity to vote on a proposal to approve, on an advisory (non-binding) basis, the compensation of Redwood’s Named Executive Officers (also referred to as NEOs) as disclosed in this Proxy Statement in the Compensation Discussion and Analysis section and the related executive compensation tables. This proposal, commonly known as a “say-on-pay” proposal, gives our stockholders the opportunity to express their views on our Named Executive Officers’ compensation. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our Named Executive Officers and the executive compensation philosophy, objectives, programs, plans, policies, and practices described in this Proxy Statement. Redwood’s NEOs are the six executive officers listed in the various compensation tables of the Compensation Discussion and Analysis section of this Proxy Statement.

The Compensation Committee of Redwood’s Board of Directors acts on behalf of the Board of Directors in administering Redwood’s executive compensation plans and programs. As described in detail within the Compensation Discussion and Analysis section of this Proxy Statement, Redwood has a performance-based executive compensation philosophy that seeks to provide incentives to achieve both short-term and long-term business objectives and ensure that Redwood can hire and retain talented individuals in a competitive marketplace. Based on this compensation philosophy, Redwood’s executive compensation objectives are as follows:

Please read the Compensation Discussion and Analysis section of this Proxy Statement, which begins on page 21, and the related executive compensation tables, which begin on page 49, for more information about the compensation of Redwood’s Named Executive Officers for 2010. The Compensation Committee is committed to providing disclosure within the Compensation Discussion and Analysis section of this Proxy Statement that gives insight into the process by which it arrives at determinations relating to executive compensation and the underlying rationale for those determinations. Among other things, the Compensation Discussion and Analysis describes:

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Each year the Compensation Committee reviews Redwood’s compensation philosophy and its executive compensation plans and programs and makes compensation determinations and changes it believes are necessary or appropriate in light of its executive compensation objectives. The following is a summary of certain determinations and changes that applied to 2010 and/or will apply to 2011 and subsequent years as a result of this regular review process. The Board of Directors and the Compensation Committee believe these determinations and changes should be taken into consideration by stockholders in exercising their advisory vote on executive compensation.