July 9, 2012

VIA EDGAR AND FACSIMILE TRANSMISSION – 202-772-9209

Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549

Dear Mr. Demarest,

On behalf of Redwood Trust, Inc. (“Redwood”), I hereby provide the following response in reply to the Staff’s comment letter dated June 25, 2012 (the “Comment Letter”) in connection with the above-referenced Annual Report on Form 10-K and Quarterly Report on Form 10-Q. For your convenience, each of my responses is preceded with an italicized recitation of the comment set forth in the Comment Letter.

Form 10-K for the fiscal year ended December 31, 2011

Legal Proceedings, page 37

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 (our “2011 Form 10-K”), on July 19, 2011, the FHLB-Seattle’s claims against Redwood and its subsidiary, Sequoia Residential Funding, Inc., were dismissed for lack of personal jurisdiction. As a result of the dismissal, FHLB-Seattle is currently pursuing claims only against the underwriters of the Sequoia mortgage-backed securities at issue in the litigation. Our current potential exposure to those claims is indirect and is a result of the indemnities we provided to those underwriters at the time of the issuance of those mortgage-backed securities. The mortgage-backed securities at issue in the original complaint continue to perform and, as a result, the FHLB-Seattle continues to receive all principal and interest payments to which it is contractually entitled under the terms of the securities. Because of these and other factors, including the nature of the claims that the FHLB-Seattle is pursuing against the underwriters, equitable considerations that may limit the availability of any potential remedy against those underwriters, and potential limits on the underwriters’ indemnity claims against us, we are not able to quantify the remedy that the FHLB-Seattle is seeking or the amount to which we, indirectly, could be exposed as a result of this litigation. We believe that any quantification that is premised on various assumptions regarding these factors may be materially inaccurate and, therefore, would not be useful to investors or other readers of our quarterly and annual Exchange Act reports.

We have and will continue to disclose in our quarterly and annual Exchange Act reports the original principal amount of the securities at issue (which is equivalent to the purchase price paid by the FHLB-Seattle for those securities), as well as the current principal balance of those securities, which we believe aids readers of our Exchange Act reports by providing information that is helpful in assessing the magnitude of any loss that could be associated with a rescission remedy. In addition, we will also provide in future quarterly and annual Exchange Act reports, the aggregate amount of interest payments made to the FHLB-Seattle in respect of those securities, which will provide readers of our Exchange Act reports with additional information that will be helpful in assessing the magnitude of any loss that could be associated with a rescission remedy.

Earning Assets – Redwood (Parent), page 65

We allocate specific borrowings to specific asset classes in certain circumstances – namely through our consolidation of various securitization entities for financial reporting purposes. Beginning on Page 44 of our 2011 Form 10-K, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes our securitization activities and how we account for consolidated entities. Contributing to our reported income is net interest income earned at these entities that consists of interest income on real estate related assets less the interest expenses incurred on the debt secured by those assets. On Page 57 of MD&A, we present a disaggregated version of our GAAP consolidated income that separates income earned at Redwood from income earned at consolidated securitization entities with associated assets and borrowings. Additionally, we believe that Tables 22 and 25 beginning on Page 71 illustrate the spread between the yield on our securitized assets and their specific financing costs.

In addition to our ongoing securitization activities, we had accumulated residential mortgage loans and residential mortgage-backed securities that were funded with a combination of short-term debt and equity. Short-term debt includes warehouse facilities for residential mortgage loans and repurchase facilities for residential securities. On Page F-49 of our 2011 Form 10-K, we highlight the outstanding short-term debt by collateral type (residential loans and real estate securities) as well as the weighted average interest rate on the debt for the periods presented. Additionally, in MD&A of our 2011 10-K, we provide information on Page 60 highlighting yields on our loans and securities, some of which are funded with short-term debt. In addition, we will also provide in future quarterly and annual Exchange Act reports, a table that sets forth the spread between the yield on unsecuritized loans and securities and their specific debt financing costs.

Management uses asset-specific measures to evaluate risk associated with our real estate loans and securities, and our risk management derivatives. Set forth below is a summary of these measures and references to related disclosures made in our 2011 Form 10-K. As disclosed on Page 12 of our 2011 Form 10-K, credit ratings assigned to debt securities by the credit rating agencies may not accurately reflect the risks associated with the securities we own. As a result, we generally do not consider credit ratings in assessing risks associated with our assets.

Real Estate Loans

For loans held at fair value or the lower of cost or fair value, our risk assessment associated with these assets is reflected in their estimated fair values. The factors used to determine the fair value of our residential loans are summarized in our 2011 Form 10-K, in Note 5, on Page F-29. For loans held-for-investment, we assess the risk of these loans as part of our initial underwriting and recurring loss reserving analyses. In addition to the weighted average FICO score and weighted average original loan to value noted on Page F-34, we consider the following factors, as disclosed in Note 3 on Page F-13, to evaluate our residential loans held-for-investment on an ongoing basis:

For commercial loans held-for-investment, our risk analysis is based on an internal risk assessment process by which we assign an internal risk rating of “Pass,” “Watch List,” “or “Workout,” to each loan. As disclosed in our 2011 Form 10-K in Note 3 on Pages F-14 through F-15, we consider the following factors to assign ratings and establish loss reserves for these commercial loans on an ongoing basis:

Real Estate Securities

Our risk assessment associated with real estate securities we own is reflected in their estimated fair values. The factors used to determine the fair value of our residential securities are summarized in Note 5, on Page F-30 of our 2011 Form 10-K. We also use the “prime” or “non-prime” designations to categorize our residential securities based upon the general credit characteristics of the residential loans underlying each security at the time of origination as described in Note 3 on Page F-15. For residential securities, which comprise 94% of the fair value of our securities portfolio, we consider the credit quality at time of origination of the underlying loans as well as the serious delinquencies on those loans at the balance sheet date as part of our ongoing risk assessment. As noted above, we generally do not assess the risks associated with our securities based on their credit ratings or changes in credit ratings. Instead, we focus on the rights of our securities to principal and interest cash flows based upon their seniority within a securitization capital structure (e.g., senior, subordinate, etc.) as discussed in Note 8 on Page F-40 of our 2011 Form 10-K.

Derivative Instruments

Our derivative instruments are generally used for risk management purposes and constitute interest rate and other derivatives for which there are active markets. In addition to changes in observed fair values (summarized in Note 5 on Page F-30 of our 2011 Form 10-K), we assess the risk of these derivatives based upon our assessment of counterparty nonperformance risk, as disclosed in Note 9 on Page F-48 of our 2011 Form 10-K. This risk is largely addressed through adherence to International Swaps and Derivatives Association (“ISDA”) agreements with bank counterparties. Each party must maintain compliance with these agreements (or receive a waiver of non-compliance after a specific assessment) in order to conduct derivative transactions with us. Additionally, derivative counterparty credit standings are reviewed on a daily basis and in the case of a deterioration of credit worthiness, appropriate remedial action is taken.

We mitigate counterparty nonperformance risk by exiting derivatives contracts with counterparties that (i) do not maintain compliance with (or obtain a waiver from) the terms of their ISDA agreements with us; or (ii) do not maintain their status as a primary government dealer or affiliate by the U.S. Department of Treasury or do not meet internally established guidelines regarding credit worthiness. Our ISDA agreements currently require full bilateral collateralization of unrealized loss exposures with our derivative counterparties. Through a margin posting process, our positions are revalued with counterparties each business day and cash margin is transferred to either Redwood or our derivative counterparties as collateral based upon the directional changes in fair value of the positions. The risk posed by counterparty nonperformance should generally be limited to operational delays (24 hours) in posting collateral. At December 31, 2011, we assessed this risk as remote and did not record a specific valuation adjustment.

As discussed in Note 4 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (our “Q1 2012 Form 10-Q”), during the three months ended March 31, 2012, we transferred residential loans to SEMT 2012-1 and SEMT 2012-2, and accounted for these transfers as sales under GAAP. We sponsored these securitizations to provide investors with the ability to invest in a pool of residential mortgage loans, thereby allowing us to invest in the subordinate interests in the securitizations and access liquidity to finance our acquisition of additional loans.

In performing our consolidation analysis, we considered whether or not Redwood, as transferor, had surrendered control over the transferred financial assets in accordance with Accounting Standards Codification (“ASC”) 860. Control was considered to be surrendered upon the completion of each securitization once we determined that all three of the following conditions were met:

At the time of the issuance of the securitizations, we obtained legal true sale opinions from our outside securitization counsel. These opinions concluded that the transactions are true sales at law, and that the securitization entities are bankruptcy remote from Redwood and its affiliates, regardless of whether the securitizations are accounted for as sales or secured financings. Additionally, each entity qualified as a real estate mortgage investment conduit (“REMIC”) for federal tax purposes. Based on these factors, we concluded the criteria for legal isolation with regard to these securitizations had been met.

The SEMT 2012-1 and SEMT 2012-2 securitization trusts that were transferees of the financial assets were established with the limited purpose of engaging in securitization or asset-backed financing activities. Because the securitization entities are established as trusts, ownership of the securities issued by the securitization entities represents ownership of the beneficial interests in the underlying assets of the trusts. Accordingly, we determined that it was appropriate to look through each of the limited purpose securitization entities and analyze whether holders of these beneficial interests (i.e., holders of the securities issued by the securitization trusts) have the right to pledge or exchange their beneficial interests.

After evaluating this criterion with respect to the terms and conditions placed on each third-party holder of the beneficial interests, we concluded that there are no material restrictions or constraints on the rights of a holder of the securities issued by the SEMT 2012-1 or SEMT 2012-2 securitization trusts to monetize the cash inflows (the primary economic benefits of the beneficial interests in the residential mortgage loans) by pledging or selling those beneficial interests. As such, we concluded the condition for pledging or exchanging the transferred assets has been met for each securitization transaction.

In order to determine if effective control had been surrendered, we identified the key activities that we believe significantly influence the ongoing economic performance of the transferred financial assets and the associated securitizations. These activities include credit loss management activities and other discretionary rights.

Credit loss management activities

All loans in these securitization entities are serviced by one of several third-party primary servicers under the terms of the pooling and servicing agreement applicable to each securitization. This includes loans for which Redwood owns the mortgage servicing rights (“MSRs”) and contracts with a third-party licensed servicer to perform servicing functions. In instances where securitized loans become delinquent (or are reasonably foreseeable of becoming delinquent), the third-party master servicer (“Master Servicer”) of each securitization has the sole ability to authorize payment plans and modifications for such loans. The primary servicers can propose loan modifications or various workout strategies, but these proposals must be approved by the Master Servicer of the securitization prior to enactment. No party can overrule or terminate the Master Servicer’s rights to approve these loss management activities. The failure by a primary servicer to comply with the Master Servicer’s approval authority would constitute an event of default under the servicing agreement and allow for the eventual replacement of that primary servicer by the Master Servicer to the extent the default is not remedied.

Other discretionary rights

The Master Servicer for the SEMT 2012-1 and SEMT 2012-2 securitization entities possesses an optional call right that provides it with the right to purchase the outstanding mortgage loans from the securitization entities when the aggregate principal balance of the securitized loans falls below a predetermined threshold. Neither Redwood nor the primary servicers of loans possess these discretionary rights and do not have the ability to unilaterally cause the special purpose entities to return specific assets or have the ability to unilaterally repurchase current or nonperforming loans out of these entities.

Our ongoing role in each securitization is as an investor and holder of MSRs, with effectively no substantive discretionary powers that would imply effective control over the transferred loans. The Master Servicer of each securitization holds the exclusive power to direct credit loss mitigation activities as well as other discretionary rights. The Master Servicer can only be replaced if an event of default occurs, as defined in the applicable pooling and servicing agreement. In such case, the third-party trustee for each securitization must appoint a successor Master Servicer or succeed to all responsibilities, duties and liabilities of the Master Servicer under the applicable pooling and servicing agreement.

Based on the foregoing, we concluded that effective control had been surrendered over the transferred loans as defined by ASC 860, and account for these transfers as sales in accordance with GAAP.

As discussed in Note 4, Page 19, of our Q1 2012 Form 10-Q, we recognized an MSR asset with a fair value of less than $2 million at March 31, 2012. This asset was established upon the transfer of $743 million (principal value) of residential loans, of which we owned the servicing rights for $206 million of these loans, to the above referenced securitizations (SEMT 2012-1 and SEMT 2012-2) during the first quarter of 2012.

Our receipt of interest income on retained securities is not subject to any covenants. Our receipt of servicing fee income is not subject to any covenants other than customary performance obligations associated with servicing residential loans. For loans that we have transferred into securitizations while maintaining the associated servicing rights, the sub-servicer we contract with to perform servicing activities may be terminated if it fails to perform under the applicable contractual terms. If the sub-servicer is terminated for a breach of contract, a new sub-servicer would need to be approved by the Master Servicer and assume the servicing responsibilities in accordance with the applicable pooling and servicing agreement. If a sub-servicer we contract with was to default, we would evaluate our MSR asset for impairment at that time.

Additionally, any ratings action related to Redwood would not impact our contractual right to receive servicing fee income related to MSRs or interest income related to the retained securities from SEMT 2012-1 and SEMT 2012-2, and therefore would not impact our valuation of servicing fee income or interest income.

At March 31, 2012, we had long-term debt outstanding of $140 million. Our long-term debt does not include financial covenants. At March 31, 2012, we had short-term debt outstanding of $441 million. In conjunction with incurring short-term debt, we make covenants to creditors based on certain financial metrics and ratios. Our existing Exchange Act reports disclose the nature of the financial covenants we make, the consequences of a financial covenant default, and related risks, including for example, in:

In order to supplement our existing disclosures, we plan to include in future quarterly and annual Exchange Act reports additional disclosure in the form set forth on Annex A hereto relating to financial covenants. In addition, when necessary or appropriate, we will (i) update in each Quarterly Report on Form 10-Q and Annual Report on Form 10-K the disclosures described above that were included in our 2011 Form 10-K under the heading “Risks Relating to Short-Term Debt Incurred Under Residential Mortgage Loan Warehouse Facilities and Securities Repurchase Facilities” and (ii) include in each Quarterly Report on Form 10-Q and Annual Report on Form 10-K updates to our Risk Factors that relate to financial covenants contained in long-term and short-term debt that we incur.

As of March 31, 2012, we had short-term debt outstanding of $441 million. In connection with incurring short-term debt, we generally agree to margin call provisions with creditors. Our existing Exchange Act reports describe that we are subject to margin call provisions in our short-term debt and disclose associated risks, including for example, in:

In order to supplement our existing disclosures, we plan to include in future quarterly and annual Exchange Act reports additional disclosure in the form set forth on Annex B hereto relating to the margin call provisions of our short-term debt. In addition, when necessary or appropriate, we will (i) update in each Quarterly Report on Form 10-Q and Annual Report on Form 10-K the disclosures described above that were included in our 2011 Form 10-K under the heading “Risks Relating to Short-Term Debt Incurred Under Residential Mortgage Loan Warehouse Facilities and Securities Repurchase Facilities” and (ii) include in each Quarterly Report on Form 10-Q and Annual Report on Form 10-K updates to our Risk Factors that relate to margin call provisions contained in debt that we incur.

* * *

As you have requested, I confirm that:

Should you have any further comments or questions about this letter, please contact me by telephone at 415-389-7373, by fax at 415-381-1773, or by email at [email protected].

Very truly yours,

Redwood Trust, Inc.

By: /s/ Christopher J. Abate

Christopher J. Abate

Chief Financial Officer

ANNEX A

Form of Supplemental Disclosures Relating to Financial Covenants

Financial Covenants Associated With Short-Term Debt

Residential Loan Warehouse Facilities.   One source of our short-debt debt financing is secured borrowings under residential loan warehouse facilities we have established with two different financial institution counterparties. Financial covenants included in these warehouse facilities are as follows and as of [insert quarter end date] we were in compliance with each of these financial covenants:

Securities Repurchase Facilities.  Another source of our short-term debt financing is through secured borrowings under securities repurchase facilities we have established with various financial institution counterparties. Financial covenants included in these securities repurchase facilities are as follows and as of [insert quarter end date] we were in compliance with each of these financial covenants:

Committed Line of Credit.  We also maintain a $10 million committed line of short-term credit from a bank, which is secured by our pledge of certain mortgage-backed securities we own. This bank line of credit is an additional source of short-term financing for us. The types of financial covenants included in this bank line of credit are a subset of the covenants summarized above.

ANNEX B

Form of Supplemental Disclosures Relating to Margin Calls

Margin Call Provisions Associated With Short-Term Debt

Residential Loan Warehouse Facilities.  One source of our short-debt debt financing is secured borrowings under residential loan warehouse facilities we have established with two different financial institution counterparties. These warehouse facilities include the margin call provisions described below and during the three months ended [insert quarter end date] we did [not receive any / receive and complied with] margin calls from creditors under these warehouse facilities:

Securities Repurchase Facilities.  Another source of our short-debt debt financing is through secured borrowings under securities repurchase facilities we have established with various financial institution counterparties. These repurchase facilities include the margin call provisions described below and during the three months ended [insert quarter end date] we did [not receive any / receive and complied with] margin calls from creditors under these repurchase facilities:

Committed Line of Credit.  We also maintain a $10 million committed line of short-term credit from a bank, which is secured by our pledge of certain mortgage-backed securities we own. This bank line of credit is an additional source of short-term financing for us. Margin call provisions included in this bank line of credit are as follows and during the three months ended [insert quarter end date] we did [not receive any / receive and complied with] margin calls from this creditor under this line of credit: