The proposed bank capital rule changes could create further opportunity for Redwood Trust when it comes to non-agency mortgages, company management said on its second quarter earnings call.
The real estate investment trust is seeing more interest from bank executives that “like us, see where the proverbial puck is headed after watching portfolio mortgages play a central role in the demise of Silicon Valley Bank and First Republic Bank earlier this year,” said CEO Christopher Abate on the earnings call.
“In fact, over the past few months, we’ve completed onboarding and have already activated a number of regional and midsized banks with aggregate assets of over $2 trillion, and we’re in various stages of bringing many more online in the coming weeks and months,” he added.
Abate also updated investors on related developments he had discussed in Redwood Trust’s first quarter earnings call.
Since then, Redwood has added new business relationships to existing flow purchase arrangements with banks. These have included partnerships with institutions finding it no longer economically feasible for that to continue, Abate said, noting that it’s a trend he expects to intensify in the wake of the new capital proposal.
“Our strategic focus will be to continue onboarding such depositories with the goal of becoming their primary capital partner as they look to serve their jumbo clients in a seamless manner even before the final regulatory changes go into effect,” Abate said.
During the quarter Redwood increased its capital allocation to the residential mortgage business to $80 million from $15 million as of March 31.
It locked $567 million of jumbo loans during the second quarter, while buying $184 million, including three bulk pools from depositories; most of those underlying loans were seasoned and acquired at attractive discounts.
For the period ended March 31, it had $117 million of locks and purchases of $52 million.
“The change in jumbo [residential mortgage] trends could be an inflection point in terms of capital deployment,” said Bose George, an analyst at Keefe, Bruyette & Woods, in a flash note on Redwood.
Jumbo lending is a $300 billion market and Redwood has connected with approximately half of it, said Redwood’s President, Dashiell Robinson, during the call. The REIT historically has had a 2% to 3% share in this market.
“And in terms of the folks that we engage with, our wallet share has kind of been between 8% to 12%, 8% to 14% over the past few years with some dispersion around that average,” Robinson said, later adding Redwood has now engaged with over 70 banks.
Redwood’s been a first mover in this changing environment in the banking world. Adding those depositories as business partners comes with challenges in terms of operational lift and vendor management, Robinson said. But the REIT considers the inroads it’s making to be worth it.
“There’s some real upside to what our historical wallet share has been,” Robinson said.
Redwood’s investment in this area may have come at the expense of its business purpose lending line. However, in June, it entered into a joint venture with Oaktree Capital Management to invest in loans originated by Redwood’s CoreVest subsidiary.
The venture has the potential to finance $1 billion of BPL. Oaktree owns 80% of the JV’s equity.
Business purpose lending had a one percentage point reduction in capital allocation to 11% during the quarter, according to George.
Term BPL fundings fell to $129 million from $174 million in the first quarter, while bridge loan volume increased slightly to $278 million from $264 million.
For the second consecutive quarter, Redwood Trust was barely in the black, with GAAP net earnings of $1 million. This was up from $3 million in the first quarter and a loss of $100 million in the second quarter of 2022.
GAAP income was affected by “net negative investment fair value changes from incremental impairments on our bridge loan portfolio and fair value declines on our reperforming loan, or RPL investments, from spread widening during the first quarter despite fundamental credit performance of our RPL book continuing to improve,” said Brooke Carillo, chief financial officer, during the call.
Earnings available for distribution, a non-GAAP metric, totaled $16 million in the second quarter, up from $14 million in the first quarter.
