Redwood's net income slips on lower mortgage banking earnings

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Redwood Trust's net income was down 30% from the prior quarter as mortgage banking activities earnings fell by 60%.

The real estate investment trust had net income of $33 million in the second quarter, down from $47 million in the first quarter and off nearly 8% from $36 million one year prior. Mortgage banking income was $11 million, compared with $27 million in the first quarter and $12 million in the second quarter of 2017.

"Our second-quarter results reflects lower mortgage banking income with gross margins within our long-term expected range after outperformance in the first quarter," said Chief Financial Officer Collin Cochrane during its conference call. "Additionally, we experienced a decrease in gains realized from security sales relative to the first quarter as the pace of our portfolio optimization moderated."

During the quarter, Redwood Trust closed four securitizations totaling $1.7 billion. It also did the fourth securitization of its Redwood Choice expanded prime loan program.

Nearly three-quarters of its volume during the period was purchase loans, up from 63% during the first quarter, said Dash Robinson, Redwood's president.

"In our view, the current environment reaffirms the value of product diversity that we bring to our sellers, most notably Redwood Choice," said Robinson. "This channel remains a significant area of growth for us with Choice loans accounting for approximately 33% of our total second-quarter lock volume, up from 29% in the first quarter."

The company acquired a minority stake in 5 Arches, a single-family rental and "fix and flip" lender during the quarter.

"Our $10 million minority investment may not have seemed to overly significant at the time it was announced in the second quarter, but it is already bearing fruit," said CEO Chris Abate.

"We have recently begun purchasing our first single-family rental loans originated through 5 Arches and have a growing pipeline of loans that we are committed to purchase. We also committed $50 million of capital in early August to purchase short-term residential fix-and-flip loans originated and managed by 5 Arches and expect that investment to generate accretive returns."

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