Redwood Trust, Mill Valley, Calif., earned $18 million in the first quarter, a 61% decline from the same period a year ago as lower net interest revenue and negative valuation adjustments took a bite out of its performance.

But Redwood – the only firm to issue Jumbo MBS during the past two years – also reported that it is having a hard time finding Jumbo loans to purchase in the secondary market, telling shareholders: “The biggest obstacle we face today is volume.”

In its regular Redwood Trust ‘letter’ to stockholders, the mortgage investing REIT noted that, “We are only able to source loans from the 5% to 10% of mortgage loans that are outside the government’s reach.”

It also referred to its Jumbo conduit as being “operationally inefficient,” adding that the unit is a “drag on earnings.”

But the company, whose forte is investing in MBS, is not giving up on Jumbo securitizations. “The good news is that the systems and operations in place can be leveraged, likely leading to higher earnings,” it told shareholders.

Redwood purchases already funded Jumbo loans from originators in the primary market. It does not fund loans itself, except commercial mortgages.

In all of 1Q11 it acquired $101 million of Jumbo loans.

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