Redwood Trust, the only firm to publicly issue Jumbo MBS the past two years, earned just $1 million in the third quarter, but its acquisition of nonconforming product in the secondary market jumped by 166%.

The publicly traded REIT reported late Thursday that it acquired $405 million of Jumbo home mortgages during the period compared to $152 million in 2Q.

At Sept. 30 it had a $295 million pipeline of jumbos that it was ready to purchase.

But the Mill Valley, Calif.,-based financial services firm had a weak earnings quarter, which it blamed on an unexpected drop in interest rates.  In 2Q it earned $9 million, and in 3Q10 it posted a $20 million profit.

Redwood, like other bank and mortgage companies, was hurt when the value of its derivatives fell precipitously.

In its Redwood Review report that accompanied its earnings release, the firm noted that the yield on the 10-year Treasury began the quarter at 3.16% and reached a low of 1.72% as investors sought a safe haven in U.S. debt.

Although government backed bonds rose in value “Prices underperformed for virtually all non-government backed fixed-income instruments,” the company said.

It also booked a $4 million loss on its “legacy” Sequoia entities compared to a $2 million hit in 2Q11. However, serious delinquencies were flat.

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