Redwood Trust will struggle to generate revenue without securitization funding as an option, according to an FBR Capital Markets report.

The real estate investment trust on Monday reported 1Q2104 earnings.

“We intend to continue increasing our market share and growing loan purchase volumes by adding sellers, ramping up our new GSE product line, and adding other mortgage products – such as non-QM loans – down the road," Redwood said in its earnings report. 

However the REIT's ability to securitize and sell these purchased loans “remains muted in the current environment”, according to the FBR report. “Based on the current environment, we believe that Redwood is unlikely to securitize any meaningful amount of loans and expect any future securitizations to be on the smaller side.”

Redwood completed a $347 million securitization of residential mortgages in April — the issue’s first of 2014 — but the company gave no clear outlook on future securitization volumes in its earning report.

Instead the REIT indicated that thanks to strong demand for whole loans, profit margins are higher for selling mortgages in this fashion as opposed to securitizing them. 

Redwood completed $722 million of whole loan sales in the first quarter of 2014, consisting of 12 jumbo loan transactions totaling $562 million and $160 million of conforming loan sales to the GSEs.

In late October 2013, Shellpoint Partners pulled its Shellpoint Asset Funding Trust 2013-2 RMBS in favor of selling the underlying whole loans. The decision was based on the “substantial pricing disconnect” between the whole loan and new issue RMBS secondary markets, said Shellpoint.

Without the securitization option, FBR believes that Redwood will struggle to generate revenues comparable to 2013.

Redwood reported a net loss from residential mortgage banking activities of $2 million for 1Q2014, as compared $10 million in income for 4Q2013. In 1Q2014, the company earned $12 million, or $0.14 per share, a decrease from $25 million, or $0.29 per share, in the fourth quarter of 2013.

“Total residential securitizations of $5.5 billion and loans sales of $7.1 billion in 2013 will be difficult to match given a weak start to the year,” wrote FBR analysts.

Redwood said it plans to offset declining residential mortgage securitization volumes by ramping its conforming and commercial businesses. The company plans to capitalize on the $250 billion of commercial mortgage loans that are set to mature in 2014 and annually over the following three years.

The REIT has forecast $1 billion in origination volume of commercial loans in 2014. Redwood said it has already originated $119 million of senior commercial mortgage loans and $2 million of mezzanine loans in the first quarter of 2014. In addition, it retained $5 million of B-Note mortgages from three senior commercial loans it originated. It also sold $65 million of senior commercial loans in the first quarter.

 

 

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