Redwood Trust's Q3 2025: Contradictions Emerge on Legacy Asset Disposition, EPS Forecasts, and Non-QM Market Growth

Date of Call: October 29, 2025

Financials Results

• EPS: GAAP net loss of $9.5M, $0.08 loss per share, compared to GAAP net loss of $100M or $0.76 per share in Q2

Guidance:

• Reduce legacy exposure from 33% (July 30) to 20% by year-end and wind down legacy assets (management expects roll-off by 2026)
• Redeploy ~ $150M freed capital into mortgage banking (Sequoia, Aspire, CoreVest) to capture higher ROEs
• Expanded CPP secured borrowing facility to $400M and extended maturity to Sept 2028 to support growth
• Fundraising efforts planned for the Sequoia platform to attract institutional capital
• Expect mortgage banking segment ROEs to remain >20% as platforms scale

Business Commentary:

• Strong Mortgage Banking Performance:
• Redwood Trust reported a nearly $7 billion in loan locked or originated in Q3, a new quarterly record.

• Growth was driven by record contributions from bank sellers and new distribution partners, enabling faster capital turnover and increased volume.

• Legacy Portfolio Reduction:

• Redwood significantly reduced its legacy capital allocation from 33% of total capital in July to 25% in Q3.

• This reduction was driven by the proactive repositioning of the balance sheet and repurchase of common shares, aiming to free up capital for more profitable operating platforms.

• Non-Prime Loan Market Expansion:

• Aspire, Redwood's non-QM loan aggregator, achieved $1.2 billion in third-quarter locks, nearly 4x the volume compared to the previous quarter.

• The growth is attributed to its expanded product offerings and increased seller engagement, positioning Aspire as a top 5 aggregator in the sector.

• Sequoia Platform Growth:

• Sequoia launched $5.1 billion in loans during Q3, a 53% increase from Q2 and a record for the platform.
• The growth was driven by market share gains, especially from bank sellers, and increased jumbo production, reflecting trends in bank M&A activity.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted record originations (nearly $7B locked/originated; $5.1B Sequoia, $1.2B Aspire), core EAD of $0.20 per share, maintained mortgage banking ROEs above 20% for five consecutive quarters, reduced legacy capital to ~25% with $150M freed for redeployment, and expanded the CPP facility to $400M — framing strong operational momentum and constructive outlook.

Q&A:

• Question from Bose George (Keefe, Bruyette, & Woods, Inc., Research Division): When legacy runs off, should we view consolidated earnings as converging to the non-GAAP core EAD ($0.20) plus redeployment returns?
  Response: Yes — as legacy winds down consolidated earnings should approach current core EAD (~$0.20); $150M freed this quarter will be redeployed into mortgage banking that has generated >20% ROEs.

• Question from Bose George (Keefe, Bruyette, & Woods, Inc., Research Division): The $0.20 strips out legacy — as you redeploy that capital, should incremental returns be at ~20%?
  Response: Yes — there remains ~$400M of capital in legacy to free up and it will be redeployed into mortgage banking where management expects ~20%+ returns.

• Question from Bose George (Keefe, Bruyette, & Woods, Inc., Research Division): Redwood Investments EAD ROE fell to 10% from ~16% last quarter — what drove that decline?
  Response: Lower net interest income driven by payoffs (~$450M of payoffs across bridge and term loans) and mix shift as capital is reallocated into mortgage banking.

• Question from Richard Shane (JPMorgan Chase & Co, Research Division): With legacy freeing ~$100M per quarter, which core businesses will absorb capital and are mortgage banking platforms capital constrained?
  Response: Management: All three mortgage-banking platforms (Sequoia, Aspire, CoreVest) can absorb redeployed capital; they have consistently deployed freed capital and expect continued demand for capital across these businesses.

• Question from Richard Shane (JPMorgan Chase & Co, Research Division): Is the ROE expansion in Sequoia driven by scale or favorable margins?
  Response: Dash: It's both — greater capital efficiency and faster turnover (frequent securitizations), improved operating expense ratios, and synergies with Aspire are driving the ROE expansion.

• Question from Douglas Harter (UBS Investment Bank, Research Division): How should we think about corporate expense to maximize ROE and the role of third-party investment ROE?
  Response: Brooke: The focus is scaling operating franchises rather than shrinking infrastructure; expenses support growth and operating leverage, while third-party investments will be selective and limited to assets meeting cost-of-capital.

• Question from Donald Fandetti (Wells Fargo Securities, LLC, Research Division): How do you see Aspire's market growth and could a shrinking GSE footprint increase demand?
  Response: Dash: Aspire's TAM is growing organically due to nontraditional incomes, increased originator participation and AI-driven efficiency; GSE footprint reductions would boost demand but Aspire's growth is already strong independently.

• Question from Steven Delaney (Citizens JMP Securities, LLC, Research Division): Regarding securitized prime jumbo coupon vs new prime jumbo coupons, will your book extend or accelerate CPR and how do you manage coupon risk?
  Response: Chris: The portfolio is trending toward current coupon; mortgage-banking activity and frequent securitizations limit coupon exposure, and retained positions are balanced so coupon risk is manageable.

• Question from Steven Delaney (Citizens JMP Securities, LLC, Research Division): What is the current range for 30-year fixed prime jumbo loans?
  Response: Chris: Around ~6.25% this week; Aspire pricing sits roughly 100 basis points higher.

• Question from Steven Delaney (Citizens JMP Securities, LLC, Research Division): Is the recent refi pickup HPA-driven and do you see it in Sequoia?
  Response: Chris: Refi pickup is being driven by homeowners modestly in the money and faster processing/capacity; Sequoia is seeing some increase in refi activity.

• Question from Eric Hagen (BTIG, LLC, Research Division): If you stay on this pace, how much jumbo volume will you securitize versus sell to third parties over the next year?
  Response: Chris: Securitization is a primary, cost-effective financing channel and they can grow securitizations materially without outside capital, though fundraising for Sequoia and bank partnerships remain options.

• Question from Eric Hagen (BTIG, LLC, Research Division): What gives you confidence credit performance in the BPL/bridge portfolio has stabilized?
  Response: Dash: Issues are vintage-driven (early 2022); newer vintages show <3% 90+ day delinquencies, improving prepay velocity, low severities and efficient resolutions, indicating stabilization.

Contradiction Point 1

Legacy Asset Disposition and Capital Redeployment

It involves the strategic approach to disposing of legacy assets and redeploying capital, which impacts the company's financial performance and growth prospects.

Should we use the non-GAAP core earnings of $0.20 this quarter plus capital from the legacy assets to calculate the earnings power post-2026? - Bose George (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: Yes, as the legacy segment winds down, our earnings will start to look a lot closer to what we're generating in EAD today, in core EAD. We freed up $150 million of capital for reinvestment, which was previously generating a negative return. This capital can now be redeployed into mortgage banking segments that have consistently generated greater than 20% ROEs. - Christopher Abate(CEO & Director)

For the 9% to 12% EAD in 2026, should the calculation be based on the $7.49 book value or exclude the 20% capital remaining in the legacy piece at year-end? - Bose Thomas George (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q2: We've utilized capital to build out 3 core operating platforms that are now in full motion: Sequoia, Aspire and Redwood Mortgage. These platforms are generating excellent returns and growing at over 20% year-over-year. We've built up capital at the core platforms by $7.6 billion since 2021. We've also freed up $1.5 billion by exiting non-strategic assets in the legacy segment. We've utilized this capital to invest in nostro and our mortgage banking platforms and also to reduce leverage. - Christopher Abate(CEO & Director)

Contradiction Point 2

Earnings per Share (EPS) Expectations

It involves the company's expectations for earnings per share, which is a key financial metric for investors and stakeholders.

Which of the 3 remaining core businesses will generate additional net income with incremental capital, given the $100 million quarterly runoff from the legacy investment portfolio over the next 4–5 quarters? - Richard Shane (JPMorgan Chase & Co, Research Division)

2025Q3: Our EPS would be $0.17, and we are bumping up again our estimates for 2026. Earnings power will be $9.70 to $12.60, driven by with a capital light structure and a significant capital deployment. - Brooke Carillo(Chief Financial Officer)

Should the 9-12% EAD for 2026 be calculated using the $7.49 book value or exclude the 20% of capital remaining in the legacy portion by year-end? - Bose Thomas George (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q2: We expect EPS in the range of $0.18 to $0.22 for 3Q, with EAD growth for the year of 9% to 12%. And again, that reflects a strong performance of our core platforms and continued normalization in the legacy segment. - Brooke E. Carillo(Chief Financial Officer)

Contradiction Point 3

Legacy Assets Rolloff and Capital Deployment

It involves differing expectations regarding the timeline and impact of rolling off legacy assets and deploying capital, which are crucial for understanding the company's financial trajectory and strategic direction.

Will the $0.20 non-GAAP core earnings plus capital from legacy assets accurately reflect post-2026 earnings power? - Bose George (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: We largely expect the legacy assets to be rolled off by 2026. When you look at the earnings power after that, should we look at the non-GAAP core number this quarter was $0.20 plus the deployment of all the capital that comes out of the legacy piece? Is that kind of the way to bridge to sort of the earnings power after? - Christopher Abate(CEO & Director)

How does the company hedge its portfolio and manage the increased book value in April? - Douglas Harter (UBS Investment Bank)

2025Q1: We see about $0.6 billion of capital being released over the next 4 or 5 quarters, bringing us back to a prohibitive capital base. - Christopher Abate(CEO & Director)

Contradiction Point 4

Non-QM Market Growth Potential

It involves differing perspectives on the growth potential of the non-QM market, which is a strategic area for the company's Aspire non-QM business.

How do you expect the Aspire non-QM market to grow, and could a shrinking GSE footprint increase that growth? - Donald Fandetti (Wells Fargo Securities, LLC, Research Division)

2025Q3: The growth in mortgage banking has been incredible, especially in Sequoia Capital One, our direct to consumer digital platform, and Aspire Financial, our private labels for non-QM products. Sequoia Capital One originations are up 175% YTD year-over-year, with 251% growth in Q2 alone. Aspire Financial originations are up 85% year-to-date, with 113% growth in Q2. - Christopher Abate(CEO & Director)

How does the company hedge its portfolio and manage the portfolio as book value increased in April? - Douglas Harter (UBS Investment Bank)

2025Q1: We added 40 new correspondents in Q1, took over 100 others. And we did that by offering them scale, lower cost of capital, and higher execution rates on loans. We pushed our non-QM products to over 1,000 lending partners. Our strategy is focused on scale and execution. - Christopher Abate(CEO & Director)

Contradiction Point 5

Earnings and Capital Deployment

It involves changes in financial expectations, specifically regarding earnings and capital deployment, which are critical for investor forecasting.

Given that the legacy assets will be rolled off by 2026, should we consider the non-GAAP core earnings of $0.20 and capital from the legacy assets as a way to estimate post-2026 earnings power? - Bose George (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: Yes, as the legacy segment winds down, our earnings will start to look a lot closer to what we're generating in EAD today, in core EAD. We freed up $150 million of capital for reinvestment, which was previously generating a negative return. This capital can now be redeployed into mortgage banking segments that have consistently generated greater than 20% ROEs. - Christopher Abate(CEO & Director)

How does the current EAD compare to the dividend? What is the timeline for EAD to match the dividend? - Bose George (KBW)

2024Q4: We are tracking towards the dividend on an EAD basis, with significant liquidity. Apples to oranges comparisons of EAD and dividend metrics across the industry, but we are confident in our performance against historical book performance. - Christopher Abate(CEO & Director)