Good afternoon and welcome to the Redwood Trust Inc. 2015 Second Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Kristin Brown, Vice President of Investor Relations. Please, go ahead.

Thank you, Travis. Good afternoon and thank you for joining us to review Redwood Trust’s Second Quarter 2015 Earnings Report. Before we begin I wanted to remind you that certain information presented and certain statements made during management’s presentation with respect to future financial or business performance, strategies, or expectations may constitute a forward-looking statements. Forward-looking statements are based on current expectations or assumptions and involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company’s most recent annual report on Form 10-K filed with the SEC which provides a description of some of the factors that could have a material impact on the company’s performance and could cause actual results to differ from those that may be expressed in forward-looking statements. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today, Wednesday, August 5th, 2015. The company does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances. Finally, today’s call is being recorded and access to the recording of the call will be available on the company’s website at RedwoodTrust.com. For opening remarks and introductions I will now turn the call over to Marty Hughes, Redwood’s Chief Executive Officer. Marty?

Good afternoon, everyone. Thank you for participating in Redwood’s Second Quarter 2015 Earnings Call. Joining me on the call are Brett Nicholas, Redwood’s President, and Chris Abate, Redwood’s CFO. After my remarks, Brett will go through our thoughts on the operating environment and all of the key metrics in our residential and commercial businesses. Chris will discuss some meaningful changes this quarter to the Redwood review and our on going efforts to make our financial disclosures as transparent as possible as well as the quarter’s financial results. We experienced a challenging operating environment in the second quarter with the return of high interest rate volatility. After a positive start, this volatility created headwinds for our residential jumbo and commercial loan sale margins late in the quarter. Additionally, loan price competition remained intense for our residential business in general but for conforming loans in particular. Despite the difficult market conditions, all total, we earned $0.31 percent share in the second quarter compared to $0.16 percent share in the first quarter of 2015. Book value was essentially flat after paying our quarterly dividend. We also made good operating progress, particularly in our residential business. From a strategic standpoint, our overriding goal is to continue to leverage our residential and commercial loan platforms to generate an ongoing stream of fees and a source of attractive investments for Redwood. During the quarter we made meaningful progress on several fronts towards this goal. First, despite a difficult operating environment during the quarter, we successfully completed two jumbo securitizations, this brings our post-crisis total to 28 transactions. We remain committed to this space as an active participate and a market leader. As an example, we introduced new structural protection mechanisms in our latest transaction and we have more ideas that we are currently working on implementing…

Thank you, Marty. Our residential and commercial business volume and margins improved in the second quarter despite, as Marty mentioned, significant interest rate volatility that reemerged near quarter end. Heightened interest rate volatility poses several challenges for us. First, it increases the cost of hedging our rate sensitive portfolio investments and also impacts investor appetite for our residential commercial loans and ultimately widens out our execution in the RMBS, CMBS, and whole loan markets. Additionally, it negatively impacts many of our interest rate sensitive assets such as MSRs and IOs. We will continue to fine-tune our hedging and portfolio strategies with a goal of reducing overall sensitivity to interest volatility which may include asset sales from time to time. In terms of volume metrics, our combined residential and jumbo conforming purchase volume was $2.8 billion for the second quarter, an increase of 15% from the first quarter of 2015. At June 30th, our pipeline of residential loans identified for purchase was $1.6 billion and included $1.2 billion of jumbo loans and $0.5 billion of conforming loans unadjusted for fallout expectations. From a loan seller standpoint, at June 30, 2015 we had 212 loan sellers up from 180 at the end of the first quarter. The majority of the increase was the addition of new MPF direct sellers. Moving on to our conforming product line, we are seeing margins improve on our conforming product line despite heavy competition, mainly from large money center banks. Our margin improvement is a result of lower costs to produce per loan and better execution as the business has matured. We remain committed to our conforming product line as it gives us numerous options to work with both GSEs on risk sharing, mortgage servicing, and ultimately higher profitability. On the jumbo product line we are producing…

Thank you, Brett. And good afternoon, everybody. Our second quarter earnings per share were $0.31, up from $0.16 in the first quarter. Our mortgage banking margins improved for both our residential and commercial businesses and when combined with higher servicing valuations resulted in an increase to our quarterly results. Our book value was relatively stable at $14.96 per share, down $0.05 from the prior quarter. Before I go into some additional details on the second quarter I want to acknowledge some of the challenges we face translating the economic returns of our business in the transparent GAAP results. As you recall, the past few years we have endured accounting timing differences related to our jumbo pipeline hedges and the associated purchase agreements. We ultimately resolved those timing differences beginning with the first quarter of 2015. More recently we have dealt with accounting mismatches pertaining to our management of interest rates. Our utilization of natural offsets within the balance sheet provided for the most efficient and economical way to manage our interest rate exposure but also resulted in some hedging outcomes that we reported through our balance sheet and out to our income statement. This created a divergence between our GAAP and economic returns and was something we addressed in our first quarter earnings call. During the second quarter, we made some changes to both our portfolio and our disclosures that we believe will put us on a path to greater alignment of our economic and GAAP results going forward. First, during the second quarter we sold $133 million of lower yielding mezzanine RMBS as well as $31 million of IO securities that we primarily held for hedging purposes. In addition to being very pleased with our execution, given the challenging market conditions, we significantly reduced the associated complexity they caused…

[Operator Instructions] Our first question comes from Bose George, KBW.

Hey, guys. Good afternoon. Actually first just on the non-agency versus agency gain on sale margins, can you discuss that? And is the agency business – is it break even? Or just can you provide trends on that as well?

Yes , Bose. Overall during the quarter we were well within, we were probably in the higher end of our 25 to 50 basis points range that we’ve consistently disclosed. We’ve got some additional detail in the review at a segment level which I think you might find useful. But overall the jumbo margins are still consistently higher than on the conforming side. As Brett mentioned, over the past few quarters we’ve consistently headed towards I think break even on the business. It’s still volatile from a margin standpoint as far as the volume of loans that we can pull through consistently at higher margins but we think the business continues to head in the right direction although it’s at the lower end of the range.

Okay. Great. Thanks. And just switching to the commercial, the way you disclosed it this quarter was the mortgage banking number, it looked like it was net and last quarter you had the commercial gains and then the hedge offset. So, I was just curious what the gains with this quarter and how the hedging side of it compared to what it was last quarter?

So, last quarter we had some noise from some loans that had been held over and contributed to transactions later in the quarter. So, there was some holding period noise. This quarter was more straightforward. We originated $258 million or so of senior loans. The margins were in the neighborhood of just over a point and that represented a meaningful increase from the first quarter and I don’t think the hedging component was that significant.

Okay. Great. And then actually just one more. Given the interest rate volatility, I’m just curious, are there actions we can take to sort of mitigate some of the impact of what’s going on?

Yes, Bose. Historically we’ve been using a lot more balance sheet oriented hedging. Unfortunately this last quarter, some of that, particularly in MSRs did not offset all of the risk and currently looking to make some tweaks on that and possibly even looking to maybe sell premium out of the portfolio at the right price.

Thanks.

We’ll take our next question from Paul Miller, FBR Capital Markets.

Thank you very much. Can you talk a little bit about your GSE risk sharing? I know – I think the GSEs keep some of that stuff – but is – are you able to do most of your conforming product under this GSE risk sharing at this point?

Hey, Paul. It’s Brett. As we disclosed it’s a $1 billion transaction so we’ll deliver into that during the third quarter and then what we’re really working towards is programmatic programs with both GSEs so that the majority of our production we’re selling protection to the GSEs on. In terms of the structure and such, we cannot – we currently can’t disclose.

Yes. I know you can’t disclose it. But your goal is at some point most of your conforming product will be under this type of GSE risk sharing deals?

That would be our goal. Absolutely.

And has the GSEs moved in other risk sharing programs? I know you guys have been at the forefront of trying to get the GSEs or helping GSEs formulate some risk sharing products that can be broad based. Where do you think the GSEs are there? Or do they continue to move slow and cautious?

I would say, my thoughts – this is Marty – that the DSEs again are pushing strongly towards risk sharing arrangements. I think with GSE reform, formal GSE reform getting pushed back I think you can accomplish the same goal as GSE reform of at least putting private capital first through risk sharing arrangements. So, it seems to us at the moment the mandate from the FHFA who’s their boss, is for them to enter into various forms of risk sharing transactions, structural recourse type ones like you have with Redwood, insurance related ones so that they have multiple ways to do them but I think this is a wave that’s going to be here in lieu of really not a lot of momentum on GSE reform.

And then – I might be putting you on the spot here but when do you think this type of – do you think they’re getting comfortable and that you’re going to see a lot more of these risk sharing deals start to hit the market? It just seems for us they’re very slow.

To me, Paul, I do think there’s going to be more momentum on it. I mean, if the FHFA shifts gears, that would be one thing, but it just seems like it’s just a natural thing. If really what you’re worried about is the risk to tax payers you can cover that risk by putting private capital ahead of the government and you really – what’s easier than deal with the whole GSE reform housing policy and all the politics around it? I think it would be a way for the legislators out there will begin to use it as a way to get to at least one of their goals which is to put private capital ahead.

And I don’t know if I’m even – if this next question, this follow up question, I don’t even know if I’m asking this question correctly but we know the mortgage market, especially in the jumbo world, is done a lot of very brisk product which on one side the pricing stinks for you guys but I know you guys put on a lot of securitizations and you talked to the mezzanine pieces. Are those things performing much better than anticipated than stuff you put on in the past?

They’re performing from a credit risk standpoint, there’s no losses, a couple delinquencies. So, yes, they’re performing extremely well. I mean, we expected them to but they’re performing very well. Our goal is obviously to do more than – we love the risks that we take when we’re able to. Obviously, pull through the loans ourselves with our own underwriting criteria. So, we’ve been very happy with those investments.

Hey guys, thank you very much.

Our next question comes from Guillermo Roditi, New River Investments.

Good afternoon, guys. I’m wondering, you guys mentioned 1% first loss for the risk sharing. Is that kind of something we can expect going forward to be limited to only that first 1%? Or do you think maybe this will want to put more of that risk out there?

I would expect over time that you could see transactions at a much higher stop loss level.

All right. Quick follow up just on – we’ve seen kind of in the data coming through a lot of new purchase activity relative to the last five years. Are you guys seeing that as well coming in the last two months?

Yes. Refinances have dropped significantly.

And purchase activity has moved up.

One more question. Obviously we’ve really shifted gears into and environment where there’s ample amount of parties that want to take risk. Do you guys have any concerns about maybe PMI becoming a little more aggressive in terms of that first lost risk, as first time home buyers come in?

It could be. What we’re really focused on is outside of any kind of PMI, doing it on a recourse basis directly on the loans that we have acquired and have gone through our underwriting criteria.

Thank you very much.

We will take our next question from Brock Vandervliet , Nomura Securities.

Thanks for taking the question. Could you just talk about your volume guidance for the rest of the year in terms of conforming and jumbo? It looks like that has been notched down due to wanting to preserve margins? But if you could talk a lot but more to that, that would be great.

Yes, Brock. Through the first half of the year, we’re at a – we were tracking somewhere in the neighborhood north of $5 billion combined for jumbo and conforming. I think for conforming specifically, we’re really trying to stay disciplined with the pricing to preserve margin. I think last year we were a little bit more aggressive but I think for the remainder of the year we’re still – at this point there’s a lot of uncertainty in the market and we think we can continue to build while preserving margin but at this point it’s a little early to say with a lot of conviction that we’re going to hit the original goal.

Okay. And the guidance on the jumbo side, it just seemed to be opposite from the MPF structure coming on giving you even more volume potential.

Yes. You know, the MPF volume at this point just isn’t substantial. The rollout has taken time. There’s some regulatory obstacles and we need to get both individual districts online, Home Loan Bank districts as well as their member banks that what to participate in MPF. So, at this point we don’t think the volume is substantial to warrant any type of increased guidance. We’re hoping that by the end of the year we’ve got a much bigger participation by member banks and we’ll have some more meaningful guidance.

Are the regulatory issues out of the way? Or is that still that – ?

No. It’s just a matter of getting approval for each additional district that wants to participate. It’s not as though there’s any significant obstacles. It’s just a process. There’s applications and so forth. So, the roll out procedure is somewhat extensive but we’ve been adding districts and I think we noted that in our seller, our active sellers, our loan sellers were well over 200 now as a result of additional MPF members. So, it’s certainly trending in the right direction and I think once we get over this hump with this rollout we’ll have a much better idea on contribution and be able to offer better guidance.

Okay, Thank you.

That concludes today’s question and answer session. This also concludes our conference. On behalf of management we very much appreciate you taking time to participate in our earnings call. You may now disconnect.