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Redwood Trust Reports Earnings for the Third Quarter of 2004; GAAP Earnings of $3.18 per Share and Core Earnings of $2.29 per Share

Wednesday, November 10, 2004

MILL VALLEY, Calif.--(BUSINESS WIRE)--Nov. 10, 2004--Redwood Trust, Inc. (NYSE:RWT) today reported GAAP earnings of $72 million, or $3.18 per share, for the third quarter of 2004. GAAP earnings for the first nine months of 2004 were $178 million, or $8.29 per share. Redwood Trust is a financial institution that invests in, credit-enhances, and securitizes residential and commercial real estate loans and securities.

Core earnings for the third quarter of 2004 were $2.29 per share. This is a 32% increase from the $1.74 core earnings per share Redwood earned in the previous quarter and a 78% increase over the $1.29 core earnings per share earned in the third quarter of 2003. Core earnings for the first nine months of 2004 were $5.76 per share, a 75% increase over the $3.29 core earnings per share earned in the first nine months of 2003. Core earnings are ongoing earnings from operations, and thus exclude gains and losses from asset sales, calls, and changes in market values that are included in reported GAAP earnings.

Redwood's total taxable income (pre-tax income as calculated according to tax rules) for the third quarter of 2004 was $2.53 per share outstanding at quarter-end. Our REIT taxable income (which excludes income earned in taxable non-REIT subsidiaries) was $2.10 per share for the quarter. For the first nine months of 2004, total taxable income was $8.45 per share and our REIT taxable income was $7.05 per share. All taxable income results reported here are estimates that are subject to change.

"Our business continues to develop and grow in a manner that we believe should support attractive long-term results," said Doug Hansen, Redwood's President. "The portfolio of assets we have built over the last ten years is performing well. The new assets we are acquiring for our permanent investment portfolio are high quality, and are likely, we believe, to provide attractive returns for shareholders in the years ahead."

Hansen continued, "Our portfolio of managed real estate credit continues to grow. Our managed assets within the high-quality jumbo residential real estate loan segment have grown from $84 billion to $143 billion during the first nine months of 2004."

"Our real estate portfolios are designed to deliver attractive returns on the upside if real estate credit performs well," Hansen said. "There is also significant downside risk within our portfolio if real estate credit performs poorly. For now, from our point of view, real estate credit trends continue to be favorable."

"We continue to maintain a strong balance sheet," said Hansen. "We do not leverage our permanent investment portfolio assets. We only use debt to facilitate the accumulation of assets on a temporary basis prior to securitization."

"We have made a number of cautionary statements during the last year," continued Hansen. "We have said that we believe credit losses and loan delinquencies are likely to increase from the insignificant levels we are experiencing today, especially if housing prices level off. Rising short-term interest rates could create stress for homeowners, including some of our borrowers. We believe prepayment patterns for residential real estate loans are unlikely to be as favorable for us in the future as they have been in the last few years."

Hansen also stated, "Competition is increasing. Asset prices have risen and quality loans are harder to find. This makes underwriting and investment discipline more important than ever. In response, we continue to tighten our credit standards and increase our future credit loss assumptions when evaluating new assets. This could mean that growth in the future becomes more difficult."

"Furthermore," Hansen continued, "we have said that, irrespective of the above trends, we expect core earnings per share may decline over time (potentially creating some negative year-over-year core earnings comparisons during 2005) due to calls of our residential credit-enhancement securities. These calls are a favorable economic event for Redwood (as we realize a large capital gain when the calls occur), but they also tend to reduce our ongoing earnings as our highest-yielding assets are typically the ones that get called away."

"Constant vigilance with respect to all these cautionary statements continues to be warranted," reiterated Hansen. "Nevertheless, the current environment for our business is still reasonably favorable. We expect our core financial results going forward will remain attractive, even if they do not match 2004's record results. Our outlook for the future of our business continues to be positive and optimistic."

Third Quarter Review

Redwood acquired $75 million of new assets for its permanent investment portfolio during the third quarter of 2004. We acquired $55 million residential credit-enhancement securities (CES) -- including $49 million from securitizations sponsored by others and $6 million from the Sequoia residential loan securitization program we sponsor. We acquired $1 million residential interest-only securities (IOS) from securitizations sponsored by others. We also acquired as permanent investments $6 million commercial real estate CES and $13 million collateralized debt obligations (CDO) equity securities from the Acacia CDO securitization program we sponsor. Our permanent investment portfolio consists of assets we have acquired that earn an equity rate of return and that we generally hold without leverage on our balance sheet. The bulk of our earnings come from our permanent investment portfolio.

Our securitization activities were successful and profitable in the third quarter. Redwood acquired $2.9 billion residential real estate loans. We sold $2.7 billion loans to Sequoia securitization entities for securitization. Sequoia completed three securitizations (Sequoia 2004-7, 2004-8, and 2004-9), creating and selling $2.7 billion asset-backed securities (ABS) to capital markets investors, including $6 million to Redwood Trust for its permanent investment portfolio. During the third quarter, Redwood acquired $188 million real estate securities for future sale to Acacia CDO entities. Redwood sold $300 million securities to Acacia CDO 5, which issued $300 million ABS securities to capital markets investors. Redwood bought $13 million of these Acacia 5 securities for its permanent investment portfolio.

Redwood utilizes both debt and equity to fund the accumulation of assets prior to sale to securitization entities. Redwood's debt averaged $405 million for the quarter and the maximum level of debt reached during the quarter was $976 million. We expect Redwood's debt levels to vary between $0 and $2 billion during the next year, varying as a function of the timing of Redwood's purchase of assets under accumulation for sale to securitization entities relative to the timing of the closing of Redwood's sales transactions to these entities. At the end of the third quarter of 2004, Redwood Trust had debt of $246 million and shareholders' equity of $902 million, for quarter-end debt-to-equity ratio of 0.27 to 1.0.

For GAAP balance sheet purposes, Redwood reports its own assets and debt, plus all of the assets and ABS liabilities of the securitization entities sponsored by Redwood. The four securitizations sponsored by Redwood in the third quarter added $2.9 billion of assets and liabilities to Redwood's consolidated GAAP balance sheet. Redwood's net investment in and maximum loss exposure to these securitizations totaled $19 million.

Residential real estate loan credit managed by Redwood rose to $143 billion at the end of the third quarter. Redwood owns the residential CES issued from the securitizations of these loans. Redwood sponsored the securitization of $21 billion of these loans through the Sequoia securitization program; other sponsors securitized the remainder of these loans. The underlying loans were generally originated to high-quality standards. The bulk of these loans were jumbo loans at the time of origination (Fannie Mae and Freddie Mac were not eligible to invest in, credit-enhance, or securitize these loans due to the larger loan balances of these loans).

Seriously delinquent loans (over 90 days, in foreclosure, in bankruptcy, or real estate owned (REO)) within Redwood's managed residential loans increased during the quarter while remaining at low levels. Serious delinquencies were $185 million (0.13% of loan balances) at the end of the third quarter as compared to $137 million (0.12% of loan balances) at the beginning of the quarter and $180 million (0.31% of loan balances) one year ago.

Credit losses for Redwood's managed residential loans were $0.7 million for the third quarter of 2004, $1.8 million for the previous quarter, and $1.0 million for the third quarter of 2003. The credit loss rate for these loans remained under one basis point (less than 0.01%) per annum.

Credit results for the rest of the residential and commercial loans that underlie our permanent investment portfolio were also strong during the third quarter of 2004.

Current residential loan prepayment rate patterns continue to be favorable for Redwood's long-term results, although not as favorable as they were in the past. In the third quarter, prepayment rates on short-term ARMs (adjustable rate mortgages with coupon rates that adjust each month or six months) securitized by Sequoia remained near 20% CPR (i.e., approximately 20% of the aggregate loan balance is prepaying annually).

Short-term interest rates rose 20 to 50 basis points during the quarter (0.20% to 0.50%). We continue to maintain a balance sheet that is well balanced and matched from an interest rate perspective, so these interest rate changes had little direct effect on our economic results.

Third quarter GAAP and core income benefited from a reduction in premium amortization expenses on residential loans from $13 million in the prior quarter to a negative expense of $2 million in the third quarter. Under our current GAAP methodologies, premium amortization expenses tend to be significantly lower in a rising rate environment than in a falling rate environment. Assuming we continue with this methodology in future quarters, our GAAP and core results could be volatile should the direction of change of interest rates fluctuate from quarter to quarter.

Investors should note that our economic risk with respect to the premium balances on these loans is less than the $195 million of premium balance on our GAAP books (as of September 30, 2004) would suggest. When we sponsor the securitization of these loans, our purchase premium on these loans is effectively offset in some cases as a result of the issuance of asset-backed securities (ABS) at premium prices and from the issuance of ABS interest-only securities (all the proceeds of which are issuance premium). The total ABS issuance premium (net of unamortized ABS issuance expenses) on our GAAP books for these loans at September 30, 2004 was $185 million. GAAP income from the amortization of this ABS issuance premium (which reduces our reported GAAP interest expense) partially offsets expenses from the amortization of purchase premiums (which reduces our GAAP interest income) from the same loans. Our net premium position on these loans (including ABS premium) is $10 million, for an adjusted net amortized basis of 100.05% of principal value of the loans. GAAP accounting methods used for these offsetting premium balances on the same loans are not parallel, however. Additionally, premium balances are not equally offsetting on each pool of loans. Furthermore, as noted above, premium amortization expenses on loans for GAAP can be volatile, depending on the direction of interest rate changes. As a result of these three factors, net premium amortization for GAAP for these assets and ABS liabilities can be variable even though the aggregate net premium economic risk is low.

Redwood's GAAP and taxable income exceeded core earnings due, in part, to calls of residential CES. During the third quarter of 2004, calls of $32 million principal value of CES generated $20 million of GAAP income and $15 million of estimated taxable income. We do not include gains or losses from calls, sales, or market value fluctuations in our core earnings calculations.

The yield Redwood earns on its residential CES portfolio that it has acquired from securitizations sponsored by others continued to decline as the highest-yielding assets are called away. Redwood's yield from this portfolio was 17% in the third quarter of 2004 versus 20% in the prior quarter and 28% in the third quarter of 2003.

Redwood raised $98 million new equity capital in the third quarter, and has raised $198 million of new equity during the first nine months of 2004. Permanent investment portfolio acquisitions for the year have totaled $209 million. These purchases have been funded with new equity capital, retained earnings, and cash flow from our existing portfolio. Redwood ended the quarter with $302 million of net liquidity (unrestricted cash balance assuming assets held short-term for sale to securitization entities were sold and all Redwood Trust debt was paid off using the sale proceeds). This should be sufficient to provide continued on-going support for our securitization activities, meet our dividend distribution requirements, and fund permanent asset acquisitions for the fourth quarter of 2004.

Growth has contributed positively to Redwood in a number of ways. Our operating efficiency has improved with growth -- our efficiency ratio (operating expenses before excise tax and variable stock option expenses divided by net interest income) has improved from 25% to 12% over the last year. In addition, the combination of accretive stock issuance (as a result of growth) and retention of earnings has increased the amount of permanent tangible capital per share we have available to help us generate shareholder dividends. We believe the best measure of long-term dividend-producing capital is "adjusted core book value per share", which is GAAP book value per share, less mark-to-market adjustments, less undistributed REIT taxable income (at least 90% of which will be distributed in the near future as dividends under the REIT rules). Adjusted core book value has increased by 30% during the first nine months of 2004 (from $21.92 per share to $28.55 per share).

"The third quarter was a strong quarter for real economics, cash flow, taxable income, REIT taxable income, book value gains, core earnings, and GAAP earnings," said Hansen. "Total taxable income of $59 million ($2.53 per share) was an outstanding result. Furthermore, REIT taxable income of $49 million ($2.10 per share) for the third quarter significantly increases the dividends per share we will be distributing to shareholders over the next year."

Release of Form 10-Q

Our GAAP and core earnings for the third quarter of 2004 include $4.8 million of net positive prior period adjustments. Of this amount, $4.1 million increases our interest income through a reduction of premium amortization expense and $0.7 million reduces our income tax accruals. In management's opinion, these adjustments are immaterial and we have therefore reported them as a component of income during the third quarter of 2004. If these were material adjustments, we would not have recorded these adjustments in this quarter, but rather we would have restated earnings for quarters during the years 2001 through 2004, with an aggregate increase in GAAP and core earnings during these quarters. At the time of this press release, our external auditors have indicated that they have not yet completed their review of this issue (and it is possible other issues could arise before their overall review is completed). Since their review is required before we file our Form 10-Q with the SEC, we have requested a five-day extension for filing the Form 10-Q, and we currently anticipate filing our Form 10-Q on or before Monday, November 15, 2004.

Dividends

"The outlook for continuing our regular dividend payments of $0.67 per share per quarter remains excellent," said Hansen.

"We estimate we ended the third quarter with $139 million ($5.95 per share currently outstanding) of undistributed REIT taxable income," Hansen continued. "All of this undistributed REIT taxable income was earned during 2004. Under the REIT rules, we will need to distribute at least 90% of this amount (plus 90% of fourth quarter REIT taxable earnings) to shareholders prior to September 2005. It is likely we will make these required distributions through continued regular dividends plus one or more special dividends to be authorized in the future by our Board of Directors."

We generally release our press release, our Form 10-Q (including our financial statements, footnotes, and management's discussion and analysis), and our supplemental information package all on the same day. For this quarter, our release of our Form 10-Q is delayed for reasons discussed above. Once released and filed, you can access these documents at our web site -- www.redwoodtrust.com.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Certain matters discussed in this news release may constitute forward-looking statements within the meaning of the federal securities laws that inherently include certain risks and uncertainties. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, among other things, changes in interest rates on our real estate loan assets and borrowings, changes in prepayment rates on our real estate loan assets, general economic conditions, particularly as they affect the price of real estate loan and the credit status of borrowers, and the level of liquidity in the capital markets, as it affects our ability to finance our real estate loan portfolio, and other risk factors outlined in the Company's 2003 Annual Report on Form 10-K and September 2004 Prospectus Supplement (available on the Company's Web site or by request to the Contacts listed above). Other factors not presently identified may also cause actual results to differ. No one should assume that results or trends projected in or contemplated by the forward-looking statements included above will prove to be accurate in the future. We will revise our outlook from time to time and frequently will not disclose such revisions publicly.

REDWOOD TRUST, INC.
(All dollars in millions, except per share data)

                                Third  Second   First  Fourth   Third
                               Quarter Quarter Quarter Quarter Quarter
Consolidated Income Statement   2004    2004    2004    2003    2003
------------------------------ ------- ------- ------- ------- -------

Interest Income                $180.1  $138.0  $124.8  $108.3   $90.2
Interest Expense               (114.8)  (90.4)  (79.5)  (68.6)  (55.6)
------------------------------ ------- ------- ------- ------- -------
Net Interest Income             $65.3   $47.6   $45.3   $39.7   $34.6

Operating Expenses               (8.3)   (9.1)   (8.6)   (8.0)   (8.5)
Net Recognized Gains (Losses)
 and Valuation Adjustments       20.5    12.3    17.4    42.1     0.6
Variable Stock Option (Expense)
 Income                          (0.2)    0.6    (1.4)   (2.7)   (0.5)
Provision For Income Taxes       (5.0)   (1.5)   (1.9)   (1.2)   (1.5)
One Time Deferred Tax Benefit     0.0     5.2     0.0     0.0     0.0
Preferred Dividends               0.0     0.0     0.0     0.0     0.0
------------------------------ ------- ------- ------- ------- -------
GAAP Earnings                   $72.3   $55.1   $50.8   $69.9   $24.7

Less:  Net Recognized (Gains)
 Losses and Valuation
 Adjustments                    (20.5)  (12.3)  (17.4)  (42.1)   (0.6)
Less:  Variable Stock Option
 (Expense) Income                 0.2    (0.6)    1.4     2.7     0.5
Less: One Time Deferred Tax
 (Benefit)                        0.0    (5.2)    0.0     0.0     0.0
------------------------------ ------- ------- ------- ------- -------
Core Earnings (1)               $52.0   $37.0   $34.8   $30.5   $24.6

Average Diluted Shares
 (thousands)                   22,728  21,325  20,399  19,801  19,018
GAAP Earnings per Share
 (Diluted)                      $3.18   $2.58   $2.49   $3.53   $1.30
Core Earnings per Share (1)     $2.29   $1.74   $1.71   $1.54   $1.29
Estimated Total Taxable Income
 Per Share Outstanding          $2.53   $3.35   $2.57   $4.15   $1.97
Estimated REIT Taxable Income
 Per Share Outstanding          $2.10   $2.81   $2.15   $4.00   $1.83

Dividends Per Common Share
 (Regular)                      $0.67   $0.67   $0.67   $0.65   $0.65
Dividends Per Common Share
 (Special)                      $0.00   $0.00   $0.50   $4.75   $0.00
------------------------------ ------- ------- ------- ------- -------
Total Dividends per Common
 Share                          $0.67   $0.67   $1.17   $5.40   $0.65

Net Interest Income / Average
 GAAP Equity                     32.6%   28.7%   31.0%   28.4%   25.1%
Net Interest Income / Average
 Core Equity (2)                 37.5%   32.6%   35.7%   33.8%   30.2%

GAAP ROE:  GAAP Earnings/ Avg
 GAAP Common Equity              36.1%   33.2%   34.8%   50.0%   17.8%
Core ROE:  Core Earnings / Avg
 Common Core Equity              29.9%   25.4%   27.5%   26.0%   21.4%

(1) Core earnings is not a measure of earnings in accordance with
    generally accepted accounting principles (GAAP). It is calculated
    as GAAP earnings from ongoing operations less net recognized gains
    (losses) and valuation adjustments (which include gains and losses
    from sales and calls and valuation adjustments on certain assets
    hedges) and other temporary or one-time adjustments. Management
    believes that core earnings provides relevant and useful
    information regarding its results from operations in addition to
    GAAP measures of performance. This is, in part, because market
    valuation adjustments on only a portion of the company's assets
    and stock options and none of its liabilities are recognized
    through the income statement under GAAP and thus GAAP valuation
    adjustments may not be fully indicative of changes in market
    values on the balance sheet as a whole or a reliable guide to
    current operating performance. Furthermore, gains or losses
    realized upon sales of assets vary based on portfolio management
    decisions; a sale of an asset for a gain or a loss may or may not
    affect on-going earnings from operations. Because all companies
    and analysts do not calculate non-GAAP measures such as core
    earnings in the same fashion, core earnings as calculated by the
    company may not be comparable to similarly titled measures
    reported by other companies.

(2) Core equity is calculated as GAAP equity less unrealized gains and
    losses on certain assets and hedges. Management believes
    measurements based on core equity provide relevant and useful
    information regarding its results of operations in addition to
    GAAP measures of performance. This is, in part, because market
    valuation adjustments reflected in GAAP equity represent
    unrealized gains and losses on a portion of the balance sheet only
    and may not be reflective of the equity available to invest in
    operations. Because all companies and analysts do not calculate
    non-GAAP measures in the same fashion, core equity and ratios
    using core equity as calculated by the company may not be
    comparable to similarly titled measures reported by other
    companies.



REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
                                                        Nine    Nine
                                                       Months  Months
Consolidated Income Statement                           2004    2003
------------------------------------------------------ ------- -------

Interest Income                                        $442.9  $222.7
Interest Expense                                       (284.7) (134.3)
------------------------------------------------------ ------- -------
Net Interest Income                                     158.2    88.4

Operating Expenses                                      (26.0)  (23.2)
Net Recognized Gains (Losses) and Valuation
 Adjustments                                             50.2     4.6
Variable Stock Option (Expense) Income                   (1.0)   (3.0)
Provision For Income Taxes                               (8.4)   (4.3)
One Time Deferred Tax Benefit                             5.2     0.0
------------------------------------------------------ ------- -------
GAAP Earnings (Diluted)                                $178.2   $62.5
Less: Dividends On And Earnings Allocated to Preferred    0.0    (1.2)
------------------------------------------------------ ------- -------
GAAP Earnings (1)                                       178.2    61.3

Less:  Net Recognized Gains (Losses) and Valuation
 Adjustments                                            (50.2)   (4.6)
Less:  Variable Stock Option Expense (Income)             1.0     3.0
Less:  One Time Deferred Tax Benefit                     (5.2)    0.0
------------------------------------------------------ ------- -------
Core Earnings (2)                                      $123.8   $59.7

Average Diluted Shares                                 21,486  18,466
GAAP Earnings per Share (Diluted) (1)                   $8.29   $3.38
Core Earnings per Share (2)                             $5.76   $3.29
Estimated Total Taxable Income Per Share Outstanding    $8.45   $5.48
Estimated REIT Taxable Income Per Share Outstanding     $7.05   $5.21

Dividends Per Common Share (Regular)                    $2.01   $1.95
Dividends Per Common Share (Special)                    $0.50   $0.00
------------------------------------------------------ ------- -------
Total Dividends Per Common Share                        $2.51   $1.95

Net Interest Income / Average GAAP Equity                30.8%   22.9%
Net Interest Income / Average Core Equity (3)            35.4%   27.2%

GAAP Return on Equity:  GAAP Earnings/ Average GAAP
 Equity                                                  34.8%   16.3%
Core Return on Equity:  Core Earnings / Average Core
 Equity                                                  27.7%   19.0%

(1) The nine months 2003 GAAP earnings are lower than previously
    reported due to the adoption of EITF 03-6 (Participating
    Securities and the Two-Class Method under FASB Statement No. 128),
    which allocates undistributed earnings between the common and
    preferred stock based upon their respective contractual rights to
    share in such earnings as if the earnings were distributed. EITF
    03-6 had the effect of lowering GAAP earnings by $0.5 million for
    the nine months 2003. EITF 03-6 also lowered GAAP earnings per
    share (diluted) by $0.02 per share.

(2) Core earnings is not a measure of earnings in accordance with
    generally accepted accounting principles (GAAP). It is calculated
    as GAAP earnings from ongoing operations less net recognized gains
    (losses) and valuation adjustments (which include gains and losses
    from sales and calls and valuation adjustments on certain asset
    hedges) and other temporary or one-time adjustments. Management
    believes that core earnings provides relevant and useful
    information regarding its results from operations in addition to
    GAAP measures of performance. This is, in part, because market
    valuation adjustments on only a portion of the company's assets
    and stock options and none of its liabilities are recognized
    through the income statement under GAAP and thus GAAP valuation
    adjustments may not be fully indicative of changes in market
    values on the balance sheet as a whole or a reliable guide to
    current operating performance. Furthermore, gains or losses
    realized upon sales of assets vary based on portfolio management
    decisions; a sale of an asset for a gain or a loss may or may not
    affect on-going earnings from operations. Because all companies
    and analysts do not calculate non-GAAP measures such as core
    earnings in the same fashion, core earnings as calculated by the
    company may not be comparable to similarly titled measures
    reported by other companies.

(3) Core equity is calculated as GAAP equity less unrealized gains and
    losses on certain assets and hedges. Management believes
    measurements based on core equity provide relevant and useful
    information regarding its results of operations in addition to
    GAAP measures of performance. This is, in part, because market
    valuation adjustments reflected in GAAP equity represent
    unrealized gains and losses on a portion of the balance sheet only
    and may not be reflective of the equity available to invest in
    operations. Because all companies and analysts do not calculate
    non-GAAP measures in the same fashion, core equity and ratios
    using core equity as calculated by the company may not be
    comparable to similarly titled measures reported by other
    companies.



REDWOOD TRUST, INC.
(All dollars in millions, except per share data)

                          30-Sept   30-Jun   31-Mar   31-Dec   30-Sep
Consolidated Balance Sheet  2004     2004     2004     2003     2003
------------------------- -------- -------- -------- -------- --------

Residential Real Estate
 Loans                    $21,558  $19,916  $18,086  $16,239  $13,813
Residential Home Equity
 Lines of Credit (HELOC)      317      327       --       --       --
Residential Loan Credit-
 Enhancement Securities       497      442      375      379      373
Commercial Real Estate
 Loans                         33       34       22       22       24
Securities Portfolio        1,239    1,095      937      845      605
Cash and Cash Equivalents      76       38       58       59       32
Working Capital and Other
 Assets                       134      110       66       83       54
------------------------- -------- -------- -------- -------- --------
Total Consolidated Assets $23,854  $21,962  $19,544  $17,627  $14,901

Redwood Trust Debt           $246     $270     $278     $236     $500
Consolidated Asset-Backed
 Securities Issued         22,622   20,870   18,583   16,783   13,782
Working Capital and Other
 Liabilities                   84       64       75       55       53
Common Equity                 902      758      608      553      566
------------------------- -------- -------- -------- -------- --------
Total Liabilities and
 Equity                   $23,854  $21,962  $19,544  $17,627  $14,901

Total GAAP Equity            $902     $758     $608     $553     $566
Less: Accumulated Other
 Comprehensive Income         (96)    (111)     (79)     (82)     (91)
------------------------- -------- -------- -------- -------- --------
Core Equity                  $806     $647     $529     $471     $475
Less: Undistributed REIT
 Taxable Income              (139)    (110)     (69)     (53)     (83)
------------------------- -------- -------- -------- -------- --------
Adjusted Core Equity         $667     $537     $460     $418     $392

Common Shares Outstanding
 at Period End
 (thousands)               23,346   21,511   19,796   19,063   18,468
GAAP Equity (GAAP Book
 Value) per Common Share   $38.64   $35.24   $30.72   $29.03   $30.65
Core Equity (Core Book
 Value) per Common Share   $34.52   $30.06   $26.75   $24.72   $25.75
Adjusted Core Equity per
 Share                     $28.55   $24.96   $23.25   $21.92   $21.24

Average Total
 Consolidated Assets      $22,877  $20,610  $18,386  $15,758  $12,132
Average Consolidated
 Earning Assets           $22,461  $20,283  $18,158  $15,504  $11,911
Average Debt and Asset
 Backed Securities Issued $22,011  $19,890  $17,747  $15,120  $11,542
Average Total GAAP Equity    $802     $664     $584     $559     $553



REDWOOD TRUST, INC.
(All dollars in millions)
                           30-Sep   30-Jun   31-Mar   31-Dec   30-Sep
Leverage Ratios (1)         2004     2004     2004     2003     2003
------------------------- -------- -------- -------- -------- --------

Total Reported
 Consolidated Assets      $23,854  $21,962  $19,544  $17,627  $14,901
Less: Assets Consolidated
 from Securitization
 Entities                 (22,706) (20,934) (18,658) (16,838) (13,835)
------------------------- -------- -------- -------- -------- --------
Redwood's Direct Assets    $1,148   $1,028     $886     $789   $1,066

Total Redwood Debt and
 Consolidated ABS Issued
 Securities               $22,868  $21,140  $18,861  $17,019  $14,282
Less:  Consolidated ABS
 Issued Securities        (22,622) (20,870) (18,583) (16,783) (13,782)
------------------------- -------- -------- -------- -------- --------
Redwood's Debt               $246     $270     $278     $236     $500

Redwood Debt                 $246     $270     $278     $236     $500
Redwood Equity                902      758      608      553      566
------------------------- -------- -------- -------- -------- --------
Redwood Capital            $1,148   $1,028     $886     $789   $1,066

Redwood Debt to GAAP
 Equity                       0.3x     0.4x     0.5x     0.4x     0.9x
GAAP Equity / Redwood's
 Direct Assets                 79%      74%      69%      70%      53%
Redwood Debt to Capital
 Ratio                         21%      26%      31%      30%      47%

(1) The Asset-Backed Securities reported on our GAAP balance sheet as
    liabilities consist of Asset-Backed securities issued by
    bankruptcy-remote securitization entities. The owners of these
    securities have no recourse to Redwood and must look only to the
    assets of the securitization entities for repayment. Both the
    assets and liabilities of these entities, however, are
    consolidated on Redwood's balance sheet for GAAP reporting
    purposes. Management believes that an analyst could achieve
    insight into Redwood's business and balance sheet by
    distinguishing between debt that must be repaid by Redwood and
    Asset-Backed Securities that are consolidated onto Redwood's
    balance sheet from other entities. This table shows leverage
    ratios calculated for Redwood using measures that incorporate
    Redwood's debt only.



REDWOOD TRUST, INC.
(All dollars in millions, except per share data)

                           Third    Second   First    Fourth   Third
                          Quarter  Quarter  Quarter  Quarter  Quarter
                           2004     2004     2004     2003     2003
                          -------- -------- -------- -------- --------
Consolidated Residential
 Real Estate Loans (1)
-------------------------
Start of Period Balances  $19,916  $18,086  $16,239  $13,813   $9,247
Acquisitions                2,898    2,703    2,322    2,897    4,997
Sales Proceeds (Not
 Including Sales to
 Consolidated Asset-
 Backed Securities
 Trusts)                     (113)       0        0       (1)       0
Principal Pay Downs        (1,144)    (858)    (460)    (458)    (420)
Net Amortization Expense        2      (14)     (12)     (10)      (9)
Net Charge Offs
 (Recoveries)                   0        0        0        0        0
Credit Provisions              (1)      (1)      (3)      (2)      (2)
Net Recognized Gains
 (Losses)                       0        0        0        0        0
------------------------- -------- -------- -------- -------- --------
End of Period Balances    $21,558  $19,916  $18,086  $16,239  $13,813

Average Amortized Cost
 During Period, Net of
 Credit Reserves          $20,484  $18,754  $16,916  $14,381  $10,958
Interest Income              $148     $110      $99      $83      $64
Yield                        2.89%    2.34%    2.34%    2.30%    2.32%

Principal Value of Loans  $21,382  $19,767  $17,951  $16,111  $13,704
Credit Reserve                (21)     (20)     (19)     (16)     (14)
Net Premium to be
 Amortized                    197      169      154      144      123
------------------------- -------- -------- -------- -------- --------
Residential Real Estate
 Loans                    $21,558  $19,916  $18,086  $16,239  $13,813

Credit Reserve, Start of
 Period                       $20      $19      $16      $14      $12
Net Charge-Offs                 0        0        0        0        0
Credit Provisions               1        1        3        2        2
------------------------- -------- -------- -------- -------- --------
Credit Reserve, End of
 Period                       $21      $20      $19      $16      $14

Delinquencies (90 days +
 FC + BK + REO)               $11       $5       $3       $5       $2

Delinquencies as % of
 Residential Loans           0.05%    0.03%    0.02%    0.03%    0.01%
Net Charge-offs as % of
 Residential Loans
 (Annualized)                0.00%    0.00%    0.00%    0.01%    0.00%
Reserve as % of
 Residential Loans           0.10%    0.10%    0.10%    0.10%    0.10%
Reserve as % of
 Delinquencies                198%     374%     548%     301%     852%

(1) Includes loans securitized by securitization entities sponsored by
    Redwood that are consolidated on Redwood's GAAP balance sheet as
    well as loans owned directly by Redwood on a temporary basis prior
    to sale to a securitization entity.



REDWOOD TRUST, INC.
(All dollars in millions, except per share data)

                                Third  Second   First  Fourth   Third
                               Quarter Quarter Quarter Quarter Quarter
                                 2004    2004    2004    2003    2003
                               ------- ------- ------- ------- -------
Consolidated Residential Home
 Equity Lines of Credit
 (HELOC)
------------------------------
Start of Period Balances         $327      $0      $0      $0      $0
Acquisitions                        0     335       0       0       0
Sales Proceeds (Not Including
 Sales to Consolidated Asset-
 Backed Securities Trusts)          0       0       0       0       0
Principal Pay Downs                (8)     (8)      0       0       0
Net Amortization Expense           (1)     (0)      0       0       0
Net Charge Offs (Recoveries)        0       0       0       0       0
Credit Provisions                  (1)     (0)      0       0       0
Net Recognized Gains (Losses)
 & Valuation Adjustments            0       0       0       0       0
------------------------------ ------- ------- ------- ------- -------
End of Period Balances           $317    $327      $0      $0      $0

Average Amortized Cost During
 Period, Net of Credit
 Reserves                        $323    $124      $0      $0      $0
Interest Income                    $1      $1      $0      $0      $0
Yield                            2.00%   1.73%   0.00%   0.00%   0.00%

Principal Value of Loans         $309    $317      $0      $0      $0
Credit Reserve                     (1)     (0)      0       0       0
Net Premium to be Amortized         9      10       0       0       0
------------------------------ ------- ------- ------- ------- -------
Residential Home Equity Lines
 of Credit                       $317    $327      $0      $0      $0

Credit Reserve, Start of
 Period                            $0      $0      $0      $0      $0
Net Charge-Offs                     0       0       0       0       0
Credit Provisions                   1       0       0       0       0
------------------------------ ------- ------- ------- ------- -------
Credit Reserve, End of Period      $1      $0      $0      $0      $0

Delinquencies (90 days + FC +
 BK + REO)                         $0      $0      $0      $0      $0

Delinquencies as % of HELOCs     0.00%   0.00%   0.00%   0.00%   0.00%
Net charge-offs as % of HELOCs
 (Annualized)                    0.00%   0.00%   0.00%   0.00%   0.00%
Reserve as % of HELOCs           0.17%   0.08%   0.00%   0.00%   0.00%
Reserve as % of Delinquencies    0.00%   0.00%   0.00%   0.00%   0.00%



REDWOOD TRUST, INC.
(All dollars in millions, except per share data)

                           Third    Second   First    Fourth   Third
                          Quarter  Quarter  Quarter  Quarter  Quarter
                           2004     2004     2004     2003     2003
                         --------- -------- -------- -------- --------
Consolidated Residential
 Loan Credit-Enhancement
 Securities (1)
------------------------
Start of Period Balances     $442     $375     $379     $373     $393
Acquisitions                   83       75       38       78       23
Sales Proceeds (Not
 Including Sales to
 Consolidated Asset-
 Backed Securities
 Trusts)                        0        0      (22)       0        0
Principal Pay Downs
 (Including Calls)            (45)     (48)     (35)    (117)     (37)
Net Amortization Income         9        9        9       10       11
Unrealized (Losses)
 Gains Reported Through
 Balance Sheet                (12)      18      (12)     (12)     (21)
Realized Gains and
 Market Valuation Losses
 Reported in Income
 Statement                     20       13       18       47        4
------------------------ --------- -------- -------- -------- --------
End of Period Balances       $497     $442     $375     $379     $373

Average Amortized Cost
 During Period, Net of
 Credit Reserves             $369     $317     $287     $273     $271
Interest Income               $16      $16      $16      $17      $19
Yield                       17.36%   20.27%   21.64%   25.49%   28.09%

Principal Value of
 Redwood's Credit-
 Enhancement Securities      $831     $713     $634     $624     $604
Internally Designated
 Credit Protection on
 Loans Credit-Enhanced       (299)    (236)    (217)    (201)    (178)
Net Discount to be
 Amortized                   (109)    (122)    (111)    (123)    (145)
------------------------ --------- -------- -------- -------- --------
Net Investment in
 Credit-Enhancement
 Securities                  $423     $355     $306     $300     $281
Net Unrealized Gains
 (Losses)                      74       87       69       79       92
------------------------ --------- -------- -------- -------- --------
Residential Loan Credit-
 Enhancement Securities      $497     $442     $375     $379     $373

Securities Senior to
 Redwood's Interests     $120,685  $96,322  $70,684  $67,463  $43,024
Principal Value of
 Redwood's Credit-
 Enhancement Securities       831      713      634      624      604
Securities Junior to
 Redwood's Interests           69       70       44       46       52
------------------------ --------- -------- -------- -------- --------
Underlying Residential
 Real Estate Loan
 Balances                $121,585  $97,105  $71,362  $68,133  $43,680

Internally Designated
 Credit Protection on
 Loans Credit-Enhanced       $299     $236     $217     $201     $178
External Credit-
 Enhancement on Loans
 Credit-Enhanced               69       70       44       46       52
------------------------ --------- -------- -------- -------- --------
Total Credit Protection
 (2)                         $368     $306     $261     $247     $230

Delinquencies (90 days +
 FC + BK + REO)              $174     $131     $143     $133     $178

Redwood's Net Charge-
 Offs                         $(1)     $(2)     $(0)     $(1)     $(1)
Losses to Securities
 Junior to Redwood's
 Interests                     (0)      (0)      (0)      (1)      (0)
------------------------ --------- -------- -------- -------- --------
Total Underlying Loan
 Credit Losses                $(1)     $(2)     $(0)     $(2)     $(1)

Delinquencies as % of
 Underlying Loans            0.14%    0.14%    0.20%    0.19%    0.41%
Total Pool Credit
 Losses/Underlying Loans
 (Annualized)                0.01%    0.01%    0.01%    0.01%    0.01%
Total Credit Protection
 as % of Underlying
 Loans                       0.30%    0.32%    0.37%    0.36%    0.53%
Total Credit Protection
 as % of Delinquencies        211%     233%     183%     187%     129%

(1) Includes credit-enhancement securities acquired from
    securitizations sponsored by third parties. Does not include
    residential CES acquired from securitizations sponsored by us.

(2) Total credit protection represents the aggregate of the internally
    designated credit reserve and the amount of any junior securities
    with respect to each credit-enhanced security. The credit
    protection amount for any credit-enhanced security is only
    available to absorb losses on the pool of loans related to that
    security. To the extent such losses exceed the credit protection
    amount for that security, a charge-off of the net investment in
    that security would result.



REDWOOD TRUST, INC.
(All dollars in millions, except per share data)

                          Third    Second    First    Fourth   Third
Total Managed            Quarter   Quarter  Quarter  Quarter  Quarter
 Residential Loans (1)     2004      2004     2004     2003     2003
----------------------- --------- --------- -------- -------- --------

Residential Real Estate
 Loans Owned by Redwood     $259      $161      $97      $43     $406
Residential Real Estate
 Loans Securitized by
 Redwood                  21,299    19,755   17,989   16,196   13,407
Residential Real Estate
 Loans Securitized by
 Others                  121,585    97,105   71,362   68,133   43,680
----------------------- --------- --------- -------- -------- --------
Total Residential Real
 Estate Loans Managed   $143,143  $117,021  $89,448  $84,372  $57,493


Credit Reserve on
 Residential Loans
 Securitized by Redwood      $21       $20      $19      $16      $14
Internally Designated
 Credit Reserve on
 Loans Securitized by
 Others                      299       236      217      201      178
Redwood's Total
 Residential Credit
 Protection                 $320      $256     $236     $217     $192
External Credit
 Enhancement on Loans
 Securitized by Others        69        70       44       46       52
----------------------- --------- --------- -------- -------- --------
Total Credit Protection
 (2)                        $389      $326     $280     $263     $244
Total Credit Protection
 as % of Total
 Residential Loans          0.27%     0.28%    0.31%    0.31%    0.42%

Delinquencies for
 Residential Loans
 owned by Redwood             $0        $0       $0       $0       $0
Delinquencies for
 Residential Loans
 Securitized by Redwood       11         5        3        5        2
Delinquencies for
 Residential Loans
 Securitized by Others       174       131      143      133      178
----------------------- --------- --------- -------- -------- --------
Total Residential Loan
 Serious Delinquencies      $185      $136     $146     $138     $180

Delinquencies as % of
 Total Residential
 Loans                      0.13%     0.12%    0.16%    0.16%    0.31%
Total Credit Protection
 as % of Delinquencies       211%      239%     191%     191%     136%


Net Charge-Offs on
 Residential Loans
 Owned by Redwood             $0        $0       $0       $0       $0
Net Charge-Offs on
 Residential Loans
 Securitized by Redwood       $0        $0       $0       $0       $0
Net Charge-Offs on
 Residential Loan
 Securitized by Others        (1)       (2)       0       (1)      (1)
----------------------- --------- --------- -------- -------- --------
Redwood's Shares of Net
 Credit (Losses)
 Recoveries                  ($1)      ($2)      $0      $(1)     $(1)
Credit Losses to
 External Credit
 Enhancement                   0         0        0       (1)       0
----------------------- --------- --------- -------- -------- --------
Total Residential
 Credit Losses               ($1)      ($2)      $0      $(2)     $(1)
Total Credit Losses as
 % of Total Residential
 Loans (Annualized)         0.01%     0.01%    0.01%    0.01%    0.01%

(1) Includes loans securitized by Sequoia securitization entities
    sponsored by Redwood from which Redwood has acquired the
    residential CES plus loans securitized by third parties from which
    Redwood has required the residential credit-enhanced securities,
    plus loans held temporarily by Redwood prior to securitization.

(2) The credit reserve on residential real estate loans owned is only
    available to absorb losses on the residential real estate loan
    portfolio. The internally designated credit reserve on loans
    credit-enhanced and the external credit enhancement on loans
    credit-enhanced are only available to absorb losses on the pool of
    loans related to each individual credit-enhancement security.



REDWOOD TRUST, INC.
(All dollars in millions, except per share data)

                                 Third  Second   First  Fourth   Third
                               Quarter Quarter Quarter Quarter Quarter
Commercial Real Estate Loans     2004    2004    2004    2003    2003
------------------------------ ------- ------- ------- ------- -------
Start of Period Balances          $34     $22     $22     $24     $35
Acquisitions                        0      17       0       0       1
Sales Proceeds (Not Including
 Sales to Consolidated Asset-
 Backed Securities Trusts)          0      (2)      0       0      (1)
Principal Pay Downs                 0      (3)      0       0     (11)
Net Amortization Income            (1)      0       0       0       0
Credit Provisions                   0       0       0      (1)      0
Net Loss Adjustments through
 I/S                                0       0       0      (1)      0
------------------------------ ------- ------- ------- ------- -------
End of Period Balances            $33     $34     $22     $22     $24

Average Amortized Cost During
 Period, Net of Credit
 Reserves                         $33     $26     $22     $23     $30
Interest Income                  $1.0    $0.9    $0.7    $0.2    $0.9
Yield                           12.40%  13.29%  12.56%   4.16%  12.33%

Principal Value of Loans          $43     $43     $31     $31     $31
Credit Reserve and Credit
 Protection                        (9)     (8)     (8)     (8)     (7)
Net Discount to be Amortized       (1)     (1)     (1)     (1)     (0)
------------------------------ ------- ------- ------- ------- -------
Commercial Mortgage Loans         $33     $34     $22     $22     $24

Commercial Real Estate Loan
 Delinquencies                     $0      $0      $0      $0      $0
Commercial Real Estate Loan
 Net Charge-Offs                   $0      $0      $0      $0      $0
Commercial Real Estate Loan
 Credit Provisions                 $0      $0      $0      $1      $0
Commercial Real Estate Loan
 Credit Reserves and Credit
 Protection                        $8      $8      $8      $8      $7

                                 Third  Second   First  Fourth   Third
                               Quarter Quarter Quarter Quarter Quarter
Securities Portfolio             2004    2004    2004    2003    2003
------------------------------ ------- ------- ------- ------- -------
Start of Period Balances       $1,095    $937    $845    $605    $596
Acquisitions                      151     193      86     257      28
Sales Proceeds (Not Including
 Sales to Consolidated Asset-
 Backed Securities Trusts)          0      (9)      0       0       0
Principal Pay Downs               (18)    (10)    (10)    (17)    (13)
Net Amortization Income
 (Expense)                          0      (1)      0      (1)      0
Net Unrealized Gains (Losses)      11       0      16       4      (3)
Net Recognized Gains (Losses)
 & Valuation Adjustments            0     (15)      0      (3)     (3)
------------------------------ ------- ------- ------- ------- -------
End of Period Balances         $1,239  $1,095    $937    $845    $605

Average Amortized Cost During
 Period                        $1,149    $980    $862    $710    $603
Interest Income                   $13     $11     $10      $8      $6
Yield                            4.62%   4.30%   4.46%   4.40%   4.30%

Principal Value of Securities   1,243  $1,097    $921    $833    $599
Net (Discount) Premium to be
 Amortized                        (20)     (7)     (4)      8       7
Net Unrealized Gains (losses)      16       5      20       4      (1)
------------------------------ ------- ------- ------- ------- -------
Securities Portfolio           $1,239  $1,095    $937    $845    $605



REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Differences Between GAAP Net Income and Estimated Total Taxable and
REIT Taxable Income
                                 Estimated     Estimated      Actual
                               For the Three  For the Nine   For the
                                Months Ended  Months Ended  Year Ended
                                 Sept. 30,     Sept. 30,     Dec. 31,
                                   2004          2004          2003
                               ------------- ------------- -----------
GAAP Net Income                       $72.3        $178.2      $131.7
Interest Income and Expense
 Differences                          (23.5)        (19.5)       22.3
Provision for Credit Losses -
 GAAP                                   1.5           5.5         8.7
Tax Deductions for Realized
 Credit Losses                         (0.1)         (0.6)       (0.8)
Long-Term Compensation
 Differences                            2.0           6.7         1.8
Stock Option Exercise
 Deductions Differences                (2.4)        (13.9)        3.2
Depreciation of Fixed Asset
 Differences                           (0.6)         (0.5)       (0.7)
Other Operating Expense
 Differences                           (0.0)         (0.0)        0.9
Sales of Assets to Third
 Parties Differences                   (0.5)         (1.7)       (0.0)
Call Income from Residential
 CES Differences                       (4.0)         (8.0)       (8.4)
Tax Gain on Securitizations            11.2          21.5          --
Tax Gain on Intercompany Sales
 and Transfers                          0.0           7.5         2.8
GAAP Market Valuation Write
 Downs (EITF 99-20)                     0.4           4.8         7.6
Interest Rate Agreements
 Differences                           (0.3)          0.3        (0.2)
Provision for Excise Tax - GAAP         0.3           0.8         1.2
Provision for Income Tax
 Differences                            2.8           1.0         5.5
Preferred Dividend - GAAP               0.0           0.0         0.7

                               ------------- ------------- -----------
Total Taxable Income (Pre-Tax)        $59.1        $182.1      $176.3

(Earnings) Losses From Taxable
 Subsidiaries                         (10.1)        (30.2)       (7.9)

REIT Taxable Income (Pre-Tax)          49.0         151.9       168.4

GAAP Income per Share Based on
 Average Diluted Shares During
 Period (2)                           $3.18         $8.29       $7.04

Total Taxable Income per Share
 Based on Shares Outstanding at
 Period End                           $2.53         $8.45       $9.64

REIT Taxable Income per Share
 Based on Shares Outstanding at
 Period End                           $2.10         $7.05       $9.21

(1) Estimated total taxable income and estimated REIT taxable income
    are not GAAP performance measures but are important measures as
    they are the basis of our dividend distributions to shareholders.

(2) Historic periods may be lower than previously reported earnings
    per share numbers as a result of the application of EITF 03-6
    (Participating Securities and the Two-Class Method under FASB
    Statement No. 128) requirement that prior period basic and diluted
    earnings per share be restated for participating securities. Under
    the provision of EITF 03-6 our convertible preferred stock that
    was converted in the second quarter of 2003 is a participating
    security and thus our reported earnings per share for periods 2003
    and earlier are revised downwards by up to 2% per period.

    CONTACT: Redwood Trust, Inc.
             Harold Zagunis, 415-389-7373

    SOURCE: Redwood Trust, Inc.

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