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Redwood Trust Reports First Quarter 2005 Results

Tuesday, May 03, 2005

MILL VALLEY, Calif.--(BUSINESS WIRE)--May 3, 2005--Redwood Trust, Inc. (NYSE:RWT) today reported GAAP earnings of $61 million ($2.42 per share) for the first quarter of 2005.

Our core earnings were $1.82 per share for the first quarter, an increase of 6% relative to first quarter 2004 core earnings of $1.71 per share but a slight decrease from fourth quarter 2004 core earnings of $1.86 per share. Core earnings exclude gains and losses from asset sales, calls, and market value changes that are included in reported GAAP earnings. We believe core earnings can be a meaningful measure of Redwood's financial performance in addition to reported GAAP results because core earnings highlights that portion of our reported earnings that is more likely to be ongoing in nature. A reconciliation of our core earnings to GAAP earnings appears in the tables below.

Redwood declared dividends of $0.70 per share for the first quarter of 2005.

Doug Hansen, Redwood's President, said, "Our portfolio of high-quality real estate assets continues to produce strong cash flows and earnings, and real estate credit trends remain favorable."

Hansen continued, "As noted in the past, we expect our quarterly core earnings per share results will most likely decline somewhat during 2005 as our highest yielding assets from the past pay down or are called away."

"We are continuing to face increased levels of competition for asset acquisitions at a time when the supply of new high-quality real estate loan originations is declining," said Hansen. "We were able to source a reasonable amount of attractive new assets for our permanent asset portfolio during the first quarter, although our acquisition rate is slowing. Given current market conditions, we expect that our rate of asset acquisition will continue to decline."

"We have a material amount of cash that is not yet invested," Hansen continued. "In addition, we are actively working on a number of additional asset sales and capital recycling opportunities that could generate more cash. We are willing to hold this cash while looking patiently for attractive long-term high-quality investment opportunities. Even if current market conditions persist, we do expect to invest our unutilized cash over time and to continue to grow by employing capital in both new and existing products. Accordingly, we are continuing to make significant new investments in staff, infrastructure, and information technologies."

"We expect our assets will continue to generate strong cash flows," said Hansen. "We expect to continue to post results and pay dividends that are attractive on an absolute basis, so long as real estate credit results for high-quality residential and commercial real estate loans are reasonably favorable."

Review of the First Quarter of 2005

From the fourth quarter of 2004 to the first quarter of 2005, GAAP return on equity rose slightly from 25.0% to 27.0% and core return on equity declined slightly from 23.5% to 22.9%. Our use of "core equity" is described below.

Redwood's estimated total taxable income (pre-tax income as calculated according to the tax rules) was $1.89 per share for the first quarter of 2005, $2.46 for the fourth quarter of 2004, and $2.57 per share for the first quarter of 2004. Estimated REIT taxable income (which excludes income earned in taxable non-REIT subsidiaries) was $1.84 per share for the first quarter of 2005, $2.09 per share for the fourth quarter of 2004, and $2.15 per share for the first quarter of 2004.

Permanent assets are the assets we own and hold in portfolio for the long term to earn interest income and to benefit from asset appreciation and call gains. Redwood's total permanent asset acquisitions for the first quarter were $50 million, including $0.5 million residential credit-enhancement securities (CES) and $0.5 million interest-only (IO) securities acquired from Sequoia residential securitizations we sponsored, $21 million residential credit-enhancement securities (CES) acquired from securitizations sponsored by others, $14 million commercial real estate CES, $3 million commercial real estate loans, and $11 million collateralized debt obligation (CDO) equity securities acquired from the $300 million Acacia CDO 7 securitization we sponsored during the first quarter. Permanent asset acquisitions for the four quarters of 2004 were $54 million, $80 million, $75 million, and $64 million, respectively. Redwood's asset acquisitions from Sequoia and Acacia securitizations do not appear as assets on our Consolidated Balance Sheets as these securitizations are accounted for as financings for GAAP purposes.

We sold $27 million (market value) permanent assets during the first quarter of 2005, generating GAAP gains of $8 million and estimated tax gains of $7 million. An additional $14 million permanent assets were called during the first quarter, generating GAAP gains of $8 million and estimated tax gains of $6 million. GAAP gains from these sales and calls represent the primary difference between GAAP and core earnings for the first quarter.

Total permanent assets increased by 6% (from $626 million to $660 million) during the first quarter as a net result of $50 million new acquisitions, $32 million market value appreciation, and $11 million net discount amortization income accruals, offset by $40 million sales (including $13 million of sales to Acacia CDO 7), $7 million calls, and $12 million principal pay downs.

During the first quarter of 2005, we sponsored two Sequoia securitizations (Sequoia 2005-1 and Sequoia 2005-2), securitizing $767 million high-quality residential real estate loans. On average during 2004, we sponsored the securitization of $2.4 billion residential loans per quarter. Our residential loan securitization volume and our securitization margin (the gain-on-sale we generate for tax purposes in our taxable non-REIT subsidiaries when we sponsor a residential securitization) have declined. A flatter yield curve (higher short-term interest rates relative to longer-term interest rates) has reduced homeowner interest in the short-term adjustable rate loans (ARMs) we have been acquiring for sale to Sequoia. In addition, homeowners have increasingly favored competing short-term ARM products (negative amortization option ARMs and Moving Treasury Average ARMs), reducing interest in our core LIBOR-index ARM product. Our securitization margins have declined due to increased demand from banks for whole loans for their portfolios and increased securitization competition from Wall Street firms and others. We expect that our taxable income gains from securitization in 2005 will be substantially reduced from the $32 million taxable income gains we earned in 2004. The securitizations we sponsor are treated as financings for GAAP purposes, so no gain or loss on the sale of accumulated securitization assets to securitization entities is recorded in our GAAP statements.

As a result of sales of residential CES and prepayments within the loan pools underlying the CES we own, total residential real estate credit managed by Redwood increased only slightly to $152 billion at the end of the first quarter from $149 billion at year-end. Seriously delinquent loans (over 90 days, in foreclosure, in bankruptcy, or real estate owned) within Redwood's managed residential loans increased during the first quarter while remaining at low levels. Serious delinquencies were $217 million (0.14% of loan balances) at quarter-end and $164 million (0.11% of loan balances) at the beginning of the quarter. One year ago, serious delinquencies were $146 million (0.16% of loan balances of $89 billion).

Credit losses for Redwood's managed residential loans were $1.4 million for the first quarter, $0.7 million for the fourth quarter of 2004, and $0.1 million for the first quarter of 2004. Our residential credit loss rates remain under one basis point (0.01%) of loan balances on an annual basis.

At March 31, 2005, Redwood credit-enhanced (assumed first-loss credit risk on) $13 billion commercial real estate loans. Serious delinquencies on these loans at quarter-end totaled $5 million (0.04% of loan balances), and there were no commercial credit losses during the quarter.

Credit results for the remainder of our permanent assets were also strong during the first quarter of 2005.

During the quarter, interest rates rose, the yield curve flattened, prepayment rates for the adjustable-rate residential loans underlying our residential CES and IO securities (including assets acquired from Sequoia) increased, and prepayment rates for fixed-rate and hybrid residential loans underlying our residential CES decreased. We believe our balance sheet and operations are well balanced with respect to changes in interest rates and prepayment rates, and that there has been no major effect of these current trends on our results and cash flows.

Operating expenses (before excise taxes and variable stock option expense, but including FAS123 expenses for the granting of stock options) for the first quarter of 2005 were $10.7 million and our efficiency ratio (operating expenses as a percent of net interest income) was 18%. In the first quarter of 2004, operating expenses were $8.3 million and our efficiency ratio was also 18%. From the first quarter of 2004 to the first quarter of 2005, our operating expenses grew by 30% while our business (as measured by the size of our permanent asset portfolio) grew by 64%.

Redwood continues to use only equity capital (no debt) to fund its permanent assets. We utilize debt only to fund assets accumulated and held temporarily as inventory for sale to future securitizations.

At March 31, 2005, the assets Redwood owns (excluding assets owned by securitization entities that are consolidated for GAAP) included permanent assets of $660 million, assets held temporarily as inventory for sale to future securitizations of $379 million, unrestricted cash of $65 million, interest rate agreements of $28 million, and net working capital and fixed assets of $43 million, for a total of $1.1 billion. These assets were funded with Redwood debt of $199 million and equity of $948 million. Our debt-to-capital ratio was 17% and our debt-to-equity ratio was 0.2X.

Redwood issued 344,755 new common shares through its Direct Stock Purchase and Dividend Reinvestment Plan in the first quarter at an average net price to Redwood of $55.83 per share, raising $19 million new equity capital.

At quarter-end, after setting aside the capital we need to run our current business under our risk-adjusted capital guidelines, and setting aside cash equaling the estimated REIT taxable income we will distribute as dividends prior to September 2006, we had $80 million of excess cash available to invest in new permanent assets.

Reported GAAP book value per share at quarter-end was $38.67 per share, an increase of 8% during the quarter. Adjusted core book value per share at quarter-end was $31.03 per share, an increase of 4% during the quarter. Core book value is reported GAAP book value less unrealized asset market value appreciation. Adjusted core book value is core book value less REIT taxable income earned that will need to be distributed as dividends prior to September 2006. We believe adjusted core equity is a good measure of the amount of capital we have available in the long-term to run our business. A reconciliation of adjusted core equity to GAAP equity appears in the tables below.

Update for the Second Quarter of 2005 (through May 2, 2005)

Permanent asset acquisitions completed during the second quarter of 2005 to date have totaled $7 million, including $0.8 million residential CES and $0.4 million IO securities acquired from the $365 million Sequoia 2005-3 residential securitization we sponsored in April, and $6 million residential CES acquired from securitizations sponsored by others. To date in the second quarter, we have not sold permanent assets.

Our credit results have remained excellent during the second quarter of 2005 to date.

Calls of residential CES were $7 million principal value in April, generating estimated gains of $3 million for GAAP and $2 million for tax.

Additional Information

Please see our supplemental information package, released today on our web site (www.redwoodtrust.com) and included as an exhibit to our Current Report on Form 8-K, for more information about the first quarter of 2005. In addition, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 contains additional information about the first quarter.

As is our current practice, we plan to simultaneously release our second quarter earnings release, Quarterly Report on Form 10-Q, and supplemental information package. Our current plan is to release these documents for the second quarter of 2005 no later than the SEC filing deadline for our Quarterly Report on Form 10-Q of August 9, 2005.

Redwood Trust invests in, credit-enhances, and securitizes residential and commercial real estate loans and securities. The company is a leader in the real estate loan marketplace, with assets backed by $151 billion of residential real estate loans, representing approximately 10% of the U.S. jumbo residential real estate loan market.

CAUTIONARY STATEMENT

This press release contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, including the words "anticipated," "estimated," "should," "expect," "believe," "intend," and similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K under the caption "Risk Factors." Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are detailed from time to time in reports filed by us with the Securities and Exchange Commission, or SEC, including Forms 10-Q and 8-K.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking events mentioned, or discussed in, this press release might not occur. Accordingly, our actual results may differ from our current expectations, estimates, and projections.

Important factors that may impact our actual results include changes in interest rates and market values; changes in prepayment rates; general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; the level of liquidity in the capital markets as it affects our ability to finance our real estate asset portfolio; and other factors not presently identified. For a discussion of risk factors, readers should review the section of our Annual Report on Form 10-K entitled "Risk Factors." This press release contains statistics and other data that in some cases have been obtained from, or compiled from information made available, by servicers and other third-party service providers.

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

                                 First  Fourth   Third  Second   First
                               Quarter Quarter Quarter Quarter Quarter
CONSOLIDATED INCOME STATEMENT     2005    2004    2004    2004    2004
------------------------------ ------- ------- ------- ------- -------

Interest Income                $237.2  $205.2  $180.1  $138.0  $124.8
Interest Expense               (176.0) (147.2) (114.8)  (90.4)  (79.5)
------------------------------ ------- ------- ------- ------- -------
Net Interest Income             $61.2   $58.0   $65.3   $47.6   $45.3

Operating Expenses              (10.7)   (7.9)   (8.0)   (8.9)   (8.3)
Net Recognized Gains (Losses)
 and Valuation Adjustments       15.0     8.9    20.5    12.3    17.4
Variable Stock Option
 (Expense) Income                 0.1    (0.0)   (0.2)    0.6    (1.4)
Excise Tax (Expense) Credit      (0.3)    0.2    (0.3)   (0.2)   (0.3)
Provision For Income Taxes       (4.7)   (4.8)   (5.0)   (1.5)   (1.9)
Reversal of Deferred Tax
 Valuation Allowance              0.0     0.0     0.0     5.2     0.0
                               ------- ------- ------- ------- -------
GAAP Earnings                   $60.6   $54.4   $72.3   $55.1   $50.8

Less:  Net Recognized (Gains)
 Losses and Valuation
 Adjustments                    (15.0)   (8.9)  (20.5)  (12.3)  (17.4)
Less:  Variable Stock Option
 (Expense) Income                (0.1)    0.0     0.2    (0.6)    1.4
Less: One Time Deferred Tax
 (Benefit)                        0.0    (0.0)   (0.0)   (5.2)    0.0
------------------------------ ------- ------- ------- ------- -------
Core Earnings (1)               $45.5   $45.5   $52.0   $37.0   $34.8

Average Diluted Shares
 (thousands)                   25,021  24,491  22,728  21,325  20,399
GAAP Earnings per Share
 (Diluted)                      $2.42   $2.22   $3.18   $2.58   $2.49
Core Earnings per Share (1)     $1.82   $1.86   $2.29   $1.74   $1.71
Estimated Total Taxable Income
 Per Share Outstanding          $1.89   $2.46   $2.53   $3.35   $2.57
Estimated REIT Taxable Income
 Per Share Outstanding          $1.84   $2.09   $2.10   $2.81   $2.15

Dividends Per Common Share
 (Regular)                      $0.70   $0.67   $0.67   $0.67   $0.67
Dividends Per Common Share
 (Special)                      $0.00   $5.50   $0.00   $0.00   $0.50
------------------------------ ------- ------- ------- ------- -------
Total Dividends per Common
 Share                          $0.70   $6.17   $0.67   $0.67   $1.17

GAAP Net Interest Income /
 Average GAAP Equity             27.3%   26.7%   32.6%   28.7%   31.0%
Core Net Interest Income /
 Average Core Equity (2)         30.8%   29.9%   37.5%   32.6%   35.7%

GAAP ROE:  GAAP Earnings/ Avg
 GAAP Common Equity              27.1%   25.0%   36.1%   33.2%   34.8%
Core ROE:  Core Earnings / Avg
 Common Core Equity              22.9%   23.5%   29.9%   25.4%   27.5%

(1) Core earnings is not a measure of earnings in accordance with
    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 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. (A reconciliation of
    core-equity to GAAP equity appears in the table presenting balance
    sheet data.) 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)

CONSOLIDATED BALANCE       31-Mar   31-Dec  30-Sept   30-Jun   31-Mar
 SHEET                       2005     2004     2004     2004     2004
------------------------- -------- -------- -------- -------- --------

Residential Real Estate
 Loans                    $21,493  $22,208  $21,558  $19,916  $18,086
Residential Home Equity
 Lines of Credit (HELOC)      279      296      317      327       --
Residential Loan Credit -
 Enhancement Securities       611      562      497      442      375
Commercial Real Estate
 Loans                         57       54       33       34       22
Securities Portfolio        1,534    1,395    1,239    1,095      937
Cash and Cash Equivalents      65       57       76       38       58
Other Assets                  246      206      192      163      113
------------------------- -------- -------- -------- -------- --------
Total Consolidated Assets $24,285  $24,778  $23,912  $22,015  $19,591

Redwood Trust Debt           $199     $203     $246     $270     $278
Consolidated Asset-Back
 Securities Issued         23,057   23,630   22,680   20,923   18,630
Other Liabilities              81       81       84       64       75
Common Equity                 948      864      902      758      608
------------------------- -------- -------- -------- -------- --------
Total Liabilities and
 Equity                   $24,285  $24,778  $23,912  $22,015  $19,591

Total GAAP Equity            $948     $864     $902     $758     $608
Less: Accumulated Other
 Comprehensive Income        (125)    (105)     (96)    (111)     (79)
------------------------- -------- -------- -------- -------- --------
Core Equity                  $823     $759     $806     $647     $529
Less: Undistributed REIT
 Taxable Income               (63)     (38)    (139)    (110)     (69)
------------------------- -------- -------- -------- -------- --------
Adjusted Core Equity         $760     $721     $667     $537     $460

Common Shares Outstanding
 at Period End
 (thousands)               24,514   24,154   23,346   21,511   19,796
GAAP Equity (GAAP Book
 Value) per Common Share   $38.67   $35.78   $38.63   $35.24   $30.72
Core Equity (Core Book
 Value) per Common Share
 (1)                       $33.58   $31.42   $34.50   $30.06   $26.75
Adjusted Core Equity per
 Share (2)                 $31.03   $29.86   $28.55   $24.96   $23.25

Average Total
 Consolidated Assets      $24,563  $24,320  $22,877  $20,610  $18,386
Average Consolidated
 Earning Assets           $24,043  $23,890  $22,461  $20,283  $18,158
Average Debt and Asset
 Backed Securities Issued $23,602  $23,304  $22,011  $19,890  $17,747
Average Total GAAP Equity    $895     $870     $802     $664     $584

(1) Core equity is calculated as GAAP equity less unrealized gains and
    losses on certain assets and hedges. A reconciliation of core
    equity to GAAP equity appears in the table presenting balance
    sheet data. 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 might not be comparable to similarly titled measures
    reported by other companies.
(2) As a REIT we have minimum dividend distribution requirements. We
    thus have future payment obligations, but these are not recognized
    in GAAP accounting until dividends are declared. Cash that we have
    earned but that we must pay out as dividends is not cash that will
    be available to us to acquire long-term assets and build our
    business. Thus, we calculate adjusted core equity in order to
    provide additional information about our equity available after
    the distribution of our dividend requirements and review of equity
    available to fund our long-term assets.


REDWOOD TRUST, INC.
(All dollars in millions)

                            31-Mar   31-Dec   30-Sep   30-Jun   31-Mar
LEVERAGE RATIOS (1)          2005     2004     2004     2004     2004
------------------------- -------- -------- -------- -------- --------

Total Reported
 Consolidated Assets      $24,285  $24,778  $23,912  $22,015  $19,591
Less: Assets Consolidated
 from Securitization
 Entities                 (23,138) (23,711) (22,764) (20,987) (18,705)
------------------------- -------- -------- -------- -------- --------
Redwood's Permanent
 Assets and Inventory
 Assets                    $1,147   $1,067   $1,148   $1,028     $886

Total Redwood Debt and
 Consolidated ABS Issued
 Securities               $23,256  $23,833  $22,926  $21,193  $18,908
Less:  Consolidated ABS
 Issued Securities        (23,057) (23,630) (22,680) (20,923) (18,630)
------------------------- -------- -------- -------- -------- --------
Redwood's Debt               $199     $203     $246     $270     $278

Redwood Debt                 $199     $203     $246     $270     $278
Redwood Equity                948      864      902      758      608
------------------------- -------- -------- -------- -------- --------
Redwood Capital            $1,147   $1,067   $1,148   $1,028     $886

Redwood Debt to GAAP
 Equity                       0.2x     0.2x     0.3x     0.4x     0.5x
GAAP Equity / Redwood's
 Direct Assets                 83%      81%      79%      74%      69%
Redwood Debt to Capital
 Ratio                         17%      19%      21%      26%      31%

(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)

                             First   Fourth    Third   Second    First
                           Quarter  Quarter  Quarter  Quarter  Quarter
                              2005     2004     2004     2004     2004
                          -------- -------- -------- -------- --------
Consolidated Residential
 Real Estate Loans (1)
-------------------------
Start of Period Balances  $22,208  $21,558  $19,916  $18,086  $16,239
Acquisitions                  832    1,792    2,898    2,703    2,322
Sales Proceeds (Not
 Including Sales to
 Consolidated Asset-
 Backed Securities
 Trusts)                        0       (1)    (113)       0        0
Principal Pay Downs        (1,539)  (1,133)  (1,144)    (858)    (460)
Net Amortization Expense       (7)      (6)       2      (14)     (12)
Net Charge Offs
 (Recoveries)                   0        0        0        0        0
Credit Provisions              (1)      (2)      (1)      (1)      (3)
Net Recognized Gains
 (Losses)                       0        0        0        0        0
------------------------- -------- -------- -------- -------- --------
End of Period Balances    $21,493  $22,208  $21,558  $19,916  $18,086

Average Amortized Cost
 During Period, Net of
 Credit Reserves          $21,640  $21,717  $20,484  $18,754  $16,916
Interest Income              $195     $169     $148     $110      $99
Yield                        3.60%    3.11%    2.89%    2.34%    2.34%

Principal Value of Loans  $21,307  $22,024  $21,382  $19,767  $17,951
Credit Reserve                (24)     (23)     (21)     (20)     (19)
Net Premium to be
 Amortized                    210      207      197      169      154
------------------------- -------- -------- -------- -------- --------
Residential Real Estate
 Loans                    $21,493  $22,208  $21,558  $19,916  $18,086

Credit Reserve, Start of
 Period                       $23      $21      $20      $19      $16
Net Charge-Offs                 0        0        0        0        0
Credit Provisions               1        2        1        1        3
------------------------- -------- -------- -------- -------- --------
Credit Reserve, End of
 Period                       $24      $23      $21      $20      $19

Delinquencies (90 days,
 in foreclosure, in
 bankruptcy, or real
 estate owned)                $16      $13      $11       $5       $3

Delinquencies as % of
 Residential Loans           0.08%    0.06%    0.05%    0.03%    0.02%
Net Charge-offs as % of
 Residential Loans
 (Annualized)                0.01%    0.01%    0.00%    0.00%    0.00%
Reserve as % of
 Residential Loans           0.11%    0.10%    0.10%    0.10%    0.10%
Reserve as % of
 Delinquencies                151%     173%     198%     374%     548%

(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)

                                 First  Fourth   Third  Second   First
                               Quarter Quarter Quarter Quarter Quarter
                                  2005    2004    2004    2004    2004
                               ------- ------- ------- ------- -------
Consolidated Residential Home
 Equity Lines of Credit
 (HELOC)
Start of Period Balances         $296    $317    $327      $0      $0
Acquisitions                        0       0       0     335       0
Sales Proceeds (Not Including
 Sales to Consolidated Asset-
 Backed Securities Trusts)          0       0       0       0       0
Principal Pay Downs               (16)    (20)     (8)     (8)      0
Net Amortization Expense           (1)     (1)     (1)     (0)      0
Net Charge Offs (Recoveries)        0       0       0       0       0
Credit Provisions                   0       0      (1)     (0)      0
Net Recognized Gains (Losses)
 & Valuation Adjustments            0       0       0       0       0
------------------------------ ------- ------- ------- ------- -------
End of Period Balances           $279    $296    $317    $327      $0

Average Amortized Cost During
 Period, Net of Credit
 Reserves                        $285    $303    $323    $124      $0
Interest Income                    $3      $2      $1      $1      $0
Yield                            3.59%   2.87%   2.00%   1.73%   0.00%

Principal Value of Loans         $273    $289    $309    $317      $0
Credit Reserve                     (1)     (1)     (1)     (0)      0
Net Premium to be Amortized         7       8       9      10       0
------------------------------ ------- ------- ------- ------- -------
Residential Home Equity Lines
 of Credit                       $279    $296    $317    $327      $0

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

Delinquencies (90 days, in
 foreclosure, in bankruptcy,
 or real estate owned)           $0.2    $0.3    $0.3    $0.0    $0.0

Delinquencies as % of HELOCs     0.06%   0.10%   0.09%   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           0.22%   0.24%   0.17%   0.08%   0.00%
Reserve as % of Delinquencies     363%    240%    202%   0.00%   0.00%


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

                           First    Fourth     Third   Second    First
                         Quarter   Quarter   Quarter  Quarter  Quarter
                            2005      2004      2004     2004     2004
                       --------- --------- --------- -------- --------
Consolidated
 Residential Loan
 Credit-Enhancement
 Securities (1)
----------------------
Start of Period
 Balances                  $562      $497      $442     $375     $379
Acquisitions                 68        73        83       75       38
Sales Proceeds (Not
 Including Sales to
 Consolidated Asset-
 Backed Securities
 Trusts)                    (27)        0         0        0      (22)
Principal Pay Downs
 (Including Calls)          (24)      (30)      (45)     (48)     (35)
Net Amortization
 Income                       8         8         9        9        9
Unrealized (Losses)
 Gains Reported
 Through Balance Sheet        9         4       (12)      18      (12)
Realized Gains and
 Market Valuation
 Losses Reported in
 Income Statement            15        10        20       13       18
---------------------- --------- --------- --------- -------- --------
End of Period Balances     $611      $562      $497     $442     $375

Average Amortized Cost
 During Period, Net of
 Credit Reserves           $493      $425      $369     $317     $287
Interest Income             $20       $17       $16      $16      $16
Yield                     15.91%    15.99%    17.36%   20.27%   21.64%

Principal Value of
 Redwood's Credit-
 Enhancement
 Securities                $979      $934      $831     $713     $634
Internally Designated
 Credit Protection on
 Loans Credit-Enhanced     (366)     (343)     (299)    (236)    (217)
Net Discount to be
 Amortized                  (89)     (107)     (109)    (122)    (111)
---------------------- --------- --------- --------- -------- --------
Net Investment in
 Credit-Enhancement
 Securities                $524      $484      $423     $355     $306
Net Unrealized Gains
 (Losses)                    87        78        74       87       69
---------------------- --------- --------- --------- -------- --------
Residential Loan
 Credit-Enhancement
 Securities                $611      $562      $497     $442     $375

Securities Senior to
 Redwood's Interests   $129,081  $125,485  $120,685  $96,322  $70,684
Principal Value of
 Redwood's Credit-
 Enhancement
 Securities                 979       934       831      713      634
Securities Junior to
 Redwood's Interests         67        68        69       70       44
---------------------- --------- --------- --------- -------- --------
Underlying Residential
 Real Estate Loan
 Balances              $130,127  $126,487  $121,585  $97,105  $71,362

Internally Designated
 Credit Protection on
 Loans Credit-Enhanced     $366      $340      $299     $236     $217
External Credit
 Enhancement on Loans
 Credit-Enhanced             67        68        69       70       44
---------------------- --------- --------- --------- -------- --------
Total Credit
 Protection (2)            $433      $408      $368     $306     $261

Delinquencies (90
 days, in foreclosure,
 in bankruptcy, or
 real estate owned)        $201      $151      $174     $131     $143

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

Delinquencies as % of
 Underlying Loans          0.15%     0.12%     0.14%    0.14%    0.20%
Total Pool Credit
 Losses/Underlying
 Loans (Annualized)        0.01%     0.01%     0.01%    0.01%    0.01%
Total Credit
 Protection as % of
 Underlying Loans          0.33%     0.32%     0.30%    0.32%    0.37%
Total Credit
 Protection as % of
 Delinquencies              216%      273%      211%     233%     183%

(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)

                          First    Fourth     Third    Second    First
                        Quarter   Quarter   Quarter   Quarter  Quarter
TOTAL MANAGED
RESIDENTIAL LOANS (1)      2005      2004      2004      2004     2004
--------------------- --------- --------- --------- --------- --------

Residential Real
 Estate Loans Owned
 by Redwood               $256      $193      $259      $161      $97
Residential Real
 Estate Loans
 Securitized by
 Redwood                21,237    22,015    21,299    19,755   17,989
Residential Real
 Estate Loans
 Securitized by
 Others                130,127   126,487   121,585    97,105   71,362
--------------------- --------- --------- --------- --------- --------
Total Residential
 Real Estate Loans
 Managed              $151,620  $148,695  $143,143  $117,021  $89,448


Credit Reserve on
 Residential Loans
 Securitized by
 Redwood                   $24       $23       $21       $20      $19
Internally Designated
 Credit Reserve on
 Loans Securitized by
 Others                    366       343       299       236      217
                      --------- --------- --------- --------- --------
Redwood's Total
 Residential Credit
 Protection               $390      $366      $320      $256     $236
External Credit
 Enhancement on Loans
 Securitized by
 Others                     67        68        69        70       44
--------------------- --------- --------- --------- --------- --------
Total Credit
 Protection (2)           $457      $434      $389      $326     $280
Total Credit
 Protection as % of
 Total Residential
 Loans                    0.30%     0.29%     0.27%     0.28%    0.31%

Delinquencies for
 Residential Loans
 owned by Redwood           $0        $0        $0        $0       $0
Delinquencies for
 Residential Loans
 Securitized by
 Redwood                    16        13        11         5        3
Delinquencies for
 Residential Loans
 Securitized by
 Others                    201       151       174       131      143
--------------------- --------- --------- --------- --------- --------
Total Residential
 Loan Serious
 Delinquencies            $217      $164      $185      $136     $146

Delinquencies as % of
 Total Residential
 Loans                    0.14%     0.11%     0.13%     0.12%    0.16%
Total Credit
 Protection as % of
 Delinquencies             211%      263%      211%      239%     191%

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)       (1)       (1)       (2)       0
--------------------- --------- --------- --------- --------- --------
Redwood's Shares of
 Net Credit (Losses)
 Recoveries                ($1)      ($1)      ($1)      ($2)      $0
Credit Losses to
 External Credit
 Enhancement                 0         0         0         0        0
--------------------- --------- --------- --------- --------- --------
Total Residential
 Credit Losses             ($1)      ($1)      ($1)      ($2)      $0
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.
    External credit protection absorbs losses before Redwood is
    exposed to losses in such securities.


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

                                 First  Fourth   Third  Second   First
                               Quarter Quarter Quarter Quarter Quarter
Commercial Real Estate Loans      2005    2004    2004    2004    2004
------------------------------ ------- ------- ------- ------- -------
Start of Period Balances          $54     $33     $34     $22     $22
Acquisitions                        7      21       0      17       0
Sales Proceeds (Not Including
 Sales to Consolidated Asset-
 Backed Securities Trusts)          0       0       0      (2)      0
Principal Pay Downs                (5)      0       0      (3)      0

Net Amortization Income             0       0      (1)      0       0
Credit Provisions                   1       0       0       0       0
Net Loss Adjustments through
 I/S                                0       0       0       0       0
------------------------------ ------- ------- ------- ------- -------
End of Period Balances            $57     $54     $33     $34     $22

Average Amortized Cost During
 Period, Net of Credit
 Reserves                         $56     $40     $33     $26     $22
Interest Income                  $1.6    $1.2    $1.0    $0.9    $0.7
Yield                           11.32%  11.67%  12.40%  13.29%  12.56%

Principal Value of Loans          $67     $65     $43     $43     $31
Credit Reserve and Credit
 Protection                        (8)     (9)     (9)     (8)     (8)
Net Discount to be Amortized       (2)     (2)     (1)     (1)     (1)
------------------------------ ------- ------- ------- ------- -------
Commercial Mortgage Loans         $57     $54     $33     $34     $22

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                 $1      $0      $0      $0      $0
Commercial Real Estate Loan
 Credit Reserves and Credit
 Protection                        $8      $9      $8      $8      $8

                                 First  Fourth   Third  Second   First
                               Quarter Quarter Quarter Quarter Quarter
Securities Portfolio              2005    2004    2004    2004    2004
------------------------------ ------- ------- ------- ------- -------
Start of Period Balances       $1,395  $1,239  $1,095    $937    $845
Acquisitions                      181     181     151     193      86
Sales Proceeds (Not Including
 Sales to Consolidated Asset-
 Backed Securities Trusts)        (12)      0       0      (9)      0
Principal Pay Downs               (27)    (25)    (18)    (10)    (10)
Net Amortization Income
 (Expense)                         (1)      0       0      (1)      0
Net Unrealized Gains (Losses)      (2)      0      11       0      16
Net Recognized Gains (Losses)
 & Valuation Adjustments            0       0       0     (15)      0
------------------------------ ------- ------- ------- ------- -------
End of Period Balances         $1,534  $1,395  $1,239  $1,095    $937

Average Amortized Cost During
 Period                        $1,443  $1,279  $1,149    $980    $862
Interest Income                   $18     $15     $13     $11     $10
Yield                            4.97%   4.85%   4.62%   4.30%   4.46%

Principal Value of Securities   1,611   1,425   1,243  $1,097    $921
Net (Discount) Premium to be
 Amortized                        (92)    (47)    (20)     (7)     (4)
Net Unrealized Gains (losses)      15      17      16       5      20
------------------------------ ------- ------- ------- ------- -------
Securities Portfolio           $1,534  $1,395  $1,239  $1,095    $937


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 Estimated
                                             First    Fourth     First
                                           Quarter   Quarter   Quarter
                                              2005      2004      2004
                                         --------- --------- ---------
GAAP Net Income                             $60.6     $54.4     $50.8
Interest Income and Expense Differences     (20.1)     (6.2)     (1.1)
Provision for Credit Losses - GAAP            1.0       1.7       2.5
Tax Deductions for Realized Credit
 Losses                                      (0.4)     (0.2)      0.0
Long-Term Compensation Differences            1.9      (2.5)      2.9
Stock Option Exercise Deductions
 Differences                                 (0.5)     (3.1)    (12.1)
Depreciation of Fixed Asset Differences       0.1      (0.2)      0.0
Other Operating Expense Differences           0.1      (2.2)      0.0
Sales of Assets to Third Parties
 Differences                                 (0.9)      1.9      (0.6)
Call Income from Residential CES
 Differences                                 (2.3)     (2.9)     (1.9)
Tax Gain on Securitizations                   2.5      10.1       0.0
Tax Gain on Intercompany Sales and
 Transfers                                    3.3       3.1       7.5
GAAP Market Valuation Write Downs (EITF
 99-20)                                       0.4       1.6       0.6
Interest Rate Agreements Differences          0.2      (0.7)      0.0
Provision for Excise Tax - GAAP               0.3      (0.2)      0.3
Provision for Income Tax Differences          0.1       4.8       1.9

                                         --------- --------- ---------

Total Taxable Income (Pre-Tax)              $46.3     $59.4     $50.8

(Earnings) Losses From Taxable
 Subsidiaries                                (1.2)     (9.0)     (8.3)

REIT Taxable Income (Pre-Tax)               $45.1     $50.4     $42.5

GAAP Income per Share Based on Average
 Diluted Shares During Period (2)           $2.42     $2.22     $2.49

Total Taxable Income per Share Based on
 Shares Outstanding at Period End           $1.89     $2.46     $2.57

REIT Taxable Income per Share Based on
 Shares Outstanding at Period End           $1.84     $2.09     $2.15

(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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