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Redwood Trust Reports Fourth Quarter 2005 Results

Monday, February 27, 2006

MILL VALLEY, Calif.--(BUSINESS WIRE)--Feb. 27, 2006--Redwood Trust, Inc. (NYSE:RWT) today reported GAAP earnings of $42 million ($1.68 per share) for the fourth quarter of 2005 and $200 million ($7.96 per share) for the year ended December 31, 2005. In 2004, GAAP earnings were $54 million ($2.22 per share) for the fourth quarter and $233 million ($10.47 per share) for the year ended December 31, 2004.

The reduction in our net income of $33 million from 2004 to 2005 resulted from a decrease in net interest income of $14 million, an increase in operating expenses of $11 million, and an increase in GAAP provisions for income taxes of $10 million. Net gains on sales and calls increased by $2 million. The reduction in net interest income reflects the impact of increased prepayment rates and reduced balances for residential adjustable rate mortgages consolidated on our balance sheet from Sequoia securitization entities we have sponsored, lower yields on our portfolio of residential credit-enhancement securities as seasoned higher-yielding securities have been prepaid, called, or sold, and higher levels of uninvested cash. Operating expenses increased in part due to the rapid growth we experienced in 2003 and 2004 and also due to continuing investments we are making in systems, infrastructure, and new employees to position our business for additional growth. Provisions for income taxes increased in 2005 because we benefited from net operating loss carryforwards in 2004.

At the end of 2004, GAAP book value per share was $35.78. After declaring dividends of $5.80 per share, GAAP book value increased during 2005 by 4% to $37.20 per share.

Fourth Quarter Summary

From the fourth quarter of 2004 to the fourth quarter of 2005, net income decreased by $12 million. Net interest income decreased by $17 million and operating expenses increased by $4 million. These decreases in income, driven by the factors discussed above, were partially offset by an increase in realized gains on sales and calls of assets and net recognized market valuation adjustments of $9 million as a result of increased sales activity.

Additional Information

Additional information on our GAAP results is available in our Annual Report on Form 10-K for the year ended December 31, 2005 which was filed today with the Securities and Exchange Commission. Today we also released our first "Redwood Review", covering the fourth quarter of 2005. The Review (formerly the supplemental information package) contains a discussion of 2005 and fourth quarter activity, taxable income and other non-GAAP performance measures, and a review of Redwood's business and outlook. Our 10-K and the Redwood Review are available on our web site (www.redwoodtrust.com).

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

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

Interest Income           $ 230.9  $ 243.5  $ 248.4  $ 237.2  $ 205.2
Interest Expense           (189.7)  (196.6)  (195.2)  (176.0)  (147.2)
------------------------- -------- -------- -------- -------- --------
Net Interest Income          41.2     46.9     53.2     61.2     58.0

Operating Expenses          (12.1)   (10.9)   (11.1)   (10.7)    (7.9)
Net Recognized Gains and
 Valuation Adjustments       17.8     24.9      3.1     15.0      8.9
Variable Stock Option
 (Expense) Income             0.0      0.0     (0.0)     0.1     (0.0)
Excise Tax (Expense)
 Credit                      (0.3)    (0.3)    (0.3)    (0.3)     0.2
Provision For Income
 Taxes                       (4.1)    (4.7)    (4.0)    (4.7)    (4.8)
Reversal of Deferred Tax
 Valuation Allowance          0.0      0.0      0.0      0.0      0.0
------------------------- -------- -------- -------- -------- --------
GAAP Earnings             $  42.5  $  55.9  $  40.9  $  60.6  $  54.4

Average Diluted Shares
 (thousands)               25,311   25,314   25,196   25,021   24,491
GAAP Earnings per Share
 (Diluted)                $  1.68  $  2.21  $  1.62  $  2.42  $  2.22

Regular Dividends per
 Share                    $  0.70  $  0.70  $  0.70  $  0.70  $  0.67
Special Dividends per
 Share                       3.00     0.00     0.00     0.00     5.50
------------------------- -------- -------- -------- -------- --------
Total Dividends per Share $  3.70  $  0.70  $  0.70  $  0.70  $  6.17



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


CONSOLIDATED INCOME STATEMENT                 2005     2004     2003
------------------------------------------- -------- -------- --------

Interest Income                             $ 960.0  $ 648.1  $ 331.0
Interest Expense                             (757.5)  (431.9)  (202.9)
------------------------------------------- -------- -------- --------
Net Interest Income                           202.5    216.2    128.1

Operating Expenses                            (44.8)   (33.1)   (30.0)
Net Recognized Gains and Valuation
 Adjustments                                   60.8     59.1     46.7
Variable Stock Option (Expense) Income          0.1     (1.0)    (5.7)
Excise Tax (Expense) Credit                    (1.2)    (0.6)    (1.2)
Provision For Income Taxes                    (17.5)   (13.2)    (5.5)
Reversal of Deferred Tax Valuation
 Allowance                                      0.0      5.2      0.0
Dividends and Income Allocated to Preferred
 Stock                                           --       --     (0.7)
------------------------------------------- -------- -------- --------
GAAP Earnings                               $ 199.9  $ 232.6  $ 131.7

Average Diluted Shares (thousands)           25,121   22,229   18,812
GAAP Earnings per Share (Diluted)           $  7.96  $ 10.47  $  7.04

Regular Dividends per Share                 $  2.80  $  2.68  $  2.60
Special Dividends per Share                    3.00     6.00     4.75
------------------------------------------- -------- -------- --------
Total Dividends per Share                   $  5.80  $  8.68  $  7.35



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


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

Residential Real Estate
 Loans                    $13,875  $16,556  $19,630  $21,772  $22,504
Residential Loan Credit-
 Enhancement Securities       613      664      706      611      562
Commercial Real Estate
 Loans                         60       56       42       57       54
Commercial Loan Credit-
 Enhancement Securities        58       44       29       29       14
Securities Portfolio        1,749    1,783    1,649    1,505    1,381
Cash and Cash Equivalents     176      163       72       65       57
Other Assets                  246      239      218      246      206
------------------------- -------- -------- -------- -------- --------
Total Consolidated Assets $16,777$19,505$22,346$24,285$24,778

Redwood Trust Debt        $   170  $   162  $   453  $   199  $   203
Consolidated Asset-Back
 Securities Issued         15,585   18,237   20,815   23,057   23,630
Other Liabilities              87       90       86       81       81
Equity                        935    1,016      992      948      864
------------------------- -------- -------- -------- -------- --------
Total Liabilities and
 Equity                   $16,777  $19,505  $22,346  $24,285  $24,778

Shares Outstanding at
 Period End (thousands)    25,133   24,764   24,647   24,514   24,154
GAAP Equity (GAAP Book
 Value) per Share         $ 37.20  $ 41.03  $ 40.24  $ 38.67  $ 35.78
    CONTACT: Redwood Trust, Inc.
             Harold Zagunis, 415-389-7373

    SOURCE: Redwood Trust, Inc.

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