Q3 2020 Redwood Trust Inc Earnings Call
[music].
Good night and welcome to the waste by truck incorporated third quarter, that's going to between <unk> financial results Conference call.
During the managements presentation your lines will be on listen only mode.
At the conclusion of prepared remarks, they will be.
A question and association.
I will provide you with instructions to join the question queue after management's comments.
Yup and non-GAAP financial net.
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The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures the financial performance prepared in accordance with gap.
And reconciliation between gap and non-GAAP financial measures is provided in my third quarter Redwood review available on our website Redwood Trust Dot com.
Also note that the content of the conference call contains time sensitive information is accurate only as of today. The company does not intend and undertakes no obligation to update this information to reflect subsequent events or circumstances.
Finally, today's call is being recorded and will be available on the company's website later today.
Will now turn the call over to Chris Davante Red with Chief Executive Officer for opening remarks.
Did you wish the branch to all of you for joining the call.
It was Lisa mentioned, we've got a fancy new website and I encourage everyone to take a look to learn more about the company and the things that make us who we are.
Particular note for those of Nicole reset is rolled out a new investor relations section with enhanced functionality, which would make accessing our results in filings much easier going forward.
And the third quarter of 2020 Redwood move forward.
With the early shocks of the COVID-19 pandemic behind us, we solidified our team and positioned ourselves to take advantage of extraordinary opportunities emerging in our markets are.
Businesses are back to operating a full throttle and we're optimistic that we will end 2020 on a high note, even with policymakers and Marcus on guard with respect to the election next week and a new wave of coronavirus cases emerging throughout the world.
We feel well prepared for this in a position to take advantage of any dislocation that might arise.
As I discussed last quarter, we spent much of the early spring focused on recasting, our balance sheet and positioning our businesses to relaunch from a position of strength.
We are now conducting new business at a rapid pace leveraging our experienced team and very strong industry relationships forged over many cycles, where.
We are pleased to once again see this hard work reflected in our financial results are third quarter GAAP net income was one dollar and two per share which includes record contribution from our business purpose lending segment.
Ah residential lending business also achieved record breaking results with select volumes of 2.1 billion growing from nearly zero in the second quarter.
Additionally, our portfolio of investments continue to increase in market value growing 10% since June 30th.
The past few months, however had been about.
About much more than getting back to business.
After such a profoundly challenging period for a sector in country. We are compelled to think critically about the type of company, we want to lead over the long term, including how we fit into a nation grappling with civil unrest endemic fatigue, and a depressed job market.
We emerged with great clarity on who we are and where we're headed.
Our business continues to gravitate towards where our capital is most impactful in a residential and business purpose lending segments.
Complemented by portfolio strategies, where we hold distinct competitive advantages.
The federal reserve injecting an unprecedented amount of stimulus into the financial markets.
The detailing of asset prices from underlying fundamentals.
Is the most pronounced we have seen since the lead us the great financial crisis.
A vast amount of capital is now needed a deployment.
And this excess liquidity will continue to support higher prices for mortgage investments and exacerbate the scarcity value.
Looking for any possible like up to become a strategic priority from any investment houses to access the whole loans raw material that is used the structure. These types of investments.
That happens to be exactly what rabbits platforms both to provide.
Demand for our loans continues to grow stronger as the year unfolds and we've leveraged this with our counterparties to enhance our distribution strategies and compete more effectively for volume.
Also reducing our exposure to market volatility.
Recent successes in securing non mark to market financing facilities across their product lines, including significant the capacity for financing residential loans and forbearance speaks to this.
Most of these new facilities for completed with our traditional banking partners for expanding are reached by partnering with non bank financing sources that will allow us to use our working capital more efficiently.
The combination of these efforts has given us a head start of sorts in the non AG sector and.
And resulted in rapid reflation of our loan volumes and the potential to gain sharing growing markets.
Today's completion of our first equate securitization backed by loans originated since the COVID-19 crisis began as an important affirmation of our progress.
Like a recent capital securitization of single family rental loans.
We are extremely pleased with our Sequoia execution.
Cash will provide more details on the securitization markets and growth we see in our sector in his opening remarks.
As operating strategies takes shape the rising our portfolios asset value. Since May has continued offer an excellent opportunity for our current shareholders.
And a significant upside we have seen in these investments appears to be somewhat unique story to redwood with many of our competitors exiting they're not agency portfolios in response to the pandemic.
So we can't predict the pace or extent of a broad based economic recovery.
We believe our portfolios value still have room to run with a book currently yielding low to mid <unk> economic returns.
As we focus on growth opportunities ahead.
We believe the secular trend supporting our housing thesis or not just in tact, but accelerating due to the COVID-19 pandemic.
The nationwide push toward single family housing, whether rendered or owned is no longer a nuanced datapoint.
Is front page news is families look for more space to live socially distance and continue to work and learn from home.
As the shift unfolds densely populated cities continue to see home prices and rents stay relatively flat or decline while neighboring suburbs enjoy robust demand home price appreciation in many cases exceeding 10% to 20% over prior year levels.
However, 65% of single family homes, having three bedrooms or more compared to only 11% of apartment units. We expect the trend towards single family living to continue and to be fueled by ultra low interest rates.
Overall, we're very pleased their market positioning and expectations for growth.
But it's a comment upon us to aim higher and lead our sector and innovation in order to realize our full potential the.
The high standards, we have set for service to our customers are already well established but it's critical for us to maintain an infrastructure that can preserve the standard while allowing us to scale profitably and safely.
Doing this well will require a renewed commitment to technology something we're very focused on before the pandemic hit earlier this year.
Our business has recently completed and updated technology roadmap that we're excited to begin communicating out to our stakeholders.
We've identified significant opportunities to provide technology enabled solutions throughout our network that aimed to disrupt traditional private sector workflows and ideologies that have scuttled automation and the non agency sector.
Non agency residential loan purchase workflows and timelines is one such opportunity.
Today, we announced the pilot launch a redwood rapid funding and technology enabled platform that will permit qualifying originators to transact with us on a significantly accelerated purchase timeline in many cases faster than they currently achieved or Fannie Mae and Freddie Mac.
Are delegated process allows originators to control their closing timelines and adding the rapid funding feature will enable them to free up capital more quickly than derisk their balance sheets.
Our program will also create opportunities for faster settlements to a loan by our network.
Depositaries, which would ultimately lead to better outcomes from borrowers.
To wrap up we are entering the next era housing finance and we are prepared to lead the way.
In that sense, we would characterize our third quarter as a transition or bridge to the future.
So our business platform serve different parts of the housing market, our core mission unifies them and that is to make quality housing accessible to all Americans, whether rented or owned.
Refinance build the rent communities in the Midwest.
Workforce housing in the south and high balance residential mortgages on the coast to name just a few.
Our mission speaks to the role we play in our communities and motivates us to advocate for in advance inclusion and diversity initiatives across our industry.
Focusing on financing solutions for all types of borrowers not served by government loan programs are confident we can make a positive impact for our communities employees and shareholders.
Done well our businesses stand to generate higher returns are more durable cash flows and we previously thought possible.
That concludes my prepared remarks, I will now turn the call over to Dash Roberts President.
Thank you Chris.
Our third quarter results reflect the hard work and discipline of our experienced team.
With a four to five balance sheet and enhance relationships with business partners old and new our platforms are operating at full strength and capitalizing on a unique market opportunity.
We entered the quarter optimistic for significant volumes and improved operating margins for a residential and corvette businesses and both platforms exceeded expectations.
Continued improvement in the broader financial markets also benefited our investment portfolio with further tightening of non agency spreads coupled with strong financial results from our operating platforms. This drove gap book value at September 30th higher to $9 41 per share and increase of 15% from the second quarter.
Critical to our success and driving scale is the health and flexibility of our balance sheet.
During the past several months, we further improved balance sheet and operating capacity by reducing our recourse in marginal that expanding our nonrecourse borrowings and growing non marginal warehouse capacity.
We remain focused on efficient use of our working capital, including new structures that we hope will disrupt traditional aggregation warehouse financing.
Before I go deeper into the business I want to share observations, we are seeing in the markets we serve.
As Chris mentioned, the secular trends, we laid out at the beginning of last year are accelerating as demand for single family homes, whether rented are owned is increasing.
Recent reports show the health of the housing market is strong.
Total household equity now exceeds 20 trillion and continues to trend higher the result of a persistent supply demand imbalances in record low cost of borrowing for homebuyers.
The migration from cities to suburbs, we observed over the past several months is also expected to continue in some form.
Evidenced by recent housing search data showing over 50% of property searches and the top 100, metro's or for suburbs outside metro areas.
I will surprise depreciation is also driving some homeowners towards lower cost areas with the expectation that will be working from home at least part time indefinitely.
Industry research indicates that in June 42% of Americans reported they were working from home from 60% of those surveyed expecting to be able to work from home as the new normal.
While we don't expect the recent exodus from urban centers to persist at its current pace. These.
These trends nonetheless pointed towards a more structural evolution and housing demand in which consumers whether homeowners or renters continue to prioritize the benefits of single family detached housing with less surrounding population density.
The markets in which we originated in purchase mortgages mortgage loan stand to benefit from all of this.
Refresh pockets of consumer demand has been supportive of jumbo volumes of our third quarter locks, which I will elaborate more on shortly on a pull through adjusted basis, almost 50% or for purchase money loans, notwithstanding the substantial uptick in broad refinance activity.
Another clear beneficiary has been the single family rental market, which comprises over 10% of single family housing stock and growing.
That's F R occupancy rates now standard over 94% the highest I have been in over 20 years and overall rental collection rates have remained steady notwithstanding the laps and stimulus over the summer.
Turning to our operating platforms.
Third quarter represented an interesting juncture in the jumbo market, one that favor the nimble and those with the wherewithal <unk>.
Financial and otherwise to prudently rescale their operations.
In the quarter or residential lock volume not accounting for potential fallout.
Was $2.1 billion, the highest quarterly level source to a residential loans cellar network in five years.
This is fruit born from efforts across our residential team to re engage with sellers. After the severe market dislocation we saw in the spring.
A process that takes time and benefits from years of relationship and trust.
As of today, we have lock loans with over 80 discreet sellers since June.
This volume growth is notable in that the industry remains focused on what is for now a highly profitable refinance business for government sponsored loads.
In our view there is potential for the market to unlock significantly increased jumbo volumes.
Driven by evolving consumer demand.
The potential for jumbo rates to reconversion towards those for conforming borrowers and the natural <unk> of the agency refinance opportunities.
And as Chris mentioned with fewer players participating in the non agency space. We see the time is right for us to deepen our foothold in gain market share.
Also worth mentioning is that this strengthened volume was almost exclusively in redwood select our traditional prime jumbo offerings.
And the several quarters, leading up to the pandemic are expanded prime offering redwoods choice represented as much as 44% of locked volumes.
We expect to see more momentum with our sellers and choice as the market dynamics I mentioned continue to play out.
We completed another key milestone for the residential business as Chris mentioned, just this morning closing or 108 Sequoia securitization in the first back predominantly by alone source since the onset of the pandemic.
Execution was particularly strong.
Notably or print on the Triple a rated securities, which replace with the deep base of investors.
On the business purpose lending side corvettes continue to press that significant market advantage.
Originated in activity remained robust in the third quarter, providing us with a virtuous combination of strong underwriting coupled with higher margins we.
We saw record segment contribution of $52 million through third quarter originations and an increase in fair value of both FSFR securities and loans held an inventory of June 30th.
The securitization corvettes completed during the quarter was $293 million in size and back largely by newly originated FSFR left the.
The offer bonds were met with extremely high demand with the triple a rated tranche pricing and a coupon or 136% blended.
Blended credit spreads were better than the execution, we achieved and our final transaction of 2019, well in advance of the springs volatility.
Our origination pipeline for both term in bridge loans remains robust and it is powerful to observe even after years of market leadership, how much more room to run the corvettes platform possesses.
Across both large institutional sponsors and those investing in a smaller handful of geography's substantial amounts of fresh capital continue to enter the market for single family held for rent.
And while the nationwide participants grab most of the headlines they still represent only 2% of the overall market.
Through core vessel, we serve a distinct segment of the market made up a professional real estate investors.
That typically one between 50 and 300 homes. These borrowers makeup about 15% of the overall market, which has historically been underserved by traditional balance sheet lenders.
The ultimate measure of durability of course as asset performance, which continues to be a bright spot for our BPL portfolio.
90, plus day delinquencies have picked up only slightly across the book and within our securitize portfolio stood at 2.5% at September 30th.
Versus one 8% at June 30th.
Said overall delinquencies in the in that book, our lower versus the prior quarter.
Reflective of fewer borrowers rolling into delinquent status and others sharing after missing a payment are too.
Additionally, we continue to see healthy overall repayment rates within our bridge portfolio driven.
Driven by successful refinances into term products in many cases hours.
Or disposition by the sponsor while.
While the overall strength and housing is certainly a key input performance reflects the thoroughness of our underwriting strength of loan structure and careful selection of product mix, which we continue to refine in response to bar needs and market dynamics.
While the BPL spaces, once again competitive, particularly in certain segments of bridge lending, we feel confident that our speed to close in first mover advantage will remain a strategic mode.
A corvette technology and data architecture have long been hallmarks of the platforms advantages and client acquisition and retention.
Cultural consistent iteration of the technology sweet, particularly in the proprietary use of leading cloud based systems to automate workflow management keeps the platforms first mover advantage fresh.
This client centric approach keeps customers coming back as evidenced by and approximately 50% repeat borrow rate, but also physicians us to win even bigger is this area of the market continues to grow.
Turning to our investment portfolio fair value increased 10% as asset values generally continue their recovery fur.
A fair value increase was driven in part by a re performing loans securities most of which were able to re securitize during the quarter into a nonrecourse non marshalls structure. The first of its kind for these types of bonds.
Elsewhere in the portfolio, we saw an acceleration and prepayments as qualified conforming jumbo borrowers were quick to capitalize on historically low borrowing rates.
This has the impact of deleveraging the bonds capital structure, and leaving us with thicker subordinate investments.
Similar to dynamics I described in our BPL portfolios at September 30th 90, plus day delinquencies in our <unk> portfolios that a two 4% still well below market averages, while overall delinquencies were lower quarter on quarter.
Investment opportunities in the secondary market remains scarce amidst limited new issue supply in a large quantum of deployable cash market wide.
We continued to see the best investment opportunities emerging from our operating businesses and as such we anticipate allocating increased working capital to our platforms to ensure our growth trajectory is realized safely.
Looking ahead, we believe we are positioned for significant growth through our market leading brands are operating platforms occupy unique position in the housing finance value chain, providing liquidity to growing segments of the us housing market not served by government programs.
We are delivering customize housing credit investments to a diverse mix of investors to our best in class securitization platforms and hold on distribution activities.
We are leveraging our first mover advantage to take share while ensuring continued success through the innovative use of technology.
As we execute we will remain disciplined.
Focused on managing capital prudently in calibrating, our risks and opportunities.
And with that I'll turn the call over to Colin Redwood CFO.
Thanks Dash and good afternoon, everyone.
As Chris and dashed discussed our third quarter earnings and book value benefited from strong result at both of our operating businesses as well as further increases in the fair value of our investment portfolio.
<unk> GAAP earnings of $1 per share for the quarter and helping to generate a 17% economic return on book value for the quarter.
As our business continues to evolve we're continuing to evaluate a revised or earnings metric that'll be most relevant and assessing our operating performance of the future.
And currently expect to launch the metric for 2021.
After the payment of a 14% dividend, which was 12% higher than our prior quarter dividend are both value increased to $9 and $41 per share.
This represents a 15% increase for the quarter that was primarily driven by our strong earnings and also benefited from the repurchase of approximately 3 million of our outstanding shares for $22 million, which we repurchased at a 25% discount tour September 30th of value.
At September 30th we had $78 million capacity remaining under a repurchase authorization.
Closing in on some of the operating results within the business or residential mortgage banking team achieved a significant increase in volume during the quarter with long purchase commitments of 1.2 billion and gross margins of 95 basis points generating $11 million mortgage banking income.
At corvette, we originate $261 million, a business purpose long, including $196 million or at the far loan $66 million a free spot.
These origination in combination with our $380 million of FSFR alone inventory at the end of the prior quarter. Both benefited from that very strong execution Encore best September securitization that that's discussed helping to generate $49 million of mortgage banking income for the quarter.
And our investment portfolio net interest income decreased slyly as we experienced a full quarter of elevated borrowing costs from some of the new financing transactions, we enter into during the second quarter, along with lower average palaces.
We note that while these facilities came with somewhat higher borrowing costs. They do not include any dilutive to equity linked features and as a paydown or get refinanced as we head into 2021. This will give us the opportunity to lower our funding.
During the quarter, we deploy $73 million of capital into new investments, including $13 million of net deployment and detailed bridge on $16 million of FSFR securities retain from her forehead securitization 28 million multifamily securities retained from the securitization issues or multifamily joint venture and.
And $16 million, a CRT and other third party investments be purchased.
The capital deployment was largely offset by paydown of existing assets in sales during the quarter.
Our investment portfolio experienced that continued recovery during the third quarter, including a 10% increase in our securities portfolio driven in large part by recovery and the value of our Pls security.
We estimate at September 30th approximately $168 million for one dollar and 50 cents per share of the unrealized losses you reported in the first quarter of this year remained outstanding.
Shifting to the tax side, we have free taxable income of seven per share in the third quarter.
31 per share of taxable income at a Trs.
Given our year to date net loss at the we currently expect the majority of our did and pay may of 2022 return of capital for tax purposes.
Turning to our balance sheet, we ended the third quarter with unrestricted cash of 451 million, providing ample liquidity in available capital deployment or operating businesses and to pursue opportunistic investments in the near term.
During the third quarter, we continued to optimize our financing structure further reducing our recourse debt and bringing our leverage down to one four times at the end of the quarter.
This was achieved through the completion of two new nonrecourse that transactions financing portion of our free exhaust every performing local security.
Additionally, we completed two new non Mark Malone warehouse facilities, which brought our total capacity up to 600 million for residential loan and one 1 billion for business purpose long, which an aggregate, let's comprised of more than 85% of non marketable facility.
We also expect that further non Knoxville capacity for residential business in the near term.
As a result of these changes in our financing structure or 2.1 billion investment portfolio is now what we believe to be conservatively leopard. It just around one time with over 90% of non marketable borrowings.
This direct leverages effectively supplemented by a long term appropriate unsecured debt Ah $661 million.
Although we deleveraged our investment portfolios during the quarter, we expect our overall leverage ratio to increase going forward as we continue to build back up a residential inventory.
All else being equal with a stabilized residential loan inventory, we'd expect our leverage to increase the 2225 times range.
Finally, I will note that in this quarter's review, we reintroduced revised non-GAAP measure of economic net interest income for investment portfolio.
This measure utilizes a historical cost methodology to calculate an effective yield based on estimated future cash flows that takes into account discount and premium on our investment asset.
This results in a more stable longer term view that reflects our current outlook foreign investment.
Given our portfolios relatively stable for the quarter. We expect that this quarter's results will provide a good baseline to build offer and.
And as Chris mentioned, our portfolios currently generating attractive returned and the low to mid double digit range.
As we look forward, we expect economic net interest income and growth through net capital deployment, both and investments created organically through our operating businesses and through opportunistic deployment into third party securities.
And further we also expect to bring down our financing costs as in previous years.
Yes.
Further our investment portfolio continues to include a significant embedded discount which provides further upside of spreads continued.
And with that I'll conclude our prepared remarks, operator, please open the call for Kunai.
We will now begin the question and answer session to ask a question you may pray Scott in one on your telephone keypad.
If you're using a speaker fine please pick up your handset before pressing the case.
<unk>, Australia Christian place by stabbing K.
Your first question comes from Stephen Lawless left Raymond James. Please go ahead.
Hi, good afternoon, and congratulations on a very nice third quarter.
Chris.
With really comment from the first paragraph in the review it talked about jumbo rates versus conforming rates and seeing some.
Lower jumbo rates potentially drive higher volume can you may be talked to wear where those rates are in that spread today and what what metrics you're watching to to push those jumbo rate slower to drive higher origination volumes and then refinance activity on the portfolio.
Hey, Stephen a dash I can I.
I can take that yet jumbo rates.
R.
Are still lingering above above.
Above conforming, probably 20 to 25 bps or so.
Depending on how the market is situated on any given day.
The average gross coupon of the jumbo loans that we're locking are still.
Right around 3%.
And we continue to feel even at that level frankly that there is a significant.
And the money notes to a lot of borrowers. It just hasn't been served yet just due to natural capacity constraints given the the volume of conforming.
And so we do feel that there's there's a lot.
There is we set with rates are there currently situated and obviously a jumbo rates trend lower.
Converge more on conforming, we would expect more and more.
To open up we are hearing from sellers that <unk>.
Capacity constraints are starting to ease a little bit as we've gotten through.
The past several months, we're starting to see loans delivered to us on the jumbo side more efficiently, which reflects better capacity.
With our sellers and so we we remain optimistic on just the <unk> side.
That will continue to see over the next quarter or two that continue to pick up.
Chris alluded to the service level, we provide with our sellers continues to be really really important.
In terms of speed defined and of course, the flexibility we always.
Provide them so that will continue to be important Steven I'd add the AAA spreads have come in quite a bit as well. So it's been a really nice story and that will definitely help us.
Pete effectively here going forward, we started to see that at the beginning of the quarter and just completing a securitization actually today.
I feel really good about.
Funding costs and.
Our pipeline and being able to price loans competitively unprofitably.
Thanks for the color of their and to follow up on that.
Fall fall fall in the review now can you talk about your expectations for additional securitization this quarter given the size of a locked pipeline, which even after fall obsolete for some pretty strong purchase volume but.
You also have entered a couple of forward sale agreement one.
Prior quarter and one in October can you maybe talk about.
The decision to do that and then what's the deal pipeline looks like on the deploy upfront.
Yeah, Stephen we'll see in terms of between now and the end of the year.
But certainly we are beginning to lay plans for the first quarter to continue to execute sequoias you're right.
Forward sales that we executed.
Some of which are.
Settled.
This week in which will continue to settle between now and the end of the year. We did capitalize on some unique opportunities. There in terms of bank demand, which is you know continues to be robust just given the overall pressures on NIM.
With depository is broadly and so we were able to put on some attractive forward sales between now and the end of the year. So we'll see about so coy between now and December but certainly for the first quarter again, we would expect to recommence in some shape or form yeah, and Steven you need inventory to complete the deals and so as we're selling more loans forward.
And we're actually.
The inventories building at a slower pace, which is a good thing so to us the faster, we can transact recycle capital or at least neutralize risk.
That's what's really going to push this business to the next level and get us operating and hopefully.
Sustainably higher volumes going forward.
Great and final question.
Q, but.
Can you talk about.
The unrealized loss of unrealized marks on assets, you hold now versus versus year, and kind of where does that stand today as far as what potentially could be recovered and when you think about that.
Book value plus that number.
How do you think about stock buybacks from here on the you're buying back stock in a little bit lower levels, but stock buybacks versus putting money into new investments right now.
Sure.
So we did we did continue to recover.
Some of the unrealized loss from the end of the first quarter.
We've probably got around a third or so that <unk>.
Remaining which I think is called articulated.
About $1.50 a share to retrace.
Everything remaining back to 12 31.
Through that lens, Stephen is always we're going to remain floor.
Flexible on the stock buybacks, obviously, we repurchased about 3 million shares in the third quarter, which was about three secretive to book. So that's always going to be on the table, but I would probably reinforce that.
The real priority strategically remains.
Your marketing more operating capital to the businesses to ensure they can grow safely and of course remaining opportunistic not only for what we see from third party markets, but obviously remaining flexible and nimble to retain or distribute the pieces that we see fit from core vast and from our residential business.
Steven I'd, Adam good color commentator today.
The stock still in our view is undervalued certainly with R Q3 book at 941.
So that's definitely something we will continue to focus on his dash alluded to we think we've got pretty good opportunities to deploy capital away from that.
But.
But we're not pleased with where the stock sits today relative to the inherent value of the book and so we will continue to focus on that and monitor it.
Particularly as we as we go through this period of volatility.
Already started with the election and certainly with.
The escalation and Covid cases, just how the market's respond.
Great. Thanks for the color I appreciate that.
Have a good afternoon.
Thanksgiving.
Your next question comes on Dad's <unk>, what's kinda flat. Please go ahead.
Thanks.
Can you help us think about kind of a normal.
Normalized level of.
Mortgage banking income for for the BPL business.
And kind of how much of how much of this quarter's was because of the kind of the spread tightening that that happened during the quarter.
Sure.
Yeah. So the number was.
Was certainly a little bit outside this quarter just based on the the the inventories that we were carrying at 630.
Little more than half of the revenue was because of that but I also think the third quarter.
You had a unique set of circumstances in terms of the loans that we.
Produced over the summer and we were able to securitize, those with particularly low benchmark rates, which which was very very helpful to us.
So those are those are some of the elements that drove.
That drove the number higher so on average our margins, where if you look at simply the total total revenues over volume easily a few points higher than you would expect to see them normally first for those reasons.
Got it and can you help us kind of frame kind of for the BPL.
What sort of how you exited the corner in terms of volume and kind of where you are in terms of.
Kind of getting to to kind of full speed in in terms of.
Production volume.
Yes, I would say the we exited the quarter.
A little bit lighter in inventory then we entered it but we've obviously had a very active October and so those balances have.
Have come back up.
The pipeline remains really robust.
Certainly the right environment, which with benchmarks is lower as low as they are accommodated we have the lunch like Chris reference on the Sequoia side, we have the significant tailwind from the recent.
Execution on the corvette securitization that are back which is meaningful and we continue to see significant opportunities across what I would consider the bread and butter.
S F R loans that we originated securitize, but also in the pockets of the of the bridge book, which I think the platform is really unique and executing things like built to rent.
Other types of portfolio strategies for more sophisticated sponsors that we hope will ultimately stay with the with the platform when they get turned out.
Yes, and I would add.
Although we're not providing guidance this quarter seasonally the fourth quarter has been historically, a very strong quarter for the beep y'all business.
Borrowers.
Unlike the residential business, where where things sort of slowdown during holiday season. Some of these are more commercial and borrowers and are actively looking to get loans closed ahead of year and so so typically December is a very busy time for this business. So as as things really ramp backup we're looking forward to.
As we indicated closing up a year and a high note.
Okay.
Your next question comes on.
Much worse cave capital Yea. Please go ahead.
Against get ultimate.
Wanted to follow up on this.
Question just not.
Hi to think about the operating earnings this quarter.
The 107 million of game that is in the mortgage banking segment.
You said it is a component of that was obviously drift.
Driven by evaluation changes, but is there a piece of that that's also sort of operating in the sense that that would have been there even if spreads does not.
First how are you doing this is con artist clarify that that 107 million is is the full mark to market across our entire investment portfolio so that within.
Razvi EPL in third party. So so that is.
The full mark to market.
There is some portion of that that.
Is related to the change in fair value securities that can be.
That the amortization of premium or some small amount that is kind of recurring an implicit in the portfolio.
But the vast vast majority of that is.
Spread driven particularly this quarter.
As as we discuss related to some of our investment, particularly the RTL.
If you if you follow bows.
There is some spread tightening no, particularly related to loans that were closed in the third quarter.
That appreciated prior to.
For me securitization in both businesses, so there's always going to be a spread.
Component to a mortgage banking results were fortunate this quarter.
It was significant tightening.
So a contributed to to a mortgage banking income, but but as calling indicated most of that.
Certainly in the Bpl's side had to do with.
June 30th inventory.
Okay. Okay. Great. That's helpful. And then just wanted to go back to the comment about the expected economic returns the low to mid teens.
<unk>.
So should we think about.
The book value.
<unk>.
And.
The return based on the portfolio plus mortgage banking.
Gets you.
The book at 941.
Suggest.
Returns would have about 25 feet.
Is that kind of what's your.
What those numbers would suggest.
First I will just clarify a couple of things on that.
The numbers that Chris reference and I also referenced in my script, we're really specific to the investment portfolio. So that's away from the operating businesses and we did update.
The numbers there too.
The low to mid double digit.
As as we saw an increase in the book value of the assets in our investment portfolio the math, they're just.
Causes some some downward push on the yield so the yields you referenced is what we discussed last quarter's we saw some appreciation portfolio those came down a little bit as we realize that appreciation and book value.
And we've also bows.
We've tried to.
Call out that we have this non agency portfolio that seems to be pretty unique at this point I think some of our competitors of.
Have moved on or sold their positions and so I think the story and the significant appreciation or recovery in our book perhaps.
Hasn't tracked with the industry.
I think it continues to be a good story certainly I think I think we said we've got about a third of that that.
Unrealized loss that we took in March.
That hasn't been recovered.
As far as what what will requirement recover going forward that that's going to be dependent upon.
Market forces, but but at this point.
Absent another major downturn with respect to covid or something else and the economy, we feel pretty good about.
The prospects of recovering more of that on.
In the next few quarters.
Okay, great. Thanks, actually you can also get books out and changed.
No significant change.
We don't expect that it's down, but but no significant change higher.
Okay, great. Thanks.
Your next question I'm, Kevin Kevin back as like Python Sandblast. Please call ahead.
Hi, good afternoon.
In regards to the mortgage banking outlook on the jumbo side, because you talk about some of the presentation for seeing in the near term.
I know the market loosing I'll be starting to eat better spreads.
Starting to feel a little bit more capacity come to the market but.
And.
Yeah definitely so much better revenue line.
Help us maybe size of the ramp and that as we go into early 21.
Just given the current market dynamics.
Sure Dash and I can tag team. This but you know a lot of it has to do with our sellers coming back online and actually offering jumbo products again.
There's been such a great.
Opportunity and the agency side with the fed effectively supporting the market.
That the easy money has clearly been an agency and it's only been in the past few months where.
Jumbos really started to take take hold again with the originators so big opportunity to for US is just getting getting ourselves back on line is dash said, we had 80 distinct sellers contribute over the past quarter or or quarter to date.
We've got.
We've typically had 185 to 200 sellers. So we think there's a great opportunity there we've seen very little focus on Redwood choice, which we expect to change significantly in the coming quarters. That's a great purchase product and we're still seeing over half of our flow is purchase related.
So there's things unique to redwood that that we.
We feel confident in we alluded to that I think on the last call.
So we we certainly observed it I think we'll continue to observe it as far as the market goes the convergence back towards.
Agency mortgage rates continues to occur we expect that to continue.
We expect that.
The banks will will slowly refocused on jumbo and there'll be some competitive forces, but really were extremely well position right now.
As a team.
As a network and I think that for those looking to to to build at this point.
We're up and running we're we're kind of full steam ahead, and I think we're very focused on taking share and really growing the business in the next few quarters.
Do you think is volume is going to drive most of the increase in mortgage banking and the jumbos time or do you feel like it's going to be.
Moreover, driven by.
Spreads or the execution securitization.
Right now it's both we've got great.
Trajectory on volumes certainly as we bring more sellers online and as I mentioned, we've got some strategies some technology focus too.
Sure take wallet chair.
But spreads continue to tighten theirs.
There is.
Great demand for securitized products right now.
Reising on AAA has has been very strong both on the capital side and the Sequoia side.
So to the extent, we continue to see demands.
And the Pls space that really drives a lot of the industry wide pricing.
So so I think in the near term.
There's certainly.
Strong likelihood that will experienced both.
I would caveat that statement with with the near term volatility that we all know is kind of headed our way as a country over the next few weeks.
Are you seeing term times accelerate now and then they were in the past.
Or do you still feel like you have.
To accelerate the turnpike.
Typically what happens.
Just to clarify Kevin you mean turned times on and off of our balance sheet are in terms of how we settle with our sellers on and off your balance sheet.
Yeah, I think we continue to.
Improve that but they're also has room to improve.
As.
Cause we.
The sooner we can purchase loans from sellers the sooner we can.
Neither securitizers sell them.
To the ultimate end user we've talked about that a couple of times on this call in terms of.
That pilot initiative, which we're very excited about.
And it does speak to just continuing to deepen the outlets and continuing frankly in some ways to try and disrupt the traditional securitization process in the lead time.
That.
Want to get to the net interest margin more quickly we talked about the banks, we're definitely seeing an increased demand for them and everyone is aligned to get loans to their final spot more quickly and so there's more there's more for us to do there, but I think we've come a long way over the past year or so.
Thanks for taking my question.
Thanks Bye.
Based on content trade that Cranston West JMP security. Please go ahead.
Alright. Thanks.
Most of my questions have been asked.
I was curious when you were talking about sort of.
Sellers coming back online with prime jumbo products.
When you look at the expanded prime products.
Can you just share some thoughts on sort of how far away do you think we are from.
More originators.
Starting to work on that product and originating expand upon products again.
You guys more formally relaunching in that space.
Sure.
Good question.
We expect.
The product to begin ramping soon as this quarter.
Is going to take some time to get back to.
Choice, becoming 40% plus of our quarterly volume.
The demand for the product exists today the inhibitor is is capacity.
So you have a limited number of loan officers limited amount of capital and there's frankly, just easier loans to underwrite, but as as R. R reports show.
There is a huge drive towards the suburbs, there's a lot of purchase activity going on in the market and choice is is very.
Very much.
Relevant and the purchase space.
Helping people get into homes getting to Ah yes.
Warm body underwriting that's all we think very much still in demand, it's just a function of.
Focusing loan officers on a marginally more difficult underwrite more time consuming underwrite.
Okay. That's helpful.
And can you say like if you when you evaluate that market and and where you are seeing securitizations price.
Kind of where you think margins would potentially be for that business.
Generally relative to kind of where they were sort of pre covid.
A little tricky to say at this point Trevor just because it is so Nathan and I think there's a lot to discover in terms of.
The coupon that choice borrowers wanting to take at this point.
And the relative coupon spread versus our select loans I think there's a lot more discovery from in the middle of doing right now.
And standing the securitization apparatus backup will we expect to do but.
There's some more price discovery, there, but to Christmas point. The first step is engaged in on the product and.
He said the view from the ground canoe.
Continues to indicate ink.
Incrementally more and more direct engagement on non agency broadly and choice in specific because there is a borrower need there's no question about that it's just that it has a capacity issue as Chris said, but.
If you talk to our business development team. They would tell you that the aloe engagement continues to increase every day.
For the products that we're focused on including choice switches, which is obviously, where we need to start.
Okay fair enough. Thank you.
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