Q2 2024 Redwood Trust Inc Earnings Call
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Speaker Change: Good afternoon and welcome to the Redwood Trust Inc. second quarter 2024 financial results conference call.
Unknown Executive: Thanks, Kate, and welcome everyone to Redwood's second quarter 2024 earnings call. As always, I'll kick off our opening remarks before handing it over to Dash and Brooke to cover our operating and financial results. Today, after a second consecutive quarter of approximately 50% growth in residential consumer LOC volumes, combined with 40% quarterly growth in residential investor loan volumes, validation of that statement is upon us. Our June 30th GAAP book value was $8.73 per share, roughly flat for the quarter, and we estimate book value is up an additional 1-2% at July 31st.
Speaker Change: Today after a second consecutive quarter of approximately 50% growth in residential consumer lock volumes combined with 40% quarterly growth in residential and investor loan volumes validation of that statement is upon us.
Speaker Change: Year to date, we have distributed close to $3 5 billion of our collateral as investors continue to exhibit strong demand for the residential assets, we're uniquely positioned to source and manage.
Speaker Change: And now as the fed finally begins to exhibit signs that its historic tightening cycle is ending a macro environment to facilitate transformative growth can emerge.
Speaker Change: Putting it altogether, we think the case for Redwood has never been clear to recap our second quarter results, we improved our operating efficiency on the back of strong volumes, while realizing a 20% reduction in fixed costs.
Speaker Change: Earnings available for distribution was <unk> 13 per share, 70% higher than the prior quarter.
Speaker Change: Our June 30th GAAP book value was $8 73 per share roughly flat on the quarter and we estimate book value was up an additional 1% to 2% at July 31.
Speaker Change: Yeah.
Unknown Executive: Progress with our bank partners illustrates the core asset liability challenges these institutions still face when funding fixed-rate mortgages with deposits. As you recall, our recently established partnerships with CPP Investments and Oak Tree are indicative of the ongoing demand we have witnessed for our residential investor loans. These joint ventures, combined with ongoing inroads with whole loan buyers, will help evolve the platform's revenues toward recurring and predictable fee streams, facilitating scale with less direct capital usage over time. Thanks, Chris.
Speaker Change: Progress with our bank partners illustrates the core asset liability challenges these institutions still face when funding fixed rate mortgages with deposits.
Speaker Change: Drive shifts in bank product and portfolio strategies and has further evolved how banc serve their customers as we continue to focus on forward flow jumbo production with the banks, we now consider the $1 three trillion of season jumbo loans on bank balance sheets to be an addressable market for us and in fact in the second quarter.
Speaker Change: <unk>, 35% of our bank lock volume came from such seasoned portfolios all told our lock volume with banks grew 80% quarter over quarter.
Speaker Change: On the regulatory front recent commentary from the Fed also suggests that a re proposal of the Basel III end game rules is eminent though we were the first to acknowledge that anything can happen in Washington. These days, we're encouraged by the early feedback on Chrystie Goldsmith Romero was been nominated to be the new chair of the FDIC.
Speaker Change: Goldsmith Romero has stated publicly that she is quote very open to the re proposal of the Basel III on game capital requirements and that the agency under her leadership, we will strive to follow a congressional intent concerning a law requiring banking agencies to tailor their capital regulations to bank size.
Speaker Change: We currently expect to vote on this nomination to occur in September after the Senate returns for a three week session beginning the week of September nine.
Speaker Change: Turning to our Investor loan business demand from private credit institutions helped drive the strongest return for our residential investor segments since 2021.
Speaker Change: As you recall, our recently established partnerships with CPP investments and Oaktree are indicative of the ongoing demand we have witnessed for a residential investor loans. These joint ventures combined with ongoing inroads with whole loan buyers will help evolve the platforms revenues towards recurring and predictable fee streams facilitating scale.
Speaker Change: With less direct capital usage through time.
Speaker Change: Looking ahead to the second half of the year, we remain pleased with our market positioning and we'll continue to execute on our strategic goals.
Speaker Change: However, we're preparing for unexpected challenges, particularly in light of an already unprecedented presidential election cycle.
Speaker Change: The rates remained stubbornly high.
Speaker Change: Data driven fad, knowing there's increasing evidence to commence a more accommodative monetary policy and we're optimistic on what that could mean for our markets across the residential housing landscape.
Speaker Change: We look forward to further updating you on our progress as the regulatory monetary and political changes take shape. This fall.
Dash: And now I'll turn the call over to dash to discuss our operating performance in more detail.
Dash: Thanks, Chris.
Unknown Executive: Second quarter operating performance across our platforms reflected important progress on wallet share, improved efficiencies, and continued momentum on distribution. Residential Mortgage Banking's lock volume growth was driven by increased penetration across our seller base, including the 80% quarter-over-quarter increase in bank volumes that Chriss referenced. Distribution has kept pace with the growth, and we priced three jumbo securitizations during the quarter while maintaining an active posture on pipeline hedging. This drove gross margins of 72 basis points, just below our historical target range, despite TBA widening and softening in issuance spreads.
Dash: Quarter operating performance across our platforms reflected important progress on wallet share improved efficiencies and continued momentum on distributions.
Dash: We grew revenues increased activity with joint ventures sold term loans to a new strategic investor and maintained our monthly cadence for jumbo loans Securitizations.
Speaker Change: Residential mortgage banking lock volume growth was driven by increased penetration across our seller base, including the 80% quarter over quarter increase in bank volumes that Chris referenced.
Chris: As seasonality help nudge overall industry volumes up from the first quarter, we estimate our overall second quarter market share in jumbo to be approximately 6% up from 5% in the first quarter.
Speaker Change: Activity on the quarter was highlighted by the purchase from a bank or a sizable pool of seasoned hybrid adjustable rate mortgages or arms and we expect to settle later in August and important development that underscores our role as a solutions provider to banks balance sheets.
Speaker Change: The transaction also represents attractive diversification from our traditional 30 year fixed rate offering, which given banks traditional footprint in arm lending may become a growing opportunity for our business.
Speaker Change: As is often the case when market conditions become more favorable new players in our space attempt to enter a re emerge.
Speaker Change: Now I'm gonna than we saw in the second quarter as a handful of issuers pursued market share from independent mortgage bankers or <unk>. This dynamic quickly shifted a securitization spreads began to retrace tightening from earlier in the year.
Speaker Change: <unk> remain a longstanding competitive advantage for our business and in spite of these entrants we grew RMB lock volume by 10% quarter over quarter.
Speaker Change: <unk> represented 50% of quarterly volume and we expect this group to remain a critical focus in driving our overall wallet share higher.
Speaker Change: Distribution has kept pace with the growth and we priced three jumbo securitizations during the quarter, while maintaining an active posture on pipeline hedging.
Speaker Change: This drove gross margins of 72 basis points, just below our historical target range, Despite TBA widening and softening in issuance spreads already in the third quarter, we priced our seventh jumbo securitization of the year backed by $638 million of collateral and sold a $150 million of whole loans to an insurance company.
Unknown Executive: Already in the third quarter, we priced our seventh jumbo securitization of the year, backed by $638 million of collateral, and sold $150 million of whole loans to an insurance company. Our residential investor segment also posted impressive upticks in volume and profitability during the second quarter, funding $459 million of loans, up 41% from the first quarter. Importantly, origination momentum came from higher-margin products where we have prioritized growth. After several quarters of impact from persistently higher rates, term loan volume rose 90% quarter over quarter and was close to half our overall funding mix, key progress given our historical footprint in this product. We sold $415 million of loans in the second quarter, a high watermark for distribution away from securitization.
Speaker Change: Our residential Investor segment also posted impressive upticks in volume and profitability during the second quarter funding $459 million of loans up 41% from the first quarter importantly, origination momentum came from higher margin products, where we have prioritized growth.
Speaker Change: After several quarters of impact from persistently higher rates term loan volume rose, 90% quarter over quarter and was close to half our overall funding mix key progress given our historical footprint in this product.
Speaker Change: We also achieved record volume for both single asset bridge and D. SCR loans growing each 50% from the first quarter July fundings for the full business were in line with average monthly volumes for the second quarter.
Speaker Change: Market demand for our products, most notably from large pools of institutional capital seeking long term partnerships remains a key differentiator for the platform.
Speaker Change: We sold $415 million of loans in the second quarter, a high watermark for distribution away from securitization. This.
Speaker Change: This included sales to our joint ventures, including the initial funding on the CPP investments JV and an accretive sale of $240 million in term loans to a large insurance backfire.
Speaker Change: This was a notable transaction and represented a sizable new investor for our loans our results reflect the benefits of the partnerships that we have established and looking ahead. We believe the depth of our distribution sets us apart and managing the business to durable profitability.
Speaker Change: Credit performance in our residential Investor portfolio has remained stable overall, but continues to command asset management focus, particularly related to workout activity within our legacy multifamily bridge portfolio. The strategy, we largely discontinued in the summer of 2022.
Speaker Change: Through the process of stabilizing this portfolio, we have continued to incur incidental workout costs as we progress toward productive resolutions.
Unknown Executive: Given the pace of paydowns and workout activity, we expect this portfolio to continue factoring down in the next two to three quarters, with moderating interest rates potentially accelerating payoff and refinance activity. The second quarter was a recent high point in deployment within our investment portfolio, with over $130 million of capital put to work. Investments were generally focused on shorter duration, higher coupon securities from third parties and helped drive the growth in net interest income that Brooke will describe in more detail.
Speaker Change: Given the pace of Paydowns and workout activity. We expect this portfolio to continue factoring down in the next two to three quarters with a moderating interest rates potentially accelerating payoff and refinance activity.
Speaker Change: The second quarter was the recent high point and deployment within our investment portfolio with over $130 million of capital put to work investments were generally focused on shorter duration higher coupon securities from third parties and helped drive the growth in net interest income that broke will describe in more detail.
Speaker Change: Fundamentals within our overall $3 $4 billion investment portfolio continued to perform well, particularly in our jumbo and re performing loan books, where performance has materially exceeded our modeled expectations.
Unknown Executive: The carrying value of this portfolio has been significantly impacted by the 550 basis point hike in benchmark rates over the past two years. As rates stabilize and potentially begin to come down, the book values of our long-term fixed-rate investments stand to directly benefit us. With the overall portfolio still carried at an aggregate $2.18 per share net discount, 65% of which is from our jumbo and re-performing loan security, this resulted in an EAD return on common equity of 6.5%, primarily due to growth in net interest income and higher net income contributions from both our mortgage banking platforms. Our book value per share was $8.73, a slight decrease as compared to $8.78 on March 31st.
Speaker Change: The carrying value of this portfolio has been significantly impacted by the 550 basis point hike in benchmark rates over the past two years as rates stabilize and potentially begin to come down the book values of our long term fixed rate investments stand to directly benefit.
Speaker Change: The overall portfolio is still carried at an aggregate $2 18 per share in net discount 65% of which is from our jumbo and re performing loan securities. This represents a key source of earnings upside that in recent quarters has been hard to unlock.
Speaker Change: I will now turn the call over to Bruce to discuss our financial results in more detail.
Bruce: Thank you dash they reported GAAP earnings of 14 million or Ken cents per share for the second quarter compared to $29 million or 29 cents per share in the first quarter earnings available for distribution or AAD with 19 million or 13 cents per share for the second quarter up 70% from $11 million or <unk>.
Shannon: For Shannon first corner.
Shannon: This resulted in an EBIT return on common equity of six 5% primarily due to growth in net interest income and higher net income contributions from both our mortgage banking platform.
Shannon: We saw positive fair value changes on our investment portfolio in the second quarter that performance lagged the first quarter due to higher reserves on our French Atlanta.
Shannon: Our book value per share was $8.73, a slight decrease as compared to $8 78 at March 31st, including our 16000 common dividend, we delivered an economic return of one 3%. This brings the year to date total economic return to nearly 5%, which would exceed our dividend yield on book value on an annualized.
Unknown Executive: Including our $0.16 common dividend, we delivered an economic return of 1.3%. This brings the year-to-date total economic return to nearly 5%, which would exceed our dividend yield on book value on an annualized basis, underscoring our ability to deliver a stable to growing book value and consistent dividends despite a volatile market backdrop. We also saw the net cost to originate for a residential investor improving to just under 100 basic points in the second quarter, which is also approaching long-term efficiency targets for that business.
Shannon: Underscoring our ability to deliver a stable to growing book value and consistent dividend, despite a volatile market backdrop.
Shannon: Higher volumes and improved operating efficiencies resulted in higher returns across our operating platforms during the quarter. The residential consumer mortgage banking segment delivered a 16% return and the residential investor segment delivered a 13% return adjusting for the amortization of acquisition related intangibles.
Speaker Change: Net interest income continued to grow in the second quarter, increasing by $1 million $25 million, the roughly $130 million of accretive capital deployment. During Q2 contributed roughly $4 million net interest income. This was somewhat offset by lower net interest income from the bridge portfolio.
Shannon: A smaller portfolio side as we saw nearly 400 million of pay offs and $200 million of transfers into joint ventures in the first half of the year.
Shannon: Additionally, there are modifications that are at 10 basis point reduction in our weighted average coupon on the portfolio compared to Q1.
Shannon: We anticipate that continued accretive capital deployment and the regulation of lower yielding legacy branch assets.
Unknown Executive: We maintained a robust cash position of $276 million at quarter end, effectively unchanged from the first quarter, even as we grew the business and deployed a great deal of capital. Post-quarter end, we retired our 2024 outstanding convertible debt using existing cash on hand, reducing our total convertible debt outstanding to $364 million, down 43% year over year. We closed one temporary securitization and one re-securitization, freeing up approximately $70 million of incremental cash. Paying for these activities, our July 31st cash and cash equivalents position stood at approximately $275 million.
Speaker Change: Reducing our total convertible debt outstanding to $364 million down 43% year over year, we closed one securitization in one REIT securitization freeing up approximately $70 million of incremental cash pro forma for these activities. Our July 30, <unk> cash and cash equivalents position stood at approximately 207.
Shannon: $5 million.
Unknown Executive: We were active on the financing front, securing $2.5 billion in new or refreshed capacity, including $1 billion to support our joint ventures. These new facilities, executed on favorable terms with existing bank partners, are expected to support growth of our own production. We added a few new facilities to maintain sufficient runway for our residential consumer pipeline with a $300 million facility that supports our capital light, high capital turn strategy. Additionally, during the second quarter, we drew down $125 million of our CPP investments facility and still have another $125 million remaining under that facility, of which $3.8 billion was undrawn and available.
Shannon: We were active on the financing front and securing $2 5 billion in new or refreshed capacity, including $1 billion to support our joint ventures. These new facilities.
Speaker Change: We executed on favorable terms of existing bank partners are expected to support growth of our own production. We added a few new facilities to maintain sufficient runway for our residential consumer pipeline with a 300 million dollar facility that supports our capital light high capital turn strategy. Additionally, during the second quarter, we drew down 125.
Speaker Change: $5 million of our C. P P investments facility and still have another $125 million remaining under that facility.
Speaker Change: We also completed on the $85 million senior.
Speaker Change: Senior unsecured corporate note offering with a 9% coupon inside her inaugural issue in January providing incrementally accretive capital for deployment.
Unknown Executive: Looking forward, we aim to build on the momentum generated in the first half of 2024. We remain committed to growing market share and deploying capital accretively to grow earnings throughout the remainder of the year. And with that, Operator, we will open the line for questions. Thank you.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Dash: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star 2. One moment, please, while we poll for questions. Sure, Bose, it's Dash. I can take that.
Unknown Executive: In terms of the prospects for bulk, I think we remain really optimistic that the transaction we talked about that we expect to settle later this month is the first of several. Obviously, those are a little bit more episodic conversations with banks, you know, versus our sort of point of sale flow business. But if you look at the dynamics, number one, with rates, obviously, with this recent rally, we're getting much closer to a point where dollar prices may make sense for certain banks looking to dispose of seasoned collateral. Okay, so that makes sense. But just in terms of like, when you think about your target range of 75 to 100, the bulk doesn't necessarily need to kind of fall there. Is that, is that fair?
Speaker Change: Take that.
Speaker Change: The transaction, we talked about that we expect to settle later this month as is the first of several obviously those are a little bit more episodic conversations with banks.
Speaker Change: Versus our sort of point of sale flow business, but if you look at the dynamics number one with rates obviously with this recent rally.
Speaker Change: We're getting much closer to a point where.
Speaker Change: Dollar prices may make sense for certain banks looking to dispose of seasoned collateral.
Speaker Change: Obviously, the dynamics with Basel.
Speaker Change: Banks looking to manage overall balance sheet sizes continues to be a dynamic that we see a lot.
Speaker Change: And we think as a tailwind for availability of bulk. So those are all positive tailwind and oftentimes, including this situation that we talked about it involves being around the hoop with these banks and constant dialogue, whether thats being active on the flow side.
Speaker Change: Already.
Speaker Change: Or simply being.
Unknown Executive: You know, to work for a little bit less if the capital efficiency is ultimately there. Okay, great. And then actually, just one more on switching to the multi-purpose bridge loan, the delinquency increase. Can you talk about the drivers?
Unknown Executive: Was that on the, you know, multi-families thing, just trends on, you know, what drove that? Sure. So in terms of the overall trend of the book, it was a modest uptick. It was largely driven by multifamily. We did resolve several of our 90-plus buckets during the first quarter. In general, that book, Bose, I would say just a few things.
Speaker Change: Family, we did resolve.
Speaker Change: Several of our 90 plus bucket during the first quarter.
Speaker Change: In General that book goes I would say just a few things.
Speaker Change: And the bridge portfolio overall.
Unknown Executive: In the bridge portfolio overall, we've continued to see runoff. We had close to a quarter billion of payoffs in the second quarter. So some of that increase is because we actually do have a smaller portfolio at this point. In general, we're seeing the lending markets open up. We saw a lot of loans refinance out in the second quarter that we were probably less constructive on refinancing.
Speaker Change: We've continued to see run off we had close to a quarter billion dollars of payoffs in the second quarter. So some of that increase is because we actually do have a smaller portfolio.
Speaker Change: At this point in general were seeing the lending markets open up.
Speaker Change: We saw a lot of loans refinance out in.
In the second quarter that we were probably less constructive on refinancings, so you're definitely starting to see flow of funds.
Douglas Michael Harter: So you're definitely starting to see a flow of funds. Our next question is from Douglas Harter with UBS. Please proceed with your question.
Speaker Change: Increase in those markets. So it was it was definitely a modest uptick, but we resolved a lot in the second quarter and importantly that portfolio remains the ring fence.
Speaker Change: Just over 10% of our overall capital at this point and we're continuing to see it factor down.
Speaker Change: Okay, great. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question is from Douglas Harter with UBS. Please proceed with your question.
Unknown Executive: I'm, No, I was just going to say as a reminder, you know, we were, and have been the last two quarters, kind of well in excess of our historical gain on sale as primarily securitization spreads were continuing to tighten on execution. And so for us to be able to generate, you know, in and around our historical gain on sale, when both AAA spreads to TBAs and TBAs were widening throughout the quarter, we thought it was pretty, well, demonstrates the effectiveness of our, Great. And I apologize if I missed this, but did you give an outlook for either July locked volumes or your outlook for the full quarter? No, we didn't.
Speaker Change: Okay.
Douglas Harter: Thank you.
Speaker Change: Our next question comes from Christian Love with Piper Sandler. Please proceed with your question.
Unknown Executive: Okay. Thank you. Good morning, everyone. First, can you talk about the HCI product a little bit, which saw a big pickup in revenues in the quarter? What drove the pickup?
Christian Love: Thanks, Good morning, everyone.
Christian Love: Could you just talk about the ATI products, a little bit which saw a big pickup in revenues in the quarter what drove the pickup there was it primarily just valuations there and also just the ACI in the area you're bullish on near term with rates are and how you view the outlook.
Christian Love: Yeah.
Speaker Change: Great question.
Speaker Change: One driver.
Speaker Change: There isn't where youre correct and then the portfolio in terms of its overall valuation was after liver.
Speaker Change: Related fair value changes on our portfolio a lot of what.
We have in terms of.
Speaker Change: Income on that portfolio is almost think about it as like recurring accretion.
Speaker Change: There is underlying options are struck at a.
Speaker Change: At a discount to face value and so on.
Speaker Change: Almost act like a bond instrument in certain ways that you know a lot of our returns from the underlying option is accretive through time in excess of that.
Speaker Change: Accretable return every quarter, we did see a modest pickup in the fair values also from both.
Unknown Executive: Was it primarily just valuations there? And also, this is HCI in the area, your bullet shot near term, what rates are, and how you view the outlook? Yeah, I'd say high level, and Brooke can color commentate.
Unknown Executive: We feel very good about the current level of the dividend, and we feel like, starting with our March Investor Day, we're tracking towards, you know, EAD covering it, you know, the dividend at 16, EAD was 13. I think more importantly, though, in the big picture, you know, there is the prospect of a rate cut. And we talked about, you know, the macro economic environment for our sector has been, you know, very, very challenging in the past few years. But as the environment shifts, that should definitely be a tailwind behind us, not only in our ability to lower funding costs and generate incremental net interest income.
Unknown Executive: But the book, you know, the portfolio, you know; we have a lot of longer-duration fixed rate assets that have been impacted by rising rates over the past few years. And to see, you know, to see that start to recover, you know, that's another facet of earnings generation on the gap side, that is quite meaningful, you know, and how we think about the dividend going forward. I think when we put out that Investor Day comment, that was really under the backdrop of a hire for longer or kind of more of the same rate backdrop.
Unknown Executive: So a lot of what we laid out was really centered around our capital deployment. We have raised $1.5 billion in capital. We have raised $1.5 billion in revenue, and unlocked a significant amount of capital from the fact that we had carried such low recourse leverage in the portfolio. You saw that take down again this quarter, so sitting just over a half a turn.
Jason Weber: When we think about the dry powder that we have to invest to continue to drive NII through accretive capital deployment, we really think about it as about $250 million today. We cited $275 million of current cash, but pro forma for the other $125 million or so remaining under CPP, and we have a lot of sources of capital, I think, behind that just in terms of the unencumbered assets that we still carry in our portfolio.
Jason Weber: As we mentioned in some of our prepared remarks, we are continuing to unlock some of those unencumbered assets through. Our next question comes from Jason Weber with Jones Trading. Please proceed with your question. Hi, good morning.
Speaker Change: Some of our prepared remarks, we are continuing to unlock some of those unencumbered assets through.
Speaker Change: Term securitization.
Speaker Change: On the term securitizations that are pretty accretive and allow us for incremental capital to be redeployed at higher spreads today.
Chris: And then Furthermore, I think if you to Chris's point on a rate cut if you look at our the mix, especially with the uptick in residential volume we have about 1 billion more of floating rate debt and assets today because of that fixed rate residential pipeline that we finance with warehouse lined up. So you know that is you know we see immediate pick up to now.
Speaker Change: I'm there.
Speaker Change: Great. Thank you I appreciate taking my questions all very helpful.
Speaker Change: Our next question comes from Jason Weaver with Jones trading. Please proceed with your question.
Unknown Executive: Thanks for taking my question. Dash, I might have missed your remarks about July, but the jumbo retention rate looked quite a bit higher at 630. But with the effect of the securitization subsequently, that might be more evened out. Is that correct? Yeah, that's right.
Jason Weaver: Hi, Good morning, Thanks for taking my question Dash I Might've missed your remarks about July but the jumbo retention rate look quite a bit higher at 630, but with the effect of the securitization subsequently that might be more evened out is that correct.
Speaker Change: Yes, that's right.
Unknown Executive: We've, you know, we've since then done a deal in July, and you're seeing this; we have about 963 million loans on the balance sheet. You could continue to see that increase just as we continue to gain share and, you know, further support growing our volumes. But we are at about a deal a month cadence in the securitization markets right now. So depending on the timing of those securitizations, you might see that balance fluctuate up and down over time. Got it, thank you. Next, I wanted to ask you about HEI as well.
Unknown Executive: Can you talk about the build out of the sourcing network behind that? When we decided to build that business organically a couple of years ago, we felt like we had a couple of main competitive advantages. Number one was just the operational infrastructure we have in place with the existing businesses, which is a stark contrast to a lot of the newer players that have come up over the past few years. But also inherent in that is this sort of, quote unquote, wholesale sourcing network, where we can source potential HEI customers from our existing loan sellers or other sort of B2B contexts that a lot of other players aren't doing.
Unknown Executive: The traditional model is more direct to consumer, spending a lot of money on marketing to get the word out, assessing your pull-throughs, etc. Yes, can you talk about whether or not you think Fed cuts could help some of the bridge loans get further refinanced out, and when you think that delinquency rate might peak? Good question, Don.
Unknown Executive: Thank you. I think I think there's a few things going on. I think there's the math, step up and refinance loans today than there were six to nine months ago. You're seeing a lot of equity on the sidelines start to come off the sidelines in housing finance where there's, again, more clarity about what's going on with interest rates, more conviction around investments, things of that nature. And you're also seeing borrowers remain in projects.
Unknown Executive: That's what's most important for us to keep sponsors engaged. Our multi-book, in particular, is inherently pretty seasoned because we've talked about it a lot. We sort of de-emphasized that strategy coming up on two years ago at this point. And so if you've been in a project for two, two and a half years, and you've stuck with it, you have much more conviction now, frankly, than you did six to nine months ago when rates were higher, the markets were harder, and there was just less of a path to stabilization with rates and lower.
Unknown Executive: So I think the math will help incrementally, but I think what really matters most is sentiment. And we're starting to see sentiment definitely shift, which we've seen in the runoff of our bridge portfolio, which we're obviously dealing with resolutions in the book. Will other stuff come up? Yes, but we're ahead of the curve on those issues, which I think will help with the expediency of those resolutions. Sure, I'm happy to start
Speaker Change: Portfolio.
Speaker Change: And which we're obviously pleased with.
Speaker Change: And so you think the delinquency rate could continue to tick up a little bit but remain relatively contained.
Speaker Change: We have our arms around this portfolio, it's hard to exactly prognosticate, the exact direction, but I think what we would expect to see continued pace of resolutions. We are actively engaged with.
Speaker Change: With the outcomes on the vast majority of our 90 plus bucket at June 30, So we expect that to continue to run off.
Speaker Change: You know being honest, we certainly expect to confront pockets of other issues in the portfolio, we expect that to come up but we've got the right asset management team in place to deal with that we've talked a lot in recent quarters about being ahead of the curve with these sponsors which really matters and I think <unk> seen that in the pace of resolutions. So I think we will expect we will continue to see.
Speaker Change: Resolutions in the book will other stuff come up yes, but were.
Speaker Change: We're ahead of the curve on those issues, which I think will help of the expediency of those resolutions.
Speaker Change: Thanks.
Unknown Executive: I think it's a great point to raise on just the timing disconnect between, you know, we've historically, we have a, Unknown Executive, Kyle Joseph, Kaitlyn Mauritz, Redwood Trust, Unknown Executive, Kyle Joseph. The bank relationship building has been ongoing, as you know, and we're really pleased with some of the metrics that we're seeing, certainly, bank volume is a percentage of total lock volume, number And, you know, most of that momentum is with the banks today.
Unknown Executive: So, we would expect that to continue to go higher on the bank side. The relationships, the way we think about it is we continue to be doing infrastructure building with these guys, and ultimately, you know, this is the first time we've kind of declared that the $1.3 trillion of Jumbo sitting on bank balance sheets is officially an addressable market of ours, which is what we're trying to do. We're trying to build and grow the markets that we can address through trade. For years, those were loans that we never saw.
Unknown Executive: And I think that what's really interesting is as these relationships are set up and as monetary policy shifts, we can buy loans from banks, and we've been an avid seller of loans to banks, you know, so what's most important is the infrastructure building and having these relationships. You know, we sort of approach it through the context of a vendor versus just a capital takeout. You know, they invest a lot in technology and training, so we think that these are durable relationships.
Unknown Executive: You know, most of our competition, almost all of our competition for loans these days continues to be on the IMB side. The vast majority of securitization activity that picked up, you know, right into July was competition on the IMB front. Our next question comes from Eric Hagen with BTIG. Please proceed with your question. Hey, Eric, it's Dash.
Speaker Change: Delinquency pipeline.
Speaker Change:
Unknown Executive: Thanks for the question. So we..., as well. Yeah, I think we feel really good about our cash and liquidity position today, pro forma for paying off our converts, we're sitting at the same cash position that we've had for the last couple of quarters, and we've put a lot of money to work accretively. The only two kinds of main recourse financing obligations that we had through the next 12 months we addressed in July, that's the quint quarter end.
Dash: Hey, Eric it's dash. Thanks for the question so we.
For our bridge portfolio.
Speaker Change: We are essentially the special services. So we can interact directly with borrowers and sponsors.
Dash: For both the term and the bridge books were not the primary servicer. So we don't do the basic payment collection we.
Dash: We.
Dash: Farm that work out.
Dash: To third parties.
Dash: Our securitized term portfolio, which as you know is the majority.
Dash: Of that book those are rate of transactions. So there are rated primary and special Servicers there's very.
Dash: A very specific protocols within remics for special servicing we're obviously involved as the.
Dash: As the owner of the subordinate bonds, but there is a third party named special servicer.
Unknown Executive: We have had elevated bridge maturities; we are probably expecting in and around $350 million or so, stepping down to the high $200s of maturities in our bridge portfolio over the next number of quarters. That provides a very nice source of capital for us, as well as some of the resolution activity that Dash mentioned unlocks creative capital that we can redeploy at more optimal levels than where it sits today. We also have dry powder from the CBP facility that I mentioned, and a pretty... [inaudible] You know, term non-recourse financing, as you probably saw, we moved about $200 million of bridge loans into non-recourse. Got it. Thank you so much.
Richard Barry Shane: Our next question comes from Rick Shane with J.P. Morgan. Please proceed with your question. Good morning, everybody, and I apologize if some of this has been covered.
Unknown Executive: I'm bouncing between calls this morning. Look, one of the interesting developments we're going to start to face is a pickup in speeds as rates fall. When we think about many of the mortgage rates we follow where they own instruments at premiums, we're starting to factor that into our models. Historically, Redwood has owned instruments at pretty significant discounts and benefited from a pickup in rates. Can you talk a little bit about that dynamic where the accretable discount is in the portfolio and what you would need to see in terms of movements of rates to really see that manifest? Sure, we can tag team this one.
Unknown Executive: But I think the headline response is, you know, the vast majority. The forecast of when rates might come down has moved pretty immensely. I think last quarter, you know, few were predicting a rate cut even this year, and now we're building a consensus towards possibly September. So the macro environment, you know, that that could create for us is definitely a tailwind. And the combination of starting to realize that a credible discount on the book, which again, you know, our portfolio, we've talked about, you know, multi bridge, which is actually a relatively small piece of the overall book. And as a portfolio, the credit performance of the book has been extremely strong.
Dash: Okay.
Dash: And as a portfolio the credit performance of the book has been extremely strong. So when you think about what what's going to move it.
Unknown Executive: So when you think about what's going to move it, it's not credit, it's rates. And I'm down, we'll hopefully start to, you know, that will be a contributor, at least to gap earnings. So, that's, that's a big piece.
Dash: It's not credit its rates and.
Dash: Come down we'll hopefully start to you know that will be a contributor at least to GAAP earnings.
Dash: So that's a big piece and obviously if speeds pick up for the on the run the business that means that there is.
Unknown Executive: And obviously, if speeds pick up for the on the run business, that means that there's more loan activity. And if there's more loan transactions, there's more regular business for us as well. So that's definitely something we can manage. You know, I think we've, we continue to kind of fine-tune our hedging regimen for our resi business, which is obviously the rate-sensitive business. And there, we feel really good that we can continue to lock loans and distribute into securitizations, you know, as speeds go up.
Theres more loan activity and if theres more loan transactions theres more regular way business for us as well. So that's definitely something we can manage I think we've we continue to kind of fine tune, our hedging regimen for our <unk>.
Speaker Change: <unk> business, which is obviously the rate sensitive business.
Speaker Change: And there we feel really good that we can continue to lock loans and distribute into securitizations.
Unknown Executive: So those are all those are just a few things. But I think, Rick, the headline again is that we're positioned, I think, meaningfully differently than many others in the sector. Hey, Rick and Stash.
Unknown Executive: That's definitely a piece of it. So, like I said, we made about a quarter billion in runoff in the second quarter, and a good chunk of that was multifamily.
Speaker Change: Mentioned, there's a lot of private lenders that I think are more comfortable coming into the space.
Speaker Change: To take loans out that may not have as clear path to a GSE takeout, but there's just more liquidity flowing a little bit more freely in the system, even away from sort of the Uber institutional.
Speaker Change: Take outs like the Gse's all of this as a tailwind to paydowns.
Unknown Executive: Many of those sponsors do go Fannie and Freddie. And as you know, a 10 year at 4% versus four and a half is a big 50-50 difference in terms of the viability of, and things of that nature. But you're right, we're in a pocket of rates where incremental rallies make a lot of difference between loans that work and loans that don't go into GSE takeouts. No, all good, man.
Speaker Change: And things of that nature, but youre right. We are in a pocket of rates, where incremental rallies made a lot of difference between loans that work in loans that don't into into GSE takeouts.
Speaker Change: Got it.
Speaker Change: Thank you and sorry, I sort of had you guys repeat that I appreciate it.
Speaker Change: No argument.
Speaker Change: Our next question comes from Steve Delaney with JMP JMP Securities. Please proceed with your question.
Steve DeLaney: Thanks, Good morning, everybody nice to see you guys are staying busy out there.
Unknown Executive: We could be looking at what? You know, our bank channel, we'd love to be an ongoing 30 year takeout for banks. I think the hybrid product is a better portfolio product for banks for obvious reasons, just how they're funded, and the deposit base. And so we can be competitive there. But if they lean in on hybrids, it gives us an opportunity to be a 30 year takeout for those guys. And then on the IMB front, it's more competitive.
Speaker Change: Trinity to be a 30 year take out for.
Speaker Change: For those guys and then on the AMB front.
Speaker Change: It's more competitive.
Speaker Change: We see people.
Unknown Executive: You know, we see people, you know, sellers kind of come in and go out. And so there, I think, whereas, you know, despite the fact that we saw some new entrants, you know, buying loans from sellers in Q2 and into Q3, our IMB volume continues to grow. And so I think we're very well situated there.
Speaker Change: Sellers kind of come in and go out and so there I think whereas.
Steve DeLaney: Despite the fact that we saw some new entrants.
Speaker Change: Buying loans from from sellers in Q2 and into Q3.
Speaker Change: Our AMB volume continued to grow and so I think we're very well situated there.
Speaker Change: One thing.
Dash: And dash can speak to the 10 year, but one really interesting thing for US is as 10 year comes down.
Unknown Executive: One thing, you know, and Dash can speak to, you know, the 10 year, but one really interesting thing for us is, as the 10 year comes down, the unrealized losses on these bank back books will potentially reach a point where banks will be comfortable selling, or risk transferring, or whatever it is. And that starts to get really interesting for us. You know, I mentioned that 1.3 trillion sitting on bank balance sheets. I feel like we're better positioned to take that call than most at this point. And that gets really exciting. So there's a lot, you know, to like about this business as rates start to come down. I do think I'll turn it over to Dash.
Speaker Change: The unrealized losses on these bank back books.
Speaker Change: We will potentially reach a point, where banks will will be comfortable selling.
Speaker Change: Our risk transferring or whatever it is.
Unknown Executive: Yes, that's what you're hearing. So we're, you know, we're having conversations all the time. And, you know, each bank has, you know, unique circumstances. But, you know, when you look at the makeup of some of these, these portfolios, the unrealized losses, you know, just have not been too significant to want to realize candidly, as rates come down, you know, and those unrealized losses come down, you know, I think there's a lot of bank executives that would love to clean up some of these portfolios.
Unknown Executive: So that's all the infrastructure work we talked about and building those relationships to get those phone calls. Steve, in terms of just the tenure directly impacting volumes, I think a further rally in the long end, to Chris's point, probably has the most direct impact on unlocking. That now's a good time to invest because they didn't do it a year ago and, you know, that was five to seven points higher on HPA, so they're figuring.
Speaker Change: And that I think reflect consumers that want to enter the housing market and have conviction that.
Speaker Change: That now's, a good time to invest because they didn't do it a year ago and that was 5% to seven points or go on HPA, So they're figuring.
Speaker Change: Conviction to get in and buy a home if rates were to rally further into the sixes I think from a sentiment perspective that probably does a lot.
Speaker Change: For transaction activity and a lot of it is psychological I think once you get into the <unk>. There's a lot of consumers. So to think about that rate is at least in the context of long term historical rates and you probably start to see more come off the sidelines. Obviously the overlay is supply and the fact that there's still not a lot of housing supply.
Speaker Change: Going out because a lot of people are.
Operator: We have reached the end of our question and answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.