Redwood Trust, Inc.

Good afternoon, and welcome to the Redwood Crushed Inc. Second Quarter 2023 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Caitlin Moritz, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Operator. Hello, everyone, and thank you for joining us today for our Second Quarter 2023 Earnings Conference Call. With me on today's call are Chris Abate, Chief Executive Officer, Dash Robinson, President, and Brooke Carrillo, Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions, and involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we might also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures are provided in our second quarter of Redwood Review, which is available on our website, redwoodtrust.com. Also note that the content of today's conference call contains time-sensitive information that are only accurate as of today, and we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on our website later today. I'll now turn the call over to Chris for opening remarks.

Thank you, Kate. And thank you all for joining us here today. Before we dive into our quarterly results, I'd like to take the opportunity to share how Redwood is positioned with respect to the impending regulatory rule changes concerning higher bank capital charges for holding residential mortgages. We expect some version of this proposed rule to become final in the foreseeable future in response to the regional bank crisis. More importantly, we expect that through the benefit of hindsight, these regulatory changes will mark a major turning point and how most non-agency loans are owned and distributed in the United States. Our confidence in this outcome stems from working behind the scenes with many bank executives like us to see where the proverbial puck is headed after watching portfolio mortgages play a central role in the demise of Silicon Valley Bank and First Republic Bank earlier this year. In fact, over the past few months, we've completed onboarding and have already activated a number of regional and mid-sized banks with aggregate assets of over $2 trillion. We're in various stages of bringing many more online in the coming weeks and months. In some cases, a number of these banks represent long-standing flow relationships we've built over many years or even decades. Others are new to Redwood and have previously held loans on balance sheet, but no longer find it economical to do so. As the tide turns, more and more depositories are looking to Redwood given our long-standing track record of accumulating and distributing non-agency loans. As such, our strategic focus will be to continue onboarding such depositories with the goal of becoming their primary capital partner as they look to serve their jumbo clients in a seamless manner, even before the final regulatory changes go into effect. To try and contextualize the transformational shift that we foresee for our market, I'll begin by reiterating to today's listeners that mortgage cycles are no longer determined by Wall Street. Today, they're almost exclusively determined by Washington, D.C. Monetary policy and the path of mortgage rates as governed by the Fed, regulatory rules and enforcement actions concerning banks and other lenders as overseen by the Treasury, the FDIC, OCC, CFPB, and others, and of course, housing policy as dictated by the current administration, primarily through the FHFA and HUD. Altogether, these government influencers play a much more prominent role in the booms and busts of the mortgage market than they ever have before. And the effects that Washington has on banks and their propensity to lend has always had a profound effect on Redwood's business. That's why we consider this impending regulatory change, in keeping with our historical experience, to be a very positive market-shifting event for our business. As many of you know, Redwood got its start on the back of another bank crisis the S&L crisis. As interest rates rose and credit worsened, many depositories that held long-duration residential mortgages started losing money and became insolvent as the loans declined in value. It was through this lens where Redwood's value proposition became clear. The company was built to serve banks and other originators who relied upon mismatched borrowings for liquidity. Our ability to match fund long-term mortgages with long-term debt via securitization technology provided an outlet for lenders, just as Fannie Mae and Freddie Mac did for agency-conforming mortgages. Since our founding almost three decades ago, the non-agency mortgage market has endured significant changes, yet Redwood has continued to provide valuable liquidity to the market by aggregating residential mortgages so that lenders can recycle their capital and continue making new loans. In recent years, we've expanded our consumer business to also serve housing investors, in response to secular shifts in how homes are owned in the United States. During the second quarter of 2023, we completed our 143rd residential securitization that packaged billions of dollars of bulk pools for distribution to all types of investors. Fast forwarding to today, we're witnessing yet another round of policy changes in Washington that will kick off this next era of the mortgage market. The outgoing era, characterized by a 41% increase in home prices since 2020, was fueled by extremely accommodative Fed monetary and government fiscal policy in response to the COVID-19 pandemic. With benchmark Fed rates reduced to effectively zero during this period, banks had an almost limitless supply of deposit capital to lend as the country battled COVID. Many banks chose to opportunistically put that money to work in 30-year jumbo mortgages. and these mortgages were predominantly held in portfolio for investment rather than distributed into the capital markets. These mortgage portfolios proved to be sound credit investments and posed little principal risk to the banks, but the interest rate mismatch between the 30-year loans and the deposits funding them was undeniably significant, and in many cases, very risky. Even as benchmark Treasury bills gapped from near zero in January 2021 to over 5% in March 2023, The perceived stickiness of deposits compelled many banks to continue offering mortgages to preferred clients at rates well below market. In fact, prior to the onset of the regional bank crisis this past March, depositories originated two-thirds of all jumbo mortgages in the first quarter. As we take stock of the situation today, the cost of deposit capital is now rising rapidly, and deposits continue to leave the banking system with both consumers and businesses demanding much higher rates on their savings. But in addition, the regulatory capital charges for residential mortgages held at banks are about to rise as well. Where does the non-agency market go from here? Well, for many of these banks, continuing to offer competitive mortgage products to retain their clients will be imperative, and the solutions Redwood offers are a logical alternative to portfolio lending. Our re-engagement with many banks over the past two months has validated this statement. In recent weeks, we have recast our correspondent network and renewed or established new partnerships with depositories, which in the aggregate speak for approximately 45% of new jumbo originations, a number that, by our estimates, represents upwards of $130 billion in annual volume. We view this as our target addressable market when combined with the independent mortgage banks within our existing seller network. As Dash will cover, that business channel has also resumed growing. Our June mock volume is more than the previous two quarters combined, with July flow volumes continuing to grow. As our bank partners will attest, going live with a capital partner in the non-agency sector requires much more than just flipping a switch. For banks especially, investing in these relationships entails workflow changes, underwriting guide implementations, loan officer training, systems integration and onboarding, regulatory compliance protocols, cash and collateral management, and other infrastructure enhancements necessary to distribute whole loans with no noticeable impact to the consumer experience. And partnering with Redwood allows this work to be applied across a variety of mortgage products that we offer lenders to meet the diverse needs with speed to close and reliable execution acting as part of our competitive mode. But perhaps our biggest differentiator is that while we help our bank partners serve their customers, we don't seek to serve those customers directly in other ways, such as by running our own competing origination business. Eliminating this inherent conflict of interest that often exists with our competition is cited by many banks as foundational to our partnership. To sum things up, our enthusiasm has grown considerably in recent months, bolstered by our engagement with an increasing number of originators eager to work with Redwood. With such significant changes afoot, the need for Redwood to play a centralized role going forward is rising rapidly in importance. There's a lot of work ahead, but the leading indicators we use to assess our progress, including the strategic onboarding of new loan sellers and the depth of their origination channels, are a reliable roadmap for the growth of our residential business going forward. I'll now turn the call over to Dash and Brooke, who will cover our operating and financial results for the second quarter.