Marty Hughes - CEO Brett Nicholas - President Chris Abate - CFO Mike McMahon - Managing Director, IR.

Vik Agrawal - Wells Fargo Securities Steve DeLaney - JMP Securities Bose George - KBW Paul Miller - FBR Capital Markets Brock Vandervliet - Nomura Securities Matthew Howlett - UBS.

Good afternoon and welcome to the Redwood Trust, Inc. Fourth Quarter 2014 Conference Call.

[Operator Instructions] Management has requested that I remind that certain information presented and certain statements made during management's presentation with respect to future financial or business performance, strategies or expectations may constitute forward-looking statements.

Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially.

Management encourages you to read the Company's most recent annual report on Form 10-K filed with the SEC which provides a description of some of the factors that could have a material impact on the Company's performance and could cause actual results to differ from those that may be expressed in forward-looking statements.

I have also been asked to note that the content of this conference will contain time-sensitive information that is accurate only as of today, Monday, February 23rd, 2015. The Company does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances.

Finally, today's call is being recorded and access to the recording of the call will be available on the Company's website at www.redwoodtrust.com later today. For opening remarks and introduction, I would now like to turn the call over to Marty Hughes, Redwood's Chief Executive Officer. Please go ahead, Mr. Hughes..

Good afternoon everyone. Thank you for participating in Redwood's fourth quarter 2014 earnings call. Joining me on the call are Brett Nicholas, Redwood's President, and Chris Abate, Redwood's CFO. 2014 proved to be a challenging yet highly productive year towards further developing and positioning our residential and commercial loan businesses.

As we start 2015, we are well-positioned to grow income through the generation of fees from loan sales and interest income from the creation of proprietary investments for our -- from our four investment portfolio. Brett and Chris will go through the metrics for the quarter shortly.

As we closed out 2014 and look to 2015, the most important takeaway is that we have now put in place and we're executing on all major pieces of our business model.

For the residential and commercial platforms, our focus is now more on tuning rather than building, such as continuing to add products, sellers and distribution capability while at the same time improving our operating efficiencies and capital deployment to improve profitability.

The fourth quarter was a bit noisy from an accounting standpoint as the sharp decline in U.S. benchmark interest rates during the first quarter caused a $15 million negative mark-to-market valuation adjustment against the carrying value of our servicing portfolio.

Chris will fill in the accounting specific, but from a high level, we take an enterprise view towards financial risk management. This means we don't look at our business risks in isolation but instead manage our risks across our portfolios and business lines as a whole.

From a tactical standpoint, our approach is to first look at our balance sheet investments which can move in opposite directions as interest rates change and act as natural hedges. For example, our securities typically increase in value as benchmark rates decline and act as a natural hedge against MSRs that decline in value when rates drop.

We also looked to derivatives to fill in any gaps or to hedge other risks for which there are no natural offsets. This approach to financial risk management does not protect us from occasional periods of GAAP earnings volatility as the price movements of some of our hedges impact earnings and book value while others impact book value only.

That's why we typically communicate our cumulative hedge results to their impact on book value. To me, the most important takeaway is that we manage our economic interest rate exposure appropriately during the fourth quarter. Let's move on to our discussion of our membership in the Federal Home Loan Bank of Chicago.

Our well-capitalized captive insurance subsidiary became a member in mid-2014. Our goals are consistent with the mission of the Federal Home Loan Bank system which is to provide liquidity for the mortgage market.

Our subsidiary's ability to access the system for advances broadens our distribution capability as our subsidiary has the ability to hold loans for investment. And we expect to have approximately $1 billion of loans held for investment by midyear.

This is in addition to our ability to access the securitization market, access whole loan sales, and sell conforming loans to Fannie Mae and Freddie Mac. As many of you know, the Federal Home -- the FHFA has proposed rules, among other things, that would eliminate captive insurance companies from membership.

There were numerous comment letters filed by industry groups in opposition to the proposed rule changes.

We too filed a comment letter that in summary said the one-size-fits-all approach of the proposed rules change was unwarranted and that the captive insurance subsidiaries could be structured and capitalized in ways that minimize or even reduce to the -- reduce risks to the Federal Home Loan Bank system.

The FHFA is currently reviewing the comment letters and is expected to issue a final rule later this year. It seems to us that in the worst-case scenario, if the captives are excluded, our subsidiary would remain a member for five years during the phase-out phase.

Finally, I would like to share our residential and commercial acquisition and origination goals for 2015. For residential, our expectation is acquire $8 billion of conforming loans and $7 billion of jumbo loans in 2015 for a total of $15 million or 67% increase from the $9 billion we acquired in 2014.

However, our primary focus will be to achieve our maximum purchase volume potential while maintaining loan sale profit margins within our long-term range of 25 to 50 basis points. For commercial, our expectation is to originate $1.5 billion of loans in 2015, up from $1 billion in 2014 at margins averaging 150 basis points.

We do not expect a linear ramp in originations, however, given the historical experience and the seasonal factors that generally negatively impact the pace originations, especially in the first quarter. Now I'd like to turn the call over to Brett Nicholas, Redwood's President..

Thank you, Marty. As Marty noted, we had a highly productive 2014 in light of a challenging operating environment for the residential mortgage banking segment and a tough fourth quarter for the CMBS market. Let me run through some key operating metrics and then I'll comment on our business operations.

In the fourth quarter of 2014, our residential loan acquisition volume was $2.8 billion. We issued one residential jumbo securitization in the fourth quarter, had $776 million of jumbo home loan sales, and $1.4 billion of conforming loan sales. Our investment in mortgage servicing rights increased to $139 million.

We executed our first loss risk sharing transaction with Fannie Mae. And lastly, we originated $326 million of senior commercial loans and $22 million of mezzanine loans. I'll first comment on our residential businesses. Our residential mortgage business had a productive 2014 despite industry volume declining 39% from 2013 levels.

We acquired $5 billion of residential jumbo loans in 2014, a decline of 29% from 2013. We attribute this drop to the industry-wide drop in refinanced volume as a result of higher rates in 2014 and a modest increase in competition from other non-bank aggregators.

However, the biggest competition for jumbo loans came from money center bank retail channels who, during certain periods of 2014, priced jumbo loans of lower coupons than conforming loans to borrowers.

We completed four private residential mortgage securitizations during the year, bringing our total completed securitization since 2010 to 25 transactions, which represents a market-leading 36% market share. Our goal is to attract more triple-A investors, many of whom remain on the sidelines for structural reasons.

We continue to work with investors and other industry participants to make improvements to our deal structures and other RMBS 3.0 initiatives. We published a white paper last August which includes our ideas on structural improvements to revive private-label securitization. This paper can be found on our website.

Throughout 2014, whole loan buyers provided better pricing and execution for our jumbo home loan sales versus securitization. We sold $2.4 billion of jumbo whole loans to numerous buyers in 2014. This was approximately 54% more than what we did in 2013.

We believe that over time there should be more equilibrium between private label triple-A and whole loan pricing levels. However, we expect strong demand for whole loans in the first part of 2015, which had produced healthy margins for our jumbo product line.

In addition to securitization and whole loan sales, our subsidiary continues to invest in jumbo whole loans that are financed with the Federal Home Loan Bank. We increased our residential loans held for investment to $582 million at the end of 2014.

We completed the first year of our conforming residential business with acquisition volume of $4 billion for the year. We are quite pleased with our accomplishments building out this de novo product line during 2014. We established Redwood's conforming market presence, a broad seller network and efficient and scalable operations.

Margins on conforming loans remain under pressure as there is still excess capacity in conforming loan correspondent lending. Some of this margin pressure has been driven by aggressive bank and non-bank servicing buyers, pricing mortgage servicing rights at low yields throughout most of 2014.

We believe there is a possibility that 2015 brings us a different market. Servicing values were up roughly 10-plus percent in the fourth quarter, which could have an impact on additional capital formation in the space. Furthermore, given the pressure on margins in the conforming business, we expect further consolidation in the mortgage industry.

Our investment in mortgage servicing rights grew to $139 million at the end of 2014. We look at servicing as a financial investment. We will invest and grow the portfolio to the extent we believe the asset is fairly priced. Additionally, as Marty mentioned, we do hedge the asset with a combination of balance sheet assets and derivatives.

We continue to actively work with both Fannie Mae and Freddie Mac on different potential risk-sharing structures. As stated previously, we completed a transaction with Fannie Mae in the fourth quarter. This year, both GSEs have FHFA risk-sharing scorecard goals and continue to evolve their programs.

We expect to complete other transactions with the GSE's during 2015. Our residential correspondent seller network continues to grow. At yearend we had 169 sellers, which is up from 118 at the end of 2013.

Our operational focus is on lowering our acquisition cost per loan, increasing our market penetration by growing our seller network, and improving overall profitability. I will now move on to our commercial business. Looking at the entire year, our commercial business had a solid 2014.

We originated and distributed close to $1 billion of senior loans and originated $50 million of mezzanine and subordinated investments. We grew the team, adding experienced originators in New York and Los Angeles.

During the first three quarters of 2014, the market environment in CMBS lending was robust, with strong investor participation for both senior and subordinate securities. This all changed during the fourth quarter as CMBS spreads widened and there was a significant reduction in the number of CMBS BP spires [ph].

The result was negative not only for Redwood but for the entire CMBS origination market. CMBS BP spires [ph] widened their prices and clamped down on underwriting. This resulted in loans they would not accept in CMBS transactions, which led to numerous kick-out -- loan kick-outs and pricing adjustments.

While we have now distributed all of our available inventory we originated in the fourth quarter, we were not immune and we're negatively impacted by wider CMBS spreads and the pricing adjustment. We expect lower volumes in the first quarter, which is typical of the seasonal nature of CMBS lending. Looking at all of 2015, we remain bullish.

Market participants are expecting as much as $120 billion of new CMBS in 2015. Furthermore, we expect supply/demand imbalance for CMBS BP spires [ph] to solve itself during 2015 as this dynamic will draw capital and new entrants to the space. I will now hand it over to Chris Abate, our CFO, to run through the numbers..

Thank you, Brett, and good afternoon everyone. Fourth quarter earnings per share were $0.31, down from $0.50 in the third quarter. Net interest income continued to grow in the fourth quarter, and both our jumbo and conforming residential mortgage banking margins improved.

However, overall net income declined due to lower commercial mortgage banking income, lower MSR valuations, fewer realized gains from sales of securities, and yearend corporate expense adjustments. Before I speak further about the quarter, there are a few important things I want to note on our accounting results.

First, we did not have any material accounting timing differences related to our jumbo mortgage pipeline such as those we experienced in the third quarter where we had approximately $7 million of favorable timing differences.

If you recall, these differences occurred as a result of mark-to-market increases on jumbo loans in our pipeline that we had not yet purchased.

Based on our accounting, those gains have typically showed up a quarter removed from any associated hedging expenses, creating comparability issues when attempting to analyze the periodic income we earn from mortgage banking activities.

Since the end of the fourth quarter we have amended substantially all of our purchase agreements with our loan sellers such that we should be able to recognize jumbo purchase commitment derivatives for accounting purposes going forward.

This would effectively align our accounting for jumbo purchase commitments with our accounting for conforming purchase commitments. Assuming this occurs, the types of timing differences we've experienced on our jumbo loan pipeline should more or less go away beginning with the first quarter of 2015.

Another source of earnings volatility that I want to address relates to the financial risk management discussion Marty mentioned in his opening remarks and something we wrote about in this quarter's Redwood review that was published today.

We continue to have mark-to-market items associated with interest rate volatility to flow through our income statement, whereas in certain cases there are economic offsets in place that only flow through our balance sheet.

A good example is our MSR portfolio where we took a $15 million mark-to-market write-down during the fourth quarter as a result of declining interest rates. The portfolio offsets we used to manage interest rate volatility inherent in our MSRs often referenced the same loan collateral and have proven to be fairly reliable economic hedges.

The challenge has been that this offset has only shown up in our balance sheet and not our income statement.

So in addition to the enhancements we are already making to reduce accounting timing differences, we are currently looking for ways to better align the accounting between our MSR investments and other interest rate sensitive securities over the coming quarters. Getting back to our fourth quarter results.

Net interest income was $41 million in the fourth quarter, an increase of $1 million from the third quarter, driven by $159 million of capital deployed, as well as interest earned on our residential and commercial loan inventory awaiting sale.

Consistent with past quarters, our investment portfolio continued to generate a high level of cash flow, which more than cover our costs to run our operations, service our debt, and pay our quarterly dividend. Income from mortgage banking activities was $11 million for the fourth quarter versus $18 million for the third quarter.

Residential mortgage banking income was modestly down on lower seasonal volume, tempered by higher margins.

Most of the overall quarterly decline was related to lower commercial mortgage banking income, and as Brett mentioned, CMBS market conditions became more challenging in the fourth quarter, prompted by a smaller buyer base for subordinate CMBS securities and overall credit spread widening.

Average margins for the quarter were particularly affected by a few senior loan transactions where we were required to retain larger mezzanine positions than we originally anticipated. Our GAAP book value per share was $15.05 at December 31st, a decrease of $0.16 per share from September 30th.

The fourth quarter decrease largely reflects the change in value of hedges associated with long-term debt as our net income covered the quarterly dividend we paid to shareholders in the fourth quarter. Turning to our cash position and our capital.

At December 31st, our unrestricted cash was $270 million and our current investment capacity, which we define as the approximate amount of capital we have readily available to make long-term investments, was $198 million.

As we mentioned last quarter, our increased rate of capital deployment in the second half of 2014 required us to source additional capital to support our investment opportunities. In the second half of 2014, we deployed over $300 million of capital as compared to $51 million in the first half of 2014.

As a result, we raised $205 million of capital through the issuance of exchangeable debt through a taxable subsidiary so that we could continue to deploy capital and grow our portfolio. Our rate of capital deployment remains elevated, and in the first quarter, through February 17th, we have invested $53 million of additional capital.

That concludes my prepared remarks for financial results. With that, we're ready for Q&A..

Thank you. [Operator Instructions] And we do have our first question from Vik Agrawal with Wells Fargo Securities..

Good afternoon. Thanks for taking my question. So on the issue of capital, you said you had roughly $200 million of capital in the quarter and deployed roughly $53 million post the quarter. How do you -- and I think you mentioned that you had elevated capital needs.

How do you see your capital requirements to execute your 2015 plan at this point?.

Hey, Vik, it's Chris. You know, at this point, we feel like we've got enough capital to operate the business in accordance with our internal projections for the next few quarters.

We have, you know, in addition to permanent capital, we obviously have other sources of capital, other short-term debt, or things we're doing with the Federal Home Loan Bank of Chicago. So, you know, fairly good for the next few quarters..

Okay. And then on the conforming risk-sharing opportunities, I think you mentioned that you're expecting to look at more of those transactions in 2015.

Can you give us more color on that and what do you expect for 2015?.

Yeah, this is Brett. I think both GSEs are evaluating the types of structures that they want to pursue.

They both have their own capital market transactions, they have transactions with reinsurance companies, and then they're also looking at numerous options for point-of-sale types of transactions, which is very familiar with the transaction we did in the fourth quarter.

Beyond that, I can't get into any more details because these are all private conversations between us and the GSEs on that part..

Okay.

And then finally, on -- given the rate decline, I think you mentioned that MSR is a far more attractive place to deploy capital, so, is that -- are you also considering purchasing MSRs in conjunctions with the ones that you create through your mortgage banking activities?.

Actually the point of my remarks were that actually a lot of the margin pressure in the conforming loan business is actually -- is created actually by non-mortgage companies buying servicing at what we think are pretty low yields.

And the comment was that, through the fourth quarter, with rates declining, a lot of those buyers may have -- may see some poor financial results. We, through our correspondent lending business, we acquire servicing at levels we find attractive.

And that's our focus is to buy it -- buy whole loans released through our operations, deliver them to Fannie Mae and Freddie Mac, and retain servicing, to the extent that we saw an opportunity where servicing values widen significantly, we may look to do other -- take other investments outside of our normal correspondent lending operation..

Okay, that makes sense. Thanks for the clarification, Brett, and thanks for answering my question..

Thank you..

Our next question comes from Steve DeLaney with JMP Securities..

Thanks. Good afternoon everyone. Thanks for taking the question. Brett, I believe you mentioned the 500-and-some million of held-for-investment loans that you now have sort of a new -- part of your investment portfolio.

You've mentioned that in conjunction with the FHLB, so we should assume these are loans that you are putting on balance sheet and funding with Federal Home Loan Bank advances, is that correct?.

That is correct..

Okay.

And can you talk about what type of loans -- you see a lot of loans that come through the conduit, are there certain characteristics that you're looking for for the loans that you hold on balance sheet versus what you would sell either as whole loans or securitized?.

Yeah, I think currently it's really a combination of everything that's coming through our jumbo origination channels. I think over time we would like to utilize those lines for the purposes of developing other prime-quality non-QM products that we can incubate and create a securitization market for.

But I think for the time being, it's very accretive for us to utilize that line, put more capital to work at a fairly high ROE. And I think what you'll see, as Marty said, you'll see us grow that portfolio and put some capital to work, and then, you know, look to the whole loan and securitization markets for other jumbo products..

Thanks.

And I read the review quickly, but I believe I saw in there a figure of $1 billion, and was that sort of a target utilization of advances that would be used to acquire these types of loans?.

Yeah, that's correct..

Okay, great. Chris, this is just a housekeeping thing, but the first Fannie Mae CRT deal that you deal, I believe you showed in the third quarter an $11 million investment against that $1.1 billion.

Could you just tell me where you're running the revenue associated with that? Where's that coming through on the income statement?.

It actually goes through other income. So, you know, it just hasn't reached a material point to break out. And I believe the investment turned out to be $10 million. I think we delivered $1 billion instead of $1.1 billion..

Got it. $10 billion versus $11. Okay, thanks for clarifying that, appreciate it. And I guess just looking at the volume, really appreciate the guidance across all three products, that'll be very helpful to our modeling.

I'm just curious though, when you set this, you know, pretty aggressive $15 billion, up 67%, should we assume that there's an interest rate assumption embedded in that that the 10-year will stay within a certain level? And I guess just with the Fed looking to raise rate maybe midyear, kind of how do you guys feel about the stability of your business, whether short rates or long rates, to bounce around?.

You know, I think our expectation is more in line with the MBA projections to somewhere around $1.2 billion -- $1.2 trillion, $1.3 trillion for 2015.

So we don't have any, in ours, there's no implicit big rate move down and a big refi boom and it is not, you know, or the other way that there's going to be a really sharp increase in interest rates that would really pull back on purchase volume..

And Steve, a lot of it too, we had 169 sellers, and we've got the platform in a position at this point to add a lot of loans, and from a market share standpoint, we're still a very small percentage. So we think we can grow in this market irrespective of where rates are going..

[Operator Instructions] Our next question comes from Bose George with KBW..

Hey guys, good afternoon.

Actually, I didn't know if Chris mentioned this when he mentioned the on-balance-sheet MSR hedge sort of offset, but is there a number that we can think about in terms of how much of an offset there was to that MSR market, you know, that just went through the balance sheet?.

You know, we haven't disclosed a specific formula per se, Bose, but substantially all of it was offset in the balance sheet. If you back out the hedge on our Traps [ph] long-term debt, we have a specific cash flow hedge there. Book value was relatively unchanged.

And without getting into the specifics, I think that's a good way to look at the effectiveness of the Q4 hedging..

So there $4 billion -- there was a $4 million on-balance-sheet hedge and then the remainder essentially was kind of -- $4 million through the income statement and the rest was through the balance sheet?.

That's correct. And as I stated in my opening remarks, we're looking for ways to better match those. So, whether it's more of the hedges go through the income statement or less of the MSR goes through the income statement, we're trying to match those up more effectively going forward..

Okay, great. That's helpful, thanks. And then, just switching to the commercial gain on sale, can you just talk about the outlook, you know, you noted in the review to expect improvements.

Where do you think that number goes over the course of 2015?.

Bose, we expect, as I said, we expect CMBS markets to normalize. For first quarters, historically seasonally slow. As Marty mentioned, our outlook is around $1.5 billion and around 150 basis points, which we would expect to earn this year..

Our next question comes from Paul Miller with FBR Capital Markets..

Thank you very much.

Hey guys, I know we've seen a lot of interest rate volatility, but I do know -- can you remind us again how the credit spreads, if credit spreads on the resi market tighten up, would that give you a better opportunity for securitizations of the jumbos, or is it just the aggressiveness of some of these bigger banks in the jumbo markets make it very difficult to do those securitizations in a more profitable manner?.

Paul, it's Brett. Actually credit spreads don't drive a lot of the economics. It's really all embedded in the triple-A spreads and how they price back of comparable agency securities. They widened -- they were pretty wide through most of 2014 and end of this year.

And it's really a function of the economics, I mean we look at these transactions as though we sell all the assets, it's just we'd retained certain assets at market value.

That versus the economics with whole loan sales and then also -- obviously the retail banks love jumbo customers and sometimes they can just price to a point where it really has -- it's completely de-coupled from the capital markets.

And then in that case, we will, you know, listen, we just have to sit on the sidelines for a while if they're going to be that aggressive. But that's really what drives it, the triple-A spreads..

The triple-A spreads. I mean we know every bank out there is trying to grow assets and they can't do commercial as much, so they all jump on this jumbo market. And just going back, you had to hold a bigger mez piece, he said, on that commercial, on some of those commercial securities in the fourth quarter.

Can you just go into that a little bit more? Did -- is that better for you in the long run or just that eats up too much capital..

Well, I mean -- go for it, Chris..

You know, we're very happy to hold a mez. So from an investment standpoint, these are [ph] exactly the type of mezzanine loans we like to create. In that particular instance, I think we have anticipated creating a larger senior piece, and just based on liquidity in the market, we retained more than we anticipated.

So from a senior loan sale margin perspective, it had a negative impact to mortgage banking revenue. Certainly though from an investment standpoint, we think that's a good investment that we made, and we're happy to hold it..

[Operator Instructions] Our next question comes from Brock Vandervliet with Nomura Securities..

Thanks for taking my question. I stepped off the call briefly, but is there any further color on the MPF direct business? I know the first quarter now is the first quarter when we actually see some originations, but I wondered if you had any tidbits from the last couple of months. Thanks..

Not a whole lot. You know, we've been in the pilot phase working specifically with Chicago District. We have essentially started locking and pricing loans, but it's an ongoing process to roll out the program. So again, unfortunately, we should probably have a better update in the next few quarters..

Got it. Okay, thank you..

Our next question comes from Matthew Howlett with UBS..

Hey, thanks guys. Just -- I'm just trying to get a grip on the true gain on sale margin specifically for the jumbo sales, I know it's a mixture between securitization and whole loan sales.

But I mean, do I look at it as, you know, so what's the true mortgage banking number? Is it 19 million and I split amount until I get to a point on the jumbo and 15 bps on the agency? If you could just help us true-up on what the true economics of the jumbo sales on the $1.5 billion were in the quarter?.

Yeah, I mean -- and again, this is going to be I think much more transparent as we move towards, you know, a lock commitment [ph] model which we have on the conforming side. At a high level, we don't -- we haven't disclosed them separately, but we're right in between the 25 to 50 on a blended basis, our long-term target.

So I'd say we're in the mid-30s and -- yes. So you're looking at jumbo spreads that continue to be -- jumbo margins continue to be outsized relative to history, and conforming has been more challenging..

Got you. And any change potentially, the mix shift in jumbo's whole loans or jumbo sales this year.

And on that note, I guess the question I have is on that prime -- residential prime subordinated portfolio, clearly that's been growing, but the -- we're not seeing as much growth in the true subordinate, I guess the first, second, third loss piece, as much as we would have expected.

That's just going to be a function of just more securitizations coming down the pike versus whole loan sales?.

Yes. It's really a function of our best execution. We're going to continue to issue transactions throughout 2015, I'm talking about private-label securitizations through Sequoia.

However, we cannot ignore the fact that we have a lot of bank and insurance company buyers that they're willing to pay significantly more than the economics of the securitization.

So, to the -- so, unless triple-A spreads tighten significantly, you're going to see us, and that was part of my comments, continue to sell into the whole loan market, to generate earnings..

Okay.

And we haven't seen -- I mean when you say significantly, is it 50, 100 basis -- we haven't -- have we seen progress towards that with the treasury now getting involved? Has there been -- I mean, there'd been no -- more dealer shelves coming off here early in the year, are there any signs that that's going in that direction?.

Well, I mean, we've, you know, our last transaction, we sold our securities. It's just it's a function of pricing, and that there's a lot of initiatives by treasury and others, but it is, to date, not impacted the spreads that triple-A private label trades in the back of agencies..

Right, got you. And just one last follow-up on that.

On the non-QM, so, are you rolling out a program? Is there anything to talk about on that front this year?.

I mean we currently have a non-QM program which just sits just outside of the QM box, it's mainly for very high-quality borrowers with slightly higher DTI ratios. We currently originate those through all of our seller network. Many of those loans get securitized, in Sequoia, we've continued to add non-QM loans.

Some of those loans will finance through our subsidiary with Federal Home Loan Bank. And then we're going to -- we continue to work in a product development mode to continue to look for other ways to finance prime borrowers who are underserved out there..

Okay, so there's -- and I know there's been a lot of talk in this market getting a lot bigger. It just seems like it's moving slowly, but you guys still have a program out there and --.

We have a current program. And our focus is not going down to, you know, subprime borrowers or charging 7% coupons. We're looking for prime borrowers who were typically, you know, have lots of options to borrow and are currently basically locked out of market. We're talking about self-employed borrowers, people with volatile income histories.

And that's the area we'd like to serve and we think that's a pretty big market that’s currently underserved. But there's still a lot of work to do and there's a lot of guidance from the CFPB that needs to be sorted through..

Yeah. Matt, it really gets around being able to document and substantiate the borrower's ability to pay. For the self-employed borrower, their incomes -- personal incomes and business incomes are often intertwined, which makes it very difficult to make a hard, fast DTI test.

So we're exploring ways of trying to make sure we are comfortable on how we would document that..

Got you.

And just given the, you know, see much help from Washington or rating agencies, or is it just sort of a lot of stuff do you think that's figuring out on that front?.

I think with some of it, it could be industry standards developed.

For instance, on one of the things, you know, the extent that you cannot get a straight DTI, can you use bank statements or other ways to look at the cash flows of a borrower to get comfortable with their ability to pay? You know, and obviously we would also talk to people in Washington to look for more guidance.

Because I think it'd be very helpful to the extent that there is a need for more liquidity in this area, I think there's a need for acquirers of loans like us that we have more clarity around the guidance on the ability to repay..

That does conclude our question-and-answer session. I'd like to turn the call back over to our speakers for any closing comments..

Thank you everyone for joining us on the fourth quarter earnings call. This is Mike McMahon speaking, and I'll be available to anyone with questions for the next few hours as well as the rest of the week. Thank you very much..

Once again, that does conclude today's call. We appreciate your participation..