Good afternoon, and welcome to the Redwood Trust Incorporated Third Quarter 2020 Financial Results Conference Call. During management's presentation, your line will be on a listen-only mode. After conclusion of prepared remarks, there will be a question-and-answer session.

I will provide you with instructions to join the question queue after management's comments. Today's conference is being recorded. I will now turn the call over to Lisa Hartman, Redwood's Senior Vice President of Investor Relations. Please go ahead ma'am..

Thank you, Ashley and hello, everyone. Thank you for joining us. With me on today's call are Chris Abate, Redwood's Chief Executive Officer; Dash Robinson, Redwood's President; and Collin Cochrane, Redwood's Chief Financial Officer.

Before we begin, I am pleased to announce we recently launched a new company website with a refreshed brand identity that reflects our evolution as an organization over the past several years. This launch includes a new Investor Relations page where investors and analysts can easily find the trail related to our financial results.

We hope you find that these very helpful. I also want to remind you that certain statements made during management's presentation with respect to future financial or business performance 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.

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 could cause actual results to differ from these that may be expressed in forward-looking statements.

On this call, we may 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 is provided in our third quarter Redwood review available on our website at redwoodtrust.com. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today.

The company does not intend and undertakes no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on the company's website later today. I will now turn the call over to Chris Abate, Redwood's Chief Executive Officer for opening remarks..

Thank you, Lisa, and thanks to all of you for joining the call. As Lisa mentioned, we've got a fancy new website and I encourage everyone to take a look to learn more about the company and the things that make us who we are.

Of particular note for those on the call, we also [ph] rolled out a new Investor Relations section with enhanced functionality, which should make accessing our result and filings much easier going forward. In the quarter 2020, Redwood moved forward.

With the early shocks of the COVID-19 pandemic behind us, we solidified our team and positioned ourselves to take advantage of extraordinary opportunities emerging in our markets.

Our businesses are back to operating at full throttle and we're optimistic that we will end 2020 on a high note even with policymakers and markets on guard with respect to the election next week and a new wave of coronavirus cases emerging throughout the world.

We feel well prepared for this and our position to take advantage of any dislocations that might arise. As I discussed last quarter, we spent much of the early spring focused on recasting our balance sheet and positioning our businesses to relaunch from a position of strength.

We're now conducting new business at a rapid pace, leveraging our experienced team and very strong industry relationships forged over many cycles. We're pleased to once again see this hard work reflected in our financial results.

Our third quarter GAAP net income with $1.02 per share, which includes record contribution from our business purpose lending segment. Our residential lending business also achieved record-breaking results for select volumes of $2.1 billion growing from nearly $0 in the second quarter.

Additionally, our portfolio of investments continue to increase in market value growing 10% since June 30. The past two months however have been about much more than getting back to business.

After such a profound new challenging period for our sector and country, we were compelled to think critically about the type of company we want to lead over the long-term including how we fit into a nation grappling with civil unrest, pandemic fatigue and a depressed job market. We emerged with great clarity on who are and where we're headed.

Our business continues to gravitate towards where capital is most impactful in the residential and business purpose lending segments, complemented by portfolio strategies where we hold distinct competitive advantages.

The federal reserve injecting unprecedented amount of stimulus into the potential markets, the de-tailoring investment prices from underlying fundamentals is the most pronounced we've seen since we had the great financial crises.

A vast amount of capital is now near deployment and this excess liquidity will continue to support higher prices investments and exacerbate the scarcity value. Looking for any possible leg up, a kind of strategic priority for many investment houses to access the whole loan while material that is used to structure these types of investments.

That happens to be exactly Redwood's platforms are built to provide. Demand for our loans continues to grow stronger as the year unfolds and we've leveraged with our counterparties to enhance our distribution strategies and compete more effectively for volume. We're also reducing our exposure to market volatility.

Recent successes in securing non-mark to market financing facilities across our product volumes, including significant capacity for financing residential loans and forbearance speaks to this. Most of these new facilities were completed with our traditional banking partners.

We're expanding our reach for partner with non-bank financing sources that will allow us to use our working capital more efficiently. The culmination of these efforts has given us a head start towards [indiscernible] sector and resulted in rapid reflection of our loan volumes and the potential to gain share in growing markets.

Today's completion of our first Sequoia securitizations backed by loans originated since the COVID-19 crisis began as an important affirmation of our progress. Like our recent capital securitization of single-family rental loans, we're extremely pleased with our Sequoia execution.

Dash will provide more details on the securitization markets and growth we see in our sector in his opening remarks.

As operating strategies take shape, the rise in our portfolio's asset values since May has continued to offer an excellent opportunity for our current shareholders and the significant upside we've seen in these investments appears to be a somewhat unique story to Redwood with many of our competitors exiting their non-agency portfolios in response to the pandemic.

While we can't predict the pace or extent of a broad-based economic recovery, we believe our portfolio's value still has room to run with the book currently yielding low to mid double-digit economic returns.

As we focus on growth opportunities ahead, we believe the secular trends supporting our housing pieces are not just intact, but accelerating due to the COVID-19 pandemic. The nationwide towards single-family housing whether rented or owned is no longer a nuance data point.

As front-page news as families look for more space to live socially distance and continue to work and learn from home.

As the shift unfolds, densely populated cities continue to see home prices and rents stay relatively flat or decline when they bring suburbs into our robust demand and home price appreciation, in many cases exceeding 10% to 20% of the prior year levels.

Although restricted 5% percent of single-family homes have increased bedrooms or more compared to only 11% of apartment units, we expect the trend toward single-family living to continue and to be fueled by ultralow interest rates. Overall, we're very pleased with the market positioning and expectations for growth.

They're counting upon us to aim higher and lead our sector in innovation in order to realize our full potential. The high standards we've set for service to our customers are already well-established but it's critical for us to maintain an infrastructure that can preserve this standard while allowing us to scale profitably and safely.

Doing this well will require renewed commitment to technology, something we're very focused on before the pandemic hit earlier this year. Our business has recently completed an updated technology roadmap they we're excited to begin communicating out to our stakeholders.

We've identified significant opportunities to provide technology-enabled solutions throughout our network that aim to disrupt traditional private-sector workflows and ideologies that has scribbled automation in the non-agency sector.

Non-agency residential loan purchase workflows and timelines is one such opportunity and today we announced the pilot launch of Redwood Rapid Funding, a technology-enabled platform that will commit qualifying originators to transact with us in a significantly accelerated purchase timeline, in many cases faster than they currently achieve their Fannie Mae and Freddie Mac.

Our delicate of process allows originators to control their closing timelines and adding the Rapid Funding feature will enable them to free up capital more quickly and de-risk their balance sheets.

Our program will also create opportunities for faster settlements to our loan buyer network, particularly depositories, which will ultimately lead to better outcomes from borrowers. To wrap up, we're entering the next era of housing finance and we're prepared to lead the way.

In that sense, we'll characterize our third quarter as a transition or bridge to future. Our business platforms serve different parts of the housing market, our core mission unifies them and that is to make quality housing accessible to all Americans whether rented or owned.

We finance build-to-rent communities in the Midwest, Workforce Housing in the South and High Balance Residential Mortgages on the coast to name just a few. Our mission speaks to the role we play in our communities and motivates us to advocate for an advanced inclusion and diversity initiatives across our industry.

By focusing on financing solutions for all types of borrowers not served by government loan programs, we're confident we can make a positive impact for our communities, employees and shareholders. We've done well, our businesses tend to generate higher returns and more durable cash flows than we previously thought possible.

That concludes my prepared remarks. I'll now turn the call over to Dash Robinson, Redwood's President..

Thank you, Chris. Our third quarter results reflect the hard work and discipline of our experienced team. For the fortified balance sheet and enhance relationships with business partners old and new, our platforms are operating at full strength and capitalizing on a unique market opportunity.

We entered the quarter optimistic for significant volumes and improved operating margins for our residential and CoreVest businesses and both platforms exceeded expectations. Continued improvement in the broader financial markets also benefited our investment portfolio with further tightening in non-agency spreads.

Coupled with strong financial results from our operating platforms, this drove GAAP book value at September 30 higher to $9.41 per share, an increase of 15% from the second quarter. Critical to our success in driving scale is the health and flexibility of our balance sheet.

During the past several months, we further improved balance sheet and operating capacity by reducing our recourse and marginable debt, expanding our non-recourse borrowings and growing non-marginable warehouse capacity.

We remain focused on efficient use of our working capital, including new structures that we hope will disrupt traditional aggregation warehouse financing. Before I go deeper into the business, I want to share observations we are seeing in the markets we serve.

As Chris mentioned, the secular trends we laid out at the beginning of last year are accelerating as demand for single-family homes whether rented or owned is increasing. Recent reports show the health of the housing market is strong.

Total household equity now exceeds $20 trillion and continues to trend higher, a result of a persistent supply-demand imbalance and record low cost of borrowing for home buyers. The migration from cities to suburbs we observed over the past several months is also expected to continue in some form.

Evidenced by recent housing search data showing over 50% of property searches in the top 100 metros or for suburbs outside metro areas. House price appreciation is also driving some homeowners toward lower-cost areas with the expectation they’ll be working from home at least part-time indefinitely.

Industry research indicates that in June 42% of Americans reported they were working from home and 60% of those survey are expecting to be able to work from home as the new normal.

While we don’t expect the recent exodus from urban center to persist at its current pace, these trends nonetheless point towards a more structural evolution in housing demand in which consumers whether homeowners or renters, continue to prioritize the benefits of single-family detached housing with less surrounding population density.

The markets in which we originate and purchase mortgages -- mortgage loans tend to benefit from all of these. Refreshed pockets of consumer demand have been supportive from jumbo volumes.

Of our third quarter loss, which I'll elaborate more on shortly, on a pull through adjusted basis, almost 50% were for purchase money loans notwithstanding the substantial uptick and broad refinance activity. Another clear beneficiary has been the single family rental market, which comprises over 10% of single-family housing stock and growing.

Occupancy rates now stand at over 94%, the highest they've been in over 20 years and overall rental collection rates have remained steady notwithstanding the lapse in stimulus over the summer.

Turning to our operating platforms, third quarter represented an interesting juncture in the jumbo market, one that favors the nimble and those with the wherewithal, financial and otherwise, to prudently rescale their operations.

In the quarter, our residential lock volume not accounting for potential fallout was $2.1 billion, the highest quarterly level sourced to our residential loans solid networking in five years.

This is reborn from efforts across our residential team to reengage with sellers after the severe market dislocation we saw in the spring, a process that takes time and benefits from years of relationship and trust. As of today, we've locked loans with over 80 discrete sellers since June.

This volume is notable and that the industry remains focused on what is for now, a highly profitable refinance business for government-sponsored loans.

In our view, there is potential for the market to unlock significantly increased jumbo volumes, driven by evolving consumer demand, the potential for jumbo rates to reconverge towards those for conforming borrowers and the natural ebb of the agency refinance opportunity and as Chris mentioned, with fewer players participating in the non-agency space, we see the time is right for us to deepen our foothold and gain market share.

Also was mentioning is that the strength and volume was also inclusively in Redwood Select, our traditional prime jumbo offering.

In the quarter leading up to the pandemic, our extended prime offering Redwood Choice, represent as much as 44% of lock volumes and we expect to see more momentum with our sellers and choice as the market dynamics I mentioned continue to play out.

We completed another key milestone for the residential business as Chris mentioned just this morning, closing our 108 Sequoia Securitization in the first back predominantly by loans sources since the onset of the pandemic. Execution was particularly strong, notably on the AAA rated securities, which were placed with the base of investors.

On the business purpose lending side, CoreVest continue to press it's significant market advantage. Origination activity remained robust in the third quarter, providing us with a virtuous combination of strong underwriting, coupled with higher margins.

We saw record segment contribution of $52 million through its third quarter originations and an increase in fair value of both SFR Securities and loans held in inventory at June 30. The securitization of CoreVest completed during the quarter was $293 million in size and backed largely by newly originated SFR loans.

The offer bonds were met with extremely high demand with the AAA rated charge pricing at a coupon of 1.36%. Lending credit spreads were better than the execution we achieved in our final transaction of 2019, well in advance of the spring's volatility.

Our origination pipeline for both term and bridge loans remains robust and it is powerful to observe even after years of market leadership how much more room to run the CoreVest platform possesses.

Across both large institutional sponsors and those investing in a smaller handful of geographies, substantial amounts of fresh capital continue to enter the market for single-family held for rent and while the nationwide participants grab most of the headlines, they still represent only 2% of the overall market.

Through CoreVest, we serve a distinct segment of the market made up of professional real estate investors that typically own between 50 homes and 300 homes. These borrowers make up about 15% of the overall market, which has historically been underserved by traditional balance sheet lenders.

The ultimate measure of durability of course is asset performance, which continues to be a bright spot for our BPL portfolio. 90 plus day delinquencies have picked up only slightly across the book and within our securitized portfolio stood at 2.5% at September 30 versus 1.8% at June 30.

That said, overall delinquencies in that book are lower versus the prior quarter, reflective of fewer borrowers rolling into delinquent status and others securing after missing a payment or two.

Additionally, we continue to see healthy overall repayment rates within our bridge portfolio driven by successful refinances into term products in many cases ours or disposition by the sponsor.

While the overall strength in housing is certainly a key input, the performance reflects the thoroughness of our underwriting, strength of loan structure and careful selection of product mix, which we continue to refine the response to borrower needs and market dynamics.

While the BPL space is once again competitive, particularly in certain segments of bridge lending, we feel confident that our speed to close and first mover advantage will remain a strategic mode and our CoreVest technology and data architecture have long been hallmarks of the platform's advantages and client acquisition and retention.

The culture of consistent iteration of the technology suite, particularly in the proprietary use of leading cloud-based systems to automate workflow management keeps the platforms first mover advantage fresh.

This client-centric approach keeps customers coming back as evidenced by an approximately 50% repeat borrower rate, but positions us to win even bigger as this area of the market continues to grow. Turning to our investment portfolio, fair value increased 10% as asset values generally continue their recovery.

The fair value increase was driven in part by our reperforming loan securities, most of which we were able to resecuritize during the quarter into a nonrecourse, non-marginable structure, the first of its kind for these types of loans.

Also in the portfolio, we saw an acceleration in prepayments as qualified, conforming and jumbo borrowers were quick to capitalize on historically low borrowing rates. This has the impact of deleveraging the bond's capital structure and leaving us with bigger subordinate investments.

Similar to dynamics that's described in our BPL portfolio at September 30, 90-plus day delinquencies in our Sequoia portfolio stood at 2.4%, still well below market averages, while overall delinquencies were lower quarter-on-quarter.

Investment opportunities in the secondary market remains scarce and it's limited new issue supply and a large quantum of deployable cash market wide.

We continue to see the best investment opportunities emerging from our operating businesses and as such, we anticipate allocating increased working capital to our platforms to ensure our growth trajectory is realized safely. Looking ahead, we believe we are positioned for significant growth through our market-leading brands.

Our operating platforms occupy unique position in the housing finance value chain, providing liquidity to growing segments of the US housing market not served by government program.

We're delivering customized housing credit investments to a diverse mix of investors through our best in class securitization platforms and whole loan distribution activity. We're leveraging our first mover advantage to take share while ensuring continued success through the innovative use of technology.

As we execute, we will remain discipline, focused on managing capital prudently and calibrating our risks and opportunities. And with that, I'll turn the call over to Collin, Redwood's CFO..

Thanks Dash and good afternoon, everyone.

As Chris and Dash discussed, our third quarter earnings and book value benefited from strong results at both of our operating businesses as well as further increases in the fair value of our investment portfolio including the GAAP earnings of $1.02 per share for the quarter and helping to generate a 17% economic return on book value for the quarter.

As our business continues to evolve, we are continuing to evaluate our revised core earnings metric that will be most relevant in assessing our operating performance in the future and currently expect to launch new metric for 2021.

After the payment of $0.14 dividend, which was 12% higher than our prior quarter dividend, our book value increased to $9.41 per share.

This represents a 15% increase for the quarter that was primarily driven by our strong earnings and also benefited from the repurchase of approximately three million of our outstanding shares for $22 million, which we repurchased at a 25% discount towards September 30 book value.

At September 30, we had $78 million of capacity remaining under our repurchase authorization.

Looking at some of the operating results within the business, our Residential Mortgage banking team achieved a significant increase of volume during the quarter with loan purchase commitments of $1.2 billion and gross margins of 95 basis points, generating $11 million of mortgage banking income.

At CoreVest we retained $61 million of business purpose loans, including $196 million of SFR loans and $66 million of bridge loan.

These originations in combination with our $380 million of SFR loan inventory at the end of the prior quarter, both benefitted from the very strong execution of CoreVest's September securitization that Dash discussed, hoping to generate $49 million of mortgage banking income for the quarter.

In our investment portfolio, net interest income decreased slightly as we experienced the full quarter of elevated borrowing cost from some of the new financing transactions we entered during the second quarter along with lower average balances.

We note that while these facilities came with somewhat higher borrowing costs, they do not include any diluted equity-linked features and as they pay down or get refinanced as we head into 2021, this will give us the opportunity to lower our funding cost.

During the quarter, we deployed $73 million of capital into new invests including $13 million of net deployment in detail bridge loans, $60 million of SFR securitization retained from CoreVest securitization, $28 million of multifamily securities retained from the securitization issued for multifamily joint venture and $50 of CRT and other third party investments we purchased.

The capital deployment was largely offset by pay downs of existing assets and sales during the quarter. Our investment portfolio experienced a continued recovery during the third quarter, including a 10% increase in our securities portfolio, driven in large part by recovery and the value of our PL securities.

We estimated that at September 30, approximately $168 million of $1.50 per share of the unrealized losses, we reported in the first quarter of this year, remained outstanding. Shifting to the tax side, we had taxable income of $0.07 per share in the third quarter and $0.31 per share of taxable income out of US.

Given our year-to-date net loss at the REIT, we currently expect the majority of our dividend payment in 2020 to return of capital for tax purposes.

Turning to our balance sheet, we ended the third quarter with unrestricted cash of $451 million providing ample liquidity and available capital deployment to our operating businesses and to pursue opportunistic investment for the near term.

During the third quarter, we continue to optimize our financing structure, further reducing our recourse debt and bringing our leverage down to 1.4 times at the end of the quarter. This was achieved through the completion of two new nonrecourse debt transactions, financing a portion of our bridge loans to every performing loan securities.

Additionally, we completed two new non-marginal loan warehouse facility, which brought our total capacity up to $600 million for residential loans and $1.1 billion for business purpose loans, which in aggregate was comprised of more than 85% of non-marginable facilities.

We also expect that further nonmarketable capacity for residential business in the near term. As a result of these changes in our financial structure, our $2.1 billion investment portfolio is now what we believe to be conservatively levered at just around one time with over 90% of nonmarketable borrowings.

This direct leverage is the fact we supplemented by our long-term corporate unsecured debt of $661 million. Although we de-levered our investment portfolios during the quarter, we expect our overall leverage ratio to increase going forward as we continue to build back up our residential loans inventory.

All else being equal, the stabilized residential loan inventory, we would expect our leverage to increase to the 2 to 2.5 times range. Finally, I'll note that in this quarter's review, we introduced a revised non-GAAP measure of economic net interest income for our investment portfolio.

This measure utilizes a historical cost methodology to calculate an effective yield based on estimated future cash flows that take into account discount and premium on our investment assets. This results in a more stable longer-term view that reflect our current outlook for our investment.

Given our portfolio is relatively stable for the quarter, we expect that this quarter's results will provide a good base find to build offer and as Chris mentioned, our portfolio is currently generating attractive returns in the low to mid double-digit range.

As we look forward, we expect economic net interest income growth for net capital deployment both into investments created organically through our operating businesses and through optimistic deployment into third party securities. And further we also expect to bring down our financing cost that I previously discussed.

Further our investment portfolio continues to include a significant embedded discount which provides further upsize for us. And with that, I'll conclude our prepared remarks. Operator, please open the call for Q&A..

We'll now begin the question-and-answer session. [Operator instructions] Your first question comes from Stephen Laws with Raymond James. Please go ahead..

Hi. Good afternoon and congratulations on the very nice third quarter. Chris, I want to start with really the comments in the first paragraph in the review that talked about jumbo rate versus conforming rates and seeing some lower jumbo rates potentially drive higher volumes.

Can you maybe talk to where those rates are in that spread today and what metrics you're watching to push those jumbo rates lower to drive higher origination volumes and then refinance activity on the portfolio?.

Hey Stephen, it's Dash. I can take that. Yes, jumbo rates are still lingering above conforming probably 20 bps to 25 bps or so depending on how the market is situated on any given day.

The average gross coupon of the jumbo loans that we're locking are still right around 3% and we continue to feel even at that level frankly that there is a significant in the money as a lot of borrowers that just haven’t been served yet just due to natural capacity constraints given the volume of conforming and so we do feel that there is a lot there as we said with rates that are currently situated and obviously if jumbo rates trend lower and conversion we're conforming, we do expect more and more driven out.

We are hearing from sellers that capacity constraints are starting to ease a little bit as we've gotten through near the past several months and we're starting to see loans deliver to us on the jumbo side more efficiently, which reflects better capacity with our sellers and so we remain optimistic on just the refi side as we'll continue to see over the next quarter or two that continue to pick up.

As Chris alluded to, the service level we provide with our sellers continues to be really, really important in terms of speed to fund that of course the flexibility we always provide them. So that will continue to be important..

Stephen I'll add, the AAA spreads have come in quite a bit as well. So it's been a really nice story and that will definitely help us compete effectively here going forward.

We've started to see that at the beginning of the quarter and just completing a securitization actually today we feel really good about funding costs in our pipeline and being able to price loans competitively and profitably..

Thanks for the color there and to follow-up on that, I also saw in the review, can you talk about your expectations for additional securitizations this quarter given the sizable lock to pipeline, which even after fallouts pretty strong purchase volume, but I expect you also have been really couple of forward sale agreements one in prior quarter and one in October.

Can you really talk about the decision to do that and then what the deal pipeline look like on Sequoia front?.

Yeah Stephen, we'll see in terms of between now and the end of the year, but certainly we're beginning to lay plan for the first quarter to continue to execute Sequoia.

You're right, the forward sales that we executed some of which are settled this week and which we'll continue to serve between now and the end of the year, we did capitalize on some unique opportunities there in terms of bank demand, which as you know continues to be robust just given the overall pressures on NIM with depositories broadly.

And so we were able to put on some attractive forward sales between now and the end of the year. So we'll see about Sequoia between now and December, but certainly for the first quarter, again we would expect to recommence in some shape or form..

Yeah and Stephen, you need inventory to complete the deals and so as we're selling more loans forward, actually the inventories building at a slower pace, which is a good thing.

So to us the faster we can transact, recycle capital or at least neutralize risk that's just really going to push this business to the next level and get us operating and hopefully sustainably higher volumes going forward..

And final question and I'll re-queue, but can you talk about the unrealized loss -- unrealized mark assets you hold now versus year end, kind of where does that stand today as far as what potentially could be recovered and when you think about that book value plus that number, how do you think about stock buybacks from here? I know you're buying back stock a little lower level, but stock buybacks versus putting money into new investments right now?.

Sure, so we did continue to recover some of the unrealized loss from the end of the first quarter. You probably got around a third or so that remaining, which I think as Collin articulated about $1.50 a share to retrace everything remaining back to 12/31. Through that when Stephen is always we're going to remain flexible on the stock buybacks.

So obviously we refer just the 3 million shares in the third quarter, which was about $0.03 accretive to book.

So that's always going to be on the table, but I would probably reinforce that the real priority strategically remains earmarking more operating capital to the businesses to ensure they can grow safely and of course remaining opportunistic, not only for what we see from third-party markets, but obviously remaining flexible and nimble to retain or distribute the pieces that we see set from CoreVest and from our residential business..

Stephen, I'd add -- good color commentator today, the stock still in our view is undervalued certainly with our Q3 book at $9.41. So that's definitely something we'll continue to focus on.

As Dash alluded to, we think we've got pretty good opportunities to deploy capital away from that, but we're not pleased with where the stock sits today relative to the inherent value of the book and so we'll continue to focus on that and monitor it, particularly as we go through the period of volatility that's already started with the election and certainly with the escalation in COVID cases just how the markets respond..

Your next question comes from Doug Harter with Credit Suisse. Please go ahead..

Thanks.

Can you help us think about kind of a normalized level of mortgage banking income for the BPL business and how much of this quarter's was because of the kind of the spread tightening that happened during the quarter?.

Sure Doug. So the number was certainly a little bit outsized this quarter just based on the inventory that we were carrying at $6.30.

Little more than half of the revenue was because of that, but I also think the third quarter had a unique set of circumstances in terms of the loans that we produce over the summer and we're able to securitize those with particular low benchmark rate, which was very, very helpful to us. So those are some of the elements that drove the number higher.

So on average, our margins were if you look at simply the total revenues over volume, easily a few points higher than you'd expect to see them normally for those reasons..

And can you help us kind of frame kind of for the BPL how you exited the quarter in terms of volume and where you are in terms of getting to full speed in terms of production volume?.

Yeah I would say we exited the quarter a little bit lighter in inventory than we entered it, but we've obviously had a very active October and so those balances have come back up and if the pipeline remain really robust, certainly the rate environment, which benchmarks as low as they are as accommodated, we have the arrived from some of the Sequoia side, we have the significant tailwinds from the recent execution of the CoreVest securitization in our back which is meaningful.

We continue to see significant opportunities across what I'll consider the bread-and-butter SFR loans that we originate and securitize, but also in the pockets of the bridge book, which I think the problem is really unique in executing things like built to rent, other types of portfolio of strategies for more sophisticated sponsors that we hope will ultimately stay with the platform when they get termed out..

And I'd add though we're not providing guidance this quarter, seasonally the fourth quarter has been historically a very strong quarter for the BPL business.

The borrowers unlike the residential business where things sort of slow down during holiday season, some of these are more commercial lending borrowers and actively working to get loans closed ahead of year end. So typically December is a very busy time for this business.

So as things really ramp back up, we're looking forward to as we indicated closing out the year on a high note..

Your next question comes from Bose George with KBW. Please go ahead..

I just wanted to follow-up on Doug's question just on the how to think about the operating earnings this quarter.

The $107 million of gains that's in the mortgage banking segment, is a component of that was obviously driven by valuation changes, but is there a piece of that has also operating in a sense that would've been even if spreads did not improve?.

I'll just clarify that $107 million is the full mark-to-market across our entire investment portfolio. So that's within resi, BPL and third-party. So that is the full mark-to-market.

There is some portion of that that is related to the change in fair value security that can be the amortization of premium with some small amounts that is kind of recurring and implicit in the portfolio, but the vast majority of that spread driven particularly this quarter as we discussed related to some of our investments particularly the RPL..

If you follow Bose, there is some spread tightening though particularly related to loans that were closed in the third quarter that appreciated prior to certainly securitization in both businesses. So there's always going to be a spread component to our mortgage banking results. We're fortunate this quarter it was significant tightening.

So it contributed to our mortgage banking income, but as Colin indicated, most of it certainly in the BPL side had to do with June 30 inventory..

And then just wanted to go back to the comment about the expected economic returns the low to mid teens, so should we think about the book value is where it is and the return based on the portfolio plus mortgage banking gets you the book at $9.41 that's the guess the returns whatever $1.25 to $1.50, is that kind of what you're what the numbers would suggest?.

I'll just clarify a couple of things on that. The number that Chris referenced and I also referenced in my script, were really specific to the investment portfolio.

So that's away from the operating businesses and we did update the numbers there to the low to mid double-digits as we saw an increase in the book value of the assets in our investment portfolio. The math there just causes some downward push on the yield. So the yields you referenced is what we discussed last quarter.

So we saw some appreciation in the portfolio those came down a little bit as we realize that appreciation into book value..

We've also Bose -- we've tried to call out that we have this non-agency portfolio that seems to be pretty unique at this point and I think some of our competitors have moved on sold their positions and so I think the story and the significant appreciation or recovery in our book perhaps hasn’t tracked with the industry.

I think it continues to be a good story. Certainly I think we've said we've got about a third of that unrealized loss that we took in March that hasn’t been recovered.

As far as what we'll recover going forward, that's going to be dependent upon market forces, but at this point absent another major downturn with respect to COVID or something else in the economy, we feel pretty good about the prospects of recovering more of that in the next two few quarters..

Can you also get your book value today and change that..

No significant change. We don't expect that it down, but no significant change higher..

Your next question comes from Kevin Barker with Piper Sandler. Please go ahead..

In regards to the mortgage banking outlook on the jumbo side, can you talk about some of the puts and takes you're seeing in the near-term? I know the markets are loosening and you're seeing better spreads, you're starting to see a little bit more capacity come to market, and you definitely saw much better revenue line.

Can you help us maybe size up that ramp in that as we go into early '21 just given the current market dynamics?.

Sure Dash and I can tag team, but a lot of it has to do with our sellers coming back online and actually offering jumbo products again.

There's been such a great opportunity in the agency side with the fed effectively supporting the market that the easy money has clearly been an agency and it's only been in the past few months where jumbos really started to take hold again with originators.

It's a big opportunity for us to just getting our sellers back online and as Dash said, we had 80 distinct sellers contribute over the past quarter or quarter-to-date. We've got -- we typically had 185 to 200 sellers. So we think there's a great opportunity there.

We've seen very little focus on Redwood Choice which we expect to change significantly in the coming quarters. That's a great purchase product and we're still seeing over half of our flow as purchase related. So there's things you need to Redwood that we feel confident in. We alluded to that I think on the last call. So we certainly observed it.

I think we'll continue to observe it. As far as the market goes, the convergence back towards agency mortgage rates continues to occur. We expect that to continue.

We expect that the banks will slowly refocus on jumbo and there will be some competitive forces, but really we're extremely well positioned right now as a team, as a network and I think that for those looking to build at this point, were up and running, we're going at full steam ahead and I think we're very focused on taking share and really growing the business in the next few quarters..

Do you think is volume going to drive most of the increase in mortgage banking in the jumbo side or do you feel like it's going to be more driven by spreads or the execution you get securitization?.

Right now it's both. We've got great trajectory on volumes certainly as we bring more sellers online and as I mentioned, we've got some strategies, some technology focus to take share, take wallet share, but spreads continue to tighten. There's great demand for securitized products right now.

Pricing on AAA has been very strong both on the capital side and the Sequoia side. So to the extent we continue to see demands in the POS space that really drives a lot of the industry-wide pricing. So I think in the near-term, there's certainly a strong likelihood that we'll experience both.

I'd caveat that statement with the near-term volatility that we all know is headed our way as a country over the next few weeks..

Are you seeing churn times accelerate now than anywhere in the past or do you still feel like you have room to accelerate the churn times than you typically would have?.

Just to clarify Kevin, you mean churn times on an off of our balance sheet or in terms of how we settle with our sellers?.

On and off of your balance sheet?.

Yeah, I think we continue to improve that, but there also is room to improve. As we -- the sooner we can purchase loans from sellers, the sooner we can either securitize or sell them to the ultimate end-user.

We've talked about a couple times on this call in terms of that pilot initiative which we're very excited about and it does peak to just continue to deepen the outlets and continuing frankly in some ways to try and disrupt the traditional securitization process and the lead time and of course standing on new partnerships with loan buyers that once you get to the net interest margin more quickly, we talked about the banks we're definitely seeing an increased demand for NIM and everyone is aligned to get loans to their final spot more quickly and so there's more for us to do there, but I think we've come a long way over the past year or so..

Your next question comes from Trevor Cranston with JMP Securities. Please go ahead..

Most of my questions have been asked but I was curious when you were talking about sellers coming back online with more products.

When you look at the expanded prime products, can you just share some thoughts on sort of how far away you think we are from more originators starting to work on that product and originating the expanded prime products again and you guys more formally relaunching in that space?.

Sure. Good question. We expect the product to begin ramping sooner this quarter. It's going to take some time to get back to choice becoming 40% plus of our quarterly volume, but the demand for the product exist today, the inhibitor is capacity.

So you have a limited number of loan officers, limited amount of capital and there is frankly just easier loans to underwrite, but as our reports show, there's a huge drive towards the suburbs, there's a lot of purchase activity going on in the market and choice is very much relevant in the purchase space, helping people get in the homes, getting to yes.

One body underwriting, that's all we think very much still in demand. It's just a function of focusing loan officers on a marginally more difficult underwrite -- more time-consuming underwrite..

And can you say like when you evaluate that market and where you're seeing securitizations price where you think margins would potentially be for that business just generally relative to where they were pre-COVID?.

A little trick to say at this point Trevor just because it is so nascent and I think there's a lot to discover in terms of the coupon that a choice borrowers want to take at this point and the relative coupon spread versus our select loans.

I think there is a lot more discovery from the middle of doing right now and stealing securitization apparatus back up we expect to do, but there is some price discovery there, but to Chris's point the first step is engaging on the product.

And as he said, the view from the ground continues to indicate incrementally more and more direct LO engagement on non-agency broadly and choice and specific because there is a borrower need. There is no question about that.

It is a capacity issue as Chris said but if you talk to our business development team, they will tell you that the LO engagement continues to increase every day for the products that we're focused on including choice, which is obviously where we need to start..

[Operator instructions] We have no further questions at this time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..