Redwood Trust Inc

NYSE:RWT

Earnings Call Analysis

Company's Soaring Mortgage and Loan Activities

In a robust third quarter, the company's mortgage locks reached $1.6 billion, nearly tripling the previous quarter's production, with depositories representing 40% of this volume. Reflecting an expanding seller base, the share of jumbo production climbed to approximately 4%, with residential purchase volume up over 340%. CoreVest, the company's lending platform, also saw growth with $411 million funded, a slight uptick from before, and over $350 million distributed in various transactions. Despite slight increases in delinquency rates, which stand at 4% for bridge and term loans, proactive management strategies with borrowers are in place to mitigate impact. The company also launched Aspire, a platform to scale its Home Equity Investment offerings, showcasing continued support for housing accessibility. This performance has coincided with the lowest delinquency rates in three years within its reperforming loan portfolio, prompting strategic capital reallocation for greater long-term shareholder value. However, Earnings Available for Distribution decreased slightly to $11 million, influenced by lower net interest income from bridge loans, with recovery expected in upcoming quarters.

Market Adjustments and Book Value

The company experienced a 5% decrease in GAAP book value for the third quarter, primarily due to mark-to-market adjustments connected to the quick rise in 10-year treasury rates. Post-quarter estimates indicate an additional 2% decline in GAAP book value.

Banks' Role in the Jumbo Loan Market and Mortgage Banking Expansion

Banks currently have over $1.4 trillion of jumbo loans on their balance sheets. The company anticipates that about half of the jumbo origination market could shift to a sell model, potentially representing $100 billion to $150 billion in annual volume. This market evolution is already reflected in the company's third-quarter mortgage banking results, which will likely inform banks' strategies in mortgage financing going forward.

Significant Growth in Residential Mortgage Banking

In the third quarter, mortgage lock-ins surged to $1.6 billion, nearly triple the volume of the second quarter, with 40% originating from depository institutions. The company has partnered with over 185 active sellers, including large regional banks, which positions it for considerable growth despite higher interest rates. The credit quality of the lock pipeline was notably strong, featuring an average credit score (FICO) of 772, loan-to-value (LTV) ratio of 72%, and debt-to-income (DTI) ratio of 33%. Capital allocation to residential mortgage banking almost doubled, and the company expects to increase it further leading into 2024. Moreover, the company's estimated share of jumbo production rose significantly to about 4%, signaling both expansion and deeper market penetration.

Positive Trends in Loan Distribution and Securitization

The company completed residential purchase volume totaling $815 million in the third quarter, marking a 340% increase from the preceding quarter. Distribution channels remain viable, as evidenced by the sale of $391 million in loans through securitizations and dispositions, and the continuation of this strategy into the fourth quarter with over $1 billion in residential securitization activity for 2023. The company maintains a firm position in distributing jumbo loans and has diversified its investment initiatives to manage the ongoing shifts in mortgage funding markets effectively.

CoreVest Performance and Business-Purpose Lending Opportunities

CoreVest, the company's business-purpose lending platform, recorded $411 million in loan fundings, slightly up from the previous quarter. The demand for bridge loans, particularly those for build-for-rent projects, has increased, indicating a safer risk profile. Challenges remain due to the selective nature of capital sources in multifamily origination and the impact of higher short-term interest rates on sponsors. The company has been proactive in managing potential sponsor stress and sees a future in partnerships that could leverage bank pipelines for mutually beneficial outcomes.

Introducing Aspire: A Home Equity Investment Platform

To adapt to the constraints in consumers' access to home equity due to high mortgage rates, the company unveiled the Aspire platform, which facilitates home equity investments (HEIs) without additional monthly payments for homeowners. Aspire aims to scale and institutionally reinforce the HEI sector by capitalizing on the company's substantial mortgage lender network.

Robust Underlying Credit Performance Amid Rate Increases

The company's investment portfolio showcased a resilient credit performance despite significant negative impacts from rapidly rising 10-year treasury rates on fair values. Delinquencies across reperforming loans and the Sequoia portfolio were either at their lowest in years or remained stable. The third quarter provided an opportunity to reallocate capital to more accretive long-term investments, particularly those in areas responding to shifts in mortgage funding markets.

Financial Results Indicate Earnings Recovery and Efficiency Gains

Earnings available for distribution (EAD) was reported at $11 million or $0.09 per share, down from $16 million or $0.14 in the previous quarter, representing a 4.3% return on common equity. The reduction in EAD resulted mainly from lower net interest income due to bridge loans, but recovery is anticipated in the fourth quarter. Higher mortgage banking revenues partially counteracted this decrease, with mortgage banking businesses exhibiting an 11% after-tax return. Notably, general and administrative expenses were reduced, aligning with the company's strategy for profitable growth. However, GAAP net income was negative $31 million, indicating challenges but also potential areas for recovery and growth.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good afternoon, and welcome to the Redwood Trust, Inc. Third Quarter 2023 Financial Results Conference Call. Today's conference is being recorded.I will now turn the call over to Kaitlyn Mauritz, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

[Kaitlyn Mauritz, executive]

Thank you, operator. Hello, everyone, and thank you for joining us today for our third quarter 2023 earnings conference call. With me on today's call are Chris Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, 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 third quarter Redwood Review, which is available on our website, redwoodtrust.com.Also note that the content of today's conference call contain 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.

[Christopher Abate, executive]

Thanks, Kate, and welcome, everyone to Redwood's third quarter earnings call. There's no question that our markets are in a state of transition, impacted by the final throes of a hyper-aggressive Fed policy, ongoing geopolitical strife and proposed regulatory rule changes that will usher in a new era of housing finance.In the third quarter, the gravitational pull of an inverted yield curve continued to take its toll on the mortgage sector, particularly on the market values of fixed rate portfolio investments. Redwood's GAAP book value was down 5% for the third quarter, largely on mark-to-market adjustments directly attributable to the rapid rise in the 10-year treasury that took place in the final month of the quarter. Since quarter-end, we estimate our GAAP book value to be down approximately 2%. For those in our sector who have already reported their third quarter results, GAAP book values have been down 8% on average. Trying to make sense of this market and see through the fog of 8% mortgage rates is difficult for any of us, especially given the prospect of an extended period of higher for longer benchmark rates as the economy continues to outpace expectations.With housing affordability at the lowest levels we've seen since the 1970s and transaction activity at multi-year lows, many market participants have simply retreated to the sidelines. In fact, as we head towards year-end, we've already started to see the same diminution of market activity that we observed a year ago. That's why it's so important for us to keep our shareholders apprised of the transformational changes that we expect to become prominent in the coming months. Our perspective is informed by 30 years of cycles and market turns and learnings from things we've got wrong or missed in order to best position our company for the future. And to summarize our view, we expect a major secular shift in our mortgage-related assets will be owned and financed in the years ahead, particularly in the non-agency mortgage space, we have long stood as a critical provider of liquidity. In fact, we believe the option value of our franchise has never been higher than it is today.To contextualize our thinking, we expect a convergence in how both agency and non-agency mortgage markets function with a large percentage of non-agency loans getting distributed to match-funded private credit institutions, largely in securitized form and away from bank balance sheets. In the agency mortgage market, Fannie Mae and Freddie Mac were created for this purpose to provide liquidity to banks and other lenders by aggregating and securitizing the residential loans for distribution to bond investors. In the non-agency mortgage space, similar intermediaries must emerge to provide that liquidity, and reminiscent of Redwood's founding thesis, there is no one better positioned than us to do so. We are a natural non-competing partner to our loan sellers, allowing them to preserve their customer relationships, while maintaining liquidity in an otherwise illiquid market.As we previously mentioned, our near-term production will remain risk minded, given the challenging market backdrop. We will not be scaling volume at any cost. Instead, we'll be focused on growing wallet share with large banks, many of whom have not needed a capital partner since the great financial crisis ended. The aftermath of that crisis, we would remind shareholders, was the last time that regulatory rules significantly changed for the mortgage sector. In this sense, we're neither predicting nor in need of a major boost in industry-wide transaction volumes to achieve our near-term objectives. Instead, we're focused on further solidifying relationships and providing much needed liquidity to our new and existing partners with the goal of realizing transformative and durable market share gains, as the yield curve normalizes.As you may recall, our second quarter earnings call in July took place just hours after the Federal Reserve released newly proposed risk-based capital rules for the US banking system. Our thesis at the time was that while the final rules would likely evolve, bank management teams have looked to comply with the spirit of the rules well in advance of their passage. Three months later, our thinking has thus far been validated, and our progress has been well-timed with the emergence of fresh demand for our products from new sources of capital complementary to our traditional distribution channels. As Dash will outline in his remarks, results on leading indicators we are tracking are pointing green, with a response from regional and other banks that has exceeded our expectations.Without the safety net of zero cost on limited deposit capital, the asset-liability mismatch that owning mortgages [ proposals ] for banks is inherently risky. We realize the large banks face a high degree of uncertainty and are naturally pushing back against the proposed risk capital rule changes. Our response will be to help our partners approach these changes constructively. We believe it's possible for banks to preserve lending footprints, including for first-time homebuyers, with the right capital partner.Our team has honed a degree of operational excellence in the non-agency mortgage market over decades, allowing us to support our bank partners with more than just a rate sheet. Many banks have understandably not had to flex their loan sale muscles in many years, creating uncertainty. Our ability to swiftly onboard and educate our lending partners provides incredible value to banks, as they work to pivot from net buyers and portfolio lenders to net sellers on a forward flow basis.Besides the long-term opportunity, we estimate that banks have over $1.4 trillion of jumbo loans held on their balance sheets today before considering ongoing production. We further estimate that around 50% of the jumbo origination market, a number of which could represent $100 billion to $150 billion or more of annual volume, could pivot to an originate-to-sell model. Leading indicators suggest that the shift is now underway. We believe our third quarter mortgage banking results are indicative of how banks and other financial institutions will look to finance their mortgage production going forward.Given the changes we foresee for our markets, we have begun thinking more holistically about the Redwood platform and believe that evolving our capital structure and procuring long-term private capital partnerships must be a top priority. As I have emphasized, we continue to observe the transition occurring with the roles of banks, private credit institutions and specialty finance companies such as Redwood rapidly evolving. In particular, regulatory crosscurrents are redefining the most efficient holders of real estate-related assets, as well as those who will finance and service them.As evidenced by the joint venture that we announced this past summer, the value proposition of platforms like ours offer institutional credit investors has grown dramatically over the past few years with investors seeking out the assets we create. These investors include the likes of pension funds, life insurance companies, sovereign wealth funds and other nonpublics who have accretive capital but lack the origination or sourcing capabilities that we offer. They also possess patient capital, a key advantage when holding less liquid non-agency investments such as ours.In keeping with these trends, our long-term strategic focus will be to further position our mortgage banking franchises to meet this unprecedented market opportunity with ample working capital and access to a deep set of products. Our investment strategy will naturally evolve [ in times ] with continued focus on deployment of our organically-created assets to third-party capital partners in lieu of traditional direct investing. This includes a strong internal focus on the next frontier of non-agency investing, which is credit risk transfers on bank portfolios, where significant risk capital can be freed up at a relatively low cost. We expect progress on these efforts and partnerships to continue to play out in the coming quarters and look forward to keeping our shareholders current as we proceed.I'll now turn the call over to Dash.

[Dashiell Robinson, executive]

Thank you, Chris. I will now cover details of our operating platforms and investment portfolio during the third quarter before turning it over to Brooke to discuss our overall financial performance. As Chris highlighted in his opening remarks, proposed changes to the bank regulatory capital regime, while far from final, are turning into the tailwinds we expected for our residential mortgage banking business, in many cases, ahead of schedule. While we believe we are still in the early innings of this sizable market shift, it is clear that business models are evolving quickly with important ramifications for how 30-year mortgage risk is funded and hedged. As always, our team has been [ a ready and able ] partner.Third quarter locks were $1.6 billion, close to triple second quarter production, with approximately 40% of this volume coming from depositories. Since March, our residential team has engaged with depositories from coast to coast, onboarding new partnerships and bringing our total count of active seller relationships to 185 and growing. This group now includes over 70 banks, including some of the nation's largest regional and large financial institutions, many with assets over $200 billion and extensive mortgage origination footprints. Several of these institutions have just commenced lock activity with us in recent weeks, implying an attractive runway for growth, notwithstanding persistently higher rates. In fact, our lock pipeline in Q3 carried some of the strongest credit characteristics we've seen in recent years, 772 FICO, 72% LTV and 33% debt-to-income ratio.In keeping with the momentum we see for the business, we nearly doubled our capital allocation to residential mortgage banking in the third quarter and expect that allocation to grow further heading into 2024. Our estimated share of overall jumbo production in the third quarter approached 4%, well above our historical 2% to 3% range and up from just 1% in the previous quarter, reflective of both a growing seller base and deeper penetration with existing partners. Residential purchase volume in the third quarter was $815 million, up over 340% from the second quarter. Bank sellers accounted for 50% of total quarterly purchase activity, up from just 10% in the second quarter and a de minimis amount in Q1. Of note, total bulk activity, over 90% of which was from banks, was a key driver of third quarter purchase volume, much of its seasoned loans acquired at a significant discount to par. Notwithstanding the persistent rise in rates, we continue to evaluate bulk pools coming to market, more evidence of the scarcity of shelf space for many banks seeking to balance pressures on capital, liquidity and net interest margin.Distribution channels for jumbo remain open, and we sold $391 million of loans in the third quarter through a combination of securitization and whole loan dispositions. The team followed up quickly in the fourth quarter by closing our fourth Sequoia securitization of the year just last week, bringing our total residential securitization activity for 2023 to over $1 billion. Both deals were distributed to a broad base of buyers, including several new insurance and money manager investors and were executed within our target gain on sale range. Our most recent print was achieved amidst the 10-year treasury yield moving within close to a 50 basis point range in just over a week, an important statement about the power of our platform and the depth of capital that remains under invested in the space.The same regulatory changes driving strategic progress in our residential business are also an opportunity for CoreVest, our business-purpose lending platform. The same regulatory changes driving strategic progress in our residential business are also an opportunity for CoreVest, our business purpose lending platform. Borrowers who have historically sought funding from banks now frequent our pipeline discussions. And while the overall credit environment calls for continued caution and selectivity, demand from capital partners remains strong for well-underwritten BPL loans to quality sponsors. We've been in dialog with several banks on partnership opportunities that would allow us to access their existing pipelines with an eye toward mutually beneficial outcomes. With the lifecycle lending platform that offers both bridge and stabilized term financing, we are well positioned to capture incremental market share that we believe will continue shifting to private lenders.CoreVest funded $411 million of loans in the third quarter, a slight increase from the second quarter with a 10% increase in bridge volume being offset by a decline in term production. Within bridge, our build-for-rent aggregation product has seen increased demand from borrowers and carries a favorable risk profile, given the turnkey nature of the homes being financed. In keeping with broader market trends, multifamily origination remains light as sources of capital become more selective, especially for value-add projects. And while we expect volumes for our fixed-rate term loans to remain influenced by benchmark rates, our bridge portfolio remains fertile ground for refinances into term loans as borrowers progress with projects.As with residential, our distribution efforts within business-purpose lending remain a key differentiator. We distributed over $350 million of BPL loans in the third quarter, including a highly-accretive private securitization with a quality institutional partner, 2 bulk whole loan sales and initial contribution of bridge loans to our recently-established joint venture with Oaktree. As Chris highlighted in his comments, given the elevated demand for and attractiveness of our assets, we see opportunities to further diversify these distribution and partnership structures.The BPL sector overall continues to manage through macro crosswinds that have impacted sponsor sentiment and reduced transaction volumes across the industry. As we highlighted on our last earnings call, we remain focused on the impact that higher short-term interest rates have on sponsors, notwithstanding overall strength in leasing trends. In anticipation of this impacts, our team has continued to work with borrowers well in advance of their loan maturities to assess project plans and ensure they manage towards successful completions.While 90-plus day delinquencies across the bridge and term books declined slightly in the third quarter to 4%, we continue to manage through pockets of stress, particularly in our bridge portfolio, where some combination of rate modifications and fresh equity from new or existing sponsorship have eased the burden of rapidly rising rates across a small handful of sponsor relationships. Engagement with borrowers has been productive, particularly when it occurs in anticipation of the need to reassess the project, and we believe that these efforts provide ample runway for sponsors to complete their work, while strengthening our position as lender.High mortgage rates also continue to impact consumers' ability to access equity in their homes, underscoring the importance of secondary financing products that fit the current environment. We were pleased last month to formally launch Aspire, our home equity investment, or HEI, origination platform. As a quick reminder, HEI are products that allow homeowners to monetize some of their home's equity without an additional monthly payment burden in exchange for sharing in a portion of the change in the home's price going forward. This launch comes after years of investing in and financing HEI and was a natural next step in the progression of our support for this nascent but growing sector. With our track record of supporting housing accessibility, as well as our sizable connectivity with mortgage lenders, we believe we have a unique opportunity to help scale and institutionalize HEI in a way that will benefit consumers. Aspire allows us to do so directly, in part by leveraging our nationwide correspondent network of loan officers, a significant advantage over more traditional high-cost marketing campaigns.Turning to our investment portfolio, while the rapid rise in 10-year treasury rates during the final month of the quarter significantly impacted fair values, we continue to see strong underlying credit performance. Our reperforming loan portfolio saw the lowest 90-plus day delinquencies in almost 3 years, and delinquencies in our Sequoia book remained flat quarter-over-quarter at below 1%. These credit tailwinds created a window during the third quarter to optimize segments of the portfolio in support of our long-term thesis and strategy. In that vein, we were able to free up over $30 million of capital net of financing for deployment in areas we believe to be more accretive to long-term shareholder returns, most notably in opportunities presented by continued shifts in mortgage funding markets overall and other areas where we can invest alongside strategic capital partners.I will now turn the call over to Brooke to cover our financial results.

[Brooke Carillo, executive]

Thank you, Dash. We reported earnings available for distribution, or EAD, of $11 million or $0.09 per basic common share, as compared to $16 million or $0.14 per share in the second quarter, resulting in an EAD return on common equity of 4.3%. The decrease in EAD was primarily due to lower net interest income from bridge loans in our investment portfolio, inclusive of a higher balance of loans entering non-accrual status in the third quarter. We anticipate significant recovery of the associated interests going forward and expect net interest income to trend higher beginning in the fourth quarter. The decrease in net interest income was partially offset by higher mortgage banking revenues on the quarter, which increased over 20% versus Q2. Adjusted for acquisition-related intangibles, our combined mortgage banking businesses generated an 11% after-tax return on the quarter.Income from residential mortgage banking activities increased $2 million on the strength of higher volume, attractive execution on our securitization activity and overall market risk management. We were well hedged against [ basis ] exposure on our growing pipeline throughout the quarter and benefited from a steepening of the yield curve. As a result, margins were 80 basis points, which is in line with our target gain on sale. Income from business-purpose mortgage banking activities increased by $1 million, driven largely by the accretive term loan securitization financing that Dash described.G&A expenses decreased by $1 million from the second quarter as our operating businesses were able to demonstrate efficiencies on higher volume. Both residential and business-purpose mortgage banking saw a decrease in cost per loan, declining to levels that we believe support profitable growth going forward. G&A also declined in part due to lower expenses associated with performance-based long-term incentive compensation.GAAP net income related to common stockholders was negative $31 million or negative $0.29 per diluted share, compared to $1 million or $0.00 in the second quarter. Negative earnings per share drove book value to $8.77 compared to $9.26 in the second quarter, reflecting a total economic return of negative 3.6% for the third quarter. GAAP earnings for the quarter reflected the impact of the sharp increase in rates later in the quarter on our reperforming loan securities, despite the continued positive trends in [ fundamental ] performance that has been mentioned. Fair value changes were impacted by certain non-performing loans and loan modifications that Dash referenced and also by spread widening within the BPL bridge portfolio. The negative fair value changes were partially offset by fair value increases for HEI assets, as well as servicing assets, which benefited from an increase in rates.Our unrestricted cash and cash equivalents as of September 30 were $204 million, as we repaid the remainder of our convertible debt securities that matured in August. Consequently, recourse leverage was 2.3 turns for the quarter, only 1 turn of which was against the investment portfolio. Over the last 12 months, we raised multiples of the cash needed to repay our 2023 converts, and the vast majority of proceeds were raised organically through the optimization within our investment portfolio, given the relatively low amount of secured financing leverage we carry there. We have approximately $300 million of unencumbered assets that remain a continued potential source of capital, which can serve both to fuel growth of our mortgage banking businesses or continue to repurchase corporate debt across our term structure. Through the fourth quarter, we have begun to repurchase our 2024 convertible maturity, and we'll continue to evolve our capital structure over the longer term to balance our corporate debt ratios with more permanent forms of equity capital to drive accretive growth.We continue to see strong demand from counterparties to finance our assets. We successfully renewed 2 maturing loan warehouse financing facilities with $1 billion of capacity with key counterparties during the quarter. Overall, at September 30, we had excess capacity of $2.2 billion, which we are likely to further increase to support the continued growth of our BPL and residential businesses.In the third quarter, we sold $49 million of securities that were largely nonstrategic above their second quarter values, recognizing fair value gains of $2 million. While these sales reinforce market appetite for our collateral, we retained roughly $390 million of embedded net discount, or $3.26 per share that we carry forward into future quarters. We were able to redeploy this capital into the growing opportunity across our operating platforms, where we're seeing attractive target returns of 15% to [ 25% ]. As a result, residential mortgage banking capital grew to $150 million from $80 million in the second quarter. Given the efficiency of our distribution efforts, we believe that our near-term volume targets could be supported by roughly $200 million of capital. Given the work we've done in both residential and business purpose mortgage banking, we forecast our operating businesses are positioned for profitability and continued growth.And with that, operator, we will now open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan.

[Richard Shane, analyst]

I'd like to talk a little bit about the origination environment. Obviously, it is skewing pretty significantly towards purchase, not a surprise. Underlying that, we're also seeing a skew towards new home purchase because of the lack of availability of inventory. I'm curious if you're seeing any disruption or dislocation associated with homebuilders providing subsidized financing in order to drive volume in this environment.

[Christopher Abate, executive]

Rick, it's Chris. I don't think so. The housing market has been surprisingly stable in recent months. And I think that in our markets -- we actually did have a small amount, 20% or so, of recent locks have been [ refied ]. Some of that has to do with bulk pools that we purchased. But by and large, it is a purchase market. I think the fact that active listings are half of what they typically are historically has a big part to do with a stable housing market. And the rate concessions from the homebuilders have not, at least from our perspective, impacted our book or what we're seeing.

[Richard Shane, analyst]

Got it. And Chris, with that in mind, obviously, the big opportunity -- and you guys have been clear about the impact of Basel III and the opportunity that creates. Does it make sense to also partner with the homebuilders? I don't know -- and again, for as long as I've known you guys, it's not anything I've ever thought about or asked about, but do they make -- do the homebuilders make sense as channel partners as well?

[Dashiell Robinson, executive]

They certainly could, Rick. And this is Dash. In the history of the jumbo business, we have done some of that. We do have sellers that have smaller homebuilding ventures that we have actually done business with in the past. The other opportunity that comes out of what you're articulating is with BPL. I referenced it in the prepared remarks briefly. But we are still seeing a lot of homebuilders, either pivot to -- from for-sale to for-rent strategies themselves or move that inventory to other clients of ours who are looking for financing. So we are starting to see more of that. It's a product that's gotten more and more interest here as the homeowners are looking to continue to diversify and address some of the -- just the overall financing challenges that you're referencing. We really like that risk because, as you know, in that case, the construction is done. We don't finance those until certificate of occupancy is in hand. So that's actually been a reasonable part of the BPL pipeline here in the past quarter. So that's definitely another opportunity off the back of some of the trends you're articulating.

[Operator]

Our next question comes from Bose George with KBW.

[Bose George, analyst]

I wanted to ask how does resi lock volume? How did that look in October? And if this move-up in interest rates persists, how do you think that could impact volumes -- industry jumbo volumes in 2024 versus this year?

[Dashiell Robinson, executive]

Good question, Bose. I think the pace of play in October has been pretty consistent with the latter part of Q3. So we've been pleased with the daily lock flow. I think that's -- notwithstanding higher rates. I think, again, that's driven by the fact that our bench of sellers is deepening, number one; and number two, we're adding wallet share here with the folks that we already -- had already been penetrated with over the past few quarters. Certainly, rates continuing to trend up, will continue to impact the size of the overall pie. I think we've been really pleased, frankly, with the credit quality of the loans we've been locking. As I mentioned in the prepared remarks, some of the best credit profiles we've seen in quite a while at rates that are at or touching 8% from a [indiscernible] perspective at this point. So we'll see how it evolves, but I think we've been pleased with the recent trends, and October is on pace with the latter part of Q3.

[Christopher Abate, executive]

Yes, Bose, I'd add just another way of expressing that. The jumbo borrowers, certainly what we've seen from an underwriting standpoint, they were well qualified with a [ 3% 10-year ], and they're well qualified with a [ 46 10-year ]. So I don't think we've seen much in the way of slower volumes, especially for purchase activity, but we'll have to wait and see how things ride out.

[Bose George, analyst]

Okay. Great. That's helpful. And then, can you talk a little bit about the bulk purchase opportunity? Do you think this could end up being fairly meaningful? How do the economics compare with your regular flow business?

[Dashiell Robinson, executive]

We continue to be optimistic about those continuing to come out, Bose. I think we're a particularly strong bid for bulk for a few reasons. Number one, just our operational history with more and more of these sellers just being around the hoop on a flow basis, we think positions us well to be a helpful partner to those sellers when it's time to explore a bulk sale. As we talked about, those types of loans [indiscernible] discount have pared particularly well in some of our recent Sequoia securitizations. So I think we naturally have a pretty strong bid for those types of loans to complement our on-the-run production. So it's definitely a big opportunity. I think certainly, obviously, with the evolving capital rules, that will be a big deal. If we see a little bit of a rally in rates from here, that could unlock more, frankly, as dollar prices trend up a little bit, particularly for those that may not be hedging their positions on more seasoned loans. So it definitely moves the needle. And frankly, we think as the banks in general start to get their head around the rules and, frankly, they get more [ advanced ] with us on the flow side, that will make the bulk opportunities, hopefully, come with even more speed than they have over the past quarter or so.

[Operator]

Our next question comes from the line of Don Fandetti with Wells Fargo.

[Donald Fandetti, analyst]

Can you talk about your credit outlook for the BPL investment portfolio? Delinquencies improved a little bit this quarter, but I guess you're doing some modifications. And are borrowers having a lot of success in terms of going from variable to fixed? Is that kind of working out well?

[Dashiell Robinson, executive]

Yes. Good question. I can take that. I think at the -- starting at the high level, I think a lot of the trends we're seeing this quarter are consistent with the ones we've been speaking to the past quarter or 2. I think in general, business plans are going fine. We are seeing pockets of stress with sponsors, some of whom have been able to bring additional capital to the table to rebalance. And other situations, frankly, Don, where it's been the right project but the wrong sponsor, and we've had to bring in outside equity. And I think we've been pleased with the speed with which we've done that. Just to give you a sense for the speed of resolution, in terms of the 90-plus book at the end of June, we worked through over half of those loans at this point either explicitly or in contract and expect to be -- have the rest of that book resolved by the end of the year. In terms of our REO position, our REOs at [ 930 ], over 90% of those are either sold or in contracts. So I think we've been pleased with the speed of resolution.In terms of your question, floating to fixed, yes, that's obviously a priority for most borrowers in the market to see if they can get to the right level of stabilization to take out a traditional fixed rate term loan. The recutting of deals we did in the quarter were largely floating to fixed, where we still were able to maintain accrual rates 9% or so. So definitely still healthy average accrual rates there. So in general, like the support levels and the tailwinds for rents are still there. And we've been pleased with our ability to, in general, move on from situations where we don't have the right sponsors in the projects and/or bring in fresh equity from sponsors that we felt were still viable to continue. So asset management remains a big focus for us, notwithstanding the fact that we're still very constructive on rents. We do expect this work to continue in the coming quarters, just given the overall environment. I think it helps us, Don. We are generally focused in markets where we have a pretty deep [indiscernible]. And if a sponsor doesn't work out, we can bring in someone else. We've had very good success with that over the last quarter or 2 and would expect some of that to continue going forward.

[Operator]

Our next question comes from the line of Stephen Laws with Raymond James.

[Stephen Laws, analyst]

First, I wanted to start with the jumbo side. Clearly, a big opportunity. And Chris, appreciate your comments in the beginning about being able to gain market share. When you think internally and when you're -- when you guys model out internally and looking 3 to 4 years out, how much market share do you think you can have? What type of volume is that? You mentioned some things in the comments that you think maybe third-party capital helping funding a lot of the securities retained, similar to what the JV has on the BPL side. So can you talk about maybe what your 3 to 5 year vision of how the jumbo business plays out?

[Christopher Abate, executive]

Sure. Well, you know, this will be somewhat riddled with assumptions, but we are -- we do think that some form of these capital rules will go into effect. I think, most of our bank partners think that as well. Our strategy, which is a little nuanced, is basically helping banks preserve and/or grow market share. So we don't necessarily think that bank share needs to be ceded to the independents per se, although we have great business relationships there as well. But to the extent we can work as a capital partner with large banks, we think there is a lot of wallet share there, as Dash mentioned, that's basically been locked up since the great financial crisis. These loans have gone into portfolio. They have not come out to markets, and we talk about market share. It really hasn't been an opportunity for a while. And so, that piece of the business is what excites us the most currently. And to the extent that we can unlock some of that and a good percentage moves from originate to distribute, we look at years like 2021, for instance, and we sort of peg those as launch points to what the platform is capable of doing. We're still in a single-digits range as far as market share goes. We've got a lot of upward mobility. We will need capital partners. We're focused on JVs. We're focused in -- thankfully, we've got a lot of interest. So we want to scale the right way. That's why we made the comment that we're not going to chase volume in this environment, especially as rates are -- continue to be very, very stubborn. But we do think this -- unlocking this volume is a key aspect of our strategy, and that's why we keep talking about it and that's why we're so focused on a facet of the jumbo market that really hasn't been accessible in a number of years.

[Stephen Laws, analyst]

Appreciate the comments there. Definitely, it seems like a real opportunity ahead of you here, working with the banks. To follow up on the BPL side, I think from answer to Don's question, it sounds like you can sort of work through 90-day delinquencies in about 6 months. It seems like REOs are processed fairly quickly. Can you talk about that REO resolution process? Is there a capital infusion there? Or do you sell as is? How do you think about losses there or potentially gains on liquidations? How quickly that can take place?

[Dashiell Robinson, executive]

Sure. In general, what we try and do, obviously, is avoid getting to REO at all. That's -- I think it's reflected in the relatively low percentage that gets there. But I think where we've had the most success, frankly, is having a plan going in. It's being able to have sponsors lined up that we know are going to have interest in the properties, and once we take it back, we'll sell it as quickly as possible. Depending on the particular project, selling it as is, is most efficient. We've been able to do that with a number of these, where they just -- where we had cash buyers and just moved on, in many cases, getting out flat to up a bit depending on the situation. I think with some of the other projects, it's helpful, frankly, to have a sponsor also lined up where we potentially provide some financing as well, bringing a new sponsor who is buying at a level that makes sense and provide some financing, and then that loan goes back on our book with fresh capital and fresh operations, which is helpful. So it clearly depends, Stephen, on the outcome. But it's always trying to get as far ahead of the situation as possible to be able to have buyers lined up and get those properties in the right hands as quickly as possible.

[Christopher Abate, executive]

Hey, Stephen, it's Chris. I'd also add, just from an accounting perspective, most of our peer set uses some form of cost accounting, certainly for BPL loans, commercial loans, non-QM loans, and we continue to use fair value. And so, what -- the impact there is, as rates are going up and the credit environment is getting tougher, I think what we're pushing through the P&L encompasses potentially more than just the credit component. We've got the rate component. We've got the average life component. So it's not necessarily an apples-to-apples comparison. And we'll try to do a better job of -- as these mods go through of what's actually recoverable because there's a fair amount that is, especially as Dash mentioned, you get fresh sponsor capital or new sponsors in place. These are good projects, and it's been a tough rate environment. But I think to the extent we can work on these, there's quite a bit of potential upside if we're successful.

[Stephen Laws, analyst]

Great. I appreciate you highlighting that. And lastly, if I can squeeze one more in, it looks like a couple of securitizations deals since quarter-end. Can you talk about market reception, kind of what kind of gains or margins you saw on that? And a lot of rate volatility here we've seen recently as you guys noted in your remarks.

[Dashiell Robinson, executive]

Yes. The big one was our fourth Sequoia of the year, which we just closed about a week ago. We got really strong receptivity to that. I would say from a margin perspective, it's supportive of margins that are probably consistent with where we landed in Q3 overall. The fact that the curve has uninverted significantly has certainly been helpful. We've been able to place bonds to real variety of investors. We have a lot of insurance companies and money managers in those books, which we've been pleased with, so definitely supportive of staying within the range of our long-term margins, which has been helpful. Part of it also, Steve, we've been selling higher and higher pass-through coupons and have been getting good receptivity. So, on this last Sequoia deal, we sold 6% AAA bonds, which priced at a very slight discount to par just -- obviously, on a hedge adjusted basis, it was higher than that. And we're able to create bond profiles from a convexity perspective that are getting a lot of people in books. We had a few first-time buyers as well. We're exploring the right coupon slots for upcoming deals. It's possible we'll sell 6.5% before the end of the year, where we see decent liquidity. And we're able to manufacture some really nice profiles with obviously very good carry and more limited extension risk just based on where the dollar prices are. So we've been pleased with that. Notwithstanding the volatility, the execution for Sequoia has remained really strong.

[Operator]

Our next question comes from the line of Kevin Barker with Piper Sandler.

[Kevin Barker, analyst]

On the BPL portfolio, it's good to see that the 90-day delinquencies come down. It looks like we've seen a few loans transition to REO. Maybe could you maybe provide a little bit more depth on how that portfolio is performing? Is it possible to maybe categorize some of that portfolio as either like a watch list or classified, and how that's developed over the last few quarters?

[Dashiell Robinson, executive]

Sure. I think we measure -- we obviously have a bunch of different metrics in terms of managing the book. Maybe I'll stop short of quantifying the specific buckets, Kevin. But I think we look at a few different key metrics. Obviously, payment velocity and delinquency is the one that we talk the most about on these calls and publicly. But the other big thing we look at is just overall, number one, just where the projects are on schedule. So we spend a lot of time focusing on that and making sure that these sponsors are getting up and down as quickly, or if not and need more time, what that means, number one, for potential extensions and obviously, fresh equity because, obviously, if projects take longer, ultimately, interest expense will go up through time because of a longer duration loan.Just to give you some context on extensions, like give or take over the past 6 months or so, we have extended probably 25% to 30% of the book on average. Those extensions range from -- anywhere from 3 to 6 months. And generally, we have not had to extend the second time. We've had sponsors generally get in and out in those time frames. That's an expected part of the bridge business. Frankly, it always has been, even before market conditions have gotten harder. I think we've done a really good job, a much better job, frankly, over the past 18 to 24 months, getting ahead of some of these issues, being out in front of situations where we're talking to sponsors 3 to 6 months before their maturity. And we may access a maturity date well in advance of that actual date. And from our perspective, actually, we think that's healthy because at those points in time, that's the right -- that's the right point in time to be able to get fresh equity in, understand if the interest rate that therein is right and just really understanding how much more time they need. So I think, Kevin, the biggest thing is time, right? It's just understanding if these sponsors need more time to get these projects done, and I think the modifications of the extensions are sort of a good [indiscernible], I would say.

[Kevin Barker, analyst]

So, in regards to that market, are you seeing an increasing amount of competition, a decreasing amount of competition, and are you seeing your ability to either increased price on new originations? Maybe just a general view on the competitive dynamic within the BPL book.

[Dashiell Robinson, executive]

I think it's pretty dislocated still, Kevin. I think on any given loan, we still will compete with a handful of other lenders who will be aggressive. I think there -- on balance, though, there are lot of shops that have retrenched significantly or completely, frankly. And 1 cohort there, obviously, is the banks. As I mentioned, we are starting to see a lot of loans, whether it's smaller multifamily or build-for-rent, all day would have been the stomping ground of the banks, where those loans are coming our way. So that's definitely a tailwind. But as you know, there's a lot of private lenders in this space, and there's a fair amount of private capital as well. So, I think on any given moment, like I said, the competition can be deep. But in general, I think the competitive landscape is probably as good as it's been in the past few quarters, given our overall position, our ability to stand up these capital partnerships and just there are fewer folks able to lend constructively than there were 3 or 4 quarters ago.

[Kevin Barker, analyst]

Would you categorize this -- the returns on capital within that business as expanding significantly relative to where it was 6 to 12 months ago on any new business that you're underwriting?

[Dashiell Robinson, executive]

I think it's mixed. I think on -- if we consider BPL mortgage banking, where we are originating and securitizing our term loans, I think those gain-on-sales are pretty static from where they were a few quarters ago. We're certainly pleased with it. I think that business's ROE, I think, is generally consistent. I think on the overall bridge side, I think, yes, in certain pockets. We have seen some tightening bias on loans, just in general, because frankly, there are not as many good loans to do as there were a few quarters ago, right? And so, the good sponsors, for the lower leverage, which obviously is where lenders are focusing, there can be some pricing pressure there. So I think there has been some expansion on ROEs in the bridge space. And I think BPL mortgage banking is probably overall consistent with where it's been.

[Operator]

Our next question comes from Steve Delaney with JMP Securities.

[Steven Delaney, analyst]

Some good discussions this afternoon. Chris, I think it was you that mentioned something in the context of some expanding relationships. I believe you mentioned a CRT product, something new that was evolving. Could you elaborate on that a little bit, please? Didn't get that [indiscernible] that it was you?

[Christopher Abate, executive]

It probably was. On CRT, I think, we've been focused with banks on their back books, certainly. And as we've signed up banks, I think we have 50 or more recently approved with a big pipeline behind that. We're getting better access, better visibility to portfolio challenges that they may have, and so we've introduced some structures that we think are pretty straightforward. And obviously, the Fed recently issued some guidelines, and I think there is -- to me, the market feels like it's more accepting of some of these structures than perhaps a few years ago. And so, we're definitely open for business there. It is a big capital expenditure, and that's where I mentioned, we are focused on partnerships. So, our business, our franchise is having access to these opportunities and we're excited to partner with other businesses to fund them, to fully fund them. But I think the arbitrage, if you will, on lowering risk capital through CRT is very real. And as the rule changes, going effect, I think, more and more banks, in particular, will look to CRT, potentially via credit-linked notes to be a solution. Again, that doesn't allow them or doesn't require them to sell the asset, sell the loans and record a big P&L charge. Otherwise, they're good loans, right? So they're good loans. They're paying loans. So keeping them on the books and reducing the risk capital is probably the right way to go.

[Steven Delaney, analyst]

Yes. So maybe cost -- a little more cost to carry, a little hit to net interest income, but not a big capital hit for selling the assets off of the discount. We've been highlighting to clients the attractiveness in Redwood goes far beyond 70% -- whatever it is, 75% of book value price to book, and we're just using an overused term, but we're saying, just think about the strategic value. I think you went up this with your -- the option value of the franchise never higher. So with your permission, I might throw that strategic option value out their forms, see if anybody gets hooked on that one.

[Christopher Abate, executive]

Well, you've never needed our permission. So I'd -- I encourage you to use your judgment. But it is -- we are trying to sift through the noise of rates. It's hard on a quarter-to-quarter basis to see some of these opportunities. We just want to make sure that our shareholders do because things are turning behind the scenes. And the engagement we've had from all market participants, especially banks, has been -- we haven't seen this in probably the better part of 2 decades. So, it's something that we're very focused on, and we do think that as the market stabilizes, you'll start to see more and more activity. And again, I think what you've heard from most people, most that have filed, is that we're looking for stability in rates. I think even at these higher for longer levels, I think if there's stability, you'll start to see more and more housing activity. So that's -- that piece needs to come together for the market and for us. We still have to take our lumps with fair value hits on portfolio assets that frankly are performing very well. But it is -- things are things are definitely evolving in the markets and keeping us busy.

[Steven Delaney, analyst]

All right. We'll look forward to 2024 and beyond.

[Operator]

Our next question comes from Eric Hagen with BTIG.

[Eric Hagen, analyst]

Maybe just a couple more on the jumbo. Was there a mark-to-market impact from interest rates for the jumbo loans that are held for investment? And how did that contribute to performance? How sensitive would you even say that that portfolio could be even further backups in the interest rates from here? And then, if you guys wanted to add capital to the jumbo business, like where do you think you'd source that incremental capital? From like which bucket would you maybe take it from and how much liquidity do you think you consume when you really start to scale up the jumbo pipeline?

[Brooke Carillo, executive]

I can start, Eric, and Dash, feel free to chime in. The margins that we referenced on the quarter and mortgage banking income were all inclusive of any fair value changes on the loan pipeline. But in my prepared remarks, I mentioned we were hedge with TBAs this quarter, which was a significant tailwind for us in terms of how that book performed over the course of the quarter. And so, our interest rate risk management was really notable on the quarter in the right way.In terms of additional capital to fund that business, that is one of the asset classes that really is squarely underscoring the remarks that Chris and Dash made around private capital interest in our platform. The private market is certainly paying a premium for the quality of collateral that we're buying today and sourcing. That's reflected in the execution of our securitization, but also in breadth of discussions that we're having around folks interested in partnering with us on aggregating jumbo today. In addition, I would say just, regular way bank warehouse demand continues to be really strong for that kind of collateral and the advance rates that we're seeing are reflective of that today too.

[Operator]

Our next question comes from the line of Kyle Joseph with Jefferies.

[Kyle Joseph, analyst]

On the -- you mentioned NII would recover in the fourth quarter. What's the specific driver of that?

[Brooke Carillo, executive]

Yes. So, the main item that drove the decline in net interest income on the quarter was really a onetime reversal of prior quarter interest, and that was on our non-accrual loans. I would note that our -- what we call our non-accrual loans is a broader list of just our 90-day bucket and really doesn't have anything to do with our view on recoverability. It's been fairly formulaic to date, and so we've -- a lot of that $6 million decline that was from a prior quarter reversal really in our view remains recoverable today. And so, as we look out to Q4, we really expect that NII would more roughly approximately what we saw in Q2.

[Kyle Joseph, analyst]

Got it. And I think -- sorry, go ahead.

[Brooke Carillo, executive]

Sorry, one other thing. I would just note that a lot of what we talked about in our prepared remarks is really strategically rotating capital from the third-party investment portfolio and your operating businesses. And so you'll continue to see a shift from us in terms of income generated from NII relative to non-interest income, and that was apparent on the quarter. Our mortgage banking businesses saw non-interest income up almost $3.5 million. So, that will be a shift that will continue to play out as well.

[Kyle Joseph, analyst]

Got it. And then, just 1 follow-up for me on the Aspire product. Is that purely equity? Are there any second lien in there? And how do you foresee that flowing through the P&L and impacting margins?

[Brooke Carillo, executive]

Yes. To date, that is only the true equity products that we've been talking about. We're focused on closed-in seconds as well. And other home equity products that just generally speak to what we view as a massive opportunity in the home equity space today. But that -- those all flow through investment fair value changes like our other options that we have on balance sheet today from some of the other third-party originators.

[Operator]

Thank you. As there are no further questions, that concludes the conference of Redwood Trust, Inc. Thank you for your participation. You may now disconnect your lines.