Redwood Trust Inc

NYSE:RWT

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, greetings, and welcome to the Redwood Trust Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kaitlyn Mauritz, Head of Investor Relations. Please go ahead.

[Kaitlyn Mauritz, executive]

Thank you, operator. Hello, everyone, and thank you for joining us today for Redwood's Third Quarter 2024 Earnings Conference Call. With me on today's call are Christopher Abate, Chief Executive Officer; Dashiell 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 include risks and uncertainties that cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provide 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 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 are provided in our third quarter review, which is available on our website, redwoodtrust.com. Also note that the contents of today's call contain time-sensitive information that are only accurate as of today. 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. And with that, I'll turn the call over to Chris.

[Christopher Abate, executive]

Thanks, Kate. As we work towards the end of a productive year, we find ourselves at the dawn of a new rate regime and a too close to call presidential election, which is now less than a week away. Many macro questions remain, particularly with respect to the speed and impact of monetary and fiscal policy shifts. What we do know is that the U.S. will have a new administration and a fresh take on improving access to quality housing, a challenge we have undertaken since Redwood's founding 3 decades ago. Each major party candidate has acknowledged the need for more scalable solutions with proposals that include enhanced down payment assistance programs, incentives for increased construction, and easing of the maze of local regulations that blend housing development. In an otherwise polarized environment, it seems many have found common cause for an issue that is central to our company's core mission.



As we rise to meet this formidable challenge, our platform continues to make good operating progress. We recently increased our common dividend for the first time since 2021, up over 6% to $0.17 per share for the third quarter, reflecting continued growth in our operating activities. Our combined mortgage banking returns were the highest in over 3 years as each business unlocked operating leverage to achieve strong results. These were goals we outlined at our Investor Day earlier this year, and we're pleased with the progress we've made towards them. We continue to spend a significant amount of time collaborating with our loan sellers, particularly as higher mortgage rates appear to be returning after a short-lived reprieve. Rates today sit nearly 70 basis points higher than their September lows, and are effectively back to levels we saw in early July. 



In anticipation of this pickup, we've leveraged momentum in our distribution channels, the sellers securitized approximately $1.5 billion of jumbo collateral in October alone, an amount equal to our distribution for the entire third quarter. These efforts have contributed to us maintaining a flat book value per our estimation since quarter end. Though we expect to see continued rate volatility through the election with expectations for further Fed easing on the horizon, we still expect to see housing activity pick up in the coming quarters from the anemic levels we have witnessed over the past few years. With that in mind and with the prospect of a new administration in Washington, we continue to believe our platform's value proposition to the market will only grow, particularly as more regions of the country turn to the non-agency sector for creative solutions. 



The industry demands positive disruption as it continues to grapple with an estimated undersupply of 3 million to 4 million homes. In many corners of the market, there also remains a significant knowledge gap between prospective homeowners and the non-agency housing finance solutions available to them. That's why much of our focus heading into 2025 will be on mission expanding strategies that are designed to leverage areas of high potential growth, common sense use cases for prospective homeowners and a strong nexus between technology and consumer adoption. As you may have seen in an earlier press release today, we have added senior leadership to support and drive this focus area. As always, this work will be coupled with expanded access to private credit investors, an area that now represents a deep competitive strength. I'll now turn the call over to Dash.

[Dashiell Robinson, executive]

Thank you, Chris. Mortgage banking performance was a key driver of our strong third quarter performance with GAAP contribution from these businesses tripling versus the second quarter on strong margins and continued broadening of our distribution channels. Our residential consumer platform remains a valued partner to both banks and independent mortgage bankers or IMBs, with third quarter results benefiting from tightening securitization execution, accretive hedging and continued progress in capital efficiency. The third quarter brought some notable shifts in the composition of our lock volumes, reflective of both market conditions and strategic progress with our origination partners. We locked $2.2 billion of loans during Q3 compared to $2.7 billion in the second quarter, essentially flat when adjusting for the large pool of seasoned hybrid ARMs we discussed on our second quarter call. 



After a slow July marked by heightened market volatility that predated the significant rate rally later in the quarter, August and September volumes rebounded. In spite of the rate backup since quarter end, we are finishing up an equally active October, helped in part by a revamped set of guidelines on new production hybrid ARMs, which has been met with favorable early feedback across our seller base. Third quarter volume was split evenly between bulk and flow with IMB volume accounting for close to 60% of total production. Our loan sourcing remains well-diversified across a deep seller base. And year-to-date, we have locked loans with over 160 discrete originators with no one seller representing more than 7% of total flow volume. Interest rates moved significantly throughout the third quarter, including a rally in the 10-year treasury yield to just under 3.6% that opened up a brief window for consumers seeking to refinance, a dynamic we haven't seen in meaningful size since early 2022. 



Refinance activity represented 27% of our overall flow volume during the third quarter, more than double our recent run rate. With rates now almost 70 basis points higher than prior to September's FOMC announcement, refinance demand has ebbed, but the volume increase is evidence that homeowners and originators are prepared to transact once a more durable reprieve eventually emerges. The level of activity also serves as a good reminder that 10% of outstanding mortgages are 100 basis points or less out of the money, a potential boon to market activity into a traditional seasonal slowdown in the fourth quarter. We completed 3 Sequoia securitizations during the third quarter for $1.5 billion, maintaining a reliable monthly cadence that promotes strong execution levels, a measure of contrast with other market participants that issue more episodically. But our issuance pace also has an important impact on our capital efficiency, particularly critical amidst what until recently has been a persistently inverted yield curve. 



Average days on balance sheet has decreased approximately 40% since 2023 to just under 40 days, freeing up capital for accretive alternative use, including hedging activities that drove significant outperformance during the third quarter. As Chris referenced, this momentum has continued into October. Our residential investor business built on its progress from the second quarter, sustaining overall production volume and executing on key distribution channels. We funded $458 million of investor loans during the third quarter, highlighted by another record quarter of single asset bridge or SAB originations and growth in bridge lines of credit, which offer borrowers ongoing funding capacity on a cross-collateralized basis. Term loan volumes in the quarter were impacted by sponsors taking a wait-and-see approach to the September Fed decision. With that now behind us, we've maintained a robust term loan funnel through a combination of new borrowers and opportunities within our existing portfolio. 



Of note, 75% of second quarter term loan volume was either a purchase transaction or a refinance from outside our book, reflecting the strength of our lead generation and the potential growth impact of organic refinance activity. During the third quarter, we also made critical strides in running the residential investor business in a capital-efficient manner. Q3 was our first full quarter of operations with the CPP Investments joint venture, a partnership that allows us to capitalize more fully on a broadening set of products. Through October, we have contributed nearly $650 million of loans to our JVs, volume we expect to steadily ramp in conjunction with other emerging distribution outlets. Chief among these is whole loan sales. And already in the fourth quarter, we have agreed to sell a $200 million-plus pool of term loans to an institutional investor on the follow from our successful settlement of a $240 million term loan pool earlier this year. Taken together, this strategic progress in distribution gives the business differentiated alternatives to securitization while also reinforcing our positioning within the private capital ecosystem.



The market's largest asset allocators are increasingly looking to Redwood for scalable investment partnerships. Through time, this will have important benefits for shareholders, including a growing and durable revenue stream and the ability to serve even more facets of the market. Within the residential investor portfolio, overall repayment velocity increased by 19% from the second quarter with close to $380 million of total payoffs, including over $225 million in the bridge book. Delinquencies increased approximately 1% from the second quarter as resolutions were offset by a small number of loans entering delinquent status. While the process of resolving certain of these loans often isn't a straight line, successful execution will free up valuable capital for redeployment. Through the work of our asset management team, we have visibility on resolving close to half of the delinquent bridge portfolio by the end of the year or early in Q1 2025 at anticipated loss severities favourable to the net discount at which the overall bridge portfolio is currently marked.



Credit quality within our broader investment portfolio has remained strong. Performance of our jumbo and seasoned reperforming loan securities continue to exceed expectations, supported by high levels of equity in the underlying loans. As Brooke will describe in more detail, our portfolio maintains a meaningful discount to par that we have begun to unlock through accretive secured financings, and that represents a potentially meaningful tailwind for shareholders with continued strong credit performance and a durable change in the rate cycle. And with that, I will turn the call over to Brooke to discuss our financial performance during the third quarter.

[Brooke Carillo, executive]

Thank you, Dash. We reported GAAP earnings of $13 million or $0.09 per share for the third quarter compared to $14 million or $0.10 per share in the prior quarter. Our earnings available for distribution or EAD, reached $25 million or $0.18 per share for the third quarter, up from $19 million or $0.13 per share in the prior quarter. This resulted in an EAD return on equity of 8.7%. As highlighted, income from mortgage banking activities increased by $21 million, driving the nearly 40% increase in EAD. Book value per share increased slightly to $8.74, up from $8.73 as of June 30. Year-to-date, our total economic return is approaching 7%, positioning us to potentially exceed our dividend yield on book value annually, a testament to our ability to grow dividends and book value.



Our residential consumer mortgage banking segment achieved a return on capital of 30%, up from 16% in Q2, while the residential investor segment EAD return on capital was 58% compared to 13% last quarter. The segment's return was driven both by higher earnings and lower working capital as Q3 marks the first full quarter with CPP investments partnership. Higher residential consumer mortgage banking income was a result of lower rates, strategic positioning for interest rate volatility and spread tightening on our securitizations throughout the quarter. We anticipate that these elevated margins will normalize to our historical range of 75 to 100 basis points, particularly as longer-dated interest rates have reverted higher in the quarter. During Q3, we optimized the use of high advance rate facilities and partnerships with banks and distributed $242 million of loans into our JV entities to reduce overall capital needs per loan by approximately 15%.



In the residential investor segment, income was modestly higher due to stable volume and slightly higher bridge and other fees. Margins remained relatively consistent as accretive whole loan sales and sales to joint ventures bolstered results. Net interest income this quarter was positively impacted by increased capital allocation to our Sequoia and third-party investment portfolios. As Dash noted, the smaller residential investor portfolio, coupled with a 50-basis point reduction in the weighted average accrual rate of the portfolio resulted in lower net interest income from bridge loans relative to the second quarter. Within the investment portfolio, while our credit securities benefited from steady fundamental performance and generally tighter spreads, those gains were more than offset as our interest rate hedges lost value into the rate rally and we took incremental reserves on bridge loans. At September 30, we had $2.09 of net discount in our securities portfolio. Approximately, 40% of this net discount was created during the Fed's tightening cycle between 2022 and 2023 and could unlock as interest rates begin to fall.



We control the call rights on 97% of these assets and could unlock further value by calling this collateral and securitizing the loans at a premium. General and administrative or G&A expenses were $3 million higher in the quarter. While fixed costs declined another consecutive quarter, performance-based variable and equity compensation costs rose sequentially, reflecting improved earnings performance. Cost metrics for both the residential and consumer and investor platforms remain within or below previously guided ranges, underscoring our progress towards long-term efficiency goals. Prudent balance sheet management has enabled us to capitalize on timely investments, particularly through more efficient financing facilities. This quarter, we closed 2 non-marginable financing deals secured by Capital and Sequoia Securities. We also secured or renewed $1.7 billion in financing capacity with key partners, supporting the growth of our operating platforms.



During the third quarter, we repaid our 2024 convertible debt with cash on hand. And early in the fourth quarter, we took advantage of market conditions to reopen $40 million of our 775 convertible notes due 2027, mainly to retire our 2025 convertible notes. This extends our convertible debt maturity profile. Our outstanding convertible debt balance is now $364 million, and our recent financing actions extended nearly 80% of our term financing maturities to 2027 and beyond. Total recourse leverage increased to 2.5x in Q3 from 2.1x in Q2, mainly due to the increase in residential loan inventory, offset by converting $121 million of recourse debt on Sequoia securities to nonrecourse longer-term debt. Subsequent to quarter end, we distributed $1.5 billion of collateral on the residential consumer side, which has brought leverage down, and leverage should remain within a range of 2 to 2.5x depending on the inventory of our loans on balance sheet.



With $7.7 billion in total financing capacity, including $4.8 billion undrawn, we are well-positioned to support the growth of our platforms. Our capital deployment remained strong in Q3 with $157 million invested, a high point for the year, which we believe should drive incremental net interest income for the fourth quarter. Despite elevated capital deployment and the debt repayment, our cash position held relatively steady, ending the quarter at $254 million. Looking ahead, we remain committed to enhancing our operating platforms and deploying capital strategically to drive earnings growth. And now I'll turn the call over to the operator for Q&A.

[Operator]

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

[Richard Shane, analyst]

I'm interested in Slide 10, and it's obviously important, the net discount on the portfolio. You make the observation here that of the $2.09 of discount, $0.84 or about 40% has occurred since the Fed started tightening. And implicitly, that's a call on spreads. I am curious because I think that there are potentially different factors underlying the portfolio. And I'm curious, when you think about that, how much of this is attributable to -- and I'm going to call it the capital securities. Is there more credit risk there given what we're seeing in that business? And is that statement sort of factoring in the potential higher credit risk with that portfolio?

[Dashiell Robinson, executive]

Rick, it's Dash. Great question. I can take that. I would say higher level, the discount is spread across a couple of principal asset classes, as you noted. The majority of it is still in the reperforming loan portfolio, where performance continues to be extremely strong. Those are consumers that have been in their houses for 15-plus years at this point. Estimated mark-to-market LTVs in the 40s have been prepaying in a very, very stable fashion. So, I think it's a different kind of credit risk than the capital securities, which is obviously newer vintage loans. Average seasoning is probably three to four years in that portfolio. There is a lot of built-up rental growth in our securities because we've been selling a lot more term loans recently. That portfolio has more seasoning to it than if we were securitizing on the run more regularly. So, I think the risks are of a different type. Within the capital securities book, the other thing I would say is if you look at some of the realized severities we've had, they've generally been below 100 basis points where there have been severity. So, the realized losses have been really low. But you're right, I mean, those loans are exposed to different dynamics in the market than RPL loans. So, you're right to point that out, but I think the risks are just somewhat different in nature.

[Christopher Abate, executive]

This is Chris. I'd also add to that, just not to lose the punch line, we do have this big investment portfolio, which is carried at a pretty significant discount. And I think the vast majority of that is recoverable. You mentioned that a huge portion of that has been due to spread widening since the Fed started tightening in late '22. So now that we're sort of at the dawn of an easing cycle, we're pretty excited about how that's positioned. I think for the mortgage banking businesses, we're different to the path of rates, which we can certainly talk about. But for the book, we certainly stand to benefit if some of that is recovered through tightening here, which of course, we'd expect to start realizing over the course of the coming quarters.

[Richard Shane, analyst]

For sure. Look, I think the mortgage banking business and the return year-to-date -- the ROE on EAD or however you want to describe it, is good proof of concept. I'm just thinking about how we could see those discounts sort of evolve over time as well, because obviously, that's a big driver of another significant allocation of your capital.

[Operator]

The next question comes from the line of Bose George from KBW.

[Bose George, analyst]

In terms of the mortgage banking gains this quarter, is it possible to disaggregate that to some degree just in terms of the benefits you got from spread tightening? Just really trying to think about the cadence of the EAD growth from current levels?

[Brooke Carillo, executive]

Sure, Bose. I'm happy to do that. Since where a lot of the kind of alpha relative in margins relative to last quarter was centered around the residential consumer business, I'll start there. Roughly half of the total mortgage banking revenue was really driven by rates. And then it was fairly divided evenly between spread tightening. We saw about 12 ticks of spread tightening on securitization execution on average throughout the quarter, and the remainder was really gain on sale and carry.

[Bose George, analyst]

And then in terms of the lock volume, can you talk about lock volume in September? And you noted that the sort of the cadence there was increasing over the course of the quarter. Can you just talk about the monthly trends in lock volume on the residential?

[Christopher Abate, executive]

Sure. On the consumer side, we ended the quarter with much higher sort of daily locks than we had seen where we started the quarter. I think there were some seasonal factors that came into play. And then certainly, the rate cut in September. I would say the fourth quarter has started out much more briskly than the third quarter did. So, October, we're off to a great start. We did have in Q2, a big bulk deal that accounted for much of the difference in lock volume quarter-over-quarter. So, backing that out and just kind of focusing on the run, we definitely like where things are tracking. And then obviously, the margin story was very good this past quarter. We continue to guide to the 75 to 100 basis points consumer business. But I would say we've been in the market each month with the securitization. We've been turning the capital over very efficiently. We've seen some real differentiation in pricing and execution versus some of the less episodic or more episodic issuers. So, I think all of that's playing into the margins that we're realizing on the pipe. And hopefully, we're off to a good start in October. Hopefully, we can continue to do that.

[Operator]

The next question comes from the line of Jason Weaver from JonesTrading.

[Jason Weaver, analyst]

Seeing in the deck the leverage picking up about 0.5 turn. I'm thinking that's more to do with a point in time as you've distributed so much in Q4. Can you give us some insight as to what that is currently? And also, how comfortable you are with the higher level of liquidity here?

[Brooke Carillo, executive]

Yes, Jason, I'm happy to take that. You're exactly right. Dash and others mentioned the $1.5 billion of distributions. We've been very encouraged by seeing a pickup in the whole loan sale activity on the residential consumer side. And we've done a lot of securitizations. So, we really cleared the decks ahead of the election and potential further increase in volatility. Leverage has trended back down to start the quarter. It's probably close to where we were at Q2 around 2.2x. That should really fluctuate throughout the rest of the quarter depending on pace of distributions versus our pipeline coming on balance sheet.

[Christopher Abate, executive]

Yes. We're pretty pleased with our leverage, our recourse leverage being a 2-handle or thereabouts, 2.5, 2 to 3. We operate with, I think, meaningfully lower leverage than much of the sector. And Brooke and the team have done a great job of adding more nonrecourse facilities, non-mark-to-market facilities. So, quality of leverage, if you will, is quite a bit different than it's been in the past.

[Jason Weaver, analyst]

Got it. And then just something I believe that Chris mentioned in his prepared remarks talking about the breadth of your seller partnerships from banks. Any sort of significant developments that have happened during the quarter or quarter-to-date expanding that number of partnerships?

[Christopher Abate, executive]

Well, it continues to expand. We've done business with, I think, 80%, 90% of our sellers this year. So, the breadth is really, really strong. We're not overly concentrated to any individual seller, whether it's a bank or an IMB. I think banks are still trying to figure out the path of capital charges with Basel III. But we continue to add banks and we continue to build that business. So, with this backup in rates, I think it just reinforces the value proposition that we offer, particularly in the 30-year. We started to see more hybrid ARMs being originated. That's something that we're apt to participate in. And so, we've been rolling out those products. But I think overall, really pleased with the diversification of the seller base. And certainly, we continue to make traction with the banks. And I think for many of them, we're an exclusive partner.

[Operator]

The next question comes from the line of Doug Harter from UBS.

[Douglas Harter, analyst]

Looking at the investment portfolio, it seems like HEI income was down pretty noticeably quarter-over-quarter. I was hoping you could give us a little more insight into that and how to think about that going forward?

[Brooke Carillo, executive]

Yes, happy to. On our portfolio, about $400 million, you should expect kind of baseline accretion or yield around $9 million as long as empirical HPA that we observed kind of falls in line with our assumptions. We saw both actual HPA come in above where we were modeling it. That was a stronger factor in the first half of the year where HEI income was elevated relative to our expectations. And so, while it was still above kind of modeled expectations for Q3, we expect it to revert as HPA assumptions have been coming down. That and discount rates are really the main drivers of that portfolio.

[Douglas Harter, analyst]

And I guess just more broadly on that, delivered a 12% return on equity or return on capital this quarter. You've been kind of targeting returns well north of that for quite some time. How should we think about what the segment can result and try to square those two numbers?

[Christopher Abate, executive]

Well, with respect to HEI, I think as Brooke said, a big part of it is the path of home prices and discount rates. So, I think in the long run, we're very bullish on HPA. Obviously, housing activity has been very slow. So there hasn't been any near-term catalysts to move that one way or the other. The huge undersupply of homes is just a great technical support, we think, for that asset class. But over time, it's going to come down to efficient financing and ultimately, the path of home prices. So, well, 12 is double digits and is fine. We still think there's real upside to unlock in that portfolio. And then certainly, as we focus on potentially originating more of those pricing, price discovery will be a big part of that.

[Operator]

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

[Donald Fandetti, analyst]

Yes. Can you talk a bit about how the rate move? Higher rates in Q4 has impacted book value and any EAD considerations for Q4? I guess, gain on sale margins will be more normalized? Anything else to consider?

[Christopher Abate, executive]

Yes. I think I mentioned in my remarks that book value was flat. We think that's pretty consequential, because as rates have backed up, I think many would assume that either the pipes down or certainly the sector has been impacted, but we're really pleased with how we've hedged the pipeline and how we've managed distribution. So, for us, it's not been a headwind per se. And in fact, as I mentioned before, the banks, as things have backed up, become more engaged versus wanting to put more 30-year fixed rate mortgages on their balance sheets. So, we think EAD, certainly, we had some onetime items. In Q3, margins were very elevated. We continue to guide to normalized margins, particularly for the consumer business. That said, we're pretty happy with how the quarter has begun, how October certainly has begun from a volume standpoint. So, we're optimistic that there's enough levers to continue the momentum that we've been able to generate.

[Dashiell Robinson, executive]

Sorry, the one thing I would just add to that in terms of EAD and the hedging is, Brooke and Chris both referenced this earlier in the Q&A and in the remarks, where we've sort of pivoted from a hedging strategy perspective has had an impact on carry, but also on the contingent and risk capital we have to hold against our hedging instruments. So, it's a use of capital, but it's accretive to NII, and also accretive to the amount of risk capital we have to hold just based on how those instruments are marginable or not. So as Chris said, that strategy has paid some dividends here, particularly early in the fourth quarter as rates have backed up, and they were also a meaningful driver of mortgage banking income in the third quarter.

[Operator]

The next question comes from the line of Eric Hagen from BTIG.

[Kaitlyn Mauritz, executive]

Eric are you there? Operator, we can go to the next question. Operator? Please hold so we connect with the operator.

[Operator]

Kristen your line is unmuted.

[Bradley Capuzzi, analyst]

This is Bradley Capuzzi on for Kristen. Can you just speak on your current thoughts on the dividend? Obviously, your operating earnings covered the dividend this quarter. But wanted to get your thoughts if you and the Board believe you're at the right level now at $0.17 when you look at rate outlook? And what do you need to see to continue covering the dividend with EAD?

[Christopher Abate, executive]

Yes. So, we can certainly dig into specifics if that's helpful. But I think at a high level, we were pleased to raise it this quarter. And I would say, we believe that most shareholders continue to value the dividend and particularly a growing dividend as does the Board. So, we'll continue to look for ways to raise it incrementally as the quarters progress. I think we were certainly tracking to ahead of schedule on EAD this quarter. We probably cite the guidance that we gave at our Investor Day in March as far as the path to growing the dividend. So, we're very happy that we got there a little bit ahead of schedule. But I think from a sustainability perspective, we want to continue to tether to that guidance and continue to build over the coming quarters. But certainly, I think the Board was pleased to raise it and we'll continue to value an increasing dividend as the quarters progress.

[Brooke Carillo, executive]

One other thing I'd add is just that heading into a more accommodative rate cycle. We've been really focused on earnings available for distribution. But Rick very nicely pointed out the discount inherent in our book. We really should have an opportunity for our GAAP earnings to meet and exceed our earnings available for distribution over the next cycle as we pull forward a lot of the discount from the investment portfolio even as we progress through time and recover some of what we have lost from technical spread and rate volatility over the last 2 years. And really the impact of SOFR on the front-end for us, we have about $1 billion more floating rate debt and assets. And with our fixed rate residential pipeline, we could see somewhat of an immediate pickup to NIM there.



We've done a lot in terms of capital deployment on the year that should continue to provide a tailwind to both net interest income and earnings available for distribution. And then mortgage banking, as we keep rescaling those businesses, that should be a longer-term benefit to both GAAP earnings and earnings available for distribution as we move through this next cycle. So those are all longer-term tailwinds that we're seeing, that gave the Board comfort in raising it soon and should provide additional room for growth in the dividend as we move through time.

[Bradley Capuzzi, analyst]

And then Chris, in your prepared remarks, you mentioned the election. I was just wondering if you could expand on election implications for Redwood. We see rate moves, potential volatility, housing implications. I was just curious on how you are thinking about it and positioning the company both over the near and intermediate-term on potential impacts on Redwood?

[Christopher Abate, executive]

Sure. Well, I actually think this cycle is pretty unique in that you have strong alignment between both major party candidates in the critical need to address home accessibility. So, it's literally the mission of this firm. And so, in past cycles, we've probably been rooting for one side or the other as far as how it helps or hurts the business. I think this time around both candidates or both parties will be focused on this issue because it's a very big issue in the swing states. We spent a lot of time in the Midwest and other places. And home prices are just very high, and it's very tough first-time homebuyers or certainly others to access housing. So, I think whether it's on the supply side or the demand side, we'll see programs implemented that we think will leverage our business and our products, particularly in the non-agency space. As far as rates, for many reasons, we are planning for the long end of the curve to stay elevated, if not go higher.



Big reason why we've been focusing on expanding our distribution and certainly our seller base is for wallet share, if you will. And with the banks, in particular, if rates stay elevated, we think they'll be less apt to resume portfolio lending. So that's a huge opportunity for us and why, in many ways, higher rates, higher mortgage rates could actually be a good thing for our mortgage banking businesses. But ultimately, we think that the volatility associated or that we've seen recently is mostly due to maybe the Fed getting ahead of itself. We've had some really strong good GDP print today. Strong employment numbers. I think the volatility has as much to do with that as it does an election outcome. So those are things that we've been managing in the past few years, and we'll continue to manage. But ultimately, I'm quite excited by the prospect of being a solution provider as the candidates focus on housing accessibility.

[Operator]

The next question is from the line of Steve Delaney from JMP Securities.

[Steven Delaney, analyst]

Obviously, everyone's a lot of comments on rate moves. Dash, I'd like to go to the real rate, not so much just following the 10-year, but could you comment on where your 30-year fixed rate prime jumbo loan coupons, where are you quoting those today to your IMBs and to the banks compared to where the low was, I guess, late summer or maybe in September? Just like what does it cost? What are your customers paying, your borrowers paying as we sit here today on prime jumbo?

[Dashiell Robinson, executive]

Sure. You want me to quote the Steve Delaney rate or more generic rate sheet?

[Steven Delaney, analyst]

No. I don't deserve a good guy rate probably, but just a straight up, no good guy discount.

[Dashiell Robinson, executive]

No, I appreciate the question. Currently, obviously, we have LLPAs and things of that nature depending on the nature of the risk in the loan. But generically, at the moment, our 30-year fixed rate is sort of very high 6s, very low 7s. That's where it sits today. That's probably 5.8 to 0.75 point in rate over the lows that we hit over the summer. And just a couple of observations around that, Steve, because as you know, a lot of this is borrower psychology, notwithstanding that the 30-year fixed rate is prepayable at any time. There is a psychology element to when. Number one, consumers will come off the sideline for a rate, but also the relative in the moneyness which it would take them to move and where that rate is versus where their current mortgages and what can get housing turnover rates finally higher. We definitely, I think the whole market saw some really interesting empirical evidence as we got into the low 6s. Not only did refinance pick up, as we talked about, it was over 1/4 of our flow volume in the third quarter, it's been at least 6 quarters since refi volume was that much of our production. But we also saw purchase money pick up as well. And so, you definitely started to see the benefit. But as Chris articulated, October has been on par, so to speak, from a volume perspective with August and September. And I think that speaks to more of the wallet share piece and us continuing to gain share in the market. So just some additional perspective there.

[Steven Delaney, analyst]

That's very helpful. And Kate, a quick question for you. Chris mentioned something about senior leadership. I didn't see anything in the press release. I haven't been all the way through. Where can we find that in your disclosures in your information?

[Kaitlyn Mauritz, executive]

Steve, the press release is up on our website under the News section. I can send it to you as well.

[Steven Delaney, analyst]

It's a separate stand-alone press release. I apologize. I wasn't looking at my newsfeed.

[Operator]

The next question is from the line of Brian Violino from Wedbush Securities.

[Brian Violino, analyst]

I think there was a mention of a 50 basis point reduction in the accrual rate on the bridge portfolio this quarter, which had a negative NII impact. But at the same time, it sounds like you're expecting some incremental NII growth in the fourth quarter from capital deployment. I was just wondering if you could give some more detail on your outlook related to overall NII in the fourth quarter and just going forward in general?

[Brooke Carillo, executive]

Sure. I'm happy to. The $157 million of capital deployment that we put to work should more than offset what we saw in terms of some modifications we made to rates with borrowers on the quarter. So, in that regard, we expect some catalyst for growth to NII from here. We also mentioned -- Dash mentioned that we are expecting to resolve or aiming to resolve about half of our focused asset portfolio by the end of the first quarter, which should provide a material pickup in earnings available for distribution and capital available for redeployment.

[Operator]

The next question comes from the line of Eric Hagen from BTIG.

[Eric Hagen, analyst]

I wanted to follow up on the HPA discussion. What are your expectations for the loan limit increases from the GSEs that we should get here in about a month? Do you think that will create any new opportunities in areas where home prices have grown faster than the national average?

[Christopher Abate, executive]

Eric, those are largely already priced in. A lot of the originators are -- it's basically a math formula, so modestly higher, not nearly as big of a jump as we've seen in recent years. Certainly, there's opportunities. We've been very competitive on agency high balance as well as nonowner-occupied for some time now. So, to the extent some markets become more attractive, our guys will definitely be running the numbers and make sure that we're pricing for that. But I think overall, it's not quite as big of a story as it's been in past years. To me, the bigger story is back to some of the mission stuff. ADUs in California are 1 in 5 new homes. Some of the expanded non-QM products that we're focused on. There's a number of underserved consumers out there, particularly ones that are dealing in high-cost areas like California where we are. So having the right product mix is really important. And then certainly, on non-agency, we feel like we've got the best pricing, particularly because it's been a heavy year for securitization and our deals have priced obviously, very well, which allows us to pass that on in rates. So, we're pretty well-positioned for the increase to answer your question. But I don't expect it to have as much of an effect as it's had in recent years.

[Eric Hagen, analyst]

Yes. Okay. That's helpful. I actually have another one here on jumbo. I mean, do you have an estimate or any visibility into how much jumbo supply we could see next year at these rates and spreads? And are there any scenarios where you could actually see more jumbo securitization without rates necessarily falling? And if that were the case, like how do you think you could respond and take advantage of that if rates are higher and you need more capital to meet that opportunity. But again, rates are higher?

[Christopher Abate, executive]

Yes. I mean, this year, I think, is tracking closer to 2020 as far as prime issuance goes and jumbo PLS, 2021 was probably double what we'll see this year. So, the capacity of the market is definitely there. From a funding perspective, we're funded very efficiently, particularly in that business. So, it definitely won't be a matter of having the capital. I think it's a matter of supply, like you said. And again, the vast majority of non-agency, particularly jumbo mortgages since the great financial crisis have been originated by banks for portfolio. And that's why we keep talking about that opportunity. The biggest driver of the PLS market has been bank lending. And to the extent rates remain high, it's going to be a huge opportunity for us to partner with these banks and securitize more collateral. So, we could definitely see issuance levels continue to grow from here.

[Operator]

Thank you. Ladies and gentlemen, this now concludes the earnings call. You may now disconnect your lines. And thank you for your participation.