I wonder if the "light" RWT loan loss reserves can be explained this way. WMT (and most lendors in the business today) must value their loans at current market, which in a seized-up market such as this one is what they actually receive from buyers who know the loans are not good quality and that WMT must sell them NOW. RWT's model is to match maturities of assets and liabilties; it does not plan to or need to sell the loans. Does this model not allow them to arrive at a market value for their loans in a more traditional way, based on borrowers' payment histories, etc.? The absence of an overwhelming pressure to sell the loans immediately has to have an effect on estimates of their market value and the related loan loss reserves.
The credit profile and payment history of the borrowers who comprise RWT's loan portfolio is quite different than those of WMT. This also has to affect the market value of the loans.
RWT management apologized at the last shareholders' meeting for having pretty much withdrawn from the market during the latter half of 2005 (they were explaining why assets had shrunk). They said they did not like what was happening in the market and stopped buying loans. I believe they were saying they had tried to dodge the loan quality bullet that has now killed so many other players in the industry. Of course, we won't know how successful they were for some time yet, but they have been through markets somewhat similar in the past. But if they are correct, their loans are not only higher quality, they are more seasoned and more easily analyzed.
Last, if RWT knew they had loan loss problems and truly were strapped for cash, they could have avoided paying the special dividend by selling enough problem loans to reduce taxable income and obviate the need for the special dividend. That would have killed two birds with one stone. The stock was already in the tank, so there was little to lose on that front. I think the fact they did not take that step is significant.
I am not minimizing the risk of owning RWT, but I do believe they know their business and manage it well. I look forward to your responses!