Jun 30 02:47 PMI have to completely disagree with this article. Most of the arguements are compleley illogical. And some of the proported facts are erroneous. First of all comparing Redwood to Thornburg misses the point. Thornburgs downfall had completley to do with their loss of financing. The performance of the underlying mortgages was fine. And we dont know who bought them but Redwood certainly is a candidate. They reported that they bought CES's in Q1 at 37% of face value.
Redwood's debt is not trading at 50% of face value. It is just not trading at all. If you do your homework you will see that Redwood was forced by todays accounting standard to estimate that if someone had to sell the debt what price would it fetch. 50% is probably a good estimate as every market of this sort is currently inactive. The exact same thing hold true of many of the mortgages that Redwood owns. Redwood also marks those down to the price it would get if it had to sell. Fortunaltey unlike Thornberg, Redwood has commited financing until 2037 and will never be forced to sell.
In terms of the quality of the loans they own well it doesnt get much better. Average equity is the loans is 31%. Average FICO score is 736. Well heeled borrowers with lots of skin in the game means they will not be walking away from their obligations. So yes you would be in trouble if you had to sell like Thornberg did but Redwood smartly is buying qualityu paper while others are selling. to be fair Redwood does have a small exposure to ALT-A. But there as well it is very high quality ALT-A, Average equity is 22% and average FICO is 705. ALT-A currently makes up about 15% of Redwood's residential portfolio. This was all about knocking the stock down at the end of the quarter. Long term investors should hold on as Redwood is nicely postioned unless of course the entire US economy collapses and then well you got bigger problems than Redwood. Report abuse
I reread the Seeking Alpha. I had a few questions about the points the writer made.
First, it seems to me that the writer ignores the positive impact of the $257M cash position as of March 31.
Assuming the management of RWT has learned anything from this sub-prime debacle, they will be investing that money in incoming producing assets which are being sold at a bargain price. In addition, they will be investing in seasoned mortgages not subject to the losses of the 2006/2007 vintages. These new investments, made at advantageous prices, should produce significant positive contributions to the RWT income stream for years to come.
In addition, the writer bases his argument for large future losses at RWT on an assumed linkage between the value of RWT's mortgage CES and the ABX index. This index reflects the willingess of a group of investors/dealers to buy or sell credit default swaps on the basis of their views about the risk of that tranche of 20 specific subprime MBS transactions. So, the index is reflective of what a group of dealers/ investors is willing to pay for protection against future losses in the various tranches in 20 specific mortage pools. How accurate is this index in predicting actual future losses is a question, since it is a relatively small group of people contributing to this index, is based on only 20 specific mortgage pools, and is for insurance against losses. But it seems to be a real leap to predict the collapse of RWT on the basis of this one index.
Regardless of how justifiable it is to base the prediction of the collapse of RWT of this one index, it seems absolutely true that the RWT mortgage pools are, by definition, not the same as these specific 20 pools. Given management's prior statements regarding their focus on higher quality assets, I am assuming the RWT portfolios would show superior loss experience. But, that is also an assumption, one that the second quarter numbers will help confirm or deny.
Last, I could not help but notice that this article was posted coincident with the wave of selling. I assume the end of month short interest will show a rather impressive jump. It seems logical to conclude that the short sellers have launched a coordinated program to target this stock. They have certainly succeeded to date. But the second quarter RWT numbers may not confirm what this article is predicting. If so, the short sellers success could be short lived.
An interesting fact is that the CEO of RWT, George Bull, owns about 350,000 shares of RWT. I cannot see where he has sold stock, other than as part of a stock option exercise. In fact, he bought another 18,000 shares in March at the $28/$29 price range.
So, if RWT has these major asset write downs coming, resulting in an implosion on the scale this article is suggesting, why haven't we seen the insiders like George Bull selling? And why would be be investing another $500K in a company that is going to implode?
As a founder of the company, and a knowledgeable mortgage investor, George Bull has to know what risks and losses he has in his own company's portfolio.
I tend to agree that RWT has been targeted by the short sellers. I think they have to report short positions on 6/30. If this is correct, we will see a big jump in short positions. And, of course, RWT will have to report second quarter results as well.
It should be an interesting quarter.