It was a tough fourth quarter of 2022 for Redwood Trust with its jumbo aggregation business recording losses.

As a result of interest rate volatility, the REIT suffered a $44 million loss in its jumbo aggregation segment in the fourth quarter of last year. To cope with the losses, the company shifted its focus to the business purpose (BPL) lending and investment portfolios and cut 24 percent of its workforce.

During the conference call for the company’s earnings,  Brooke Carillo, Redwood’s chief financial officer, said that the firm had been “rationalizing” its entire operating structure.

As a result of employee severance and related transition expenses, general and administrative expenses increased slightly from the third quarter. For the full year of 2022, G&A expenses were down 20% from the previous year.

According to CEO Christopher Abate, results during this period fell short of expectations. The company strategically protected its book value, managed risk, and positioned itself for the future.

Abate noted that Redwood’s residential mortgage banking business had reduced its working capital by about 70% during 2022. As long as interest rates do not stabilize and investor demand does not rise, the company is less likely to expand its jumbo business.

In January, Abate acknowledges that a modest decline in mortgage rates contributed to some much-needed stabilization in the market. As yet, it’s difficult to tell if this is the start of a trend or merely pent-up demand from the fourth quarter.

Until then, they will continue to focus on originating BPL loans backed by solid fundamental assets and quality sponsors. Because of this, even with the prospect of a potential recession in 2023, we remain bullish on our BPL business. As the primary driver of our book value, the overall positive market sentiment in the first few weeks of the year matters most to our investment portfolio.