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Redwood Trust NYSE: RWT reported a second-quarter GAAP net loss of $3 million, or $0.03 per share, while its mortgage banking platforms continued to generate returns above 20% and the company advanced efforts to reduce its legacy investment portfolio.

Chief Executive Officer Chris Abate said Redwood exceeded $8 billion in mortgage banking volume for the second consecutive quarter and completed more than 20 securitizations in the first half of 2026. The company ended the quarter by pricing three securitizations in one week, representing each of its operating platforms: Sequoia, Aspire and CoreVest.

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Management emphasized technology, product expansion, bank relationships and capital reallocation as central elements of its strategy amid elevated mortgage rates and weak housing activity. Abate said Redwood is building what he described as an “AI-native housing finance platform,” using internally developed systems to support activities including seller financial reviews, guideline comparisons and contract analysis.

Technology and operating efficiency Redwood said direct expenses represented 64 basis points of production volume in the first half of 2026, a 28% improvement from full-year 2025. Annualized time savings from AI-enabled automation initiatives reached about 23,600 hours, more than 50% above the first-quarter baseline, according to management.

Chief Technology Officer Abhinav Asthana said the company is seeking to redesign operating processes rather than simply adding AI tools to existing workflows. He said the technology platforms are intended to accommodate growing volume at greater efficiency.

Chief Financial Officer Brooke Carillo said the company expects the next 10 to 15 basis points of expense improvement to be driven more substantially by technology and continued platform scalability. Total operating expenses declined 21% sequentially, while general and administrative expenses fell to $38 million from $49 million. About $7 million of the reduction reflected restructuring charges recorded in the first quarter, management said.

Mortgage banking platforms maintain profitability Redwood’s core segments generated $34 million in earnings available for distribution, or EAD, during the quarter, equating to an 18.5% annualized return on equity. In contrast, legacy investments generated a $14 million EAD loss.

Aggregate mortgage banking net revenue was essentially unchanged from the prior quarter despite a roughly 6% decline in production, as margins held steady to improved and direct expenses declined. Redwood’s operating platforms produced a 33% annualized return on average capital, while average capital required per dollar of production decreased to about 2.6% in the first half from roughly 3% a year earlier.

Sequoia: Lock volume totaled $5.6 billion. Gain-on-sale margins were 92 basis points, compared with 96 basis points in the first quarter. The platform completed nine securitizations and $1.2 billion of whole-loan sales, nearly all to banks. More than 65% of Sequoia production was purchase-money loans. Aspire: Record lock volume increased 31% sequentially to $2.1 billion. GAAP net income rose to $7 million from $2 million in the first quarter, while gain-on-sale margins climbed to 101 basis points from 73 basis points as securitization spreads normalized and hedge performance improved. CoreVest: Loan funding totaled $410 million, down about 5% from the first quarter. The segment reported $1 million of GAAP net income, compared with a $3 million loss in the prior quarter that included about $5 million of restructuring charges. President Dash Robinson said newly launched Sequoia products accounted for more than 30% of quarterly lock volume. The company also introduced a HELOC product within Sequoia and expanded its Medical Professionals loan program, which completed a second securitization in July that priced inside its inaugural issuance.

Aspire completed its second and third securitizations under its shelf during the quarter. Redwood said 60-plus-day delinquencies in Aspire’s securitized population were below 10 basis points as of June 30. Subsequent to quarter-end, the company executed definitive documentation for a dedicated joint venture with Crayhill Capital Management that could have purchasing power of up to $8 billion of loans over time.

Legacy portfolio wind-down remains a priority Redwood continued reallocating capital away from its legacy investment segment, which accounted for 12% of overall capital at quarter-end, down from 15% at March 31 and 63% below the level one year earlier. The company said it began formally marketing a substantial portion of its remaining legacy bridge loans early in the third quarter and priced a financing arrangement for the remainder of its home equity investment portfolio.

Robinson said the financing transaction is expected on a pro forma basis to reduce capital allocated to legacy investments below 10%. Redwood continues to target reducing the segment to below 5% of capital by the end of 2026.

Legacy investments generated a $23 million GAAP loss, including $12 million of negative fair-value changes, primarily related to bridge loans. Carillo said each $100 million of capital redeployed from the legacy portfolio could improve consolidated EAD return on equity by approximately 200 to 400 basis points through reinvestment in operating platforms or potentially through share repurchases at suitable levels.

Balance sheet and market outlook Book value per common share was $6.90 at June 30, down 3% from $7.12 at the end of the first quarter. Management attributed the decline primarily to mark-to-market changes and carrying costs in legacy investments, as well as the company’s $0.18 common dividend. During the question-and-answer session, management said book value had recovered approximately 1% quarter-to-date.

Redwood ended the quarter with $192 million of unrestricted cash, about $100 million of unencumbered assets and $3.7 billion of excess warehouse capacity. Recourse debt declined by about $150 million to $4.5 billion, while recourse leverage declined modestly to five times.

Management said Redwood adopted a more cautious posture during the volatile early portion of the second quarter but increased activity in June, when it generated about 40% of quarterly volume. Robinson said July had been a relatively strong month for mortgage banking, though the company remains attentive to higher rates and broader market conditions.

About Redwood Trust (NYSE:RWT)Redwood Trust, Inc NYSE: RWT is a publicly traded real estate investment trust specializing in the U.S. residential mortgage market. Headquartered in Mill Valley, California, the company focuses on investing in a diversified portfolio of residential mortgage assets, including whole loans, agency and non-agency mortgage-backed securities, and structured credit products.

The company's core activities encompass the acquisition, financing, and management of prime residential mortgage whole loans and mortgage-backed securities.

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The Zacks REIT and Equity Trust industry is bearing the brunt of mortgage rate volatility, fueled by persistent inflation and broader economic uncertainty. With mortgage rates averaging in the mid-6% in recent weeks, industry players are likely to face continued earnings pressure in the near term.

Ongoing affordability challenges in the housing market are weighing on purchase originations and refinancing activity.  However, companies like Ellington Financial LLC (EFC - Free Report) , Redwood Trust Inc. (RWT - Free Report) and TPG Mortgage Investment Trust Inc. (MITT - Free Report) are well-poised to navigate industry challenges.

About the Industry The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry participants invest in and originate mortgages and mortgage-backed securities (“MBS”), and provide mortgage credit for homeowners and businesses. Typically, these companies focus on either the residential or commercial mortgage markets. Some invest in both markets through asset-backed securities. Agency securities are backed by the federal government, making them safer bets and limiting credit risks. Such REITs raise funds in the debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities. The net interest margin, the spread between interest income on mortgage assets and securities held, as well as funding costs, is a key revenue metric for mREITs.

What's Shaping the Future of the mREIT Industry? Volatility in Mortgage Rates Keeps Buyers on Sidelines: The 30-year fixed mortgage rate has climbed in recent weeks to the mid-6% from low-6% range in the start of the 2026.

Meanwhile, the Federal Reserve has kept interest rates unchanged so far in 2026 as policymakers continue to balance rising inflation with a resilient labor market. Against this backdrop, mortgage rates are likely to remain elevated in the near term.

Higher borrowing costs, combined with affordability pressures and economic uncertainty, have discouraged many potential homebuyers from entering the market.

As a result, mortgage origination and refinancing activity are under pressure. This trend is expected to heighten operational and financial challenges for mREIT industry players, while weighing on gain-on-sale margins and limiting investment activity.
 

Industry Resorts to Dividend Cuts as Book Values Erode: Elevated interest rates, persistent mortgage market volatility, and the widening spread between 30-year Agency mortgage-backed securities (MBS) and 10-year U.S. Treasury yields have reduced the value of Agency MBS portfolios.

As such, agency mREITs are witnessing a decline in tangible book value as spreads on benchmark indices have widened. This will increase earnings pressure for highly leveraged mREITs.

To preserve capital and align payouts with sustainable earnings, many ndustry players are reducing dividends. Dividend cuts may trigger investor outflows from income-focused funds, further weighing on share prices and book values, creating near-term headwinds for the mREITs.
 

Conservative Approach to Aid Long-Term Returns: In the current volatile mortgage market environment, mREITs are adopting a more conservative approach, which could strengthen their long-term positioning.

By becoming more selective in their investments, these companies are focusing on higher-quality assets, thereby enhancing the overall resilience and stability of their portfolios.

This disciplined strategy helps reduce exposure to risky credit conditions and limits potential losses during periods of uncertainty.

Additionally, the use of higher hedge ratios to manage interest rate risks reflects prudent financial management. While this approach may restrict near-term upside, it improves earnings visibility and protects capital from sudden market fluctuations.

By prioritizing liquidity, asset quality and risk management, mREITs are better-equipped to navigate market volatility and capitalize on attractive opportunities once conditions stabilize.

Overall, this cautious stance supports sustainable performance and creates a stronger foundation for consistent long-term returns.

Zacks Industry Rank Indicates Bleak Prospects The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. The industry carries a Zacks Industry Rank #211, which places it in the bottom 15% of more than 244 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of the discouraging earnings outlook for the constituent companies.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. The industry’s current-year earnings estimate moved 9.3% down over the last year.

Before we present a few stocks that you may want to buy despite near-term challenges, let us take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags the Sector & the S&P 500 The Zacks REIT and Equity Trust industry has underperformed the broader Zacks Finance sector and the S&P 500 composite in the past year.

The industry has gained 1.4% in the above-mentioned period compared with the broader sector’s rise of 15.6%. Further, the S&P Index has grown 27.7% over the past year.

Price Performance

 

Industry's Current Valuation Based on the trailing 12-month price-to-book (P/B), which is a commonly used multiple for valuing mREITs, the industry is trading at 0.93X compared with the S&P 500’s 8.02X. In the past five years, the industry has traded as high as 1.05X, as low as 0.70X and at the median of 0.91X.

Price-to-Book TTM

As finance stocks typically have a low P/B ratio, comparing REIT and Equity Trust with the S&P 500 may not make sense to many investors. A comparison of the group’s P/B ratio with that of the broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/B came in at 4.53X. This is above the Zacks REIT and Equity Trust industry’s ratio, as the chart below shows.

Price-to-Book TTM

3 mREIT Stocks to Bet On -- EFC, RWT & MITT
Ellington Financial invests in a diverse array of financial assets. These include residential and commercial mortgage loans and mortgage-backed securities, consumer loans, and asset-backed securities.

The assets are supported by consumer loans, collateralized loan obligations, non-mortgage and mortgage-related derivatives, equity investments in loan origination companies, and other strategic investments.

EFC is well-positioned to weather volatility in the mortgage market, supported by its diversified exposure across residential and commercial mortgage loan portfolios, and strong momentum in its securitization platform.

The company’s loan originations, especially in commercial mortgage bridge loans, proprietary reverse mortgages and closed-end second lien loans, continue to contribute to stable growth and income.

Its first-quarter 2026 growth was driven by strong performance across its diversified mortgage and credit platforms. Its subsidiary, Longbridge Financial, remained a major earnings contributor in the first quarter of 2026, benefiting from higher loan originations, securitizations, and servicing income.

To navigate market uncertainty, Ellington Financial is actively leveraging dynamic hedging strategies, maintaining a broad and balanced portfolio, securing multiple sources of financing and operating with low leverage.

These measures reflect a disciplined approach to risk management and a commitment to preserving book value while adapting to shifting market conditions.

The company’s 2026 earnings estimates have been unchanged at $1.95 per share over the past month, indicating year-over-year growth of 7.1%.

Price and Consensus: EFC

Redwood Trust is a self-advised and self-managed real estate investment trust.

RWT specializes in acquiring and managing real estate mortgage assets, which may be acquired as whole loans or as mortgage securities representing interests in or obligations, backed by pools of mortgage loans.

The company has been witnessing exceptional growth in its mortgage banking platforms over the recent quarters despite a volatile interest-rate environment.

Mortgage banking production reached a record $8.5 billion in the first quarter of 2026, marking the third consecutive quarterly record, supported by strong demand for Sequoia and Aspire products, increased securitization activity and higher whole-loan sales.

In recent months, RWT undertook targeted actions to simplify its operating structure and sharpen its focus on businesses generating strong and sustainable returns. This positions the platform to realize cost savings in the future.

Redwood Trust’s 2026 earnings have been unchanged at $1.28 over the past month. It indicates a year-over-year jump of 45.5%.

The company currently carries a Zacks Rank # 2 (Buy) and a market capitalization of $659.9 million.
 

Price and Consensus: RWT

TPG Mortgage is a residential mREIT with a focus on investing in a diversified risk-adjusted portfolio of residential mortgage-related assets principally in the U.S. mortgage market.

Over the past few quarters, MITT’s growth has been driven by a resilient residential mortgage portfolio and disciplined capital management despite market volatility.

The company maintained an $8.1-billion investment portfolio in the first quarter of 2026, supported by $7.7 billion of financing, primarily through non-recourse borrowings, while keeping economic leverage at a conservative 1.7X. The company is also benefiting from stable net interest income and continued strength in its investment in Arc Home.

In February 2026, TPG Mortgage announced a long-term strategic investment management partnership with Jackson Financial Inc., which is expected to unlock additional avenues for growth over time.

TPG Mortgage’s 2026 earnings have been unchanged at $1.09 per share over the past month. It indicates a year-over-year rally of 26.7%.

At present, MITT has a Zacks Rank #2 and a market capitalization of $252.5 million.

Price and Consensus: MITT