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Abstract

THE VOTES ARE IN Along with Mitt Romney and Paul Ryan, the invisible hand had an election to forget. Even so, the market is pricing an assortment of mortgage REITs as if the Republicans won--with the price mechanism riding victorious on their coattails--and as if the Democrats lost. Following is a look at some potentially mispriced securities. Redwood Trust (RWT on the New York Stock Exchange) was--so one would have thought--a Romney stock. A special kind of mortgage real estate investment trust, Redwood buys prime jumbo loans from private mortgage originators. It securitizes them and sells them, all but the higher-yielding, first-loss slice, which it retains. In effect, Redwood is the anti-Fannie Mae and the anti-Freddie Mac of American mortgage finance. IMAGE1 It has seemed a quixotic market niche. The government today is responsible for nine out of 10 mortgage originations--given the formidable regulatory barriers to competing with the U.S. mortgage apparatus, one might have supposed it would be doing 10 out of 10. Yet Redwood, which in 2010 issued the first free enterprise, residential mortgage-backed security of the post-Great Recession era (Grant's, May 14, 2010), has subsequently issued seven more. As for 2012, with five deals totaling $1.7 billion in the books so far, it's shaping up as the fifth-busiest year in the company's 14-year history. The business plan is simple, Martin S. Hughes, Redwood's CEO, advises colleague Evan Lorenz. In a world of falling Interest rates and a superabundance of liquidity, people need the safe and sound kind ...

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