Nov. 7--Mill Valley-based Redwood Trust Inc. this week reported a net income of $27 million, or 35 cents per share, for the third quarter of 2009.

That compares with a loss of $111 million, or $3.34 per share, for the third quarter of 2008. The second quarter of 2009, during which Redwood reported a $7 million profit, was its first profitable quarter since the second quarter of 2007.

While reporting a profit for the third quarter, Redwood also incurred a taxable loss of $23 million, or 30 cents per share, during the quarter. The taxable loss reflects the fact that the Internal Revenue Service prohibits Redwood from establishing credit reserves for tax purposes, said Martin Hughes, Redwood's president and chief financial officer.

Before the real estate bubble burst, Redwood purchased residential and commercial mortgages, packaged them as securities and sold them to investors. But the company hasn't been able to complete any new securitizations since credit markets froze in 2007.

This spring Redwood raised $522 million with two public offerings and used the money to selectively buy mortgage-backed securities it judged to be undervalued. Since then, however, prices for mortgage-backed securities have risen.

"This unprecedented investment opportunity attracted lots of investors, and numerous competitors followed after us, raising a substantial amount of capital to invest in the sector," George Bull, Redwood's founder and chief executive, wrote in a letter to investors.

Hughes

said much of the new market demand for mortgage-backed securities is due to traditional banks, hedge funds and newly formed real estate investment trusts once again delving into higher-risk, higher-yielding investments.

"We've gone from total fear, panic, huge psychological barriers to even investing, back to where we were before the crash," Hughes said.

As a result, Redwood has stopped buying mortgage-backed securities, and has already sold $165 million of its mortgage-backed securities.

"Unlike some forecasters, we are not calling a bottom to the decline in home prices -- in fact, we are modeling a further overall decline in home prices nationwide," Hughes said. "We expect downward price pressure on housing to be caused by a mounting oversupply of homes for sale."

Nevertheless, Hughes said Redwood is doing all it can to restart the private securitization market for mortgage loans.

"We are confident that there will be opportunities to deploy capital in the not-too-distant future on high-quality commercial assets at attractive risk-adjusted yields," Hughes said.

Redwood's stock, which trades on the New York Stock Exchange, closed at $13.40 a share, down 10 cents, on Friday. The stock's 52-week high was $19.45 a share; it's low was $9 a share.

Read more Business and stocks stories at the IJ's Business and stocks section.

Contact Richard Halstead via e-mail at rhalstead@marinij.com

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