Big Mortgage REIT's Stock Off Nearly a Third This Week; Slow Market for

One of the largest mortgage-focused real estate investment trusts lost almost 30% of its stock value early this week.

Shares of Redwood Trust Inc., a Mill Valley, Calif.-based REIT, fell from $39.81 on Monday to $27.75 at Tuesday's close. At noon Wednesday, Redwood shares were trading at $28.62.

The loss can be blamed partially on the slow market for adjustable rate mortgages, or ARMs, as Redwood buys only ARM securitizations and loan pools.

On Monday analyst Jamie Handwerker of Furman Selz, New York, cut Redwood's 1997 earnings estimates from $2.25 a share to $2.08, setting off a selloff. More than 2.6 million shares of Redwood's stock traded on Monday, versus a daily average of 46,054 shares.

Redwood's asset growth will be smaller than estimated this year, Ms. Handwerker said, because it will not be able to find enough economically priced product to purchase. Borrowers are turning away from ARMs to fixed- rate loans, she said, because they offer a more attractive yield curve now.

Ms. Handwerker reduced her estimates for the company's quarterly acquisitions from $2 billion to $600 million.

Doug Hansen, president of Redwood, confirmed that the REIT is slowing down its asset growth on the securitization side.

"ARM securitizations have gotten too expensive," said Mr. Hansen.

Banks and savings and loans that Redwood competes against when purchasing ARM securities are flush with capital, he explained, and willing to pay up for the product. Meanwhile, ARM originations are down.

"It's not a good time to be growing fast, if you're dealing with mortgage-backed securities," Mr. Hansen said.

The REIT market has been hot for the past 24 months, and several players have racked up consistent double-digit earnings growth.

Redwood's situation doesn't necessarily mean that every REIT that invests in ARM securities will rack up slower growth. Right now, "we don't think that securities make sense, but we are very conservative," Mr. Hansen said. "Others might be less conservative."

Redwood is not out of the ARM securities business for good, Mr. Hansen said. "If spreads were to widen, only a little bit, we could come back in. I don't know when it's going to happen-it could be a month, a quarter, or a year-but it will."

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