A company that anticipated the liquidity crunch and avoided it is Redwood Trust Inc., Mill Valley, Calif.

"We've always believed liquidity was one of main risks of the business," said Douglas Hansen, president of Redwood. We have replaced much of the short-term debt with long-term callable debt. As mortgages pay down, that's when you pay down callable debt. You don't want to have long-term debt that stays in place as loans prepay."

Mr. Hansen said Redwood's earnings actually bottomed out in the second quarter, though they actually went lower in the third quarter as a result of the company's adoption of mark-to-market accounting under the Financial Accounting Standards Board's Statement 133. Mr. Hansen says proudly that Redwood was the first financial company to adopt FAS 133.

"We actually had quite a good fourth quarter because we were able to take advantage of the crisis," he added.

"In 1997, we announced we were going to stop growing our mortgage portfolio," Mr. Hansen said. "It was not worth it to keep growing with spreads that tight. While many others kept growing their portfolios, we adhered to a discipline where we only commit assets when there's a decent return compared to a risk."

Redwood, he said, had built a substantial mortgage origination capacity and had to decide whether to let it be idle or to continue to originate mortgages, but for other investors. It decided on the latter strategy and formed two units, Redwood Residential Funding and Redwood Commercial Funding, along with a Florida unit that helps banks groom their mortgage portfolios. He said the new businesses would soon be more than half of the company.

Redwood's stock has nevertheless been painted with the same brush as the other REITs. Its stock fell from a high of about $26 a share in May to a low of $10.375 in October. Like the others, it has since recovered and is selling for about $15, still well below its high.

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