Edgar Filing: REDWOOD TRUST INC

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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REDWOOD TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

591 Redwood Highway, Suite 3100
Mill Valley, CA 94941

MARYLAND (415) 389-7373 68-0329422
(STATE OR OTHER JURISDICTION OF (ADDRESS, INCLUDING ZIP CODE, AND (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) TELEPHONE NUMBER, INCLUDING AREA
CODE, OF PRINCIPAL EXECUTIVE
OFFICES)

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George E. Bull III
Chairman of the Board and Chief Executive Officer
REDWOOD TRUST, INC.
591 Redwood Highway, Suite 3100
Mill Valley, CA 94941
(415) 389-7373
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPY TO:

Phillip R. Pollock, Esq.
TOBIN & TOBIN
500 Sansome Street, 8th Floor
San Francisco, CA 94111-3214
(415) 433-1400

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.

If the only securities been registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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CALCULATION OF REGISTRATION FEE

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Proposed Proposed
Maximum Maximum
Title Of Class Of Amount To Be Offering Aggregate
Securities To Be Registered Price Per Offering Amount Of
Registered (1)(2)(3) Share(4) Price(1)(2)(3)) Registration Fee
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Common Stock, $.01 per value........ $100,000,000.00 100% $100,000,000.00 $9,200.00
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(1) Represents amount registered under Rule 415(a)(4) of the Securities Act of
1933, as amended. There is being registered an indeterminate number of
shares of common stock as may be sold, from time to time, by the Registrant,
pursuant to the Registrant's Direct Stock Purchase and Dividend Reinvestment
Plan.

(2) Calculated pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended.

(3) Does not take into account the discount of 0% to 3% (subject to change)
offered to participants in the Registrant's Direct Stock Purchase and
Dividend Reinvestment Plan.

(4) Estimated solely for the purpose of calculating the registration fee. The
proposed maximum offering price per share will be determined, from time to
time, by the Registrant in connection with the issuance by the Registrant of
the Securities registered.

You should rely only on the information contained or incorporated by reference
in this prospectus. We have not authorized anyone to provide you with any other
information. We are not making an offer of securities in any place where the
offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of this
document.

Subject to Completion,

Prospectus dated August 27, 2002

DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN

$100,000,000.00

RWT
REDWOOD TRUST, INC.

PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND
RETAIN IT FOR YOUR FUTURE REFERENCE.
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We offer new investors and existing holders of our common and preferred
stock the opportunity to participate in our Direct Stock Purchase and Dividend
Reinvestment Plan (the "Plan"). The Plan is designed to be an economical and
convenient method for existing stockholders to increase their holdings of our
common stock and for new investors to make an initial investment in our common
stock.

If you are currently enrolled in our Dividend Reinvestment Plan you will
automatically be enrolled in this amended Plan. If you are not currently
enrolled in our Plan but you are an existing holder of our common or preferred
stock, you may elect to have your cash dividends automatically invested in
additional shares of common stock at a discount of 2% from the Market Price (as
described in Question 12), without payment of any brokerage or service charge.

If you are either an existing holder of our common or preferred stock, or a
new investor, you may also purchase shares of common stock with Optional Cash
Payments of $500 to $5,000 per month at a discount determined by us each month
and without payment of any brokerage commission or service charge. Upon our
approval of a Request for Waiver, you may also invest Optional Cash Payments in
excess of the $5,000 monthly limit. Each month we will set a discount, currently
ranging between 0% and 3%, from the Market Price for the investment of Optional
Cash Payments. Should we choose to allow purchases of more than the $5,000
monthly limit, we may also establish a Threshold Price that must equal or exceed
the trading price for a set period of time, as calculated pursuant to the
formula detailed in Question 17, before we will allow such a purchase. In
requesting a waiver, you may set a Maximum Price for optional cash purchases. If
the Market Price less the applicable discount exceeds the Maximum Price
specified by you, no purchase shall be made if the stock is acquired directly
from us (and not through open market purchases). See Question 17 for a
discussion of the Maximum Price. We will set the Optional Cash Discount and
Threshold Price in our sole discretion after a review of transaction costs,
current market conditions, the level of participation in the Plan, and our
current and projected capital needs. Purchases of common stock subject to our
waiver of the $5,000 monthly limit are also without payment of brokerage
commissions or service charges. Each of the discounts is subject to change, but
will not vary from the range of 0% to 3%, and is also subject to discontinuance
at our discretion. Also see Question 12 for further information regarding
purchase prices.

If you are eligible, you may begin participating in the Plan by completing
an authorization form and returning it to the Plan Administrator. Brokers and
nominees may reinvest dividends and make Optional Cash Payments on behalf of
Beneficial Owners. Enrollment in the Plan is entirely voluntary and you may
terminate your participation at any time. If you are not currently enrolled in
our Plan and do not wish to participate, you do not need to take any action, and
you will continue to receive your cash dividends, if and when declared, as
usual.

Under the Plan, we will receive proceeds from the sale of newly issued
common stock but will not receive any proceeds from open market sales. We will
bear the costs relating to the registration of the common stock being offered,
estimated to be $100,000.

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK, INCLUDING THE
POSSIBLE LOSS OF ALL OF YOUR INVESTMENT. YOU SHOULD CONSIDER CAREFULLY THE RISK
FACTORS BEGINNING ON PAGE 4 OF THIS PROSPECTUS BEFORE ENROLLING IN THE PLAN. THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES ISSUED UNDER THE PLAN
OR HAVE DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Our principal executive offices are located at 591 Redwood Highway, Suite
3100, Mill Valley, California 94941, telephone (415) 389-7373.

The date of this Prospectus is August 27, 2002.

TABLE OF CONTENTS

PAGE
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SUMMARY..................................................... 1
RISK FACTORS................................................ 4
REDWOOD TRUST, INC. ........................................ 14
THE PLAN.................................................... 14
PURPOSE..................................................... 15
AVAILABLE OPTIONS........................................... 15
BENEFITS AND DISADVANTAGES.................................. 16
Benefits.................................................. 16
Disadvantages............................................. 16
ADMINISTRATION.............................................. 17
PARTICIPATION............................................... 18
PURCHASES AND PRICES OF SHARES.............................. 22
ACCOUNT STATEMENTS.......................................... 26
DIVIDENDS ON FRACTIONS...................................... 27
CERTIFICATES FOR COMMON SHARES.............................. 27
WITHDRAWALS AND TERMINATION................................. 27
OTHER INFORMATION........................................... 28
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................... 29
FEDERAL INCOME TAX CONSIDERATIONS........................... 32
General................................................... 32
Qualification as a REIT................................... 33
Stock Ownership Tests..................................... 33
Asset Tests............................................... 34
Gross Income Tests........................................ 34
Distribution Requirement.................................. 35
Taxation of Redwood Trust, Inc. .......................... 35
Termination or Revocation of REIT Status.................. 36
Taxation of Taxable Domestic Shareholders................. 36
Taxation of Stockholder Rights............................ 37
Taxation of Tax-Exempt Entities........................... 37
Taxation of Foreign Shareholders.......................... 38
Other Tax Considerations.................................. 38
ERISA INVESTORS............................................. 38
DIVIDENDS................................................... 38
USE OF PROCEEDS............................................. 38
PLAN OF DISTRIBUTION........................................ 39
WHERE YOU CAN FIND MORE INFORMATION......................... 39
INCORPORATION OF IMPORTANT INFORMATION BY REFERENCE......... 40
LEGAL OPINIONS.............................................. 40
EXPERTS..................................................... 40
GLOSSARY.................................................... 41
SCHEDULE A.................................................. A-1
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS........... II-1

SUMMARY

The following summary description of our Direct Stock Purchase and Dividend
Reinvestment Plan is qualified by reference to the full text of the Plan which
appears in this prospectus. Capitalized terms have the meanings given to them in
the Plan.

OUR COMPANY................... Redwood Trust, Inc. is a Maryland corporation
operating as a real estate finance company. We
have elected to be taxed as a real estate
investment trust or REIT since our tax year
ending December 31, 1994. Our primary business
is owning, financing, and credit-enhancing
high-quality jumbo residential mortgage loans.
We distribute to our shareholders as dividends
the mortgage payments we receive from our real
estate loans and securities, less interest
expense and operating costs.

PURPOSE OF THE PLAN........... The purpose of the Plan is to provide our
existing stockholders and interested new
investors with a convenient and less costly
method of purchasing shares of our common stock
and investing all or a portion of their cash
dividends in additional shares of our common
stock. The Plan can also provide us with a
means of raising additional capital through the
direct sale of our common stock.

SOURCE OF PURCHASE OF
SHARES........................ Shares of common stock purchased through the
Plan will be purchased either directly from us
as newly issued shares or Treasury shares or on
the open market or through privately negotiated
transactions, or by a combination of such
purchases, at our option.

INVESTMENT OPTIONS............ You may choose from the following options:

Full Dividend Reinvestment: The Plan
Administrator will apply all cash dividends
relating to all shares of common and preferred
stock registered in your name and all cash
dividends on all shares distributed to you
under the Plan together with Optional Cash
Payments, toward the purchase of additional
shares of our common stock.

Partial Dividend Reinvestment: The Plan
Administrator will apply the cash dividends on
the number of common or preferred shares
registered in your name specified by you to
purchase additional shares of our common stock.
The Plan Administrator will pay the dividends
relating to the remaining shares of common or
preferred stock to you in cash.

Optional Cash Payments Only: You will continue
to receive cash dividends on shares of common
and preferred stock registered in your name in
the usual manner. You may make Optional Cash
Payments to invest in additional shares of our
common stock, subject to monthly minimums and
maximums.

You may change your investment options at any
time by requesting a new authorization form
from the Plan Administrator and returning it to
the Plan Administrator. Dividends paid on all
common shares acquired under and held in the
Plan will be automatically reinvested in
additional shares of our common stock, unless
otherwise requested.

OPTIONAL CASH PAYMENTS........ Each Optional Cash Payment is subject to a
minimum per month purchase of $500 and a
maximum per month purchase limit of $5,000.
Optional cash payments in excess of $5,000
require our prior approval.

THRESHOLD PRICE............... When pre-approved Optional Cash Payments in
excess of $5,000 are being used to purchase
common stock from us, rather than in the open
market, we may establish a Threshold Price
which is the minimum price at which our common
stock must trade on a given day during the
Pricing Period to be included in the
determination of the Market Price (as described
below) for such investments. Your investment
will be reduced, and 1/10 of your Optional Cash
Payment will be returned to you without
interest, for each trading day that does not
meet the Threshold Price. See Question 17 for a
further discussion of the Threshold Price.

MAXIMUM PRICE................. As an investor in a pre-approved optional cash
purchase that exceeds $5,000, you may set a
Maximum Price for such purchases if the stock
is being acquired directly from us (and not
through open market purchases). If the Market
Price, less the applicable discount, exceeds
the Maximum Price specified by you, no purchase
shall be made and your Optional Cash Payment
will be returned to you. See Question 17 for a
discussion of the Maximum Price.

CASH DISCOUNTS................ Each month, we may establish a discount between
0% and 3% from the Market Price applicable to
Optional Cash Payments. The discount may vary
each month but once established will apply
uniformly to all purchases made using Optional
Cash Payments during that month. With respect
to common stock purchased with reinvested
dividends, the discount is 2% off the Market
Price. See Question 12 for a further discussion
of discounts.

INVESTMENT DATE............... With respect to dividend reinvestment:

The Investment Date will be (i) if acquired
directly from us, the dividend payment date
declared by our Board of Directors, or (ii) in
the case of open market purchases, the date or
dates of actual investment, but no later than
10 business days following the dividend payment
date.

With respect to Optional Cash Payments:

The Investment Date is on or about the 21st day
of each month or, in the case of open market
purchases, some day or days between the 21st
and the next 10 business days thereafter, as
market conditions permit.

PRICE......................... Whether the shares are acquired directly from
us or on the open market, they will be
purchased for the Plan at the applicable
discount from the Market Price. In no event
shall the amount of the discount plus brokerage
commissions, if any, paid by us exceed 5% of
the fair market value of our common stock on
the date of purchase.

In the case of shares purchased on the open
market, the Market Price will be the weighted
average of the actual prices paid, computed to
3 decimal places, for all of the common stock
purchased by the Plan Administrator with all
Participants' reinvested dividends and Optional
Cash Payments for the related month.

EXPENSES...................... With respect to shares of common stock
purchased directly from us from reinvested
dividends or Optional Cash Payments, we will
pay expenses incurred in connection with such
purchases. With respect to shares of common
stock purchased in the open market, we will
also pay brokerage commissions so long as the
combined discount and brokerage commissions do
not exceed 5% of the value of our common stock
on the date of purchase. We will pay all other
costs of administering the Plan. However, if
you request that the Plan Administrator sell
all or any portion of your shares, you must pay
a nominal fee per transaction to the
Administrator, any related brokerage
commissions and applicable stock transfer
taxes.

NO INTEREST PENDING
INVESTMENT.................... No interest will be paid on cash dividends or
Optional Cash Payments pending investment or
reinvestment under the terms of the Plan.

WITHDRAWAL.................... You may withdraw from the Plan with respect to
all or a portion of the shares held in your
Plan account at any time by notifying the Plan
Administrator in writing.

AMOUNT OFFERED................ We are registering an indefinite number of
shares of common stock authorized to be issued
under the Securities Act for the Plan, up to a
maximum aggregate value of $100,000,000. The
amounts remaining under our prior plans will be
aggregated into this limit. Because we expect
to continue the Plan indefinitely, we expect to
authorize for issuance and register under the
Securities Act additional shares from time to
time as necessary for purposes of the Plan.

RISK FACTORS

You should carefully consider the following factors and other information
contained or incorporated by reference in this prospectus before deciding to
purchase shares of our common stock.

The following is a summary of the risk factors that we currently believe
are important and that could cause our results to differ from expectations. This
is not an exhaustive list; other factors not listed here could be material to
our results.

We can provide no assurances with respect to projections or forward-looking
statements made by us or by others with respect to our future results. Any one
of the factors listed here, or other factors not so listed, could cause actual
results to differ materially from expectations. It is not possible to accurately
project future trends with respect to these factors, to project which factors
will be most important in determining our results, or to project what our future
results will be.

Throughout this prospectus supplement and other documents we release or
statements we make, the words "believe," "expect," "anticipate," "intend,"
"aim," "will," and similar words identify "forward-looking" statements.

MORTGAGE LOAN DELINQUENCIES, DEFAULTS, AND CREDIT LOSSES COULD REDUCE OUR
EARNINGS. WE HAVE OTHER TYPES OF CREDIT RISK THAT COULD ALSO CAUSE LOSSES.
CREDIT LOSSES COULD REDUCE OUR CASH FLOW AND ACCESS TO LIQUIDITY.

As a core part of our business, we assume the credit risk of mortgage
loans. We do this in each of our portfolios. We may add other product lines over
time that may have different types of credit risk than are described here. We
are generally not limited in the types of credit risk or other types of risk
that we can undertake.

Tax and GAAP accounting for credit losses differ. While we have established
a credit reserve for GAAP reporting purposes, we are not permitted to deduct
from our taxable income amounts added to our reserves for future credit losses.
Thus, if credit losses occur in the future, taxable income may be reduced
relative to GAAP income. When taxable income is reduced, our minimum dividend
distribution requirements under the REIT tax rules are reduced. We could reduce
our dividend rate in such a circumstance. Alternatively, credit losses in our
assets may be capital losses for tax. Unless we had offsetting capital gains,
our minimum dividend distribution requirement would not be reduced by these
credit losses, but eventually our cash flow would be. This could reduce our free
cash flow and liquidity.

If the recent slowdown in the U.S. economy should persist, or worsen, our
credit losses could be increased beyond levels that we have anticipated. If we
incur increased levels of credit losses, our earnings might be reduced, and our
cash flows, asset market values, and access to borrowings might be adversely
affected. The amount of capital and cash reserves that we hold to help us manage
credit and other risks may prove to be insufficient to protect us from earnings
volatility, dividend cuts, liquidity, and solvency issues.

WE ASSUME DIRECT CREDIT RISK IN OUR RESIDENTIAL MORTGAGE LOANS, AND REALIZED
CREDIT LOSSES MAY REDUCE OUR EARNINGS AND FUTURE CASH FLOW.

In our residential mortgage loan portfolio, we assume the direct credit
risk of residential mortgages. Realized credit losses will reduce our earnings
and future cash flow. For GAAP reporting, we have a credit reserve for these
loans and we may continue to add to this reserve in the future. There can be no
assurance that our credit reserve will be sufficient to cover future losses. We
may need to reduce earnings by increasing our credit-provisioning expenses in
the future.

Credit losses on residential mortgage loans can occur for many reasons,
including: poor origination practices -- leading to losses from fraud, faulty
appraisals, documentation errors, poor underwriting, legal errors, etc.; poor
servicing practices; weak economic conditions; declines in the values of homes;
special hazards; earthquakes and other natural events; over-leveraging of the
borrower; changes in legal protections

for lenders; reduction in personal incomes; job loss; and personal events such
as divorce or health problems.

Despite our efforts to manage our credit risk, there are many aspects of
credit that we cannot control, and there can be no assurance that our quality
control and loss mitigation operations will be successful in limiting future
delinquencies, defaults, and losses. Our underwriting reviews may not be
effective. The representations and warranties that we receive from sellers may
not be enforceable. We may not receive funds that we believe are due to us from
mortgage insurance companies. We rely on our servicers; they may not cooperate
with our loss mitigation efforts, or such efforts may otherwise be ineffective.
Various service providers to securitizations, such as trustees, bond insurance
providers and custodians, may not perform in a manner that promotes our
interests. The value of the homes collateralizing our loans may decline. The
frequency of default, and the loss severity on our loans upon default, may be
greater than we anticipated. Interest-only loans, negative amortization loans,
loans with balances over $1 million, and loans that are partially collateralized
by non-real estate assets may have special risks. Our geographical
diversification may be ineffective in reducing losses. If loans become "real
estate owned" ("REO"), we, or our agents, will have to manage these properties
and may not be able to sell them. Changes in consumer behavior, bankruptcy laws
and the like may exacerbate our losses. In some states and circumstances, we
have recourse against the borrower's other assets and income; but, nevertheless,
we may only be able to look to the value of the underlying property for any
recoveries. Expanded loss mitigation efforts in the event that defaults increase
could be costly. We expect to continue to increase the size of our residential
loan portfolio at a rate faster than we increase our equity base, thus exposing
us to a greater degree to the potential risks of owning these loans.

Generally, a high percentage of our residential mortgage loans are secured
by properties located in California. This concentration is one state may expose
us to special credit risks.

WE HAVE CREDIT RISKS IN OUR RESIDENTIAL CREDIT-ENHANCEMENT SECURITIES RELATED
TO THE UNDERLYING LOANS.

If our total net investment in residential credit-enhancement securities a
portion is in a first loss position with respect to the underlying loans. We
generally expect that the entire amount of these first loss investments will be
subject to credit loss, potentially even in healthy economic environments. Our
ability to make an attractive return on these investments depends on how quickly
these expected losses occur. If the losses occur more quickly than we
anticipate, we may not recover our investment and/or our rates of return may
suffer.

Second loss credit-enhancement securities, which are subject to credit loss
after the entire first loss investment (whether owned by us or by others) has
been eliminated by credit losses on the underlying loans, makes up a portion of
our net investment in credit enhancement securities. Third loss credit-
enhancement securities, or other investments that themselves enjoy various forms
of material credit-enhancement, make up the remainder of our net investment in
credit enhancement interests. Given our normal expectations for credit losses,
we would anticipate some future losses on many of our second loss interests but
no losses on investments in the third loss or similar position. If credit losses
are greater than, or occur sooner than, expected, our expected future cash flows
will be reduced and our earnings will be negatively affected. Credit losses and
delinquencies could also affect the cash flow dynamics of these securitizations
and thus extend the period over which we will receive a return of principal from
these investments. In most cases, adverse changes in anticipated cash flows
would reduce our economic and accounting returns and may also precipitate
mark-to-market charges to earnings. From time to time, we may pledge these
interests as collateral for borrowings; a deterioration of credit results in
this portfolio may adversely affect the terms or availability of these
borrowings, and thus our liquidity.

We generally expect to increase our net acquisitions of residential
credit-enhancement securities and to increase our net acquisitions of first loss
and second loss investments relative to third loss investments. This may result
in increased risk with respect to the credit results of the residential loans we
credit enhance.

In our credit-enhancement securities portfolio, we may benefit from credit
rating upgrades or restructuring opportunities through re-securitizations or
other means in the future. If credit results deteriorate, these opportunities
may not be available to us, or may be delayed. It is likely, in many instances,
that we will not be able to anticipate increased credit losses in a pool soon
enough to allow us to sell such credit-enhancement interests at a reasonable
price.

In anticipation of future credit losses, for GAAP reporting purposes we
designate a portion of the purchase discount associated with many of our credit
enhancement securities as a form of credit reserve. The remaining discount is
amortized into income over time via the effective yield method. If the credit
reserve we set aside at acquisition proves to be insufficient, we may need to
reduce our effective yield income recognition in the future or we may adjust our
basis in these interests, thus reducing earnings.

We adopted EITF 99-20 in 2001. Generally, under EITF 99-20, if prospective
cash flows from certain investments deteriorate even slightly from original
expectations -- due to changes in anticipated credit losses, prepayment rates,
and so forth -- then the asset will be marked-to-market if the market value is
lower than our basis. Any future mark-to-market adjustments under EITF 99-20
reduce earnings in that period. Since we do not expect every asset we own to
always perform equal to or better than our expectations, we expect to make
negative EITF 99-20 adjustments to earnings from time to time. Any positive
adjustments to anticipated future cash flows are generally reflected in a higher
yield recognition for that asset for as long as anticipated future cash flows
remain favorable.

A large percentage of properties securing the residential loans that we
credit-enhanced are located in California. This concentration in one state may
expose us to special credit risks.

WE MAY HAVE CREDIT LOSSES IN OUR SECURITIES PORTFOLIO.

Most of our securities (excluding our residential credit-enhancement
securities) are currently rated AAA or AA. Most of these securities are backed
by residential and commercial real estate assets. These assets benefit from
various forms of corporate guarantees from Fannie Mae, Freddie Mac, and other
companies and/or from credit enhancement provided by third parties, usually
through their ownership of subordinated credit enhancement interests. Thus, the
bulk of our existing securities have reduced exposure to currently expected
levels of credit losses. However, in the event of greater than expected future
delinquencies, defaults, or credit losses, or a substantial deterioration in the
financial strength of Fannie Mae, Freddie Mac, or other corporate guarantors,
our results would likely be adversely affected. We may experience credit losses
in our securities portfolio. Deterioration of the credit results or guarantees
of these assets may reduce the market value of these assets, thus limiting our
borrowing capabilities and access to liquidity. Generally, we do not control or
influence the underwriting, servicing, management, or loss mitigation efforts
with respect to these assets. Results could be affected through credit rating
downgrades, market value losses, reduced liquidity, adverse financing terms,
reduced cash flow, experienced credit losses, or in other ways. For the
non-investment grade assets in our securities portfolio, generally representing
a small percentage of this portfolio, our protection against credit loss is
smaller and our credit risks and liquidity risks are increased. If we acquire
equity securities, results may be volatile. We intend to increase the percentage
of our securities portfolio that is rated below AA and that is rated below
investment grade, and we intend to expand the range of types of securities that
we acquire; these trends may increase the potential credit risks in our
securities portfolio.

WE ASSUME DIRECT CREDIT RISK IN OUR COMMERCIAL MORTGAGE LOANS.

The loans in our commercial mortgage loan portfolio may have higher degrees
of credit and other risks than do our residential mortgage loans, including
various environmental and legal risks. The net operating income and market
values of income-producing properties may vary with economic cycles and as a
result of other factors, so that debt service coverage is unstable. The value of
the property may not protect the value of the loan if there is a default. Our
commercial loans are not geographically diverse, so we are at risk for regional
factors. Most of our commercial loans are on commercial properties located in
California. Many of our commercial loans are not fully amortizing, so the timely
recovery of our principal

is dependent on the borrower's ability to refinance at maturity. We generally
lend against income-properties that are in transition. Such lending entails
higher risks than traditional commercial property lending against stabilized
properties. Initial debt service coverage ratios, loan-to-value ratios, and
other indicators of credit quality may not meet standard commercial mortgage
market criteria for stabilized loans. The underlying properties may not
transition or stabilize as we expect. The personal guarantees and forms of
cross-collateralization that we receive on some loans may not be effective. We
generally do not service our loans; we rely on our servicers to a great extent
to manage our commercial assets and work out loans and properties if there are
delinquencies or defaults. This may not work to our advantage. As part of the
work-out process of a troubled commercial loan, we may assume ownership of the
property, and the ultimate value of this asset would depend on our management
of, and eventual sale of, the property which secured the loan. Our loans are
illiquid; if we choose to sell them, we may not be able to do so in a timely
manner or for a reasonable price. Financing these loans may be difficult, and
may become more difficult if credit quality deteriorates. We have sold senior
participations on some of our loans, so that the asset we retain is junior and
has concentrated credit and other risks. We have directly originated our
commercial loans. This may expose us to certain credit, legal, and other risks
that may be greater than is usually present with acquired loans. We have sold
commercial mortgage loans. The representations and warranties we made on these
sales are limited, but could cause losses and claims in some circumstances. On a
net basis, we intend to increase our investment in commercial real estate loans
and in junior participations of these loans.

WE MAY INVEST IN OTHER TYPES OF CREDIT RISKS THAT COULD ALSO CAUSE LOSSES.

To the extent permissible within the requirements for REIT classification,
we intend to invest in other types of commercial loan assets, such as mezzanine
loans, second liens, credit-enhancement interests of commercial loan
securitizations, junior participations, among others that may entail other types
of risks. In addition, to the extent permissible within the requirements for
REIT classification, we intend to invest in other assets with material credit
risk, including sub-prime residential mortgage securities, the equity and debt
of collateralized bond obligations ("CBOs"), corporate debt and equity of REITs
and non-real estate companies, real estate and non-real estate asset-backed
securities and other financial and real property assets.

OUR RESULTS COULD ALSO BE ADVERSELY AFFECTED BY COUNTER-PARTY CREDIT RISK.

We have other credit risks that are generally related to the
counter-parties with which we do business. In the event a counter-party to our
short-term borrowings becomes insolvent, we may fail to recover the full value
of our collateral, thus reducing our earnings and liquidity. In the event a
counter-party to our interest rate agreements becomes insolvent or interprets
our agreements with them in an unfavorable manner, our ability to realize
benefits from hedging may be diminished, and any cash or collateral that we
pledged to these counter-parties may be unrecoverable. We may be forced to
unwind these agreements at a loss. In the event that one of our servicers
becomes insolvent or fails to perform, loan delinquencies and credit losses may
increase. We may not receive funds to which we are entitled. In various other
aspects of our business, we depend on the performance of third parties that we
do not control. We attempt to diversify our counter-party exposure and to limit
our counter-party exposure to strong companies with investment-grade credit
ratings, but we are not always able to do so. Our counter-party risk management
strategy may prove ineffective.

FLUCTUATIONS IN OUR RESULTS MAY BE EXACERBATED BY THE LEVERAGE THAT WE EMPLOY
AND BY LIQUIDITY RISKS.

We employ substantial financial leverage on our balance sheet relative to
many non-financial companies, although we believe we employ less leverage than
most banks, thrifts, and other financial institutions. In addition, the bulk of
our financing is typically in the form of non-recourse debt issued through asset
securitization. We believe this is generally an effective and lower- risk form
of financing compared to many other forms of debt utilized by financial
companies. We believe the amount of leverage that we employ is appropriate,
given the risks in our balance sheet, the non-recourse nature of the long-

term financing structures that we typically employ, and our management policies.
However, in order to operate our business successfully, we require continued
access to debt on favorable terms with respect to financing costs, capital
efficiency, covenants, and other factors. We may not be able to obtain debt on
such terms.

Due to our leverage, relatively small changes in asset quality, asset
yield, cost of borrowed funds, and other factors could have relatively large
effects on us and our stockholders, including fluctuations in earnings and
liquidity. Our use of leverage may not enhance our returns and could erode our
financial soundness. In general, we currently intend to increase our use of
leverage in the future through asset accumulation funded by securitized
non-recourse debt issuance.

Although we do not have a corporate debt rating, the nationally-recognized
credit rating agencies have a strong influence on the amount of capital that we
hold relative to the amount of credit risk we take. The rating agencies
determine the amount of net investment we must make to credit-enhance the
long-term debt, mostly rated AAA, that we issue to fund our residential loan
portfolio. They also determine the amount of principal value required for the
credit-enhancement interests we acquire. The credit-rating agencies, however, do
not have influence over how we fund our net credit investments nor do they
determine or influence many of our other capital and leverage policies. With
respect to our short-term debt, our lenders, typically large commercial banks
and Wall Street firms, limit the amount of funds that they will advance versus
our collateral. We typically use far less leverage than would be permitted by
our lenders. However, lenders can reduce the amount of leverage that they will
permit us to undertake, or the value of our collateral may decline, thus
reducing our liquidity.

Unlike banks, thrifts, and the government-sponsored real estate finance
companies, we are not regulated by national regulatory bodies. Thus, the amount
of financial leverage that we employ is largely controlled by management, and by
the risk-adjusted capital policies approved by our Board of Directors.

In the period in which we are accumulating loans or other debt to build a
portfolio of efficient size to issue long-term debt, variations in the market
for these assets or for long-term debt issuance could affect our results.
Ultimately we may not be able to issue long term debt, the cost of such debt
could be greater than we anticipated, the net investment in our financing trust
required by the rating agencies could be greater than anticipated, certain of
our assets could not be accepted into the financing trust, the market value of
our assets to be sold into the trust may have changed, our hedging activities or
agreements with counter-parties may have been ineffective, or other negative
effects could occur.

We borrow on a short-term basis to fund our a portion of our securities
portfolio, to fund residential loans or other assets prior to the issuance of
long-term debt, to employ a certain amount of leverage with respect to our net
investments in credit-enhancement interests, to fund our commercial loan
portfolio, to fund working capital and general corporate needs, and for other
reasons. We borrow short-term by pledging our assets as collateral. We usually
borrow via uncommitted borrowing facilities for the substantial majority of our
short-term debt funded assets that are generally liquid, have active trading
markets, and have readily discernable market prices. The term of these
borrowings can range from one day to one year. To fund less liquid or more
specialized assets, we typically utilize committed credit lines from commercial
banks and finance companies with a one to two year term. Whether committed or
not, we need to roll over short-term debt on a frequent basis; our ability to
borrow is dependent on our ability to deliver sufficient market value of
collateral to meet lender requirements. Our payment of commitment fees and other
expenses to secure committed borrowing lines may not protect us from liquidity
issues or losses. Variations in lenders' ability to access funds, lender
confidence in us, lender collateral requirements, available borrowing rates, the
acceptability and market values of our collateral, and other factors could force
us to utilize our liquidity reserves or to sell assets, and thus affect our
liquidity, financial soundness, and earnings. In recent years, we believe that
the marketplace for our type of secured short-term borrowing has been more
stable than the commercial paper market (or corporate unsecured short-term
borrowing, typically utilized by larger corporations) but there is no assurance
that such stability will continue.

Various of our borrowing arrangements subject us to debt covenants. While
these covenants have not meaningfully restricted our operations through as of
the date of this prospectus, they could be restrictive or

harmful to our stockholders' interests in the future. Should we violate debt
covenants, we may incur expenses, losses, or reduced ability to access debt.

Preferred stock makes up a portion of our equity capital base. Our Class B
Preferred Stock has a dividend rate of at least $0.755 per share per quarter,
and has certain rights to dividend distributions and preferences in liquidation
that are senior to common stockholders. Having preferred stock in our capital
structure is a form of leverage, and such leverage may or may not work to the
advantage of common stockholders.

CHANGES IN THE MARKET VALUES OF OUR ASSETS AND LIABILITIES CAN ADVERSELY
AFFECT OUR EARNINGS, STOCKHOLDERS' EQUITY, AND LIQUIDITY.

The market values of our assets, liabilities, and hedges are affected by
interest rates, the shape of yield curves, volatility, credit quality trends,
mortgage prepayment rates, supply and demand, capital markets trends and
liquidity, general economic trends, expectations about the future, and other
factors. For the assets that we mark-to-market through our income statement
and/or balance sheet, such market value fluctuations will affect our earnings
and book value. To the extent that our basis in our assets is thus changed,
future income may be affected as well. If we sell an asset that has not been
marked-to-market through our income statement at a reduced market price relative
to our basis, our earnings will be reduced. Market value reductions of the
assets that we pledge for short-term borrowings may reduce our access to
liquidity.

Generally, reduced asset market values for the assets that we own may have
negative effects, but might improve our opportunities to acquire new assets at
attractive pricing levels. Conversely, increases in the market values of our
existing assets may have positive effects, but may mean that acquiring new
assets at attractive prices becomes more difficult.

CHANGES IN MORTGAGE PREPAYMENT RATES MAY AFFECT OUR EARNINGS, LIQUIDITY, AND
THE MARKET VALUES OF OUR ASSETS.

Residential and commercial mortgage prepayment rates are affected by
interest rates, consumer behavior and confidence, seasoning of loans, the amount
of equity in the underlying properties, prepayment terms of the mortgages, the
ease and cost of refinancing, the housing turnover rate, media awareness of
refinancing opportunities, and many other factors.

Changes in prepayment rates (including prepayments from liquidated
defaulted loans) may have multiple effects on our operations. Faster mortgage
prepayment rates may lead to increased premium amortization expenses for premium
and interest-only assets, increased working capital requirements, reduced market
values for certain types of assets, adverse reductions in the average life of
certain assets, adverse changes in hedge ratios, and an increase in the need to
reinvest cash to maintain operations. Premium assets may experience faster rates
of prepayments than discount assets. Slower prepayment rates may lead to reduced
discount amortization income for discount assets, reduced market values for
discount and other types of assets, extension of the average life of certain
investments at a time when this would be contrary to our interests, adverse
changes in hedge ratios, a reduction in cash flow available to support
operations and make new investments, and a reduction in new investment
opportunities, since the volume of new origination and securitizations would
likely decline. Slower prepayment rates may lead to increased credit losses.

The amount of premium and discount we have on our books, and thus our net
amortization expenses, can change over time as we mark-to-market assets or as
our asset composition changes through principal repayments and asset purchases
and sales.

INTEREST RATE FLUCTUATIONS CAN HAVE VARIOUS EFFECTS ON OUR COMPANY, AND COULD
LEAD TO REDUCED EARNINGS AND/OR INCREASED EARNINGS VOLATILITY.

Our balance sheet and asset/liability operations are complex and diverse
with respect to interest rate movements, so we cannot fully describe all the
possible effects of changing interest rates. We do not seek to eliminate all
interest rate risk. Changes in interest rates, and in the interrelationships
between various interest rates, could have negative effects on our earnings, the
market value of our assets and liabilities, mortgage prepayment rates, and our
access to liquidity. Changes in interest rates can also affect our credit
results.

Generally, rising interest rates could lead to reduced asset market values
and slower prepayment rates. Initially, our net interest income may be reduced
if short-term interest rates increase, as our cost of funds would likely respond
to this increase more quickly than would our asset yields. Within three to
twelve months of a rate change, however, asset yields for our adjustable rate
mortgages may increase commensurately with the rate increase. Higher short-term
interest rates may reduce earnings in the short-term, but could lead to higher
long-term earnings, as we earn more on the equity-funded portion of our balance
sheet. To the extent that we own fixed rate assets that are funded with floating
rate debt, our net interest income from this portion of our balance sheet would
be unlikely to recover until interest rates dropped again or the assets matured.
Some of our adjustable-rate mortgages have periodic caps that limit the extent
to which the coupon we earn can rise or fall, usually 2% annual caps, and life
caps that set a maximum coupon. If short-term interest rates rise rapidly or
rise so that our mortgage coupons reach their life caps, the ability of our
asset yields to rise along with market rates would be limited, but there would
be no such limits on the increase in our liability costs.

Falling interest rates can also lead to reduced asset market values in some
circumstances, particularly for prepayment sensitive assets and for many types
of interest rate agreement hedges. Decreases in short-term interest rates can be
positive for earnings in the near-term, as our cost of funds may decline more
quickly than our asset yields would. For longer time horizons, falling
short-term interest rates can reduce our earnings, as we may earn lower yields
from the assets that are equity-funded on our balance sheet.

Changes in the interrelationships between various interest rates can reduce
our net interest income even in the absence of a clearly defined interest rate
trend. If the short-term interest rate indices that drive our asset yields were
to decline relative to the short-term interest rate indices that determine our
cost of funds, our net interest income would be reduced.

HEDGING ACTIVITIES MAY REDUCE LONG-TERM EARNINGS AND MAY FAIL TO REDUCE
EARNINGS VOLATILITY OR TO PROTECT OUR CAPITAL IN DIFFICULT ECONOMIC
ENVIRONMENTS; FAILURE TO HEDGE MAY ALSO HAVE ADVERSE EFFECTS ON OUR RESULTS.

Hedging against interest rate movements using interest rate agreements
(including interest rate swap instruments and interest rate futures) and other
instruments usually has the effect over long periods of time of lowering
long-term earnings. To the extent that we hedge, it is usually to protect us
from some of the effects of a rapid or prolonged increase in short-term interest
rates, to lower short-term earnings volatility, to stabilize liability costs, or
to stabilize the future cost of anticipated liability issuance. Such hedging may
not be in the long-term interest of stockholders, and may not achieve its
desired goals. For instance, hedging costs may rise as interest rates increase,
without an offsetting increase in hedging income. In a rapidly rising interest
rate environment, the market values of hedges may not increase as predicted.
Using interest rate agreements to hedge may increase short-term earnings
volatility, particularly since we currently employ mark-to-market accounting for
our hedges. Reductions in market values of interest rate agreements may not be
offset by increases in market values of the assets or liabilities being hedged.
Conversely, increases in market values of interest rate agreements may not fully
offset declines in market values of asserts or liabilities being hedged. Changes
in market values of interest rate agreement hedges may require us to pledge
collateral or cash.

We also may hedge by taking short or long positions in U.S. Treasuries,
mortgage securities, or other instruments. Such hedges may have special basis,
liquidity, and other risks. We generally intend, to the

extent permissible within the requirements for REIT classification, to increase
our hedging activities in the future.

MAINTAINING REIT STATUS MAY REDUCE OUR FLEXIBILITY.

To maintain REIT status, we must follow certain rules and meet certain
tests specified by federal tax law and regulations. In doing so, our flexibility
to manage our operations may be reduced. If we make frequent asset sales, we
could be viewed as a "dealer," and thus subject to entity level taxes. Certain
types of hedging may produce income that is limited under the REIT rules. Our
ability to own non-real estate related assets and earn non-real estate related
income is limited. Meeting minimum REIT dividend distribution requirements may
reduce our liquidity. Because we will generally distribute all of our taxable
earnings as dividends, we may need to raise new equity capital to if we wish to
grow operations at a rapid pace. Stock ownership tests may limit our ability to
raise significant amounts of equity capital from one source. Failure to meet
REIT requirements may subject us to taxation, penalties, and/or loss of REIT
status. REIT laws and taxation could change in a manner adverse to our
operations. To pursue our business plan as a REIT, we generally need to avoid
becoming a Registered Investment Company, or RIC. To avoid RIC restrictions, we
generally need to maintain at least 55% of our assets in whole loan form or in
other related forms of assets that qualify for this test. Meeting this test may
restrict our flexibility. Failure to meet this test would limit our ability to
leverage and would impose other restrictions on our operations. Our ability to
operate a taxable subsidiary is limited under the REIT rules. Our REIT status
affords us certain protections against take-over attempts. These take-over
restrictions may not always work to the advantage of stockholders. Our stated
goal is to not generate income that would be taxable as unrelated business
taxable income, or UBTI, to our tax-exempt shareholders. Achieving this goal may
limit our flexibility in pursuing certain transactions. Despite our efforts to
do so, we may not be able to avoid distributing UBTI to our stockholders.

OUR CASH BALANCES AND CASH FLOWS MAY BECOME LIMITED RELATIVE TO OUR CASH
NEEDS.

We need cash to meet our working capital needs, preferred stock dividends,
and minimum REIT dividend distribution requirements, and other needs. Cash could
be required to pay down our borrowings in the event that the market values of
our assets that collateralize our debt decline, the terms of short-term debt
become less attractive, or for other reasons. Cash flows from principal
repayments could be reduced should prepayments slow or should credit quality
trends deteriorate (in the latter case since for certain of our assets, credit
tests must be met for us to receive cash flows). For some of our assets, cash
flows are "locked-out" and we receive less than our pro rata share of principal
payment cash flows in the early years of the investment. Operating cash flow
generation could be reduced if earnings are reduced, if discount amortization
income significantly exceeds premium amortization expense, or for other reasons.
Our minimum dividend distribution requirements could become large relative to
our cash flow if our income as calculated for tax purposes significantly exceeds
our cash flow from operations. Generally, our cash flow has materially exceeded
our cash requirements; this situation could be reversed, however, with
corresponding adverse consequences to us. We generally maintain what we believe
are ample cash balances and access to borrowings to meet projected cash needs.
In the event, however, that our liquidity needs exceed our access to liquidity,
we may need to sell assets at an inopportune time, thus reducing our earnings.
In a serious situation, our REIT status or our solvency could be threatened.

INCREASED COMPETITION COULD REDUCE OUR ACQUISITION OPPORTUNITIES OR AFFECT OUR
OPERATIONS IN A NEGATIVE MANNER.

We believe that our principal competitors in our business of real estate
finance are depositories such as banks and thrifts, mortgage and bond insurance
companies, other mortgage REITs, hedge funds and private investment
partnerships, life insurance companies, government entities such as Fannie Mae,
Freddie Mac, Ginnie Mae, and the Federal Home Loan Banks, mutual funds, pension
funds, mortgage originators, overseas entities, and other financial
institutions. We anticipate that we will be able to compete effectively due to
our relatively low level of operating costs, relative freedom to securitize our
assets, our

ability to utilize leverage, freedom from certain forms of regulation, focus on
our core business, and the tax advantages of our REIT status. Nevertheless, many
of our competitors have greater operating and financial resources than we do.
Competition from these entities, or new entrants, could raise prices on
mortgages and other assets, reduce our acquisition opportunities, or otherwise
materially effect our operations in a negative manner. We generally expect
competition to increase from time to time.

NEW ASSETS MAY NOT BE AVAILABLE AT ATTRACTIVE PRICES, THUS LIMITING OUR GROWTH
AND/OR EARNINGS.

To reinvest proceeds from mortgage principal repayments, or to deploy new
equity capital that we may raise in the future, we need to acquire new assets.
If pricing of new mortgage assets is unattractive, or if the availability of new
assets is much reduced, we may not be able to acquire new assets at attractive
prices. Our new assets may generate lower returns than the assets that we have
on our balance sheet. Generally, unattractive pricing and availability of new
assets is a function of reduced supply and/or increased demand. Supply can be
reduced if originations of a particular product are reduced, or if there are few
sales in the secondary market of seasoned product from existing portfolios. The
supply of new securitized assets appropriate for our balance sheet could be
reduced if the economics of securitization become unattractive or if a form of
securitization that is not favorable for our balance sheet predominates. Also,
assets with a favorable risk/reward ratio may not be available if the risks of
owning such assets increase substantially relative to market pricing levels.
Increased competition could raise prices to unattractive levels.

ACCOUNTING CONVENTIONS AND ESTIMATES CAN CHANGE, AFFECTING OUR REPORTED
RESULTS AND OPERATIONS.

Accounting rules for the various aspects of our business change from year
to year. While we believe we use conservative accounting methods, changes in
accounting rules can nevertheless affect our reported income and stockholders'
equity. Our revenue recognition and other aspects of our reported results are
based on estimates of future events. These estimates can change in a manner that
adversely affects our results.

OUR POLICIES, PROCEDURES, PRACTICES, PRODUCT LINES, RISKS, AND INTERNAL
RISK-ADJUSTED CAPITAL GUIDELINES ARE SUBJECT TO CHANGE.

In general, we are free to alter our policies, procedures, practices,
product lines, leverage, risks, internal risk-adjusted capital guidelines, and
other aspects of our business. We can enter new businesses, or pursue
acquisitions of other companies. In most cases, we do not need to seek
stockholder approval to make such changes. We will not necessarily notify
stockholders of such changes.

WE DEPEND ON KEY PERSONNEL FOR SUCCESSFUL OPERATIONS.

We depend significantly on the contributions of our executive officers and
staff. Many of our officers and employees would be difficult to replace. The
loss of any key personnel could materially affect our results.

INVESTORS IN OUR COMMON STOCK MAY EXPERIENCE LOSSES, VOLATILITY, AND POOR
LIQUIDITY, AND WE MAY REDUCE OUR DIVIDENDS IN A VARIETY OF CIRCUMSTANCES.

Our earnings, cash flow, book value, and dividends can be volatile and
difficult to predict. Investors should not rely on predictions or management
beliefs. Although we seek to pay a regular common stock dividend rate that is
sustainable, we may cut our dividend rate in the future for a variety of
reasons. We may not provide public warnings of such dividend reductions prior to
their occurrence. Fluctuations in our current and prospective earnings, cash
flow, and dividends, as well as many other factors such as perceptions, economic
conditions, stock market conditions, and the like, can affect our stock price.
Investors may experience volatile returns and material losses. In addition,
liquidity in the trading of our stock may be insufficient to allow investors to
sell their stock in a timely manner or at a reasonable price.

This prospectus includes forward-looking statements. All statements
regarding our and our subsidiaries' expected future financial position, results
of operations, cash flows, funds from operations, dividends and dividend plans,
financing plans, business strategy, budgets, projected costs, capital
expenditures, competitive positions, growth opportunities, expected interest
income, continued qualification as a real estate investment trust, plans and
objectives of our management for future operations and statements that include
words such as "if," "anticipate," "believe," "plan," "estimate," "expect,"
"intend," "may," "could," "should," "will," and other similar expressions are
forward-looking statements. Such forward-looking statements are inherently
uncertain, and you should recognize that actual results may differ from our
expectations. We do not undertake any duty to update such forward-looking
statements.

REDWOOD TRUST, INC.

We are a real estate finance company. We distribute to our shareholders as
dividends the mortgage payments we receive from our real estate loans and
securities, less interest expenses and operating costs.

Our primary business is owning, financing, and credit enhancing
high-quality jumbo residential mortgage loans. Jumbo residential loans have
mortgage balances that exceed the financing limit imposed on Fannie Mae and
Freddie Mac, both of which are United States government-sponsored real estate
finance entities. Most of the loans that we finance have mortgage loan balances
between $300,000 and $600,000.

We acquire high-quality jumbo residential mortgage loans from large,
high-quality mortgage origination companies. We hold these loans on our balance
sheet to earn interest income. We typically fund these loans with a combination
of equity and long-term amortizing non-recourse debt. At December 31, 2001, our
residential mortgage loan portfolio totaled $1.5 billion.

We also acquire mortgage securities representing subordinated interests in
pools of high-quality residential mortgage loans. By acquiring the subordinated
securities of these loan pools, we provide credit-enhancement for the more
senior securities backed by the pool so they can be sold to capital market
investors. Our prospective returns from our investment in these
credit-enhancement securities will be driven primarily by the future credit
performance of these mortgages.

We also own and finance commercial mortgage loans and own a portfolio of
residential and commercial real estate securities. We may acquire or create
other types of assets in the future.

We have elected, and anticipate that we will continue to elect, to be
organized as a real estate investment trust, or REIT. As a REIT, we distribute
substantially all of our net taxable earnings (excluding earnings generated in
but not yet distributed from taxable subsidiaries) to our stockholders as
dividends. As long as we retain our REIT status, we will not pay most types of
corporate income taxes on taxable income earned in Redwood Trust, Inc.

Redwood Trust, Inc. was incorporated in the State of Maryland on April 11,
1994, and commenced operations on August 19, 1994. Our executive offices are
located at 591 Redwood Highway, Suite 3100, Mill Valley, California 94941.

At August 27, 2002, we had outstanding 15,812,706 shares of common stock
(New York Stock Exchange, Symbol "RWT") and 902,068 shares of Class B Cumulative
Convertible Preferred Stock (New York Stock Exchange, Symbol "RWT-PB").

Unless otherwise mentioned or unless the context requires otherwise, all
references in this prospectus to "we," "us," "our," or similar references to the
"Company" mean Redwood Trust, Inc. and our subsidiaries.

THE PLAN

The original Dividend Reinvestment Plan was adopted by our Board of
Directors on September 15, 1995 and became effective on October 9, 1995. The
Plan was amended by our Board of Directors as of December 13, 1996 to include
the Stock Purchase program. This amendment to the Plan is effective as of August
28, 2002.

The following series of questions and answers explains and constitutes the
Plan in its entirety. Shareholders who do not participate in the Plan will
receive cash dividends, as declared, and paid in the usual manner.

PURPOSE

1. WHAT IS THE PURPOSE OF THE PLAN?

The primary purpose of the Plan is to provide eligible holders of shares of
our common and preferred stock and interested new investors with a convenient
and economical method of increasing their investment in us by investing cash
dividends or Optional Cash Payments, or both, in additional shares of common
stock without payment of any brokerage commission or service charge and,
currently, at a discount ranging from 0% to 3% from the Market Price (as defined
in Question 12). See Question 5 for a description of the holders who are
eligible to participate in the Plan and methods for Beneficial Owners and new
investors to become eligible to participate.

We may also use the Plan to raise additional capital through the sale each
month of a portion of the shares available for issuance under the Plan to owners
of shares and interested new investors (including brokers or dealers) who, in
connection with any resales of such shares, may be deemed to be underwriters.
Our ability to waive limitations applicable to the amounts which participants
may invest pursuant to the Plan's Optional Cash Payment feature will allow for
these sales. See Question 17 for information concerning limitations applicable
to Optional Cash Payments and certain of the factors that we may consider when
granting waivers.

Under the Plan, if you purchase shares directly from us, the net proceeds
of the sale of those shares will be used to purchase additional mortgage assets
and for general corporate purposes.

The Plan is intended for the benefit of our investors and not for
individuals or investors who engage in transactions which may cause aberrations
in the price or trading volume of shares of common stock. From time to time,
financial intermediaries may engage in positioning transactions to benefit from
the discount from the Market Price of the shares of common stock acquired
through the reinvestment of dividends or Optional Cash Payments under the Plan.
Those transactions may cause fluctuations in the price or trading volume of the
shares of our common stock. We reserve the right to modify, suspend or terminate
participation in the Plan by otherwise eligible holders of shares of common
stock or interested new investors to eliminate practices which are, in our sole
discretion, not consistent with the purposes or operation of the Plan or which
adversely affect the price of the shares of common stock.

AVAILABLE OPTIONS

2. WHAT OPTIONS ARE AVAILABLE UNDER THE PLAN?

Stock Purchase Program. Each month, you may elect to invest Optional Cash
Payments in additional shares of common stock, subject to a minimum per month
purchase of $500 and a maximum per month purchase limit of $5,000, subject to
waiver. See Question 17 for information concerning limitations applicable to
Optional Cash Payments and the availability of waivers with respect to such
limitations. You may make Optional Cash Payments each month even if you do not
reinvest dividends.

Dividend Reinvestment Program. Holders of our common or preferred stock
who wish to participate in the Plan, whether Record Owners, Beneficial Owners,
and interested new investors who make an initial investment through the Stock
Purchase program described above (each a "Participant"; see also Question 5
regarding the definition of a "Participant") may elect to have all, a portion,
or none of their cash dividends paid on their shares of our common or preferred
stock automatically reinvested in additional shares of common stock through the
Dividend Reinvestment program. Cash dividends are paid on our common and
preferred stock when and as declared by our Board of Directors, generally on a
quarterly basis. Subject to the availability of shares of common stock
registered for issuance under the Plan, there is no limitation on the amount of
dividends you may reinvest under the dividend reinvestment feature of the Plan.

BENEFITS AND DISADVANTAGES

3. WHAT ARE THE BENEFITS AND DISADVANTAGES OF THE PLAN?

BENEFITS

(a) The Plan provides you with the opportunity to automatically reinvest
cash dividends paid on all or a portion of your common or preferred stock in
additional shares of common stock without payment of any brokerage commission or
service charge and at a 2% discount from the Market Price (as defined in
Question 12 and subject to change).

(b) Whether you are an eligible stockholder or a new investor, the Plan
provides you with the opportunity to make monthly investments of Optional Cash
Payments, subject to minimum and maximum amounts, for the purchase of additional
shares of common stock. If you purchase shares of common stock under the
Optional Cash Payment program, you will not pay any brokerage commission or
service charge, and your purchase price will be less a discount ranging from 0%
to 3% from the Market Price. See Question 17 regarding how to obtain information
about each month's Optional Cash Discount.

(c) All cash dividends paid on participants' Plan shares enrolled in the
Dividend Reinvestment program can be fully invested in additional shares of
common stock because the Plan permits fractional shares to be credited to Plan
accounts. Dividends on such fractional shares, as well as on whole shares, will
also be reinvested in additional shares which will be credited to Plan accounts.

(d) The Plan Administrator, at no charge to you and at your election,
either sends certificates to you for optional shares purchased or provides for
the safekeeping of stock certificates for shares credited to each Plan account.

(e) As a participant in the Plan, you may also elect to deposit with the
Plan Administrator certificates for your other common stock registered in your
name for safekeeping without charge. Because you bear the risk of loss in
sending certificates to the Plan Administrator, certificates should be sent by
registered mail, return receipt requested, and properly insured to the address
specified in Question 37 below. If certificates are later issued either upon
your request or upon termination of your participation, new, differently
numbered certificates will be issued.

(f) Periodic statements reflecting all current activity, including
purchases, sales and latest balances, will simplify your record keeping. See
Question 22 for information concerning reports to you.

DISADVANTAGES

(a) Neither we nor the Plan Administrator will pay interest on dividends or
Optional Cash Payments held pending reinvestment or investment. See Question 11.
In addition, Optional Cash Payments of less than $500 and that portion of any
Optional Cash Payment which exceeds the maximum monthly purchase limit of
$5,000, unless such upper limit has been waived by us, may be subject to return
to you without interest. In addition, for pre-approved Optional Cash Payments in
excess of $5,000 used to purchase common stock directly from us, if the
Threshold Price, if any, is not met or the Maximum Price you specified is
exceeded, a portion or all of your Optional Cash Payments in excess of $5,000
may be subject to return to you without interest. See Question 17.

(b) With respect to Optional Cash Payments, the actual number of shares to
be issued to your Plan account will not be determined until after the end of the
relevant Pricing Period. Therefore, during the Pricing Period you will not know
the actual number of shares, if any, you have purchased.

(c) With respect to shares acquired from us, while the Plan currently
provides for a discount from the Market Price during the Pricing Period, the
Market Price, as so discounted, may exceed the price at which shares of our
common stock are trading on the Investment Date (as defined in Questions 11 and
18) when the shares are issued or thereafter. The trading price on the
Investment Date generally governs the amount of taxable income to shareholders.
See Question 34.

(d) Because Optional Cash Payments must be received by the Plan
Administrator by the Optional Cash Payment Due Date, such payments may be
exposed to changes in market conditions for a longer period of time than in the
case of typical secondary market transactions. In addition, Optional Cash
Payments once received by the Plan Administrator will not be returned to you
unless you send a written request to the Plan Administrator at least five
business days before the Record Date for the Investment Date with respect to
that payment. See Questions 11, 13 and 18 through 20 for detailed information.

(e) There is a nominal fee per transaction, a brokerage commission and
applicable share transfer taxes on resales that you may be required to pay to
the Plan Administrator if you request that the Plan Administrator sell some or
all or your shares of common stock credited to your Plan account. See Questions
21 and 27.

(f) If you chose to reinvest cash dividends, you will be treated for
federal income tax purposes as having received a distribution in cash on the
distribution payment date. You will have to use other funds (or sell a portion
of the common stock received) to fund the resulting tax liability.

Prospective investors should carefully consider the matters described in
the Risk Factors section of the prospectus before making an investment in our
common stock.

ADMINISTRATION

4. WHO ADMINISTERS THE PLAN?

We have retained Mellon Investor Services LLC, as plan administrator (the
"Plan Administrator"), to administer the Plan, keep records, send statements of
account activity, and perform other duties relating to the Plan. The mailing
address, telephone number, website and email addresses are:

Redwood Trust, Inc.
c/o Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1938
Telephone (800)-522-6645
HTTP://WWW.CHASEMELLON.COM/
SHRRELATIONS@MELLONINVESTOR.COM

See Question 22 for information concerning reports available to you.
Certificates for Plan Shares purchased pursuant to the Stock Purchase program
but not designated for investment in the Dividend Reinvestment program will be
sent to you or held by the Plan Administrator, at your discretion, free of
charge. Plan Shares designated for the Dividend Reinvestment program will be
held by the Plan Administrator and registered in the Plan Administrator's name
(or its nominee) as agent for each Participant in the Plan. As record holder for
the Plan shares, the Plan Administrator will receive dividends on all Plan
Shares held on the dividend Record Date, will credit such dividends to
Participants' accounts on the basis of whole or fractional Plan Shares held in
such accounts, and will automatically reinvest such dividends in additional
shares of common stock according to the portion of the Participants' shares of
stock designated to participate in the Dividend Reinvestment program. Any
remaining portion of cash dividends not designated for reinvestment will be sent
to you. See Question 9. If the Plan Administrator resigns or otherwise ceases to
act as plan administrator, we will appoint a new plan administrator to
administer the Plan, and advise you of the change.

The Plan Administrator also acts as dividend disbursing agent, transfer
agent, and registrar for our common and preferred stock.

PARTICIPATION

For purposes of this section, responses are generally directed (a) to
existing shareholders, according to the method by which their shares are held,
or (b) to investors who are not currently shareholders but would like to make an
initial purchase of common stock to become a Participant.

5. WHO IS ELIGIBLE TO PARTICIPATE?

A "Record Owner" (which means a stockholder who owns shares of common or
preferred stock in his or her own name) or a "Beneficial Owner" (which means a
stockholder who beneficially owns shares of common or preferred stock that are
registered in a name other than his or her own name, for example, in the name of
a broker, bank, or other nominee) may participate in the Plan. A Record Owner
may participate directly in the Plan. A Beneficial Owner must either become a
Record Owner by having one or more shares transferred into his or her own name
or coordinating with his or her broker, bank, or other nominee to participate in
the Plan on his or her behalf. A broker, bank, or other nominee acting on behalf
of a Beneficial Owner must have a separate account for each Beneficial Owner who
is a Participant in the Plan and for whom it acts as the broker, bank, or other
nominee. In addition, interested investors who are not stockholders may
participate in the Plan through the Optional Cash Payment feature. See Question
6.

We may terminate, by written notice, at any time, any Participant's
participation in the Plan if that participation would or could be in violation
of the restrictions contained in our Articles of Incorporation or By-laws. Those
restrictions prohibit any person or group of persons from acquiring or holding,
directly or indirectly, ownership of shares of our capital stock in excess of
9.8% (by number or value) of the outstanding shares. The meanings given to the
terms "group" and "beneficial ownership" may cause a person who individually
owns less than 9.8% of the shares outstanding to be deemed to be holding shares
in excess of the foregoing limitation. Our Articles of Incorporation provide
that in the event a person acquires shares of capital stock in excess of the
foregoing limitation, the excess shares will be transferred to a trustee for the
benefit of a charitable beneficiary designated by our Board of Directors. Under
our Articles of Incorporation, certain transfers or attempted transfers that
would jeopardize our qualification as a real estate investment trust for tax
purposes may be void to the fullest extent permitted by law

6. HOW DOES AN ELIGIBLE SHAREHOLDER OR INTERESTED NEW INVESTOR PARTICIPATE?

RECORD OWNERS may join the Plan by completing and signing an authorization
form and returning it to the Plan Administrator. Authorization forms may be
obtained at any time by written request to:

Redwood Trust, Inc.
c/o Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1938
Telephone (800)-522-6645
HTTP://WWW.CHASEMELLON.COM/
SHRRELATIONS@MELLONINVESTOR.COM

BENEFICIAL OWNERS who wish to join the Plan must instruct their bank,
broker, or other nominee to arrange participation in the Plan on the Beneficial
Owner's behalf. The bank, broker, or other nominee should then make arrangements
with its securities depository and the securities depository will provide the
Plan Administrator with the information necessary to allow the Beneficial Owner
to participate in the Plan. Should the Beneficial Owner wish to participate in
the Stock Purchase program, a broker and nominee form must also be sent to the
Plan Administrator for the bank, broker, or other nominee to participate in the
Stock Purchase Program on behalf of the Beneficial Owner. See Question 8. To
facilitate participation by Beneficial Owners, we have made arrangements with
the Plan Administrator to reinvest dividends, on a per dividend basis, and
accept Optional Cash Payments under the Stock Purchase program by record holders
such as brokers, banks, and other nominees, on behalf of Beneficial Owners.
Interested Beneficial Owners are cautioned to insure that the broker, bank, or
other nominee passes along the proceeds of any applicable discount to the
beneficiary's account.

Alternatively, a Beneficial Owner may simply request that the number of
shares the Beneficial Owner wishes to be enrolled in the Plan be reclassified or
reregistered by the bank, broker, or other nominee in the Beneficial Owner's own
name as Record Owner to directly participate in the Plan.

NEW INVESTORS may join the Plan as a Record Owner by making an initial
investment in an amount of at least $500 up to $5,000 (unless the maximum limit
is specifically waived by us, as discussed in Question 17). The new investor
should mark the box on the authorization form indicating that he or she is a new
investor wishing to become a participant and should designate the amount for
initial purchase of common stock. At the same time, the new participant may
designate all, a portion, or none of the shares to be purchased to be enrolled
in the Dividend Reinvestment program. The authorization form should be returned
to the Plan Administrator, with payment, on or before the applicable dates
discussed below.

ANY PARTICIPANT WHO RETURNS A PROPERLY EXECUTED AUTHORIZATION FORM TO THE
PLAN ADMINISTRATOR WITHOUT SPECIFYING THE NUMBER OF SHARES TO BE INCLUDED IN THE
DIVIDEND REINVESTMENT PROGRAM WILL BE ENROLLED AS HAVING SELECTED THE FULL
DIVIDEND REINVESTMENT OPTION DESCRIBED BELOW. See Question 7 for other
investment option information.

If an authorization form requesting reinvestment of dividends is received
by the Plan Administrator at least 2 business days before the Record Date
established for a particular dividend, reinvestment will commence with that
dividend. If an authorization form is received less than 2 business days before
the Record Date established for a particular dividend, the reinvestment of
dividends will begin on the dividend payment date following the next Record Date
if such stockholder or the participating bank, broker or other nominee is still
a holder of record. Additionally, for Participants wishing to make Optional Cash
Payments to purchase shares under the Stock Purchase program, full payment must
be received by the Plan Administrator by the Optional Cash Payment Due Date. In
the case of new investors making an initial investment to become Participants,
both the authorization form and full payment of their designated initial
investment must be received by the Optional Cash Payment Due Date. See also
Questions 7 and 8.

7. WHAT DOES THE AUTHORIZATION FORM PROVIDE?

The authorization form appoints the Plan Administrator as your agent and
directs us to pay to the Plan Administrator your cash dividends on all or a
specified number of shares of common stock that you own on the applicable Record
Date, as well as on all whole and fractional shares of common stock credited to
your Plan account. The authorization form directs the Plan Administrator to
purchase for your account on the Investment Date (as defined in Question 11)
additional shares of common stock with those dividends and Optional Cash
Payments, if any, made by you. See Question 8 for a discussion of the broker and
nominee form that the broker, bank or other nominee uses for Optional Cash
Payments of a Beneficial Owner if the broker, bank, or other nominee holds the
Beneficial Owner's shares in the name of a major securities depository. The
authorization form also directs the Plan Administrator to reinvest automatically
all, a portion, or none of the subsequent dividends with respect to shares of
common stock credited to your Plan account. Dividends will continue to be
reinvested on the number of shares of common and preferred stock that you own on
the applicable Record Date and on all shares of common stock credited to your
Plan account until you withdraw from the Plan (see Questions 26 and 27), or we
terminate the Plan. See Question 6 for additional information about the
authorization form.

The authorization form provides for the purchase of initial or additional
shares of common stock through the following investment options:

(1) If you elect "Full Dividend Reinvestment," the Plan Administrator
will apply all cash dividends on all shares of common and preferred stock
then or subsequently registered in your name, and all cash dividends on all
shares of common stock credited to your Plan account, together with any
Optional Cash Payments, toward the purchase of additional shares of common
stock.

(2) If you elect "Partial Dividend Reinvestment," the Plan
Administrator will apply all cash dividends on a specified number of shares
of common or preferred stock that you own on the applicable Record Date
registered in your name and specified on the authorization form and all
cash

dividends on all shares of common stock credited to your Plan account,
together with any Optional Cash Payments, toward the purchase of additional
shares of common stock. The Plan Administrator will pay cash dividends on
the remaining shares of common or preferred stock directly to you.

(3) If you elect "Optional Cash Payments Only", you will continue to
receive cash dividends on shares of common and preferred stock held for
your benefit outside the Plan, if any, in the usual manner. However, the
Plan Administrator will apply all cash dividends on all shares of common
stock credited to your Plan account, together with any Optional Cash
Payments that it receives from you, toward the purchase of additional
shares of common stock. See Question 8 for a discussion of the broker and
nominee form that the broker, bank, or other nominee uses for Optional Cash
Payments of a beneficial owner if the broker, bank, or other nominee holds
the Beneficial Owner's shares in the name of a major securities depository.

You may select any one of these three options. In each case, the Plan
Administrator will reinvest dividends on all shares of common stock credited to
your Plan account, including dividends on shares of common stock purchased with
any Optional Cash Payments, until you withdraw from the Plan altogether, or
until we terminate the Plan. If you would prefer to receive cash payments of
dividends paid on shares of common stock credited to your Plan account rather
than reinvest such dividends, you must withdraw those shares from the Plan by
written notification to the Plan Administrator. See Questions 26 and 27
regarding withdrawal of shares of common stock credited to your Plan account.

You may change your investment options at any time by requesting a new
authorization form and returning it to the Plan Administrator at the address set
forth in Question 4. See Question 11 for the effective date for any change in
investment options

ANY PARTICIPANT WHO RETURNS A PROPERLY EXECUTED AUTHORIZATION FORM TO THE
PLAN ADMINISTRATOR WITHOUT ELECTING AN INVESTMENT OPTION WILL BE ENROLLED AS
HAVING SELECTED THE FULL DIVIDEND REINVESTMENT OPTION.

8. WHAT DOES THE BROKER AND NOMINEE FORM PROVIDE?

The broker and nominee form provides the only means by which a broker,
bank, or other nominee holding shares of a Beneficial Owner in the name of a
major securities depository may invest Optional Cash Payments on behalf of that
Beneficial Owner. A broker and nominee form must be delivered to the Plan
Administrator each time such broker, bank, or other nominee transmits Optional
Cash Payments on behalf of a Beneficial Owner. Broker and nominee forms will be
furnished upon request to the Plan Administrator at:

Redwood Trust, Inc.
c/o Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1938
Telephone (800)-522-6645
HTTP://WWW.CHASEMELLON.COM/
SHRRELATIONS@MELLONINVESTOR.COM

Before submitting the broker and nominee form, the broker, bank, or other
nominee for a Beneficial Owner must submit a completed authorization form on
behalf of the Beneficial Owner. See Questions 6 and 7.

THE PLAN ADMINISTRATOR MUST RECEIVE THE BROKER AND NOMINEE FORM AND
APPROPRIATE INSTRUCTIONS BY NOT LATER THAN THE APPLICABLE RECORD DATE OR THE
PLAN ADMINISTRATOR WILL NOT INVEST THE OPTIONAL CASH PAYMENT UNTIL THE FOLLOWING
INVESTMENT DATE.

9. IS PARTIAL PARTICIPATION POSSIBLE UNDER THE PLAN?

Yes. New investors, Record Owners or the bank, broker, or other nominee for
Beneficial Owners may designate any desired number of their shares for which
dividends are to be reinvested. Dividends will thereafter be reinvested only on
the number of shares specified, and the Record Owner or Beneficial Owner, as the
case may be, will continue to receive cash dividends on the remainder of the
shares.

10. WHEN MAY AN ELIGIBLE SHAREHOLDER OR INTERESTED NEW INVESTOR JOIN THE PLAN?

A Record Owner or a Beneficial Owner may join the Plan at any time. A new
investor may join the Plan by making an initial investment of $500 to $5,000 (or
more with our permission) when returning the authorization form. See Question 7.
Once in the Plan, you remain in the Plan until you withdraw, we or the Plan
Administrator terminate your participation or we terminate the Plan. See
Question 27 regarding withdrawal from the Plan.

11. WHEN WILL DIVIDENDS AND OPTIONAL CASH PAYMENTS BE INVESTED?

When shares are purchased from us, the Plan Administrator will make those
purchases on the Investment Date in each month. Generally, the Investment Date
will be the 21st day of a month, unless such date is not a business day in which
case it is the 1st business day immediately thereafter, or, in the case of open
market purchases, typically some day or days between the 21st and the next 10
business days thereafter, as market conditions permit.

See Question 18 for detailed information concerning Investment Dates for
Optional Cash Payments under the Stock Purchase program.

When the Plan Administrator makes open market purchases, those purchases
may be made on any securities exchange where the shares are traded, in the
over-the-counter market or in negotiated transactions, and may be subject to
such terms with respect to price, delivery, and other matters as agreed to by
the Plan Administrator. Neither we nor you will have any authorization or power
to direct the time or price at which the Plan Administrator purchases shares or
the selection of the broker or dealer through or from whom the Plan
Administrator makes purchases. However, when the Plan Administrator makes open
market purchases with Optional Cash Payments, the Plan Administrator is required
to use its reasonable best efforts to purchase the shares at the lowest possible
price.

If the Plan Administrator receives the authorization form at least two days
before the Record Date for a dividend payment, the election to reinvest
dividends will begin with that dividend payment. If the Plan Administrator
receives the authorization form less than two days before any such Record Date,
reinvestment of dividends will begin on the dividend payment date following the
next Record Date if you are still a stockholder of record.

See Question 17 for information concerning limitations on the minimum and
maximum amounts of Optional Cash Payments that you may make each month and
Question 18 for information as to when the Plan Administrator must receive
Optional Cash Payments to be invested on each Investment Date.

The Plan Administrator will allocate shares and credit shares, computed to
three decimal places, to your account as follows: (1) shares purchased from us
will be allocated and credited as of the appropriate Investment Date; and (2)
shares purchased in open market transactions will be allocated and credited as
of the date on which the Plan Administrator completes the purchases of the
aggregate number of shares to be purchased on behalf of all participants with
dividends to be reinvested or Optional Cash Payments, as the case may be, during
the month.

NO INTEREST WILL BE PAID ON CASH DIVIDENDS PENDING INVESTMENT OR
REINVESTMENT UNDER THE TERMS OF THE PLAN. SINCE NO INTEREST IS PAID ON CASH HELD
BY THE PLAN ADMINISTRATOR, IT NORMALLY WILL BE IN YOUR BEST INTEREST TO DEFER
OPTIONAL CASH PAYMENTS UNTIL SHORTLY BEFORE COMMENCEMENT OF THE PRICING PERIOD.

PURCHASES AND PRICES OF SHARES

12. WHAT WILL BE THE PRICE TO PARTICIPANTS OF SHARES PURCHASED UNDER THE PLAN?

With respect to reinvested dividends whether the shares are acquired
directly from us or on the open market, they will be purchased for the Plan at a
discount of 2% from the Market Price (as defined below).

Each month, we may establish a discount between 0% and 3% from the Market
Price applicable to Optional Cash Payments. The discount may vary each month but
once established will apply uniformly to all purchases made using Optional Cash
Payments during that month. See Question 16 for a further discussion of the
discount applicable to Optional Cash Payments.

However, in no event shall the amount of discounts specified above, plus
any brokerage commissions as described in Question 21 below, exceed 5% of the
fair market value of the common stock on the date of purchase.

The Market Price, in the case of shares purchased directly from us, will be
the average of the daily high and low sales prices, computed to 3 decimal
places, of our common stock on the NYSE or other applicable securities exchange,
as reported in the Wall Street Journal, during the Pricing Period (the 10 days
on which the NYSE is open and for which trades in our common stock are reported
immediately preceding the relevant Investment Date, or, if no trading occurs in
our common stock on one or more of such days, for the 10 days immediately
preceding the Investment Date for which trades are reported). See Question 17
for a further discussion of the computation of Market Price when purchases are
being made from us using pre-approved Optional Cash Payments in excess of
$5,000. In the case of shares purchased on the open market, the Market Price
will be the weighted average of the actual prices paid, net of any brokerage
commissions, computed to 3 decimal places, for all of the common stock purchased
by the Plan Administrator with all Participants' reinvested dividends and
Optional Cash Payments for the related month.

Neither we nor you will have any authorization or power to direct the time
or price at which the Plan Administrator purchases shares or the selection of
the broker or dealer through or from whom the Plan Administrator makes the
purchases. However, when open market purchases are made by the Plan
Administrator, the Plan Administrator is required to use its best efforts to
purchase the shares at the lowest possible price.

13. WHAT ARE THE RECORD DATES AND INVESTMENT DATES FOR DIVIDEND REINVESTMENT?

For the reinvestment of dividends, the "Record Date" is the date declared
by our Board of Directors for payment of a dividend. Likewise, the dividend
payment date declared by our Board of Directors constitutes the Investment Date
applicable to the reinvestment of that dividend with respect to shares of common
stock acquired directly from us, except that if any such date is not a business
day, the first business day immediately following such date will be the
Investment Date. The Investment Date with respect to shares of common stock that
the Plan Administrator purchases in open market transactions will typically be
some day or days between the 21st and the next 10 business days thereafter, as
market conditions permit. Dividends will be reinvested on the Investment Date
using the applicable Market Price (as defined in Question 12). See Schedule A
for a list of the future dividend Record Dates and Investment Dates. Please
refer to Question 18 for a discussion of the Record Dates and Investment Dates
applicable to Optional Cash Payments.

14. HOW WILL THE NUMBER OF SHARES PURCHASED FOR YOU BE DETERMINED?

Your Plan account will be credited with the number of shares, including
fractions computed to three decimal places, equal to the total amount to be
invested on your behalf divided by the purchase price per share, less the
applicable discount from the Market Price per share as calculated pursuant to
the methods described in Question 12, as applicable. The total amount to be
invested will depend on the amount of any dividends paid on the number of shares
of common stock that you own on the applicable Record Date and shares of common
stock credited to your Plan account and available for investment on the related
Investment Date, or the amount of any Optional Cash Payments made by you and
available for investment on the related Investment Date. Subject to the
availability of shares of common stock registered for issuance under the Plan,
there is no limit to the number of shares available for issuance pursuant to the
reinvestment of dividends.

15. WHAT IS THE SOURCE OF SHARES OF COMMON STOCK PURCHASED UNDER THE PLAN?

Shares of common stock credited to your Plan account will be purchased
either directly from us, in which event such shares will be authorized but
unissued shares or treasury shares, or on the open market or privately
negotiated transactions, or by a combination of the foregoing, at our option,
after a review of current market conditions and our current and projected
capital needs. We will determine the source of the shares of common stock to be
purchased under the Plan at least three business days before the relevant Record
Date, and will notify the Plan Administrator of the same. Neither we nor the
Plan Administrator will be required to provide any written notice to you as to
the source of the shares of common stock to be purchased under the Plan, but
information regarding the source of the shares of common stock may be obtained
by contacting our investor relations department at (415) 389-7373.

16. HOW DOES THE OPTIONAL CASH PAYMENT FEATURE OF THE PLAN WORK?

All Record Owners and interested new investors who have timely submitted
signed authorization forms indicating their intention to participate in the
Optional Cash Payment feature, and all Beneficial Owners whose brokers, banks,
or other nominees have timely submitted signed authorization forms indicating
their intention to participate in the Optional Cash Payment feature (except for
Beneficial Owners whose brokers, banks, or other nominees hold the shares of the
Beneficial Owners in the name of a major securities depository), are eligible to
make Optional Cash Payments during any month, whether or not a dividend is
declared. If a broker, bank, or other nominee holds shares of a Beneficial Owner
in the name of a major securities depository, Optional Cash Payments must be
made through the use of the broker and nominee form. See Question 8. Optional
cash payments must be accompanied by an authorization form or a broker and
nominee form, as applicable. Each month the Plan Administrator will apply any
Optional Cash Payment received from you no later than one business day before
commencement of that month's Pricing Period (as defined in Question 12) to the
purchase of additional shares of common stock for your account on the following
Investment Date (as defined in Questions 11 and 18) and will enroll all, a
portion or none of such shares in the Dividend Reinvestment program as directed
on the authorization form.

The Optional Cash Discount will be established each month by us and will
range between 0% and 3% of the Market Price. Refer to Question 17 regarding how
to obtain information on the discount and for a discussion of the possible
limitations on the purchase price applicable to the purchase of shares made with
Optional Cash Payments.

17. WHAT LIMITATIONS APPLY TO OPTIONAL CASH PAYMENTS?

Each Optional Cash Payment is subject to a minimum per month purchase of
$500 and a maximum per month purchase limit of $5,000. For purposes of these
limitations, all Plan accounts under your common control or management (which
will be determined at our sole discretion) will be aggregated. Generally,
Optional Cash Payments of less than $500 and that portion of any Optional Cash
Payment

which exceeds the maximum monthly purchase limit of $5,000, unless such limit
has been waived by us, will be returned to you without interest at the end of
the relevant Pricing Period.

You may make Optional Cash Payments of up to $5,000 each month without our
prior approval, subject to our right to modify, suspend or terminate
participation in the Plan by otherwise eligible holders of shares of common
stock or interested new investors to eliminate practices which are, in our sole
discretion, not consistent with the purposes or operation of the Plan or which
adversely affect the price of the shares of common stock. Optional cash payments
in excess of $5,000 may be made by you only upon our acceptance of a completed
Request for Waiver form from you and the Plan Administrator's receipt of that
form. There is no pre-established maximum limit applicable to Optional Cash
Payments that may be made pursuant to accepted Requests for Waivers. A Request
for Waiver form must be received each month by us and the Plan Administrator and
accepted by us and notice of our acceptance must have been received by the Plan
Administrator no later than the Record Date (as defined in Question 18) for the
applicable Investment Date. Request for Waiver forms will be furnished at any
time upon request to the Plan Administrator at the address or telephone number
specified in Question 4. Requests for Waivers will be accepted only with respect
to actual Record Owners and not for the benefit of Beneficial Owners or multiple
Participants. If you are interested in obtaining further information about a
Request for Waiver, you should contact our investor relations department at
(415) 389-7373.

Waivers will be considered on the basis of a variety of factors, which may
include our current and projected capital needs, the alternatives available to
us to meet those needs, prevailing market prices for shares of common stock and
our other securities, general economic and market conditions, expected
aberrations in the price or trading volume of the shares of common stock, the
potential disruption of the price of the shares of common stock by a financial
intermediary, the number of shares of common stock that you hold, your past
actions under the Plan, the aggregate amount of Optional Cash Payments for which
such waivers have been submitted and the administrative constraints associated
with granting such waivers. Grants of waivers will be made in our absolute
discretion.

You are not obligated to participate in the Optional Cash Payment feature
of the Plan. Optional cash payments need not be in the same amount each month.

Unless we waive our right to do so, we may establish for any Pricing Period
a minimum Threshold Price applicable only to the investment of Optional Cash
Payments that exceed $5,000 and that are made pursuant to Requests for Waivers,
to provide us with the ability to set a minimum price at which shares of common
stock will be sold under the Plan each month pursuant to such requests. A
Threshold Price will only be established when shares of common stock will be
purchased directly from us on the applicable Investment Date. We will, at least
three business days before each Record Date (as defined in Question 18),
determine whether to establish a Threshold Price and, if a Threshold Price is
established, its amount and so notify the Plan Administrator. The determination
whether to establish a Threshold Price and, if a Threshold Price is established,
its amount, will be made by us at our discretion after a review of current
market conditions, the level of participation in the Plan, and our current and
projected capital needs. Neither we nor the Plan Administrator will be required
to provide any written notice to you as to whether a Threshold Price has been
established for any Pricing Period, but information regarding the Threshold
Price may be obtained by contacting us at (415) 389-7373.

The Threshold Price, if any, for Optional Cash Payments made through
Requests for Waivers, if established for a Pricing Period, will be a stated
dollar amount that the average of the high and low trading prices of the shares
of common stock on the New York Stock Exchange during the Pricing Period must
equal or exceed. In the event that the Threshold Price is not satisfied for a
trading day in the Pricing Period, then the trading price for such day will be
excluded from the computation of the Market Price for such period and the
investment made on the corresponding Investment Date will be reduced. For each
trading day on which the Threshold Price is not satisfied, 1/10 of each Optional
Cash Payment made by you pursuant to a Request for Waiver will be returned to
you, without interest, as soon as practicable after the end of the applicable
Pricing Period. Thus, for example, if the Threshold Price is not satisfied for
three of the ten trading days in a Pricing Period, 3/10 of your Optional Cash
Payment made pursuant to a Request

for Waiver will be returned to you by check, without interest, as soon as
practicable after the end of the applicable Investment Date. The Plan
Administrator expects to mail such checks within five to ten business days from
the end of the applicable Investment Date. This return procedure will only apply
when shares are purchased directly from us for Optional Cash Payments made
through Requests for Waivers and we have set a Threshold Price with respect to
the relevant Pricing Period. See Question 15.

Setting a Threshold Price for a Pricing Period will not affect the setting
of a Threshold Price for any subsequent Pricing Period. The Threshold Price
concept and return procedure discussed above apply only to Optional Cash
Payments made through Requests for Waivers.

For any Pricing Period, we may waive our right to set a Threshold Price for
Optional Cash Payments made through Requests for Waivers. You may ascertain
whether the Threshold Price applicable to a given Pricing Period has been set or
waived, as applicable, by contacting us at (415) 380-2304.

For a list of expected dates by which the Threshold Price will be set in
2002 and 2003, see Schedule A, or refer to the updated schedule on our website
at HTTP://WWW.REDWOODTRUST.COM.

Likewise, your Optional Cash Payments made pursuant to a Request for Waiver
may specify a Maximum Price per share that you are willing to pay -- and if the
Market Price less the applicable discount exceeds such Maximum Price, and the
stock is to be purchased directly from us and not on the open market, your
investment will not be made and your full payment will instead be returned to
you without interest.

Each month, at least three business days before the applicable Record Date
(as defined in Question 18), we may establish the discount from the Market Price
applicable to Optional Cash Payments during the corresponding Pricing Period and
will notify the Plan Administrator of the same. The discount may be between 0%
and 3% of the Market Price and may vary each month, but once established will
apply uniformly to all Optional Cash Payments made during that month. The
discount will be established in our sole discretion after a review of current
market conditions, the level of participation in the Plan, and our current and
projected capital needs. The discount applies only to Optional Cash Payments.
Neither we nor the Plan Administrator will be required to provide any written
notice to you as to the discount, but information regarding the discount
applicable to the next Pricing Period may be obtained by contacting us at (415)
389-7373. Setting a discount for a Pricing Period will not affect the setting of
a discount for any subsequent Pricing Period.

18. WHAT ARE THE RECORD DATES AND INVESTMENT DATES FOR OPTIONAL CASH PAYMENTS?

Optional cash payments will be invested every month on the related
Investment Date. The Optional Cash Payment Due Date is one business day before
commencement of the related Pricing Period and the "Investment Date" is on or
about the 21st day of each month or, in the case of open market purchases, the
Investment Date will be some day or days between the 21st and the next 10
business days thereafter, as market conditions permit.

Optional cash payments that the Plan Administrator receives by the Record
Date will be applied to the purchase of shares of common stock on the Investment
Dates which relate to that Pricing Period. No interest will be paid by us or the
Plan Administrator on Optional Cash Payments held pending investment. Generally,
Optional Cash Payments received after the Record Date will be returned to you
without interest at the end of the Pricing Period; you may resubmit those
Optional Cash Payments before commencement of the next or a later Pricing
Period.

For a schedule of expected Optional Cash Payment Due Dates and Investment
Dates through January 2004, see Schedule A or visit our website at
HTTP://WWW.REDWOODTRUST.COM.

19. WHEN MUST THE PLAN ADMINISTRATOR RECEIVE OPTIONAL CASH PAYMENTS?

Each month the Plan Administrator will apply any Optional Cash Payment for
which good funds are timely received to the purchase of shares of common stock
for your account during the next Pricing

Period. See Question 18. For funds to be invested during the next Pricing
Period, the Plan Administrator must have received a check, money order or wire
transfer by the end of the business day immediately preceding the first trading
day of the ensuing Pricing Period and that check, money order or wire transfer
must have cleared on or before the first Investment Date in such Pricing Period.
Wire transfers may be used only if the Plan Administrator approves it verbally
in advance. Checks and money orders are accepted subject to timely collection as
good funds and verification of compliance with the terms of the Plan. Checks or
money orders should be made payable to "Mellon Investor Services LLC -- Redwood
Trust, Inc. DRP" and submitted together with, initially, the authorization form
or, subsequently, the form for additional investments attached to your
statements. Checks returned for any reason will not be resubmitted for
collection.

NO INTEREST WILL BE PAID BY US OR THE PLAN ADMINISTRATOR ON OPTIONAL CASH
PAYMENTS HELD PENDING INVESTMENT. SINCE NO INTEREST IS PAID ON CASH HELD BY THE
PLAN ADMINISTRATOR, IT NORMALLY WILL BE IN YOUR BEST INTEREST TO DEFER OPTIONAL
CASH PAYMENTS UNTIL SHORTLY BEFORE COMMENCEMENT OF THE PRICING PERIOD.

For payments to be invested on the first Investment Date in a Pricing
Period, in addition to the receipt of good funds by the first Investment Date in
a Pricing Period, the Plan Administrator must be in receipt of an authorization
form or a broker and nominee form, as appropriate, as of the same date. See
Questions 6 and 8.

20. MAY OPTIONAL CASH PAYMENTS BE RETURNED?

Yes. Upon telephone or written request to the Plan Administrator received
at least five business days before the Record Date for the Investment Date with
respect to which Optional Cash Payments have been delivered to the Plan
Administrator, such Optional Cash Payments will be returned to you as soon as
practicable. Requests received less than five business days before such date
will not be returned but instead will be invested on the next related Investment
Date. Additionally, in the case of shares being purchased from us, 1/10 of each
Optional Cash Payment will be returned by check, without interest, as soon as
practicable after the end of the Pricing Period for each trading day that does
not meet the Threshold Price, if any, applicable to Optional Cash Payments made
pursuant to Requests for Waivers. Similarly, if the Market Price less any
applicable discount exceeds the requested Maximum Price, all your waiver request
funds will be returned. See Question 17. Also, each Optional Cash Payment, to
the extent that it does not either conform to the limitations described in
Question 18 or clear within the time limit described in Question 19, will be
subject to return to you as soon as practicable.

21. ARE THERE ANY EXPENSES TO YOU IN CONNECTION WITH YOUR PARTICIPATION UNDER
THE PLAN?

No. You will incur no brokerage commissions or service charges in
connection with the reinvestment of dividends and in connection with all
purchases made pursuant to Optional Cash Payments under the Plan. We will pay
all other costs of administration of the Plan. Additionally, you may elect to
send the certificates for your other shares of common or preferred stock to the
Plan Administrator for safekeeping, and there is no fee for this service.
However, should you request that the Plan Administrator sell all or any portion
of your shares (see Question 27) you may pay a nominal fee per transaction to
the Plan Administrator, any related brokerage commissions, and applicable stock
transfer taxes.

ACCOUNT STATEMENTS

22. WHAT KIND OF REPORTS WILL BE SENT TO YOU?

You will receive a statement of your account following each purchase or
sale transaction and following any withdrawal of shares. These statements are
your continuing record of the cost of your purchases and should be retained for
income tax purposes. In addition, you will receive copies of other
communications sent to holders of the shares of common stock, including our
annual report to stockholders, the notice of annual meeting and proxy statement
in connection with our annual meeting of stockholders, and Internal Revenue
Service information for reporting dividends paid.

DIVIDENDS ON FRACTIONS

23. WILL YOU BE CREDITED WITH DIVIDENDS ON FRACTIONS OF SHARES?

Yes.

CERTIFICATES FOR COMMON SHARES

24. WILL CERTIFICATES BE ISSUED FOR SHARES PURCHASED?

No. Shares of common stock purchased for you will be held in the name of
the Plan Administrator or its nominee. No certificates will be issued to you for
shares in the Plan unless you submit a written request to the Plan Administrator
or until participation in the Plan is terminated. At any time, you may request
that the Plan Administrator send you a certificate for some or all of the whole
shares credited to your account. You should mail this request to the Plan
Administrator at the address set forth in the answer to Question 4. Any
remaining whole shares and any fractions of shares will remain credited to your
Plan account. Certificates for fractional shares will not be issued under any
circumstances.

25. IN WHOSE NAME WILL CERTIFICATES BE REGISTERED WHEN ISSUED?

Your Plan account is maintained in the name in which your certificates were
registered at the time of your enrollment in the Plan. Share certificates for
whole shares purchased under the Plan will be similarly registered when issued
upon your request. If you are a Beneficial Owner, you should place the request
through your banker, broker, or other nominee. See Question 6. If you wish to
pledge shares credited to your Plan account, you must first withdraw those
shares from the Plan account. If you wish to withdraw your shares and have any
or all of the full shares held in their Plan account issued and delivered to you
in physical form, you may do so by sending a written instruction to the Plan
Administrator. Registration of withdrawn shares in a name other than yours will
require the guaranty of your signature.

WITHDRAWALS AND TERMINATION

26. WHEN MAY PARTICIPANTS WITHDRAW FROM THE PLAN?

You may withdraw from the Plan with respect to all or a portion of the
shares held in your Plan account at any time. If the request to withdraw is
received before a dividend Record Date set by our Board of Directors for
determining stockholders of record entitled to receive a dividend, the request
will be processed on the day following the Plan Administrator's receipt of the
request.

If the Plan Administrator receives your request to withdraw on or after a
dividend Record Date, but before a payment date, the Plan Administrator, in its
sole discretion, may either pay such dividend in cash or reinvest it in shares
for your account. The request for withdrawal will then be processed as promptly
as possible following such dividend payment date. All dividends subsequent to
such dividend payment date or Investment Date will be paid in cash unless you
re-enroll in the Plan, which may be done at any time.

Any Optional Cash Payments which have been sent to the Plan Administrator
before a request for withdrawal will also be invested on the next Investment
Date unless you expressly request return of that payment in the request for
withdrawal, and the Plan Administrator receives the request for withdrawal at
least five business days before the Record Date for the Investment Date with
respect to which Optional Cash Payments have been delivered to the Plan
Administrator.

27. HOW DO YOU WITHDRAW FROM THE PLAN?

If you wish to withdraw from the Plan with respect to all or a portion of
the shares held in your Plan account, you must notify the Plan Administrator in
writing at its address set forth in the answer to Question 4. Upon your
withdrawal from the Plan or termination of the Plan by us, certificates for the

appropriate number of whole shares credited to your account under the Plan will
be issued. Registration of withdrawn shares in a name other than yours will
require the guaranty of your signature.

Upon withdrawal from the Plan, you may also request in writing that the
Plan Administrator sell all or part of the shares credited to your Plan account.
The Plan Administrator will sell the shares as requested within ten business
days after processing the request for withdrawal. The timing and price of the
sale are at the sole discretion of the Plan Administrator. The Plan
Administrator will send a check for the proceeds of the sale, less any brokerage
commissions and service charges paid to the Plan Administrator and any
applicable share transfer taxes, generally within five business days of the
sale.

Cash will be paid in lieu of any fraction of a share, based on the
prevailing market price.

28. ARE THERE ANY AUTOMATIC TERMINATION PROVISIONS?

Yes. Participation in the Plan will be terminated if the Plan Administrator
receives written notice of the death or adjudicated incompetence of a
Participant, together with satisfactory supporting documentation of the
appointment of a legal representative, at least five business days before the
next Record Date for purchases made through the reinvestment of dividends or
Optional Cash Payments, as applicable. In the event written notice of death or
adjudicated incompetence and such supporting documentation is received by the
Plan Administrator less than five business days before the next Record Date for
purchases made through the reinvestment of dividends or Optional Cash Payments,
as applicable, shares will be purchased for the Participant with the related
cash dividend or Optional Cash Payment and participation in the Plan will not
terminate until after such dividend or payment has been reinvested. Thereafter,
no additional purchase of shares will be made for the Participant's account and
the Participant's shares and any cash dividends paid thereon will be forwarded
to the Participant's legal representative.

Further, participation in the Plan may be terminated if all whole shares
have been disbursed from your stockholder account and your Plan account, leaving
only a fraction of a share.

Lastly, participation in the Plan may be terminated if we have reason to
believe that your continued participation may cause your share ownership to
violate our 9.8% charter limit on share ownership.

WE RESERVE THE RIGHT TO MODIFY, SUSPEND OR TERMINATE PARTICIPATION IN THE
PLAN BY OTHERWISE ELIGIBLE HOLDERS OF SHARES OF COMMON STOCK OR INTERESTED NEW
INVESTORS TO ELIMINATE PRACTICES WHICH ARE, IN OUR SOLE DISCRETION, NOT
CONSISTENT WITH THE PURPOSES OR OPERATION OF THE PLAN OR WHICH ADVERSELY AFFECT
THE PRICE OF THE SHARES OF COMMON STOCK.

OTHER INFORMATION

29. WHAT HAPPENS IF YOU SELL OR TRANSFER ALL OF THE SHARES REGISTERED IN YOUR
NAME?

If you dispose of all shares registered in your name and all shares held in
your Plan account, and are not shown as a Record Owner on a dividend Record
Date, you may be terminated from the Plan as of that date and the termination
treated as though a withdrawal notice had been received before the Record Date.

30. WHAT HAPPENS IF WE DECLARE A STOCK DIVIDEND OR A STOCK SPLIT?

Any dividend payable in shares and any additional shares distributed by us
in connection with a share split in respect of shares credited to your Plan
account will be added to that account. Share dividends or split shares which are
attributable to shares registered in your own name and not in your Plan account
will be mailed directly to you as in the case of stockholders not participating
in the Plan.

31. HOW WILL SHARES HELD BY THE PLAN ADMINISTRATOR BE VOTED AT MEETINGS OF
SHAREHOLDERS?

If you are a Record Owner, you will receive a proxy card covering both
directly held shares and shares held in the Plan. If you are a Beneficial Owner,
you will receive a proxy covering shares held in the

Plan through your broker, bank, or other nominee. If a proxy is returned
properly signed (unless returned electronically) and marked for voting, all the
shares covered by the proxy will be voted as marked. If a proxy is returned
properly signed (unless returned electronically) but no voting instructions are
given, all of your shares will be voted in accordance with recommendations of
our Board of Directors, unless applicable laws require otherwise. If the proxy
is not returned, or if it is returned unexecuted or improperly executed (unless
returned electronically) or improperly completed, shares registered in your name
may be voted only by you in person; neither we nor the Plan Administrator will
vote such shares.

32. WHAT ARE OUR RESPONSIBILITIES AND THE PLAN ADMINISTRATOR'S RESPONSIBILITIES
UNDER THE PLAN?

We and the Plan Administrator will not be liable in administering the Plan
for any act done in good faith or required by applicable law or for any good
faith omission to act including, without limitation, any claim of liability
arising out of failure to terminate a participant's account upon his or her
death, with respect to the prices at which shares are purchased and/or the times
when such purchases are made or with respect to any fluctuation in the market
value before or after purchase or sale of shares. Notwithstanding the foregoing,
nothing contained in the Plan limits our liability with respect to alleged
violations of federal securities laws.

We and the Plan Administrator will be entitled to rely on completed forms
and the proof of due authority to participate in the Plan, without further
responsibility of investigation or inquiry.

33. MAY THE PLAN BE CHANGED OR DISCONTINUED?

Yes. We may suspend, terminate, or amend the Plan at any time. Notice will
be sent to you of any suspension or termination, or of any amendment that alters
the Plan terms and conditions, as soon as practicable after such action by us.

We may appoint a successor administrator or agent in place of the Plan
Administrator at any time. You will be promptly informed of any such
appointment.

Any questions of interpretation arising under the Plan will be determined
by us, in our sole discretion, and any such determination will be final.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

34. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATION IN THE PLAN?

The following summarizes certain federal income tax considerations to
current stockholders who participate in the Plan. New investors and current
stockholders should also consult the general discussion under the caption
"Federal Income Tax Considerations" for a summary of federal income tax
considerations related to the ownership of our stock.

The following summary is based upon an interpretation of current federal
tax law. It is important that you consult your own tax advisors to determine
particular tax consequences, including state income tax (and non-income tax,
such as stock transfer tax) consequences, which vary from state to state and
which may result from participation in the Plan and the subsequent disposition
of shares of common stock acquired pursuant to the Plan. Income tax consequences
to Participants residing outside the United States will vary from jurisdiction
to jurisdiction.

GnazzoThill, A Professional Corporation, our special tax counsel, has
rendered an opinion that the following are the material federal income tax
consequences of participating in the Plan. However, the opinions of counsel are
not binding on the Internal Revenue Service or on the courts, and no assurance
can be given that the conclusions reached by GnazzoThill would be sustained in
court.

DIVIDEND REINVESTMENT PROGRAM

Participants in the Dividend Reinvestment program under the Plan will be
treated for federal income tax purposes as having received, generally on the
Investment Date, a distribution in an amount equal to the fair market value on
that date of the shares acquired with reinvested dividends. Such shares will
have a tax basis equal to the same amount and the holding period for such shares
will begin on the day following the Investment Date.

For federal income tax purposes, the fair market value of shares acquired
under the Plan will likely be treated as equal to 100% of the average of the
high and low sale prices of shares on the related Investment Date. Such average
sales price on that specific date may vary from the market price determined
under the Plan for such shares

Such distribution will be taxable as a dividend to the extent of our
current or accumulated earnings and profits. To the extent the distribution is
in excess of our current or accumulated earnings and profits, the distribution
will be treated first as a tax-free return of capital, reducing the tax basis in
your shares, and the distribution in excess of your tax basis will be taxable as
gain realized from the sale of your shares.

EXAMPLE 1:

The following example may be helpful to illustrate the federal income tax
consequences of the reinvestment of dividends at a 2% discount from the market
price where the fair market value for tax purposes is the same as the market
price.

Cash dividends reinvested................................... $100.00
Assumed market price*....................................... $30.00
Less 2% discount per share.................................. $(0.60)
Net purchase price per share................................ $29.40
Number of shares purchased ($100.00/$29.40)................. 3.4014
Total taxable dividend resulting from transaction (30.00 x
3.4014)**................................................. $102.04

---------------

* This price is assumed for illustrative purposes only, and may vary from the
actual market price of the common stock.

** Assumes trading price on Investment Date also equals $30.00

STOCK PURCHASE PROGRAM

The taxation of discounts, if any, associated with optional cash purchases
is not entirely clear. You may be treated as having received a distribution in
an amount equal to the excess, if any, of the fair market value of the shares
acquired for your account on the Investment Date over the amount of your
Optional Cash Payment. The fair market value on an Investment Date may differ
from the Market Price determined under the Plan for such shares. You should be
aware that we will treat the entire amount of such excess value as a
distribution for tax reporting purposes that is taxable as a dividend. It is
possible, however, that such excess value should not be treated as a taxable
distribution, or if it is, that all or a portion of such distribution should be
treated as a tax-free return of capital. PARTICIPANTS ARE STRONGLY ENCOURAGED TO
CONSULT THEIR OWN TAX ADVISORS IN THIS REGARD.

Shares acquired under the Stock Purchase program under the Plan will have a
tax basis equal to the amount of the payment plus the dividend income, if any,
recognized as a result. Your holding period for shares of common stock acquired
pursuant to the Plan will begin on the day following the Investment Date.

EXAMPLE 2:

The following example may be helpful to illustrate the federal income tax
consequences of the Optional Cash Payment feature at a 2% discount from the
market price where the fair market value for tax purposes differs from the
market price.

Optional Cash Payment....................................... $100.00
Assumed market price*....................................... $30.00
Less 2% discount per share.................................. $(0.60)
Net purchase price per share................................ $29.40
Number of shares purchased ($100.00/$29.40)................. 3.4014
Total taxable dividend resulting from transaction (3.4014 X
$30.50 - $100.00)**....................................... $ 3.74

---------------

* This price is assumed for illustrative purposes only, and may vary from the
actual market price of the common stock.

** Assumes trading price on Investment Date also equals $30.50

You will not realize any taxable income upon receipt of certificates for
whole shares of common stock credited to your account, either upon your request
for certain of those shares of common stock or upon your termination of
participation in the Plan. You will recognize gain or loss upon the sale or
exchange of shares of common stock acquired under the Plan. You will also
recognize gain or loss upon receipt, following termination of participation in
the Plan, of a cash payment for any fractional share equivalent credited to your
account. The amount of any such gain or loss will be the difference between the
amount that you received for the shares of common stock or fractional share
equivalent and the tax basis thereof.

35. HOW ARE INCOME TAX WITHHOLDING PROVISIONS APPLIED TO YOU?

If you fail to provide certain federal income tax certifications in the
manner required by law, distributions on shares of common stock, proceeds from
the sale of fractional shares and proceeds from the sale of shares of common
stock held for your account will be subject to federal income tax backup
withholding imposed at the fourth lowest tax rate applicable to unmarried
individuals, or such other rate as is then in effect. If withholding is required
for any reason, the appropriate amount of tax will be withheld before investment
or payment. Certain stockholders (including most corporations) are, however,
exempt from the above withholding requirements.

If you are a foreign stockholder you need to provide the required federal
income certifications to establish your status as a foreign stockholder so that
the foregoing backup withholding does not to apply to you. You also need to
provide the required certifications if you wish to claim the benefit of
exemptions from federal income tax withholding or reduced withholding rates
under a treaty or convention entered into between the United States and your
country of residence. Generally, distributions to a foreign stockholder are
subject to federal income tax withholding at 30% (or a lower treaty rate if
applicable), but may be as much as 35% for certain types of income. Certain
distributions or portion of a distribution to a foreign stockholder may still be
subject to federal income tax withholding even when the distribution or that
portion of the distribution is not treated as dividend under federal income tax
laws. If you are a foreign stockholder whose distributions are subject to
federal income tax withholding, the appropriate amount will be withheld and the
balance will be credited to your account to purchase shares of common stock.

36. WHO BEARS THE RISK OF MARKET FLUCTUATIONS IN OUR SHARES OF COMMON STOCK?

Your investment in shares held in the Plan account is no different from
your investment in directly held shares. You bear the risk of any loss and enjoy
the benefits of any gain from market price changes with respect to those shares.

37. WHO SHOULD BE CONTACTED WITH QUESTIONS ABOUT THE PLAN?

All correspondence regarding the Plan should be directed to:

Redwood Trust, Inc.
c/o Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1938
Telephone (800)-522-6645
HTTP://WWW.CHASEMELLON.COM/
SHRRELATIONS@MELLONINVESTOR.COM

Please mention Redwood Trust, Inc. and this Plan in all correspondence.

38. HOW IS THE PLAN INTERPRETED?

Any question of interpretation arising under the Plan will be determined by
us and any such determination will be final. We may adopt additional terms and
conditions of the Plan and its operation will be governed by the laws of the
State of California.

39. WHAT ARE SOME OF YOUR RESPONSIBILITIES UNDER THE PLAN?

Shares of common stock credited to your Plan account are subject to escheat
to the state in which you reside in the event that such shares are deemed, under
such state's laws, to have been abandoned by you. You, therefore, should notify
the Plan Administrator promptly in writing of any change of address. Account
statements and other communications to you will be addressed to you at the last
address of record that you provide to the Plan Administrator.

You will have no right to draw checks or drafts against your Plan account
or to instruct the Plan Administrator with respect to any shares of common stock
or cash held by the Plan Administrator except as expressly provided in the Plan.

FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes certain material federal income tax
considerations to a holder of shares of our common stock. GnazzoThill, A
Professional Corporation has provided us with an opinion that this discussion is
an accurate general summary of material federal income tax considerations to
such investors. However, opinions of counsel are not binding on the Internal
Revenue Service or on the courts, and no assurance can be given that the
conclusions reached by GnazzoThill, A Professional Corporation would be
sustained in court. The following discussion, which is not exhaustive of all
possible tax consequences, does not give a detailed discussion of any state,
local or foreign tax considerations. Nor does it discuss all aspects of federal
income taxation that may be relevant to you in light of your particular
circumstances or to certain types of investors who are subject to special
treatment under federal income tax laws, including insurance companies, certain
tax-exempt entities, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States.

EACH PROSPECTIVE INVESTOR IN OUR SECURITIES IS ADVISED TO CONSULT WITH HIS
OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF
THE PURCHASE, OWNERSHIP, AND SALE OF SECURITIES IN AN ENTITY ELECTING TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, AND SALE AND THE POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.

GENERAL

The Code provides special tax treatment for organizations that qualify and
elect to be taxed as REITs. The discussion of various aspects of federal
taxation contained in this prospectus is based on the Code, administrative
regulations, judicial decisions, administrative rulings and practice as in
effect today, all of which are subject to change. In brief, if certain detailed
conditions imposed by the Code are met,

entities that invest primarily in real estate assets, including mortgage loans,
and that otherwise would be taxed as corporations are, with certain limited
exceptions, not taxed at the corporate level on their taxable income that is
currently distributed to their stockholders. This treatment eliminates most of
the "double taxation," at the corporate level and then again at the stockholder
level when income is distributed, that typically results from the use of
corporate investment vehicles. A qualifying REIT, however, may be subject to
certain excise and other taxes, as well as normal corporate tax, on taxable
income that is not currently distributed to its stockholders

We elected REIT status commencing with our taxable year ending December 31,
1994. In any taxable year in which we qualify as a REIT, we generally will not
be subject to federal income tax on that portion of our REIT taxable income or
capital gain which we distribute to stockholders.

Our qualification and taxation as a REIT depends upon our ability to
satisfy on a continuing basis, through actual annual operating and other
results, various requirements under the Internal Revenue Code, with regard to,
among other things, the sources of our gross income, the composition of our
assets, the level of our dividends to stockholders, and the diversity of our
share ownership. The purpose of these requirements is to allow the tax benefit
of REIT status only to companies that primarily own, and primarily derive income
from, real estate-related assets and certain other assets which are passive in
nature, and that distribute 90% of taxable income (computed without regard to
our net capital gain) to stockholders. We believe that we have qualified as a
REIT for all of our taxable years commencing with our taxable year ended
December 31, 1994, and that our current structure and method of operation is
such that we will continue to qualify as a REIT.

GnazzoThill has provided an opinion to the effect that we were organized
and have operated in conformity with the requirements for qualification and
taxation as a REIT under the Internal Revenue Code for our taxable year ended
December 31, 2001, the date of our latest audited financial statements received
by special tax counsel, and our current organization and method of operation
should enable us to continue to meet the requirements for qualification and
taxation as a REIT. It must be emphasized that this opinion is based on various
assumptions and factual representations made by us relating to our organization,
our prior and expected operation, and all of the various partnerships, limited
liability companies and corporate entities in which we presently have an
ownership interest, or in which we had an ownership interest in the past.
GnazzoThill will not review our compliance with these requirements on a
continuing basis. No assurance can be given that the actual results of our
operations, and our subsidiary entities, the sources of their gross income, the
composition of their assets, the level of our dividends to stockholders and the
diversity of our share ownership for any given taxable year will satisfy the
requirements under the Internal Revenue Code for qualification and taxation as a
REIT.

If we fail to qualify for taxation as a REIT in any taxable year, we will
be subject to tax on our taxable income at regular corporate rates. As a result,
our failure to qualify as a REIT would significantly reduce the cash available
for distribution by us to our stockholders. Unless entitled to relief under the
specific statutory provisions, we also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances we would be
entitled to such statutory relief.

QUALIFICATION AS A REIT

The following is a brief summary of certain technical requirements that we
must meet on an ongoing basis to qualify, and remain qualified, as a REIT under
the Code.

STOCK OWNERSHIP TESTS

Our capital stock must be transferable and held by at least 100 persons and
no more than 50% of the value of such capital stock may be owned, directly or
indirectly, by five or fewer individuals at all times during the last half of
any taxable year. Under the Code, most tax-exempt entities including employee
benefit trusts and charitable trusts (but excluding trusts described in section
401(a) and exempt under section 501(a)) are generally treated as individuals for
these purposes. We must satisfy these stock

ownership requirements each taxable year. We must solicit information from
certain of our stockholders to verify ownership levels and our Articles of
Incorporation provide restrictions regarding the transfer of our stock to aid in
meeting the stock ownership requirements. If we were to fail either of the stock
ownership tests, we would generally be disqualified from REIT status, unless, in
the case of the "five or fewer" requirement, the "good faith" exemption is
available.

ASSET TESTS

For tax years beginning before December 31, 2000, we must generally meet
the following asset tests (the "REIT Asset Tests") at the close of each quarter
of each taxable year:

(a) at least 75% of the value of our total assets must consist of
Qualified REIT Real Estate Assets, government securities, cash, and cash
items (the "75% Asset Test"); and

(b) the value of securities held by us but not taken into account for
purposes of the 75% Asset Test must not exceed either (i) 5% of the value
of our total assets in the case of securities of any one non-government
issuer, or (ii) 10% of the outstanding voting securities of any such
issuer.

For tax years beginning after December 31, 2000, we must generally meet the
following REIT Asset Tests at the close of each quarter of each taxable year:

(a) the 75% Asset Test;

(b) not more than 25% of the value of our total assets is represented
by securities (other than those includible under the 75% Asset Test);

(c) not more than 20% of the value of our total assets is represented
by securities of one or more taxable REIT subsidiary; and

(d) the value of securities held by us, other than those of a taxable
REIT subsidiary or taken into account for purposes of the 75% Asset Test,
must not exceed either (i) 5% of the value of our total assets in the case
of securities of any one non-government issuer, or (ii) 10% of the
outstanding vote or value of any such issuer's securities.

We expect that substantially all of our assets will be Qualified REIT Real
Estate Assets. In addition, we do not expect that the value of any
non-qualifying security of any one entity, including interests in taxable
affiliates, would ever exceed 5% of our total assets, and we do not expect to
own more than 10% of the vote or value of any one issuer's securities.

We intend to monitor closely the purchase, holding and disposition of our
assets to comply with the REIT Asset Tests. In particular, we intend to limit
and diversify our ownership of any assets not qualifying as Qualified REIT Real
Estate Assets to less than 25% of the value of our assets, to less than 5%, by
value, of any single issuer and to less than 20%, by value, of any taxable REIT
subsidiaries. If it is anticipated that these limits would be exceeded, we
intend to take appropriate measures, including the disposition of non-qualifying
assets, to avoid exceeding such limits.

GROSS INCOME TESTS

We must generally meet the following gross income tests (the "REIT Gross
Income Tests") for each taxable year:

(a) at least 75% of our gross income must be derived from certain
specified real estate sources including interest income and gain from the
disposition of Qualified REIT Real Estate Assets or "qualified temporary
investment income" (i.e., income derived from "new capital" within one year
of the receipt of such capital) (the "75% Gross Income Test"); and,

(b) at least 95% of our gross income for each taxable year must be
derived from sources of income qualifying for the 75% Gross Income Test, or
from dividends, interest, and gains from the sale of stock or other
securities (including certain interest rate swap and cap agreements,
options, futures

and forward contracts entered into to hedge variable rate debt incurred to
acquire Qualified REIT Real Estate Assets) not held for sale in the
ordinary course of business (the "95% Gross Income Test").

We intend to maintain our REIT status by carefully monitoring our income,
including income from hedging transactions and sales of mortgage assets, to
comply with the REIT Gross Income Tests. In accordance with the Code, we will
treat income generated by our interest rate caps and other hedging instruments
as qualifying income for purposes of the 95% Gross Income Tests to the extent
the interest rate cap or other hedging instrument was acquired to reduce the
interest rate risks with respect to any indebtedness incurred or to be incurred
by us to acquire or carry real estate assets. In addition, we will treat income
generated by other hedging instruments as qualifying or non-qualifying income
for purposes of the 95% Gross Income Test depending on whether the income
constitutes gains from the sale of securities as defined by the Investment
Company Act of 1940. Under certain circumstances, for example, (i) the sale of a
substantial amount of mortgage assets to repay borrowings in the event that
other credit is unavailable or (ii) unanticipated decrease in our qualifying
income which may result in the non-qualifying income exceeding 5% of gross
income, we may be unable to comply with certain of the REIT Gross Income Tests.
See "-- Taxation of Redwood Trust" below for a discussion of the tax
consequences of failure to comply with the REIT Provisions of the Code.

DISTRIBUTION REQUIREMENT

For tax years before 2001, we must generally distribute to our stockholders
an amount equal to at least 95% of our REIT taxable income before deductions of
dividends paid and excluding net capital gain. Beginning with the 2001 tax year,
this REIT distribution requirement is reduced to 90%.

The IRS has ruled that if a REIT's dividend reinvestment plan allows
stockholders of the REIT to elect to have cash dividends reinvested in shares of
the REIT at a purchase price equal to at least 95% of the fair market value of
such shares on the distribution date, then such distributions qualify under the
distribution requirement.

Our Plan terms are intended to comply with this ruling.

TAXATION OF REDWOOD TRUST, INC.

In any year in which we qualify as a REIT, we generally will not be subject
to federal income tax on that portion of our taxable income or net capital gain
which is distributed to our stockholders. We will, however, be subject to tax at
normal corporate rates upon any net income or net capital gain not distributed.
We intend to distribute substantially all of our taxable income to our
stockholders on a pro rata basis in each year.

In addition, we will also be subject to a tax of 100% of net income from
any prohibited transaction and will be subject to a 100% tax on the greater of
the amount by which we fail either the 75% or 95% income tests, reduced by
approximated expenses, if the failure to satisfy such tests is due to reasonable
cause and not willful neglect and if certain other requirements are met. We may
be subject to the alternative minimum tax on certain items of tax preference.

If we acquire any real property as a result of foreclosure, or by a deed in
lieu of foreclosure, we may elect to treat such property as "foreclosure
property." Net income from the sale of foreclosure property is taxable at the
maximum federal corporate rate, currently 35%. Income from foreclosure property
will not be subject to the 100% tax on prohibited transactions. We will
determine whether to treat such real property as foreclosure property on our tax
return for the fiscal year in which such property is acquired.

For tax years beginning prior to 2001, REITs were generally limited to
holding nonvoting stock in taxable affiliates. However, beginning with the 2001
tax year, REITs may own directly all of the stock, including voting stock, of a
taxable REIT subsidiary. Effective January 1, 2001, RWT Holdings, Inc.
("Holdings") and we elected to treat Holdings as a taxable subsidiary. Any other
taxable subsidiaries generally will also be converted to qualified taxable REIT
subsidiaries. The aggregate value of these

taxable REIT subsidiaries must be limited to 20% of the total value of our
assets. In addition, the taxable REIT subsidiaries may not, directly or
indirectly, operate or Manage lodging facility or health-care facilities or
provide to any person, under franchise, license or otherwise, rights to any
lodging facility or health-care facilities brand-name. In addition, we will be
subject to a 100% penalty tax equal to any rent or other charges that we impose
on any taxable REIT subsidiary in excess of an arm's length price for comparable
services.

We will derive income from our taxable REIT subsidiaries by way of
dividends. Such dividends are non-real estate source income for purposes of the
75% income test. Therefore, when aggregated with our other non-real estate
source income, such dividends must be limited to 25% of our gross income each
year. We will monitor the value of our investment in our taxable REIT
subsidiaries to ensure compliance with all applicable income and asset tests.

Our taxable REIT subsidiaries are generally subject to corporate level tax
on their net income and will generally be able to distribute only net after-tax
earnings to their shareholders, including us, as dividend distributions.

We will also be subject to the nondeductible 4% excise tax discussed above
if we fail to make timely dividend distributions for each calendar year. We
intend to declare our fourth regular quarterly dividend during the final quarter
of the year and to make such dividend distribution no later than thirty-one days
after the end of the year to avoid imposition of the excise tax. Such a
distribution would be taxed to our stockholders in the year that the
distribution was declared, not in the year paid. Imposition of the excise tax on
us would reduce the amount of cash available for distribution to our
stockholders. Shareholders may also be required to include on their own returns
certain undistributed long-term capital gains earned by us and on which we have
paid tax. Shareholders shall receive credit for the tax so paid by us and shall
increase the basis in their stock by the excess of such gains over such tax
paid.

TERMINATION OR REVOCATION OF REIT STATUS

Our election to be treated as a REIT will be terminated automatically if we
fail to meet the requirements described above. In that event, we will not be
eligible again to elect REIT status until the fifth taxable year which begins
after the year for which our election was terminated unless all of the following
relief provisions apply:

- We did not willfully fail to file a timely return with respect to the
termination taxable year;

- inclusion of incorrect information in such return was not due to fraud
with intent to evade tax; and,

- we establish that failure to meet requirements was due to reasonable
cause and not willful neglect.

We may also voluntarily revoke our election, although we have no intention
of doing so, in which event we will be prohibited, without exception, from
electing REIT status for the year to which the revocation relates and the
following four taxable years.

If we fail to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, we would be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Distributions to stockholders with respect to any year in which we fail
to qualify as a REIT would not be deductible by us nor would they be required to
be made. Failure to qualify as a REIT would result in reduction of our
distributions to stockholders to pay the resulting taxes. If, after forfeiting
REIT status, we later qualify and elect to the taxed as the REIT again, we could
face significant adverse tax consequences.

TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS

GENERAL

For any taxable year in which we are treated as a REIT for federal income
purposes, amounts distributed by us to our stockholders out of current or
accumulated earnings and profits will be includible

by our stockholders as ordinary income for federal income tax purposes unless
properly designated by us as capital gain dividends. In the latter case, the
distributions will generally be taxable to our stockholders as long-term capital
gains.

Distributions will not be eligible for the dividends received deduction for
our stockholders that are corporations. Our stockholders may not include in
their individual income tax returns any of our net operating losses or capital
losses.

Upon a sale or disposition of common stock, a stockholder will generally
recognize a capital gain or loss in an amount equal to the difference between
the amount realized and the shareholder's adjusted basis in such stock, which
gain or loss will be long-term if the stock has been held for more than one
year. Any loss in the sale or exchange of shares of our stock held by a
stockholder for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividend received on the stock held by such
stockholder.

If we make distributions to our stockholders in excess of our current and
accumulated earnings and profits, those distributions will be considered first
as a tax-free return of capital, reducing the tax basis of a stockholder's
shares until the tax basis is zero. Such distributions in excess of the tax
basis will be taxable as gain realized from the sale of your stock.

We will notify stockholders after the close of our taxable year as to the
portions of the distributions which constitute ordinary income, return of
capital and capital gain. Dividends and distributions declared in the last
quarter of any year payable to stockholders of record on a specified date in
such quarter will be deemed to have been received by the stockholders and paid
by us on December 31 of the record year, provided that such dividends are paid
before February 1 of the following year. If stock is sold after a Record Date
but before a payment date for declared dividends on such stock, the stockholder
will nonetheless be required to include such dividends in income in accordance
with the rules above for distributions, whether or not such dividend is required
to be paid over to the purchaser.

Generally, a distribution of earnings from a REIT is considered for
estimated tax purposes only when the distribution is made. However, if we are at
any time deemed to be a "closely held REIT" (a REIT in which at least 50% of the
vote or value is owned by five or fewer persons), any stockholder owning 10% or
more of the vote or value of our shares must accelerate the recognition of year
end distributions such shareholder receives from us in computing estimated tax
payments. We are not currently, and do not intend to be, a "closely held REIT."

TAXATION OF STOCKHOLDER RIGHTS

If we make a distribution of stockholder rights with respect to our common
stock, such distribution generally will be tax free and a stockholder's basis in
the rights received in such distribution will be zero. If the fair market value
of the rights on the date of issuance is 15% or more of the value of the common
stock or, if the stockholder so elects regardless of the value of the rights,
the stockholder will make an allocation between the relative fair market values
of the rights and the common stock on the date of the issuance of the rights. On
the exercise of the rights, the stockholder will generally not recognize gain or
loss. The stockholder's basis in the shares received from the exercise of the
rights will be the amount paid for the shares plus the basis, if any, of the
rights exercised. Distribution of stockholder rights with respect to other
classes of securities generally would be taxable.

TAXATION OF TAX-EXEMPT ENTITIES

In general, a tax-exempt entity that holds our common stock is not subject
to tax on distributions. The Internal Revenue Service has ruled that amounts
distributed by a REIT to an exempt employees' pension trust do not constitute
unrelated trade or business income and thus should be nontaxable to such a
tax-exempt entity. Based on that ruling, but subject to the discussion of excess
inclusion income set forth above, special tax counsel is of the opinion that
indebtedness incurred by us in connection with the acquisition of real estate
assets such as mortgage loans will not cause dividends paid by us to a
stockholder

that is a tax-exempt entity to be unrelated trade or business income, provided
that the tax-exempt entity has not financed the acquisition of its stock with a
"acquisition indebtedness" within the meaning of the Code. Under certain
conditions, however, if a tax-exempt employee pension or profit sharing trust
were to acquire more than 10% of our stock, a portion of the dividends on such
stock could be treated as unrelated trade or business income.

Other tax-exempt entities should review the Code and should consult their
own tax advisors concerning application of the unrelated trade or business
income rules to them.

TAXATION OF FOREIGN SHAREHOLDERS

The preceding discussion does not address the federal income tax
consequences to foreign investors, non-resident aliens and foreign corporations
as defined in the Code, of an investment in our stock. In general, foreign
investors will be subject to special withholding tax requirements on income and
capital gains distributions attributable to their ownership of our stock.
Foreign investors in our stock should consult their own tax advisors concerning
the federal income tax consequences to them of the purchase of our common stock
including the federal income tax treatment of dispositions of interests in, and
the receipt of distributions from, REITs by foreign investors. In addition,
federal income taxes must be withheld on certain distributions by a REIT to
foreign investors unless reduced or eliminated by an income tax treaty between
United States and foreign investor's country. A foreign investor eligible for
reduction or elimination of withholding must file an appropriate form with us to
claim such treatment.

OTHER TAX CONSIDERATIONS

STATE AND LOCAL TAXES. We and our stockholders may be subject to state or
local taxation in various jurisdictions, including those in which we or they
transact business or reside. The state and local tax treatment of us and our
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, you should consult you own tax advisors regarding the
effect of state and local tax laws on an investment in our common stock.

ERISA INVESTORS

Because our common stock will qualify as a "publicly offered security,"
employee benefit plans and individual retirement accounts may purchase shares of
common stock and treat such shares, and not the underlying assets, as plan
assets. Fiduciaries of ERISA plans should consider (i) whether an investment in
our common stock satisfies ERISA diversification requirement, (ii) whether the
investment is in accordance with the ERISA plans' governing instruments and
(iii) whether the investment is prudent.

DIVIDENDS

We have paid dividends since our incorporation. See Schedule A for a list
of anticipated dividend Record and Investment dates or visit our website at
HTTP://WWW.REDWOODTRUST.COM.

USE OF PROCEEDS

We do not know either the number of shares of common stock that will be
ultimately sold pursuant to the Plan or the prices at which such shares will be
sold. We will receive proceeds from the purchase of shares of common stock
through the Plan only to the extent that such purchases are made directly from
us and not from open market purchases by the Plan Administrator. We intend to
use the net proceeds from the sale of such shares of our common stock for the
purchase of additional Mortgage Assets and for other general corporate purposes.

PLAN OF DISTRIBUTION

Except to the extent the Plan Administrator purchases common stock in open
market transactions, the common stock acquired under the Plan will be sold
directly by us through the Plan. We may sell common stock to owners of shares
(including brokers or dealers) who, in connection with any resales of such
shares, may be deemed to be underwriters. Such shares, including shares acquired
pursuant to waivers granted with respect to the Stock Purchase program of the
Plan, may be resold in market transactions (including coverage of short
positions) on any national security exchange on which shares of common stock
trade or in privately negotiated transactions. Our common stock is currently
listed on the NYSE.

Under certain circumstances, it is expected that a portion of the shares of
common stock available for issuance under the Plan will be issued pursuant to
such waivers. The difference between the price such owners pay to us for shares
of common stock acquired under the Plan, after deduction of the applicable
discount from the Market Price, and the price at which such shares are resold,
may be deemed to constitute underwriting commissions received by such owners in
connection with such transactions.

Subject to the availability of shares of common stock registered for
issuance under the Plan, there is no total maximum number of shares that can be
issued pursuant to the reinvestment of dividends. From time to time, financial
intermediaries may engage in positioning transactions to benefit from the
discount from the Market Price of common stock acquired through the reinvestment
of dividends under the Plan.

We will pay any and all brokerage commissions and related expenses incurred
in connection with purchases of common stock under the Plan. Upon withdrawal by
a participant from the Plan by the sale of common stock held under the Plan, the
participant will receive the proceeds of such sale less a nominal fee per
transaction paid to the Plan Administrator (if such resale is made by the Plan
Administrator at the request of a participant), any related brokerage
commissions and any applicable transfer taxes.

Common stock may not be available under the Plan in all jurisdictions. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any common stock or other securities in any jurisdiction to any person
to whom it is unlawful to make such offer in such jurisdiction.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission" or "SEC"). Reports, proxy statements and other information filed by
us may be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at 233 Broadway, New York, New York
10279-0001, and at 500 West Madison Street, Chicago, Illinois 60661. Copies may
also be obtained from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1
800 SEC-0330. Our common stock is currently listed on the New York Stock
Exchange under the trading symbol "RWT". Holders of the common stock will
receive annual reports containing audited financial statements with a report
thereon by our independent certified public accountants, and quarterly reports
containing unaudited summary financial information for each of the first three
quarters of each fiscal year.

We file information electronically with the Commission, and the Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants (including the Company) that file
electronically with the Commission. The address of the Commission's Web site is:
HTTP://WWW.SEC.GOV.

We will provide without charge to each person, including any beneficial
owner, to whom a Prospectus is delivered, upon written or oral request of that
person, a copy of any document incorporated herein by reference (other than
exhibits to those documents unless the exhibits are specifically incorporated
herein

by reference into the documents that this Prospectus incorporates by reference).
Requests should be directed to Redwood Trust, Inc., 591 Redwood Highway, Suite
3100, Mill Valley, California 94941, telephone (415) 389-7373.

For more information about us, please visit HTTP://WWW.REDWOODTRUST.COM.
Information on our web site and on web sites linked to it is not part of this
prospectus.

INCORPORATION OF IMPORTANT INFORMATION BY REFERENCE

The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings made by us with the SEC which we may make under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act (other than information
in listed documents and future filings that is deemed not to be filed) until all
of the securities being offered are sold:

(a) Our Annual Report on Form 10-K, and amendments thereto on Form
10-K/A, for the fiscal year ended December 31, 2001;

(b) Our Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 2002 and June 30, 2002; and,

(c) The description of our common stock included in our registration
statement on Form 8-A filed July 18, 1995 (Reg. No. 0-26434) and as amended
by Form 8-A/A filed August 4, 1995, under the Exchange Act.

LEGAL OPINIONS

The validity of the common stock offered and certain legal matters will be
passed upon by Tobin & Tobin, a professional corporation, San Francisco,
California. Certain tax matters will be passed on by GnazzoThill, A Professional
Corporation, San Francisco, California.

EXPERTS

We have incorporated by reference in this prospectus our audited financial
statements as of December 31, 2001 and 2000 and for each of the three years in
the period ended December 31, 2001 along with the PricewaterhouseCoopers LLP
audit report on these financial statements. PricewaterhouseCoopers LLP,
independent accountants, issued the report as experts in auditing and
accounting.

GLOSSARY

"Beneficial Owners" are shareholders who beneficially own shares of our
stock that are registered in a name other than their own (for example, in the
name of a bank, broker or other nominee).

"business day" means any day other than Saturday, Sunday or legal holiday
on which the New York Stock Exchange or another applicable securities exchange
is closed or a day on which Redwood Trust, Inc. or the Plan Administrator is
authorized or obligated by law to close.

"Commission" means the Securities and Exchange Commission.

"Common Stock" means Redwood Trust, Inc.'s common stock, $.01 par value.

"Company" means Redwood Trust, Inc., a Maryland corporation.

"Company Stock" or "Company's Stock" means Redwood Trust, Inc.'s common
stock, preferred stock, and any other classes of equity securities outstanding
from time to time, collectively.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Investment Date" means, with respect to common stock acquired pursuant to
a dividend reinvestment, in the case of shares acquired directly from us, the
quarterly dividend payment date declared by our Board of Directors (unless such
date is not a business day in which case it is the 1st business day immediately
thereafter) or, in the case of open market purchases, some day or days between
the 21st day of the month and the next 10 business days thereafter, as market
conditions permit; and with respect to common stock acquired pursuant to an
Optional Cash Payment, in the case of shares acquired directly from us, on or
about the 21st day of each month; or in the case of open market purchases, some
day or days between the 21st and the next 10 business days thereafter, as market
conditions permit.

"Market Price" means, with respect to reinvested dividends and Optional
Cash Payments for shares acquired directly from us, the average high and low
sales prices, computed to 3 decimal places, of the common stock on the NYSE or
another applicable securities exchange, as reported in the Wall Street Journal,
during the Pricing Period (the 10 days on which the NYSE or another applicable
securities exchange is open and for which trades in our common stock are
reported immediately preceding the relevant Investment Date, or, if no trading
occurs in the common stock on one or more of such days, for the 10 days
immediately preceding the Investment Date for which trades are reported). With
respect to reinvested dividends and Optional Cash Payments for shares to be
acquired on the open market, Market Price means the weighted average of the
actual prices paid, computed to 3 decimal places, for all of the common stock
purchased by the Plan Administrator with all participants' reinvested dividends
and Optional Cash Payments for the related month.

"Maximum Price" means, with respect to Requests for Waivers and subsequent
purchases of stock directly from us, the amount established by you above which
you will not purchase our common stock at the Investment Date. That is, should
the Market Price, less applicable discount, exceed the Maximum Price you
established, no purchases will be made if the stock is purchased directly from
us. Your ability to establish a Maximum Price does not apply to open market
purchases.

"NYSE" means the New York Stock Exchange.

"Optional Cash Discount" means the discount from the Market Price
applicable to Optional Cash Payments. Such discount will vary between 0% and 3%
of the Market Price (based on a variety of potential considerations as discussed
in Question 17) and may vary from month to month.

"Optional Cash Payment Due Date" means 1 day before the relevant Pricing
Period.

"Participant" means a record owner of our common stock, the beneficial
owner of our common stock whose bank, broker or other nominee participates on
the beneficial owner's behalf, or a new investor who wishes to participate in
the Plan upon making an initial investment in our common stock.

"Plan" means the Redwood Trust, Inc. Direct Stock Purchase and Dividend
Reinvestment Plan.

"Plan Administrator" means a plan administrator that administers the Plan,
keeps records, sends statements of account to each Participant and performs
other duties related to the Plan. Mellon Investor Services LLC currently serves
as plan administrator of the Plan.

"Plan Shares" are all shares of common stock held in a participant's
account under the Plan, including shares purchased through the Stock Purchase
program and all whole and fractional shares credited to a participant's Plan
account as the result of reinvestment of dividends on shares of our common stock
enrolled in the Dividend Reinvestment program.

"Pricing Period" is the period encompassing the 10 days during which our
common stock is traded on the NYSE or other securities exchange preceding the
relevant dividend reinvestment or Optional Cash Payment Investment Date.

"Record Date" means, with respect to reinvestments of dividends, the date
declared by our Board of Directors for payment of such dividends.

"Record Owner" refers to shareholders who own shares of our common or
preferred stock in their own names.

"Request for Waiver" means a written request from a Participant, requesting
that we waive the $5,000 Optional Cash Payment limitation and allow the
Participant to make Optional Cash Payments in excess of $5,000.

"Securities Act" means the Securities Act of 1933, as amended.

"Threshold Price" means the minimum price, if any, established by us that
the average high and low prices of the common stock must equal or exceed during
each day of the Pricing Period for Optional Cash Payments made pursuant to
Requests for Waivers.

SCHEDULE A

OPTIONAL CASH PAYMENTS:

THRESHOLD PRICE AND
OPTIONAL CASH OPTIONAL CASH PRICING PERIOD
DISCOUNT SET DATE WAIVER DUE DATE PAYMENT DUE DATE COMMENCEMENT DATE INVESTMENT DATE
------------------- --------------- ---------------- ----------------- ---------------

December 26, 2002 December 31, 2002 January 3, 2003 January 6, 2003 January 21, 2003
January 27, 2003 February 3, 2003 February 5, 2003 February 6, 2003 February 21, 2003
February 25, 2003 March 4, 2003 March 6, 2003 March 7, 2003 March 21, 2003
March 25, 2003 April 1, 2003 April 3, 2003 April 4, 2003 April 21, 2003
April 25, 2003 May 2, 2003 May 6, 2003 May 7, 2003 May 21, 2003
May 28, 2003 June 4, 2003 June 6, 2003 June 9, 2003 June 23, 2002
June 28, 2003 July 1, 2003 July 3, 2003 July 7, 2003 July 21, 2003
July 28, 2003 August 4, 2003 August 6, 2003 August 7, 2003 August 21, 2003
August 26, 2003 September 3, 2003 September 5, 2003 September 8, 2003 September 22, 2003
September 25, 2003 October 2, 2003 October 6, 2003 October 7, 2003 October 22, 2003
October 28, 2003 November 4, 2003 November 6, 2003 November 7, 2003 November 21, 2003
November 25, 2003 December 3, 2003 December 5, 2003 December 8, 2003 December 22, 2003
December 24, 2003 January 2, 2004 January 6, 2004 January 7, 2004 January 21, 2004

DIVIDENDS REINVESTED:

COMMON AND PREFERRED DIVIDENDS

RECORD DATE(1) INVESTMENT DATE(1)
-------------- ------------------

September 30, 2002 October 21, 2002
December 31, 2002 January 21, 2003
March 31, 2003 April 21, 2003
June 30, 2003 July 21, 2003
September 30, 2003 October 21, 2003
December 31, 2003 January 21, 2004

---------------

(1) The dates indicated are those expected to be applicable under the Plan with
respect to future dividends, if and when declared by our Board of Directors.
The actual record and payment dates will be determined by our Board of
Directors and are subject to change.

FOR FUTURE REFERENCE:

THRESHOLD PRICE &
OPTIONAL CASH OPTIONAL CASH PRICING PERIOD
DISCOUNT SET DATE WAIVER DUE DATE PAYMENT DUE DATE COMMENCEMENT DATE INVESTMENT DATE
----------------- --------------- ---------------- ----------------- ---------------

5 business days 2 business days 1 business day 10 trading days before The 21st (or first
before Optional before Optional before Pricing Investment Date business day
Cash Payment Cash Payment Period thereafter)
Date Date Commencement Date

No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by us or any
other person. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of our company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities, nor shall any sales of the Securities be
made pursuant to this prospectus, in any circumstances in which such offer or
solicitation or sale is unlawful.

A-1

---------------------------------------------------------
---------------------------------------------------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION.

WE ARE NOT OFFERING THE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.

WE DO NOT CLAIM THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE STATED ON THE COVER.

$100,000,000.00

REDWOOD TRUST, INC.

COMMON STOCK

(REDWOOD TRUST LOGO)
--------------------

PROSPECTUS

AUGUST 28, 2002

--------------------

---------------------------------------------------------
---------------------------------------------------------

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The expenses to be incurred in connection with the issuance and
distribution of the securities being registered are as set forth below. All such
expenses, except for the SEC registration and filing fees, are estimated:

SEC Registration fee........................................ $ 9,200.00
Legal Fees and Expenses..................................... $ 40,000.00
Accounting Fees and Expenses................................ $ 15,000.00
Printing and Duplicating Expenses........................... $ 30,000.00
Miscellaneous............................................... $ 5,800.00
-----------
Total..................................................... $100,000.00
===========

ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Section 2-418 of the Corporations and Associations Article of the Annotated
Code of Maryland provides that a Maryland corporation may indemnify any director
of the corporation and any person who, while a director of the corporation, is
or was serving at the request of the corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise or employee benefit plan,
is made a party to any proceeding by reason of service in that capacity unless
it is established that the act or omission of the director was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; or the director actually received an
improper personal benefit in money, property or services; or, in the case of any
criminal proceeding, the director had reasonable cause to believe that the act
or omission was unlawful. Indemnification may be against judgments, penalties,
fines, settlements, and reasonable expenses actually incurred by the director in
connection with the proceeding, but if the proceeding was one by or in the right
of the corporation, indemnification may not be made in respect of any proceeding
in which the director shall have been adjudged to be liable to the corporation.
Such indemnification may not be made unless authorized for a specific proceeding
after a determination has been made, in the manner prescribed by law, that
indemnification is permissible in the circumstances because the director has met
the applicable standard of conduct. On the other hand, the director must be
indemnified for expenses if he has been successful in the defense of the
proceeding or as otherwise ordered by a court. The law prescribes the
circumstances under which the corporation may advance expenses to, or obtain
insurance or similar protection for, directors.

The law also provides for comparable indemnification for corporate officers
and agents.

The Registrant's Articles of Incorporation provide that our directors and
officers shall, and our agents in the discretion of the Board of Directors may,
be indemnified to the fullest extent required or permitted from time to time by
the laws of Maryland.

The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of our directors and
officers to the corporation and our stockholders for money damages except to the
extent that (1) it is proved that the person actually received an improper
benefit or profit in money, property or services for the amount of the benefit
or profit in money, property or services actually received, or (2) a judgment or
other final adjudication is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. Our Articles of Incorporation contain a provision providing for
elimination of the liability of our directors and officers or our stockholders
for money damages to the maximum extent permitted by Maryland law from time to
time.

II-1

ITEM 16. EXHIBITS.*

5.1 Opinion of Tobin & Tobin, a professional corporation, as to
legality (including consent of such firm)
8.1 Opinion of GnazzoThill, A Professional Corporation, as to
certain tax matters (including consent of such firm)
23.1 Consent of Tobin & Tobin (see Item 5.1 above)
23.2 Consent of GnazzoThill (see Item 8.1 above)
23.3 Consent of PricewaterhouseCoopers LLP, independent
accountants
24.1 Power of Attorney (set forth on signature page)

ITEM 17. UNDERTAKINGS.

(a) The undersigned registrant undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of the securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;

provided, however, that the undertakings set forth in clauses (i) and
(ii) of this paragraph do not apply if the information required to be
included in a post-effective amendment is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in this registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) The undersigned registrant undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

(c) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission

II-2

such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(d) That,

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mill Valley, County of Marin, State of California, on
August 27, 2002.

REDWOOD TRUST, INC.

By: /s/ George E. Bull III
------------------------------------
George E. Bull III
Chairman of the Board and
Chief Executive Officer

We, the undersigned Directors and Officers of Redwood Trust, Inc., do
hereby constitute and appoint George E. Bull III , Douglas B. Hansen and Harold
F. Zagunis, and each of them individually, our true and lawful attorney[s] and
agent[s], to do any and all acts and things in our name and behalf in our
capacities as directors, officers and to execute any and all instruments for us
and in our names in the capacities indicated below, which said attorney[s] and
agent[s] may deem necessary or advisable to enable said corporation to comply
with the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Registration Statement, including specifically, but without limitation, power
and authority to sign for us or any of us in our names and in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereof; and we do hereby ratify and confirm all that the said attorneys and
agents shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

SIGNATURE POSITION DATE
--------- -------- ----

/s/ George E. Bull III Chairman of the Board and Chief August 27,
------------------------------------------------ Executive Officer and Director 2002
George E. Bull III (principal executive officer)

/s/ Douglas B. Hansen President and Director August 27,
------------------------------------------------ 2002
Douglas B. Hansen

/s/ Harold F. Zagunis Chief Financial Officer, August 27,
------------------------------------------------ Treasurer, Vice President, 2002
Harold F. Zagunis Controller and Secretary
(principal financial officer and
principal accounting officer)

/s/ Thomas C. Brown Director August 27,
------------------------------------------------ 2002
Thomas C. Brown

/s/ Mariann Byerwalter Director August 27,
------------------------------------------------ 2002
Mariann Byerwalter

/s/ Greg Kubicek Director August 27,
------------------------------------------------ 2002
Greg Kubicek

/s/ Charles J. Toeniskoetter Director August 27,
------------------------------------------------ 2002
Charles J. Toeniskoetter

II-4

SIGNATURE POSITION DATE
--------- -------- ----

/s/ Richard D. Baum Director August 27,
------------------------------------------------ 2002
Richard D. Baum

/s/ David L. Tyler Director August 27,
------------------------------------------------ 2002
David L. Tyler

II-5

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION OF DOCUMENT
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II-6