Why Redwood Trust Stock Jumped as Much as 11% on August 11

Shares of mortgage-focused real estate investment trust (REIT) Redwood Trust (NYSE: RWT) rose as much as 11% on Aug 11. That gain, however, was pared in the last hour of trading, with the stock ending the day with a lower, but still notable, gain of around 7.5%. The big driver was an analyst call out by Raymond James.    

First some background. Redwood Trust belongs to a niche of the REIT sector that invests in mortgages and mortgage securities instead of owning physical properties, like more traditional REITs. A key piece of the mortgage REIT model is leverage, generally using the value of a company's mortgage portfolio as collateral for the loans taken on. The problem with this is that when financial markets get volatile, the value of mortgages can decline sharply, leading banks to require additional capital to secure the loans they back. If that capital can't be found, a mortgage REIT could be forced to sell assets to resolve the shortfall, basically at the exact moment when the mortgages are being undervalued by the market. 

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Source Fool.com