AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This amended and restated employment Agreement (“Agreement”), effective as of the first day of June, 2005 (the “Effective Date”), and amended and restated as of the 31 ^st day of March, 2009, is entered into by and between Martin S. Hughes (the “Executive”) and Redwood Trust, Inc. , a Maryland corporation (the “Company”).

The Company desires to establish its right to the continued services of the Executive, in the capacity, on the terms and conditions, and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment in such capacity, on such terms and conditions, and subject to such rights of termination.

In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and do hereby agree as follows:

1.   Employment As President and Co-Chief Operating Officer Of The Company.   The Company does hereby employ the Executive as President and Co-Chief Operating Officer of the Company, reporting to the Chief Executive Officer of the Company.  The Executive does hereby accept and agree to such employment.  The Executive’s duties shall be such executive and managerial duties as set forth in Exhibit A attached hereto.   The Chief Executive Officer may, from time to time, in its sole discretion, modify, reassign and/or augment the Executive’s responsibilities, subject to approval by the Board of Directors of the Company (the “Board”).  Any such modification, reassignment or augmentation of responsibilities shall be in writing .  The Executive shall devote such time, energy and skill to the performance of his duties for the Company and for the benefit of the Company as may be necessary or required for the effective conduct and operation of the Company’s business.  Furthermore, the Executive shall act only in good faith and exercise due diligence and care in the performance of his duties to the Company under this Agreement.

2.   Term Of Agreement.   The term of this Agreement (the “Term”) shall commence on the Effective Date and shall continue through December 31, 2007; provided, however, that (i) on January 1, 2008 and each succeeding January 1, the Term shall automatically be extended for one additional year unless, not later than three months prior to any such January 1, either party shall have given written notice to the other that it does not wish to extend the Term and (ii) such one year extensions of the Term shall not occur on and after the January 1 of the year in which the Executive will attain age sixty-five (65) but instead the Term shall be extended only until the date of the Executive’s sixty-fifth (65th) birthday.

3.  Compensation.

(a)  Base Salary .   The Company shall pay the Executive, and the Executive agrees to accept from the Company, in payment for his services to the Company a base salary at the rate of $500,000   per year (“Base Salary”), payable in equal biweekly installments or at such other time or times as the Executive and Company shall agree.  Base Salary shall be subject to such adjustments as the Company and the Executive shall agree.

(b)  Performance Bonus – Board of Directors’ Discretion.   The Executive shall be eligible to receive an annual bonus. The Board in its discretion will determine whether such annual bonus will be paid, the amount of such bonus and its form of payment.  The Executive’s target annual bonus amount is 150% of his Base Salary (the “Target Bonus”).  If the Board determines in its discretion that the Executive’s performance meets or exceeds the criteria established by the Board for the award of a Target Bonus, the Board may award the Executive the Target Bonus or a higher amount.  Likewise, if the Executive’s performance does not meet said criteria, the Board may award a lesser amount, or no bonus may be awarded.  Unless otherwise provided in this Agreement, the Executive’s eligibility to receive any bonus under this Section 3(b) shall be expressly conditioned on, among other things, the Executive remaining employed with the Company up through any designated distribution date set by the Board.

(c)  Equity Incentive Awards.    Executive shall be eligible to receive grants of equity-based long-term incentive awards, which may include options to purchase Company stock, Company restricted stock, contributions to Company’s deferred compensation plan, or other Awards.  Such awards shall be determined in the discretion of the Board.  In the event of a Change of Control (as defined in Section 2(f) of the Redwood Trust, Inc. Executive Deferred Compensation Plan) in which the surviving or acquiring corporation does not assume the Executive’s outstanding stock options and equity-related awards (including options and awards granted both before and after the Effective Date) or substitute similar options and equity-related awards, such options and equity-related awards shall immediately vest and become exercisable if the Executive’s service with the Company has not terminated before the effective date of the Change of Control; provided, however, that the foregoing provision shall only apply if the Company is not the surviving corporation or if shares of the Company’s common stock are converted into or exchanged for other securities or cash.

(d)  Annual Review.   The Executive’s performance shall be reviewed at least annually.  The performance evaluations shall consider and assess the Executive’s performance of his duties and responsibilities, the timely accomplishment of existing performance objectives, his level of efficiency and overall effectiveness and/or other factors or criteria that the Company, in its sole discretion, may deem relevant.  The frequency of performance evaluations may vary depending upon, among other things, length of service, past performance, changes in job duties or performance levels.  The Board shall, at least annually, review the Executive’s entire compensation package to determine whether it continues to meet the Company’s compensation objectives.  Such annual review will include a determination of (i) whether to increase the Base Salary in accordance with Section 3(a); (ii) the incentive performance bonus to be awarded in accordance with Section 3(b); and (iii) the amount and type of any equity awards granted in accordance with Section 3(c).  Positive performance evaluations do not guarantee salary increases or incentive bonuses.  Salary increases and incentive bonus awards are solely within the discretion of the Board and may depend upon many factors other than the Executive’s performance.

4.   Fringe Benefits.  The Executive shall be entitled to participate in any benefit programs adopted from time to time by the Company for the benefit of its senior executive employees, and the Executive shall be entitled to receive such other fringe benefits as may be granted to him from time to time by the Board.

(a)  Benefit Plans.   The Executive shall be entitled to participate in any benefit plans relating to stock options, stock purchases, pension, thrift, profit sharing, life insurance, medical coverage, education, deferred compensation, or other retirement or employee benefits available to other senior executive employees of the Company, subject to any restrictions (including waiting periods) specified in such plans and/or related individual agreements. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board shall from time to time determine, for its senior executive employees.

(b)  Paid Time Off .   The Executive shall be entitled to twenty-five (25) days of paid time off (“PTO”) per calendar year consistent with the Executive’s satisfactory performance of the duties set forth in Section 1   and in accordance with Company policies regarding PTO; provided, however, that the Executive may accrue up to a maximum of fifty (50) days of PTO.  The Executive may use PTO for any reason, including vacation, sick time, personal time and family illness.

5.   Business Expenses.   The Company shall reimburse the Executive for any and all necessary, customary and usual expenses, properly receipted in accordance with Company policies, incurred by Executive on behalf of the Company.

6.  Termination Of Executive’s Employment.

(a)  Death.   If the Executive dies while employed by the Company, his employment shall immediately terminate. The Company’s obligation to pay the Executive’s Base Salary shall cease as of the date of the Executive’s death, and any unpaid Base Salary shall be paid to the Executive’s estate.  In addition, within fifteen (15) days of the Executive’s death, the Company shall pay to the Executive’s estate an incentive performance bonus based on Executive’s Target Bonus then in effect, prorated for the number of days of employment completed by the Executive during the year of his death.  Executive’s beneficiaries or his estate shall receive benefits in accordance with the Company’s retirement, insurance and other applicable programs and plans then in effect.  All stock options or other equity-related awards, including restricted stock awards, shall vest in full and, in the case of stock options, shall be exercisable for such period as set forth in the applicable award agreement by which such awards are evidenced.

(b)  Disability.   If, as a result of the Executive’s incapacity due to physical or mental illness (“Disability”), Executive shall have been absent from the full-time performance of his duties with the Company for six (6) consecutive months, and, within thirty (30) days after written notice is provided to him by the Company, he shall not have returned to the full-time performance of his duties, the Executive’s employment under this Agreement may be terminated by the Company for Disability.  During any period prior to such termination during which the Executive is absent from the full-time performance of his duties with the Company due to Disability, the Company shall continue to pay the Executive his Base Salary at the rate in effect at the commencement of such period of Disability.  Subsequent to such termination, the Executive’s benefits shall be determined under the Company’s retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs.  In addition, within fifteen (15) days of such termination, the Company shall pay to the Executive an incentive performance bonus based on Executive’s Target Bonus then in effect, prorated for the number of days of employment completed by the Executive during the year in which his employment terminated.  The Executive, the Executive’s beneficiaries or his estate shall receive benefits in accordance with the Company’s retirement, insurance and other applicable programs and plans then in effect.  All stock options or other equity-related awards, including restricted stock awards, shall vest in full and, in the case of stock options, shall be exercisable for such period as set forth in the applicable award agreement by which such awards are evidenced.

(c)  Termination By The Company For Cause .  The Company may terminate the Executive’s employment under this Agreement for Cause, at any time prior to expiration of the Term of the Agreement.  For purposes of this Agreement, “Cause” shall mean (i) the Executive’s material failure to substantially perform the reasonable and lawful duties of his position for the Company, which failure shall continue for thirty (30) days after notice thereof by the Company to the Executive; (ii) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of the Executive in respect of the performance of his duties hereunder, his fiduciary obligations or otherwise relating to the business of the Company; (iii) the habitual or repeated neglect of his duties by Executive; (iv) the Executive’s conviction of a felony; (v) theft or embezzlement, or attempted theft or embezzlement, of money or tangible or intangible assets or property of the Company or its employees, customers, clients, or others having business relations with the Company.; (vi) any act of moral turpitude by Executive injurious to the interest, property, operations, business or reputation of the Company; or (vii) unauthorized use or disclosure of trade secrets or confidential or proprietary information pertaining to Company business.  However, the termination of Executive’s employment shall not be deemed to be for Cause unless and until there has been delivered to Executive a copy of a resolution duly adopted by the Board (after reasonable notice is provided to Executive and Executive is given an opportunity to be heard by the Board), finding that, in the good faith opinion of the Board, Executive’s conduct met the standard for termination for Cause.

In the event of a termination under this Section 6(c), the Company will pay only the portion of Base Salary or previously awarded bonus unpaid as of the termination date.  Fringe benefits which have accrued and/or vested on the termination date will continue in effect according to their terms.

(d)  Termination By The Company Without Cause.   The Company may terminate Executive’s employment hereunder at any time without Cause upon 30 days written notice to Executive or pay in lieu thereof.  In the event of a termination under this Section 6(d), the Executive shall be entitled to the benefits set forth in Section 7.

(e)  Termination By The Executive For Good Reason . The Executive shall have the right to terminate this Agreement for Good Reason. For purposes of this Agreement, “Good Reason” shall mean the occurrence, without the Executive’s express written consent, of any one or more of the following events:

(i)   A significant reduction in Executive’s responsibilities or title;

(ii)   A reduction in the Executive’s Base Salary or a material reduction by the Company in the value of the Executive’s total compensation package (salary, bonus opportunity, equity incentive award opportunity and benefits) if such a reduction is not made in proportion to an across-the-board reduction for all senior executives of the Company and a Change of Control (as defined in Section 2(f) of the Redwood Trust, Inc. Executive Deferred Compensation Plan) has not occurred;

(iii)   The relocation of the Executive’s principal Company office to a location more than twenty-five (25) miles from its location as of the Effective Date, except for required travel on the Company’s business to the extent necessary to fulfill the Executive’s obligations under Section 1;

(iv)   A failure at any time to renew this Agreement for successive one-year periods pursuant to Section 2;

(v)   The complete liquidation of the Company; or

(vi)   In the event of a merger, consolidation, transfer, or closing of a sale of all or substantially all the assets of the Company with or to any other individual or entity, the failure of the Company’s successor to affirmatively adopt this Agreement or to otherwise comply with its obligations pursuant to Section 13 below.

In the event of a termination under this Section 6(e), the Executive shall be entitled to the benefits set forth in Section 7.

(f)  Termination By The Executive Without Good Reason.   The Executive may at any time during the Term terminate his employment hereunder for any reason or no reason by giving the Company notice in writing not less than one hundred twenty (120) days in advance of such termination. The Executive shall have no further obligations to the Company after the effective date of termination, as set forth in the notice.  In the event of a termination by the Executive under this Section 6(f), the Company will pay only the portion of Base Salary or previously awarded bonus unpaid as of the termination date.  Fringe benefits which have accrued and/or vested on the termination date will continue in effect according to their terms.

7.  C OMPENSATION U PON T ERMINATION B Y T HE C OMPANY W ITHOUT C AUSE O R B Y T HE E XECUTIVE F OR G OOD R EASON .

(a)   If the Executive’s employment shall be terminated by the Company  without Cause or by the Executive for Good Reason, the Executive shall be entitled to the following benefits:

(i)  Payment of Unpaid Base Salary. The Company shall immediately pay the Executive any portion of the Executive’s Base Salary through the date of termination or previously awarded bonus not paid prior to the termination date.

(ii)  Severance Payment.   The Company shall provide the Executive the following: (x) an amount equal to 2.5 times Executive’s Annual Base Salary as in effect immediately prior to his termination; (y) an amount equal to 1.5 times the Executive’s Annual Base Salary in effect immediately prior to his termination prorated for the number of days of employment completed by the Executive during the year in which his employment is terminated; and (z) with respect to options granted on or before December 31, 2002, the sum of the Dividend Equivalent Rights payments (as defined in the applicable award agreement by which any such Dividend Equivalent Rights were granted) that would have been payable to Executive over the one (1) year period following his termination had he remained employed (taking into consideration the term of options and Dividend Equivalent Rights and assuming that the options are fully vested and remain unexercised).  Payments pursuant to this Section with respect to options granted after December 31, 2002 will be calculated in the same manner, unless such options provide a different formula for Dividend Equivalent Rights payments if Executive’s employment is terminated by the Company without Cause or by the Executive for Good Reason, in which case the Dividend Equivalent Rights payments shall be governed by the terms of such options.   The quarterly dividend per share rate that shall be used in this calculation is the higher of (I) one-fourth (25%) of the sum of common stock dividends declared per common share in the twelve (12) months prior to the termination date, and (II) one-twelfth (8.333%) of the sum of common stock dividends declared per common share in the thirty-six (36) months prior to the termination date.

(iii)  Stock Options and Other Equity-Related Awards.   All stock options and other equity-related awards, including restricted stock awards, held by the Executive as of the termination date, shall vest in full and, in the case of stock options, shall be exercisable for such period as set forth in the applicable award agreements by which such awards are evidenced.

(iv)  Continuation of Fringe Benefits.   For the twelve (12) month period following the termination of the Executive’s employment, the Company shall continue to provide the Executive with all life insurance, disability insurance and medical coverage fringe benefits set forth in Section 4 as if the Executive’s employment under the Agreement had not been terminated; provided, however, that such life insurance, disability insurance and medical coverage shall cease as of the date the Executive receives such coverage from a subsequent employer.  No provision of this Agreement will affect the continuation coverage rules under Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), except that the Company’s payment, if any, of applicable insurance premiums will be credited as payment by the Executive for purposes of the Executive’s payment required under COBRA.  Therefore, the period during which the Executive may elect to continue the Company’s medical plan coverage at the Executive’s own expense under COBRA, the length of time during which COBRA coverage will be made available to the Executive, and all other rights and obligations of the Executive under COBRA (except the obligation to pay insurance premiums that the Company pays) will be applied in the same manner that such rules would apply in the absence of this Agreement.  For purposes of this Section 7(a)(iv), (A) references to COBRA shall be deemed to refer also to analogous provisions of state law and (B) any applicable insurance premiums that are paid by the Company shall not include any amounts payable by the Executive under an Internal Revenue Code Section 125 health care reimbursement plan, which amounts, if any, are the sole responsibility of the Executive.

(v)  Excise Tax Gross-Up.   In the event that the Executive becomes entitled to the payments and benefits provided under the provisions of this Section 7 (“Payments and Benefits”), and if any of the Payments and Benefits will be subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”), or successor sections thereto (“Excise Tax”), the Company shall pay to or for the benefit of the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Payments and Benefits and any federal, state and local income tax and Excise Tax upon the payments provided for under this Section 7(a)(v), shall be equal to the amount of the Payments and Benefits. For purposes of determining whether any of the Payments and Benefits will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by the Executive that are contingent on a transaction described in Section 280G(b)(2)(A)(i) of the Code or on an event, including (without limitation) a termination of the Executive’s employment that is materially related to such a transaction (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in such a transaction, or any person affiliated with the Company or such person) shall be treated as “parachute payments” within the meaning of Section 280G(b)(2) of the Code, and all “excess parachute payments” within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, in the opinion of tax counsel selected by the Company and reasonably acceptable to the Executive, such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in Section 280G(b)(3) of the Code) allocable to such