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REDWOOD MORTGAGE INVESTORS VIII - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 14, 2014

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto, which are included in Item 1 of this Report, as well as the audited consolidated financial statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the partnership's Annual Report on Form 10-K for the year ended December 31, 2013.



Forward-Looking Statements

Certain statements in this Report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the partnership's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding economic conditions and their effect on the partnership and its assets, trends in the California real estate market, estimates as to the allowance for loan losses, estimated costs to complete certain property developments, additional foreclosures in 2014, expectations regarding the level of loan delinquencies, plans to develop certain properties, the anticipated diminishment of the difference between amount distributed and net income, and the use of excess cash flow. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the partnership has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.



Critical Accounting Policies

Management estimates

See Note 2 (Summary of Significant Accounting Policies) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of critical accounting policies.

Related Parties

See Note 1 (Organizational and General) and Note 3 (General Partners and Other Related Parties) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of various partnership activities for which the general partners and related parties are compensated, and other related-party transactions, including the formation loan. 36 --------------------------------------------------------------------------------

Results of Operations



Results of operation are discussed below for the three and six months ended June 30, 2014 and 2013 ($ in thousands).

Changes during the three Changes during the six months ended June 30, 2014 months ended June 30, versus 2013 2014 versus 2013 Dollars Percent Dollars Percent Revenue, net Interest income Loans $ 212 37 % $ 538 59 % Imputed interest on formation loan 5 5 19 10 Other interest income - - - - Total interest income 217 33 557 51 Interest expense Bank loan, secured - - - - Mortgages payable 17 3 12 1 Amortization of discount on formation loan 5 5 19 9 Other interest expense - - - - Total interest expense 22 4 31 2 Net interest income/(expense) 195 542 526 304 Late fees 15 750 14 280 Other (82 ) (32 ) (216 ) (40 ) Total revenues, net $ 128 43 % $ 324 87 % Provision for loan losses/(recoveries), net 12 8 (18 ) (13 ) Operating expenses Mortgage servicing fees 50 30 23 7 Asset management fees (3 ) (2 ) (5 ) (1 ) Costs from RMC 30 8 149 19 Professional services (1 ) (1 ) (343 ) (62 ) REO Rental operations, net (114 ) (13 ) (225 ) (14 ) Holding costs (2 ) (7 ) (39 ) (43 ) Loss/(gain) on disposal - - (2 ) 100 Impairment loss (291 ) (100 ) (291 ) (100 ) Other 16 64 23 79 Total operating expenses, net (315 ) (99 ) (710 ) (50 ) Net income (loss) $ 431 356 % $ 1,052 284 % Please refer to the above table and the consolidated Statement of Operations in the financial statements included in Part I, Item 1 of this report throughout the discussion of Results of Operations. 37 --------------------------------------------------------------------------------



General Economic Conditions and Financial Overview

As noted in the Wells Fargo Economics Group report "California Employment Conditions: June 2014" - "Over the past year, nonfarm employment has increased 2.4 percent, producing a net gain of 356,400 jobs. With the increase, nonfarm employment in California has finally surpassed its prerecession peak, which dates back to July 2007. the current cycle has largely been driven by the technology boom, which has most directly benefitted the San Francisco Bay Area. Coastal areas of Southern California have also improved, lifted by rebounds in international trade, tourism, and housing." This is a continuation of trends noted in the "California Economic Outlook: March 2014" also published by the Wells Fargo's Economics Group: "The Golden State's Economy continues to grow at a pace slightly ahead of the nation's, although gains have been heavily weighted toward the state's larger metropolitan areas along the coast. Technology, tourism and retail trade have led the recovery in job growth in recent years, which has helped trim the unemployment rate and revive housing demand." The report states in its Summary and Outlook Section: "California's economy continues to gradually gain momentum. While the recovery has been slower than in the past, the state has methodically made progress working through a number of major impediments, most notably the overhang of foreclosures and distressed homes left over from the housing bust." Further contained in that section: "The biggest headlines and strongest job gains continue to be in California's tech sector, much of which is centered in the Bay Area." Other published reports, including regional real estate market reports prepared by Polaris Pacific as published June 2014, indicate that real estate prices and rents are increasing in the California communities in which we lend. Median condominium resale prices increased 11.4% in San Francisco, 7.7% in the Silicon Valley and 12.6% in the Greater Los Angeles Area compared to the prior year. During 2013, rents in San Francisco increased 11.5% and 10.1% in the Silicon Valley. Performance Highlights The year 2013 marked the first full year since the 2008 financial crisis the partnership has operated without severe constraints that had been imposed by its lenders (which borrowings since have been repaid) and in a normally operating (i.e. not distressed) real estate markets. For the first time since 2008, the partnership reported full year net income for 2013, which continues into the second quarter of 2014, and the transition from crisis management, focused on cash management to a focus on re-building the business' profitability. Net income for the quarter ending June 30, 2014 increased by $431,000 compared to the quarter ending June 30, 2013. The change in net income is primarily due to an increase of interest on loans, net of $195,000 due to growth in the performing loan balance and average yield rate, and a decrease in REO impairment losses of $291,000 due the continued stabilization of the partnership's loan and REO portfolios. Net income for the six months ending June 30, 2014 increased by $1,052,000 compared to the same period in 2013. The change in net income is primarily due to the same reasons discussed above, with an increase of interest on loans, net of $526,000, and a reduction in REO impairment losses of $291,000 for the six months ended June 30, 2014. Additionally, for the six months ended June 30, 2014 professional fees decreased by $343,000 compared to the same period in 2013, due to the reduction of complex workout agreements, legal costs, and tax and accounting matters regarding the loan and REO portfolios' stabilization and rental operations.



Loan Characteristics - Ongoing & Legacy Loans

The loans made after the bank loan was repaid (Ongoing) have borrowers underwritten to today's standards and have significantly higher equity in their properties than the loans created before the bank loan was repaid. The loans created before the bank loan was repaid (Legacy loans), have many borrowers that continue to struggle with the effects of the financial crisis and the resultant loss of equity in their properties. The partnership has been concentrating its Ongoing lending efforts in the San Francisco Bay Area, and Coastal Metropolitan Southern California. These areas have shown the greatest recoveries in the real estate markets as well as their respective local economies. 38

-------------------------------------------------------------------------------- The tables below show the 2014 activity and various characteristics of the loan portfolio by Ongoing and Legacy groupings as of June 30, 2014 ($ in thousands). Transactions Ongoing Legacy Total Principal, January 1, 2014 $ 27,402$ 24,488$ 51,890 Loans funded or acquired 22,907 - 22,907 Principal collected (12,252 ) (743 ) (12,995 ) Loans sold to affiliates (2,394 ) - (2,394 ) Foreclosures - (360 ) (360 ) Other-loans charged off - (17 ) (17 ) Principal, June 30, 2014 $ 35,663$ 23,368$ 59,031 Portfolio characteristics Number of secured loans 26 19 45 Average secured loan-principal 1,372 1,230



1,312

Largest secured loan-principal 10,500 16,312



16,312

Smallest secured loan-principal 218 59 59 Number of counties 10 14 19 Average interest rate 7.37 % 5.76 % 6.73 % Number of loans with workout agreements - 3



3

Aggregate workout principal balance - 508



508

Number of loans with active modifications - 4



4

Aggregate modifications principal balance - 3,448



3,448

The Ongoing portfolio has an average interest rate of 7.37% compared to 5.76% for the Legacy portfolio. The difference is primarily due to reducing interest rates from collection efforts through loan modifications and workout agreements over the past several years on Legacy loans. As of June 30, 2014, the partnership's largest Legacy loan, in the unpaid principal balance of $16,312,000 (representing 68.39% of outstanding secured Legacy principal balance and 6.79% of total partnership assets) has an interest rate of 5.00% and is secured by 75 units in a 128 unit condominium complex located in Contra Costa County, California. This loan matured April 1, 2012. A court appointed receiver is overseeing the management of the property and exploring the market for the disposition of the remaining units. 39 --------------------------------------------------------------------------------

Loans Principal Percent Geographic distribution Ongoing San Francisco Bay Area 17 $ 28,523 80 % Other Northern California 2 3,018 8 Los Angeles & Southern Coastal 7 4,122 12 Other Southern California - - - Total ongoing loans 26 $ 35,663 100 % Legacy San Francisco Bay Area 11 $ 22,034 94 % Other Northern California 5 743 3 Los Angeles & Southern Coastal 2 476 2 Other Southern California 1 115 1 Total legacy loans 19 $ 23,368 100 % Total San Francisco Bay Area 28 50,557 85 % Other Northern California 7 3,761 6 Los Angeles & Southern Coastal 9 4,598 8 Other Southern California 1 115 1 Total 45 $ 59,031 100 % Lien position Ongoing First trust deeds 20 $ 30,524 86 % Second trust deeds 6 5,139 14 Third trust deeds - - - Total ongoing loans 26 $ 35,663 100 % Legacy First trust deeds 8 $ 17,984 77 % Second trust deeds 10 5,098 22 Third trust deeds 1 286 1 Total legacy loans 19 $ 23,368 100 % Total First trust deeds 28 $ 48,508 82 % Second trust deeds 16 10,237 17 Third trust deeds 1 286 1 Total loans 45 $ 59,031 100 % 40

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Ongoing Legacy Total Scheduled maturities 2014 $ 374$ 141$ 515 2015 22,443 1,273 23,716 2016 5,665 3,025 8,690 2017 1,015 1,379 2,394 2018 349 233 582 Thereafter 5,817 - 5,817 Total future maturities 35,663 6,051 41,714 Matured at June 30, 2014 - 17,317 17,317 Total secured loans $ 35,663$ 23,368$ 59,031 Matured loans Number of loans - 4 4 Principal $ - $ 17,317$ 17,317 Advances - 718 718 Accrued interest - - - Loan balance $ - $ 18,035$ 18,035 Percent of principal - % 74 % 74 % Delinquency Past due 30-89 days $ 349 $ - $ 349 90-179 days - 665 665 180 or more days - 16,885 16,885 Total past due 349 17,550 17,899 Current 35,314 5,818 41,132 Total secured loans $ 35,663$ 23,368$ 59,031 Secured loans in nonaccrual status Number of loans - 7 7 Principal $ - $ 17,962$ 17,962 Advances - 723 723 Accrued interest - - - Loan balance $ - $ 18,685$ 18,685 Loans designated impaired Principal $ - 20,632 $ 20,632 Recorded investment(1) $ - 21,371 $ 21,371 Impaired loans without allowance $ - 3,695 $



3,695

Impaired loans with allowance $ - 17,675 $



17,675

Allowance for loan losses Provision/(Recovery) for loan losses, 2014 $ - $ (160 ) $ - Allowance for loan losses $ - $ 8,578$ 8,578



(1) Recorded investment is the sum of principal, advances, and interest accrued

for financial reporting purposes. 41

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Revenue - Interest income - Loans

Interest income on loans increased for the three and six months ended June 30, 2014 as a result of the partnership adding approximately $33,539,700 of new performing loans to the loan portfolio since June 30, 2013. Foregone interest (not recorded for financial reporting purposes on loans designated in non-accrual status) was $243,046 and $729,655 for the three months ended, and $486,134 and $1,475,005 for the six months ended June 30, 2014 and 2013, respectively. The tables below recap the three and six month averages and the effect of the foregone interest on the average yield rate for the Ongoing and Legacy groups of loans ($ in thousands). For the three months ended June 30, Average Stated Secured Effective Average Loan Interest Yield Yield Year Balance Income Rate Rate Ongoing 2014 $ 35,066$ 622 7.10 % 7.49 % 2013 $ 17,524$ 231 5.28 % 6.69 % Legacy 2014 $ 24,093$ 156 2.59 % 5.78 % 2013 $ 50,020$ 335 2.68 % 7.34 % Total 2014 $ 59,159$ 778 5.26 % 6.63 % 2013 $ 67,544$ 566 3.35 % 7.02 % For the six months ended June 30, Average Stated Secured Effective Average Loan Interest Yield Yield Year Balance Income Rate Rate Ongoing 2014 $ 35,557$ 1,089 7.13 % 7.42 % 2013 $ 14,012$ 330 4.71 % 5.35 % Legacy 2014 $ 24,409$ 358 2.93 % 5.81 % 2013 $ 50,320$ 578 2.30 % 7.36 % Total 2014 $ 54,966$ 1,446 5.26 % 6.62 % 2013 $ 64,332$ 908 2.82 % 6.35 % Revenue - Interest expense - Mortgages Mortgage interest expense increased by $17,000 for the three months ended June 30, 2014 compared to the same period in 2013 due to a new mortgage acquired in June of 2013, for which the first payment was not due until August 2013. For the six months ended June 30, 2014 mortgage interest expense increased by $12,000 compared to the same period in 2013 due to the new mortgage discussed above, and an offsetting reduction in interest expense during the first quarter of 2014 related to one mortgage being paid off in full subsequent to the sale of the rental property securing the loan at the end of 2013.



Revenue - Other

Rental income generated from REO held for sale is reclassified as Revenue - Other when the property is designated as held for sale. The decrease of $216,000 for the six months ended June 30, 2014, is primarily due to the sale of three properties since June 30, 2013. 42 --------------------------------------------------------------------------------



Provision for Losses on Loans/Allowance for Loan Losses

The provision for loan losses (recoveries), net is primarily driven by the specific reserves maintained in the allowance for loan losses, associated with impaired loans as analyzed each year. All Ongoing loans are performing and are deemed well collateralized and the improving real estate markets in our lending areas is increasing the fair values of the underlying collateral of the legacy loans. As a result, the allowance for loan losses decreased by $18,000. See Note 4 (Loans) to the consolidated financial statements included in Part I, Item 1 of this report for detailed presentations of loan balances, activity, and characteristics, and the corresponding data regarding the allowance for loan losses. Operating Expenses - Mortgage servicing fees The increase in mortgage servicing fees for the three months ended June 30, 2014 is due to the increase in the average secured loan balances and a change in the portion of fees waived by RMC, a general partner. Fees are charged at the annual rate of 1.5%, and prior to April 2014, RMC at its sole discretion, waived 0.5% of the annual rate. Beginning in the second quarter of 2014, the full 1.5% was charged to the partnership. There is no guarantee RMC will waive any portion of this fee in the future. - Costs from RMC The increase in costs from RMC was largely due to increased office and personnel expenses for the six months ending June 30, 2014, compared to the same period in 2013. The increase in reimbursable expenses were offset by a revision in the general partner's allocations, done in accordance with the operating agreement. The change was made during the quarter ended June, 30, 2014, which resulted in a reduction in allocated costs for both the first and second quarter of 2014 totaling $105,000.



- Professional services

The decrease in professional services for the six month ended June 30, 2014 was largely due to the above normal operating costs during the first quarter of 2013 related to complex workout agreements, legal costs, and tax and accounting matters regarding the loan and REO portfolios' stabilization and rental operations. Fees for auditing and tax services decreased approximately $30,000, legal fees decreased $264,000 and consultant's fees decreased $11,000.



REO - Rental operations, net

The table below summarizes the rental operations, net for the three and six months ended June 30, ($ in thousands).

Three months ended June 30,



Six months ended June 30,

2014 2013 2014 2013 Rental income $ 2,602$ 2,453$ 5,278$ 4,600 Operating expenses, rentals Administration and payroll 331 331 673 629 Homeowner association fees 167 153 375 302 Professional services (33 ) - (6 ) - Utilities and maintenance 256 240 546 462 Advertising and promotions 25 27 53 57 Property taxes 261 233 589 417 Other 89 57 139 92 Total operating expenses, rentals 1,096 1,041 2,369 1,959 Net operating income 1,506 1,412 2,909 2,641 Depreciation 520 526 1,123 1,021 Receiver fees 1 15 1 60 Rental operations, net 985 871 1,785 1,560 Interest on mortgages 386 392 823 785 Rental operations, net, less related mortgage interest $ 599 $ 479 $ 962$ 775 43

-------------------------------------------------------------------------------- Rental operations are comprised of residential and commercial properties. There were 10 residential properties at June 30, 2014 with a net book value of $116,262,000, and three commercial properties with a net book value of $2,678,000. Rental financial highlights by property type are presented in the table below for the three and six months ended June 30, 2014, ($ in thousands). Rental Operations, net, less Net Related Rental Operating Operating Receiver Mortgage Mortgage Income Expenses Income Depreciation Fees Interest Interest Three months ended June 30, Property type Residential Single family $ 3$ 16$ (13 ) $ 2 $ - $ - $ (15 ) Condominiums and 1,046 342 704 263 - 188 253 apartments Fractured condominiums 1,377 609 768 241 1 198 328 Total residential 2,426 967 1,459 506 1 386 566 Commercial 176 129 47 14 - - 33 Total $ 2,602$ 1,096$ 1,506 $ 520 $ 1 $ 386 $ 599 Six months ended June 30, Property type Residential Single family $ 15$ 23$ (8 ) $ 8 $ - $ - $ (16 ) Condominiums and 2,053 746 1,307 526 - 376 405 apartments Fractured condominiums 2,991 1,363 1,628 567 1 447 613 Total residential 5,059 2,132 2,927 1,101 1 823 1,002 Commercial 219 237 (18 ) 22 - - (40 ) Total $ 5,278$ 2,369$ 2,909$ 1,123 $ 1 $ 823 $ 962 44

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The increase in rental operations for the second quarter of 2014 was largely due to the continued stabilization of occupancy rates and increased rental rates. Major areas of change from the second quarter of 2013 to the second quarter of 2014 are summarized in the following table, ($ in thousands).

Rental Operations, net, less Net Related Rental Operating Operating Receiver Mortgage Mortgage Income Expenses Income Depreciation Fees Interest Interest 2014 results $ 2,602$ 1,096$ 1,506$ 520$ 1$ 386$ 599 2013 results 2,453 1,041 1,412 526 15 392 479 Change $ 149$ 55$ 94$ (6)$ (14)$ (6)$ 120 Explanation of change Rents to market rates & increased occupancy $ 149$ 41$ 108 $ - $ - $ - $ 108 Refunds / Adjustments - (16) 16 - - - 16 Completed deferred maintenance - (11) 11 - - - 11 Deferred maintenance - - - - - - - Receiver contract complete - - - - (14) - 14 New mortgages - - - - - - - Other - 41 (41) (6) - (6) (29) Change $ 149$ 55$ 94$ (6)$ (14)$ (6)$ 120 - Rental income - In the second quarter of 2014, vacancy rates decreased



compared to the second quarter of 2013 due to the continued stabilization of

rental properties post acquisition. In addition, 66% of rental properties are

located in areas such as San Francisco Bay Area, Los Angeles, and Southern

Coastal California, where rental rates continue to increase due to favorable

market conditions.



- Operating expenses - The second quarter of 2014 experienced higher operating

costs in conjunction with the increase in occupancy rates and rental income as

mentioned above. Property taxes, which are due in the second quarter of each

year, increased in 2014 due in part to refunds received in the second quarter

of 2013 based on the reassessment of rental properties

post-acquisition. Additionally, state franchise tax expense increased in the

second quarter of 2014 due primarily to the timing of the annual payment. In

2013, a portion of tax expenses were paid in subsequent periods. - Receiver fees - In the second quarter of 2014 there was a decrease in



receiver fees due to the receiver's assignment being completed during 2013.

At the general partners' direction, the property management companies have worked to improve net operating income by executing the strategy of increasing occupancy while achieving market rent growth. We manage market rents across our portfolio by reviewing market surveys and by communicating with property managers. Additionally, as tenants vacate units we anticipate moving rents to the currently existing higher market rents. The general partners are also reviewing administrative costs such as management fees and operating costs.



REO - Holding costs - The decrease in holding costs in the three and six months ended June 30, 2014 was primarily due to the sale of properties during 2013.

45 --------------------------------------------------------------------------------



Liquidity and Capital Resources

The partnership relies upon loan payoffs, borrowers' mortgage payments, the sale and financing of real estate owned and to a lesser degree, retention of income when profitable for the source of funds for operations, lending and payments to partners.


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