UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


[X]
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the Quarterly Period Ended September 30, 2009





OR





[   ]
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the transition period from ______________ to ______________





Commission
File Number:  000-17573





REDWOOD
MORTGAGE INVESTORS VII,


a
California Limited Partnership


(Exact
name of registrant as specified in its charter)





California
            
            94-3094928(State
      or other jurisdiction of incorporation
            
            (I.R.S.
      Employeror
      organization)
            
            Identification
      No.)





900
      Veterans Blvd., Suite 500, Redwood City, CA
            94063-1743(Address
      of principal executive offices)
            (Zip
      Code)





(650)
      365-5341


(Registrant’s
telephone number, including area code)





NOT
      APPLICABLE


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes
            XX
            
            No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes
            
            
            No





1





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





(Check
one):





Large
      accelerated filer
            [  ]
            
            Accelerated
      filer
            [  ]Non-accelerated
      filer
            [  ]
            
            Smaller
      reporting company
            [X](Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





Yes
            
            
            No
            XX





2


Part
I – Item I.    FINANCIAL STATEMENTS





REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


BALANCE
SHEETS


SEPTEMBER
30, 2009 (unaudited) AND DECEMBER 31, 2008 (audited)





ASSETS





September
      30,
            
            
            December
      31,2009
            
            
            2008Cash
      and cash equivalents
            
            $
            599,216
            
            
            $
            183,779LoansLoans,
      secured by deeds of trustPrincipal
      balances
            
            
            5,490,028
            
            
            
            6,425,871Accrued
      interest and late fees
            
            
            152,749
            
            
            
            106,322Advances
      on loans
            
            
            48,440
            
            
            
            4,593Total
      secured loans
            
            
            5,691,217
            
            
            
            6,536,786Loans,
      unsecured, net discount of $74,747 and $84,037 forSeptember
      30, 2009 and December 31, 2008, respectively
            
            
            237,463
            
            
            
            275,181Allowance
      for loan losses
            
            
            (247,724
            )
            
            
            (236,893
            )Net
      loans
            
            
            5,680,956
            
            
            
            6,575,074Real
      estate owned
            
            
            1,518,370
            
            
            
            1,942,067Investment
      in limited liability company
            
            
            1,195,799
            
            
            
            1,069,877Receivable
      from affiliate
            
            
            —
            
            
            
            5,838Total
      assets
            
            $
            8,994,341
            
            
            $
            9,776,635








LIABILITIES AND PARTNERS’
CAPITAL





LiabilitiesAccounts
      payable and accrued liabilities
            
            $
            21,329
            
            
            $
            16,230Mortgage
      payable
            
            
            —
            
            
            
            500,000Payable
      to affiliate
            
            
            98,678
            
            
            
            74,830Total
      liabilities
            
            
            120,007
            
            
            
            591,060Partners’
      capitalLimited
      partners’ capital, subject to redemption
            
            
            8,863,840
            
            
            
            9,173,602General
      partners’ capital
            
            
            10,494
            
            
            
            11,973Total
      partners’ capital
            
            
            8,874,334
            
            
            
            9,185,575Total
      liabilities and partners’ capital
            
            $
            8,994,341
            
            
            $
            9,776,635








The
accompanying notes are an integral part of these financial
statements.





3


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


STATEMENTS
OF OPERATIONS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)








THREE
      MONTHS ENDED
            
            
            NINE
      MONTHS ENDEDSEPTEMBER
      30,
            
            
            SEPTEMBER
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008RevenuesInterest
      on loans
            
            $
            121,654
            
            
            $
            142,613
            
            
            $
            399,707
            
            
            $
            434,554Other
      interest
            
            
            1,165
            
            
            
            1,384
            
            
            
            3,010
            
            
            
            3,852Late
      fees
            
            
            459
            
            
            
            3,691
            
            
            
            1,443
            
            
            
            4,579Other
            
            
            2,072
            
            
            
            479
            
            
            
            4,054
            
            
            
            2,941Total
      revenues
            
            
            125,350
            
            
            
            148,167
            
            
            
            408,214
            
            
            
            445,926ExpensesMortgage
      servicing fees
            
            
            13,595
            
            
            
            —
            
            
            
            42,112
            
            
            
            —Clerical
      costs through Redwood Mortgage Corp.
            
            
            3,025
            
            
            
            2,354
            
            
            
            9,130
            
            
            
            4,756Asset
      management fees
            
            
            2,845
            
            
            
            —
            
            
            
            8,586
            
            
            
            —Provision
      for loan losses
            
            
            —
            
            
            
            15,551
            
            
            
            32,479
            
            
            
            13,377Impairment
      loss on REO
            
            
            124,756
            
            
            
            —
            
            
            
            124,756
            
            
            
            —Professional
      services
            
            
            29,190
            
            
            
            10,410
            
            
            
            64,633
            
            
            
            50,007Other
            
            
            5,586
            
            
            
            9,334
            
            
            
            29,380
            
            
            
            28,160Total
      expenses
            
            
            178,997
            
            
            
            37,649
            
            
            
            311,076
            
            
            
            96,300Net
      income/(loss)
            
            $
            (53,647
            )
            
            $
            110,518
            
            
            $
            97,138
            
            
            $
            349,626Net
      income/(loss):  general partners
(  1%)
            
            $
            (792
            )
            
            $
            1,095
            
            
            $
            971
            
            
            $
            3,496limited
      partners (99%)
            
            
            (52,855
            )
            
            
            109,423
            
            
            
            96,167
            
            
            
            346,130$
            (53,647
            )
            
            $
            110,518
            
            
            $
            97,138
            
            
            $
            349,626Net
      income/(loss) per $1,000 invested by limitedpartners
      for entire period-where
      income/(loss) is compounded and retained
            
            $
            (6
            )
            
            $
            12
            
            
            $
            10
            
            
            $
            38-where
      partner receives income/(loss) in monthlydistributions
            
            $
            (5
            )
            
            $
            11
            
            
            $
            11
            
            
            $
            37














The
accompanying notes are an integral part of these financial
statements.


4


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


STATEMENTS
OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008(unaudited)








2009
            
            
            2008Cash
      flows from operating activitiesNet
      income/(loss)
            
            $
            97,138
            
            
            $
            349,626Adjustments
      to reconcile net income/(loss) to net cash providedby
      operating activitiesProvision
      for loan losses
            
            
            32,479
            
            
            
            13,377Early
      withdrawal penalties credited to income
            
            
            (2,511
            )
            
            
            (2,092
            )Amortization
      of discount on unsecured loans
            
            
            (9,290
            )
            
            
            (6,169
            )Impairment
      loss on real estate owned
            
            
            124,756
            
            
            
            —Change
      in operating assets and liabilitiesLoans,
      unsecured
            
            
            43,008
            
            
            
            36,500Accrued
      interest and late fees
            
            
            (69,419
            )
            
            
            (10,417
            )Advances
      on loan
            
            
            (44,015
            )
            
            
            2,395Receivable
      from affiliate
            
            
            5,838
            
            
            
            (618
            )Accounts
      payable and accrued liabilities
            
            
            5,099
            
            
            
            2,598Payable
      to affiliate
            
            
            23,848
            
            
            
            662Net
      cash provided by operating activities
            
            
            206,931
            
            
            
            385,862Cash
      flows from investing activitiesPrincipal
      collected on loans
            
            
            746,400
            
            
            
            1,501,874Loans
      originated
            
            
            —
            
            
            
            (351,615
            )Payments
      for development of real estate
            
            
            (6,104
            )
            
            
            (131,335
            )Payments
      on investment in limited liability company
            
            
            (125,922
            )
            
            
            (98,596
            )Proceeds
      from investment in limited liability company
            
            
            —
            
            
            
            2,386Net
      cash provided by investing activities
            
            
            614,374
            
            
            
            922,714Cash
      flows from financing activitiesPartners’
      withdrawals
            
            
            (405,868
            )
            
            
            (410,879
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            415,437
            
            
            
            897,698Cash
      and cash equivalents – beginning of period
            
            
            183,779
            
            
            
            351,129Cash
      and cash equivalents – end of period
            
            $
            599,216
            
            
            $
            1,248,827Supplemental
      disclosures of cash flow informationCash
      paid for interest
            
            $
            6,000
            
            
            $
            —








The
accompanying notes are an integral part of these financial
statements.


5


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 1 –
GENERAL





In the
opinion of the management of the partnership, the accompanying unaudited
financial statements contain all adjustments, consisting of normal, recurring
adjustments, necessary to present fairly the financial information included
therein.  These financial statements should be read in conjunction
with the audited financial statements included in the partnership’s Form 10-K
for the fiscal year ended December 31, 2008 filed with the Securities and
Exchange Commission.  The results of operations for the nine month
period ended September 30, 2009 are not necessarily indicative of the operating
results to be expected for the full year.








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Cash and cash
equivalents





The
partnership places its cash and temporary cash investments with high credit
quality institutions.  Periodically, such investments may be in excess
of federally insured limits.





Loans secured by deeds of
trust





The
partnership generally funds loans with a fixed interest rate and a five year
term.  Approximately half of all loans outstanding provide for monthly
payments of interest, with the principal due in full at maturity.  The
other loans require monthly payments of principal and interest, typically
calculated on a 30 year amortization, with the remaining principal balance due
at maturity.





Loans
generally are stated at their outstanding unpaid principal balance with interest
thereon being accrued as earned.





If the
probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement, and the shortfall in
the amounts due is significant, the carrying amount of the loan is reduced to
the present value of future cash flows discounted at the loan’s effective
interest rate.  If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.





At
September 30, 2009 and December 31, 2008, the partnership had five and four
loans respectively, past maturity or more than 90 days past due in interest
payments or principal, with aggregate principal balances of $1,458,168 and
$691,864, respectively. In addition, accrued interest, late charges and advances
totaled $111,415 and $37,031, respectively.  At September 30, 2009,
four loans with an aggregate principal balance of $1,243,177 with filed notices
of default, were included in the more than 90 days past due
totals.  At December 31, 2008, there were two loans totaling $323,865
with a filed notice of default.





From time
to time, the partnership negotiates and enters into contractual workout
agreements with borrowers.  Under the terms of these workout
agreements, the partnership is not obligated to make any additional monetary
advances for the maintenance or repair of the collateral securing the loans. As
of September 30, 2009 and December 31, 2008, there were four and one loans,
respectively, in workout agreements.





6


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Loans secured by deeds of
trust (continued)





If events
or changes in circumstances cause management to have serious doubts about the
collectibility of the contractual payments, a loan may be categorized as
impaired and interest is no longer accrued for financial reporting purposes. Any
subsequent payments on impaired loans are applied to reduce the outstanding loan
balances, including accrued interest and advances.  When loans are
considered impaired the allowance for loan loss is updated to reflect the change
in the valuation of collateral security. The tables below summarize the impaired
loans and their activity for the periods ended September 30, 2009 and
2008:





As
      of September 30,Number
            
            
            Total
            
            
            Total
            
            
            Impairedof
            
            
            Impaired
            
            
            Investment
            
            
            LoansImpaired
            
            
            Loan
            
            
            Impaired
            
            
            LossLoans
            
            
            Balance
            
            
            Loans
            
            
            Reserve2009
            
            
            1
            
            
            $
            153,000
            
            
            $
            158,546
            
            
            $
            37,5152008
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —








For
      the three months ended September 30,
            
            
            For
      the Nine months ended September 30,Average
            
            
            
            
            
            Interest
            
            
            Average
            
            
            
            
            
            InterestInvestment
            
            
            Interest
            
            
            Income
            
            
            Investment
            
            
            Interest
            
            
            IncomeImpaired
            
            
            Income
            
            
            Received
            
            
            Impaired
            
            
            Income
            
            
            ReceivedLoans
            
            
            Accrued
            
            
            In
      Cash
            
            
            Loans
            
            
            Accrued
            
            
            In
      Cash2009
            
            $
            159,335
            
            
            $
            —
            
            
            $
            1,960
            
            
            $
            160,044
            
            
            $
            —
            
            
            $
            2,7102008
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —





Loans unsecured by deeds of
trust





The
partnership had four and three unsecured loans, net of a discount, totaling
$237,463 and $275,181 at September 30, 2009 and December 31, 2008,
respectively.  Interest is not being accrued as these loans are
considered impaired; however, monthly payments are being received on each
loan.





Allowance for loan
losses





Loans and
the related accrued interest, late fees and advances are analyzed on a periodic
basis for recoverability. Delinquencies are identified and followed as part of
the loan system.  Delinquencies are determined in accordance with
contractual terms of the loan agreements.  The allowance is adjusted
to an amount considered by management to be adequate, with due consideration to
collateral values, to loans and receivables, including impaired loans, other
loans, accrued interest, late fees and advances on loans and other accounts
receivable (unsecured).  The partnership charges off uncollectible
loan principal and related receivables directly to the allowance account if it
is determined the full amount is not collectible.  For loans that
proceed to foreclosure sale, or if the borrower surrenders the collateral to the
partnership in full or partial settlement of the loan obligation, the allowance
is charged for the amount, if any, by which the recorded balance of the loan and
related receivables exceeds the amount at which the real estate owned is
valued.





7


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Allowance for loan
losses (continued)





The
composition of the allowance for loan losses and the percentage of unpaid
principal balance for each property type, as of September 30, 2009 and December
31, 2008 were as follows:





September
      30, 2009
            
            
            December
      31, 2008Amount
            
            Percent
            
            
            Amount
            
            PercentBalance
      at end of period applicable to:Secured
      loansSingle
      family
            
            $
            102,962
            
            62
            %
            
            $
            90,876
            
            59
            %Apartments
            
            
            735
            
            2
            
            
            
            10,744
            
            2Commercial
            
            
            25,857
            
            26
            
            
            
            30,792
            
            28Land
            
            
            21,974
            
            10
            
            
            
            29,253
            
            11Total
            
            $
            151,528
            
            100
            %
            
            $
            161,665
            
            100
            %Unsecured
      loans
            
            $
            96,196
            
            100
            %
            
            $
            75,228
            
            100
            %Allowance
      for loan losses
            
            $
            247,724
            
            100
            %
            
            $
            236,893
            
            100
            %





Activity
in the allowance for loan losses for the nine months ended September 30, 2009
and 2008 was as follows:





2009
            
            
            2008Balance
      at beginning of year
            
            $
            236,893
            
            
            $
            386,658Provision
      for loan losses
            
            
            32,479
            
            
            
            13,377Charge-offsReal
      estate - mortgageSingle
      family
            
            
            (4,000
            )
            
            
            —Apartments
            
            
            —
            
            
            
            —Commercial
            
            
            —
            
            
            
            (187
            )Land
            
            
            —
            
            
            
            —(4,000
            )
            
            
            (187
            )RecoveriesReal
      estate - mortgageSingle
      family
            
            
            —
            
            
            
            —Apartments
            
            
            —
            
            
            
            —Commercial
            
            
            —
            
            
            
            —Land
            
            
            —
            
            
            
            ——
            
            
            
            —Net
      charge-offs
            
            
            (4,000
            )
            
            
            (187
            )Charges
      to allowance for acquiring real estate
            
            
            (17,648
            )
            
            
            —Balance
      at end of period
            
            $
            247,724
            
            
            $
            399,848Ratio
      of net charge-offs during the period to averagesecured
      loans outstanding during the period
            
            
            0.07
            %
            
            
            0.00
            %





8


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Real estate
owned





Real
estate owned (REO) includes real property acquired by bid at foreclosure sales
associated with the partnership’s loans or through negotiation with borrowers in
settlement of their loan(s), and in the judgment of management is not being held
for investment.  REO is stated at the lower of the recorded investment
in the loan, plus any senior indebtedness, or at the property’s estimated net
realizable value (fair value, less estimated costs to sell).  Costs
relating to the development and improvement of real estate owned are
capitalized, whereas costs relating to holding the property are
expensed.





Real estate held for
investment





The
partnership periodically compares the net carrying value of real estate held for
investment to expected future undiscounted cash flows for the purpose of
assessing the recoverability of the recorded amounts.  If the net
carrying value exceeds future undiscounted cash flows, the assets are reduced to
fair value.





Income
taxes





No
provision for federal and state income taxes (other than an $800 state minimum
tax) is made in the financial statements since income taxes are the obligation
of the limited partners if and when income taxes apply.





Net income per $1,000
invested





Amounts
reflected in the statements of operations as net income per $1,000 invested by
limited partners for the entire period are amounts allocated to limited partners
who held their investment throughout the period and have elected to either leave
their earnings to compound or have elected to receive periodic distributions of
their net income. Individual income is allocated each month based on the limited
partners’ pro rata share of partners’ capital.  Because the net income
percentage varies from month to month, amounts per $1,000 will vary for those
individuals who made or withdrew investments during the period, or select other
options.





Management
estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions about the reported amounts of assets and liabilities,
and disclosures of contingent assets and liabilities, at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reported periods. Such estimates relate principally to the determination of
the allowance for loan losses, including the valuation of impaired loans and the
valuation of real estate held. Actual results could differ significantly from
these estimates.





Reclassifications





Certain
reclassifications, not affecting previously reported net income or total
partners’ capital, may have been made to the previously issued financial
statements to conform to the current year classification.





9


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Late fee
revenue





Late fees
are generally charged at 6% of the monthly installment payment past
due.





Profits and
losses





Profits
and losses are allocated among the limited partners according to their
respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.





Subsequent
events





The
partnership has evaluated subsequent events through November 16, 2009, the date
of issuance of the financial statements.





Recently issued accounting
pronouncements





In June
2009, the Financial Accounting Standards Board (FASB) approved the FASB
Accounting Standards Codification (Codification) as the single source of
authoritative nongovernmental U.S. generally accepted accounting principles
(GAAP). The Codification was issued on July 1, 2009 and will be effective for
interim and annual periods ending after September 15, 2009.  Upon the
Codification issuance only one level of authoritative GAAP exists, other than
guidance issued by the Securities and Exchange Commission. All other accounting
literature excluded from the Codification is considered non-authoritative. All
references to GAAP will now use the new Codification (ASC) numbering
system.  The Codification did not have a material impact on the
company’s accounting polices.





In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active, with an
immediate effective date.  The purpose of this release was to provide
further clarification regarding Level 3 inputs and the assumptions management
may make when the market for the asset is not active.  In April 2009,
the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, with an
effective date for interim and annual reporting periods ending after June 15,
2009, with early adoption being permitted.  The purpose of this
release was to provide additional guidance for estimating fair value in
accordance with SFAS 157, when the volume and level of activity for the asset or
liability have significantly decreased.  This release also includes
guidance on identifying circumstances that indicate a transaction is not
orderly.  The adoption of these releases did not have a material
impact on the partnership’s financial condition and results of
operation.  These releases, along with SFAS 157, FSP 157-1 and FSP
157-2 are now included in ASC 820.





In April
2009, the FASB issued FSP FAS 107-1 (ASC 825) and APB 28-1 (ASC 825), Interim Disclosure about Fair Value
of Financial Instruments, with an effective date for interim and annual
reporting periods ending after June 15, 2009, with early adoption being
permitted if one also early adopts FSP FAS 157-4.  The purpose of this
release is to require disclosure about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements and to require those disclosures in summarized financial
information at interim reporting periods.  The adoption of this
release did not have a material impact on the partnership’s
disclosures.


10


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Recently issued accounting
pronouncements (continued)





In May
2009, the FASB issued SFAS No. 165, Subsequent Events(ASC
855).  This standard establishes general standards of accounting for
and disclosure of events occurring after the balance sheet date but before
financial statements are issued or available to be issued.  This
statement is effective for reporting periods beginning after June 15, 2009 and
did not have a material impact on the partnership’s accounting or
disclosures.








NOTE 3 – GENERAL PARTNERS
AND RELATED PARTIES




The
following are commissions and fees that are paid to the general partners and
affiliates.





Mortgage brokerage
commissions





For fees
in connection with the review, selection, evaluation, negotiation and extension
of loans, Redwood Mortgage Corp., an affiliate of the general partners, may
collect an amount equivalent to 12% of the loaned amount until 6 months after
the termination date of the offering. Thereafter, loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total partnership
assets per year.  The loan brokerage commissions are paid by the
borrowers, and thus, are not an expense of the partnership.





Mortgage servicing
fees





Redwood
Mortgage Corp., an affiliate of the general partners, receives monthly mortgage
servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal balance
of the loan portfolio, or such lesser amount as is reasonable and customary in
the geographic area where the property securing the mortgage is located.
Historically, Redwood Mortgage Corp. has charged 1.0% annually, and on occasion
has waived additional amounts to enhance the partnership’s
earnings.  Redwood Mortgage Corp. does not use any specific criteria
in determining the exact amount of fees to be waived.  Once a loan is
categorized as impaired, mortgage servicing fees are no longer accrued.
Additional servicing fees are recorded upon the receipt of any subsequent
payments on impaired loans.  The table below summarizes the mortgage
servicing fees paid to Redwood Mortgage Corp. for the three and nine month
periods ended September 30, 2009 and 2008.





Three
      months ended September 30,
              
              
              Nine
      months ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Maximum
      chargeable
              
              $
              20,393
              
              
              $
              23,224
              
              
              $
              63,170
              
              
              $
              69,372Waived
              
              
              (6,798
              )
              
              
              (23,224
              )
              
              
              (21,058
              )
              
              
              (69,372
              )Net
      charged
              
              $
              13,595
              
              
              $
              —
              
              
              $
              42,112
              
              
              $
              —


11


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 3 – GENERAL PARTNERS
AND RELATED PARTIES (continued)





Asset management
fee





The
general partners receive monthly fees for managing the partnership’s loan
portfolio and operations of up to 1/32 of 1% of the “net asset value” (3/8 of 1%
annually).  At times, to enhance the earnings to the partnership, the
general partners have charged less than the maximum allowable
rate.  The general partners do not use any specific criteria in
determining the exact amount of fees to be waived.  The table below
summarizes the asset management fees paid to the general partners for the three
and nine month periods ended September 30, 2009 and 2008.





Three
      months ended September 30,
            
            Nine
      months ended September 30,2009
            
            2008
            
            2009
            
            2008Maximum
      chargeable
            
            $
            8,536
            
            
            $
            8,654
            
            
            $
            25,759
            
            
            $
            26,035Waived
            
            
            (5,691
            )
            
            
            (8,654
            )
            
            
            (17,173
            )
            
            
            (26,035
            )Net
      charged
            
            $
            2,845
            
            
            $
            —
            
            
            $
            8,586
            
            
            $
            —





Other
fees





The
partnership agreement provides for other fees such as reconveyance, mortgage
assumption and mortgage extension fees.  These fees are incurred by
the borrowers and paid to the general partners or their affiliates.





Operating
expenses





The
general partners or their affiliate, Redwood Mortgage Corp., are reimbursed by
the partnership for all operating expenses incurred by them on behalf of the
partnership, including without limitation, out-of-pocket general and
administration expenses of the partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited
partners.








NOTE 4 – REAL ESTATE
OWNED





Management
periodically reviews the status of REO properties to evaluate among other
things, their value, marketability, potential for price appreciation, and
periodically their asset classification.  Properties are purchased or
acquired through bids at foreclosure sales associated with the partnership’s
loans, through negotiation with borrowers in full or partial settlement of their
loan obligations.  Several factors are considered by management in
determining the sale and/or investment strategy and the proper classification of
owned properties as “real estate owned - held”, “real estate owned - held for
sale” or “real estate held for investment”.  These factors include,
but are not limited to, real estate market conditions, status of any required
permits, repair, improvement or development work to be completed, rental and
lease income and the cash (and financing) available to and needed by the
partnership.  Real estate owned is classified as held for sale in the
period in which the GAAP prescribed criteria are met.  Real estate
owned is re-classified to real estate held for investment when management
determines to operate the property to maximize current income, thereby
optimizing its value, ultimately leading to the best price at
sale.  As a property’s status changes, reclassifications may
occur.


12


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 4 – REAL ESTATE
OWNED (continued)





The
following schedule for real estate held reflects the recorded values of the
properties at acquisition, net of any subsequent adjustments to estimated net
realizable values (fair value less estimated costs to sell) as of September 30,
2009 and December 31, 2008:





September
      30,
            
            
            December
      31,Real
      Estate Held
            
            2009
            
            
            2008Land
            
            $
            1,518,370
            
            
            $
            1,308,681Commercial
            
            
            —
            
            
            
            633,386Total
      real estate held
            
            $
            1,518,370
            
            
            $
            1,942,067





In March
2009, the partnership acquired a parcel of land through
foreclosure.  The partnership’s investment at the time of acquisition
was $212,603.  Upon completion of the acquisition, the partnership’s
secured loans declined by $212,435 and advances declined by $168.





In 2008,
the partnership acquired through foreclosure, a commercial-agricultural property
encumbered by a first deed of trust (see Note 6).  After several
failed attempts to reach an agreement with the holder of the senior mortgage,
considering the length of time and expense to hold the property until sale,
management decided to allow the property to revert back to the senior lender,
resulting in an impairment loss of $124,756.





In 2004,
the partnership acquired land through a deed in lieu of
foreclosure.  One of the parcels comprising the property was sold
during 2006.








NOTE 5 – INVESTMENT IN
LIMITED LIABILITY COMPANY





In 2005,
the partnership acquired through foreclosure a multi-unit property located in an
upscale neighborhood in San Francisco.  At the time the partnership
took ownership of the property, the partnership’s investment totaled $836,702
including accrued interest and advances.  This property is jointly
owned with three other affiliated partnerships.  Upon acquisition the
partnership transferred its interest (principally land and building) to Larkin
Property Company, LLC (“Larkin”).  The partnership owns 8% of the
interests in Larkin and 92% is owned by three other affiliates of the
partnership.  The property has not been leased or occupied since its
acquisition in 2005 and has not generated any revenues.  The
partnership and the other affiliated owners have made and are continuing to make
additional improvements to the property in preparation for the planned sale of
the property.  As of September 30, 2009, the partnership has
capitalized $359,097 in costs, net of recovery in 2006 from the guarantors of
the original loan, related to this property.  At September 30, 2009,
the partnership’s investment in Larkin totaled $1,195,799.








NOTE 6 – MORTGAGE
PAYABLE





In 2008,
the partnership obtained through foreclosure a property subject to an interest
only first lien of $500,000 with a 7.20% interest rate and a maturity date of
April 1, 2011.  In the third quarter of 2009, the partnership was
released from its obligations under this mortgage by allowing the property to be
foreclosed upon.





13


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 7 – FAIR
VALUE





GAAP
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The partnership determines the fair
values of its assets and liabilities based on the fair value hierarchy
established in GAAP. The standard describes three levels of inputs that may be
used to measure fair value (Level 1, Level 2 and Level 3). Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets or liabilities
that the partnership has the ability to access at the measurement date. An
active market is a market in which transactions occur with sufficient frequency
and volume to provide pricing information on an ongoing basis. Level 2 inputs
are inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are unobservable inputs
for the asset or liability. Unobservable inputs reflect the partnership’s own
assumptions about the assumptions market participants would use in pricing the
asset or liability (including assumptions about risk). Unobservable inputs are
developed based on the best information available in the circumstances and may
include the partnership’s own data.





The
      partnership does not record loans at fair value on a recurring
      basis.





The
following table reflects assets and liabilities measured at fair value on a
non-recurring basis as of September 30, 2009:





Fair
      Value Measurement at Report Date UsingQuoted
      Prices
            
            
            Significantin
      Active
            
            
            Other
            
            
            Significant
            
            
            TotalMarkets
      for
            
            
            Observable
            
            
            Unobservable
            
            
            as
      ofIdentical
      Assets
            
            
            Inputs
            
            
            Inputs
            
            
            September
      30,Item
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)
            
            
            2009Impaired
      secured loans
            
            $
            —
            
            
            $
            —
            
            
            $
            121,031
            
            
            $
            121,031Unsecured
      loans
            
            $
            —
            
            
            $
            —
            
            
            $
            141,267
            
            
            $
            141,267Real
      estate owned
            
            $
            —
            
            
            $
            —
            
            
            $
            1,518,370
            
            
            $
            1,518,370





The
      following methods and assumptions were used to estimate the fair
      value:





(a)
            Cash
      and cash equivalents – The carrying amount equals fair
      value.  All amounts, including interest bearing, are subject to
      immediate withdrawal.





(b)
            Secured
      loans.  The fair value of the non-impaired loans of $5,446,385
      and $6,393,000 at September 30, 2009 and December 31, 2008, respectively,
      was estimated based upon projected cash flows discounted at the estimated
      current interest rates at which similar loans would be
      made.  The applicable amount of the allowance for loan losses
      along with accrued interest and advances related thereto should also be
      considered in evaluating the fair value versus the carrying value. For
      loans in which a specific allowance is established based on the fair value
      of the collateral, the partnership records the loan as nonrecurring Level
      2 if the fair value of the collateral is based on an observable market
      price or a current appraised value.  If an appraised value is
      not available or the fair value of the collateral is considered impaired
      below the appraised value and there is no observable market price, the
      partnership records the loan as nonrecurring Level
  3.


14


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 7 – FAIR VALUE
(continued)





(c)
            Unsecured
      loans.  The carrying amount equals fair
      value.  Unsecured loans are valued at their principal less any
      discount or loss reserves established by management after taking into
      account the borrower’s creditworthiness and ability to repay the
      loan.





(d)
            Real
      estate owned.   At the time of foreclosure, real estate
      owned is recorded at the lower of the recorded investment in the loan,
      plus any senior indebtedness, or at the property’s estimated fair value,
      less estimated costs to sell, as applicable. The partnership periodically
      compares the carrying value of real estate to expected undiscounted future
      cash flows for the purpose of assessing the recoverability of the recorded
      amounts.  If the carrying value exceeds future undiscounted cash
      flows, the assets are reduced to estimated fair
  value.








NOTE 8 – ASSET
CONCENTRATIONS AND CHARACTERISTICS





At
September 30, 2009 and December 31, 2008, the loans secured by recorded deeds of
trust had the following characteristics:





September
      30,
            
            
            December
      31,2009
            
            
            2008Number
      of secured loans outstanding
            
            
            25
            
            
            
            29Total
      secured loans outstanding
            
            $
            5,490,028
            
            
            $
            6,425,871Average
      secured loan outstanding
            
            $
            219,601
            
            
            $
            221,582Average
      secured loan as percent of total secured loans
            
            
            4.00
            %
            
            
            3.45
            %Average
      secured loan as percent of partners’ capital
            
            
            2.47
            %
            
            
            2.41
            %Largest
      secured loan outstanding
            
            $
            500,000
            
            
            $
            500,000Largest
      secured loan as percent of total secured loans
            
            
            9.11
            %
            
            
            7.78
            %Largest
      secured loan as percent of partners’ capital
            
            
            5.63
            %
            
            
            5.44
            %Largest
      secured loan as percent of total assets
            
            
            5.56
            %
            
            
            5.11
            %Number
      of counties where security is located (all California)
            
            
            16
            
            
            
            18Largest
      percentage of secured loans in one county
            
            
            17.27
            %
            
            
            15.73
            %Number
      of secured loans in foreclosure status
            
            
            4
            
            
            
            2Amounts
      of secured loans in foreclosure
            
            $
            1,243,177
            
            
            $
            323,865





At times,
a specific loan may increase above 10% of the secured loan portfolio or
partnership assets as the loan portfolio and assets of the partnership decrease
due to limited partner withdrawals and/or loan payoffs.


15


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 8 – ASSET
CONCENTRATIONS AND CHARACTERISTICS (continued)





The
following categories of secured loans were held at September 30, 2009 and
December 31, 2008:





September
      30,
            
            
            December
      31,2009
            
            
            2008First
      trust deeds
            
            $
            4,470,389
            
            
            $
            5,279,823Second
      trust deeds
            
            
            931,091
            
            
            
            1,056,999Third
      trust deeds
            
            
            88,548
            
            
            
            89,049Total
      loans
            
            
            5,490,028
            
            
            
            6,425,871Prior
      liens due other lenders at time of loan
            
            
            1,566,711
            
            
            
            1,666,711Total
      debt
            
            $
            7,056,739
            
            
            $
            8,092,582Appraised
      property value at time of loan
            
            $
            12,141,561
            
            
            $
            13,809,106Total
      loans as percent of appraised value (1)
            
            
            58.12
            %
            
            
            58.60
            %Loans
      by type of propertySingle
      family
            
            $
            3,434,448
            
            
            $
            3,811,235Apartments
            
            
            98,006
            
            
            
            99,233Commercial
            
            
            1,430,219
            
            
            
            1,793,846Land
            
            
            527,355
            
            
            
            721,557$
            5,490,028
            
            
            $
            6,425,871





(1)
            Based
      on appraised values and prior liens at the time of the closing on the
      loan.  The loan to value computation does not take into account
      subsequent increases or decreases in security property values following
      consummation of the loan nor does it include changes through amortization
      of the senior mortgage, if any.  Property values have likely
      changed, particularly over the last two years, and the portfolio’s current
      loan to value ratio is likely higher than this historical
      ratio.





Scheduled
      maturity dates of secured loans as of September 30, 2009 are as
      follows:





Year Ending December 31,2009
            
            $
            443,5282010
            
            
            1,455,5132011
            
            
            865,0162012
            
            
            1,394,6632013
            
            
            429,281Thereafter
            
            
            902,027$
            5,490,028





One loan
totaling $214,992 was past maturity at September 30, 2009.








16


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


NOTES
TO FINANCIAL STATEMENTS


SEPTEMBER
30, 2009 (unaudited)








NOTE 9 – COMMITMENTS AND
CONTINGENCIES





Workout
agreements





The
partnership occasionally enters into workout agreements with borrowers who are
past maturity or delinquent in their regular payments.  Typically, a
workout agreement allows the borrower to extend the maturity date of the balloon
payment and/or allows the borrower to make current monthly payments while
deferring for periods of time, past due payments, or allows time to pay the loan
in full. The partnership was not obligated to fund additional money on these
loans as of September 30, 2009.





Legal
proceedings





The
partnership is involved in various legal actions arising in the normal course of
business.  In the opinion of management, such matters will not have a
material effect upon the financial position of the partnership.








17


Part
I – Item 2.





MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP





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 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
future interest rates and 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, estimates of future limited
partner withdrawals, 2009 annualized yield estimates, additional foreclosures in
2009, expectations regarding the levels of loan delinquencies and loan
repayments, expectations regarding the numbers of loan extensions, workouts and
foreclosures, beliefs relating to the impact on the partnership from current
economic conditions and trends in the financial and credit markets, beliefs
regarding the partnership’s ability to recover its investment in certain
properties, expectations regarding the partnership’s plans to hold or sell
properties which it forecloses, beliefs regarding the effect of borrower
foreclosures on liquidity, the use of excess cash flow and the intention not to
sell the partnership’s loan portfolio.  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 Company 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.





In
preparing the financial statements, management is required to make estimates
based on the information available that affect the reported amounts of assets
and liabilities as of the balance sheet dates and revenues and expenses for the
reporting periods.  Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
held.  At September 30, 2009, the partnership owned three parcels of
real property.





Loans and
the related accrued interest, late fees and advances are analyzed on a periodic
basis for recoverability. Delinquencies are identified and followed as part of
the loan system.  A provision is made for loan losses to adjust the
allowance for loan losses to an amount considered by management to be adequate,
with due consideration to collateral values, and to provide for unrecoverable
loans and receivables, including impaired loans, other loans, accrued interest,
late fees and advances on loans and other accounts receivable
(unsecured).  The partnership charges off uncollectible loans and
related receivables directly to the allowance account once it is determined that
the full amount is not collectible.





If the
probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due is not insignificant, the carrying amount of the investment will
be reduced to the present value of future cash flows discounted at the loan’s
effective interest rate.  If a loan is collateral dependent, it is
valued at the estimated fair value of the related collateral.  If
events and or changes in circumstances cause management to have serious doubts
about the further collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued.  Any
subsequent payments on impaired loans are applied to reduce the outstanding loan
balances including accrued interest and advances.





18


Recent
trends in the economy, particularly the downward trend in real estate values,
have been taken into consideration in the aforementioned process of arriving at
the allowance for loan losses and the carrying values of real estate owned and
investment in a limited liability company.  Actual future results
could vary from the aforementioned provisions for losses.  Because the
partnership is an asset based lender, the most significant economic trend that
impacts its allowance for loan losses is the fair value of California real
estate.  During periods of declining real estate values, this trend
will generally have a negative impact on the partnership’s estimated allowance
for loan losses. Conversely, during periods of appreciating real estate values,
this trend will generally have a positive impact. During 2008 and 2009,
residential real estate values declined from their 2007 levels. Consistent with
this trend, the partnership’s estimated allowance for loan losses increased in
2008 and has continued to increase in 2009.





Related
Parties.





The
general partners of the partnership are Gymno Corporation and Michael R.
Burwell. Most partnership business is conducted through Redwood Mortgage Corp.,
an affiliate of the general partners, which arranges, services and maintains the
loan portfolio for the benefit of the partnership.  The fees received
by the affiliate and the general partners are paid pursuant to the partnership
agreement and are determined at the sole discretion of the  general
partners, subject to limitations imposed by the partnership
agreement.  In the past the general partners have elected not to take
the maximum compensation.  The following is a list of various
partnership activities for which related parties are compensated.





·
            Mortgage
      Brokerage CommissionsFor fees in connection with
      the review, selection, evaluation, negotiation and extension of loans,
      Redwood Mortgage Corp. may collect an amount equivalent to 12% of the
      loaned amount until 6 months after the termination date of the
      offering.  Thereafter, the loan brokerage commissions (points)
      will be limited to an amount not to exceed 4% of the total partnership
      assets per year.  The loan brokerage commissions are paid by the
      borrowers, and thus, are not an expense of the
      partnership.  Loan brokerage commissions paid by the borrowers
      were $0 and $0 for the three month periods and $0 and $18,305 for the nine
      month periods ended September 30, 2009 and 2008,
    respectively.





·
            Mortgage
      Servicing Fees   Redwood Mortgage Corp. receives
      monthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual
      basis) of the unpaid principal of the partnership’s loans or such lesser
      amount as is reasonable and customary in the geographic area where the
      property securing the mortgage is located.  Historically,
      Redwood Mortgage Corp. has charged 1.0% annually, and on occasion has
      waived additional amounts to enhance the partnership’s earnings and
      thereby increase returns to the limited partners.  Such fee
      waivers were not made for the purpose of providing the partnership with
      sufficient funds to satisfy withdrawal requests, nor were such waivers
      made in order to meet any required level of distributions, as the
      partnership has no such required level of
      distributions.  Redwood Mortgage Corp. does not use any specific
      criteria when determining the exact amount of fees to be
      waived.  The decision to waive fees and the amount, if any, to
      be waived, is made by Redwood Mortgage Corp. in its sole
      discretion.  There is no assurance that Redwood Mortgage Corp.
      will waive fees at similar levels, or at all, in the
      future.  The table below summarizes the mortgage servicing fees
      paid to Redwood Mortgage Corp. for the three and nine month periods ended
      September 30, 2009 and 2008.





Three
      months ended September 30,
            
            Nine
      months ended September 30,2009
            
            2008
            
            2009
            
            2008Maximum
      chargeable
            
            $
            20,393
            
            
            $
            23,224
            
            
            $
            63,170
            
            
            $
            69,372Waived
            
            
            (6,798
            )
            
            
            (23,224
            )
            
            
            (21,058
            )
            
            
            (69,372
            )Net
      charged
            
            $
            13,595
            
            
            $
            —
            
            
            $
            42,112
            
            
            $
            —





19


·
            Asset
      Management FeesThe general partners receive
      monthly fees for managing the partnership’s portfolio and operations of up
      to 1/32 of 1% of the ‘net asset value’ (3/8
      of 1% on an annual basis).  At times, to enhance the earnings to
      the partnership, the general partners have charged less than the maximum
      allowable rate.  Such fee waivers were not made with the purpose
      of providing the partnership with sufficient funds to satisfy withdrawal
      requests, nor to meet any required level of distributions, as the
      partnership has no such required level of distributions.  The
      general partners do not use any specific criteria when determining the
      exact amount of fees to be waived.  The decision to waive fees
      and the amount, if any, to be waived, is made by the general partners in
      their sole discretion.  There is no assurance that the general
      partners will waive fees at similar levels, or at all, in the
      future.  The table below summarizes the asset management fees
      paid to the general partners for the three and nine month periods ended
      September 30, 2009 and 2008.





Three
      months ended September 30,
            
            Nine
      months ended September 30,2009
            
            2008
            
            2009
            
            2008Maximum
      chargeable
            
            $
            8,536
            
            
            $
            8,654
            
            
            $
            25,759
            
            
            $
            26,035Waived
            
            
            (5,691
            )
            
            
            (8,654
            )
            
            
            (17,173
            )
            
            
            (26,035
            )Net
      charged
            
            $
            2,845
            
            
            $
            —
            
            
            $
            8,586
            
            
            $
            —





·
            Other
      Fees   The partnership agreement provides the
      general partners may receive other fees such as processing and escrow,
      reconveyance, mortgage assumption and mortgage extension
      fees.  Such fees are incurred by the borrowers and are paid to
      the general partners.  Such fees aggregated $90 and $105 for the
      three month periods, and $105 and $1,277 for the nine month periods, ended
      September 30, 2009 and 2008,
respectively.





·
            Income and
      LossesAll income and (losses) are credited or
      charged to partners in relation to their respective partnership
      interests.  The allocation to the general partners (combined) is
      a total of 1%, which was ($792) and $1,095 for the three month periods and
      $971 and $3,496 for the nine month periods, ended September 30, 2009 and
      2008, respectively.





·
            Operating
      ExpensesAn affiliate of the partnership, Redwood
      Mortgage Corp. is reimbursed by the partnership for all operating expenses
      actually incurred by it on behalf of the partnership, including without
      limitation, out-of-pocket general and administration expenses of the
      partnership, accounting and audit fees, legal fees and expenses, postage
      and preparation of reports to limited partners.  Such
      reimbursement was $3,025 and $2,354 for the three month periods and $9,130
      and $4,756 for the nine month periods, ended September 30, 2009 and 2008,
      respectively.  For the first quarter of 2008, Redwood Mortgage
      Corp. waived $3,052 of costs.





·
            Contributed
      CapitalThe general partners jointly and severally
      are required to contribute an amount equal to 1/10 of 1% in cash
      contributions as proceeds from the partnership’s offering of units
      received from the limited partners.  As of September 30, 1992,
      the date the offering closed, Gymno Corporation, a general partner, had
      contributed $11,998 as capital in accordance with the partnership
      agreement.  After adjusting for allocations of profits and
      losses, capital and earnings liquidations, the general partners’ capital
      was $10,494 and $11,973 as of September 30, 2009 and December 31, 2008,
      respectively.





20


Results
of Operations.





Changes
in the partnership’s operating results are tabulated for reference and discussed
below:





Changes
      during the three months ended September 30,
              2009
      versus 2008
            
            
            Changes
      during the nine months ended September 30,
              2009
      versus 2008Dollars
            
            Percent
            
            
            Dollars
            
            PercentRevenueInterest
      on loans
            $
            (20,959
            )
            (15
            )%
            
            $
            (34,847
            )
            (8
            )%Other
      interest
            
            (219
            )
            (16
            )
            
            
            (842
            )
            (22
            )Late
      fees
            
            (3,232
            )
            (88
            )
            
            
            (3,136
            )
            (68
            )Other
            
            1,593
            
            333
            
            
            
            1,113
            
            38Total
      revenues
            
            (22,817
            )
            (15
            )
            
            
            (37,712
            )
            (8
            )ExpensesMortgage
      servicing fees
            
            13,595
            
            —
            
            
            
            42,112
            
            —Clerical
      costs through Redwood Mortgage Corp.
            
            671
            
            29
            
            
            
            4,374
            
            92Asset
      management fees
            
            2,845
            
            —
            
            
            
            8,586
            
            —Provision
      for loan losses
            
            (15,551
            )
            (100
            )
            
            
            19,102
            
            143Impairment
      loss on real estate owned
            
            124,756
            
            —
            
            
            
            124,756
            
            —Professional
      services
            
            18,780
            
            180
            
            
            
            14,626
            
            29Other
            
            (3,748
            )
            (40
            )
            
            
            1,220
            
            4Total
      expenses
            
            141,348
            
            375
            
            
            
            214,776
            
            223Net
      income/(loss)
            $
            (164,165
            )
            (149
            )%
            
            $
            (252,488
            )
            (72
            )%





Please
refer to the above table throughout the discussions of Results of
Operations





The
decrease in interest on loans for the three and nine month periods ended
September 30, 2009 as compared to the same period in 2008 was due to a decrease
in the average loan portfolio balance and a decrease in the effective average
interest rate primarily due to increased loan delinquencies.  Each
period includes income gained through amortization of discount on unsecured
notes, which has been eliminated in the calculation of the average interest
rate.  The table below recaps these averages.





Three
      Months ended September 30,
            
            
            Nine
      Months ended September 30,Average
            
            
            
            
            AverageInterest
            
            
            
            
            InterestAverage
            
            Rate
            
            
            Average
            
            RateSecured
            
            Adjusted
            
            
            Secured
            
            AdjustedLoan
            
            For
            
            
            Loan
            
            ForYear
            
            Balance
            
            Discount
            
            
            Balance
            
            Discount2008
            
            $
            5,907,765
            
            9.52
            %
            
            $
            6,054,980
            
            9.43
            %2009
            
            $
            5,737,650
            
            8.27
            %
            
            $
            5,974,221
            
            8.71
            %





21


The
decrease in other interest for the three and nine month periods ended September
30, 2009 as compared to 2008 was primarily due to lower average rates of
interest earned.  The table below summarizes the components in this
area.





Three
      Months ended September 30,
            
            
            Nine
      Months ended September 30,Average
            
            
            
            
            AverageInterest
            
            Average
            
            
            Interest
            
            AverageBearing
            
            Interest
            
            
            Bearing
            
            InterestYear
            
            Balance
            
            Rate
            
            
            Balance
            
            Rate2008
            
            $
            490,453
            
            1.13
            %
            
            $
            395,709
            
            1.30
            %2009
            
            $
            464,094
            
            1.00
            %
            
            $
            396,420
            
            1.02
            %





The
decrease in late fees for the three and nine month periods ended September 30,
2009 as compared to the same period in 2008 is due to management’s decision to
not accrue late fees on the delinquent loans as the uncertainty for collection
has increased.





The
increase in other revenues for the three and nine month periods ended September
30, 2009 as compared to the same period in 2008 is due to the collection of
$1,396 of early withdrawal penalties in September 2009, compared to $230 in
September of 2008.





Mortgage
servicing fees increased for the three and nine month periods ended September
30, 2009 as compared to the same period in 2008.  For 2009, Redwood
Mortgage Corp. waived one-third of these fees, and for 2008 had waived all of
these fees.





The
increase in clerical costs through Redwood Mortgage Corp. for the three and nine
month period ended September 30, 2009 as compared to the same period in 2008 was
due to Redwood Mortgage Corp. waiving $3,052 of fees in the first quarter of
2008.





Asset
management fees increased for the three and nine month periods ended September
30, 2009 as compared to the same period in 2008, due to Redwood Mortgage Corp.
waiving 100% of the fees in 2008 and two-thirds of the fees in
2009.





The
decrease in the provision for loan losses for the three month period and the
increase for the nine month period ended September 30, 2009 as compared to the
same periods in 2008 was due to management’s decision to decrease and increase,
respectively, the allowance for losses to reflect the current market
conditions.





The
increase in the impairment loss on real estate owned for the three and nine
month periods ended September 30, 2009 as compared to the same periods in 2008
was due to anticipated costs to hold a property, extended times to sell such
property, low demand for such property and the decline in and uncertain value
related to such property, which management allowed to be foreclosed
upon.





The
increase in professional services for the three and nine month periods ended
September 30, 2009 as compared to the same period in 2008, was due to general
increases in professional costs for legal services, audits, tax return
processing and the timing of billing.





The
decrease in other expenses for the three month period ended September 30, 2009
as compared to the same period in 2008, was due to expenses related to an owned
property.  The increase in other expenses for the nine month period
was due to expenses related to the two newest pieces of real estate held, which
were not owned at this time in 2008.





22


Partnership
capital decreased from $9,185,575 at December 31, 2008 to $8,876,487 at
September 30, 2009.  The decrease is attributable to the net loss
incurred in the third quarter of 2009, and to capital liquidations exceeding
earnings reinvested.  The partnership’s net income for the nine month
periods ending September 30, 2009 and 2008 was $97,138 and $349,626,
respectively.  Distributions to compounding and distributing limited
partners totaled $242,630 and $346,130, respectively.  The partnership
capital declined $81,321 in 2008.





The
partnership began funding loans in December 1989.  The aggregate
unpaid principal balance of the partnership’s secured loans outstanding as of
September 30, 2009 and December 31, 2008 were $5,490,028 and $6,425,871,
respectively.





Delinquencies
on partnership loans are within the normal historical range of the general
partners’ expectations, based upon their experience in managing similar
partnerships over the last 28 years.  Foreclosures are a normal aspect
of partnership operations and the general partners anticipate they will not have
a material effect on liquidity.  As of September 30, 2009, there were
four loans with a filed notice of default.





Cash is
generated from borrower payments of interest, principal, loan payoffs and from
the partnership’s sale of real estate owned properties.  Currently the
credit and financial markets are facing a significant and prolonged
disruption.  As a result, loans are not readily available to borrowers
or purchasers of real estate.  These credit constraints may impact the
partnership and our borrowers’ ability to sell properties or refinance their
loans in the event they have difficulty making loan payments or their loan
matures.  A slow down or reduction in loan repayments would likely
reduce the partnership’s cash flows and restrict the partnership’s ability to
invest in new loans or provide earnings and capital
distributions.  Excess cash flow is invested in new loan
opportunities, when available, and used for other partnership
business.





Allowance
for Losses.





The
general partners periodically review the loan portfolio, examining the status of
delinquencies, the underlying collateral securing these loans, real estate held
expenses, sales activities, and borrower’s payment records and other data
relating to the loan portfolio.  Data on the local real estate market
and on the national and local economy are studied.  Based upon this
and other information, the allowance for loan losses is increased or
decreased.  Borrower foreclosures are a normal aspect of partnership
operations.  The partnership is not a credit based lender and hence
while it reviews the credit history and income of borrowers, and if applicable,
the income from income producing properties, the general partners expect the
partnership will on occasion take back real estate security.





At
September 30, 2009, the partnership’s loan portfolio had four loans 90 days or
more past due in interest payments, with an aggregate unpaid principal balance
of $1,243,177 and a weighted average interest rate of 8.52%.  Three of
these loans are secured by a first deed of trust and one is secured by a second
deed of trust.  At such date, the partnership also had one loan past
maturity with a principal balance of $214,992 bearing an interest rate of
8.50%.  This loan is secured by a second deed of
trust.  With respect to the loans that have matured or are past due in
interest payments, the partnership will attempt to collect such amounts in full
and, if collection is not successful, the partnership may consider entering into
a workout agreement, restructuring the loan or foreclosing on the property as
the general partners deem appropriate based on their evaluation of each
individual loan.





The
partnership had four filed notices of default totaling $1,243,177, at September
30, 2009, which are the four delinquent loans noted above.





The
partnership occasionally enters into workout agreements with borrowers who are
past maturity or delinquent in their regular payments.  Four of the
partnership’s loans totaling $763,495 were subject to workout agreements as of
September 30, 2009, one of which is included in the four delinquent loans noted
above and also has a filed notice of default.  Typically, a workout
agreement allows the borrower to extend the maturity date of the balloon payment
and/or allows the borrower to make current monthly payments while deferring for
periods of time, past due payments, or allows time to pay the loan in
full.  By deferring maturity dates of balloon payments or deferring
past due payments, workout agreements may adversely affect the partnership’s
cash flow.





23


Workout
agreements and foreclosures generally exist within our loan portfolio to greater
or lesser degrees, depending primarily on the health of the
economy.  The general partners expect the number of foreclosures and
workout agreements will generally rise during economic downturns and conversely
fall during good economic times.  These workouts and delinquencies
have been considered when the general partners arrive at an appropriate
allowance for loan losses based on their experience, and are reflective of the
partnership’s loan marketplace segment.  Because of the number of
variables involved, the magnitude of possible swings and the general partners’
inability to control many of these factors, actual results may and do sometimes
differ significantly from estimates made by the general partners.





The
partnership has three unsecured loans totaling $237,463 net of a
discount.  These unsecured loans are considered impaired; however,
regular payments are being received on all three loans.





The
partnership made a provision of $32,479 and $13,377 to the loan loss reserve
during the nine month periods ended September 30, 2009 and 2008,
respectively.  The allowance for loan losses of $247,724 and $236,893
as of September 30, 2009 and December 31, 2008, respectively, is considered to
be adequate for the total net loan portfolio balances of $5,928,680 and
$6,811,967, respectively.








PORTFOLIO
REVIEW





Loan
Portfolio





The
partnership’s loan portfolio consists primarily of short-term (one to five
years), fixed rate loans secured by real estate.  The majority of the
real estate is located in the nine San Francisco Bay Area counties (San Mateo,
Santa Clara, Alameda, San Francisco, Napa, Solano, Sonoma, Marin and Contra
Costa).





As of
September 30, 2009 and 2008, the partnership held 25 and 22 secured loans,
respectively, in the following locations and categories:





September
      30,2009
            
            
            2008Dollars
            
            Percent
            
            
            Dollars
            
            PercentLocationSan
      Francisco Bay Area
            $
            3,586,095
            
            66
            %
            
            $
            3,571,892
            
            71
            %Other
      Northern California counties
            
            1,233,107
            
            22
            
            
            
            960,949
            
            19Southern
      California counties
            
            670,826
            
            12
            
            
            
            519,422
            
            10Total
            $
            5,490,028
            
            100
            %
            
            $
            5,052,263
            
            100
            %Property
      typeSingle
      Family
            $
            3,434,448
            
            62
            %
            
            $
            2,740,551
            
            54
            %Apartments
            
            98,006
            
            2
            
            
            
            99,622
            
            2Commercial
            
            1,430,219
            
            26
            
            
            
            1,794,111
            
            36Land
            
            527,355
            
            10
            
            
            
            417,979
            
            8Total
            $
            5,490,028
            
            100
            %
            
            $
            5,052,263
            
            100
            %





24


The
following table sets forth the priorities, asset concentrations and maturities
of the secured loans held by the partnership as of September 30,
2009:





#
      of Loans
            
            Amount
            
            PercentFirst
      trust deeds
            21
            
            $
            4,470,389
            
            81
            %Second
      trust deeds
            3
            
            
            931,091
            
            17
            %Third
      trust deeds
            1
            
            
            88,548
            
            2
            %Total
            25
            
            $
            5,490,028
            
            100
            %Maturing
      prior to 12/31/09
            2
            
            $
            443,528
            
            7
            %Maturing
      during 2010
            5
            
            
            1,455,513
            
            27
            %Maturing
      during 2011
            4
            
            
            865,016
            
            16
            %Maturing
      after 12/31/11
            14
            
            
            2,725,971
            
            50
            %Total
            25
            
            $
            5,490,028
            
            100
            %Average
      loan
            
            
            $
            219,601
            
            4.00
            %Largest
      loan
            
            
            
            500,000
            
            9.11
            %Smallest
      loan
            
            
            
            39,160
            
            0.71
            %Average
      loan-to-value, based upon appraisalsand
      senior liens at date of inception of loan (1)
            
            
            
            
            
            58.12
            %





(1)
            Based
      on appraised values and prior liens at the time of the closing on the
      loan.  The loan to value computation does not take into account
      subsequent increases or decreases in security property values following
      consummation of the loan nor does it include changes through amortization
      of the senior mortgage, if any.  Property values have likely
      changed, particularly over the last two years, and the portfolio’s current
      loan to value ratio is likely higher than this historical
      ratio.





As of
September 30, 2009, the partnership’s largest loan in the principal amount of
$500,000 represented 9.11% of outstanding secured loans and 5.56% of partnership
assets.  At times, loans may increase above 10% of the secured loan
portfolio or partnership assets as the loan portfolio and assets of the
partnership decrease due to loan payoffs and/or limited partner
withdrawals.





Liquidity and Capital
Resources.





The
partnership relies upon loan payoffs, borrowers’ mortgage payments and the sale
of real estate owned for the source of funds for loans.  Recently,
mortgage interest rates have decreased somewhat from those available at the
inception of the partnership.  If interest rates were to increase
substantially, the yield of the partnership’s loans may provide lower yields
than other comparable debt-related investments.  Additionally, since
the partnership has made primarily fixed rate loans, if interest rates were to
rise, the likely result would be a slower prepayment rate for the
partnership.  This could cause a lower degree of liquidity as well as
a slowdown in the ability of the partnership to invest in loans at the then
current interest rates.  Conversely, in the event interest rates were
to decline, the partnership could experience significant borrower prepayments,
which, if the partnership can only obtain the then existing lower rates of
interest may cause a dilution of the partnership’s yield on loans, thereby
lowering the partnership’s overall yield to the limited
partners.  Cash is generated from borrower payments of interest,
principal, loan payoffs and from the partnership’s sale of real estate owned
properties.  Currently the credit and financial markets are facing a
significant and prolonged disruption.  As a result, loans are not
readily available to borrowers or purchasers of real estate.  These
credit constraints may impact the partnership and our borrowers’ ability to sell
properties or refinance their loans in the event they have difficulty making
loan payments or their loan matures.  A slow down or reduction in loan
repayments would likely reduce the partnership’s cash flows and restrict the
partnership’s ability to invest in new loans or provide earnings and capital
distributions.  Excess cash flow is invested in new loan
opportunities, when available, and used for other partnership
business.





25


At the
time of their subscription for units in the partnership, limited partners made a
decision to either take distributions of earnings monthly, quarterly or annually
or to compound earnings in their capital account.  The table below
summarizes these allocation elections. As of September 30, 2009 and 2008,
limited partners electing to withdraw earnings represented 40% and 39%,
respectively.





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Distributing
            
            $
            27,447
            
            
            $
            41,351
            
            
            $
            96,553
            
            
            $
            133,268Compounding
            
            $
            40,673
            
            
            $
            67,079
            
            
            $
            146,077
            
            
            $
            212,862





The
partnership also allows the limited partners to withdraw their capital account
subject to certain limitations and penalties (see liquidation provisions of
partnership agreement).  These withdrawals are within the normally
anticipated range the general partners would expect in their experience in this
and other partnerships.  The general partners expect a small
percentage of limited partners will elect to liquidate their capital accounts
over one year with a 10% and/or 8% early withdrawal penalty.  In
originally conceiving the partnership, the general partners wanted to provide
limited partners needing their capital returned a degree of
liquidity.  Generally, limited partners electing to withdraw over one
year need to liquidate investments to raise cash.  The demand the
partnership is experiencing in withdrawals by limited partners electing a one
year liquidation program represents a small percentage of limited partner
capital as of September 30, 2009 and 2008, respectively, and is expected by the
general partners to commonly occur at these levels.





After a
five year hold period has passed, limited partners may withdraw their capital
account without penalty.  To date, the partnership has satisfied all
withdrawal requests by limited partners.  The table below sets forth
actual liquidations for the past three months:





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Capital
      liquidations-without penalty
            
            $
            99,488
            
            
            $
            73,441
            
            
            $
            278,436
            
            
            $
            250,888Capital
      liquidations-subject to penalty
            
            $
            17,454
            
            
            $
            2,872
            
            
            $
            31,395
            
            
            $
            26,145





In some
cases in order to satisfy broker-dealers and other reporting requirements, the
general partners have valued the limited partners’ interest in the partnership
on a basis which utilizes a per Unit system of calculation, rather than based
upon the investors’ capital account.  This information has been
reported in this manner in order to allow the partnership to integrate with
certain software used by the broker-dealers and other reporting
entities





In those
cases, the partnership will report to broker-dealers, trust companies and others
a “reporting” number of Units based upon a $1.00 per Unit
calculation.  The number of reporting Units provided will be
calculated based upon the limited partner’s capital account value divided by
$1.00.  Each investor’s capital account balance is set forth
periodically on the partnership account statement provided to
investors.  The reporting Units are solely for broker-dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners’ right or interest in
cash flow or any other economic benefit in the partnership.  Each
investor’s capital account balance is set forth periodically on the partnership
account statement provided to investors.  The amount of partnership
earnings each investor is entitled to receive is determined by the ratio each
investor’s capital account bears to the total amount of all investor capital
accounts then outstanding.  The capital account balance of each
investor should be included on any FINRA member client account statement in
providing a per Unit estimated value of the client’s investment in the
partnership in accordance with NASD Rule 2340.





While the
general partners have set an estimated value for the Units, such determination
may not be representative of the ultimate price realized by an investor for such
Units upon sale.  No public trading market exists for the Units and
none is likely to develop.  Thus, there is no certainty the Units can
be sold at a price equal to the stated value of the capital
account.  Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled “Risk Factors - Purchase of Units is a long term
investment”).





26


Current
Economic Conditions.





The
partnership makes mortgage loans primarily secured by deeds of trust on
California real estate.  The majority of its lending is concentrated
in the San Francisco Bay Area and the outlying communities.  The
economic health of California and in particular, the San Francisco Bay Area,
plays a significant role in the performance of the real estate industry, and
property values which provide the underlying collateral for our
loans.  In December 2007, California along with the rest of the United
States began to experience what has turned out to be the most severe and
prolonged economic recession in more than 50 years.  The downward
trend in economic productivity and the depth of the recession accelerated
significantly in the fourth quarter of 2008 when the national gross domestic
product declined at an annual rate of 5.4% and continued to decline in the first
and second quarters of 2009; at an annual rate of 6.4% and 1.0%, respectively,
before slightly recovering in the third quarter of 2009 with an increase at an
annual rate of 3.5% (from the second quarter of 2009), according to the
“advance” estimate released by the Bureau of Economic Analysis..





During
this recession many events have buffeted the United States economy, particularly
the financial system and the business sector.  These events include,
among others:  the failure of brokerage firm Lehman Brothers; the
forced merger of the brokerage firm Bear Stearns; the governmental bailout of
insurance giant AIG; the government takeover of both Fannie Mae and Freddie Mac
(the largest holders of residential mortgages in the United States); the merger
of Bank of America with Countrywide (the third largest holder of residential
mortgages in the United States); the forced merger of Wachovia Bank; the
takeovers of over 120 banks by the FDIC in 2009; governmental financial
assistance provided to United States automakers; the bankruptcies of Chrysler
Corporation and General Motors; and historic write downs of mortgages held by
banks.  These factors have exposed the financial system to increased
risks and decreased consumer confidence.





In
response to the turmoil in the financial markets and to help bolster the
financial system and the economy, the United States government, through the
Federal Reserve and Treasury, has adopted many measures.  These
measures include among others, two financial stimulus packages, enactment of the
Troubled Asset Relief Program (TARP) to provide capital to financial
institutions, reduction of the Federal Funds Rate to a range of 0.00% to 0.25%,
and enactment of the Emergency Economic Stabilization Act.  The impact
of these actions and future actions will take time to produce positive
results.





In
response to the reduced economic activity businesses have made significant
reductions in their workforces, which have caused an increase in
unemployment.  Since January of 2008, the national unemployment rate
has risen dramatically from 4.9% to 9.8% as of September
2009.  Likewise, California’s unemployment rate has increased from
6.1% in January 2008 to 12.2% as of September 2009.   The
escalation of unemployment has caused borrowers losing jobs to have a difficult
time meeting their financial obligations and caused concerns among workers
regarding their job security. Both of these factors have lowered overall
confidence, particularly as it relates to one’s own financial
circumstances.





The rise
in residential real estate values to all-time highs from 2003 to 2006, and the
subsequent steep value declines in many residential real estate markets, have
furthered the downturn in consumer confidence and has been a leading cause of
the current recession. As residential real estate values declined, borrowers
that had obtained subprime and high loan-to-value mortgages began to default in
high percentages on their mortgage obligations.  These defaults were
due to a variety of reasons, including borrowers’ inability to manage their
mortgage payments, dramatic increases in mortgage payments from adjustable rate
mortgage loans, rising unemployment and reduced or negative
equity.  As borrowers defaulted upon their loans in record numbers and
property values fell, real estate lenders have sought to minimize risk and
became more cautious in their real estate lending activities.





In
California, loan defaults and the subsequent filings of notices of default to
enforce lenders’ remedies against defaulted borrowers rose throughout most of
2007 and 2008.  However in the third quarter of 2009, the number of
notices of default filed decreased by 10.3% from the second quarter of 2009, but
was 18.5% higher than the third quarter of 2008. Likewise, trustee’s deeds
issued at the foreclosure sale of a property decreased in San Francisco County
from 192 during the third quarter of 2008 to 179 during the third quarter of
2009.  That number also decreased in Los Angeles County from 11,690
during the third quarter 2008 to 7,927 during the third quarter of
2009.





27


Increased
defaults, declining real estate values and losses on some loans have led to more
restrictive loan to value requirements, more stringent underwriting standards
and the elimination of a wide variety of lending programs, which in turn has
significantly reduced the number of potential buyers and borrowers for both
residential and commercial property.  Lenders’ aversion to real estate
secured lending has left FHA, Fannie Mae and Freddie Mac, and large,
well-capitalized portfolio lenders as the primary sources of capital, and even
these sources are tightening their lending guidelines.  Fannie Mae and
Freddie Mac have created two types of maximum loan amounts they are willing to
purchase.  For most single family properties there are “Conforming”
loans, which are loans up to $417,000 and in some of the higher-priced regions
of California, such as the San Francisco Bay Area, “High Cost” loans which are
up to $729,750.  Many of the properties the partnership has lent upon
have loans exceeding these amounts and would not be eligible for purchase by
these lenders.  In all respects, money available for real estate
lending has been greatly curtailed.  Access to borrowed monies is the
lifeblood to a functioning real estate market and the recent restrictions and
reductions have led to an overall reduction in real estate
activity.





Mortgage
interest rates are a key factor in the affordability of real
estate.  The higher the interest rate, the less affordable real estate
becomes.  Interest rates are currently near historic
lows.  Freddie Mac reports for September 2009, the 30-year fixed-rate
mortgage interest rate averaged 4.95% with an average cost of 0.7
points.  Last year at this time, the interest rate on the same loan
averaged 6.04% and cost 0.7 points.  The lower interest rates have
helped homeowners qualify for mortgages and provided those seeking to purchase
residential property with lower payment rates and increased
affordability.  This improved affordability is one likely reason why
residential real estate sales volumes have been increasing since July
2008.  In September 2009, California sales volumes of new and resale
houses and condominiums rose 2.1% from September 2008.





Median
home prices have declined from their highs in 2005 and 2006.  The
median sales price of an existing California home, as reported by Dataquick, was
$251,000 in September 2009, a 2.0% increase from June (which increased 10.0%
from March 2009) but an 11.3% drop from $283,000 in September
2008.   These value declines from 2008 have caused great
difficulties for residential owners and their lenders.  Owners
desiring to sell property often must face the prospect of selling at prices less
than their acquisition cost, resulting in a loss to the
owner.  Lenders on secured properties often find the decline in values
has tightened their lendable equity or in some instances resulted in their loan
being larger than the collateral property is worth.  In the current
environment, borrowers owning residential properties may find it difficult to
refinance or sell their properties.  This situation may cause or even
force borrowers to hold their existing financing longer than they normally would
choose or originally anticipated due to the lack of other financing alternatives
or the inability to sell the property and pay off the existing debt through
property sale.





Should a
borrower encounter difficulty in making their mortgage payments or paying off a
loan at its maturity, the lender must decide whether to work with the borrowers
to assist them through a period of financial difficulty or proceed with remedies
provided in the loan documents, often resulting in a foreclosure of the
property.  Slow and longer sales periods and often lower property
values, coupled with a general lack of financing alternatives and stringent
underwriting standards have forced many borrowers and lenders to make these
difficult choices.





In light
of the current economic conditions, the partnership has been increasing the
allowance for loan losses, and has taken other actions to protect the
partnership’s investment in the loans and the capital of its investors.
Nevertheless, the partnership is experiencing increased loan delinquencies,
lower levels of loan repayments, increased numbers of loan extensions, workouts
and foreclosures as some borrowers are unable to meet their financial
obligations.  In some instances, the partnership anticipates realizing
losses should it take back the real estate securing these loans and choose to
immediately sell the property.  The partnership may also consider
accepting less than the amount owed on a mortgage to facilitate the sale of real
estate at its current market value, commonly known as a short
sale.  The partnership believes it may be beneficial, in some cases to
hold a property as an investment if the property has the potential to generate
rental income or the value of the property can be enhanced through
improvements.  Given the difficult economic environment, the
partnership anticipates holding many of the properties it forecloses upon for
periods of time rather than immediately selling the properties.  In
the interim, this will result in the partnership being a holder of both debt on
and equity in California real estate.








28


Part
I – Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Under the
reporting requirements, the partnership has elected not to report on this
item.








Part
I – Item 4T.   CONTROLS AND PROCEDURES





As of
September 30, 2009, the partnership carried out an evaluation, under the
supervision and with the participation of the general partners of the
effectiveness of the design and operation of the partnership’s disclosure
controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended.  Based upon that evaluation, the general
partners concluded as of the end of the period covered by this report, that the
partnership’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by the partnership in the reports that it
files or submits under that Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and is accumulated and communicated to the general partners as
appropriate to allow timely decisions regarding required
disclosure.





There was
no change in the partnership’s internal control over financial reporting during
the three months ended September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, the partnership’s internal control over
financial reporting.


29


Part
II – OTHER INFORMATION








Item
1.                Legal
Proceedings





In the
normal course of business, the partnership may become involved in various types
of legal proceedings such as assignment of rents, bankruptcy proceedings,
appointment of receivers, unlawful detainers, judicial foreclosure, etc., to
enforce the provisions of the deeds of trust, collect the debt owed under the
promissory notes, or to protect, or recoup its investment from the real property
secured by the deeds of trust and resolve disputes between borrowers, lenders,
lien holders and mechanics.  None of these actions would typically be
of any material importance.  As of the date hereof, the partnership is
not involved in any legal proceedings other than those that would be considered
part of the normal course of business.  In the opinion of management,
such matters will not have a material effect upon the financial position of the
partnership.








Item
1A.             Risk
Factors





Not Applicable








Item
2.                Unregistered
Sales of Equity Securities and Use of Proceeds





Not
Applicable.








Item
3.                Defaults
upon Senior Securities





Not
Applicable.








Item
4.                Submission
of Matters to a Vote of Security Holders





Not
Applicable.








Item
5.                Other
Information





Not
Applicable.








Item
6.                Exhibits





31.1
Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002


31.2
Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002


32.1
Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002


32.2
Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002





30


Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934 the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereto
duly authorized on the 16th day of November, 2009.





REDWOOD
      MORTGAGE INVESTORS VII,A
      CALIFORNIA LIMITED PARTNERSHIP








By:
            /S/
      Michael R. BurwellMichael
      R. Burwell, General PartnerBy:
            Gymno
      Corporation, General PartnerBy:
            /S/
      Michael R. BurwellMichael
      R. Burwell, President, Secretary/Treasurer & Chief Financial
      Officer








31


Exhibit
31.1


GENERAL
PARTNER CERTIFICATION





I,
      Michael R. Burwell, certify that:





1.
            I
      have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
      Investors VII, a California Limited Partnership (the
      “Registrant”);





2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      Registrant as of, and for, the periods presented in this
      report;





4.
            The
      Registrant’s other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15-d-15(f)) for the Registrant and
  have:





(a)
            designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the Registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;





(b)
            designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;





(c)
            evaluated
      the effectiveness of the Registrant’s disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and





(d)
            disclosed
      in this report any change in the Registrant’s internal control over
      financial reporting that occurred during the Registrant’s most recent
      fiscal quarter (the Registrant’s forth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the Registrant’s internal control over financial
      reporting; and





5.
            The
      Registrant’s other certifying officers and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the Registrant’s auditors and the audit committee of the Registrant’s
      board of directors (or persons performing the equivalent
      functions):





(a)
            all
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the Registrant’s ability to record,
      process, summarize and report financial information;
  and





(b)
            any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the Registrant’s internal control
      over financial reporting.













/s/
Michael R. Burwell


_____________________________


Michael
R. Burwell, General Partner


November
16, 2009


32


Exhibit
31.2





PRESIDENT
AND CHIEF FINANCIAL OFFICER CERTIFICATION





I,
      Michael R. Burwell, certify that:





1.
            I
      have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
      Investors VII, a California Limited Partnership (the
      “Registrant”);





2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      Registrant as of, and for, the periods presented in this
      report;





4.
            The
      Registrant’s other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15-d-15(f)) for the Registrant and
  have:





(a)
            designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the Registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;





(b)
            designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;





(c)
            evaluated
      the effectiveness of the Registrant’s disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and





(d)
            disclosed
      in this report any change in the Registrant’s internal control over
      financial reporting that occurred during the Registrant’s most recent
      fiscal quarter (the Registrant’s forth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the Registrant’s internal control over financial
      reporting; and





5.
            The
      Registrant’s other certifying officers and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the Registrant’s auditors and the audit committee of the Registrant’s
      board of directors (or persons performing the equivalent
      functions):





(a)
            all
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the Registrant’s ability to record,
      process, summarize and report financial information;
  and





(b)
            any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the Registrant’s internal control
      over financial reporting.










/s/
Michael R. Burwell


_____________________________


Michael
R. Burwell, President, Secretary/Treasurer and


Chief
Financial Officer, of Gymno


Corporation,
General Partner


November
16, 2009


33


Exhibit
32.1





CERTIFICATION
PURSUANT TO


18 U.S.C.
SECTION 1350,


AS
ADOPTED PURSUANT TO


SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002








In
connection with the Quarterly Report of Redwood Mortgage Investors VII, a
California Limited Partnership (the “Partnership”) on Form 10-Q for the period
ended September 30, 2009 as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael R.
Burwell, certify, to the best of my knowledge:





(1)
            The
      Report fully complies with the requirements of Section 13(a) or 15(d) of
      the Securities Exchange Act of 1934;
and





(2)
            The
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Partnership at the dates and for the periods
  indicated.





A signed
original of this written statement required by Section 906 has been provided to
the Partnership and will be retained by the Partnership and furnished to the
Securities and Exchange Commission or its staff upon request.











/s/
Michael R. Burwell


_____________________________


Michael
R. Burwell, General Partner


November
16, 2009


34





Exhibit
32.2


CERTIFICATION
PURSUANT TO


18 U.S.C.
SECTION 1350


AS
ADOPTED PURSUANT TO


SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002





In
connection with the Quarterly Report of Redwood Mortgage Investors VII, a
California Limited Partnership (the “Partnership”) on Form 10-Q for the period
ended September 30, 2009 as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael R.
Burwell, certify, to the best of my knowledge:





(1)
            The
      Report fully complies with the requirements of Section 13(a) or 15(d) of
      the Securities Exchange Act of 1934;
and





(2)
            The
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Partnership at the dates and for the periods
  indicated.





A signed
original of this written statement required by Section 906 has been provided to
the Partnership and will be retained by the Partnership and furnished to the
Securities and Exchange Commission or its staff upon request.











/s/
Michael R. Burwell


_____________________________


Michael
R. Burwell, President,


Secretary/Treasurer
& Chief Financial


Officer
of Gymno Corporation, General Partner


November
16, 2009








35