<PAGE>   1

                                                                   EXHIBIT 10.14


                              EMPLOYMENT AGREEMENT

This Employment Agreement (hereinafter referred to as "Agreement") is entered
into this 13th day of March, 2000, by Harold Zagunis (hereinafter referred to as
"Executive") and Redwood Trust, Inc., a Maryland Corporation located in Mill
Valley, California (hereinafter referred to as the "Company") (hereinafter
jointly referred to as the "parties") who wish to enter into this Agreement,
superseding and replacing terms and conditions that previously existed.

WHEREAS, the Company wishes to employ Executive under the terms and conditions
set forth below, and Executive wishes to accept such employment under the terms
and conditions set forth below, and

WHEREAS, Executive acknowledges that Executive has read and is fully familiar
with the terms of this Agreement, that Executive has had a reasonable
opportunity to consider this Agreement and to seek legal counsel,

NOW, THEREFORE, for and in consideration of the above stated premises, and the
mutual promises and agreements set forth herein, the parties agree as follows:

1.      EMPLOYMENT AGREEMENT

        The Company hereby employs Executive, and Executive hereby accepts
        employment with the Company, under the terms and conditions described in
        this Agreement. This Agreement shall take effect on March 13, 2000 and
        shall remain in effect subject to being terminated pursuant to Section 5
        of this Agreement.

2.      DUTIES

        a.      RESPONSIBILITIES

                Subject to the terms of this Agreement, Executive is hereby
                employed to perform services and function as Vice-President,
                reporting to Doug Hansen, the President of Redwood Trust, Inc.
                (hereinafter referred to as "President"). The essential
                functions of Executive's position are more particularly set
                forth in Appendix A hereto, which is incorporated herein by
                reference. The President may, from time to time, at his sole
                discretion, modify, reassign and/or augment Executive's
                responsibilities. Any such modification, reassignment or
                augmentation of responsibilities shall be in writing. Executive
                fully and completely understands and accepts the nature and
                extent of Executive's obligations and duties under this
                Agreement.



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        b.      LOYAL AND FULL-TIME PERFORMANCE OF DUTIES

                Executive shall faithfully devote the whole of his professional
                time, attention, energies and best efforts to the performance of
                Executive's duties and shall not, either directly or indirectly,
                alone or in partnership, consult with, advise, work for or have
                any interest in any other business or enterprise that directly
                or indirectly compete with the Company during his employment
                hereunder. Any modification of this subparagraph 2(b) shall be
                made only by an agreement in writing signed by Executive and the
                Company.

        c.      COMPANY POLICIES

                Executive agrees to abide by the Company's rules, regulations,
                policies and practices, written and unwritten, as they may from
                time to time be adopted or modified and issued by the Company at
                its sole discretion. The Company's written rules, issued
                policies, practices and procedures shall be binding on Executive
                unless superseded by or in conflict with this Agreement, in
                which case this Agreement shall govern.

3.      COMPENSATION

        a.      BASE COMPENSATION RATE

                As consideration for the services and covenants described in
                this Agreement, the Company agrees to pay Executive a 2000 and
                2001 base annual salary of Two Hundred Thousand Dollars
                ($200,000), subject to payroll deductions required by law or
                authorized by Executive. Payments shall be made in equal
                installments in accordance with the Company's procedures, as
                from time to time may be amended at its sole discretion,
                regarding the payment of compensation to management personnel.

        b.      INCENTIVE BONUS

                Executive may, at the President's prerogative, be eligible for
                consideration to receive an incentive bonus based upon a
                percentage of his base salary. For year 2000 and 2001, the
                Executive's target incentive bonus will be 50% of eligible
                annual base salary, and such discretionary bonus payment will
                depend on overall Company performance and other factors. For
                year 2000 and 2001, the Executive will also be eligible for an
                additional incentive bonus in the range of $0 to the maximum of
                $25,000, and such discretionary bonus payment will be based on
                the Executive's demonstrated leadership abilities and
                effectiveness as senior manager and leader of the Company, with
                specific performance criteria to be determined by the President.
                The issuance (if any), timing and amount of any incentive bonus
                shall be within the sole discretion of the President.
                Executive's eligibility to receive any such incentive bonus
                shall be expressly conditioned on, among other


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                things, Executive remaining employed with the Company up through
                any designated distribution date set by the President.

        c.      ANNUAL REVIEW

                Executive's performance shall be reviewed at least annually. The
                performance evaluations shall consider and assess Executive's
                performance of his duties and responsibilities, the timely
                accomplishment of existing performance objectives, his level of
                efficiency and overall effectiveness and/or other factors or
                criteria that the Company, in its sole discretion, may deem
                relevant. The frequency of performance evaluations may vary
                depending upon, among other things, length of service, past
                performance, changes in job duties or performance levels.
                Positive performance evaluations do not guarantee salary
                increases or incentive bonuses. Salary increases and incentive
                bonus awards are solely within the discretion of the Company and
                may depend upon many factors other than Executive's performance.

        d.      BENEFITS PLANS

                Executive shall be entitled to participate in any benefit
                adopted from time to time by the Company for the benefit
                generally of its executive employees, and Executive shall be
                entitled to receive such other fringe benefits as may be granted
                to him from time to time by the President.

                The Executive shall be entitled to participate in any benefit
                plans relating to paid time off, stock options, stock purchases,
                retirement, thrift, life insurance, medical coverage, education
                or other employee benefits that may, from time to time, be made
                available generally to other employees of the Company, subject
                to and in accordance with any provisions and restrictions
                (including applicable waiting periods) specified in such plans.

4.      BUSINESS EXPENSES

        The Company shall pay Executive's reasonable and necessary business
        expenses, incurred by Executive on behalf of the Company, in accordance
        with the customary and usual practice and policies of the Company as may
        be adopted or amended from time to time in the Company's sole
        discretion. If Executive incurs business expenses hereunder, he shall
        submit to the Company a request for reimbursement together with
        supporting documentation and receipts in accordance with Company policy.
        Reimbursement for legitimate business expenses shall be made within a
        reasonable period of time.


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5.      TERMINATION AND SEVERANCE PAY

        a.      TERMINATION FOR CAUSE BY THE COMPANY

                Executive's employment hereunder may be terminated immediately
                by the Company for cause upon occurrence of any of the
                following:

                1.      Gross negligence or willful misconduct by Executive in
                        the performance of his duties hereunder;

                2.      The habitual or repeated neglect of his duties by
                        Executive;

                3.      A material breach of this Agreement;

                4.      Executive's death;

                5.      Executive's permanent total disability, which shall be
                        defined as Executive being unable to adequately perform
                        the essential functions of their current position, as
                        defined by the Company, due to a medically determinable
                        mental or physical illness or injury which can be
                        expected to result in death or can be reasonably
                        expected to last for a continuous period of not less
                        than six (6) months. Any determination of such inability
                        to perform shall be made only by the Company based on
                        professional medical advice provided by a medical
                        professional mutually agreeable to Executive, or his
                        representative, and the Company;

                6.      Conviction of a felony;

                7.      Theft or embezzlement, or attempted theft or
                        embezzlement, of money or tangible or intangible assets
                        or property of the Company or its employees, customers,
                        clients, etc.;

                8.      Any act of moral turpitude by Executive injurious to the
                        interest, property, operations, business or reputation
                        of the Company;

                9.      Unauthorized use or disclosure of trade secrets or
                        confidential or proprietary information pertaining to
                        Company business.

                Upon the Company learning of a material breach of this Agreement
                by Executive, the Company may permit Executive a 30-day period
                to cure such a breach if, in the judgment of the Company, the
                breach may be cured and it is in the Company's best interest to
                allow an opportunity to do so. Any termination under this
                Section shall be without prejudice as to any other remedy to
                which the Company may be entitled either under this Agreement or
                at law. Upon such termination, the Company shall have no further
                obligations to make payments of any kind to Executive, except as
                required by law.


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        b.      TERMINATION WITHOUT CAUSE BY THE COMPANY

                The Company may terminate Executive's employment hereunder at
                any time without cause upon 30 days written notice to Executive
                or pay in lieu thereof.

        c.      TERMINATION BY EXECUTIVE

                Executive may terminate his employment with the Company under
                this Agreement for any reason by giving 30 days written notice
                to the Company.

                The Executive shall also have the right to terminate this
                Agreement for good reason. "Good Reason" shall mean the
                occurrence, without Executive's express written consent of the
                following:

                (i)     Failure by the Company to make payment to Executive as
                        required by this Agreement;

                (ii)    Change of Control - Change of control is defined in this
                        Agreement as the sale of all or substantially all of the
                        assets of the Company or the transfer of all or
                        substantially all of the management control or ownership
                        of the Company to an entity which is not affiliated with
                        the Company. In the event that a Change of Control
                        occurs and Executive thereafter resigns after three
                        months but within six (6) months of the Change of
                        Control for the stated reason(s) that the Company (or
                        its successor) have reduced his base salary or caused a
                        substantial and material diminution of his
                        responsibilities as Vice-President.

                (iii)   A significant reduction in Executive's responsibilities
                        or base salary, that is not accompanied or caused by a
                        Change of Control, except as may result in connection
                        with the Company's termination of Executive's employment
                        or accommodation of a disability of the Executive, in
                        accordance with this Agreement.

        d.      NO SEVERANCE PAYMENTS/INCENTIVE BONUS

                No severance payment shall be payable to Executive in the event
                of termination of this Agreement by the Company for cause, due
                to the Executive's death or in the event Executive terminates
                his employment without Good Reason. Executive shall not be
                entitled to any incentive bonus, or any portion of such bonus,
                where the distribution date as established by the President is
                subsequent to the date of termination; eligibility for any such
                incentive bonus is conditioned upon Executive actively working
                until the established distribution date.


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6.      SEVERANCE.

        If Executive's employment is terminated (i) by the Company without cause
        (Section 5b, above), or (ii) by the Executive for Good Reason (Section
        5c), and Executive signs a release discharging the Company and all its
        respective officers, agents, directors, supervisors, employees,
        representatives and their successors and assigns and all persons acting
        by, through, under, or in concert with any of them from any and all
        charges, complaints, claims, and liabilities of any kind of nature
        whatsoever, known or unknown, suspected or unsuspected, arising out of
        Executive's Employment and/or this Agreement, Executive shall be
        entitled to the following benefits:

        a.      SEVERANCE PAYMENT

                Severance payment shall be the greater of (i) fifty percent
                (50%) of current year annual base salary; or (ii) the equivalent
                gross amount of fifty percent (50%) of 1999 annual base salary
                plus 1999 incentive bonus, total of which is equivalent to One
                Hundred Six Thousand Two Hundred and Thirty-two Dollars
                ($106,232). Severance payment shall be paid in six equal
                installments over a six-month period, subject to the Executive
                executing a Release of all claims; provided, should Executive
                violate any provision of Section 7 and/or 8 of this Agreement,
                such payments shall immediately terminate and Executive shall be
                entitled to no further monies or benefits. Calculation of
                severance payment excludes any and all DERs (Dividend Equivalent
                Rights payments as noted in the Company's standard ISO or
                non-qualified stock option grant agreement). In addition,
                Executive shall not be eligible to receive DER payments for
                which the record date for the dividend is subsequent to the
                Executive's termination date. Severance eligibility is expressly
                conditioned and dependent upon, Executive's compliance with the
                terms and conditions of Sections 7 and 8 of this Agreement.

        b.      CONTINUATION OF FRINGE BENEFITS

                Continued health benefits as set forth in Section 3(d) as if
                Executive's employment under the Agreement had not been
                terminated until the earlier of the following: (i) severance
                obligations owed by the Company to Executive, as provided under
                Section 6(a), expire or terminate, or (ii) Executive shall find
                alternative employment (Executive shall be required to notify
                the Company immediately upon obtaining alternative employment).
                Notwithstanding the foregoing, should Executive not be coverable
                under the Company plans, or should the Company exercise its
                prerogative to reduce and/or terminate such benefits to
                Executive, the Company may instead compensate Executive in lieu
                of his receiving coverage by paying Executive directly, for each
                month that Executive would be eligible to receive such benefits,
                the monthly dollar amount the Company would have expended for
                premiums for such benefits for the Executive, and for any
                dependents or beneficiaries covered at the time of termination,
                less any monthly amount Executive would have paid had he
                remained employed.


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        c.      CHANGE OF CONTROL REQUIREMENTS

                Notwithstanding the provisions of Paragraph 5(c), Executive
                shall not be eligible for any severance if: a) Executive resigns
                within six (6) months following a Change of Control and there
                has been no reduction of his base salary or substantial and
                material diminution of his responsibilities as Vice-President
                following the Change of Control; or b) Executive resigns within
                three months of a Change of Control even if their has been a
                reduction of his base salary or substantial and material
                diminution of his responsibilities as Vice-President following
                the Change of Control.

7.      COMPETITION, CONFIDENTIALITY, TRADE SECRETS AND INVENTIONS.

        a.      NON-COMPETITION

                During the term of this contract, and for six months following
                the termination of this Agreement, Executive shall not engage in
                any other business, commercial or professional activity or
                capacity that is or may be competitive with the Company or a
                subsidiary or affiliate of the Company that might create a
                conflict of interest with the Company, or that otherwise might
                interfere directly or indirectly with the business of the
                Company, without the prior written consent of the Doug Hansen or
                the President of the Company. Executive further agrees that
                during this time he shall not solicit any employee of the
                Company, directly or indirectly, to leave the employ of the
                Company.

        b.      DUTY TO AVOID CONFLICT OF INTEREST

                During his employment by the Company, Executive agrees not to
                engage or participate in, directly or indirectly, any activities
                in conflict with the best interests of the Company. The Company
                shall be the final decision-maker with regard to any conflict of
                interest issue.

        c.      CONFIDENTIAL AND PROPRIETARY INFORMATION

                (1)     It is hereby acknowledged that Executive has and shall
                        gain knowledge of trade secrets and confidential
                        information owned by or related to the Company and/or
                        its affiliates including but not limited to the
                        following: (i) the names, lists, buying habits and
                        practices of their customers, clients or vendors, (ii)
                        their marketing and related information, (iii)
                        relationships between them and the persons and entities
                        with whom and which they have contracted, (iv) their
                        products, designs, software, developments, improvements
                        and methods of operation, (v) their financial condition,
                        profit performance and financial requirements, (vi) the
                        compensation paid to their employees, (vii) business
                        plans and the information contained therein, and (viii)
                        all other confidential information of, about or


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                        concerning the Company, the manner of operation of the
                        Company and other confidential data of any kind, nature
                        or description relating to the Company (collectively the
                        "Confidential Information"). Confidential Information
                        does not include information which (ix) is or becomes
                        generally available to the public other than as a result
                        of a disclosure by Executive; or (x) becomes available
                        to Executive on a non-confidential basis after the
                        termination or expiration of Executive's obligations
                        under this Agreement from a source other than the
                        Company, provided that such source is not bound by a
                        confidentiality agreement with or other contractual,
                        legal or fiduciary obligation of confidentiality to the
                        Company or any other party with respect to such
                        information; or (xi) is independently developed after
                        the termination or expiration of Executive's obligations
                        under this agreement without reference to the
                        Confidential Information, provided such independent
                        development can reasonably be proven by Executive by
                        written records.

                (2)     The parties hereby acknowledge that the Confidential
                        Information constitutes important, unique, material and
                        confidential trade secrets which affect the successful
                        activities of the Company, and constitute a substantial
                        part of the assets and goodwill of the Company. In view
                        of the foregoing, Executive agrees that he will not at
                        any time whether during or after the term of this
                        Agreement, except as required in the course of
                        Executive's employment by Company and at its direction
                        and for its sole benefit, in any fashion, form or
                        manner, directly or indirectly (i) use or divulge,
                        disclose, communicate or provide or permit access to any
                        person, firm, partnership, corporation or other entity,
                        any Confidential Information of any kind, nature or
                        description, or (ii) remove from Company's premises any
                        notes or records relating thereto, or copies or
                        facsimiles thereof (whether made by electronic,
                        electrical, magnetic, optical, laser, acoustic or other
                        means).

                (3)     Promptly upon the request of Company, and immediately
                        upon the termination of Executive's employment,
                        Executive shall not transfer and shall deliver to
                        Company all Confidential Information, and other property
                        belonging to the Company, including all copies thereof,
                        in the possession of Executive.


                (4)     Executive represents that the performance of all the
                        terms of this Agreement will not conflict with, and will
                        not breach, any other invention assignment agreement,
                        confidentiality agreement, employment agreement or
                        non-competition agreement to which Executive is or has
                        been a party. To the extent that Executive has
                        confidential information or


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                        materials of any former employer, Executive acknowledges
                        that the Company has directed Executive to not disclose
                        such confidential information or materials to the
                        Company or any of its employees, and that the Company
                        prohibits Executive from using said confidential
                        information or materials in any work that Executive may
                        perform for the Company. Executive agrees that Executive
                        will not bring with Executive to the Company, and will
                        not use or disclose any confidential, proprietary
                        information, or trade secrets acquired by Executive
                        prior to his employment with the Company. Executive will
                        not disclose to the Company or any of its employees, or
                        induce the Company or any of its employees to use, any
                        confidential or proprietary information or material
                        belonging to any previous employers or others, nor will
                        Executive bring to the Company or use in connection with
                        Executive's work for the Company copies of any software,
                        computer files, or any other copyrighted or trademarked
                        materials except those owned by or licensed to the
                        Company. Executive represents that he is not a party to
                        any other agreement that will interfere with his full
                        compliance with this Agreement. Executive further agrees
                        not to enter into any agreement, whether written or
                        oral, in conflict with the provisions of this Agreement.

        d.      INVENTIONS

                Any and all inventions, discoveries or improvements that
                Executive has conceived or made or may conceive or make during
                the period of employment relating to or in any way pertaining to
                or connected with the systems, products, computer programs,
                software, apparatus or methods employed, manufactured or
                constructed by the Company or to systems, products, apparatus or
                methods with respect to which the Company engages in, requests
                or anticipates research or development, shall be promptly and
                fully disclosed and described by Executive to the Company and
                shall be the sole and exclusive property of the Company, and
                Executive shall assign, and hereby does assign to the Company
                Executive's entire right, title and interest in and to all such
                inventions, discoveries or improvements as well as any
                modifications or improvements thereto that may be made. The
                parties agree that any inventions, discoveries or ideas that
                Executive has created or possesses prior to his employment by
                the Company are specified in Appendix B attached to this
                Agreement and will not be considered to be the property of the
                Company.

                The obligations outlined in this Section 7, except for the
                requirements as to disclosure, do not apply to any invention
                that qualifies fully under California Labor Code section 2870 or
                to any rights Executive may have acquired in connection with an
                invention, discovery or improvement that was developed entirely
                on Executive's own time for which no equipment, supplies,
                facilities or trade secret information of the Company was used
                and (a) that does not relate directly or indirectly to the
                business of the Company or to the Company's actual or
                demonstrable anticipated research or development, or (b) that
                does not result from any work performed by Executive for the
                Company.


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        e.      BREACH

                It is expressly agreed that each breach of this Section 7 is a
                distinct and material breach of this Agreement and that solely a
                monetary remedy would be inadequate, impracticable and extremely
                difficult to prove, and that each such breach would cause the
                Company irreparable harm. It is further agreed that, in addition
                to any and all remedies available at law or equity (including
                money damages), either party shall be entitled to temporary and
                permanent injunctive relief to enforce the provisions of this
                Section, without the necessity of proving actual damages. It is
                further agreed that the either party shall be entitled to seek
                such equitable relief in any forum, including a court of law,
                notwithstanding the provisions of Section 8 and the Alternative
                Dispute Resolution Agreement incorporated therein. Either party
                may pursue any of the remedies described herein concurrently or
                consecutively in any order as to any such breach or violation,
                and the pursuit of one of such remedies at any time will not be
                deemed an election of remedies or waiver of the right to pursue
                any of the other such remedies. Any breach of this Section shall
                immediately terminate any obligations by the Company to provide
                Executive with severance and continued benefits pursuant to
                Section 6 of this Agreement.

        f.      UNENFORCEABILITY

                Should any portion of this Section 7 be deemed unenforceable
                because of its scope, duration or effect, and only in such
                event, then the parties expressly consent and agree to such
                limitation on scope, duration or effect as may be finally
                adjudicated as enforceable, to give this Section its maximum
                permissible scope, duration and effect.

8.      SUBMISSION TO ARBITRATION

        In the event there is any dispute arising out of Executive's employment,
        the termination of that employment, or arising out of this Agreement,
        the Company and Executive agree to submit such dispute, except as to
        those matters specifically exempt per Section 7, to binding arbitration
        in accordance with the terms of the Alternative Dispute Agreement set
        forth in Appendix C to this Agreement and incorporated herein.

9.      GOVERNING LAW

        This Agreement shall be construed in accordance with and governed by the
        laws of the State of California, excluding its choice of law rules.

10.     INTERPRETATION

        This Agreement shall be interpreted in accordance with the plain meaning
        of its terms and not strictly for or against either party.


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11.     ENTIRE AGREEMENT

        This Agreement, together with Appendices A, B, C and D, embodies the
        complete agreement and understanding of the parties related to
        Executive's employment by the Company, superseding any and all other
        prior or contemporaneous oral or written agreements between the parties
        hereto with respect to the employment of Executive by the Company, and
        contains all of the covenants and agreements of any kind whatsoever
        between the parties with respect to such employment. Each party
        acknowledges that no representations, inducements, promises or
        agreements, whether oral or written, express or implied, have been made
        by either party or anyone acting on behalf of a party, that are not
        incorporated herein and that no other agreement or promise not contained
        herein shall be valid or binding. Section headings in this Agreement are
        included herein for convenience of reference only and shall not
        constitute a part of this Agreement for any other purpose.

12.     MODIFICATION

        This Agreement may be amended only by an agreement in writing signed by
        the parties hereto.

13.     WAIVER

        Failure to insist upon strict compliance with any of the terms,
        covenants, or conditions hereof shall not be deemed a waiver of such
        term, covenant, or condition, nor shall any waiver or relinquishment of,
        or failure to insist upon strict compliance with, any right or power
        hereunder at any one or more times be deemed a waiver or relinquishment
        of such right or power at any other time or times. This Agreement shall
        not be modified in any respect except by a writing executed by the
        parties.

14.     INVALIDITY

        Each term, clause and provision of this Agreement is separate and
        independent, and should any term, clause or provision of this Agreement
        be found to be invalid or unenforceable, the validity of the remaining
        terms, clauses, and provisions shall not be affected.


15.     NOTICES

        Any notice provided for in this Agreement shall be in writing and shall
        be either personally delivered, mailed first class mail (postage
        prepaid), or sent by facsimile or reputable overnight courier service
        (charges prepaid) to the recipient at the following addresses (or at
        such address as the recipient party has specified by prior written
        notice to the sending party):

        To the Company:                       Doug Hansen
                                              President


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<PAGE>   12

                                              Redwood Trust, Inc.,
                                              591 Redwood Highway, Suite 3100,
                                              Mill Valley, CA  94941



        To Executive:                         Harold Zagunis
                                              408 San Andreas Drive
                                              Novato, CA 94945

        Each party shall be responsible for keeping such party's address
        current. Notices shall be deemed to have been given hereunder when
        delivered personally, three business days after deposit in the U.S.
        mail, on the date of delivery by facsimile (if transmitted before 5:00
        p.m. local time), and/or one day after deposit with a reputable
        overnight courier service.

16.     VOLUNTARY AGREEMENT

        Executive and the Company represent and agree that each has reviewed all
        aspects of this Agreement, has carefully read and fully understands all
        provisions of this Agreement, and is voluntarily entering into this
        Agreement. Each party represents and agrees that such party has had the
        opportunity to review any and all aspects of this Agreement with the
        legal, tax or other advisor(s) of such party's choice before executing
        this Agreement.

17.     SUCCESSORS AND ASSIGNS

        This Agreement shall be binding upon and inure to the benefit of and
        shall be enforceable against Executive's heirs, beneficiaries and legal
        representatives. It is agreed that the rights and obligations of
        Executive may not be delegated or assigned except as specifically set
        forth in this Agreement. In the event of a sale of all or substantially
        all of the Company's assets, including the stock of the Company, or
        consolidation or merger of the Company with or into another corporation
        or entity or individual, the Company may assign its rights and
        obligations under this Agreement to its successor-in-interest, and such
        successor-in-interest shall be deemed to have acquired all rights and
        assumed all obligations of the Company hereunder, including those set
        forth in Section 7 of this Agreement.

18.     COUNTERPARTS

        This Agreement may be executed in several counterparts, each of which
        shall be deemed to be an original but all of which together will
        constitute one and the same instrument.

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
        of the day, month and year first above written.


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<PAGE>   13

DATED: March 13, 2000                       /s/ Harold Zagunis
       --------------                       ------------------------------------
                                            Harold Zagunis



                                            REDWOOD TRUST, INC.

DATED: March 13, 2000                       By: /s/ Doug Hansen
       --------------                          ---------------------------------
                                               Doug Hansen

                                            Title: President
                                                  ------------------------------




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<PAGE>   14

                                   APPENDIX A

                           ESSENTIAL RESPONSIBILITIES





<PAGE>   15

                                   APPENDIX B

                                PRIOR INVENTIONS





<PAGE>   16

                                   APPENDIX C

                      ALTERNATIVE DISPUTE RESOLUTION POLICY



I.      AGREEMENT TO ARBITRATE

        In the event that any employment dispute arises between Redwood Trust,
        Inc. ("Company") and Harold Zagunis ("Executive"), the parties involved
        will make all efforts to resolve any such dispute through informal
        means. If these informal attempts at resolution fail and if the dispute
        arises out of or is related to the parties' Employment Agreement, the
        termination of Executive's employment or alleged unlawful
        discrimination, including but not limited to unlawful harassment, the
        Company and Executive will submit the dispute to final and binding
        arbitration, except as set forth in Section 7 of the Employment
        Agreement.

        The parties expressly understand and agree that arbitration is the
        exclusive remedy for all such arbitrable disputes; with respect to such
        disputes, no other action may be brought in court or any other forum
        (except actions to compel arbitration hereunder). THIS ALTERNATIVE
        DISPUTE RESOLUTION ("ADR") AGREEMENT IS A WAIVER OF THE PARTIES' RIGHTS
        TO A CIVIL COURT ACTION FOR A DISPUTE RELATING TO BREACH OF THE PARTIES'
        EMPLOYMENT AGREEMENT, TERMINATION OF THAT EMPLOYMENT OR ALLEGED UNLAWFUL
        DISCRIMINATION, WHICH INCLUDES RETALIATION OR SEXUAL OR OTHER UNLAWFUL
        HARASSMENT; ONLY AN ARBITRATOR, NOT A JUDGE OR JURY, WILL DECIDE THE
        DISPUTE.

        To the fullest extent permitted by the law of the jurisdiction,
        employment disputes arising out of or related to termination of
        employment or alleged unlawful discrimination, including retaliation or
        sexual or other unlawful harassment, shall include, but not be limited
        to, the following: alleged violations of federal, state and/or local
        constitutions, statutes or regulations; claims based on any purported
        breach of contractual obligation, including breach of the covenant of
        good faith and fair dealing; and claims based on any purported breach of
        duty arising in tort, including violations of public policy. Disputes
        related to workers' compensation and unemployment insurance is not
        arbitrable hereunder. Claims for benefits covered by a separate benefit
        plan that provides for arbitration are not covered by this ADR
        Agreement. Also, nothing in Employment Agreement or in the ADR Policy
        shall be construed as precluding Employee from filing a charge with the
        Equal Employment Opportunity Commission ("EEOC"), the National Labor
        Relations Board ("NLRB") or other federal, state or local agencies,
        seeking administrative assistance in resolving claims. Claims that are
        filed with or are being processed by the EEOC or that are brought under
        Title VII of the Civil Rights Act of 1964, as amended ("Title VII), are
        not arbitrable under this Agreement, except that the


<PAGE>   17

        parties may agree in writing to do so with respect to each such dispute
        that may arise. The EEOC is the federal agency which enforces laws
        prohibiting employment discrimination. Title VII is the federal statute
        which prohibits discrimination on the basis of race, color, religion,
        sex, national origin, retaliation.

II.     REQUEST FOR ARBITRATION

        A.      ATTEMPT AT INFORMAL RESOLUTION OF DISPUTES

        Prior to submission of any dispute to arbitration, Executive and the
        Company shall attempt to resolve the dispute informally as set forth
        below.

        Executive and the Company will select a mediator from a list provided by
        the Federal Mediation and Conciliation Service or other similar agency
        who will assist the parties in attempting to reach a settlement of the
        dispute. The mediator may make settlement suggestions to the parties but
        shall not have the power to impose a settlement upon them. If the
        dispute is resolved in mediation, the matter shall be deemed closed. If
        the dispute is not resolved in mediation and goes to the next step
        (binding arbitration), any proposals or compromises suggested by either
        of the parties or the mediator shall not be referred to in or have any
        bearing on the arbitration procedure. The mediator cannot also serve as
        the arbitrator in the subsequent proceeding unless all parties expressly
        agree in writing.

        B.      ARBITRATION PROCEDURES

        The party desiring arbitration, whether Executive or the Company, must
        submit a "Request For Arbitration" in writing to the other party within
        the time period required by the law that applies to the claim under the
        applicable statute of limitations. If the "Request for Arbitration" is
        not submitted in accordance with the aforementioned time limitations,
        the party failing to do so will not be able to bring his claims to this
        or any other forum. The requesting party may use a "Request for
        Arbitration" form supplied by the Company (Appendix D). Alternatively,
        the requesting party may create a "Request For Arbitration" form that,
        unless otherwise required by law, clearly states "Request For
        Arbitration" at the beginning of the first page and includes the
        following information:

                1.      A factual description of the dispute in sufficient
                        detail to advise the other party of the nature of the
                        dispute;

                2.      The date when the dispute first arose;

                3.      The names, work locations and telephone numbers of any
                        individuals, including employees or supervisors, with
                        knowledge of the dispute; and

                4.      The relief requested by requesting party.

        The responding party may submit counterclaim(s) in accordance with
        applicable law.


<PAGE>   18

        C.      SELECTION OF THE ARBITRATOR

        All disputes will be resolved by a single Arbitrator, the Arbitrator
        will be mutually selected by the Company and the Executive. If the
        parties cannot agree on an Arbitrator, then a list of seven (7)
        arbitrators, experienced in employment matters, shall be provided by the
        Federal Mediation and Conciliation Service. The Arbitrator will be
        selected by the parties who will alternately strike names from the list.
        The last name remaining on the list will be the Arbitrator selected to
        resolve the dispute. Upon selection, the Arbitrator shall set an
        appropriate time, date and place for the arbitration, after conferring
        with the parties to the dispute.

        D.      THE ARBITRATOR'S AUTHORITY

        The Arbitrator shall have the powers enumerated below:

        1.      Ruling on motions regarding discovery, and ruling on procedural
                and evidentiary issues arising during the arbitration.

        2.      Ruling on motions to dismiss and/or motions for summary judgment
                applying the standards governing such motions under the Federal
                Rules of Civil Procedure.

        3.      Issuing protective orders on the motion of any party or third
                party witness. Such protective orders may include, but are not
                limited to, sealing the record of the arbitration, in whole or
                in part (including discovery proceedings and motions,
                transcripts, and the decision and award), to protect the privacy
                or other constitutional or statutory rights of parties and/or
                witnesses.

        4.      Determining only the issue(s) submitted to him/her. The issue(s)
                must be identifiable in the "Request For Arbitration" or
                counterclaim(s). Except as required by law, any issue(s) not
                identifiable in those documents is outside the scope of the
                Arbitrator's jurisdiction and any award involving such issue(s),
                upon motion by a party, shall be vacated.

        E.      DISCOVERY

        The discovery process shall proceed and be governed, consistent with the
        standards of the Federal Rules of Civil Procedure, as follows:

        1.      Unless otherwise required by law, parties may obtain discovery
                by any of the following methods:

                a.      Depositions of non-expert witnesses upon oral
                        examination, three (3) per side as of right, with more
                        permitted if leave is obtained from the Arbitrator;



<PAGE>   19

                b.      Written interrogatories, up to a maximum combined total
                        of twenty (20), with the responding party having twenty
                        (20) days to respond;

                c.      Request for production of documents or things or
                        permission to enter upon land or other property for
                        inspection, with the responding party having twenty (20)
                        days to produce the documents and allow entry or to file
                        objections to the request;

                d.      Physical and mental examination, in accordance with
                        Federal Rule of Civil Procedure 35(a); and

                e.      Any motion to compel production, answers to
                        interrogatories or entry onto land or property must be
                        made to the Arbitrator within fifteen (15) days of
                        receipt of objections.

        2.      To the extent permitted by the Federal Arbitration Act or
                applicable California law, each party shall have the right to
                subpoena witnesses and documents during discovery and for the
                arbitration.

        3.      All discovery requests shall be submitted no less than sixty
                (60) days before the hearing date.

        4.      The scope of discoverable evidence shall be in accordance with
                Federal Rule of Civil Procedure 26(b) (1).

        5.      The Arbitrator shall have the power to enforce the
                aforementioned discovery rights and obligations by the
                imposition of the same terms, conditions, consequences,
                liabilities, sanctions and penalties as can or may be imposed in
                like circumstances in a civil action by a federal court under
                the Federal Rules of Civil Procedure, except the power to order
                the arrest or imprisonment of a person.

        F.      HEARING PROCEDURE

        The hearing shall be held at a location mutually agreed upon by the
        parties, or as determined by the Arbitrator in the absence of an
        agreement, and shall proceed according to the American Arbitration
        Association's "National Rules for the Resolution of Employment Disputes"
        as amended and effective June 1, 1997, with the following amendments:

                1.      The Arbitrator shall rule at the outset of the
                        arbitration on procedural issues that bear on whether
                        the arbitration is allowed to proceed.

                2.      Each party has the burden of proving each element of its
                        claims or counterclaims, and each party has the burden
                        of proving any of its affirmative defenses.



<PAGE>   20

                3.      In addition to, or in lieu of closing argument, either
                        party shall have the right to present a post-hearing
                        brief, and the due date for exchanging any post-hearing
                        briefs shall be mutually agreed on by the parties and
                        the Arbitrator, or determined by the Arbitrator in the
                        absence of agreement.

        G.      SUBSTANTIVE LAW

                1.      The parties agree that they will be afforded the
                        identical legal equitable and statutory remedies as
                        would be afforded them were they to bring an action in a
                        court of competent jurisdiction.

                2.      The applicable substantive law shall be the law of the
                        State of California or federal law. Choice of
                        substantive law in no way affects the procedural aspects
                        of the arbitration, which are exclusively governed by
                        the provisions of this ADR Agreement.

        H.      OPINION AND AWARD

        The Arbitrator shall issue a written opinion and award, in conformance
        with the following requirements:

                1.      The opinion and award must be signed and dated by the
                        Arbitrator.

                2.      The Arbitrator's opinion and award shall decide all
                        issues submitted.

                3.      The Arbitrator's opinion and award shall set forth the
                        legal principles supporting each part of the opinion.

                4.      The Arbitrator shall have the same authority to award
                        remedies, damages and costs as provided to a judge
                        and/or jury under parallel circumstances.

        I.      ENFORCEMENT OF ARBITRATOR'S AWARD

        Following the issuance of the Arbitrator's decision, any party may
        petition a court to confirm, enforce, correct or vacate the Arbitrator's
        opinion and award under the Federal Arbitration Act, and/or applicable
        California law.

        J.      FEES AND COSTS

        Unless otherwise required by law, fees and costs shall be allocated in
        the following manner:

                1.      Each party shall be responsible for its own attorneys'
                        fees, except as otherwise provided by law for the
                        particular claim(s) at issue.


<PAGE>   21

                2.      The Company shall pay the entire cost of the
                        arbitrator's services, the facility in which the
                        arbitration is to be held, and any similar costs, except
                        that Executive shall contribute toward these costs an
                        amount equal to the then-current filing fee in
                        California Superior Court charged for filing a complaint
                        or for first appearing, whichever is lower.

                3.      The Company shall pay the entire cost of a court
                        reporter to transcribe the arbitration proceedings. Each
                        party shall advance the cost for said party's transcript
                        of the proceedings. Each party shall advance its own
                        costs for witness fees, service and subpoena charges,
                        copying, or other incidental costs that each party would
                        bear during the course of a civil lawsuit.

                4.      Each party shall be responsible for its costs associated
                        with discovery, except as required by law or court
                        order.

III.    SEVERABILITY

        Each term, clause and provision of this ADR Agreement is separate and
        independent, and should any term, clause or provision of this ADR
        Agreement be found to be invalid or unenforceable, the validity of the
        remaining terms, clauses, and provisions shall not be affected. As to
        those terms, clauses and provisions found to be invalid or
        unenforceable, they shall be replaced with valid and enforceable terms,
        clauses or provisions or shall be modified, in order to achieve, to the
        fullest extent possible, the economic, business and other purposes of
        the invalid or unenforceable terms, clauses or provisions.



Dated: March 13, 2000                       /s/ Harold Zagunis
                                            ------------------------------------
                                            Harold Zagunis


                                            REDWOOD TRUST, INC.

Dated: March 13, 2000                       By: /s/ Doug Hansen
                                               ---------------------------------
                                               Doug Hansen

                                            Title: President
                                                  ------------------------------



<PAGE>   22

                                   APPENDIX D

                          REQUEST FOR ARBITRATION FORM

                      ALTERNATIVE DISPUTE RESOLUTION POLICY

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

Submission      -   This form (or, alternatively, a form that includes the
                    information Requirement below) must be submitted by the
                    individual claimant or the Redwood Trust, Inc. (to the
                    President) within the time period required by the law that
                    applies to the claim.


                -   If Redwood Trust, Inc. requests arbitration, the form must
                    also be served on the individual within the appropriate time
                    period.

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

1.   State the nature of the claim in detail:

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

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

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

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

(Continue on reverse and add pages if necessary)


Enter the date of termination or date(s) of alleged incident(s) (i.e., date of
last instance of unlawful discrimination, sexual or other unlawful harassment):
_______/________/_______

Month     Day     Year


2.   Provide the names and work locations of any individuals, including
     employees or supervisors, with knowledge of the dispute:


Name                         Job Title                      Work Location

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

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

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

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



<PAGE>   23

3.   Describe the relief requested (i.e., what you want done):

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

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

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

(Please attach any documents relevant to the dispute.)



Signature of Party Requesting arbitration:


Redwood Trust, Inc.

__________________________   Date: ___________________


Signature of Executive:

__________________________   Date: ___________________