Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains certain forward-looking statements.
Forward looking statements are those which are not historical in nature. They
can often be identified by their inclusion of words such as “will,”
“anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar
expressions. Any projection of revenues, earnings or losses, capital
expenditures, distributions, capital structure or other financial terms is
a
forward-looking statement. Certain statements regarding the following
particularly are forward-looking in nature:
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future
performance, developments, market forecasts or projected
dividends;
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projected
acquisitions or joint ventures; and
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projected
capital expenditures.
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It
is
important to note that the description of our business in general and our
investment in mortgage loans and mortgage-backed securities holdings in
particular, is a statement about our operations as of a specific point in time.
It is not meant to be construed as an investment policy, the types of assets
we
hold, the amount of leverage we use or the liabilities we incur and other
characteristics of our assets and liabilities are subject to reevaluation and
change without notice.
Our
forward-looking statements are based upon our management’s beliefs, assumptions
and expectations of our future operations and economic performance, taking
into
account the information currently available to us. Forward-looking statements
involve risks and uncertainties, some of which are not currently known to us
and
many of which are beyond our control and that might cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express
or
imply in any forward-looking statements. Some of the important factors that
could cause our actual results, performance or financial condition to differ
materially from expectations are:
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our
proposed portfolio strategy may be changed or modified by our management
without advance notice to stockholders, and that we may suffer losses
as a
result of such modifications or
changes;
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our
ability to successfully redeploy capital from the sales of our wholesale
and retail mortgage lending platforms;
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risks
associated with the availability of
liquidity;
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risks
associated with the use of leverage;
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risks
associated with non-performing assets;
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interest
rate mismatches between our mortgage-backed securities and our borrowings
used to fund such purchases;
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changes
in interest rates and mortgage prepayment
rates;
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effects
of interest rate caps on our adjustable-rate mortgage-backed
securities;
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the
degree to which our hedging strategies may or may not protect us
from
interest rate volatility;
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potential
impacts of our leveraging policies on our net income and cash available
for distribution;
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our
board’s ability to change our operating policies and strategies without
notice to you or stockholder
approval;
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the
other important factors identified, or incorporated by reference
into this
report, including, but not limited to those under the captions
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and “Quantitative and Qualitative Disclosures about Market
Risk”, and those described under the caption “Part I. Item 1A. Risk
Factors” in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on April 2,
2007.
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We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the events described
by
our forward-looking events might not occur. We qualify any and all of our
forward-looking statements by these cautionary factors. In addition, you should
carefully review the risk factors described in other documents we file from
time
to time with the Securities and Exchange Commission.
This
Quarterly Report on Form 10-Q contains market data, industry statistics and
other data that have been obtained from, or compiled from, information made
available by third parties. We have not independently verified their
data.
General
New
York
Mortgage Trust, Inc. (“NYMT,” the “Company,” “we,” “our” and “us”) is a
self-advised real estate investment trust ("REIT") that invests in and manages
a
portfolio of mortgage loans and mortgage-backed securities. Until March 31,
2007, the Company through its wholly-owned taxable REIT subsidiary (“TRS”), The
New York Mortgage Company, LLC (“NYMC”), was also a residential mortgage lending
company that originated a wide range of mortgage loans.
On
March
31, 2007, we completed the sale of substantially all of the operating assets
related to NYMC’s retail mortgage lending platform, to IndyMac Bank, F.S.B.
(“Indymac”), a wholly-owned subsidiary of Indymac Bancorp, Inc., for a purchase
price of $13.5 million in cash and the assumption of certain of our
liabilities by Indymac. Included in the transaction, among other things,
was the assumption by Indymac of leases held by NYMC for approximately 20 full
service and approximately 10 satellite retail mortgage lending offices
(excluding the lease for the Company’s corporate headquarters, which is being
assigned, as previously announced, under a separate agreement to Lehman Brothers
Holding, Inc.), the tangible personal property located in those approximately
30
retail mortgage lending offices, NYMC’s pipeline of residential mortgage loan
applications (the “Pipeline Loans”), escrowed deposits related to the Pipeline
Loans, customer lists and intellectual property and information technology
systems used by NYMC in the conduct of its retail mortgage lending platform.
Indymac assumed the obligations of NYMC under the Pipeline Loans and
substantially all of NYMC’s liabilities under the purchased contracts and
purchased assets arising after the closing date. Indymac has also agreed to
pay
(i) the first $500,000 in severance expenses with respect to “transferred
employees” (as defined in the asset purchase agreement filed as Exhibit 10.62 to
our Annual Report on Form 10-K) and (ii) severance expenses in excess of $1.1
million arising after the closing with respect to transferred employees. As
part
of the Indymac transaction, the Company has agreed, for a period of 18 months,
not to compete with Indymac other than in the purchase, sale, or retention
of
mortgage loans. Indymac has hired substantially all of our branch employees
and
loan officers and a majority of NYMC employees based out of our corporate
headquarters.
On
February 22, 2007, we sold substantially all of the assets of our wholesale
mortgage lending platform to Tribeca Lending Corp., a subsidiary of Franklin
Credit Management Corporation (“Tribeca Lending”), for a purchase price of $0.5
million. Together, the sale of our retail mortgage lending platform to Indymac
and the sale of our wholesale mortgage lending platform to Tribeca Lending
has
resulted in gross proceeds to NYMT of approximately $14.0 million before fees
and expenses, and before deduction of approximately $2.3 million, which will
be
held in escrow to support warranties and indemnifications provided to Indymac
by
NYMC as well as other purchase price adjustments. NYMC recorded a one time
gain
on the sale of these assets of $5.2 million.
While
the
Company sold substantially all of the assets of its wholesale and retail
mortgage lending platforms and exited the mortgage lending business as of
March
31, 2007, it retains certain liabilities associated with that former line
of
business. Among these liabilities are the cost associated with the disposal
of
the mortgage loans held for sale, potential repurchase and indemnification
obligations (including early payment defaults) on previously sold mortgage
loans
and remaining lease payment obligations on real and personal property.
The
Company has reserves of $1.2 million to cover the disposition of the mortgage
loans held for sale. In addition, the Company has $2.1 million of reserves
to
cover known repurchase requests as well as indemnification obligations (where
the Company agrees to pay for a third party’s losses incurred in holding or
disposing of a loan that the Company would otherwise have been required to
repurchase). Until the Company disposes of all the mortgage loans held for
sale
and the repurchase periods set forth in the loan sale agreements expire,
the
Company may continue to incur losses on these loans.
We
expect
to redeploy the net proceeds from the sale of our retail mortgage lending
platform in high quality mortgage loan securities. We will liquidate the
remaining inventory of mortgage loans held for sale in the ordinary course
of
business. Our Board of Directors, together with our management, will continue
to
consider strategic options for NYMT, including a possible sale or merger or
raising capital under a passive REIT business model.
We
believe that the disposition of our mortgage lending business will allow us
to
meet the following business objectives:
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reduce,
and ultimately eliminate, our taxable REIT subsidiary’s operating
loses;
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enable
NYMC to retain the economic value of its accumulated net operating
losses
for income tax purposes;
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increase
NYMT’s investable capital and financial
flexibility;
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lower
NYMT’s executive management compensation
expenses;
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significantly
reduce our potential severance
obligations;
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enable
our management to focus on our mortgage portfolio management operations,
which consisted of a $1.0 billion investment portfolio as of March
31, 2007; and
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enable
us to continue to acquire loans for
securitization.
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Presentation
Format
The
Management Discussion and Analysis section of this Quarterly Report on Form
10-Q
has been separated, wherever possible, into two parts: (1) discussion of the
ongoing mortgage REIT business that invests in and manages a portfolio of
mortgage loans and mortgage-backed securities and (2) discussion of the
discontinued business (including a discussion of the assets and
liabilities that are pending disposition or that remain with the Company after
the sale of the wholesale and retail mortgage lending platforms).
In
connection with the sale of our wholesale mortgage lending platform assets
on
February 22, 2007 and the sale of our retail mortgage lending platform assets
to
Indymac on March 31, 2007, we classified certain assets and liabilities related
to our mortgage lending segment as a discontinued operation in accordance with
the provisions of Statement of Financial Accounting Standards No. 144. As a
result, we have reported revenues and expenses related to the segment as a
discontinued operation and the related assets and liabilities as assets and
liabilities related to a discontinued operation for all periods presented in
the
accompanying consolidated financial statements. Certain assets, such as the
deferred tax asset, and certain liabilities, such as subordinated debt and
liabilities related to leased facilities not assigned to Indymac will become
part of the ongoing operations of NYMT and accordingly, we have not classified
as a discontinued operation in accordance with the provisions of Statement
of
Financial Accounting Standards No. 144. See note 11 in the notes to our
consolidated financial statements.
Strategic
Overview
—
Continuing Operations
We
earn
net interest income from purchased residential mortgage-backed securities,
adjustable-rate mortgage loans and securitized loans. We have acquired and
increasingly seek to acquire additional assets that will produce competitive
returns, taking into consideration the amount and nature of the anticipated
returns from the investment, our ability to pledge the investment for secured,
collateralized borrowings and the costs associated with originating, financing,
managing, securitizing and reserving for these investments.
Our
Investment portfolio is comprised largely of prime adjustable-rate mortgage
loans that we either originated or acquired from third parties.
We
aggregate high credit quality, adjustable-rate mortgage loans until we have
a
pool of loans of sufficient size to securitize. Historically, we obtained the
loans we securitize from either our TRS or from third parties. Our first
securitization occurred on February 25, 2005 and we completed our second and
third loan securitizations on July 28, 2005 and December 20, 2005, respectively.
These securitization transactions, through which we financed the adjustable-rate
and hybrid mortgage loans that we retained, were structured as financings for
both tax and financial accounting purposes. Therefore, we do not expect to
generate a gain or loss on sales from these activities, and, following the
securitizations, the loans are classified on our consolidated balance sheet
as
loans held in securitization trusts. From each of our securitizations, we issued
investment grade securities to third parties and recorded the securitization
debt as a liability. On March 30, 2006 we completed our fourth securitization,
New York Mortgage Trust 2006-1. This securitization was structured as a sale
for
accounting purposes. The Company holds certain AAA tranches as well as all
the
subordinate interests in this transaction.
Funding
Diversification
.
We
strive to maintain and achieve a balanced and diverse funding mix to finance
our
investment portfolio and assets. We rely primarily on repurchase agreements
and
collateralized debt obligations (“CDOs”) in order to finance our investment
portfolio of residential loans and mortgage-backed securities. As of March
31,
2007, we have $4.6 billion of commitments to provide repurchase agreement
financing through 22 different counterparties with approximately $0.4 billion
outstanding as of March 31, 2007. As of March 31, 2007, we have $0.5 billion
of
CDOs. During the three months ended March 31, 2007, we sold approximately $312.9
million of previously retained securitizations resulting in the permanent
financing of these securitized loans. The CDO issuance replaced short-term
repurchase agreements freeing up approximately $15.6 million in capital needed
for repurchase agreement margin.
During
2005, we further diversified our sources of financing with the issuance of
$45
million of trust preferred securities classified as subordinated
debentures.
Risk
Management
.
As a
manager of mortgage loan investments, we must mitigate key risks inherent in
these businesses, predominantly credit risk and interest rate risk.
Investment
Portfolio Credit Quality
.
We
retain in our portfolio only high-credit quality loans that we originated or
acquired from third parties. High credit quality creates improved portfolio
liquidity and provides for financing opportunities that are available on
generally favorable terms. Since we began our portfolio investment operations,
we have experienced approximately $57,000 to date of credit losses in our
portfolio.
Interest
Rate Risk Management
.
Another
primary risk to our investment portfolio of mortgage loans and mortgage-backed
securities is interest rate risk. We use hedging instruments to reduce our
risk associated with changes in interest rates that could affect our investment
portfolio of mortgage loans and securities. We hedge our financing costs in
an
attempt to maintain a net duration gap of less than one year; as of March 31,
2007, our net duration gap was approximately 5 months.
As
we
acquire mortgage-backed securities or loans, we seek to hedge interest rate
risk
in order to stabilize net asset values and earnings during periods of rising
interest rates. To do so, we use hedging instruments in conjunction with our
borrowings to approximate the repricing characteristics of such assets. The
Company utilizes a model based risk analysis system to assist in projecting
portfolio performances over a scenario of different interest rates and market
stresses. The model incorporates shifts in interest rates, changes in
prepayments and other factors impacting the valuations of our financial
securities, including mortgage-backed securities, repurchase agreements,
interest rate swaps and interest rate caps. However, given the prepayment
uncertainties on our mortgage assets, it is not possible to definitively lock-in
a spread between the earnings yield on our investment portfolio and the related
cost of borrowings. Nonetheless, through active management and the use of
evaluative stress scenarios of the portfolio, we believe that we can mitigate
a
significant amount of both value and earnings volatility. See further discussion
of interest rate risk at the “Quantitative And Qualitative Disclosures About
Market Risk - Interest Rate Risk” section of this document.
Other
Risk Considerations
.
Our
business is affected by a variety of economic and industry factors. Management
periodically reviews and assesses these factors and their potential impact
on
our business. The most significant risk factors management considers while
managing the business and which could have a material adverse effect on our
financial condition and results of operations are:
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a
decline in the market value of our assets due to rising interest
rates;
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increasing
or decreasing levels of prepayments on the mortgages underlying our
mortgage-backed securities;
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our
ability to obtain financing to hold mortgage loans prior to their
sale or
securitization;
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our
ability to dispose of the remaining mortgage loans held for sale
in a
timely and efficient manner;
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A
significant increase in loan losses related to early payment
defaults;
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the
overall leverage of our portfolio and the ability to obtain financing
to
leverage our equity;
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the
potential for increased borrowing costs and its impact on net
income;
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the
concentration of our mortgage loans in specific geographic
regions;
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our
ability to use hedging instruments to mitigate our interest rate
and
prepayment risks;
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a
prolonged economic slow down, a lengthy or severe recession or declining
real estate values could harm our
operations;
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if
our assets are insufficient to meet the collateral requirements of
our
lenders, we might be compelled to liquidate particular assets at
inopportune times and at disadvantageous
prices;
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if
we are disqualified as a REIT, we will be subject to tax as a regular
corporation and face substantial tax liability;
and
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compliance
with REIT requirements might cause us to forgo otherwise attractive
opportunities.
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Strategic
Overview — Discontinued Operations
As
part
of the review of strategic alternatives announced in October of 2006, the
Company sold substantially all of the assets of its retail and wholesale
mortgage lending platforms in the first quarter of 2007, and exited the
mortgage
lending business. Until March 31, 2007, when we exited the mortgage lending
business, we relied primarily on secured warehouse facilities for funding
our
mortgage loans held for sale. Subsequent to March 31, 2007, the Company
will
utilize the CSFB warehouse facility until we dispose of all mortgage loans
held
for sale, which is expected to occur in the second quarter of 2007.
Financial
Overview
—
Continuing Operations
Revenues
.
Our
primary sources of income are net interest income on our loans and residential
investment securities. Net interest income is the difference between interest
income, which is the income that we earn on our loans and residential investment
securities and interest expense, which is the interest we pay on borrowings
and
subordinated debt.
Expenses
.
Non-interest expenses we incur in operating our business consist primarily
of
salary and employee benefits, and other general and administrative expenses.
All
compensation paid to employees of the continuing operations are salary-based
as
opposed to commission-based. Accordingly, very few of our expenses are variable
in nature.
Salary
and employee benefits consist primarily of the salaries and wages paid to our
employees, payroll taxes and expenses for health insurance, retirement plans
and
other employee benefits.
Other
general and administrative expenses include expenses for professional fees,
office supplies, postage and shipping, telephone, insurance, and other
miscellaneous operating expenses.
Financial
Overview
—
Discontinued Operations
Revenues:
Net
interest Income
.
We earn
net interest income on banked loans for the period of time from the closing
date
of the loan to the date of sale to a third party.
Gain
on sale of mortage loans
. Income from the gain on sale of mortgage loans to
third parties is the difference between the sales price and the adjusted
cost
basis of originated loans when title transfers. The adjusted cost basis of
the
loans includes the original principal amount adjusted for deferrals of
origination and commitment fees received, net of direct loan origination
costs
(including commissions and salaries for employees directly responsible for
such
originations) paid.
Loan
Loses
.
Loan
losses include reserves for, or actual costs incurred with respect to the
disposition of non-performing or early payment default loans and performing
loans sold at distressed prices due to market conditions.
Brokered
loan fees.
Brokered loan fees are fees collected by the Company for loans
brokered to third parties rather than banked.
Gain
on sale of retail lending segment
. Gain on
sale of retail lending segment includes a $5.2 million gain from
the sale of retail mortgage lending platform.
Expenses:
Salaries,
commissions and benefits.
Salary and employee benefits consist primarily of
the salaries and wages paid to our employees (exclusive of salaries and wages
allocated to net gain on sale of mortgage loans), payroll taxes and expenses
for
health insurance, retirement plans and other employee benefits.
Brokered
loan expenses.
Brokered loan expenses are primarily direct commissions and
other costs associated with brokered loans when such loans are closed with
the
borrower. Costs associated with brokered loans are expensed when incurred.
Occupancy
and equipment expenses.
Occupancy and equipment expenses, which are the
fixed and variable costs of buildings and equipment, consist of building
lease
expenses, furniture and equipment expenses, maintenance, real estate taxes
and
other associated costs of occupancy.
General
and administrative
. General and administrative expenses include expenses
for professional fees, office supplies, postage and shipping, telephone,
travel
and entertainment and other miscellaneous operating expenses.
Many
of
our expenses of the discontinued operation were variable in nature and were
relative to our loan origination production volumes. Variable expenses include
commissions on loan originations, brokered loan costs and, to a lesser degree,
office supplies, marketing and promotion and other miscellaneous expenses.
Fixed
expenses are primarily occupancy and equipment lease expenses and data
processing and communications expenses.
Loss
from discontinued operation
.
Loss
from discontinued operation on our Consolidated Statements of Operations
includes all revenues and expenses related to the discontinued mortgage lending
segment excluding certain costs that will be retained by the Company. Primarily,
these expenses related to rent expense for locations not being purchased
and certain allocated payroll expenses for employees remaining with the Company.
Description
of Business
—
Continuing Operations
Prior
to
the completion of our IPO on June 29, 2004, our operations were limited to
the
mortgage operations described in the preceding section. Beginning in July 2004,
we began to implement our business plan of investing in high-quality, adjustable
rate mortgage related securities and residential loans. Our mortgage portfolio,
consisting primarily of residential mortgage-backed securities and mortgage
loans held for investment, generates a substantial portion of our earnings.
In
managing our investment in a mortgage portfolio, we:
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invest
in mortgage-backed securities including ARM securities and collateralized
mortgage obligation floaters (“CMO
Floaters”);
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generally
operate as a long-term portfolio
investor;
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finance
our portfolio by entering into repurchase agreements, warehouse facilities
for loan aggregation or issue collateral debt obligations relating
to our
securitizations; and
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generate
earnings from the return on our mortgage securities and spread income
from
our mortgage loan portfolio.
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A
significant risk to our operations, relating to our portfolio management, is
the
risk that interest rates on our assets will not adjust at the same times or
amounts that rates on our liabilities adjust. Even though we retain and invest
in ARMs, many of the hybrid ARM loans in our portfolio have fixed rates of
interest for a period of time ranging from two to seven years. Our funding
costs
are variable and the maturities are short term in nature. As a result, we use
derivative instruments (interest rate swaps and interest rate caps) to mitigate,
but not eliminate, the risk of our cost of funding increasing or decreasing
at a
faster rate than the interest on our investment assets.
As
of
March 31, 2007, our mortgage securities portfolio consisted of 98% AAA- rated
or
Fannie Mae, Freddie Mac or Ginnie Mae-guaranteed (“FNMA/FHLMC/GNMA”) mortgage
securities as compared to financing rates or lower rated securities.
Such
assets are evaluated for impairment on a quarterly basis or, if events or
changes in circumstances indicate that these assets or the underlying collateral
may be impaired, on a more frequent basis. We evaluate whether these assets
are
considered impaired, whether the impairment is other-than-temporary and, if
the
impairment is other-than-temporary, recognize an impairment loss equal to the
difference between the asset’s amortized cost basis and its fair value. We
recorded an impairment loss of $7.4 million in the fourth quarter of 2005
because we concluded that we no longer had the intent to hold certain
lower-yielding mortgage-backed securities until their values recovered. This
impairment was not due to any underlying credit issues but was related to our
intent to no longer hold identified lower-yield securities and to re-position
our portfolio by selling such securities and replacing them with higher yield
securities with similar credit characteristics in order to earn higher net
interest spread in the future. The securities were disposed of during the first
quarter of 2006 resulting in an additional loss of $1.0 million.
The
loans held in securitization trusts and mortgage
loans held for investment consisted of high-credit quality prime adjustable
rate
mortgages with initial reset periods of no greater than five years or less.
Our
portfolio strategy for ARM loan originations is to acquire high-credit
quality
ARM loans for our securitization process thereby limiting future potential
losses.
Description
of Business
—
Discontinued Operation
In
connection with the sale of our wholesale mortgage origination platform assets
on February 22, 2007 and the sale of our retail mortgage lending platform
on
March 31, 2007, we classified our mortgage lending segment as a discontinued
operation.
Until
March 31, 2007, our retail mortgage lending operation contributed to our
financial results as it either produced some of the loans that ultimately
collateralized the mortgage securities that we hold in our portfolio or it
provided us the flexibility to sell the loans for gain on sale revenue. We
primarily originated prime, first-lien, residential mortgage loans and, to
a
lesser extent, second lien mortgage loans, home equity lines of credit, subprime
loans, and bridge loans. We originated a wide range of mortgage loan products
including adjustable-rate mortgage (“ARM”) loans which may have an initial fixed
rate period, and fixed-rate mortgages. Historically, we sold or retained
and
aggregated our self-originated, high-quality, shorter-term ARM loans in order
to
pool them into mortgage securities. Due to market conditions, starting in
March,
2006, NYMC began to sell all loans originated by it to third parties for
gain on
sale revenue rather than aggregating for securitization. For the three months
ended March 31, 2007 and 2006, we originated $435.7 million and $613.8 million
in mortgage loans for sale to third parties, respectively. We recognized
gains
on sales of mortgage loans totaling $2.3 million and $4.1 million for the
three
months ended March 31, 2007 and 2006, respectively. This decrease in gains
is
attributable to our reduced volume of loans originated and thus sold, and
increased scrutiny of loans by investors that resulted from the industry
wide
increase in early payment default loans (“EPDs”). EPDs, or loans wherein
borrowers missed one of their first three required mortgage payments, resulted
in investors either not purchasing loans or purchasing them at a reduced
negotiated price. On March 31, 2007, we sold substantially all of
the operating assets of the retail mortgage lending platform to
Indymac and exited the mortgage lending business.
Until
February 22, 2007, our wholesale mortgage lending strategy had been a small
component of our loan origination operations. We had a network of non-affiliated
wholesale loan brokers and mortgage lenders who submited loans to us. We
maintained relationships with these wholesale brokers and, as with retail
loan
originations, underwrote, processed, and funded wholesale loans through our
centralized facilities and processing systems. We also sold broker loans
to
third party mortgage lenders for which we received a broker fee. For the
three
months ended March 31, 2007 and 2006, we originated $134.8 million and $183.4
million in brokered loans, respectively. We recognized net brokering income
totaling $0.4 million and $0.6 million during the three months ended March
31,
2007 and 2006, respectively. On February 22, 2007, we sold substantially
all of
the assets of our wholesale mortgage lending platform to Tribeca
Lending.
Known
Material Trends and Commentary — Continuing Operations
Results
of Operations
.
We
expect that our revenues will derive primarily from the difference between
the
interest income we earn on our mortgage assets and the costs of our borrowings
(net of hedging expenses). We expect that our operating expenses will decrease
going forward due to the elimination of compensation expense attributable
to
employees related to our mortgage origination platform. The sale of each
of our
retail and wholesale mortgage lending platforms, has resulted in gross
proceeds
to NYMT of approximately $14.0 million before fees and expenses, and before
deduction of approximately $2.3 million which will be held in escrow to
support
warranties and indemnifications provided to Indymac by NYMC as well as
other
purchase price adjustments. NYMC expects to record a one time taxable gain
on
the sale of its assets to Indymac of $5.2 million.
Liquidity
.
We
depend on the capital markets to finance our investments in mortgage-backed
securities. As it relates to our investment portfolio, we have either
issued
collateralized debt to permanently finance our loan securitizations,
or entered
into repurchase agreements for short term financing. Commercial and investment
banks have provided significant liquidity to finance our operations,
and while
management cannot predict the future liquidity environment, we are currently
unaware of any material reason to prevent continued liquidity support
in the
capital markets for our business. See “Liquidity and Capital Resources” below
for further discussion of liquidity risks and resources available to
us.
Known
Material Trends and Commentary — Discontinued Operations
Origination
Volume
. For the three months ended March 31, 2007 and March 31, 2006,
NYMC’s total loan originations were to $435.7 million and $613.8 million,
respectively. This compares to total originations for the industry as a whole
of
$653 billion for the three months ended March 31, 2007 versus $626 billion
for
the same period in 2006, an increase of 4.3%, as reported by the MBA’s Mortgage
Finance Forecast dated April 23, 2007. The reason for our decrease in mortgage
originations while the industry experienced a period over period increase is
primarily due to the Company’s sale of its wholesale mortgage lending platform
on February 22, 2007 and, to a lesser degree, the then-pending sale of the
retail mortgage lending platform to Indymac on March 31, 2007.
EPDs
and Loan Sale Environment
.
Current
market conditions related to early payment defaults (“EPD”), mortgage loans that
have missed one of their first three payments due, is an important trend facing
our industry. As the incidence of EPDs has recently increased dramatically,
the
frequency of loans we are requested to repurchase has increased. EPDs pertain
only to loans originated in our discontinued mortgage lending operation. These
repurchases are predominately made with cash and are held on the balance sheet
until they are re-sold. EPD loans are typically re-sold at a loss
and resulting in a reduction of our working capital.
The
majority of our EPDs are associated with borrowers whose loans were
underwritten to loan programs where the borrower was not required to provide
full income and or asset verification in order to qualify for the loan. These
alternative documentation programs, also known as “Alternative-A” or “Alt-A”
programs, offered by many investors for whom we originated loans, combined
with
reduced amounts of required down payments made it easier for many borrowers
to
obtain mortgage financing.
The
increased incidence of EPDs has made many loan buyers and investors cautious
when it comes to the due diligence of loans they are purchasing. We have noticed
a much more cautious approach to loan review across the board by established
investors with whom we have had long term relationships. The increased number
of
EPDs also caused these investors to change their underwriting guidelines during
the first quarter of this year resulting in further difficulty in selling the
loans underwritten to the prior guidelines.
For
the
three months ended March 31, 2007, we repurchased a total of $5.5 million of
mortgage loans that were originated in either 2005 or 2006, the majority of
which were due to EPDs. Of the repurchased loans originated in 2006, all were
Alt-A. As of March 31, 2007 we had approximately $14 million of additional
repurchase requests pending, against which the Company has taken a reserve
of
$1.7 million included in accounts payable and accrued expenses.
Significance
of Estimates and Critical Accounting Policies
—
General
We
prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, or GAAP, many
of
which require the use of estimates, judgments and assumptions that affect
reported amounts. These estimates are based, in part, on our judgment and
assumptions regarding various economic conditions that we believe are reasonable
based on facts and circumstances existing at the time of reporting. The results
of these estimates affect reported amounts of assets, liabilities and
accumulated other comprehensive income at the date of the consolidated financial
statements and the reported amounts of income, expenses and other comprehensive
income during the periods presented.
Changes
in the estimates and assumptions could have a material effect on these financial
statements. Accounting policies and estimates related to specific components
of
our consolidated financial statements are disclosed in the notes to our
consolidated financial statements. In accordance with SEC guidance, those
material accounting policies and estimates that we believe are most critical
to
an investor’s understanding of our financial results and condition and which
require complex management judgment are discussed below.
Significance
of Estimates and Critical Accounting Policies
—
Continuing
Operations
Revenue
Recognition
.
Interest income on our residential mortgage loans and mortgage-backed securities
is a combination of the interest earned based on the outstanding principal
balance of the underlying loan/security, the contractual terms of the assets
and
the amortization of yield adjustments, principally premiums and discounts,
using
generally accepted interest methods. The net GAAP cost over the par balance
of
self-originated loans held for investment and premium and discount associated
with the purchase of mortgage-backed securities and loans are amortized into
interest income over the lives of the underlying assets using the effective
yield method as adjusted for the effects of estimated prepayments. Estimating
prepayments and the remaining term of our interest yield investments require
management judgment, which involves, among other things, consideration of
possible future interest rate environments and an estimate of how borrowers
will
react to those environments, historical trends and performance. The actual
prepayment speed and actual lives could be more or less than the amount
estimated by management at the time of origination or purchase of the assets
or
at each financial reporting period.
Fair
Value
.
Generally, the financial instruments we utilize are widely traded and there
is a
ready and liquid market in which these financial instruments are traded. The
fair values for such financial instruments are generally based on market prices
provided by five to seven dealers who make markets in these financial
instruments. If the fair value of a financial instrument is not reasonably
available from a dealer, management estimates the fair value based on
characteristics of the security that the Company receives from the issuer and
on
available market information.
Impairment
of and Basis Adjustments on Securitized Financial Assets
.
As
previously described herein, we regularly securitize our mortgage loans and
retain the beneficial interests created. Such assets are evaluated for
impairment on a quarterly basis or, if events or changes in circumstances
indicate that these assets or the underlying collateral may be impaired,
on a
more frequent basis. We evaluate whether these assets are considered impaired,
whether the impairment is other-than-temporary and, if the impairment is
other-than-temporary, recognize an impairment loss equal to the difference
between the asset’s amortized cost basis and its fair value. These evaluations
require management to make estimates and judgments based on changes in market
interest rates, credit ratings, credit and delinquency data and other
information to determine whether unrealized losses are reflective of credit
deterioration and our ability and intent to hold the investment to maturity
or
recovery. This other-than-temporary impairment analysis requires significant
management judgment and we deem this to be a critical accounting estimate.
We
recorded an impairment loss of $7.4 million during 2005, because we concluded
that we no longer had the intent to hold certain lower-yielding mortgage-backed
securities until their values recovered. At March 31, 2007, we have a net
unrealized loss of $3.6 million on the remaining securities in our portfolio,
which we do not consider to represent an other than temporary
impairment.
Securitizations
.
We
create securitization entities as a means of either:
|
|
·
|
creating
securities backed by mortgage loans which we will continue to
hold and
finance that will be more liquid than holding whole loan assets;
or
|
|
|
·
|
securing
long-term collateralized financing for our residential mortgage
loan
portfolio and matching the income earned on residential mortgage
loans
with the cost of related liabilities, otherwise referred to a
match
funding our balance sheet.
|
Residential
mortgage loans are transferred to a separate bankruptcy-remote legal entity
from
which private-label multi-class mortgage-backed notes are issued. On a
consolidated basis, securitizations are accounted for as secured financings
as
defined by SFAS No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities” (“SFAS No. 140”), and, therefore, no
gain or loss is recorded in connection with the securitizations. Each
securitization entity is evaluated in accordance with Financial Accounting
Standards Board Interpretation (“FIN”) 46(R), “Consolidation of Variable
Interest Entities”, and we have determined that we are the primary beneficiary
of the securitization entities. As such, the securitization entities are
consolidated into our consolidated balance sheet subsequent to securitization.
Residential mortgage loans transferred to securitization entities collateralize
the mortgage-backed notes issued, and, as a result, those investments are
not
available to us, our creditors or stockholders. All discussions relating
to
securitizations are on a consolidated basis and do not necessarily reflect
the
separate legal ownership of the loans by the related bankruptcy-remote
legal
entity.
Derivative
Financial Instruments
- The
Company has developed risk management programs and processes, which include
investments in derivative financial instruments designed to manage market
risk
associated with its mortgage-backed securities investment
activities.
All
derivative financial instruments are reported as either assets or liabilities
in
the consolidated balance sheet at fair value. The gains and losses associated
with changes in the fair value of derivatives not designated as hedges
are
reported in current earnings. If the derivative is designated as a fair
value
hedge and is highly effective in achieving offsetting changes in the fair
value
of the asset or liability hedged, the recorded value of the hedged item
is
adjusted by its change in fair value attributable to the hedged risk. If
the
derivative is designated as a cash flow hedge, the effective portion of
change
in the fair value of the derivative is recorded in OCI and is recognized
in the
income statement when the hedged item affects earnings. The Company calculates
the effectiveness of these hedges on an ongoing basis, and, to date, has
calculated effectiveness of approximately 100%. Ineffective portions, if
any, of
changes in the fair value or cash flow hedges are recognized in
earnings.
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements” (“SFAS No.157”). SFAS No.157 defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No.157 will
be
applied under other accounting principles that require or permit fair value
measurements, as this is a relevant measurement attribute. This statement
does
not require any new fair value measurements. We will adopt the provisions
of
SFAS No.157 beginning January 1, 2008. We are currently evaluating the
impact of
this statement on our consolidated financial statements.
New
Accounting Pronouncements
- In
February 2007, the FASB issued SFAS No. 159, “
The
Fair
Value Option for Financial Assets and Financial Liabilities
”
(“SFAS
No. 159”), which provides companies with an option to report selected financial
assets and liabilities at fair value. The objective of SFAS No. 159 is
to reduce
both complexity in accounting for financial instruments and the volatility
in
earnings caused by measuring related assets and liabilities differently.
SFAS
No. 159 establishes presentation and disclosure requirements and requires
companies to provide additional information that will help investors and
other
users of financial statements to more easily understand the effect of the
company’s choice to use fair value on its earnings. SFAS No. 159 also requires
entities to display the fair value of those assets and liabilities for
which the
company has chosen to use fair value on the face of the balance sheet.
SFAS No.
159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company is in the process of analyzing the
impact
of SFAS No. 159 on its consolidated financial statements.
Significance
of Estimates and Critical Accounting Policies
—
Discontinued
Operations
In
the
normal course of our discontinued mortgage lending business, we entered into
contractual interest rate lock commitments (“IRLCs”) to extend credit to finance
residential mortgages. Mark-to-market adjustments on IRLCs were recorded from
the inception of the interest rate lock through the date the underlying loan
is
funded. The fair value of the IRLCs was determined by an estimate of the
ultimate gain on sale of the loans net of estimated net costs to originate
the
loan. To mitigate the effect of the interest rate risk inherent in issuing
an
IRLC from the lock-in date to the funding date of a loan, we generally entered
into forward sale loan contracts (“FSLCs”). Since the FSLCs were committed prior
to mortgage loan funding and thus there is no owned asset to hedge, the FSLCs
in
place prior to the funding of a loan were undesignated derivatives under SFAS
No. 133 and are marked to market with changes in fair value recorded to current
earnings.
Loan
Loss Reserves on Mortgage Loans
.
We
evaluate a reserve for loan losses based on management’s judgment and estimate
of credit losses inherent in our portfolio of residential mortgage loans held
for sale.
Estimation
involves the consideration of various credit-related factors including but
not
limited to, the current housing market conditions, loan-to-value ratios,
delinquency status, historical credit loss severity rates, purchased mortgage
insurance, the borrower’s credit and other factors deemed to warrant
consideration. Additionally, we look at the balance of any delinquent loan
and
compare that to the value of the property. As many of the loans involved in
current reserve process were funded in the past six to twelve months, we
typically rely on the original appraised value of the property, unless there
is
evidence that the original appraisal should not be relied upon. If there is
a
doubt to the objectivity of the original property value assessment, we either
utilize various internet based property data services to look at comparable
properties in the same area, or consult with a realtor in the property’s
area.
Comparing
the current loan balance to the original property value determines the current
loan-to-value (“LTV”) ratio of the loan. Generally we estimate that a first lien
loan on a property that goes into a foreclosure process and becomes real estate
owned (“REO”), results is the property being disposed of at approximately 68% of
the property’s original value. This estimate is based on management’s long term
experience in similar market conditions. Thus, for a first lien loan that is
delinquent, we will adjust the property value down to approximately 68% of
the
original property value and compare that to the current balance of the loan.
The
difference, plus an estimate of past interest due, determines the base reserve
taken for that loan. This base reserve for a particular loan may be adjusted
if
we are aware of specific circumstances that may affect the outcome of the loss
mitigation process for that loan. Predominately, however, we use the base
reserve number for our reserve.
Reserves
for second liens are larger than that for first liens as second liens are in
a
junior position and only receive proceeds after the claims of the first lien
holder are satisfied. As with first liens, we may occasionally alter the base
reserve calculation but that is in a minority of the cases and only if we are
aware of specific circumstances that pertain to that specific loan.
At
March
31, 2007, we had a loan loss reserve of $1.2 million on mortgage loans held
for
sale, $2.1 million in reserves for indemnifications and repurchase
requests and had incurred $3.2 million of loan losses during the three
months ended March 31, 2007.
Overview
of Performance
For
the
three months ended March 31, 2007, we reported a net loss of $4.7 million,
as
compared to a net loss of $1.8 million for the three months ended March 31,
2006. The increase in net loss is attributed to a decrease in gain on sale
revenues and an increase in loan losses, each related to our discontinued
operations, and a decrease net interest income from our investment
portfolio. Included in the net loss is a gain of $5.2 million from the sale
of
the retail mortgage lending platform to Indymac. With respect to our
discontinued operations, for the three months ended March 31, 2007, total
residential originations, including brokered loans, were $435.7 million as
compared to $613.8 million for the same period of 2006. The decrease in our
loan
origination levels for the three months ended March 31, 2007 as compared to
the
same period of 2006 is the result of the loss of experienced loan officers
to
competitors, the sale of the wholesale mortgage lending platform as well as
an
overall market decline. Total employees decreased to 35 at March 31, 2007 as
a
result of the sale of the retail mortgage lending platform.
Summary
of Operations and Key Performance Measurements
—
Continuing
Operations
For
the
three months ended March 31, 2007, our income was dependent upon our mortgage
portfolio management operations and the net interest (interest income on
portfolio assets net of the interest expense and hedging costs associated with
the financing of such assets) generated from our portfolio, mortgage loans
held
in the securitization trusts and residential mortgage-backed securities. The
following table presents the components of our net interest income from our
investment portfolio of mortgage securities and loans for the three months
ended
March 31, 2007:
|
|
|
Amount
|
|
Average
Outstanding
Balance
|
|
Effective
Rate
|
|
|
|
|
(dollars
in thousands)
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
Net
Interest Income Components:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities and loans held in the securitization trusts
|
|
$
|
14,214
|
|
$
|
1,017.9
|
|
|
5.59
|
%
|
|
Amortization
of premium
|
|
|
(501
|
)
|
|
4.8
|
|
|
(0.23
|
)%
|
|
Total
interest income
|
|
$
|
13,713
|
|
$
|
1,022.7
|
|
|
5.36
|
%
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements and CDOs
|
|
$
|
13,543
|
|
$
|
980.3
|
|
|
5.53
|
%
|
|
Interest
rate swaps and caps
|
|
|
(459
|
)
|
|
—
|
|
|
(0.19
|
)%
|
|
Total
interest expense
(1)
|
|
$
|
13,084
|
|
$
|
980.3
|
|
|
5.34
|
%
|
|
Net
Interest income investment securities and loans held in securitization
trusts
|
|
$
|
629
|
|
$
|
42.4
|
|
|
0.02
|
%
|
(1)
Excludes $0.9 million of subordinated interest expense.
The
key
performance measures for our portfolio management activities are:
|
|
·
|
net
interest spread on the portfolio;
|
|
|
·
|
characteristics
of the investments and the underlying pool of mortgage loans including
but
not limited to credit quality, coupon and prepayment rates;
and
|
|
|
·
|
return
on our mortgage asset investments and the related management of interest
rate risk.
|
Summary
of Operations and Key Performance Measurements
—
Discontinued
Operations
For
the
three months ended March 31, 2007, our net interest income was also dependent
upon our mortgage lending operations and originations from our mortgage lending
segment, which include the mortgage loan sales and mortgage brokering activities
on residential mortgages sold or brokered to third parties. Our mortgage lending
activities generated revenues in the form of gains on sales of mortgage loans
to
third parties and ancillary fee income and interest income from borrowers.
Our
mortgage brokering operations generated brokering fee revenues from third party
buyers. In addition, the Company incurred a $3.2 million loan loss related
to
repurchase of EPD loans. As of March 31, 2007, the Company sold its retail
mortgage lending platform to Indymac for a net gain of $5.2 million and exited
the mortgage lending business.
A
breakdown of our loan originations for the three months ended March 31, 2007
follows:
|
Description
|
|
Number
of
Loans
|
|
Aggregate
Principal
Balance
($000’s)
|
|
Percentage
of
Total
Principal
|
|
Weighted
Average
Interest
Rate
|
|
Average
Loan
Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
mortgages
|
|
|
971
|
|
|
$251.2
|
|
|
57.7
|
%
|
|
6.88
|
%
|
|
$258,694
|
|
|
Refinancings
|
|
|
605
|
|
|
184.5
|
|
|
42.3
|
%
|
|
7.01
|
%
|
|
304,904
|
|
|
Total
|
|
|
1,576
|
|
|
435.7
|
|
|
100.0
|
%
|
|
6.94
|
%
|
|
276,433
|
|
|
Adjustable
rate or hybrid
|
|
|
419
|
|
|
166.2
|
|
|
38.1
|
%
|
|
6.93
|
%
|
|
396,660
|
|
|
Fixed
rate
|
|
|
1,157
|
|
|
269.5
|
|
|
61.9
|
%
|
|
6.94
|
%
|
|
232,894
|
|
|
Total
|
|
|
1,576
|
|
|
435.7
|
|
|
100.0
|
%
|
|
6.94
|
%
|
|
276,433
|
|
|
Banked
|
|
|
1,210
|
|
|
300.9
|
|
|
69.1
|
%
|
|
6.81
|
%
|
|
248,647
|
|
|
Brokered
|
|
|
366
|
|
|
134.8
|
|
|
30.9
|
%
|
|
7.22
|
%
|
|
368,293
|
|
|
Total
|
|
|
1,576
|
|
|
$435.7
|
|
|
100.0
|
%
|
|
6.94
|
%
|
|
$276,433
|
|
Financial
Condition
Balance
She
et
Analysis - Asset Quality — Continuing Operations
Investment
Securities - Available for Sale
.
Our
securities portfolio consists of agency securities or AAA-rated residential
mortgage-backed securities. At March 31, 2007 and December 31, 2006, we had
no
investment securities in a single issuer or entity (other than a government
sponsored agency of the U.S. Government) that had an aggregate book value
in
excess of 10% of our total assets. The following tables set forth the credit
characteristics of our securities portfolio as of March 31, 2007 and December
31, 2006:
Characteristics
of Our Investment Securities (dollar amounts in
thousands):
|
March
31, 2007
|
|
Sponsor
or Rating
|
|
Par
Value
|
|
Carrying
Value
|
|
%
of
Portfolio
|
|
Coupon
|
|
Yield
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
REMIC CMO Floating
Rate
|
|
|
FNMA/FHLMC/GNMA
|
|
$
|
149,669
|
|
$
|
150,045
|
|
|
34
|
%
|
|
6.70
|
%
|
|
6.58
|
%
|
|
Private
Label Floating Rate
|
|
|
AAA
|
|
|
13,985
|
|
|
13,971
|
|
|
3
|
%
|
|
6.11
|
%
|
|
6.18
|
%
|
|
Private
Label ARMs
|
|
|
AAA
|
|
|
264,893
|
|
|
263,134
|
|
|
59
|
%
|
|
4.80
|
%
|
|
5.74
|
%
|
|
NYMT
Retained Securities
|
|
|
AAA-BBB
|
|
|
18,038
|
|
|
17,942
|
|
|
3
|
%
|
|
5.75
|
%
|
|
6.18
|
%
|
|
NYMT
Retained Securities
|
|
|
Below
Investment Grade
|
|
|
2,764
|
|
|
1,971
|
|
|
1
|
%
|
|
5.68
|
%
|
|
15.96
|
%
|
|
Total/Weighted
Average
|
$
|
449,349
|
|
$
|
447,063
|
|
|
100
|
%
|
|
5.51
|
%
|
|
6.11
|
%
|
