The
following table sets forth the net interest spread since inception for
our
portfolio of investment securities available for sale, mortgage loans
held
for investment and mortgage loans held in securitization trust, excluding
the costs of our subordinated debentures.
|
As
of the Quarter Ended
|
|
Average
Interest
Earning
Assets
($ millions)
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Cash
Yield on
Interest
Earning
Assets
|
|
Cost
of
Funds
|
|
Net Interest
Spread
|
|
|
September
30, 2007
|
|
$
|
865.7
|
|
|
5.93
|
%
|
|
5.72
|
%
|
|
5.38
|
%
|
|
0.34
|
%
|
|
June
30, 2007
|
|
$
|
948.6
|
|
|
5.66
|
%
|
|
5.55
|
%
|
|
5.43
|
%
|
|
0.12
|
%
|
|
March
31, 2007
|
|
$
|
1,022.7
|
|
|
5.59
|
%
|
|
5.36
|
%
|
|
5.34
|
%
|
|
0.02
|
%
|
|
December
31, 2006
|
|
$
|
1,111.0
|
|
|
5.53
|
%
|
|
5.35
|
%
|
|
5.26
|
%
|
|
0.09
|
%
|
|
September
30, 2006
|
|
$
|
1,287.6
|
|
|
5.50
|
%
|
|
5.28
|
%
|
|
5.12
|
%
|
|
0.16
|
%
|
|
June
30, 2006
|
|
$
|
1,217.9
|
|
|
5.29
|
%
|
|
5.08
|
%
|
|
4.30
|
%
|
|
0.78
|
%
|
|
March
31, 2006
|
|
$
|
1,478.6
|
|
|
4.85
|
%
|
|
4.75
|
%
|
|
4.04
|
%
|
|
0.71
|
%
|
|
December
31, 2005
|
|
$
|
1,499.0
|
|
|
4.84
|
%
|
|
4.43
|
%
|
|
3.81
|
%
|
|
0.62
|
%
|
|
September
30, 2005
|
|
$
|
1,494.0
|
|
|
4.69
|
%
|
|
4.08
|
%
|
|
3.38
|
%
|
|
0.70
|
%
|
|
June
30, 2005
|
|
$
|
1,590.0
|
|
|
4.50
|
%
|
|
4.06
|
%
|
|
3.06
|
%
|
|
1.00
|
%
|
|
March
31, 2005
|
|
$
|
1,447.9
|
|
|
4.39
|
%
|
|
4.01
|
%
|
|
2.86
|
%
|
|
1.15
|
%
|
|
December
31, 2004
|
|
$
|
1,325.7
|
|
|
4.29
|
%
|
|
3.84
|
%
|
|
2.58
|
%
|
|
1.26
|
%
|
|
September
30, 2004
|
|
$
|
776.5
|
|
|
4.04
|
%
|
|
3.86
|
%
|
|
2.45
|
%
|
|
1.41
|
%
|
Comparative
Expenses
|
|
|
for the Three Months Ended
September
30,
|
|
for the Nine Months Ended
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
Salaries
and benefits
|
|
$
|
178
|
|
$
|
166
|
|
|
7.2
|
%
|
$
|
674
|
|
$
|
618
|
|
|
9.1
|
%
|
|
Marketing
and promotion
|
|
|
37
|
|
|
20
|
|
|
85.0
|
%
|
|
99
|
|
|
54
|
|
|
83.3
|
%
|
|
Data
processing and communications
|
|
|
50
|
|
|
58
|
|
|
(13.8
|
)%
|
|
143
|
|
|
177
|
|
|
(19.2
|
)%
|
|
Professional
fees
|
|
|
266
|
|
|
82
|
|
|
224.4
|
%
|
|
471
|
|
|
447
|
|
|
5.4
|
%
|
|
Depreciation
and amortization
|
|
|
93
|
|
|
131
|
|
|
29.0
|
%
|
|
242
|
|
|
398
|
|
|
(39.2
|
)%
|
|
Other
|
|
|
222
|
|
|
(46
|
)
|
|
(582.6
|
)%
|
|
393
|
|
|
177
|
|
|
(122.0
|
)%
|
|
|
|
$
|
846
|
|
$
|
411
|
|
|
105.8
|
%
|
$
|
2,022
|
|
$
|
1,871
|
|
|
8.1
|
%
|
The
increase in professional fees of $0.2 million for the three months ended
September 30, 2007 as compared to the three months ended September 30,
2006 is
due mainly to legal and accounting fees related to continued review our
strategic alternative initiatives. The increase in other expenses of $0.3
million for the three months ended September 30, 2007 as compared to the
three
months ended September 30, 2006 is due primarily to the change in allocation
of
certain expenses previously allocated to the discontinued mortgage lending
operation. Also, the decrease of $0.2 million in depreciation and amortization
for the nine months ended September 30, 2007 as compared the same period
in 2006
is due to the sale of fixed assets in the first quarter related to the
disposal
of the mortgage lending business.
Discontinued
Operation
|
|
|
for the Three Months Ended
September
30,
|
|
for the Nine Months Ended
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
%
Change
|
|
2007
|
|
2006
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
179
|
|
$
|
543
|
|
|
(67.0
|
)%
|
$
|
931
|
|
$
|
2,871
|
|
|
(67.6
|
)%
|
|
(Loss)
gain on sale of mortgage loans
|
|
|
(10
|
)
|
|
4,311
|
|
|
(100.2
|
)%
|
|
2,540
|
|
|
14,362
|
|
|
(82.3
|
)%
|
|
Loan
(losses)
|
|
|
(172
|
)
|
|
(4,077
|
)
|
|
(95.8
|
)%
|
|
(8,414
|
)
|
|
(4,077
|
)
|
|
(106.4
|
)%
|
|
Brokered
loan fees
|
|
|
3
|
|
|
2,402
|
|
|
(99.9
|
)%
|
|
2,319
|
|
|
8,672
|
|
|
(73.3
|
)%
|
|
Gain
on sale of retail lending segment
|
|
|
-
|
|
|
-
|
|
|
-
|
%
|
|
4,525
|
|
|
-
|
|
|
100.0
|
%
|
|
Other (expense)
income
|
|
|
(39
|
)
|
|
43
|
|
|
(190.7
|
)%
|
|
(24
|
)
|
|
(437
|
)
|
|
94.5
|
%
|
|
Total
net revenues
|
|
$
|
(39
|
)
|
$
|
3,222
|
|
|
(101.2
|
)%
|
$
|
1,877
|
|
$
|
21,391
|
|
|
(91.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
commissions and benefits
|
|
$
|
424
|
|
$
|
5,212
|
|
|
(91.9
|
)%
|
$
|
6,508
|
|
$
|
17,102
|
|
|
(61.9
|
)%
|
|
Brokered
loan expenses
|
|
|
-
|
|
|
1,674
|
|
|
(100.0
|
)%
|
|
1,731
|
|
|
6,609
|
|
|
(73.8
|
)%
|
|
Occupancy
and equipment
|
|
|
(86
|
)
|
|
1,255
|
|
|
(106.9
|
)%
|
|
2,124
|
|
|
3,870
|
|
|
(45.1
|
)%
|
|
General
and administrative
|
|
|
298
|
|
|
3,132
|
|
|
(90.5
|
)%
|
|
5,048
|
|
|
10,464
|
|
|
(51.8
|
)%
|
|
Total
expenses
|
|
|
636
|
|
|
11,273
|
|
|
(94.4
|
)%
|
|
15,411
|
|
|
38,045
|
|
|
(59.5
|
)%
|
|
Loss
before income tax benefit
|
|
|
(675
|
)
|
|
(8,051
|
)
|
|
(91.6
|
)%
|
|
(13,534
|
)
|
|
(16,654
|
)
|
|
(18.7
|
)%
|
|
Income
tax (provision) benefit
|
|
|
-
|
|
|
3,915
|
|
|
|
)%
|
|
-
|
|
|
8,494
|
|
|
(100.0
|
)%
|
|
Loss
from discontinued operations - net of tax
|
|
$
|
(675
|
)
|
$
|
(4,136
|
)
|
|
83.7
|
%
|
$
|
(13,534
|
)
|
$
|
(8,160
|
)
|
|
(65.9
|
)%
|
The
majority of the decreases i
n
revenues and expenses
are due to the Company's exit from the mortgage
lending business in the first quarter of 2007. In addition, the Company
experienced loan losses of $8.4 million a
nd
$4.1
million for the nine months ended September 30, 2007 and 2006, respectively.
This increase in loan losses for the nine months ended September 30, 2007
from
the same period in 2006 is largely attributable to decrease in real estate
values.
The Company recorded a net gain of $4.5 million for the sale of
the retail segment during the nine months ending September 30, 2007. In
addition, the Company incurred an $18.4 valuation allowance for the deferred
tax
asset, in the three months ended September 30, 2007.
Off-Balance
Sheet Arrangements
Since
inception, we have not maintained any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. Further, we have not guaranteed any obligations of unconsolidated
entities nor do we have any commitment or intent to provide funding to any
such
entities. Accordingly, we are not materially exposed to any market, credit,
liquidity or financing risk that could arise if we had engaged in such
relationships.
Liquidity
and Capital Resources
Liquidity
is a measure of our ability to meet potential cash requirements, including
ongoing commitments to repay borrowings, fund and maintain investments, pay
dividends to our stockholders and other general business needs. We recognize
the
need to have funds available for our operating businesses and our investment
portfolio. We plan to meet liquidity through normal operations with the goal
of
avoiding unplanned sales of assets or emergency borrowing of funds.
As
of the
date of this report, we believe our existing cash balances, funds available
under our current repurchase agreements and cash flows from operations will
be
sufficient for our liquidity requirements for at least the next 12 months.
At
September 30, 2007, we had cash balances of $11.1 million and borrowings
of
$327.9 million under outstanding repurchase agreements. At September 30,
2007,
we also had longer-term capital resources from CDOs outstanding of $444.2
million and from subordinated debt of $45.0 million.
We
had
outstanding repurchase agreements, a form of collateralized short-term
borrowing, with 4 different financial institutions as of September 30, 2007.
These agreements are secured by our mortgage-backed securities and bear interest
rates that have historically moved in close relationship to LIBOR. Our
borrowings under repurchase agreements are based on the fair value of our
mortgage backed securities portfolio. See "Market (Fair Value) Risk" under
Item 3 of this Form 10-Q. Interest rate changes can have a negative impact
on the valuation of these securities, reducing the amount we can borrow under
these agreements. Moreover because these lines of financing are not
committed, meaning the counterparty can call the loan at any time, interest
rate
changes, concern regarding the fair value of our mortgage-backed securities
portfolio, and shared concerns in the credit markets may lead to margin
calls initiated by the repurchase agreement providers. External disruptions
to
credit markets might also impair access to additional liquidity. See "Risk
Factors" relating to liquidity under Part II, Item 1A of this Form 10-Q and
"Liquidity and Funding Risk" under Item 3 of this Form 10-Q for a discussion
of
additional risks and uncertainties relating to our liquidity.
During
and subsequent to the month of August, 2007, the availability
of short-term collateralized borrowing through repurchase agreements
worsened considerably, primarily as a result of the fall-out from increasing
defaults in the sub-prime mortgage market and losses incurred at a number
of
larger companies in the mortgage industry. At September 30, 2007, we
had outstanding balances under repurchase agreements with four different
counterparties and, as of the date of this report, we have been successful
at
resetting all outstanding balances under our various repurchase agreements
as
they have become due. In the event a counterparty elected to not reset the
outstanding balance into a new repurchase agreement, we would be required
to
repay the outstanding balance with proceeds received from a new
counterparty or to surrender the mortgage-backed securities that serve as
collateral for the outstanding balance. If we are unable to secure
financing from another counterparty and surrender the collateral, we would
expect to incur a significant loss. Although we presently expect the
short-term collateralized borrowing markets to continue providing us with
necessary financing through repurchase agreements, we cannot assure you
that this form of financing will be available to us in the future on
comparable terms, if at all.
Our
investments and assets will also generate liquidity on an ongoing basis through
mortgage principal and interest payments, pre-payments and net earnings held
prior to payment of dividends. Should our liquidity needs ever exceed the
on-going or immediate sources of liquidity discussed above, we believe that
our
securities could be sold to raise additional cash. Such sales might occur
at prices lower than the carrying value of the assets, which would result
in
losses.
To
finance our investment portfolio, we generally seek to borrow between eight
and
12 times the amount of our equity.
At
September 30, 2007, our leverage ratio defined as financing arrangements,
portfolio investments divided by total stockholders’ equity was 13 to 1.
Collateralized debt obligations are not included in leverage ratio calculations
as they do not require any upfront or market valuation over
collateralization.
We, and the providers of our financing facilities,
generally view our $45.0 million of subordinated trust preferred debentures
outstanding at September 30, 2007 as a form of equity which would result
in an
adjusted leverage ratio of 5 to 1.
We
enter
into interest rate swap agreements to extend the maturity of our repurchase
agreements as a mechanism to reduce the interest rate risk of the securities
portfolio. As of September 30, 2007, we had $220.0 million in interest rate
swaps outstanding with two different financial institutions. The weighted
average maturity of the swaps was 560 days at September 30, 2007. The impact
of
the interest swaps extends the maturity of the repurchase agreements to 13
months.
On
September 27, 2007, the Company’s board of directors elected to omit the
quarterly dividend for holders of the Company’s common stock for the 2007 third
quarter. The board of director’s decision continues to reflect the Company’s
focus on elimination of operating losses related to the discontinued mortgage
lending business with a view to conserving capital to build future earnings
from
our portfolio management operations. The Company’s board of directors will
continue to evaluate the Company’s dividend policy each quarter and will make
adjustments as necessary, based on a variety of factors, including, among
other
things, the Company’s financial condition, liquidity, earnings projections and
business prospects. Our dividend policy does not constitute an obligation
to pay
dividends, which only occurs when the board of directors declares a dividend.
Including this omitted dividend, during the nine months ended September 30,
2007, we distributed approximately $1.8 million in common stock
dividends.
We
intend
to make distributions to our stockholders to comply with the various
requirements to maintain our REIT status and to minimize or avoid corporate
income tax and the nondeductible excise tax. However, differences in timing
between the recognition of REIT taxable income and the actual receipt of
cash
could require us to sell assets or to borrow funds on a short-term basis
to meet
the REIT distribution requirements and to avoid corporate income tax and
the
nondeductible excise tax.
Certain
of our assets may generate substantial mismatches between REIT taxable income
and available cash. These assets could include mortgage-backed securities
we
hold that have been issued at a discount and require the accrual of taxable
income in advance of the receipt of cash. As a result, our REIT taxable income
may exceed our cash available for distribution and the requirement to distribute
a substantial portion of our net taxable income could cause us to:
|
|
·
|
sell
assets in adverse market
conditions;
|
|
|
·
|
borrow
on unfavorable terms; or
|
|
|
·
|
distribute
amounts that would otherwise be invested in assets or repayment
of debt,
in order to comply with the REIT distribution
requirements.
|
Repurchase
requests from mortgage loan investors are an important factor affecting our
liquidity. Repurchase requests predominately result from early payment defaults
(“EPDs”) (i.e., where the borrowers have not timely made some or all of their
first three mortgage payments) or in the event of a breach of a representation,
warranty or covenant under the loan sale agreement. While in the past we
complied with the repurchase demands by repurchasing the loan and reselling
it
at a loss, more recently we have addressed these requests by negotiation
of a
net cash settlement b
ased
on
the actual or assumed loss on the loan in
lieu of repurchasing the
loans. New repurchase demands increased during the three months ended September
30, 2007 b
y
approximately $1.0 million, while $0.5 million of existing repurchase requests
were rescinded. In addition, we settled $18.4 million in repurchase requests,
reducing the total outstanding repurchase requests to
approximately
$7.3 million, as compared to $25.2 million for the three months ended June
30,
2007. We cannot assure you that we will be successful in settling the
remaining repurchase demands on favorable terms, or at all. If the Company
cannot continue to resolve its current repurchase demands through negotiated
net
cash settlements, the Company's liquidity could be adversely affected. In
addition, we may be subject to new repurchase requests from investors with
whom we have not settled or with respect to repurchase obligations not covered
under the settlement.
Inflation
For
the
periods presented herein, inflation has been relatively low and we believe
that
inflation has not had a material effect on our results of operations. The
impact
of inflation is primarily reflected in the increased costs of our operations.
Virtually all our assets and liabilities are financial in nature. Our
consolidated financial statements and corresponding notes thereto have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time
due
to inflation. As a result, interest rates and other factors influence our
performance far more than inflation. Inflation affects our operations primarily
through its effect on interest rates, since interest rates typically increase
during periods of high inflation and decrease during periods of low inflation.
During periods of increasing interest rates, demand for mortgages and a
borrower's ability to qualify for mortgage financing in a purchase transaction
may be adversely affected. During periods of decreasing interest rates,
borrowers may prepay their mortgages, which in turn may adversely affect
our
yield and subsequently the value of our portfolio of mortgage
assets.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Market
risk is the exposure to loss resulting from changes in interest rates, credit
spreads, foreign currency exchange rates, commodity prices and equity prices.
Because we are invested solely in U.S.-dollar denominated instruments, primarily
residential mortgage instruments, and our borrowings are also domestic and
U.S.
dollar denominated, we are not subject to foreign currency exchange, or
commodity and equity price risk; the primary market risk that we are exposed
to
is interest rate risk and its related ancillary risks. Interest rate risk
is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations
and
other factors beyond our control. All of our market risk sensitive assets,
liabilities and related derivative positions are for non-trading purposes
only.
Management
recognizes the following primary risks associated with our business and the
industry in which we conduct business:
|
|
·
|
Market
(fair value) risk
|
|
|
·
|
Liquidity
and funding risk
|
Interest
Rate Risk
Our
primary interest rate exposure relates to the portfolio of adjustable-rate
mortgage loans and mortgage-backed securities we acquire, as well as our
variable-rate borrowings and related interest rate swaps and caps. Interest
rate
risk is defined as the sensitivity of our current and future earnings to
interest rate volatility, variability of spread relationships, the difference
in
re-pricing intervals between our assets and liabilities and the effect that
interest rates may have on our cash flows, especially the speed at which
prepayments occur on our residential mortgage related assets.
Changes
in the general level of interest rates can affect our net interest income,
which
is the difference between the interest income earned on interest earning
assets
and our interest expense incurred in connection with our interest bearing
debt
and liabilities. Changes in interest rates can also affect, among other things,
our ability to acquire loans and securities, the value of our loans, mortgage
pools and mortgage-backed securities, and our ability to realize gains from
the
resale and settlement of such originated loans.
In
our
investment portfolio, our primary market risk is interest rate risk. Interest
rate risk can be defined as the sensitivity of our portfolio, including future
earnings potential, prepayments, valuations and overall liquidity to changes
in
interest rates. We attempt to manage interest rate risk by adjusting portfolio
compositions, liability maturities and utilizing interest rate derivatives
including interest rate swaps and caps. Management's goal is to maximize
the
earnings potential of the portfolio while maintaining long term stable portfolio
valuations.
We
utilize a model based risk analysis system to assist in projecting portfolio
performances over a scenario of different interest rates. 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.
Based
on
the results of this model, as of September 30, 2007, an instantaneous shift
of
100 basis points in interest rates would result in an approximate decrease
in
the net interest spread by 10-15 basis points as compared to our base line
projections over the next year.
The
following tables set forth information about financial instruments (dollar
amounts in thousands):
|
|
|
September
30, 2007
|
|
|
|
|
Notional
Amount
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale
|
|
$
|
367,980
|
|
$
|
359,872
|
|
$
|
359,872
|
|
|
Mortgage
loans held in the securitization trusts
|
|
|
457,057
|
|
|
458,968
|
|
|
453,067
|
|
|
Commitments
and contingencies:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
220,000
|
|
|
(1,601
|
)
|
|
(1,601
|
)
|
|
Interest
rate caps
|
|
$
|
783,334
|
|
$
|
977
|
|
$
|
977
|
|
|
|
|
December
31, 2006
|
|
|
|
|
Notional
Amount
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale
|
|
$
|
491,293
|
|
$
|
488,962
|
|
$
|
488,962
|
|
|
Mortgage
loans held in the securitization trusts
|
|
|
584,358
|
|
|
588,160
|
|
|
582,504
|
|
|
Commitments
and contingencies:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
285,000
|
|
|
621
|
|
|
621
|
|
|
Interest
rate caps
|
|
$
|
1,540,518
|
|
$
|
2,011
|
|
$
|
2,011
|
|
The
impact of changing interest rates may be mitigated by portfolio prepayment
activity that we closely monitor and the portfolio funding strategies we
employ.
First, our floating rate borrowings may react to changes in interest rates
before our adjustable rate assets because the weighted average next re-pricing
dates on the related borrowings may have shorter time periods than that of
the
adjustable rate assets. Second, interest rates on adjustable rate assets
may be
limited to a “periodic cap” or an increase of typically 1% or 2% per adjustment
period, while our borrowings do not have comparable limitations. Third, our
adjustable rate assets typically lag changes in the applicable interest rate
indices by 45 days due to the notice period provided to adjustable rate
borrowers when the interest rates on their loans are scheduled to
change.
In
a
period of declining interest rates or nominal differences between long-term
and
short-term interest rates, the rate of prepayment on our mortgage assets
may
increase. Increased prepayments would cause us to amortize any premiums paid
for
our mortgage assets faster, thus resulting in a reduced net yield on our
mortgage assets. Additionally, to the extent proceeds of prepayments cannot
be
reinvested at a rate of interest at least equal to the rate previously earned
on
such mortgage assets, our earnings may be adversely affected.
Conversely,
if interest rates rise or if the differences between long-term and short-term
interest rates increase the rate of prepayment on our mortgage assets may
decrease. Decreased prepayments would cause us to amortize the premiums paid
for
our ARM assets over a longer time period, thus resulting in an increased
net
yield on our mortgage assets. Therefore, in rising interest rate environments
where prepayments are declining, not only would the interest rate on the
ARM
Assets portfolio increase to re-establish a spread over the higher interest
rates, but the yield also would rise due to slower prepayments. The combined
effect could mitigate other negative effects that rising short-term interest
rates might have on earnings.
Interest
rates can also affect our net return on hybrid adjustable rate (“hybrid ARM”)
securities and loans net of the cost of financing hybrid ARMs. We
continually monitor and estimate the duration of our hybrid ARMs and have
a
policy to hedge the financing of the hybrid ARMs such that the net duration
of
the hybrid ARMs, our borrowed funds related to such assets, and related hedging
instruments are less than one year. During a declining interest rate
environment, the prepayment of hybrid ARMs may accelerate (as borrowers may
opt
to refinance at a lower rate) causing the amount of liabilities that have
been
extended by the use of interest rate swaps to increase relative to the amount
of
hybrid ARMs, possibly resulting in a decline in our net return on hybrid
ARMs as
replacement hybrid ARMs may have a lower yield than those being prepaid.
Conversely, during an increasing interest rate environment, hybrid ARMs may
prepay slower than expected, requiring us to finance a higher amount of hybrid
ARMs than originally forecast and at a time when interest rates may be higher,
resulting in a decline in our net return on hybrid ARMs. Our exposure to
changes in the prepayment speed of hybrid ARMs is mitigated by regular
monitoring of the outstanding balance of hybrid ARMs and adjusting the amounts
anticipated to be outstanding in future periods and, on a regular basis,
making
adjustments to the amount of our fixed-rate borrowing obligations for future
periods.
Interest
rate changes may also impact our net book value as our securities, certain
mortgage loans and related hedge derivatives are marked-to-market each quarter.
Generally, as interest rates increase, the value of our fixed income
investments, such as mortgage loans and mortgage-backed securities, decreases
and as interest rates decrease, the value of such investments will increase.
We
seek to hedge to some degree changes in value attributable to changes in
interest rates by entering into interest rate swaps and other derivative
instruments. In general, we would expect that, over time, decreases in value
of
our portfolio attributable to interest rate changes will be offset to some
degree by increases in value of our interest rate swaps, and vice versa.
However, the relationship between spreads on securities and spreads on swaps
may
vary from time to time, resulting in a net aggregate book value increase
or
decline. However, unless there is a material impairment in value that would
result in a payment not being received on a security or loan, changes in
the
book value of our portfolio will not directly affect our recurring earnings
or
our ability to make a distribution to our stockholders.
In
order
to minimize the negative impacts of changes in interest rates on earnings
and
capital, we closely monitor our asset and liability mix and utilize interest
rate swaps and caps, subject to the limitations imposed by the REIT
qualification tests.
Movements
in interest rates can pose a major risk to us in either a rising or declining
interest rate environment. We depend on substantial borrowings to conduct
our
business. These borrowings are all made at variable interest rate terms that
will increase as short term interest rates rise. Additionally, when interest
rates rise, mortgage loans held for sale and any applications in process
with
interest rate lock commitments, or IRLCs, decrease in value. To preserve
the
value of such loans or applications in process with IRLCs, we may enter into
forward sale loan contracts, or FSLCs, to be settled at future dates with
fixed
prices.
Our
hedging transactions using derivative instruments also involve certain
additional risks such as counterparty credit risk, the enforceability of
hedging
contracts and the risk that unanticipated and significant changes in interest
rates will cause a significant loss of basis in the contract. The counterparties
to our derivative arrangements are major financial institutions and securities
dealers that are well capitalized with high credit ratings and with which
we may
also have other financial relationships. While we do not anticipate
nonperformance by any counterparty, we are exposed to potential credit losses
in
the event the counterparty fails to perform. Our exposure to credit risk
in the
event of default by a counterparty is the difference between the value of
the
contract and the current market price. There can be no assurance that we
will be
able to adequately protect against the forgoing risks and will ultimately
realize an economic benefit that exceeds the related expenses incurred in
connection with engaging in such hedging strategies.
Market
(Fair Value) Risk
For
certain of the financial instruments that we own, fair values will not be
readily available since there are no active trading markets for these
instruments as characterized by current exchanges between willing parties.
Accordingly, fair values can only be derived or estimated for these investments
using various valuation techniques, such as computing the present value of
estimated future cash flows using discount rates commensurate with the risks
involved. However, the determination of estimated future cash flows is
inherently subjective and imprecise. Minor changes in assumptions or estimation
methodologies can have a material effect on these derived or estimated fair
values. These estimates and assumptions are indicative of the interest rate
environments as of September 30, 2007, and do not take into consideration
the
effects of subsequent interest rate fluctuations.
We
note
that the values of our investments in mortgage-backed securities and in
derivative instruments, primarily interest rate hedges on our debt, will
be
sensitive to changes in market interest rates, interest rate spreads, credit
spreads and other market factors. The value of these investments can vary
and
has varied materially from period to period. Historically, the values of
our
mortgage loan portfolio have tended to vary inversely with those of its
derivative instruments.
The
following describes the methods and assumptions we use in estimating fair
values
of our financial instruments:
Fair
value estimates are made as of a specific point in time based on estimates
using
present value or other valuation techniques. These techniques involve
uncertainties and are significantly affected by the assumptions used and
the
judgments made regarding risk characteristics of various financial instruments,
discount rates, estimate of future cash flows, future expected loss experience
and other factors.
Changes
in assumptions could significantly affect these estimates and the resulting
fair
values. Derived fair value estimates cannot be substantiated by comparison
to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumptions used to estimate fair values, the fair values used by us should
not
be compared to those of other companies.
The
fair
values of the Company's residential mortgage-backed securities 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 security 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.
The
fair
value of mortgage loans held for investment are determined by the loan pricing
sheet which is based on internal management pricing and third party competitors
in similar products and markets.
The
fair
value of loan commitments to fund with agreed upon rates are estimated using
the
fees and rates currently charged to enter into similar agreements, taking
into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed rate loan commitments, fair value also
considers the difference between current market interest rates and the existing
committed rates.
The
fair
value of commitments to deliver mortgages is estimated using current market
prices for dealer or investor commitments relative to our existing
positions.
The
market risk management discussion and the amounts estimated from the analysis
that follows are forward-looking statements that assume that certain market
conditions occur. Actual results may differ materially from these projected
results due to changes in our ARM portfolio and borrowings mix and due to
developments in the domestic and global financial and real estate markets.
Developments in the financial markets include the likelihood of changing
interest rates and the relationship of various interest rates and their impact
on our ARM portfolio yield, cost of funds and cash flows. The analytical
methods
that we use to assess and mitigate these market risks should not be considered
projections of future events or operating performance.
As
a
financial institution that has only invested in U.S.-dollar denominated
instruments, primarily residential mortgage instruments, and has only borrowed
money in the domestic market, we are not subject to foreign currency exchange
or
commodity price risk. Rather, our market risk exposure is largely due to
interest rate risk. Interest rate risk impacts our interest income, interest
expense and the market value on a large portion of our assets and liabilities.
The management of interest rate risk attempts to maximize earnings and to
preserve capital by minimizing the negative impacts of changing market rates,
asset and liability mix, and prepayment activity.
The
table
below presents the sensitivity of the market value of our portfolio using
a
discounted cash flow simulation model. Application of this method results
in an
estimation of the percentage change in the market value of our assets,
liabilities and hedging instruments per 100 basis point (“bp”) shift in interest
rates expressed in years - a measure commonly referred to as duration. Positive
portfolio duration indicates that the market value of the total portfolio
will
decline if interest rates rise and increase if interest rates decline. The
closer duration is to zero, the less interest rate changes are expected to
affect earnings. Included in the table is a “Base Case” duration calculation for
an interest rate scenario that assumes future rates are those implied by
the
yield curve as of September 30, 2007. The other two scenarios assume interest
rates are instantaneously 100 and 200 bps higher that those implied by market
rates as of September 30, 2007.
The
use
of hedging instruments is a critical part of our interest rate risk management
strategies, and the effects of these hedging instruments on the market value
of
the portfolio are reflected in the model's output. This analysis also takes
into
consideration the value of options embedded in our mortgage assets including
constraints on the re-pricing of the interest rate of ARM Assets resulting
from
periodic and lifetime cap features, as well as prepayment options. Assets
and
liabilities that are not interest rate-sensitive such as cash, payment
receivables, prepaid expenses, payables and accrued expenses are excluded.
The
duration calculated from this model is a key measure of the effectiveness
of our
interest rate risk management strategies.
Changes
in assumptions including, but not limited to, volatility, mortgage and financing
spreads, prepayment behavior, defaults, as well as the timing and level of
interest rate changes will affect the results of the model. Therefore, actual
results are likely to vary from modeled results.
Net
Portfolio Duration
September
30, 2007
|
|
|
|
|
|
Basis point increase
|
|
|
|
-100
|
|
Base
|
|
+100
|
|
+200
|
|
|
Mortgage
Portfolio
|
0.27
|
|
|
0.36
years
|
|
|
0.60 years
|
|
|
0.90 years
|
|
|
Borrowings
(including hedges)
|
0.34
|
|
|
0.34
years
|
|
|
0.34
years
|
|
|
0.34
years
|
|
|
Net
|
(0.07)
|
|
|
0.02
years
|
|
|
0.26
years
|
|
|
0.56
years
|
|
It
should
be noted that the model is used as a tool to identify potential risk in a
changing interest rate environment but does not include any changes in portfolio
composition, financing strategies, market spreads or changes in overall market
liquidity.
Based
on
the assumptions used, the model output suggests a very low degree of portfolio
price change given increases in interest rates, which implies that our cash
flow
and earning characteristics should be relatively stable for comparable changes
in interest rates.
Although
market value sensitivity analysis is widely accepted in identifying interest
rate risk, it does not take into consideration changes that may occur such
as,
but not limited to, changes in investment and financing strategies, changes
in
market spreads and changes in business volumes. Accordingly, we make extensive
use of an earnings simulation model to further analyze our level of interest
rate risk.
There
are
a number of key assumptions in our earnings simulation model. These key
assumptions include changes in market conditions that affect interest rates,
the
pricing of ARM products, the availability of ARM products and the availability
and the cost of financing for ARM products. Other key assumptions made in
using
the simulation model include prepayment speeds and management's investment,
financing and hedging strategies, and the issuance of new equity. We typically
run the simulation model under a variety of hypothetical business scenarios
that
may include different interest rate scenarios, different investment strategies,
different prepayment possibilities and other scenarios that provide us with
a
range of possible earnings outcomes in order to assess potential interest
rate
risk. The assumptions used represent our estimate of the likely effect of
changes in interest rates and do not necessarily reflect actual results.
The
earnings simulation model takes into account periodic and lifetime caps embedded
in our ARM Assets in determining the earnings at risk.
Credit
Spread Risk
The
mortgage-backed securities we currently, and will in the future, own are
also
subject to spread risk. The majority of these securities will be adjustable-rate
securities that are valued based on a market credit spread to U.S. Treasury
security yields. In other words, their value is dependent on the yield demanded
on such securities by the market based on their credit relative to U.S. Treasury
securities. Excessive supply of such securities combined with reduced demand
will generally cause the market to require a higher yield on such securities,
resulting in the use of a higher or wider spread over the benchmark rate
(usually the applicable U.S. Treasury security yield) to value such securities.
Under such conditions, the value of our securities portfolio would tend to
decline. Conversely, if the spread used to value such securities were to
decrease or tighten, the value of our securities portfolio would tend to
increase. Such changes in the market value of our portfolio may affect our
net
equity, net income or cash flow directly through their impact on unrealized
gains or losses on available-for-sale securities, and therefore our ability
to
realize gains on such securities, or indirectly through their impact on our
ability to borrow and access capital.
Furthermore,
shifts in the U.S. Treasury yield curve, which represents the market's
expectations of future interest rates, would also affect the yield required
on
our securities and therefore their value. These shifts, or a change in spreads,
would have a similar effect on our portfolio, financial position and results
of
operations.
Liquidity
and Funding Risk
Liquidity
is a measure of our ability to meet potential cash requirements, including
ongoing commitments to repay borrowings, meet margin requirements, fund and
maintain investments, pay dividends to our stockholders and meet other general
business needs. We recognize the need to have funds available for our operating.
It is our policy to have adequate liquidity at all times. We plan to meet
liquidity through normal operations with the goal of avoiding unplanned sales
of
assets or emergency borrowing of funds.
As
it
relates to our investment portfolio, derivative financial instruments we
use
also subject us to “margin call” risk based on their market values. Under our
interest rate swaps, we pay a fixed rate to the counterparties while they
pay us
a floating rate. When floating rates are low, on a net basis we pay the
counterparty and visa-versa. In a declining interest rate environment, we
would
be subject to additional exposure for cash margin calls due to accelerating
prepayments of mortgage assets. However, the asset side of the balance sheet
should increase in value in a further declining interest rate scenario. Most
of
our interest rate swap agreements provide for a bi-lateral posting of margin,
the effect being that either swap party must post margin, depending on the
change in value of the swap over time. Unlike typical unilateral posting
of
margin only in the direction of the swap counterparty, this provides us with
additional flexibility in meeting our liquidity requirements as we can call
margin on our counterparty as swap values increase.
Incoming
cash on our mortgage loans and securities is a principal source of cash.
The
volume of cash depends on, among other things, interest rates. The volume
and
quality of such incoming cash flows can be impacted by severe and immediate
changes in interest rates. If rates increase dramatically, our short-term
funding costs will increase quickly. While many of our investment portfolio
loans are hybrid ARMs, they typically will not reset as quickly as our funding
costs creating a reduction in incoming cash flow. Our derivative financial
instruments are used to mitigate the effect of interest rate
volatility.
We
manage
liquidity to ensure that we have the continuing ability to maintain cash
flows
that are adequate to meet commitments on a timely and cost-effective basis.
Our
principal sources of liquidity are the repurchase agreement market, the issuance
of CDOs, loan warehouse facilities as well as principal and interest payments
from portfolio assets. We believe our existing cash balances and cash flows
from
operations will be sufficient for our liquidity requirements for at least
the
next 12 months.
Prepayment
Risk
When
borrowers repay the principal on their mortgage loans before maturity or
faster
than their scheduled amortization, the effect is to shorten the period over
which interest is earned, and therefore, reduce the cash flow and yield on
our
ARM assets. Furthermore, prepayment speeds exceeding or lower than our
reasonable estimates for similar assets, impact the effectiveness of any
hedges
we have in place to mitigate financing and/or fair value risk. Generally,
when
market interest rates decline, borrowers have a tendency to refinance their
mortgages. The higher the interest rate a borrower currently has on his or
her
mortgage the more incentive he or she has to refinance the mortgage when
rates
decline. Additionally, when a borrower has a low loan-to-value ratio, he
or she
is more likely to do a “cash-out” refinance. Each of these factors increases the
chance for higher prepayment speeds during the term of the loan.
We
mitigate prepayment risk by constantly evaluating our ARM portfolio at a
range
of reasonable market prepayment speeds observed at the time for assets with
a
similar structure, quality and characteristics. Furthermore, we stress-test
the
portfolio as to prepayment speeds and interest rate risk in order to develop
an
effective hedging strategy.
For
the
nine and three months ended September 30, 2007, our mortgage assets paid
down at
an approximate average annualized constant paydown rate (“CPR”) of 20% and 20%,
respectively, compared to 20% and 21%, respectively, for the comparable periods
in 2006 and 19% for the year ended December 31, 2006. When prepayment experience
increases, we have to amortize our premiums over a shorter time period,
resulting in a reduced yield to maturity on our ARM Assets. Conversely, if
actual prepayment experience decreases, we would amortize the premium over
a
longer time period, resulting in a higher yield to maturity. We monitor our
prepayment experience on a monthly basis and adjust the amortization of the
net
premium, as appropriate.
Credit
Risk
Credit
risk is the risk that we will not fully collect the principal we have invested
in mortgage loans or securities. As previously noted, we were predominately
a
high-quality loan originator and our underwriting guidelines are intended
to
evaluate the credit history of the potential borrower, the capacity and
willingness of the borrower to repay the loan, and the adequacy of the
collateral securing the loan. Along with this however, during 2006 and the
first
quarter of 2007, immediately prior to our sale of our mortgage lending
operation, there was a growing percentage of loans underwritten with stated
income and/or stated assets. These loan types make credit risk assessment
more
difficult.
We
mitigate credit risk by establishing and applying criteria that identifies
high-credit quality borrowers. With regard to the purchased mortgage security
portfolio, we rely on the credit worthiness of Fannie Mae,
Freddie Mac or the AAA/Aaa rating established by the Rating
Agencies.
With
regard to loans included in our securitization, factors such as FICO score,
LTV,
debt-to-income ratio, and other borrower and collateral factors are evaluated.
Credit enhancement features, such as mortgage insurance may also be factored
into the credit decision. In some instances, when the borrower exhibits strong
compensating factors, exceptions to the underwriting guidelines may be
approved.
Our
mortgage loans held in securitization are concentrated in geographic markets
that are generally supply constrained. We believe that these markets have
less
exposure to sudden declines in housing values than those markets which have
an
oversupply of housing.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
-
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit
under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms
of the SEC, and that such information is accumulated and communicated to
our
management timely. An evaluation was performed under the supervision and
with
the participation of our management, including our Co-Chief Executive Officers
and our Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of September 30, 2007. Based upon that
evaluation, our management, including our Co-Chief Executive Officers and
our
Chief Financial Officer, concluded that our disclosure controls and procedures
were effective as of September 30, 2007.
Changes
in Internal Control over Financial Reporting
-
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for our Company, as such term is defined
in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as
amended. Our internal control system was designed to provide reasonable
assurance to our management and board of directors regarding the reliability,
preparation and fair presentation of published financial statements in
accordance with generally accepted accounting principles.
As
previously disclosed in the Company's Annual Report on Form 10-K for the
fiscal
year ended December 31, 2006, filed with the SEC on April 2, 2007, we identified
a material weakness in our internal control over financial reporting as of
December 31, 2006. A material weakness is a control deficiency or combination
of
control deficiencies that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will
not be
prevented or detected. The material weakness identified was an inadequacy
in the
operation of our control activities involving the completion and review of
the
accounting period closing process. The sale of substantially all of the
operating assets of our mortgage lending platform to IndyMac Bank, F.S.B.,
which
closed as of March 31, 2007, significantly increased the workload demands
of the
existing accounting staff, thereby disrupting the timely completion and review
of the accounting period closing process. In addition, in connection with
the
uncertainty of the consummation and effect of the Indymac transaction, the
accounting department was affected by the departure of certain key accounting
personnel during this time. The increased workload and decreased staff levels
resulted in a significant number of post-closing journal entries and contributed
to a request for additional time to file our Annual Report on Form
10-K.
In
making
our assessment of the internal control over financial reporting, our management
used the criteria issued by the Committee of Sponsoring Organizations of
the
Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Because
of the material weaknesses described above, management concluded that our
internal control over financial reporting was not effective as of December
31,
2006. At March 31, 2007, due to post-closing transition requirements related
to
the IndyMac transaction, we determined that the material weakness had not
yet
been remediated. Although we believe the actions and events outlined below
have
improved our internal controls, we determined that the material weakness
had not been remediated at September 30, 2007.
As
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2006, and in our quarterly reports on Form 10-Q for the three
months ended March 31, 2007 and June 30, 2007, during the first, second
and third quarters of 2007, our management actively assessed our accounting
needs to determine appropriate staffing levels. Subsequent to March 31, 2007,
management identified and engaged certain accounting consultants to perform
the
functions of controller for the Company. Effective October 1, 2007, the Company
employed a full-time controller. In addition, with the completion of
substantially all of the post-closing requirements related to the IndyMac
transaction the workload demands on our accounting staff and disruptions
to the
accounting period closing process have been greatly reduced. Management believes
that our internal controls have improved as a result of these actions and
events
and will continue to assess the Company's accounting needs and take such
steps
as necessary to maintain effective controls.
Item
1A. Risk Factors
We
previously disclosed risk factors under "Item 1A. Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2006. In addition to
those
risk factors and the other information included elsewhere in this report,
you
should also carefully consider the risk factors discussed below. The risks
described below and in our Annual Report on Form 10-K for the year ended
December 31, 2006, are not the only risks facing our company. Additional
risks
and uncertainties not currently known to us or that we deem to be immaterial
also may materially adversely affect our business, financial condition and/or
results of operations.
Possible
market developments could reduce the amount of liquidity available to us
and
could cause our lenders to require us to pledge additional assets as collateral.
If we are unable to obtain sufficient short-term financing or our assets
are
insufficient to meet the collateral requirements, then we may be compelled
to
liquidate particular assets at an inopportune time.
Possible
market developments, including a sharp rise in interest rates, a change in
prepayment rates or increasing market concern about the value or liquidity
of
one or more types of mortgage-related assets in which our portfolio is
concentrated may reduce the market value of
our
portfolio, which may reduce the amount of liquidity available to us or may
cause
our lenders to require additional collateral. If we are unable to obtain
sufficient short-term financing or our lenders start to require additional
collateral, we may be compelled to liquidate our assets at a disadvantageous
time, thus harming our operating results, net profitability and ability to
make
distributions to you.
Our
use of repurchase agreements to borrow funds may give our lenders greater
rights
in the event that either we or a lender files for
bankruptcy.
Our
borrowings under repurchase agreements may qualify for special treatment
under
the bankruptcy code, giving our lenders the ability to avoid the automatic
stay
provisions of the bankruptcy code and to take possession of and liquidate
our
collateral under the repurchase agreements without delay in the event that
we
file for bankruptcy. Furthermore, the special treatment of repurchase agreements
under the bankruptcy code may make it difficult for us to recover our pledged
assets in the event that a lender files for bankruptcy. Thus, the use of
repurchase agreements exposes our pledged assets to risk in the event of
a
bankruptcy filing by either a lender or us.
The
Company's liquidity may be adversely affected by margin calls under its
repurchase agreements because they are dependent in part on the lenders'
valuation of the collateral securing the financing.
Each
of
these repurchase agreements allows the lender, to varying degrees, to revalue
the collateral to values that the lender considers to reflect market. If
a
lender determines that the value of the collateral has decreased, it may
initiate a margin call requiring the Company to post additional collateral
to
cover the decrease. When the Company is subject to such a margin call, it
must
provide the lender with additional collateral or repay a portion of the
outstanding borrowings with minimal notice. Any such margin call could harm
the
Company's liquidity, results of operation, financial condition, and business
prospects. Additionally, in order to obtain cash to satisfy a margin call,
the
Company may be required to liquidate assets at a disadvantageous time, which
could cause it to incur further losses and adversely affect its results of
operations and financial condition.
The
Company's loan delinquencies may increase as a result of significantly increased
monthly payments required from ARM borrowers after the initial fixed
period.
Scheduled
increase in monthly payments on adjustable rate mortgage loans may result
in
higher delinquency rates on mortgage loans and could have a material adverse
affect on our net income and results of operations. This increase in borrowers'
monthly payments, together with any increase in prevailing market interest
rates, may result in significantly increased monthly payments for borrowers
with
adjustable rate mortgage loans. Borrowers seeking to avoid these increased
monthly payments by refinancing their mortgage loans may no longer be able
to
fund available replacement loans at comparably low interest rates. A decline
in
housing prices may also leave borrowers with insufficient equity in their
homes
to permit them to refinance their loans or sell their homes. In addition,
these
mortgage loans may have prepayment premiums that inhibit
refinancing.
We
may be required to repurchase loans if we breached representations and
warranties from loan sale transactions, which could harm our profitability
and
financial condition.
Loans
from our discontinued mortgage lending operations are sold to third parites
under agreements with numerous representations and
warranties regarding the manner in which the loan was
originated, the property securing the loan and the borrower. If these
representations or warranties are found to have been breached, we may be
required to repurchase such loan. We may be forced to resell these repurchased
loans at a loss, which could harm our profitability and financial
condition.
We
may incur increased borrowing costs related to repurchase agreements and
that
would harm our profitability.
Currently,
a significant portion of our borrowings are collateralized borrowings in
the
form of repurchase a agreements. If the interest rates on these agreements
increase, that would harm our profitability.
Our
borrowing costs under repurchase agreements generally correspond to short-term
interest rates such as LIBOR or a short-term Treasury index, plus or minus
a
margin. The margins on these borrowings over or under short-term interest
rates
may vary depending upon:
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the
movement of interest rates;
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the
availability of financing in the market;
and
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the
value and liquidity of our mortgage-related
assets.
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Because
assets we acquire may experience periods of illiquidity, we may lose profits
or
be prevented from earning capital gains if we cannot sell mortgage-related
assets at an opportune time.
We
bear
the risk of being unable to dispose of our mortgage-related assets at
advantageous times or in a timely manner because mortgage-related assets
generally experience periods of illiquidity. The lack of liquidity may result
from the absence of a willing buyer or an established market for these assets,
as well as legal or contractual restrictions on resale. As a result, the
illiquidity of mortgage-related assets may cause us to lose profits and the
ability to earn capital gains.
Our
common stock is currently quoted for trading on the Over the Counter Bulletin
Board which may adversely impact the liquidity of our shares and reduce the
value of an investment in our stock.
Effective
September 11, 2007, our common stock was delisted from quotation on the New
York
Stock Exchange and on the same day our common stock became quoted on the
Over
the Counter exchange. We have applied to list our common stock on another
national securities exchange, however, we can provide no assurance that our
common stock will be approved for listing on another national securities
exchange in the future. Our common stock has historically been sporadically
or
“thinly traded” (meaning that the number of persons interested in purchasing our
shares at or near ask prices at any given time may be relatively small or
non-existent) and no assurances can be given that a broader or more active
public trading market for our common stock will develop or be sustained in
the
future or that current trading levels will be sustained. You may be unable
to
sell at or near ask prices or at all if you desire to liquidate your shares.
This situation is attributable to a number of factors, including, among other
things, the fact that we are a small company which is relatively unknown
to
stock analysts, stock brokers, institutional investors and others in the
investment community that generate or influence sales volume. As a consequence,
there may be periods of several days or more when trading activity in our
shares
is minimal or non-existent, as compared to a seasoned issuer which has a
large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price.
We
have not established a minimum dividend payment level for our common
stockholders and there are no assurances of our ability to pay dividends
to them
in the future.
We
intend
to pay quarterly dividends and to make distributions to our common stockholders
in amounts such that all or substantially all of our taxable income in each
year, subject to certain adjustments, is distributed. This, along with other
factors, should enable us to qualify for the tax benefits accorded to a REIT
under the Code. We have not established a minimum dividend payment level
for our
common stockholders and our ability to pay dividends may be harmed by the
risk
factors described above and in our annual report on Form 10-K. On July
23, 2007, our board of directors elected to omit declaring and paying a dividend
to common stockholders for the 2007 second quarter. The board of
directors' decision reflected the Company's focus on elimination of
operating losses through the sole of our mortgage lending business with a
view
to conserving capital to build future earnings from our portfolio
management operations. All distributions to our common stockholders will
be made at the discretion of our board of directors and will depend on our
earnings, our financial condition, maintenance of our REIT status and such
other
factors as our board of directors may deem relevant from time to time. There
are
no assurances of our ability to pay dividends in the future.
Item
6. Exhibits
The
information set forth under “Exhibit Index” below is incorporated herein by
reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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NEW
YORK MORTGAGE TRUST, INC.
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Date:
November 14, 2007
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By:
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/s/ David
A. Akre
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David
A. Akre
Co-Chief
Executive Officer
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Date:
November 14, 2007
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By:
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/s/
Steven R. Mumma
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Steven
R. Mumma
Chief
Financial Officer
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No.
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Description
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3.1(a)
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Articles
of Amendment and Restatement of the Registrant (incorporated by
reference
to Exhibit 3.01 to our Registration Statement on Form S-11/A filed
on
June 18, 2004 (Registration No. 333-111668)).
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3.1(b)
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Articles
of Amendment of the Registrant (incorporated by reference to
Exhibit 3.1
to our Current Report on Form 8-K filed on October 4,
2007.)
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Articles
of Amendment of the Registrant (incorporated by reference to
Exhibit 3.2
to our Current Report on Form 8-K filed on October 4,
2007.)
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3.2(a)
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Bylaws
of the Registrant (incorporated by reference to Exhibit 3.02 to
our
Registration Statement on Form S-11/ A filed on June 18, 2004
(Registration No. 333-111668)).
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3.2(b)
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Amendment
No. 1 to Bylaws of Registrant (incorporated by reference to Exhibit
3.2(b)
to Registrant's Annual Report on Form 10-K filed on March 16,
2006)
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4.1
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Form
of Common Stock Certificate (incorporated by reference to Exhibit
4.01 to
our Registration Statement on Form S-11/ A filed on June 18, 2004
(Registration No. 333-111668)).
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4.2(a)
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Junior
Subordinated Indenture between The New York Mortgage Company, LLC
and
JPMorgan Chase Bank, National Association, as trustee, dated
September 1, 2005 (incorporated by reference to Exhibit 4.1 to our
Current Report on Form 8-K filed on September 6,
2005).
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4.2(b)
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Amended
and Restated Trust Agreement among The New York Mortgage Company,
LLC,
JPMorgan Chase Bank, National Association, Chase Bank USA, National
Association and the Administrative Trustees named therein, dated
September 1, 2005 (incorporated by reference to Exhibit 4.2 to our
Current Report on Form 8-K filed on September 6,
2005).
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10.1
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Fourth
Amendment to Assignment and Assumption of Sublease dated as of
August 30,
2007 by and between The New York Mortgage Company, LLC and Lehman
Brothers
Holdings, Inc.*
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31.1
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Certification
of Co-Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
of the
Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the
Sarbanes-Oxley Act of 2002.*
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31.2
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
of the
Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the
Sarbanes-Oxley Act of 2002.*
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32.1
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Certification
of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
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32.2
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Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
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