NEW YORK MORTGAGE TRUST INC - Quarter Report: 2005 June (Form 10-Q)

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005.


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 001-32216

NEW YORK MORTGAGE TRUST, INC.

(Exact name of registrant as specified in its charter)


Maryland (State or other jurisdiction of incorporation or organization)		47-0934168 (I.R.S. Employer Identification No.)

1301 Avenue of the Americas, New York, New York 10019
(Address of principal executive office) (Zip Code)

(212) 634-9400
(Registrant’s telephone number, including area code)

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

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o No þ

The number of shares of the registrant’s common stock, par value $.01 per share, outstanding on August 1, 2005 was 17,960,198.

NEW YORK MORTGAGE TRUST, INC.

FORM 10-Q


Part I Financial Information
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Overview of Performance
Summary of Operations and Key Performance Measurements
Known Material Trends and Commentary
Description of Business
Significance of Estimates and Critical Accounting Policies
Forward Looking Financial Statement Effects
New Accounting Policies
Risk Management
Financial Highlights for the Second Quarter of 2005
Results of Operations and Financial Condition
Off-Balance Sheet Arrangements
Liquidity and Capital Resources
Inflation
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Credit Spread Exposure
Fair Values
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-31.3: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I: FINANCIAL INFORMATION

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30,
	2005			December 31,
	(unaudited)			2004
ASSETS
Cash and cash equivalents	$	3,931,217		$	7,613,106
Restricted cash		975,874			2,341,712
Investment securities — available for sale		904,527,533			1,204,744,714
Receivable for securities sold		100,332,440			—
Due from loan purchasers		160,802,501			79,904,315
Escrow deposits — pending loan closings		46,061,064			16,235,638
Accounts and accrued interest receivable		13,098,381			15,554,201
Mortgage loans held for sale		89,188,402			85,384,927
Mortgage loans held in the securitization trust		382,569,880			—
Mortgage loans held for investment		233,853,469			190,153,103
Prepaid and other assets		11,656,197			4,351,869
Derivative assets		7,260,152			3,677,572
Property and equipment, net		5,637,519			4,801,302

TOTAL ASSETS	$	1,959,894,629		$	1,614,762,459

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Financing arrangements, portfolio investments	$	1,280,405,077		$	1,115,809,285
Financing arrangements, loans held for sale/for investment		513,480,699			359,202,980
Due to loan purchasers		842,683			350,884
Accounts payable and accrued expenses		27,608,489			19,485,241
Subordinated debentures		25,000,000			—
Derivative liabilities		631,982			164,816
Other liabilities		428,919			267,034

Total liabilities		1,848,397,849			1,495,280,240

COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY :
Common stock, $0.01 par value, 400,000,000 shares authorized 18,217,498 shares issued and outstanding at June 30, 2005 and 18,114,445 shares issued and 17,797,375 outstanding at December 31, 2004		182,175			180,621
Additional paid-in capital		112,561,269			119,045,450
Accumulated other comprehensive (loss) income		(1,246,664	)		256,148

Total stockholders’ equity		111,496,780			119,482,219

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,959,894,629		$	1,614,762,459

See notes to consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)


	For the Six Months Ended						For the Three Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
				as restated						as restated
REVENUE:
Gain on sales of mortgage loans	$	12,648,668		$	10,451,171		$	8,328,168		$	6,945,082
Interest income:
Loans held for sale		6,100,168			3,146,847			3,507,278			1,885,778
Investment securities and loans		24,826,825			—			12,105,087			—
Loans collateralizing debt obligations		5,859,042			—			4,057,127			—
Brokered loan fees		4,533,801			2,960,473			2,533,568			777,694
Gain on sale of securities		921,402			606,975			544,319			606,975
Miscellaneous income (loss)		103,640			45,977			(10,412	)		30,208

Total revenue		54,993,546			17,211,443			31,065,135			10,245,737

EXPENSES:
Salaries, commissions and benefits		16,572,261			6,890,838			9,429,500			4,171,660
Interest expense:
Loans held for sale		3,842,710			1,732,297			1,994,900			1,123,686
Investment securities and loans		21,884,873			—			12,120,701			—
Subordinated debentures		493,578			—			415,822			—
Brokered loan expenses		4,205,608			2,119,522			2,686,118			835,303
Occupancy and equipment		3,716,455			1,537,517			1,581,821			875,987
Marketing and promotion		2,589,727			1,296,391			1,189,861			812,105
Data processing and communications		1,189,582			621,236			671,861			453,193
Office supplies and expenses		1,257,560			647,240			684,874			429,369
Professional fees		1,846,533			653,754			1,102,465			400,666
Travel and entertainment		445,611			305,275			230,154			116,927
Depreciation and amortization		767,201			205,906			424,309			102,953
Other		553,323			693,071			176,665			532,996

Total expenses		59,365,022			16,703,047			32,709,051			9,854,845

(LOSS) INCOME BEFORE INCOME TAXES		(4,371,476	)		508,396			(1,643,916	)		390,892
Income tax benefit (expense)		4,880,000			(10,000	)		2,190,000			(10,000	)

NET INCOME	$	508,524		$	498,396		$	546,084		$	380,892

Basic income per share	$	0.03		$	0.03		$	0.03		$	0.02

Diluted income per share	$	0.03		$	0.03		$	0.03		$	0.02

Weighted average shares outstanding—basic		17,802,331			17,797,375			17,807,233			17,797,375

Weighted average shares outstanding—diluted		18,122,503			18,162,125			18,120,974			18,162,125

See notes to consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	For the Six Months Ended
	June 30,
	2005			2004
				as restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	508,524		$	498,396
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		767,201			205,906
Amortization of premium on investment securities and mortgage loans		2,762,341			—
Gain on sale of investment securities		(921,402	)		(606,975	)
Origination of mortgage loans held for sale		(773,402,702	)		(619,969,756	)
Proceeds from sales of mortgage loans		464,429,441			605,774,982
Deferred compensation restricted stock-non cash		1,108,817			—
Restricted stock compensation expense		2,073,459			1,326,375
Deferred tax benefit		(4,880,000	)		—
Change in value of derivatives		(943,763	)		220,521
(Increase) decrease in operating assets:
Due from loan purchasers		(80,898,186	)		(42,207,268	)
Due from affiliate		—			153,171
Escrow deposits-pending loan closings		(29,825,426	)		—
Accounts and accrued interest receivable		2,455,820			—
Prepaid and other assets		(2,424,328	)		(1,147,648	)
Increase in operating liabilities:
Due to loan purchasers		491,799			173,920
Accounts payable and accrued expenses		7,916,340			4,877,178
Other liabilities		161,885			152,832

Net cash used in operating activities		(411,710,621	)		(50,548,366	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash		1,365,838			116,896
Sale of investment securities		93,505,200			—
Purchase of investment securities		(95,859,920	)		—
Purchase of mortgage loans held in the securitization trust		(167,873,446	)		—
Principal repayments received on loans held in the securitization trust		40,080,923			—
Proceeds from sale of marketable securities		—			2,320,414
Principal paydown on investment securities		197,170,190			—
Payments received on loans held for investment		6,245,932			—
Purchases of property and equipment		(1,603,418	)		(445,604	)

Net cash provided by investing activities		73,031,299			1,991,706

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		—			123,116,740
Cash distributions to members		—			(3,295,424	)
Payments on subordinated notes due to members		—			(13,706,902	)
Increase in financing arrangements, net		318,873,511			54,133,815
Dividends paid		(8,876,078	)		—
Issuance of subordinated debentures		25,000,000			—

Net cash provided by financing activities		334,997,433			160,248,229

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(3,681,889	)		111,691,569

CASH AND CASH EQUIVALENTS — Beginning of period		7,613,106			4,357,069

CASH AND CASH EQUIVALENTS — End of period	$	3,931,217		$	116,048,638

SUPPLEMENTAL DISCLOSURE
Cash paid for interest	$	25,024,877		$	1,635,826

NON CASH FINANCING ACTIVITIES
Reduction of subordinated notes due members	$	—		$	1,000,000

Grant of restricted stock		—			3,709,125

Dividends declared to be paid in subsequent period	$	4,554,375		$	—

See notes to consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 (Unaudited)

1. Summary of Significant Accounting Policies

Organization — New York Mortgage Trust, Inc. (“NYMT” or the “Company”) is a fully integrated, self-advised residential mortgage finance company formed as a Maryland corporation in September 2003. The Company earns net interest income from residential mortgage-backed securities and fixed rate and adjustable-rate mortgage loans and securities originated through its wholly-owned subsidiary, The New York Mortgage Company, LLC (“NYMC”). The Company also earns net interest income from its investment in and the securitization of certain self-originated adjustable rate mortgage loans that meet the Company’s investment criteria. Licensed or exempt from licensing in 39 states and the District of Columbia and through a network of 30 full service loan origination locations and 32 satellite loan origination locations, NYMC originates all types of mortgage loans, with a primary focus on prime, residential mortgage loans.

On January 9, 2004, the Company capitalized New York Mortgage Funding, LLC (“NYMF”) as a wholly-owned subsidiary of the Company. In June 2004, the Company sold 15 million shares of its common stock in an initial public offering (“IPO”) at a price to the public of $9.00 per share, for net proceeds of approximately $122 million after deducting the underwriters’ discount and other offering expenses. Concurrent with the Company’s IPO, the Company issued 2,750,000 shares of common stock in exchange for the contribution to the Company of 100% of the equity interests of NYMC. Subsequent to the IPO and the contribution of NYMC, the Company had 18,114,445 shares of common stock issued and 17,797,375 shares outstanding. Prior to the IPO, NYMT did not have recurring business operations.

On February 25, 2005, the Company completed its first loan securitization of high-credit quality, first-lien, adjustable rate mortgage (“ARM”) loans, by contributing loans into New York Mortgage Trust 2005-1 (“NYMT ‘05-1 Trust”). NYMT ‘05-1 Trust is a wholly-owned subsidiary of NYMT. The securitization was structured as a secured borrowing , with the line-of-credit financing used to purchase and originate the mortgage loans refinanced through repurchase agreements. On March 15, 2005, the Company closed a private placement of $25 million of preferred securities issued by NYM Preferred Trust I. NYM Preferred Trust I is a wholly owned subsidiary of NYMC.

The Company is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. As such, the Company will generally not be subject to federal income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by the due date of its federal income tax return and complies with various other requirements.

As used herein, references to the “Company,” “NYMT,” “we,” “our” and “us” refer to New York Mortgage Trust, Inc., collectively with its subsidiaries.

Basis of Presentation — The consolidated financial statements include the accounts of the Company subsequent to the IPO and also include the accounts of NYMC and NYMF prior to the IPO. As a result, our historical financial results reflect the financial operations of this prior business strategy of selling virtually all of the loans originated by NYMC to third parties. All intercompany accounts and transactions are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period classifications.

The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for the fair statement of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

The combination of the Company and NYMC was accounted for as a transfer of assets between entities under common control. Accordingly, the Company has recorded assets and liabilities transferred from NYMC at their carrying amounts in the accounts of NYMC at the date of transfer.

Upon the closing of the Company’s IPO, of the 2,750,000 shares exchanged for the equity interests of NYMC, 100,000 shares were held in escrow through December 31, 2004 and were available to satisfy any indemnification claims the Company may have had against the contributors of NYMC for losses incurred as a result of defaults on any residential mortgage loans originated by NYMC and closed prior to the completion of the IPO. As of December 31, 2004, the amount of escrowed shares was reduced by 47,680 shares, representing $492,536 for estimated losses on loans closed prior to the Company’s IPO. Furthermore, the contributors of NYMC entered into a new escrow agreement, which extended the escrow period to December 31, 2005 for the remaining 52,320 shares.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility, prepayment volatility, credit exposure and regulatory changes. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market conditions may occur which could cause actual results to differ materially.

Cash and Cash Equivalents — Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.

Restricted Cash — Restricted cash is held by counterparties as collateral for hedging instruments and two letters of credit related to the lease of the corporate headquarters.

Investment Securities Available for Sale — The Company’s investment securities are residential mortgage-backed securities comprised of FannieMae (“FNMA”), Freddie Mac (“FHLMC”), Ginnie Mae (“GNMA”) and “AAA”— rated adjustable-rate loans, including adjustable-rate loans that have an initial fixed-rate period. Investment securities are classified as available for sale securities and are reported at fair value with unrealized gains and losses reported in other comprehensive income (“OCI”). Realized gains and losses recorded on the sale of investment securities available for sale are based on the specific identification method and included in gain on sale of securities. Purchase premiums or discounts on investment securities are accreted or amortized to interest income over the estimated life of the investment securities using the interest method. Investment securities may be subject to interest rate, credit and/or prepayment risk.

When the fair value of an available for sale security is less than amortized cost, management considers whether there is an other-than-temporary impairment in the value of the security (e.g., whether the security will be sold prior to the recovery of fair value). Management considers at a minimum the following factors that, both individually or in combination, could indicate the decline is “other-than-temporary:” 1) the length of time and extent to which the market value has been less than book value; 2) the financial condition and near-term prospects of the issuer; or 3) the intent and ability of the Company to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security is written down to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income as an immediate reduction of current earnings (i.e., as if the loss had been realized in the period of impairment). Even though no credit concerns exist with respect to an available for sale security, an other- than-temporary impairment may be evident if management determines that the Company does not have the intent and ability to hold an investment until a forecasted recovery of the value of the investment.

Receivable for Securities Sold —Reflects the amounts due from securities dealers related to the sale of investment securities, which are recorded as of the trade date. Settlement occurred after the close of the period.

Due from Loan Purchasers and Escrow Deposits – Pending Loan Closing- Amounts due from loan purchasers are a receivable for the principal and premium due to us for loans that have been shipped but for which payment has not yet been received at period end. Escrow deposits pending loan closing are advance cash fundings by us to escrow agents to be used to close loans within the next one to three business days.

Mortgage Loans Held for Sale — Mortgage loans held for sale represent originated mortgage loans held for sale to third party investors. The loans are initially recorded at cost based on the principal amount outstanding net of deferred direct origination costs and fees. The loans are subsequently carried at the lower of cost or market value. Market value is determined by examining outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis, less an estimate of the costs to close the loan, and the deferral of fees and points received, plus the deferral of direct origination costs. Gains or losses on sales are recognized at the time title transfers to the investor which is typically concurrent with the transfer of the loan files and related documentation and are based upon the difference between the sales proceeds from the final investor and the adjusted book value of the loan sold.

Mortgage Loans Held in the Securitization Trust — Mortgage loans held in the securitization trust are certain ARM mortgage loans transferred to the NYMT ‘05-1 Trust which have been securitized into sequentially rated classes of beneficial interests. Currently the Company has retained 100% interest in the securitized loans and the transfer has been accounted for as a secured borrowing with a pledge of collateral. Mortgage loans held in the securitization trust are recorded at amortized cost, using the same accounting principles as that used for mortgage loans held for investment, as described below.

Mortgage Loans Held for Investment — The Company retains substantially all of the adjustable-rate mortgage loans originated that meet specific investment criteria and portfolio requirements. Loans originated and retained in the Company’s portfolio are serviced through a subservicer. Servicing is the function primarily consisting of collecting monthly payments from mortgage borrowers, and disbursing those funds to the appropriate loan investors.

Mortgage loans held for investment are recorded net of deferred loan origination fees and associated direct costs and are stated at amortized cost. Net loan origination fees and associated direct mortgage loan origination costs are deferred and amortized over the life of the loan as an adjustment to yield. This amortization includes the effect of projected prepayments.

Interest income is accrued and recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in no case when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Credit Risk and Allowance for Loan Losses — The Company limits its exposure to credit losses on its portfolio of residential adjustable-rate mortgage-backed securities by purchasing securities that are guaranteed by a government-sponsored or federally-chartered corporation (FNMA, FHLMC or GNMA) (collectively “Agency Securities”) or that have a “AAA” investment grade rating by at least one of two nationally recognized rating agencies, Standard & Poor’s, Inc. or Moody’s Investors Service, Inc. at the time of purchase.

The Company seeks to limit its exposure to credit losses on its portfolio of residential adjustable-rate mortgage loans held for investment (including mortgage loans held in the securitization trust) by originating and investing in loans primarily to borrowers with strong credit profiles, which are evaluated by analyzing the borrower’s credit score (“FICO” is a credit score, ranging from 300 to 850, with 850 being the best score, based upon the credit evaluation methodology developed by Fair, Isaac and Company, a consulting firm specializing in creating credit evaluation models), employment, income and assets and related documentation, the amount of equity in and the value of the property securing the borrower’s loan, debt to income ratio, credit history, funds available for closing and post-closing liquidity.

The Company estimates an allowance for loan losses based on management’s assessment of probable credit losses in the Company’s investment portfolio of residential mortgage loans. Mortgage loans are collectively evaluated for impairment as the loans are homogeneous in nature. The allowance is based upon management’s assessment of various credit-related factors, including current economic conditions, the credit diversification of the portfolio, loan-to-value ratios, delinquency status, historical credit losses, purchased mortgage insurance and other factors deemed to warrant consideration. If the credit performance of mortgage loans held for investment deviates from expectations, the allowance for loan losses is adjusted to a level deemed appropriate by management to provide for estimated probable losses in the portfolio.

The allowance will be maintained through ongoing provisions charged to operating income and will be reduced by loans that are charged off. Determining the allowance for loan losses is subjective in nature due to the estimation required.

Property and Equipment, Net — Property and equipment have lives ranging from three to seven years, and are stated at cost less accumulated depreciation and amortization. Depreciation is determined in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Leasehold improvements are amortized over the lesser of the life of the lease or service lives of the improvements using the straight-line method.

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 banking and 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. (See Note 13).

In accordance with a Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”) issued on March 9, 2004, beginning in the second quarter of 2004, the fair value of interest rate lock commitments (“IRLCs”) excludes future cash flows related to servicing rights, if such rights are retained upon the sale of originated mortgage loans. Since the Company sells all of its originated loans with servicing released, SAB 105 had no effect on the value of its IRLCs.

Risk Management — Derivative transactions are entered into by the Company solely for risk management purposes. The decision of whether or not an economic risk within a given transaction (or portion thereof) should be hedged for risk management purposes is made on a case-by-case basis, based on the risks involved and other factors as determined by senior management, including the financial impact on income, asset valuation and restrictions imposed by the Internal Revenue Code among others. In determining whether to hedge a risk, the Company may consider whether other assets, liabilities, firm commitments and anticipated transactions already offset or reduce the risk. All transactions undertaken to hedge certain market risks are entered into with a view towards minimizing the potential for economic losses that could be incurred by the Company. Under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Company is required to formally document its hedging strategy before it may elect to implement hedge accounting for qualifying derivatives. Accordingly, all qualifying derivatives are intended to qualify as fair value, or cash flow hedges, or free standing derivatives. To this end, terms of the hedges are matched closely to the terms of hedged items with the intention of minimizing ineffectiveness.

In the normal course of its mortgage loan origination business, the Company enters into contractual interest rate lock commitments to extend credit to finance residential mortgages. These commitments, which contain fixed expiration dates, become effective when eligible borrowers lock-in a specified interest rate within time frames established by the Company’s origination, credit and underwriting practices. Interest rate risk arises if interest rates change between the time of the lock-in of the rate by the borrower and the sale of the loan. Under SFAS No. 133, the IRLCs are considered undesignated or free-standing derivatives. Accordingly, such IRLCs are recorded at fair value with changes in fair value recorded to current earnings. Mark to market adjustments on IRLCs are recorded from the inception of the interest rate lock through the date the underlying loan is funded. The fair value of the IRLCs is determined by the interest rate differential between the contracted loan rate and the currently available market rates as of the reporting date.

To mitigate the effect of the interest rate risk inherent in providing IRLCs from the lock-in date to the funding date of a loan, the Company generally enters into forward sale loan contracts (“FSLC”). The FSLCs in place prior to the funding of a loan are undesignated derivatives under SFAS No. 133 and are marked to market through current earnings.

Derivative instruments contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. The Company minimizes its risk exposure by limiting the counterparties with which it enters into contracts to banks, investment banks and certain private investors who meet established credit and capital guidelines. Management does not expect any counterparty to default on its obligations and, therefore, does not expect to incur any loss due to counterparty default. These commitments and option contracts are considered in conjunction with the Company’s lower of cost or market valuation of its mortgage loans held for sale.

The Company uses other derivative instruments, including treasury, agency or mortgage-backed securities forward sale contracts which are also classified as free-standing, undesignated derivatives and thus are recorded at fair value with the changes in fair value recognized in current earnings.

Once a loan has been funded, the Company’s primary risk objective for its mortgage loans held for sale is to protect earnings from an unexpected charge due to a decline in value. The Company’s strategy is to engage in a risk management program involving the designation of FSLCs (the same FSLCs entered into at the time of rate lock) to hedge most of its mortgage loans held for sale. The FSLCs have been designated as qualifying hedges for the funded loans and the notional amount of the forward delivery contracts, along with the underlying rate and critical terms of the contracts, are equivalent to the unpaid principal amount of the mortgage loan being hedged. The FSLCs effectively fix the forward sales price and thereby offset interest rate and price risk to the Company. Accordingly, the Company evaluates this relationship quarterly and, at the time the loan is funded, classifies and accounts for the FSLCs as cash flow hedges.

Interest Rate Risk — The Company hedges the aggregate risk of interest rate fluctuations with respect to its borrowings, regardless of the form of such borrowings, which require payments based on a variable interest rate index. The Company generally intends to hedge only the risk related to changes in the benchmark interest rate (London Interbank Offered Rate (“LIBOR”) or a Treasury rate).

In order to reduce such risks, the Company enters into swap agreements whereby the Company receives floating rate payments in exchange for fixed rate payments, effectively converting the borrowing to a fixed rate. The Company also enters into cap agreements whereby, in exchange for a fee, the Company is reimbursed for interest paid in excess of a certain capped rate.

To qualify for cash flow hedge accounting, interest rate swaps and caps must meet certain criteria, including:

	•		the items to be hedged expose the Company to interest rate risk; and

	•		the interest rate swaps or caps are expected to be and continue to be highly effective in reducing the Company’s exposure to interest rate risk.

The fair values of the Company’s interest rate swap agreements and interest rate cap agreements are based on market values provided by dealers who are familiar with the terms of these instruments. Correlation and effectiveness are periodically assessed at least quarterly based upon a comparison of the relative changes in the fair values or cash flows of the interest rate swaps and caps and the items being hedged.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss, and net payments received or made, on the derivative instrument are reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.

With respect to interest rate swaps and caps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps and caps, will be recognized in current earnings.

Termination of Hedging Relationships — The Company employs a number of risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item.

Additionally, the Company may elect to undesignate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair value with changes recorded in current earnings.

Comprehensive Income — Comprehensive income is comprised primarily of net income (loss) from changes in value of the Company’s available for sale securities, and the impact of deferred gains or losses on changes in the fair value of derivative contracts hedging future cash flows.

Gain on Sale of Mortgage Loans — The Company recognizes gain on sale of loans sold to third parties as the difference between the sales price and the adjusted cost basis of the 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 paid.

Loan Origination Fees and Direct Origination Cost — The Company records loan fees, discount points and certain incremental direct origination costs as an adjustment of the cost of the loan and such amounts are included in gain on sales of loans when the loan is sold. Accordingly, salaries, compensation, benefits and commission costs have been reduced by approximately $21,424,630 and $9,472,159 for the six-month periods ended June 30, 2005 and 2004, respectively, because such amounts are considered incremental direct loan origination costs.

Brokered Loan Fees and Expenses — The Company records commissions associated with brokered loans when such loans are closed with the borrower. Costs associated with brokered loans are expensed when incurred.

Loan Commitment Fees — Mortgage loans held for sale: fees received for the funding of mortgage loans to borrowers at pre-set conditions are deferred and recognized at the date at which the loan is sold. Mortgage loans held for investment: such fees are deferred and recognized into interest income over the life of the loan based on the effective yield method.

Employee Benefits Plans — The Company sponsors a defined contribution plan (the “Plan”) for all eligible domestic employees. The Plan qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Plan, participating employees may defer up to 25% of their pre-tax earnings, subject to the annual Internal Revenue Code contribution limit. The Company matches contributions up to a maximum of 25% of the first 5% of salary. Employees vest immediately in their contribution and vest in the Company’s contribution at a rate of 25% after two full years and then an incremental 25% per full year of service until fully vested at 100% after five full years of service. The Company’s total contributions to the Plan were $214,476 and $79,063 for the six months ended June 30, 2005 and 2004, respectively.

Stock Based Compensation. The Company follows the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure” (“SFAS No. 148”). The provisions of SFAS 123 allow companies either to expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. The Company has elected not to apply APB No. 25 in accounting for its stock option incentive plans and has expensed stock based compensation in accordance with SFAS No. 123.

In December, 2004 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based payment,” ( “SFAS No. 123R”) which will require all companies to measure compensation costs for all share-based payments, including employee stock options, at fair value. This statement will be effective for the Company with the quarter beginning January 1, 2006. The Company has elected to expense share based compensation in accordance with SFAS No. 123 and therefore early adopting the requirements of SFAS No. 123R. Accordingly, the adoption of SFAS No. 123R will have no impact on the Company’s financial statements.

Marketing and Promotion — The Company charges the costs of marketing, promotion and advertising to expense in the period incurred.

Income Taxes — The Company operates so as to qualify as a REIT under the requirements of the Internal Revenue Code. Requirements for qualification as a REIT include various restrictions on ownership of the Company’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders of which 85% plus any undistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise tax. The remaining balance may extend until timely filing of the

Company’s tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.

NYMC changed its tax status upon completion of the IPO from a non-taxable limited liability company to a taxable REIT subsidiary and therefore subsequent to the IPO, is subject to corporate income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base upon the change in tax status. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Earnings Per Share — Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

2. Investment Securities Available For Sale

Investment securities available for sale consist of the following as of June 30, 2005 and December 31, 2004:


	June 30, 2005			December 31, 2004
Amortized cost	$	911,172,457		$	1,207,715,175
Gross unrealized gains		—			150,682
Gross unrealized losses		(6,644,924	)		(3,121,143	)

Fair Value	$	904,527,533		$	1,204,744,714

None of the securities with unrealized losses have been in a loss position for more than one year. The Company has the intent and believes it has the ability to hold such investment securities until recovery of their amortized cost. Substantially all of the Company’s investment securities available for sale are pledged as collateral for borrowings under financial arrangements (Note 8).

3. Mortgage Loans Held For Sale

Mortgage loans held for sale consist of the following as of June 30, 2005 and December 31, 2004:


	June 30 2005		December 31, 2004
Mortgage loans principal amount	$	88,889,294	$	85,105,027
Deferred origination costs — net		299,108		279,900

Mortgage loans held for sale	$	89,188,402	$	85,384,927

Substantially all of the Company’s mortgage loans held for sale are pledged as collateral for borrowings under financial arrangements (Note 9).

4. Mortgage Loans Held in the Securitization Trust

Mortgage loans held in the securitization trust consist of the following at June 30, 2005:


Mortgage loans principal amount	$	378,915,161
Deferred origination costs — net		3,654,719

Total mortgage loans held in the securitization trust	$	382,569,880

Substantially all of the Company’s mortgage loans held in the securitization trust are pledged as collateral for borrowings under financial arrangements (Note 8).

5. Mortgage Loans Held For Investment

Mortgage loans held for investment consist of the following at June 30, 2005 and December 31, 2004:


	June 30, 2005		December 31, 2004
Mortgage loans principal amount	$	232,476,633	$	188,858,607
Deferred origination costs — net		1,376,836		1,294,496

Total mortgage loans held for investment	$	233,853,469	$	190,153,103

Substantially all of the Company’s mortgage loans held for investment are pledged as collateral for borrowings under financial arrangements (Note 9).

6. Property and Equipment — Net

Property and equipment consist of the following as of June 30, 2005 and December 31, 2004:


	June 30, 2005			December 31, 2004
Office and computer equipment	$	4,497,455		$	3,191,096
Furniture and fixtures		2,093,763			2,031,778
Leasehold improvements		1,326,387			1,138,467

Total premises and equipment		7,917,605			6,361,341
Less: accumulated depreciation and amortization		(2,280,086	)		(1,560,039	)

Property and equipment — net	$	5,637,519		$	4,801,302

7. Derivative Instruments and Hedging Activities

The Company enters into derivatives to manage its interest rate and market risk exposure associated with its mortgage banking and its mortgage-backed securities investment activities. In the normal course of its mortgage loan origination business, the Company enters into contractual IRLCs to extend credit to finance residential mortgages. To mitigate the effect of the interest rate risk inherent in providing IRLCs from the lock-in date to the funding date of a loan, the Company generally enters into FSLCs. With regard to the Company’s mortgage-backed securities investment activities, the Company uses interest rate swaps and caps to mitigate the effects of major interest rate changes on net investment spread.

The following table summarizes the estimated fair value of derivative assets and liabilities as of June 30, 2005 and December 31, 2004:


	June 30,			December 31,
	2005			2004
Derivative Assets:
Interest rate caps	$	914,813		$	411,248
Interest rate swaps		5,870,731			3,228,457
Interest rate lock commitments — loan commitments		406,454			5,270
Interest rate lock commitments — mortgage loans held for sale		68,154			32,597

Total derivative assets	$	7,260,152		$	3,677,572

Derivative Liabilities:
Forward loan sale contracts — loan commitments	$	(56,591	)	$	(23,557	)
Forward loan sale contracts — mortgage loans held for sale		(31,770	)		(1,846	)
Forward loan sale contracts — TBA securities		(543,621	)		(139,413	)

Total derivative liabilities	$	(631,982	)	$	(164,816	)

The notional amounts of the Company’s interest rate swaps, interest rate caps and forward loan sales contracts as of June 30, 2005 were $735.0 million, $1.0 billion and $82.9 million, respectively.

The notional amounts of the Company’s interest rate swaps, interest rate caps and forward loan sales contracts as of December 31, 2004 were $670.0 million, $250.0 million and $97.1 million, respectively

The Company estimates that over the next twelve months, approximately $4,531,725 of the net unrealized gains on the interest rate swaps will be reclassified from accumulated OCI into earnings.

8. Financing Arrangements, Portfolio Investments

The Company has entered into repurchase agreements with third party financial institutions to finance its residential mortgage-backed securities and mortgage loans held in the securitization trust. The repurchase agreements are short-term borrowings that bear interest rates based on a spread to LIBOR, and are secured by the residential mortgage-backed securities and mortgage loans held in the securitization trust which they finance. At June 30, 2005, the Company had repurchase agreements with an outstanding balance of approximately $1.28 billion and a weighted average interest rate of 3.23%. As of December 31, 2004, the Company had repurchase agreements with an outstanding balance of approximately $1.11 billion and a weighted average interest rate of 2.35%. At June 30, 2005 securities and mortgage loans pledged as collateral for repurchase agreements had estimated fair values of approximately $1.32 billion. As of December 31, 2004 securities pledged as collateral for repurchase agreements had estimated fair values of approximately $1.16 billion. As of June 30, 2005 all of the repurchase agreements will mature within 24 days, with a weighted average days to maturity equal to 15 days. The Company has available to it $5.43 billion in commitments to provide financings through such arrangements with 23 different counterparties. Counterparties providing repurchase commitments to the Company as of June 30, 2005 are: Banc of America Securities LLC, Barclays Capital, Inc., Bear, Stearns & Co. Inc., Cantor Fitzgerald Securities, Citigroup Global Markets Inc., Countrywide Securities Corporation, Credit Suisse First Boston LLC, Daiwa Securities America, Inc., Deutsche Bank Securities, Inc., Goldman, Sachs & Co., Greenwich Capital Markets, Inc., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch Government Securities, Inc., Morgan Keegan & Company, Morgan Stanley & Co. Incorporated, Nomura Securities International, Inc., RBC Capital Markets Corporation, UBS Securities LLC, Wachovia Capital Markets LLC, and WaMu Capital Corp.

9. Financing Arrangements, Mortgage Loans Held for Sale or Investment

Financing arrangements consist of the following as of June 30, 2005, and December 31, 2004:


	June 30,		December 31,
	2005		2004
$250 million master repurchase agreement with Greenwich Capital expiring on December 5, 2005 bearing interest at one-month LIBOR plus 0.75% (3.986% at June 30, 2005 and 3.16% at December 31, 2004). Principal repayments are required 120 days from the funding date(a)	$	231,111,808	$	215,611,800
$200 million revolving line of credit agreement with CSFB expiring on March 31, 2006 bearing interest at daily LIBOR plus spreads from 1.125% to 2.000% depending on collateral (4.214% at June 30, 2005 and 3.599% at December 31, 2004). Principal repayments are required 90 days from the funding date		155,900,996		73,751,874
$150 million revolving line of credit agreement with HSBC expiring on September 30, 2005 bearing interest at one-month LIBOR plus 1.00% (4.13% at June 30, 2005 and 3.29% at December 31, 2004)		126,467,895		69,839,306

	$	513,480,699	$	359,202,980

(a)

This credit facility, with Greenwich Capital Financial Products, Inc., requires the Company to transfer specific collateral to the lender under repurchase agreements; however, due to the rate of turnover of the collateral by the Company, the counterparty has not taken title to or recorded their interest in any of the collateral transferred. Interest is paid to the counterparty based on the amount of outstanding borrowings and on the terms provided.

The lines of credit are secured by all of the mortgage loans held by the Company, except for the loans held in the securitization trust. The lines contain various covenants pertaining to, among other things, maintenance of certain amounts of net worth, periodic income thresholds and working capital. As of June 30, 2005, NYMC was not in compliance with the net income covenant pertaining to the CSFB financing arrangements noted in the table above, or the liquidity requirement pertaining to the Greenwich and HSBC facilities. Waivers from the lenders with respect to these covenant violations for the six months ended June 30, 2005 have been obtained. As these annual agreements are negotiated for renewal, these covenants may be further modified. The agreements are each renewable annually, but are not committed, meaning that the counterparties to the agreements may withdraw access to the credit facilities at any time.

10. Commitments and Contingencies

Loans Sold to Investors — Generally, the Company is not exposed to significant credit risk on its loans sold to investors. In the normal course of business, the Company is obligated to repurchase loans which do not meet certain terms set by investors. Such loans are then generally repackaged and sold to other investors.

Loans Funding and Delivery Commitments — At June 30, 2005 and December 31, 2004 the Company had commitments to fund loans with agreed-upon rates totaling approximately $311.3 million and $156.1 million, respectively. The Company hedges the interest rate risk of such commitments and the recorded mortgage loans held for sale balances primarily with FSLCs, which totaled approximately $82.9 million and $97.1 million at June 30, 2005 and December 31, 2004, respectively. The remaining commitments to fund loans with agreed-upon rates are anticipated to be sold through optional delivery contract investor programs. The Company does not anticipate any material losses from such sales.

Net Worth Requirements — NYMC is required to maintain certain specified levels of minimum net worth to maintain its approved status with FannieMae, Freddie Mac, HUD and other investors. As of June 30, 2005 NYMC is in compliance with all minimum net worth requirements.

Outstanding Litigation — The Company is involved in litigation arising in the normal course of business. Although the amount of any ultimate liability arising from these matters cannot presently be determined, the Company does not anticipate that any such liability will have a material effect on its consolidated financial statements.

Leases — The Company leases its corporate offices and certain retail facilities and equipment under short-term lease agreements expiring at various dates through 2010. All such leases are accounted for as operating leases. Total rental expense for property and equipment amounted to $2,603,438 and $1,738,820 for the six months ended June 30, 2005 and 2004, respectively. On February 11, 2005, the Company signed a letter of intent to enter into a sub-lease for its former headquarters space at 304 Park Avenue in New York. The Company’s remaining contractual obligation to the landlord on this lease is $1.8 million. The sub-lease tenant will have a contractual rent obligation to the Company under the sub-lease of $982,000. This transaction was completed in late March 2005. Accordingly, during the first quarter of 2005, the Company recognized a charge of $796,000 to earnings.

Letters of Credit — NYMC maintains a letter of credit in the amount of $100,000 in lieu of a cash security deposit for an office lease dated June 1998 for the Company’s former headquarters located at 304 Park Avenue South in New York City. The sole beneficiary of this letter of credit is the owner of the building, 304 Park Avenue South LLC. This letter of credit is secured by cash deposited in a bank account maintained at Signature Bank.

Subsequent to the move to a new headquarters location in New York City in July 2003, in lieu of a cash security deposit for the office lease, we entered into an irrevocable transferable letter of credit in the amount of $313,000 with PricewaterhouseCoopers, LLP (sublandlord), as beneficiary. This letter of credit is secured by cash deposited in a bank account maintained at HSBC bank.

On February 15, 2005, the Company entered into an irrevocable standby letter of credit in an initial amount of $500,000 with the beneficiary being CCC Atlantic, L.L.C., the landlord of the Company’s leased facility at 500 Burton Avenue, Northfield, New Jersey. The letter of credit will serve as security for leased office property, occupied by employees of our branches doing business as Ivy League Mortgage, L.L.C. The letter of credit is secured by the personal guarantee and a mortgage on the home of the Ivy League Mortgage, L.L.C. branch manager. The initial amount of the letter of credit will be reduced at each of the first four annual anniversary dates by $50,000, thereafter to remain at a value of $250,000 until termination on April 1, 2015.

11. Related Party Transactions

Upon completion of the Company’s IPO and acquisition of NYMC, Steven B. Schnall and Joseph V. Fierro, the former owners of NYMC, were entitled to a distribution of NYMC’s retained earnings through the close of the Company’s IPO on June 29, 2004, not to exceed $4,500,000. As a result, a distribution of $2,409,323 ($409,323 of retained earnings as of March 31, 2004 plus an estimate of $2,000,000 for NYMC’s earnings through June 29, 2004) was made to the former owners upon the close of the IPO. The subsequent earnings and elimination of distributions and unrealized gains and losses attributable to NYMC for the period prior to June 29, 2004 equated to a distribution overpayment of $1,309,448, for which Messrs. Schnall and Fierro reimbursed the Company immediately upon the finalization of the overpayment calculation in July 2004.

Steven B. Schnall owns a 48% membership interest and Joseph V. Fierro owns a 12% membership interest in Centurion Abstract, LLC (“Centurion”), which provides title insurance brokerage services for certain title insurance providers. From time to time, NYMC refers its mortgage loan borrowers to Centurion for assistance in obtaining title insurance in connection with their mortgage loans,

although the borrowers have no obligation to utilize Centurion’s services. When NYMC’s borrowers elect to utilize Centurion’s services to obtain title insurance, Centurion collects various fees and a portion of the title insurance premium paid by the borrower for its title insurance. Centurion received $344,291 in fees and other amounts from NYMC borrowers for the six months ended June 30, 2005. NYMC does not economically benefit from such referrals.

12. Concentrations of Credit Risk

The Company has originated loans predominantly in the eastern United States. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers with similar characteristics, which would cause their ability to meet contractual obligations to be similarly impacted by economic or other conditions. At June 30, 2005 and December 31, 2004, there were geographic concentrations of credit risk exceeding 5% of the total loan balances within mortgage loans held for sale as follows:


	June 30,			December 31,
	2005			2004
New York		37.6	%		70.2	%
Massachusetts		19.1	%		6.6	%
New Jersey		8.9	%		7.4	%
Connecticut		6.8	%		5.0	%

At June 30, 2005 and December 31, 2004, there were geographic concentrations of credit risk exceeding 5% of the total loan balances within mortgage loans held in the securitization trust and mortgage loans held for investment as follows:


	June 30,			December 31,
	2005			2004
New York		30.6	%		30.7	%
California		22.5	%		51.3	%
Massachusetts		12.7	%		—
New Jersey		5.3	%		5.5	%

13. Fair Value of Financial Instruments

Fair value estimates are made as of a specific point in time based on estimates using market quotes, 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, estimates 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 necessarily substantiated by comparison to independent markets and, in many cases, could not be necessarily realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company’s fair values should not be compared to those of other companies.

Fair value estimates are based on existing financial instruments and do not attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented below do not represent the underlying value of the Company.

The fair value of certain assets and liabilities approximate cost due to their short-term nature, terms of repayment or interest rates associated with the asset or liability. Such assets or liabilities include cash and cash equivalents, escrow deposits, unsettled mortgage loan sales, and financing arrangements. All forward delivery commitments and option contracts to buy securities are to be contractually settled within six months of the balance sheet date.

The following describes the methods and assumptions used by the Company in estimating fair values of other financial instruments:

a. Investment Securities Available for Sale — Fair value is generally estimated 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 based on available market information.

b. Mortgage Loans Held for Sale — Fair value is estimated using the quoted market prices for securities backed by similar types of loans and current investor or dealer commitments to purchase loans.

c. Mortgage Loans Held for Investment — Mortgage loans held for investment are recorded at amortized cost. Fair value is estimated using pricing models and taking into consideration the aggregated characteristics of groups of loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed-rate period, life cap, periodic cap, underwriting standards, age and credit estimated using the quoted market prices for securities backed by similar types of loans.

d. Mortgage Loans Held in the Securitization Trust — Mortgage loans held in the securitization trust are recorded at amortized cost. Fair value is estimated using pricing models and taking into consideration the aggregated characteristics of groups of loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed-rate period, life cap, periodic cap, underwriting standards, age and credit estimated using the quoted market prices for securities backed by similar types of loans.

e. Interest Rate Lock Commitments — The fair value of IRLCs is 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 levels of interest rates and the committed rates. The fair value of IRLCs is determined in accordance with SAB 105.

f. Forward Sale Loan Contracts — The fair value of these instruments is estimated using current market prices for dealer or investor commitments relative to the Company’s existing positions.

The following tables set forth information about financial instruments, except for those noted above for which the carrying amount approximates fair value:


	June 30, 2005
	Notional		Carrying			Estimated
	Amount		Amount			Fair Value
Investment securities available for sale	$	889,567,775	$	904,527,533		$	904,527,533
Mortgage loans held for investment		232,476,633		233,853,469			235,780,381
Mortgage loans held in the securitization trust		378,915,161		382,569,880			381,497,347
Mortgage loans held for sale		88,889,294		89,188,402			90,139,821
Commitments and contingencies:
Interest rate lock commitments		311,257,227		474,608			474,608
Forward loan sales contracts		82,861,773		(631,932	)		(631,932	)
Interest rate swaps		735,000,000		5,870,731			5,870,731
Interest rate caps		1,046,991,219		914,813			914,813


	December 31, 2004
	Notional		Carrying			Estimated
	Amount		Amount			Fair Value
Investment securities available for sale	$	1,194,055,340	$	1,204,744,714		$	1,204,744,714
Mortgage loans held for investment		188,858,607		190,153,103			190,608,241
Mortgage loans held for sale		85,105,027		85,384,927			86,097,867
Commitments and contingencies:
Interest rate lock commitments		156,110,472		37,867			37,867
Forward loan sales contracts		97,080,482		(164,816	)		(164,816	)
Interest rate swaps		670,000,000		3,228,457			3,228,457
Interest rate caps		250,000,000		411,248			411,248

14. Segment Reporting

The Company operates two segments:

	•		Mortgage Portfolio Management - long-term investment in high-quality, adjustable-rate mortgage loans and residential mortgage-backed securities; and

	•		Mortgage Lending — mortgage loan originations as conducted by NYMC.

Our mortgage portfolio management segment primarily invests in adjustable-rate FNMA, FHLMC, GNMA and “AAA”— rated residential mortgage-backed securities and high-quality mortgages that are originated by our mortgage operations or that may be acquired from third parties. The Company’s equity capital and borrowed funds are used to invest in residential mortgage-backed securities, thereby producing net interest income. Certain mortgage loans originated by our mortgage lending operations or loans purchased from third parties are securitized from time to time to improve liquidity and included in the mortgage portfolio management segment. The Company’s first securitization was completed on February 25, 2005.

The mortgage lending segment originates residential mortgage loans through the Company’s taxable REIT subsidiary, NYMC. Loans are originated through NYMC’s retail and internet branches and generate gain on sale revenue when the loans are sold to third parties or revenue from brokered loans when the loans are brokered to third parties.

Prior to June 29, 2004, the Company conducted only mortgage lending operations, therefore prior period segment information is not presented herein.


	Six Months Ended June 30, 2005
	Mortgage Portfolio
	Management		Mortgage
	Segment		Lending Segment			Total
REVENUE:
Gain on sales of mortgage loans	$	—	$	12,648,668		$	12,648,668
Interest income:
Loans held for sale		—		6,100,168			6,100,168
Investment securities and loans		24,826,825		—			24,826,825
Loans collateralizing debt obligations		5,859,042		—			5,859,042
Brokered loan fees		—		4,533,801			4,533,801
Gain on sale of securities		921,402		—			921,402
Miscellaneous income		610		103,030			103,640

Total revenue		31,607,879		23,385,667			54,993,546
EXPENSES:
Salaries, commissions and benefits		1,478,857		15,093,404			16,572,261
Interest expense:
Loans held for sale		—		3,842,710			3,842,710
Investment securities and loans		21,884,873		—			21,884,873
Subordinated debentures		—		493,578			493,578
Brokered loan expenses		—		4,205,608			4,205,608
Occupancy and equipment		8,770		3,707,685			3,716,455
Marketing and promotion		85,005		2,504,722			2,589,727
Data processing and communication		64,260		1,125,322			1,189,582
Office supplies and expenses		2,888		1,254,672			1,257,560
Professional fees		145,129		1,701,404			1,846,533
Travel and entertainment		3,543		442,068			445,611
Depreciation and amortization		3,444		763,757			767,201
Other		136,122		417,201			553,323

Total expenses		23,812,891		35,552,131			59,365,022

INCOME (LOSS) BEFORE INCOME TAX BENEFIT		7,794,988		(12,166,464	)		(4,371,476	)
Income tax benefit		—		4,880,000			4,880,000

NET INCOME (LOSS)	$	7,794,988	$	(7,286,464	)	$	508,524

Segment assets	$	1,642,137,405	$	317,757,224		$	1,959,894,629
Segment equity	$	106,279,299	$	5,217,481		$	111,496,780


	Three Months Ended June 30, 2005
	Mortgage Portfolio
	Management			Mortgage
	Segment			Lending Segment			Total
REVENUE:
Gain on sales of mortgage loans	$	—		$	8,328,168		$	8,328,168
Interest income:
Loans held for sale		—			3,507,278			3,507,278
Investment securities and loans		12,105,087			—			12,105,087
Loans collateralizing debt obligations		4,057,127			—			4,057,127
Brokered loan fees		—			2,533,568			2,533,568
Gain on sale of securities		544,319			—			544,319
Miscellaneous income		610			(11,022	)		(10,412	)

Total revenue		16,707,143			14,357,992			31,065,135
EXPENSES:
Salaries, commissions and benefits		970,765			8,458,735			9,429,500
Interest expense:
Loans held for sale		—			1,994,900			1,994,900
Investment securities and loans		12,120,701			—			12,120,701
Subordinated debentures		—			415,822			415,822
Brokered loan expenses		—			2,686,118			2,686,118
Occupancy and equipment		5,462			1,576,359			1,581,821
Marketing and promotion		32,006			1,157,855			1,189,861
Data processing and communication		55,555			616,306			671,861
Office supplies and expenses		1,464			683,410			684,874
Professional fees		59,174			1,043,291			1,102,465
Travel and entertainment		2,357			227,797			230,154
Depreciation and amortization		855			423,454			424,309
Other		(34,789	)		211,454			176,665

Total expenses		13,213,550			19,495,501			32,709,051

INCOME (LOSS) BEFORE INCOME TAX BENEFIT		3,493,593			(5,137,509	)		(1,643,916	)
Income tax benefit		—			2,190,000			2,190,000

NET INCOME (LOSS)	$	3,493,593		$	(2,947,509	)	$	546,084

Segment assets	$	1,642,137,405		$	317,757,224		$	1,959,894,629
Segment equity	$	106,279,299		$	5,217,481		$	111,496,780

15. Stock Incentive Plan

Pursuant to the 2004 Stock Incentive Plan (the “2004 Plan”), eligible employees, officers and directors are offered the opportunity to acquire shares of the Company’s common stock through the grant of options and the award of restricted stock under the 2004 Plan. In connection with the Plan, the Company also awarded shares of stock to employees upon certain performance criteria related to the November 2004 acquisition of Guaranty Residential Lending. The maximum number of options that may be issued is 706,000 shares and the maximum number of restricted stock awards that may be granted under the 2004 Plan is 794,250.

2005 Stock Incentive Plan

At the Annual Meeting of Stockholders held on May 31, 2005, the Company’s stockholders approved the adoption of the Company’s 2005 Stock Incentive Plan (the “2005 Plan”). The 2005 Plan replaces the 2004 Plan, which was terminated on the same date. The 2005 Plan provides that up to 936,111 shares of the Company’s common stock may be issued thereunder. That number of shares represents 711,895 shares (4% of the 17,797,375 shares of common stock outstanding at March 10, 2005) plus 224,216 shares of common stock (the shares that remain available for issuance under the 2004 Plan). The number of shares available for issuance under the 2005 Plan will be increased by (a) 6% of the number of additional shares of the Company’s common stock issued between March 10, 2005 and May 31, 2006 (other than shares issued under the 2004 Plan or 2005 Plan) and (b) the number of shares covered by 2004 Plan awards that are forfeited or terminated after March 10, 2005.

Options

The 2004 Plan provides for the exercise price of options to be determined by the Compensation Committee of the Board of Directors (“Compensation Committee”) but not to be less than the fair market value on the date the option is granted. Options expire ten years after the grant date. As of June 30, 2005, 556,500 options have been granted pursuant to the 2004 Plan with a vesting period of two years.

The Company accounts for the fair value of its grants in accordance with SFAS No. 123. The compensation cost charged against income during the six months ended June 30, 2005 was $18,376.

Restricted Stock

As of June 30, 2005, the Company has awarded 515,178 shares of restricted stock under the 2004 Plan, of which 246,476 shares have fully vested. The remaining shares of restricted stock awarded under the 2004 Plan are subject to vesting periods between 6 and 30 months. During the six months ended June 30, 2005, the Company recognized non-cash compensation expense of $964,642 relating to the vested portion of restricted stock grants. Dividends are paid on all restricted stock issued, whether those shares are vested or not. In general, unvested restricted stock is forfeited upon the recipient’s termination of employment.

Performance Based Stock Awards

In November 2004, the Company acquired 15 full service and 26 satellite retail mortgage banking offices located in the Northeast and Mid-Atlantic states from General Residential Lending, Inc. Pursuant to that transaction, the Company has committed to award 198,209 shares of the Company’s stock to certain employees of those branches upon attaining predetermined production levels. The awards range in vesting periods from 6 to 30 months with a share price set at the December 2, 2004 grant date market value of $9.83 per share. During the six months ended June 30, 2005, the Company recognized non-cash compensation expense of $1,108,817 relating to performance based stock awards. Unvested issued performance share awards have no voting rights and do not earn dividends.

16. Subordinated Debentures

On March 15, 2005 the Company closed a private placement of $25 million of its trust preferred securities to Taberna Preferred Funding I, Ltd., a pooled investment vehicle. The securities were issued by NYM Preferred Trust I and are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities have a floating interest rate equal to three-month LIBOR plus 375 basis points, resetting quarterly (6.64% at June 30, 2005). The securities mature on March 15, 2035 and may be called at par by the Company any time after March 15, 2010. NYMC entered into an interest rate cap agreement to limit the maximum interest rate cost of the trust preferred securities to 7.5%. The term of the interest rate cap

agreement is five years and resets quarterly in conjunction with the reset periods of the trust preferred securities. The interest rate cap agreement is accounted for as a cash flow hedge transaction in accordance with SFAS No.133. In accordance with the guidelines of SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, the issued preferred stock of NYM Preferred Trust I has been classified as subordinated debentures in the liability section of the Company’s consolidated balance sheet.

17. Income Taxes

NYMT and its taxable subsidiary, NYMC, were S corporations prior to June 29, 2004 pursuant to the Internal Revenue Code of 1986, as amended, and as such did not incur any federal income tax expense.

On June 29, 2004, NYMC became a C corporation for federal and state income tax purposes and as such is subject to federal and state income tax on its taxable income for periods after June 29, 2004.

A reconciliation of the statutory income tax provision (benefit) to the effective income tax provision for the six months ended June 30, 2005 is as follows.


Tax at statutory rate (35%)	$	(1,530,016	)
Non-taxable REIT income		(2,699,372	)
Transfer pricing of loans sold to nontaxable parent		395,089
State and local taxes		(1,006,000	)
Miscellaneous		(39,701	)

Total provision (benefit)	$	(4,880,000	)

The income tax provision (benefit) for the six months ended June 30, 2005 is comprised of the following components:


	Deferred			Total
Regular Tax Provision (Benefit)
Federal	$	(3,874,000	)	$	(3,874,000	)
State		(1,006,000	)		(1,006,000	)

Total tax expense (benefit)	$	(4,880,000	)	$	(4,880,000	)

The deferred tax asset at June 30, 2005 includes a deferred tax asset of $6,519,570 and a deferred tax liability of $330,036 which represents the tax effect of differences between tax basis and financial statement carrying amounts of assets and liabilities. The major sources of temporary differences and their deferred tax effect at June 30, 2005 are as follows:


Deferred tax assets:
Net operating loss carryover	$	6,164,747
Restricted stock, performance shares and stock option expense		183,039
Management compensation		171,784

Total deferred tax asset		6,519,570

Deferred tax liabilities:
Mark-to-market adjustments		78,776
Depreciation		251,260


		330,036
Total deferred tax liability		251,260

Net deferred tax asset	$	6,189,534

The net deferred tax asset is included in prepaid and other assets on the accompanying consolidated balance sheet. Although realization is not assured, management believes it is more likely than not that all the deferred tax assets will be realized. The net operating loss carryforward expires at various intervals between 2012 and 2026.

18. Restated Quarterly Financial Information

On March 16, 2005, the Company’s management determined that the accounting for the disposition of marketable securities and certain cash flow hedges owned by NYMC was incorrect and should be restated to reflect the gain of $865,000 in earnings instead of as a change in other comprehensive income. As a result, the net income reported for the three and six months ended June 30, 2004 and the nine months ended September 30, 2004 as filed in the Company’s Quarterly Reports on Form 10-Q for such periods, respectively, was understated by $865,000.

The marketable securities were disposed of in a transaction during the second quarter of 2004 prior to completion of the Company’s IPO so as to avoid owning a legacy portfolio of securities which (i) did not meet the Company’s new investment guidelines, (ii) are equity securities, (iii) cannot be appropriately hedged or (iv) do not generate qualifying REIT income. As a result, the impact on the sale of these assets did not impact the Company or its earnings generated during periods after completion of the IPO. However, because the Company’s acquisition of NYMC is accounted for as a reverse merger for accounting and financial reporting purposes, the historical financial presentation of net income is affected.

For financial presentation purposes, the restatement increases net income by approximately $783,000 for the marketable securities and $82,000 for the cash flow hedges with a corresponding reduction in accumulated other comprehensive income for the periods indicated. There was no impact on total assets, liabilities or equity on the Company’s balance sheet, or to net comprehensive income for the periods presented.

A summary of the effects of the restatement is as follows:


	For the six months ended					For the three months ended
	June 30, 2004					June 30, 2004

	As previously					As previously
	reported			As restated		reported			As restated

Statement of Income
(Loss) Gain on sale of securities	$	(175,682	)	$	606,975	$	(175,682	)	$	606,975

Total Revenue		16,428,786			17,211,443		9,463,080			10,245,737
Interest expense		1,814,640			1,732,297		1,206,029			1,123,686
(Loss) Income before income taxes		(356,604	)		508,396		(474,108	)		390,892

Net income	$	(366,604	)	$	498,396	$	(484,108	)	$	380,892


	For the six months ended
	June 30, 2004

	As previously
	reported			As restated

Statement of Cash Flows
Net income	$	(366,604	)	$	498,396
(Loss) Gain on sale of investment securities		175,682			(606,975	)
Accounts payable and accrued expenses		4,959,521			4,877,178
Net cash used in operating activities	$	(50,548,366	)	$	(50,548,366	)

19. Subsequent Events

On July 28, 2005 the Company completed its second loan securitization of approximately $239.5 million of high-credit quality, first-lien, ARM loans, New York Mortgage Trust 2005-2. The terms of this securitization were structured so as to not meet the criteria for sale as required in SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Accordingly, this transaction is accounted for as a non-recourse secured borrowing with the ARM loans pledged as collateral.

The amount of each class of beneficial interest structured as part of the securitization, together with the interest rate and credit ratings for each class as rated by S&P, are set forth below:

Approximate

Class

Principal Amount

Interest Rate

Rating

217,126,000

LIBOR + 33 basis points

AAA

M-1

16,029,000

LIBOR + 60 basis points

M-2

6,314,000

LIBOR + 100 basis points

Total

239,469,000

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:

	•		our business strategy;

	•		future performance, developments, market forecasts or projected dividends;

	•		projected acquisitions or joint ventures; and

	•		projected capital expenditures.

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, and the types of assets we hold, the amount of leverage we use, 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 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:

	•		our limited operating history with respect to our portfolio strategy;

	•		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;

	•		impacts of a change in demand for mortgage loans on our net income and cash available for distribution;

	•		our ability to originate prime and high-quality adjustable-rate and hybrid mortgage loans for our portfolio;

	•		risks associated with the use of leverage;

	•		interest rate mismatches between our mortgage-backed securities and our borrowings used to fund such purchases;

	•		changes in interest rates and mortgage prepayment rates;

	•		effects of interest rate caps on our adjustable-rate mortgage-backed securities;

	•		the degree to which our hedging strategies may or may not protect us from interest rate volatility;

	•		potential impacts of our leveraging policies on our net income and cash available for distribution;

	•		our board’s ability to change our operating policies and strategies without notice to you or stockholder approval;

	•		the other important factors described in this Quarterly Report on Form 10-Q, including those under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and “Quantitative and Qualitative Disclosures about Market Risk.”

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 fully integrated, self-advised residential mortgage finance company that originates, acquires, retains and securitizes mortgage loans and mortgage-backed securities. Our wholly-owned taxable REIT subsidiary (“TRS”), The New York Mortgage Company, LLC (“NYMC”), is a residential mortgage banking company that originates mortgage loans of all types, with a particular focus on prime adjustable- and fixed-rate, first lien, residential purchase mortgage loans. Prior to the simultaneous completion of our acquisition of NYMC and our initial public offering (“IPO”), NYMC sold all of the loans it originated to third parties, and also brokered loans to other mortgage lenders prior to funding. NYMC, which originates residential mortgage loans through a network of 30 full service branch loan origination locations and 32 satellite loan origination locations, is presently licensed or authorized to do business in 39 states and the District of Columbia. On June 29, 2004, we closed our IPO, selling 15 million shares of our common stock at a price to the public of $9.00 per share and raising net proceeds of approximately $122.0 million after deducting the underwriters’ discount and other offering expenses. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes.

Since the completion of our IPO and acquisition of NYMC, our primary business focus has been to build a leveraged portfolio of residential mortgage loans comprised largely of prime adjustable-rate mortgage loans that we originate and that meet our investment objectives and portfolio requirements, including adjustable-rate loans that have an initial fixed-rate period, which we refer to as hybrid mortgage loans. We used a substantial portion of the net proceeds from our IPO to purchase, on a leveraged basis, approximately $1.2 billion of residential mortgage-backed securities. Over time, we expect that these securities will be replaced by adjustable-rate and hybrid mortgage loans that we originate, although we may continue to purchase securities from third parties. We believe that our ability to originate mortgage loans as the basis for our portfolio will enable us to build a portfolio that generates a higher return than the returns realized by mortgage investors that do not have their own origination capabilities, because the cost to originate and retain such mortgage loans for securitization is generally less than the premiums paid to purchase similar assets from third parties.

Generally, we intend to continue to sell the fixed-rate loans that we originate to third parties, and to retain in our portfolio and finance selected adjustable-rate and hybrid mortgage loans that we originate. Our portfolio loans are held at the REIT level or by New York Mortgage Funding, LLC (“NYMF”), our qualified REIT subsidiary (“QRS”). We continue to sell to third parties any adjustable-rate and hybrid mortgage loans we originate that do not meet our investment criteria or portfolio requirements. We rely on our own underwriting criteria with respect to the mortgage loans we retain and rely on the underwriting criteria of the institutions to which we sell our loans with respect to the loans we sell.

As we aggregate a large enough portfolio comprised mainly of retained mortgage loans originated by us, we intend to securitize such loans. We anticipate that the securitization transactions through which we finance the adjustable-rate and hybrid mortgage loans that we retain will be 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 will remain on our consolidated balance sheet as assets with the securitization debt recorded as a liability. Our first securitization occurred on February 25, 2005.

We earn net interest income from purchased residential mortgage-backed securities and adjustable-rate mortgage loans and securities originated through NYMC. We have acquired and will 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 business is affected by a variety of economic and industry factors which management considers. 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:

	•		a decline in the market value of our assets due to rising interest rates;

	•		an adverse impact on our earnings from a decrease in the demand for mortgage loans due to a period of rising interest rates;

	•		our ability to originate prime adjustable-rate and hybrid mortgage loans for our portfolio;

	•		increasing or decreasing levels of prepayments on the mortgages underlying our mortgage-backed securities;

	•		an adverse impact on our earnings from a decrease in the demand for mortgage loans due to a period of rising interest rates;

	•		our ability to originate prime adjustable-rate and hybrid mortgage loans for our portfolio;

	•		our ability to obtain financing to fund and hold mortgage loans prior to their sale or securitization;

	•		the overall leverage of our portfolio and the ability to obtain financing to leverage our equity;

	•		the potential for increased borrowing costs and its impact on net income;

	•		the concentration of our mortgage loans in specific geographic regions;

	•		increasing or decreasing levels of prepayments on the mortgages underlying our mortgage-backed securities;

	•		our ability to use hedging instruments to mitigate our interest rate and prepayment risks;

	•		a prolonged economic slow down, a lengthy or severe recession or declining real estate values could harm our operations;

	•		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;

	•		if we are disqualified as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability; and

	•		compliance with REIT requirements might cause us to forgo otherwise attractive opportunities.

As used herein, references to the “Company,” “NYMT,” “we,” “our” and “us” refer to New York Mortgage Trust, Inc., collectively with its subsidiaries.

Access to our Periodic SEC Reports and Other Corporate Information

Our internet website address is www.nymtrust.com. We make available free of charge, through our internet website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments thereto that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers and the charters of our Audit, Compensation and Nominating and Corporate Governance Committees are also available on our website and are available in print to any stockholder upon request in writing to New York Mortgage Trust, Inc., c/o Chief Financial Officer and Secretary, 1301 Avenue of the Americas, 7th floor, New York, New York 10019. Information on our website is neither part of nor incorporated into this report on Form 10-Q.

Recent Developments

On February 25, 2005, we completed our first loan securitization of approximately $419 million of high-credit quality, first-lien, adjustable rate mortgages and hybrid adjustable rate mortgages (collectively “ARM” loans) through New York Mortgage Trust 2005-1 (the “Trust”). The securitization resulted in the creation of approximately $417 million in mortgage-backed securities. This structured finance transaction will reduce borrowing costs and improve liquidity of the investment portfolio. This transaction will be accounted for as a secured borrowing.

On March 15, 2005, we closed a private offering of $25 million of trust preferred securities to Taberna Preferred Funding I, Ltd., a pooled investment vehicle. The securities were issued by NYM Preferred Trust I and are fully guaranteed by us with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities have a floating interest rate resetting quarterly equal to three-month LIBOR plus 375 basis points. The securities mature on March 15, 2035 and may be called at par by us any time after March 15, 2010.

On July 28, 2005, we completed our second loan securitization of approximately $239.5 million of high-credit quality, first-lien, adjustable rate mortgages and hybrid adjustable rate mortgages (collectively “ARM” loans) through New York Mortgage Trust 2005-2 (the “Trust”). The securitization resulted in the creation of approximately $234 million in mortgage-backed securities. This structured finance transaction will reduce borrowing costs and improve liquidity of the investment portfolio. This transaction will be accounted for as a secured borrowing.

Overview of Performance

For the six months ended June 30, 2005, we reported net income of approximately $509,000, as compared to net income of $498,000 for the same period of 2004. Our revenues were driven largely from loan originations during the period. The change in net income is attributed to a decrease in gain on sale revenues as a result of decreased gain on sale margins in 2005, the execution of our core business strategy to retain selected originated loans in our portfolio (thus forgoing the gain on sale premiums we would have otherwise received when such loans are sold to third parties), one-time severance charges of approximately $3.0 million, and increased expenses incurred for and subsequent to the acquisition of multiple retail loan origination locations during 2004 and infrastructure enhancements to accommodate increased loan origination capacity. As upfront expenses related to the acquisition and/or infrastructure enhancements of our loan origination capacity begin to result in higher production volume and lowered stabilized costs, the mortgage lending segment is expected to become a more meaningful contributor to our financial performance in the future. For the six months ended June 30, 2005, we originated $1.6 billion in residential mortgage loans as compared to $797.5 million for the same period of 2004. The increase in our loan origination levels for the six months ended June 30, 2005 as compared to the same period of 2004 is the result of the addition of sales personnel and branch offices primarily in new and underserved markets. Total employees increased to 857 at June 30, 2005 from 509 at June 30, 2004. Included in the total number of employees, the number of loan officers dedicated to originating loans increased to 385 at June 30, 2005 from 202 at June 30, 2004. Full service loan origination locations increased to 30 offices and 29 satellite loan origination locations at June 30, 2005 from an aggregate of 30 locations at June 30, 2004.

Summary of Operations and Key Performance Measurements

For the six months ended June 30, 2005, our net income was dependent on our self-originated and purchased investments in residential mortgage loans and securities (“portfolio management segment”). Our mortgage lending operations and originations (our “mortgage lending segment”), which include the mortgage loan sales (“mortgage banking”) and mortgage brokering activities on residential mortgages sold or brokered to third parties, one-time severance charges incurred in the second quarter of 2005, operated at a net loss for the six months ended June 30, 2005, primarily due to upfront expenses incurred to grow our loan origination volume, foregone gain on sale premiums as a result of retaining selected loans in our portfolio rather than selling such loans to third parties, and decreased gain on sale margins in 2005 relative to the same period of 2004. Our mortgage banking activities generate 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 generate brokering fee revenues from third party buyers. Our portfolio management activities generate revenues from the return on our mortgage securities and spread income from our mortgage loan portfolio.

A breakdown of our loan originations for the six months ended June 30, 2005 follows:


			Aggregate					Weighted
			Principal		Percentage			Average
	Number		Balance		of Total			Interest			Average
Description	Of Loans		($000’s)		Principal			Rate			Loan Size
Purchase mortgages		4,549	$	982.7		61.0	%		6.13	%	$	216,022
Refinancings		2,654		629.5		39.0	%		5.83	%		237,210

Total		7,203	$	1,612.2		100.0	%		6.01	%	$	223,829

Adjustable rate or hybrid		3,241	$	907.4		56.3	%		5.77	%	$	279,974
Fixed rate		3,962		704.8		43.7	%		6.32	%		177,901

Total		7,203	$	1,612.2		100.0	%		6.01	%	$	223,829

Bankered		6,111	$	1,336.6		82.9	%		6.09	%	$	218,714
Brokered		1,092		275.6		17.1	%		5.62	%		252,451

Total		7,203	$	1,612.2		100.0	%		6.01	%	$	223,829

The key performance measures for our origination activities are:

	•		dollar volume of mortgage loans originated;

	•		relative cost of the loans originated;

	•		characteristics of the loans, including but not limited to the coupon and credit quality of the loan, which will indicate their expected yield; and

•

return on our mortgage asset investments and the related management of interest rate risk.

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.

Management’s discussion and analysis of financial condition and results of operations, along with other portions of this report, are designed to provide information regarding our performance and these key performance measures.

Known Material Trends and Commentary

The U.S. residential mortgage market has experienced considerable growth during the past ten years, with total outstanding U.S. mortgage debt growing from approximately $3.2 trillion at the end of 1993 to approximately $7.3 trillion as of December 31, 2003, according to The Bond Market Association and the Federal Reserve. According to the July 12, 2005 Mortgage Finance Forecast of the Mortgage Bankers Association (“MBAA”), the MBAA estimated that lenders originated approximately $2.59 trillion in 2004. In the July 12, 2005 forecast, the MBAA projects that mortgage loan volumes will increase to $2.74 trillion in 2005 due to a less than expected increase in mortgage rates and fall to $2.50 trillion in 2006, primarily due to an expected continued decline in the volume of loan refinancings.


					Forecasted
			2005		Percentage
Total U.S. 1-to-4 Family Mortgage Originations	2004		Forecast		Change
	(Dollars in billions)
Purchase mortgages	$	1,439	$	1,617		12.4	%
Refinancings		1,150		1,121		(2.5	)%

Total	$	2,589	$	2,738		5.8	%

Source: July 12, 2005 Mortgage Finance Forecast of the MBAA

The following table summarizes the Company’s loan origination volume and characteristics for the three and six months ended June 30, 2005 relative to our prior year historical origination production and expected industry trends for total U.S. 1-to-4 family mortgage originations as forecast in the July 12, 2005 Mortgage Finance Forecast of the MBAA. For the three months ended June 30, 2005, our total loan originations, aided in part by our acquisitions of SIB and GRL, increased 82.8% over the comparable period for 2004. This increase contrasts favorably with the decline forecasted in the July 12, 2005 Mortgage Finance Forecast of the MBAA, which estimates an industry decline for the period of 2.9% for total originations:

Our Total Mortgage Originations


					Percentage Change
	Total Mortgage				From Prior Year
	Originations							MBAA
					NYMC			Industry
	2004		2005		Actual			Forecast
	(Dollars in Millions)
1st Quarter	$	283.5	$	672.5		137.2	%		6.2	%
2^nd Quarter		514.0		939.7		82.8	%		(2.9	)%
3^rd Quarter		415.4
4^th Quarter		632.6

Full Year	$	1,845.5

With regard to purchase mortgage originations, statistics from the MBAA since 1990 indicate that the volume of purchase mortgages year after year steadily increase throughout various economic and interest rate cycles. While management is unable to predict borrowing habits, we believe that historical trends indicate that the purchase mortgage market is relatively stable. For the three

months ended June 30, 2005, our purchase mortgage originations, aided in part by our acquisitions of SIB and GRL, have increased by $328.4 million or 120.2% over the comparable period for the prior year. This increase presently exceeds the 14.4% increase forecasted by the July 12, 2005 Mortgage Finance Forecast of the MBAA for total U.S. 1-to-4 family purchase mortgage originations for the period.

Our Total Purchase Mortgage Originations


	Total Purchase
	Mortgage
	Originations				NYMC
	2004		2005		Actual
	(Dollars in Millions)
1st Quarter	$	169.3	$	380.9		125.0	%
2^nd Quarter		273.3		601.7		120.2	%
3^rd Quarter		274.6
4^th Quarter		366.6

Full Year	$	1,083.8

For the three months ended June 30, 2005, our originations of mortgage refinancings, aided in part by our acquisitions of SIB and GRL, have increased by $97.3 million or 40.4% versus the comparable period for the prior year. This 40.4% increase in our origination of mortgage refinancings compares favorably to the 20.6% decline for total U.S. 1-to-4 family refinance mortgage originations for the period estimated in the July 12, 2005 Mortgage Finance Forecast of the MBAA.

Our Total Refinance Mortgage Originations


	Total Refinance
	Mortgage
	Originations
					NYMC
	2004		2005		Actual
	(Dollars in Millions)
1st Quarter	$	114.2	$	291.6		155.3	%
2^nd Quarter		240.7		338.0		40.4	%
3^rd Quarter		140.8
4^th Quarter		266.0

Full Year	$	761.7

For the six months ended June 30, 2005, NYMC’s purchase loan originations represented 61% of NYMC’s total residential mortgage loan originations as measured by principal balance, as compared to an industry-wide percentage of 59.1% for one-to-four family mortgage loans as estimated in the July 12, 2005 Mortgage Finance Forecast of the MBAA. We believe that our concentration on purchase loan originations has caused our loan origination volume to be less susceptible to the industry-wide decline in origination volume that has resulted from rising interest rates. We believe that the market for mortgage loans for home purchases is less susceptible than the refinance market to downturns during periods of increasing interest rates, because borrowers seeking to purchase a home do not generally base their decision to purchase on changes in interest rates alone, while borrowers that refinance their mortgage loans often make their decision as a direct result of changes in interest rates. Consequently, while our referral-based marketing strategy may cause our overall loan origination volume during periods of declining interest rates to lag our competitors who rely on mass marketing and advertising and who therefore capture a greater percentage of loan refinance applications during those periods, we believe this strategy enables us to sustain stronger home purchase loan origination volumes than those same competitors during periods of flat to rising interest rates. In addition, we believe that our referral-based business results in relatively higher gross margins and lower advertising costs and loan generation expenses than most other mortgage companies whose business is not referral-based.

We depend on the capital markets to finance the mortgage loans we originate. In the short-term, we finance our mortgage loans using “warehouse” lines of credit and “aggregation” lines provided by commercial and investment banks. As we execute our business plan of securitizing self-originated mortgage loans, we will issue bonds from our loan securitizations and will own such bonds although we may sell the bonds to large, institutional investors at some point in the future. These bonds and some of our mortgage loans may be financed with repurchase agreements with well capitalized commercial and investment banks. Commercial and investment banks have provided significant liquidity to finance our operations through these various financing facilities. 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.

Within the past year, the mortgage REIT industry has seen a significant increase in capital raising in the public markets. Additionally, there have been several new entrants, including ourselves, to the mortgage REIT business and other mortgage lender conversions (or proposed conversions) to REIT status. While many of these entrants focus on sub-prime and nonconforming mortgage lending, there are also entrants which will compete with our focus on the high-quality and prime mortgage marketplace. This increased activity may impact the pricing and underwriting guidelines within the high-quality and prime marketplace. We have not changed our guidelines or pricing in response to this activity nor do we have any plans to make such changes at this time.

State and local governing bodies are focused on certain practices engaged in by certain participants in the mortgage lending business relating to fees borrowers incur in obtaining a mortgage loan — generally termed “predatory lending” within the mortgage industry. In several instances, states or local governing bodies have imposed strict laws on lenders to curb such practices. To date, these laws have had an insignificant impact on our business. We have capped fee structures consistent with those adopted by federal mortgage agencies and have implemented rigid processes to ensure that our lending practices are not predatory in nature.

Description of Businesses

Mortgage Lending

Our mortgage lending operations are significant to our financial results as they produce the loans that ultimately will collateralize the mortgage securities that we will hold in our portfolio. We primarily originate prime, first lien residential mortgage loans and, to a lesser extent second lien mortgage loans, home equity lines of credit, and bridge loans. We originate all types of mortgage loan products including adjustable-rate mortgages (“ARM”) which may have an initial fixed rate period, and fixed-rate mortgages. Since the completion of our IPO, we have begun to retain and aggregate our self-originated, high-quality, shorter-term ARM loans in order to pool them into mortgage securities. The fixed rate loans we originate and any ARM loans not meeting our investment criteria continue to be sold to third parties. For the six months ended June 30, 2005 and 2004, we originated $1.03 billion and $620.0 million in mortgage loans for sale to third parties, respectively. We recognized gains on sales of mortgage loans totaling $12.6 million and $10.5 million for the six months ended June 30, 2005 and 2004, respectively.

Subsequent to our IPO in June 2004, we began to retain high quality, adjustable-rate mortgage loans that we originate in our investment portfolio. For the six months ended June 30, 2005, we originated and retained $303.3 million of such loans.

We also broker loans to third party mortgage lenders for which we receive a broker fee. For the six months ended June 30, 2005 and 2004, we originated $275.7 million and $177.4 million in brokered loans, respectively. We recognized net brokering income totaling approximately $328,000 and $841,000 during the six months ended June 30, 2005 and 2004, respectively. The decrease in net brokering income is mainly attributable to a compression of margins on brokered loans and increased costs related to increased personnel not fully offset by increased volume.

Our wholly-owned subsidiary, NYMC, originates all of the mortgage loans we retain, sell or broker. On mortgages to be sold, we underwrite process and fund the mortgages originated by NYMC.

A significant risk to our mortgage lending operations is liquidity risk — the risk that we will not have financing facilities and cash available to fund and hold loans prior to their sale or securitization. We maintain lending facilities with large banking and investment institutions to reduce this risk. On a short-term basis, we finance mortgage loans using warehouse lines of credit and repurchase agreements. Details regarding available financing arrangements and amounts outstanding under those arrangements are included in “Liquidity and Capital Resources” below.

Mortgage Portfolio Management

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, currently generates a substantial portion of our earnings. In managing our investment in a mortgage portfolio, we:

•

invest in mortgage-backed securities originated by others, including ARM securities and CMO floaters;

	•		invest in assets generated primarily from our self-origination of high-credit quality, single-family, residential mortgage loans;

	•		operate as a long-term portfolio investor;

	•		finance our portfolio by entering into repurchase agreements and as we aggregate mortgage loans for investment, issuing mortgage-backed bonds from time to time; and

	•		generate earnings from the return on our mortgage securities and spread income from our mortgage loan portfolio.

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 five years. Our funding costs are generally not constant or fixed. 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 the loans (both those on the balance sheet and those that serve as collateral for mortgage securities).

As of June 30, 2005 our mortgage securities portfolio consisted of 100% AAA— rated or FannieMae, Freddie Mac or Ginnie Mae-guaranteed (“FNMA/FHLMC/GNMA”) mortgage securities. This allows the company to obtain excellent financing rates as well as enhanced liquidity. The loans held for securitization and loans held for investment consisted of high-credit quality prime adjustable rate mortgages with initial reset periods of no greater than 5 years. The loan portfolio has had no credit losses to date. Our portfolio strategy for ARM loan originations is to acquire only high-credit quality ARM loans for our securitization process thereby limiting any future potential losses.

Investment Securities-Available For Sale Characteristics

The following tables present various characteristics of our investment securities and mortgage loan portfolio as of June 30, 2005.

Characteristics of Our Investment Securities:


	Carrying		Sponsor or	% of
	Value		Rating	Portfolio
*Credit*
Agency REMIC CMO Floating Rate	$	34,042,152	FNMA/FHLMC/GNMA		4	%
FHLMC Agency ARMs		120,386,207	FHLMC		13	%
FNMA Agency ARMs		378,167,238	FNMA		42	%
Private Label ARMs		371,931,936	AAA		41	%

Total	$	904,527,533			100	%


						Weighted
	Carrying		% of			Average
	Value		Portfolio			Coupon
*Interest Rate Repricing*
< 6 Months	$	73,572,378		8	%		4.15
< 36 Months		575,214,263		64	%		4.31
< 60 Months		255,740,892		28	%		4.70

Total	$	904,527,533		100	%		4.41

Characteristics of Our Mortgage Loans Held for Investment and Collateralizing Debt Obligations:


	Average			High			Low
*General Loan Characteristics:*
Original Loan Balance	$	485,388		$	3,500,000		$	25,000
Coupon Rate		4.87	%		7.75	%		2.50	%
Gross Margin		2.40	%		5.00	%		1.13	%
Lifetime Cap		10.85	%		12.88	%		9.00	%
Original Term (Months)		360			360			359
Remaining Term (Months)		349			360			325


	Percentage
*Arm Loan Type*
Traditional ARMs		6.0	%
2/1 Hybrid ARMs		4.6	%
3/1 Hybrid ARMs		47.6	%
5/1 Hybrid ARMs		41.8	%

Total		100.0	%

Percent of ARM loans that are Interest Only		70.7	%


	Percentage
*Traditional ARMs — Periodic Caps*
None		67.5	%
1%		27.0	%
Over 1%		5.5	%

Total		100.0	%


	Percentage
*Hybrid ARMs — Initial Cap*
3.00% or less		45.2	%
3.01%-4.00%		10.9	%
4.01%-5.00%		42.6	%
5.01%-6.00%		1.3	%

Total		100.0	%


	Percentage
*FICO Scores*
650 or less		4.9	%
651 to 700		20.3	%
701 to 750		33.5	%
751 to 800		38.6	%
801 and over		2.7	%

Total		100.0	%

Average FICO Score		731


	Percentage
*Loan to Value (LTV)*
50% or less		8.7	%
50.01%-60.00%		9.9	%
60.01%-70.00%		29.1	%
70.01%-80.00%		49.7	%
80.01% and over		2.6	%

Total		100.0	%

Average LTV		69.3	%


	Percentage
*Property Type*
Single Family		54.9	%
Condominium		20.5	%
Cooperative		9.2	%
Planned Unit Development		11.2	%
Two to Four Family		4.2	%

Total		100.0	%


	Percentage
*Occupancy Status*
Primary		86.9	%
Secondary		8.9	%
Investor		4.2	%

Total		100.0	%


	Percentage
*Documentation Type*
Full Documentation		59.2	%
Stated Income		23.2	%
Stated Income/ Stated Assets		15.1	%
No Documentation		1.8	%
No Ratio		0.6	%
Stated Assets		0.1	%

Total		100.0	%


	Percentage
*Loan Purpose*
Purchase		75.0	%
Cash out refinance		12.4	%
Rate & term refinance		12.6	%

Total		100.0	%


	Percentage
*Geographic Distribution: 5% or more in any one state*
NY		30.6	%
CA		22.5	%
MA		12.7	%
NJ		5.3	%
Other (less than 5% individually)		28.9	%

Total		100.0	%

The following table presents the components of our net interest income from our investment portfolio of mortgage securities and loans for the six months ended June 30, 2005:


				Average		Effective
	Amount			Balance		Rate
	(Dollars in Millions)
Net Interest Income Components
Interest Income
Investment securities and loans	$	27,202,577			—		—
Mortgage loans held in the securitization trust		6,245,631			—		—
Amortization of premium		(2,762,341	)		—		—

Total interest income	$	30,685,867		$	1,518.6		4.04	%
Interest Expense
Repurchase agreements	$	18,282,263		$	1,298.5		2.80	%
Warehouse borrowings		2,544,622			145.7		3.47	%
Interest rate swaps and caps		1,057,988			—		0.15	%

Total interest expense	$	21,884,873		$	1,444.2		3.01	%

Net Interest Income	$	8,800,994			—		1.03	%

Significance of Estimates and Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, (“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. The following summarizes the components of our consolidated financial statements where understanding accounting policies is critical to understanding and evaluating our reported financial results, especially given the significant estimates used in applying the policies. Changes in the estimates and assumptions could have a material effect on these financial statements. Management has discussed the development and selection of these critical accounting estimates with the audit committee of our Board of Directors and the audit committee has reviewed our disclosure.

Investment Securities Available for Sale. Our investments in agency and “AAA” — rated adjustable-rate residential mortgage-backed securities are classified as available for sale securities. Available for sale securities are reported at fair value with unrealized gains and losses reported in other comprehensive income (“OCI”). Gains and losses recorded on the sale of investment securities available for sale are based on the specific identification method and included in gain on sale of securities. Purchase premiums or discounts on investment securities are accreted or amortized to interest income over the estimated life of the investment securities using the interest method. Investment securities may be subject to interest rate, credit and/or prepayment risk.

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.

In March 2004, the EITF reached a consensus on Issue No 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. When the fair value of an available for sale security is less than amortized cost, management considers whether there is an other-than-temporary impairment in the value of the security (e.g., whether the security will be sold prior to the recovery of fair value). If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security is written down to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income as an immediate reduction of current earnings (i.e., as if the loss had been realized in the period of impairment). Even though no credit concerns exist with respect to an available for sale security, an other-than-temporary impairment may be evident if management determines that the Company does not have the intent and ability to hold an investment until a forecasted recovery of the value of the investment.

Mortgage Loans Held for Sale. Mortgage loans held for sale represent mortgage loans originated and held pending sale to interim and permanent investors. The mortgage loans are carried at the lower of cost or market value. Market value is determined by examining outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis, less an estimate of the costs to close the loan, less the deferral of fees and points received, plus the deferral of direct origination costs. Gains or losses on sales are recognized at the time title transfers to the investor which is typically concurrent with the transfer of the loan files and related documentation and are based upon the difference between the sales proceeds from the final investor and the adjusted book value of the loan sold.

Mortgage Loans Held in the Securitization Trust — Mortgage loans collateralizing debt obligations are loans the Company has securitized into sequentially rated classes, currently the Company has retained a 100% interest in the securitized loans. Mortgage loans held in the securitization trust are recorded at amortized cost.

Transfers of Assets. A transfer of mortgage loans or mortgage securities in which we surrender control over the financial assets is accounted for as a sale. Gains and losses on the assets transferred are recognized based on the carrying amount of the financial assets involved in the transfer, allocated between the assets transferred and the retained interests, if any, based on their relative fair value at the date of transfer. To determine fair value, we estimate fair value based on the present value of future expected cash flows using management’s best estimate of the key assumptions, including credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. When we retain control over transferred mortgage loans or mortgage securities (such as under a repurchase agreement), the transaction is accounted for as a secured borrowing.

The following is a description of the methods we have historically used to transfer assets, including the related accounting treatment under each method.

•

Whole Loan Sales. Whole loan sales represent loans sold on a servicing released basis wherein the servicing rights with respect to the loans are transferred to the purchaser concurrently with the sale of the loan. Gains and losses on whole loan sales are recognized in the period the sale occurs and we have determined that the criteria for sale treatment has been achieved primarily by the surrender of control over the assets transferred. We generally have an obligation to repurchase whole loans sold in circumstances in which the borrower fails to make one of the first three payments. Additionally, we are also generally required to repay all or a portion of the premium we receive on the sale of whole loans in the event that the loan prepays in its entirety within a period of one year after origination.

•

Loans and Securities Sold Under Repurchase Agreements. Repurchase agreements represent legal sales of loans or mortgage securities and an agreement to repurchase the loans or mortgage securities at a later date. Repurchase agreements are accounted for as secured borrowings because the company has not surrendered control of the transferred assets.

Mortgage Loans Held for Investment. We retain in our portfolio substantially all of the adjustable-rate mortgage loans that we originate and that meet our investment criteria and portfolio requirements. We service loans that we originate and retain in our portfolio through a subservicer. Servicing is the function primarily consisting of collecting monthly payments from mortgage borrowers, and disbursing those funds to the appropriate loan investors.

We may also include in our portfolio loans acquired in bulk pools from other originators and securities dealers. Mortgage loans held for investment are recorded net of deferred loan origination fees and associated direct costs and are stated at amortized cost. Mortgage loan origination fees and associated direct mortgage loan origination costs on mortgage loans held-in-portfolio are deferred and amortized over the life of the loan as an adjustment to yield using the level yield method. This amortization includes the effect of projected prepayments; such prepayment projections involve significant management judgments.

Interest is recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in no case beyond when payment on a loan becomes 90 days delinquent. Interest collected on loans for which accrual has been discontinued is recognized as income upon receipt.

We establish an allowance for loan losses based on our estimate of credit losses inherent in the Company’s investment portfolio of residential loans held for investment. Our portfolio of mortgage loans held for investment is collectively evaluated for impairment as the loans are homogeneous in nature. The allowance is based upon management’s assessment of various factors affecting our mortgage loan portfolio, including current economic conditions, the makeup of the portfolio based on credit grade, loan-to-value ratios, delinquency status, historical credit losses, purchased mortgage insurance and other factors that management believes warrant consideration. The allowance is maintained through ongoing provisions charged to operating income and is reduced by loans that are charged off. Determining the allowance for loan losses is subjective in nature due to the estimation required and the potential for imprecision.

Accounting for Transfers and Servicing of Financial Assets. We may regularly securitize mortgage loans by transferring mortgage loans to independent trusts which issue securities to investors. These securities are collateralized by the mortgage loans transferred into these independent trusts. We will generally retain interests in all or some of the securities issued by the trusts. Certain of the securitization agreements may require us to repurchase loans that are found to have legal deficiencies, subsequent to the date of transfer. The accounting treatment for transfers of assets upon securitization depends on whether or not we have surrendered control over the transferred assets. We will service, through a subservicer, loans that we originate and retain in our portfolio.

We will comply with the provisions of Statement of Financial Accounting Standards No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS No. 140, related to each securitization. Depending on the structure of the securitization, it will either be treated as a sale or secured financing for financial statement purposes. We anticipate that our securitizations will be treated as secured financings under SFAS No. 140. Our strategy of retaining on our balance sheet certain mortgage loans held for investment and included in our securitization pools will reduce the number of loans NYMC sells and, therefore, our total gains on sales of mortgage loans for financial accounting purposes will be lower than NYMC has historically recognized.

Derivative Financial Instruments. We generally hedge only the risk related to changes in the benchmark interest rate used in the variable rate index, usually a London Interbank Offered Rate, known as LIBOR, or a U.S. Treasury rate.

In order to reduce these risks, we enter into interest rate swap agreements whereby we receive floating rate payments in exchange for fixed rate payments, effectively converting the borrowing to a fixed rate. We also enter into interest rate cap agreements whereby, in exchange for a fee, we are reimbursed for interest paid in excess of a certain capped rate.

To qualify for cash flow hedge accounting, interest rate swaps and caps must meet certain criteria, including:

(1) that the items being hedged expose us to interest rate risk, and

(2) that the interest rate swaps or caps are highly effective in reducing our exposure to interest rate risk.

Correlation and effectiveness of the interest rate swaps and caps are periodically assessed based upon a comparison of the relative changes in the fair values or cash flows of the interest rate swaps and caps and the items being hedged.

For derivative instruments that are designated and qualify as a cash flow hedge (meaning hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss, and net payments received or made, on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.

With respect to interest rate swaps and caps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, these swaps and caps will be recorded to current income.

Derivative financial instruments contain credit risk to the extent that the institutional counterparties may be unable to meet the terms of the agreements. We minimize this risk by using multiple counterparties and limiting our counterparties to major financial institutions with good credit ratings. In addition, we regularly monitor the potential risk of loss with any one party resulting from this type of credit risk. Accordingly, we do not expect any material losses as a result of default by other parties.

We enter into derivative transactions solely for risk management purposes. The decision of whether or not a given transaction (or portion thereof) is hedged is made on a case-by-case basis, based on the risks involved and other factors as determined by senior management, including the financial impact on income and asset valuation and the restrictions imposed on REIT hedging activities by the Internal Revenue Code, among others. In determining whether to hedge a risk, we may consider whether other assets, liabilities, firm commitments and anticipated transactions already offset or reduce the risk. All transactions undertaken as a hedge are entered into with a view towards minimizing the potential for economic losses that could be incurred by us. Generally, all derivatives entered into are intended to qualify as hedges in accordance with GAAP, unless specifically precluded under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. To this end, terms of the hedges are matched closely to the terms of hedged items.

We have also developed risk management programs and processes designed to manage market risk associated with normal mortgage banking and mortgage-backed securities investment activities.

In the normal course of our mortgage loan origination business, we enter into contractual interest rate lock commitments, or IRLCs, to extend credit to finance residential mortgages. These commitments, which contain fixed expiration dates, become effective when eligible borrowers lock-in a specified interest rate within time frames established by our origination, credit and underwriting practices. Interest rate risk arises if interest rates change between the time of the lock-in of the rate by the borrower and the sale of the loan. The IRLCs are considered undesignated or free-standing derivatives. Accordingly, IRLCs are recorded at fair value with changes in fair value recorded to current earnings. Mark to market adjustments on IRLCs are recorded from the inception of the interest rate lock through the date the underlying loan is funded. The fair value of the IRLCs is determined by an estimate of the ultimate gain on sale of the loans net of estimated net costs to originate the loan. Beginning in the second quarter of 2004, the fair value of IRLCs are valued in accordance with SEC Staff Accounting Bulletin 105 which requires the exclusion of servicing rights cash flows prior to mortgage loans sold with servicing retained. The company currently sells all of its mortgage loans servicing released.

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 enter into forward sale loan contracts, or FSLCs. Since the FSLCs are 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 are undesignated derivatives under SFAS No. 133 and are marked to market with changes in fair value recorded to current earnings.

We use other derivative instruments, including treasury, agency or mortgage-backed securities and forward sale contracts, which are also classified as free-standing, undesignated derivatives and thus are recorded at fair value with the changes in fair value recorded to current earnings.

Once a loan has been funded, our risk management objective for our mortgage loans held for sale is to protect earnings from an unexpected charge due to a decline in value of such mortgage loans. Our strategy is to engage in a risk management program involving the designation of FSLCs (the same FSLCs entered into at the time of the IRLC) to hedge most of our mortgage loans held for sale. Provided that the FSLCs have been designated as qualifying hedges for the funded loans and the notional amount of the forward delivery contracts, along with the underlying rate and critical terms of the contracts, are equivalent to the unpaid principal amount of the mortgage loans being hedged, the forward delivery contracts effectively fix the forward sales price and thereby offset interest rate and price risk to us. We evaluate this relationship quarterly and classify and account for FSLCs which are deemed effective as fair value hedges.

We employ a number of risk management monitoring procedures that are designed to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item. Additionally, we may elect to de-designate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, we continue to carry the derivative instruments on our balance sheet at fair value with changes in their value recorded to current earnings.

Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. As previously described herein, we plan to regularly securitize our mortgage loans and retain beneficial interests created. In addition, we may purchase such beneficial interests from third parties. For certain of our purchased and retained beneficial interests in securitized financial assets we will follow the guidance in Financial Accounting Standards Board Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” or EITF 99-20. Accordingly, on a quarterly basis, when significant changes in estimated cash flows generated from the securitized asset’s underlying collateral from the cash flows previously estimated occur due to actual prepayment and credit loss experience, we will calculate revised yields based on the current amortized cost of the investment (including any other-than-temporary impairments recognized to date) and the revised cash flows. The revised yields are then applied prospectively to recognize interest income.

Additionally, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, and the present value of the revised cash flows using the current expected yield is less than the present value of the previously estimated remaining cash flows (adjusted for cash receipts during the intervening period), an other-than- temporary impairment is deemed to have occurred. Accordingly, the security is written down to the fair value with the resulting change being included in income, and a new cost basis established. In both instances, the original discount or premium is written off when the new cost basis is established. After taking into account the effect of the impairment charge, income is recognized under EITF 99-20, as applicable, using the market yield for the security used in establishing the write-down. These estimates involve significant management judgment.

Financial Highlights for the Six Months Ended June 30, 2005

	•		The net income for the Company’s Mortgage Portfolio Management segment totaled $3.5 million, or $0.20 per share, for the three months ended June 30, 2005;

	•		Consolidated net income totaled $546,000 for the three months ended June 30, 2005, inclusive of a charge during the quarter related to severance benefits of approximately $3.0 million;

	•		During the three months ended June 30, 2005, the Company undertook cost-cutting initiatives which reduced its overall recurring annual compensation expenses by an estimated $3.7 million;

	•		Completion of our first loan securitization of $419 million in residential mortgage loans;

	•		Issuance of $25 million of trust preferred securities;

	•		Total assets increased to $1.96 billion as of June 30, 2005 from $1.6 billion as of December 31, 2004; and

•

Aided in part by the SIB and GRL acquisitions, approximately 100.6% growth in loan originations of $1.6 billion for the six months ended June 30, 2005 as compared to $797.5 million for the six months ended June 30, 2004 and relative to an overall industry increase of 0.9% for the six months as projected by the MBAA.

Results of Operations and Financial Condition

The following Management Discussion and Analysis gives effect to the restatement as discussed in Note 18.

Our results of operations for our mortgage portfolio management segment during a given period typically reflect the net interest spread earned on our investment portfolio of residential mortgage loans and mortgage-backed securities. The net interest spread is impacted by factors such as our cost of financing, the interest rate our investments are earning and our interest hedging strategies. Furthermore, the cost of originating loans held in our portfolio, the amount of premium or discount paid on purchased portfolio investments and the prepayment rates on portfolio investments will impact the net interest spread as such factors will be amortized over the expected term of such investments.

Our results of operations for our mortgage lending segment during a given period typically reflect the total volume of loans originated and closed by us during that period. The volume of closed loan originations generated by us in any period is impacted by a variety of factors. These factors include:

	•		The demand for new mortgage loans. Reduced demand for mortgage loans causes closed loan origination volume to decline. Demand for new mortgage loans is directly impacted by current interest rate trends and other economic conditions. Rising interest rates tend to reduce demand for new mortgage loans, particularly demand for loan refinancings, and falling interest rates tend to increase demand for new mortgage loans, particularly loan refinancings.

	•		Loan refinancing and home purchase trends. As discussed above, the volume of loan refinancings tends to increase following declines in interest rates and to decrease when interest rates rise. The volume of home purchases is also affected by interest rates, although to a lesser extent than refinancing volume. Home purchase trends are also affected by other economic changes such as inflation, improvements in the stock market, unemployment rates and other similar factors.

	•		Seasonality. Historically, according to the MBAA, loan originations during late November, December, January and February of each year are typically lower than during other months in the year due, in part, to inclement weather, fewer business days (due to holidays and the short month of February), and the fact that home buyers tend to purchase homes during the warmer months of the year. As a result, loan volumes tend to be lower in the first and fourth quarters of a year than in the second and third quarters.

	•		Occasional spikes in volume resulting from isolated events. Mortgage lenders may experience spikes in loan origination volume from time to time due to non-recurring events or transactions, such as a large mass closing of a condominium project for which a bulk end-loan commitment was negotiated.

The mortgage banking industry witnessed record levels of closed loan originations beginning in mid-2002 and continuing throughout 2003, due primarily to the availability of historically low interest rates during that period. These historically low interest rates caused existing home owners to refinance their mortgages at record levels and induced many first-time home buyers to purchase homes and many existing home owners to purchase new homes. We, like most industry participants, enjoyed a record increase in our volume of closed loan originations during that period. During the first quarter of 2004, the Federal Reserve Bank of the United States signaled that moderate increases in interest rates were likely to occur during and after the second quarter of 2004 and followed up its first increase in interest rates in four years with measured, continued increases to-date. This reduced the volume and pace of refinance activity from the peak levels experienced by the industry in 2003.

In its July 12, 2005 Mortgage Finance Forecast, the MBAA forecast that closed loan originations in the industry declined to approximately $2.60 trillion in 2004 and will increase to $2.74 trillion in 2005. These forecasts predict growth in purchase originations and a decline in refinancings during 2004 and subsequent years. Although our origination volumes to date have continued to trend upward, due in part to the SIB and GRL acquisitions, these projected industry declines in the overall volume of closed loan originations may have a negative effect on our loan origination volume and net income. We believe that our concentration on purchase loan originations has caused our loan origination volume to be less susceptible to the industry-wide decline in origination volume.

The volume and cost of our loan production is critical to our financial results. The loans we produce generate gains as they are sold to third parties. Loans we retain for securitization serve as collateral for our mortgage securities. We do not recognize gain on sale income on loans originated by us and retained in our investment portfolio as they are recorded at cost and will generate revenues

through their maturity and ultimate repayment. As the cost basis of a retained loan is typically lower than loans purchased from third parties or already placed in a securitization, we would expect an incremental yield increase on these loans relative to their purchased counterparts.

The cost of our production is also critical to our financial results as it is a significant factor in the gains we recognize. The following table summarizes our loan production for the first and second quarters of 2005 and for each quarter of fiscal years 2004 and 2003.


			Aggregate		Average
	Number		Principal		Principal		Weighted Average
Loan Production Summary (1)	of Loans		Balance		Balance		LTV(2)		FICO
	(Dollars in millions)
2005:
Second Quarter
ARM		1,839	$	537.9	$	292,482		73		709
Fixed-rate		1,777		337.1		189,732		73		718
Subtotal — non-FHA		3,616		875.0	$	241,988		73		712

FHA		479		64.7		135,016		93		623

Total		4,095	$	939.7	$	229,475		74		706

Purchase mortgages		2,652	$	587.8		221,657		76		720
Refinancings		964		287.2		297,918		65		695
Subtotal — non-FHA		3,616	$	875.0	$	241,988		73		712

FHA		479		64.7		135,016		93		623

Total		4,095	$	939.7	$	229,475		74		706

First Quarter
ARM		1,313	$	355.3	$	270,603		73		708
Fixed-rate		1,274		247.8		194,541		71		719

Subtotal — non-FHA		2,587	$	603.1	$	233,145		72		712

FHA		521		69.4		133,191		92		637

Total		3,108	$	672.5	$	216,390		74		705

Purchase mortgages		1717	$	365.8	$	213,081		76		723
Refinancings		870		237.3		272,743		66		696
Subtotal — non-FHA		2,587	$	603.1	$	233,145		72		712

FHA		521		69.4		133,191		92		637

Total		3,108	$	672.5	$	216,390		74		705

2004:
Fourth Quarter
ARM		1,094	$	330.1	$	301,765		71		714
Fixed-rate		956		206.8		216,266		72		714

Subtotal — non-FHA		2,050	$	536.9	$	261,893		72		714
FHA		749		95.7		127,868		92		623

Total		2,799	$	632.6	$	226,029		75		700

Purchase mortgages		1,426	$	353.3	$	247,722		75		724
Refinancings		624		183.6		294,278		64		694
Subtotal — non-FHA		2,050	$	536.9	$	261,893		72		714

FHA		749		95.7		127,868		92		623

Total		2,799	$	632.6	$	226,029		75		700

Third Quarter
ARM		692	$	208.9	$	301,875		71		718
Fixed-rate		639		145.7		228,034		71		714

Subtotal — non-FHA		1,331	$	354.6	$	266,425		71		716
FHA		481		60.8		126,445		92		610

Total		1,812	$	415.4	$	229,267		74		701

Purchase mortgages		1,019	$	265.9	$	260,933		73		725
Refinancings		312		88.7		284,360		63		691

Subtotal — non-FHA		1,331	$	354.6	$	266,425		71		716
FHA		481		60.8		126,445		92		610

Total		1,812	$	415.4	$	229,267		74		701

Second Quarter
ARM		781	$	253.4	$	324,450		70		722
Fixed-rate		797		167.2		209,781		71		720

Subtotal — non-FHA		1,578	$	420.6	$	266,534		70		721
FHA		793		93.4		117,751		92		655

Total		2,371	$	514.0	$	216,772		74		709

Purchase mortgages		1,021	$	262.7	$	257,283		75		728
Refinancings		557		157.9		283,492		62		711

Subtotal — non-FHA		1,578	$	420.6	$	117,751		70		721
FHA		793		93.4		117,751		92		655

Total		2,371	$	514.0	$	216,772		74		709

First Quarter
ARM		458	$	145.5	$	317,667		70		703
Fixed-rate		613		138.0		225,057		71		704

Total		1,071	$	283.5	$	264,661		71		703

Purchase mortgages		650	$	169.3	$	260,469		75		711


			Aggregate		Average
	Number		Principal		Principal		Weighted Average
Loan Production Summary (1)	of Loans		Balance		Balance		LTV(2)		FICO
	(Dollars in millions)
Refinancings		421		114.2		271,132		64		692

Total		1,071	$	283.5	$	264,661		71		703

2003:
Fourth Quarter
ARM		502	$	181.1	$	360,691		69		708
Fixed-rate		705		158.7		225,127		70		707

Total		1,207	$	339.8	$	281,509		70		707

Purchase mortgages		749	$	203.2	$	271,209		75		712
Refinancings		458		136.6		298,353		61		699

Total		1,207	$	339.8	$	281,509		70		707

Third Quarter
ARM		585	$	224.1	$	383,018		68		714
Fixed-rate		1,062		262.2		246,880		67		707

Total		1,647	$	486.3	$	295,235		67		711

Purchase mortgages		772	$	218.2	$	282,537		75		717
Refinancings		875		268.1		306,439		60		706

Total		1,647	$	486.3	$	295,235		67		711

Second Quarter
ARM		452	$	158.1	$	349,624		66		691
Fixed-rate		1,051		254.8		242,478		67		713

Total		1,503	$	412.9	$	274,700		67		705

Purchase mortgages		647	$	173.7	$	268,487		74		691
Refinancings		856		239.2		279,397		61		715

Total		1,503	$	412.9	$	274,700		67		705

First Quarter
ARM		399	$	144.1	$	361,230		70		719
Fixed-rate		948		217.3		229,203		71		707

Total		1,347	$	361.4	$	268,311		70		712

Purchase mortgages		845	$	208.5	$	246,756		78		722
Refinancings		502		152.9		304,590		60		699

Total		1,347	$	361.4	$	268,311		70		712


(1)		Beginning near the end of the first quarter of 2004, our volume of FHA loans increased. Generally, FHA loans have lower average balances and FICO scores which are reflected in the statistics above. All FHA loans are currently and will be in the future sold or brokered to third parties.

(2)		Loan-to-value calculations are on first-lien mortgage loans only.

Cash and Cash Equivalents

We had unrestricted cash and cash equivalents of $3.9 million at June 30, 2005 versus $7.6 million at December 31, 2004. This decrease resulted from an increase in cash expenditures for severance payments that occurred at the end of the quarter.

Investment Securities Available for Sale

The following table summarizes our residential mortgage-backed securities owned at June 30, 2005, classified by type of issuer and by ratings categories:


								Portfolio
Category	Par Value		Coupon			Carrying Value		Mix			Yield
CMO floating rate security	$	33,995,787		4.23	%	$	34,042,152		4	%		4.24	%
FNMA or FHLMC ARMs		495,007,078		4.22	%		498,553,445		55	%		3.99	%
AAA”— rated		370,564,910		4.67	%		371,931,936		41	%		4.38	%

Total	$	899,567,775		4.41	%	$	904,527,533		100	%		4.16	%

Mortgage Loans Held for Sale

Loans we have originated, but have not yet sold or securitized, are classified as “held-for-sale”. We had mortgage loans held for sale of approximately $89.2 million at June 30, 2005. Mortgage loans held for sale represent mortgage loans originated and held

pending sale to interim and permanent investors and are carried at the lower of cost or market value. We use warehouse lines of credit to finance our held-for-sale loans. As such, the fluctuations in mortgage loans — held-for-sale and short-term borrowings are dependent on loans we have originated during the period as well as loans we have sold outright.

Mortgage Loans Held for Investment

Loans we have originated and that meet our investment criteria are transferred into our investment portfolio and are classified as “held for investment” until securitized. We had mortgage loans held for investment of approximately $233.9 million at June 30, 2005. Mortgage loans held for investment represent mortgage loans originated and aggregated in portfolio and which are intended to be securitized. As such, the fluctuations in mortgage loans – held for investment are dependent on the amount of such loans that are securitized during the quarter that become classified as “loans collateralizing debt obligations.”

The following table details Mortgage Loans Held for Investment:


Category	Par Value		Coupon			Carrying Value		Yield
Mortgage Loans Held for Investment	$	232,476,633		5.32	%	$	233,853,469		5.21	%

Mortgage Loans Held in the Securitization Trust

When we securitize loans we have originated or purchased that meet our investment criteria and the securitization is structured as a secured borrowing for accounting purposes, such loans used as underlying collateral for the securitization are classified as “loans collateralizing debt obligations.” We had loans collateralizing debt obligations of approximately $382.6 million at June 30, 2005. We retained all of the resultant securities and have financed these securities with repurchase agreements.

The following table details Mortgage Loans Held in the Securitization Trust:


Category	Par Value		Coupon			Carrying Value		Yield
Mortgage Loans Held in the Securitization Trust	$	378,915,161		4.50	%	$	382,569,880		4.14	%

Due from Loan Purchasers and Escrow Deposits — Pending Loan Closing

We had amounts due from loan purchasers totaling approximately $160.8 million and escrow deposits pending loan closing of approximately $46.1 million as of June 30, 2005. Amounts due from loan purchasers are a receivable for the principal and premium due to us for loans that have been shipped but for which payment has not yet been received at period end. Escrow deposits pending loan closing are advance cash fundings by us to escrow agents to be used to close loans within the next one to three business days.

Prepaid and Other Assets

Prepaid and other assets totaled approximately $11.7 million as of June 30, 2005. Other assets consist primarily of a deferred tax benefit of $6.5 million and loans held by us which are pending remedial action (such as updating loan documentation) or which do not currently meet third-party investor criteria.

Financing Arrangements, Mortgage Loans Held for Sale/for Investment

We had debt outstanding on our financing facilities of approximately $513.5 million as of June 30, 2005, the proceeds of which finance our mortgage loans held for sale. The current weighted average borrowing rate on these financing facilities is 3.48%. We use warehouse lines of credit to finance our held-for-sale loans. As such, the fluctuations in mortgage loans — held-for-sale and short-term borrowings are dependent on loans we have originated during the period as well as loans we have sold outright.

Financing Arrangements, Portfolio Investments

We have arrangements to enter into repurchase agreements, a form of collateralized borrowings, with 23 different financial institutions having a total line capacity of approximately $5.4 billion. As of June 30, 2005, there were approximately $1.3 billion of repurchase borrowings outstanding. Our repurchase agreements typically have terms of less than one year. The current weighted average borrowing rate on these financing facilities is 3.23%.

Stockholders’ Equity

Stockholders’ equity at June 30, 2005 was approximately $111.5 million and included $1.2 million of unrealized loss on available for sale securities and cash flow hedges presented as accumulated other comprehensive income.

Comparison of the Six and Three Months Ended June 30, 2005 to the Six and Three Months Ended June 30, 2004.

Net Income

For the six and three months ended June 30, 2005, we had net income of approximately $509,000 and $546,000, respectively, an increase of 2% and 43% compared with net income of approximately $498,000 and $381,000 for the respective periods of 2004.

Our primary sources of revenue are gain on sale of mortgage loans, fees from borrowers, fees earned on brokered loans, interest earned on portfolio investments and interest earned on mortgage loans held for sale during the interim period of funding a loan to a borrower and the ultimate sale of the loan to a third party. For the six and three month periods ended June 30, 2005, total revenues increased approximately 220% and 204% to approximately $55.0 million and $31.0 million from $17.2 million and $10.2 million for the same periods in 2004 respectively, due in part to the SIB and GRL acquisitions.

Interest income from our portfolio investment activities contributed approximately $30.7 million and $16.2 million to total revenues for the six and three month periods ended June 30, 2005, respectively. Interest income from our portfolio investment activities began subsequent to our IPO in June 2004 and thus was not a revenue source for the six and three month periods ended June 30, 2004.

Loan originations for the six month period ended June 30, 2005 increased approximately 101% to $1.6 billion from $797.5 million for the same period of 2004. Total loan originations for the three months ended June 30, 2005 increased 83% to $939.7 million from $514.0 million for the same period in 2004. The increase in loan origination volume and related revenues is due, in part, to new branches we assumed from SIB Mortgage Corp., or SIB, in mid-March of 2004 and the assumption of branches from GRL in mid-November 2004.

For the six and three month periods ended June 30, 2005, total operating expenses increased approximately 256% to $59.4 million and 230% to $32.7 million from $16.7 million and $9.9 million for the same periods in 2004, respectively. Interest expenses were higher for the six and three month periods of 2005 ended June 30, 2005, relative to the same periods of 2004 as a result of the commencement of our portfolio investment strategy and the financing, through repurchase arrangements, and the hedging of $1.5 billion in mortgage-backed securities and mortgage loans held in our portfolio. Overall general and administrative expenses were higher for the six and three month periods ended June 30, 2005, relative to the same periods of 2004, primarily from one-time severance charges of approximately $3.0 million, increased occupancy and personnel costs associated with new branch offices and satellite locations and increased personnel costs associated with an expansion of NYMC’s information technology, accounting, operations and marketing departments in connection with these new branches and locations. In addition, during the six months ended June 30, 2005, a non-cash charge of approximately $1.4 million in compensation expense was recorded primarily for the prior issuance of performance shares and accrued bonuses issued in connection with our hiring and retainment of former GRL branch employees. As a result of our acquisition of the-GRL branches in mid-November 2004, we incurred upfront expenses, with little offsetting revenues, through the mid-point of the first quarter due to lag time in closing the new originations associated with the assumption of these branches.

Aided in part by our acquisition of the mortgage banking operations of SIB and the Northeast and Mid-Atlantic mortgage banking operations of GRL, our closed loan originations for the six months ended June 30, 2005 totaled 7,203 loans, a 109% increase over the 3,442 loans that NYMC closed during the comparable period of 2004. The average size of a loan originated during the first six months of 2005 was $223,829, a 3% decline from the average of $231,700 during the same period of 2004. Our closed loan originations for the three months ended June 30, 2005 totaled 4,095 loans, a 73% increase over the 2,371 loans that NYMC closed during the

comparable period of 2004. The average size of a loan originated during the three month period ended June 30, 2005 was $229,475, a 6% increase from the average of $216,772 during the same period of 2004. The increase in the number of loan originations during the six and three month periods ended June 30, 2005 was due to increased loan origination personnel and branch offices, including those personnel and branch offices acquired in the SIB and GRL transactions, as compared to the same period of 2004.

We intend to increase market share by increasing our loan origination staff, as we did in 2004 when we hired 447 new employees in connection with our acquisition of SIB and GRL branches.

Revenues

Gain on Sales of Mortgage Loans. During the six and three months ended June 30, 2005, we had gains on sales of mortgage loans of approximately $12.6 million and $8.3 million, respectively, compared to $10.5 million and $6.9 million for the same periods of 2004. The 20% increase for each of the six and three month periods is attributed in part to higher loan originations in 2005 and offset by a decreasing premium spread on loans sold. During the three month period ended June 30, 2005, market conditions narrowed the average spread earned on the sale of loans to third-parties by approximately 34 basis points relative to the three month period ended March 31, 2005.

Gain on sale revenues for the six and three months ended June 30, 2005 were also impacted by the execution of our core business strategy: retaining selected adjustable rate mortgages for our investment portfolio. The execution of this strategy, which began in the third quarter of 2004 after our IPO, requires that we forgo the gain on sale premiums (revenues) we would otherwise receive when we sell these loans to third-parties. Instead, the cost basis of these loans, which is far lower than the loan and its associated third-party premium, is retained in our investment portfolio with the inherent value of the loan realized over time. For the six and three month periods ended June 30, 2005, we originated and retained $303.3 million and $166.9, respectively, of loans in our investment portfolio and estimate that the forgone gain on sale premium, net of the cost basis of these loans when retained in our investment portfolio, was approximately $4.3 million and $2.1 million, respectively.

The number of mortgage loans funded, excluding those loans retained in our investment portfolio, during the six months ended June 30, 2005 increased 81% to 5,412 loans from 2,997 mortgage loans funded during the comparable period in 2004. Mortgage loan volume, as measured by aggregate principal balance of mortgage loans funded, increased approximately 66% to $1.03 billion for the six months ended June 30, 2005 from $620 million for the comparable period in 2004. The number of mortgage loans funded, excluding those loans retained in our investment portfolio, during the three months ended June 30, 2005 increased 44% to 3,108 loans from 2,152 mortgage loans sold during the comparable period in 2004. Mortgage loan volume, as measured by aggregate principal balance of mortgage loans funded and excluding those loans retained for investment, increased approximately 91% to $609 million from $319 million for the same periods in 2004. The increase in the number of mortgage loans funded during the three and six month periods ended June 30, 2005 is due to increased loan origination personnel and branch offices as compared to the same period of 2004.

Interest Income – Mortgage Loans Held for Sale. During the six and three months ended June 30, 2005, we had interest income on loans that were held for sale of approximately $6.1 million and $3.5 million, an increase of 97% and 84%, respectively, compared with interest income of $3.1 million and $1.9 million for the same periods of 2004. This increase was due to higher average daily balances on loans held for sale during the period offset by and an increasing average yield due to higher prevailing interest rates in 2005 relative to 2004. For the six months ended June 30, 2005, the average interest rate for mortgage loans sold increased approximately 59 basis points to 6.28% from 5.69% for the comparable period in 2004. For the three months ended June 30, 2005, the average interest rate for mortgage loans sold increased 68 basis points to 6.33% from 5.65% for the comparable period of 2004. This increase was consistent with the increases in interest rates initiated by the Federal Reserve, but was not reflective of the total interest rate increases initiated by the Federal Reserve as we have seen the interest rate curve flatten during the intervening period.

Interest Income – Investment Securities and Loans. The following table highlights the components of net interest spread and the annualized yield on net interest-earning assets as of each applicable quarter end:

Components of Net Interest Spread and Yield on Net Interest-Earning Assets
(Dollars in millions)


			Historical			Yield on
			Weighted			Interest
As of the Quarter	Average Interest		Average			Earning			Cost of			Net Interest
Ended	Earning Assets		Coupon			Assets			Funds			Spread
Jun. 30, 2005	$	1,590.0		4.50	%		4.06	%		3.06	%		1.00	%
Mar. 31, 2005	$	1,447.9		4.39	%		4.01	%		2.86	%		1.15	%
Dec. 31, 2004	$	1,325.7		4.29	%		3.84	%		2.58	%		1.26	%
Sept. 30, 2004	$	776.5		4.04	%		3.86	%		2.45	%		1.41	%

The yield on net earning assets is computed by dividing net interest income by the average daily balance of interest earning assets during the quarter. The yield reflects amortization costs of the mortgages as well as short-term investments during the portfolio accumulation period. The cost of funds includes the costs of hedging interest rate risk through interest rate swaps and caps.

Brokered Loan Fees. During the six and three months ended June 30, 2005, we had revenues from brokered loans of approximately $4.5 million and $2.5 million, respectively, compared to $3.0 million and $0.8 million for the same periods in 2004 due to increased volume of loans brokered. The number of brokered loans increased approximately 399% to 1,092 loans for the six months ended June 30, 2005 from 219 loans for the comparable period in 2004. The aggregate principal balance of such brokered loans increased by approximately 195% to $275.6 million for the six months ended June 30, 2005 from $93.4 million for the comparable period in 2004.

Gain on sale of securities. During the six and three month period ended June 30, 2005, the gain on the sale of securities was approximately $921,000 and $544,000 as compared to $607,000 for the six and three month periods of 2004.

Expenses

Salaries, Commissions and Benefits. During the six and three months ended June 30, 2005, salaries, commissions and associated payroll costs increased to $16.6 million and $9.4 million, respectively, from $6.9 million and $4.2 million for the same periods of 2004, an increase of 141% and 124% for the respective periods. The increase was primarily due to an increase in personnel to 857 employees at the end of June 30, 2005 from 509 employees at the end of June 30, 2004. These recently hired employees include loan officers, support staff (information technology, marketing, processing, underwriting and closing employees) and additional corporate management hired in connection with the Company’s transition to a public REIT. In addition, for the six months ended June 30, 2005, we recognized approximately $787,000 in non-cash compensation expense related to restricted stock granted to our executive officers in conjunction with our IPO. In the three months ended June 30, 2005 we incurred a one time charge related to severance benefits of approximately $3.0 million.

Brokered Loan Expenses. During the six and three months ended June 30, 2005, we had costs of brokered loans of approximately $4.2 million and $2.7 million, respectively, as compared to $2.1 million and $835,000 for the same periods of 2004, an increase of 100% and 223% for the respective periods. These costs correlate to the period’s increased brokered loan origination volume and revenues earned from brokered loans.

Interest Expense – Mortgage loans Held for Sale. During the six and three months ended June 30, 2005, we had interest expense on the warehouse financing lines for our mortgage loans held for sale of approximately $3.8 million and $2.0 million, respectively, compared with interest expense of $1.7 million and $1.1 million for the same periods of 2004, an increase of 124% and 82% for the respective periods. The average daily outstanding balance of financing facilities for the six months ended June 30, 2005 was $346.1 million at an average interest rate of 3.67% as compared to an average daily outstanding balance of $128.7 million at an average rate of 1.85% for the comparable period in 2004. Our financing facilities are indexed at LIBOR. The higher average rate is reflective of the current rising interest rate environment. While the rates have increased, the spread to LIBOR on these lines has been significantly decreased from the comparable period in 2004 through re-negotiation and the addition of new lines.

Interest Expense – Investment Securities and Loans. During the six and three months ended, June 30, 2005 we had interest expense on our repurchase facilities that finance our residential mortgage backed securities portfolio of approximately $21.9 million and $12.1 million. We executed our business strategy of procuring an initial-portfolio of such securities commencing with the third quarter of 2004.

Occupancy and Equipment Expense. During the six and three months ended June 30, 2005, we had occupancy and equipment

expense of approximately $3.7 million and $1.6 million, respectively, compared to $1.5 million and $876,000 for the same periods of 2004, an increase of 147% and 83% for the respective periods. The increase reflects the expansion of new origination offices to 30 toward the latter part of June 2004, therefore the related expense increases are reflected in the six month period ended June 30, 2005.

Marketing and Promotion Expense. During the six and three months ended June 30, 2005, we had marketing and promotion expense of $2.6 million and $1.2 million, respectively, compared to $1.3 million and $812,000 for the same periods of 2004, an increase of 100% and 48% for the respective periods. This increase was primarily due to increased marketing and promotion expenses incurred to promote newly-opened loan origination offices and related newly-hired loan origination personnel. In addition, in conjunction with our assumption of the SIB branches, we undertook a significant direct mail campaign to market our loan products.

Data Processing and Communications Expense. During the six and three months ended June 30, 2005, we had data processing and communications expense of $1.2 million and $672,000, respectively, compared to $621,000 and $453,000 for the same periods of 2004, an increase of 93% and 48% for the respective periods. This increase was primarily due to increased personnel and expenses related to the opening of new loan origination offices During the second and third quarter of 2004, we incurred additional costs related to analytical and market research software and systems in order to accommodate our mortgage securities business and to upgrade our current loan accounting software. In addition, during the third quarter of 2004, we began to incur additional costs related to new loan operating system software.

Office Supplies and Expense. During the six and three months ended June 30, 2005, we had data office supplies and expense of $1.3 million and $685,000, respectively, compared to $647,000 and $429,000 for the same periods of 2004, an increase of 100.9% and 60% for the respective periods. This increase was primarily a result of the increase in personnel and new origination offices, as well as the supplies needed to accommodate the bulk hiring of 134 new employees formerly with SIB as well as other incremental employees hired during the first six months of 2004.

Professional Fees Expense. During the six and three months ended June 30, 2005, we had professional fees expense of $1.8 million and $1.1 million, respectively, compared to $654,000 and $401,000 for the same periods of 2004, an increase of 175% and 174% for the respective periods. This increase was primarily due to increases in dues, licenses and permits in states where NYMC has a new presence and the use of regulatory counsel to assist in the structuring and licensing of our various affiliates in certain states in conjunction with our IPO.

Travel and Entertainment Expense. During the six and three months ended June 30, 2005, we had travel and entertainment expense of $446,000 and $230,000, respectively, compared to $305,000 and $117,000 for the same periods of 2004, an increase of 46% and 97% for the respective periods. This increase was primarily due to opening of new origination offices and an increase in staff from 507 employees at June 30, 2004 to 857 for the period ended June 30, 2005.

Depreciation and Amortization Expense. During the six and three months ended June 30, 2005, we had depreciation and amortization expense of $767,000 and $424,000, respectively, compared to $206,000 and $103,000 for the same periods of 2004, an increase of 272% and 312% for the respective periods. This increase was primarily due to the opening of new origination offices and increased investments in computer networks and systems.

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 in mortgage loans until the settlement or sale of mortgages with us or with other investors. It is our policy to have adequate liquidity at all times to cover normal cyclical swings in funding availability and mortgage demand and to allow us to meet abnormal and unexpected funding requirements. We plan to meet liquidity through normal operations with the goal of avoiding unplanned sales of assets or emergency borrowing of funds.

We believe our existing cash balances and funds available under our credit facilities and cash flows from operations will be sufficient for our liquidity requirements for at least the next 12 months. Unused borrowing capacity will vary as the market values of our securities vary. 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 these on-going or immediate sources of liquidity discussed above, we believe that our securities could be sold to raise additional cash in most circumstances. We do, however, expect to expand our mortgage origination operations and may have to arrange for additional sources of capital through the issuance of debt or equity or additional bank borrowings to fund that expansion. We currently have no commitments for any additional financings, and we cannot ensure that we will be able to obtain any additional financing at the times required and on terms and conditions acceptable to us.

To finance our investment portfolio, we generally seek to borrow between eight and 12 times the amount of our equity. Our leverage ratio, defined as total financing facilities outstanding divided by total stockholders’ equity, at June 30, 2005 was 16 to 1. We, and the providers of our finance facilities, generally view our $25 million of subordinated trust preferred debentures outstanding at June 30, 2005 as a form of equity which would result in an adjusted leverage ratio of 13 to 1.

Since the IPO, the Company has purchased approximately $1.6 billion in mortgage-backed securities. These securities were financed with a combination of IPO proceeds and repurchase agreements. As of June 30, 2005 the Company had approximately $1.3 billion in outstanding repurchase agreements.

The Company has arrangements to enter into repurchase agreements, a form of collateralized short-term borrowing, with 23 different financial institutions and as of June 30, 2005 had borrowed money from seven of these firms. These agreements are secured by our mortgage-backed securities and bear interest rates that have historically moved in close relationship to LIBOR.

Under these repurchase agreements the financial institutions lend money versus the market value of our mortgage-backed securities portfolio, and, accordingly, an increase in interest rates can have a negative impact on the valuation of these securities, resulting in a potential margin call from the financial institution. The Company monitors the market valuation fluctuation as well as other liquidity needs to ensure there is adequate collateral available to meet any additional margin calls or liquidity requirements.

The Company enters into interest rate swap agreements to extend the maturity of the repurchase agreements as a mechanism to reduce the interest rate risk of the securities portfolio. At June 30, 2005 the Company had approximately $735 million in interest rate swaps outstanding with five different financial institutions. The weighted average maturity of the swaps was 449 days at June 30, 2005. The impact of the interest swaps extends the maturity of the repurchase agreements to one year.

To originate a mortgage loan, we may draw against a $200 million repurchase facility with Credit Suisse First Boston Mortgage Capital, LLC, or CSFB, and a $150 million warehouse facility led by HSBC Bank USA, or HSBC. These facilities are secured by the mortgage loans owned by us. Advances drawn under these facilities bear interest at rates that vary depending on the type of mortgage loans securing the advances. These facilities are subject to sub-limits, advance rates and terms that vary depending on the type of mortgage loans securing these financings and the ratio of our liabilities to our tangible net worth. As of June 30, 2005, the aggregate outstanding balance under these facilities was $282.4 million and the aggregate maximum amount available for additional borrowings was $67.6 million. These agreements are not committed facilities and may be terminated at any time at the discretion of the counterparties.

In addition to these facilities, we entered into a $250 million master loan and security agreement with Greenwich Capital. Under this agreement, Greenwich Capital provides financing to us for the origination or acquisition of certain mortgage loans, which then will be sold to third parties or contributed for future securitization to one or more trusts or other entities sponsored by us or an affiliate. We will repay advances under this credit facility with a portion of the proceeds from the sale of all mortgage-backed securities issued by the trust or other entity, along with a portion of the proceeds resulting from permitted whole loan sales. Advances under this facility

bear interest at a floating rate initially equal to LIBOR plus 0.75%. Advances under this facility are subject to lender approval of the mortgage loans intended for origination or acquisition, advance rates and the then ratio of our liabilities to our tangible net worth. This facility is not a committed facility and may be terminated at any time at the discretion of Greenwich Capital. As of June 30, 2005 the outstanding balance of this facility was approximately $231.1 million with the maximum amount available for additional borrowings of $18.9 million.

The documents governing these facilities contain a number of compensating balance requirements and restrictive financial and other covenants that, among other things, require us to maintain a maximum ratio of total liabilities to tangible net worth, of 20 to 1 in the case of the CSFB facility, 15 to 1 in the case of the HSBC facility and 20 to 1 in the case of the Greenwich Capital facility, as well as to comply with applicable regulatory and investor requirements. These facilities also contain various covenants pertaining to, among other things, the maintenance of certain periodic income thresholds and working capital. As of June 30, 2005, NYMC was not in compliance with the net income covenant on the CSFB facilities and the liquidity covenant on the Greenwich Capital and HSBC facilities. Waivers from the lenders with respect to these covenant violations have been obtained.

The agreements also contain covenants limiting the ability of our subsidiaries to:

	•		transfer or sell assets;

	•		create liens on the collateral; or

	•		incur additional indebtedness, without obtaining the prior consent of the lenders, which consent may not be unreasonably withheld.

These limits may in turn restrict our ability to pay cash or stock dividends on our stock. In addition, under our warehouse facilities, we cannot continue to finance a mortgage loan that we hold through the warehouse facility if:

	•		the loan is rejected as “unsatisfactory for purchase” by the ultimate investor and has exceeded its permissible warehouse period which varies by facility;

	•		we fail to deliver the applicable note, mortgage or other documents evidencing the loan within the requisite time period;

	•		the underlying property that secures the loan has sustained a casualty loss in excess of 5% of its appraised value; or

	•		the loan ceases to be an eligible loan (as determined pursuant to the warehouse facility agreement).

We expect that these credit facilities will be sufficient to meet our capital and financing needs during the next twelve months. The balances of these facilities fluctuate based on the timing of our loan closings (at which point we may draw upon the facilities) and the near-term subsequent sale of these loans to third parties or the alternative financing thereof through repurchase agreements or, in the future, securitizations for mortgage loans we intend to retain (at which point these facilities are paid down). The current availability under these facilities and our current and projected levels of loan origination volume are consistent with our historic ability to manage our pipeline of mortgage loans, the subsequent sale thereof and the related pay down of the facilities.

As of June 30, 2005, our aggregate warehouse and repurchase facility borrowings under these facilities were $513.5 million and $1.3 billion, respectively, at an average interest rate of approximately 3.48%.

Our financing arrangements are short-term facilities secured by the underlying investment in residential mortgage loans, the value of which may move inversely with changes in interest rates. A decline in the market value of our investments in the future may limit our ability to borrow under these facilities or result in lenders requiring additional collateral or initiating margin calls under our repurchase agreements. As a result, we could be required to sell some of our investments under adverse market conditions in order to maintain liquidity. If such sales are made at prices lower than the amortized costs of such investments, we will incur losses.

Our ability to originate loans depends in large part on our ability to sell the mortgage loans we originate at cost or for a premium in the secondary market so that we may generate cash proceeds to repay borrowings under our warehouse facilities and our repurchase agreement. The value of our loans depends on a number of factors, including:

•

interest rates on our loans compared to market interest rates;

	•		the borrower credit risk classification;

	•		loan-to-value ratios, loan terms, underwriting and documentation; and

	•		general economic conditions.

We make certain representations and warranties, and are subject to various affirmative and negative financial and other covenants, under the agreements covering the sale of our mortgage loans regarding, among other things, the loans’ compliance with laws and regulations, their conformity with the ultimate investors’ underwriting standards and the accuracy of information. In the event of a breach of these representations, warranties or covenants or in the event of an early payment default, we may be required to repurchase the loans and indemnify the loan purchaser for damages caused by that breach. We have implemented strict procedures to ensure quality control and conformity to underwriting standards and minimize the risk of being required to repurchase loans. We have been required to repurchase loans we have sold from time to time; however, these repurchases have not had a material impact on our results of operations.

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 future acquisitions, capital expenditures or repayment of debt,

in order to comply with the REIT distribution requirements.

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:

	•		Interest rate and market (fair value) risk

	•		Credit spread risk

	•		Liquidity and funding risk

	•		Prepayment risk

	•		Credit 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 originate and 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. The Company attempts 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.

The Company utilizes 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 June 30, 2005, an instantaneous shift of 100 basis points in interest rates would result in an approximate decrease in the net interest spread by 8-10 basis points as compared to our base line projections over the next year.

The following tables set forth information about financial instruments:


	June 30, 2005
	Notional		Carrying			Estimated
	Amount		Amount			Fair Value
Investment securities available for sale	$	889,567,775	$	904,527,533		$	904,527,533
Mortgage loans held for investment		232,476,633		233,853,469			235,780,381
Mortgage loans held in the securitization trust		378,915,161		382,569,880			381,497,347
Mortgage loans held for sale		88,889,294		89,188,402			90,139,821
Commitments and contingencies:
Interest rate lock commitments		311,257,227		474,608			474,608
Forward loan sales contracts		82,861,773		(631,982	)		(631,982	)
Interest rate swaps		735,000,000		5,870,731			5,870,731
Interest rate caps		1,046,991,219		914,813			914,813


	December 31, 2004
	Notional		Carrying			Estimated
	Amount		Amount			Fair Value
Investment securities available for sale	$	1,194,055,340	$	1,204,744,714		$	1,204,744,714
Mortgage loans held for investment		188,858,607		190,153,103			190,608,241
Mortgage loans held for sale		85,105,027		85,384,927			86,097,867
Commitments and contingencies:
Interest rate lock commitments		156,110,472		37,867			37,867
Forward loan sales contracts		97,080,482		(164,816	)		(164,816	)
Interest rate swaps		670,000,000		3,228,457			3,228,457
Interest rate caps		250,000,000		411,248			411,248

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 adjustable rate borrowings may react to changes in interest rates before our adjustable rate assets because the weighted average next repricing 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 difference 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 significantly 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 fixed-rate financing 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 can also affect the availability and pricing of adjustable rate assets, which affects our origination activity and investment opportunities. During a rising interest rate environment, there may be less total loan origination activity, particularly for refinancings. At the same time, a rising interest rate environment may result in a larger percentage of adjustable rate products being originated, mitigating the impact of lower overall loan origination activity. In addition, our focus on purchase mortgages as opposed to refinancings also mitigates the volatility of our origination volume as refinancing volume is typically a function of lower interest rates, whereas, purchase mortgage volume has historically remained relatively static during interest rate cycles. Conversely, during a declining interest rate environment total loan origination activity may rise with many of the borrowers desiring fixed-rate mortgage products. Although adjustable rate product origination as a percentage of total loan origination may decline during these periods, the increased loan origination and refinancing volume in the industry may produce sufficient investment opportunities. Additionally, a flat yield curve may be an adverse environment for adjustable rate products because the incentive for a borrower to choose an adjustable

rate product over a longer term fixed-rate mortgage loan is minimized and, conversely, in a steep yield curve environment, adjustable rate products may enjoy an above average advantage over longer term fixed-rate mortgage loans, increasing our investment opportunities.

As the rate environment changes, the impact on origination volume and the type of loan product that is favored is mitigated, in part, by our ability to operate in our two business segments. In periods where adjustable rate product is favored, our mortgage portfolio management segment, which invests in such mortgage loans, will benefit from a larger selection of loan product for its portfolio and the inherent lower cost basis and resultant wider net margin. Our mortgage lending segment, regardless of whether adjustable rate or fixed rate product is favored, will continue to originate such loans and will continue to sell to third parties all fixed rate product; as a result, in periods where fixed rate product is favored, our origination segment may see increased revenues as such fixed product is sold to third parties.

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.

When interest rates decline, loan applicants may withdraw their open applications on which we have issued an IRLC. In those instances, we may be required to purchase loans at current market prices to fulfill existing FSLCs, thereby incurring losses upon sale. We monitor our mortgage loan pipeline closely and on occasion may choose to renegotiate locked loan terms with a borrower to prevent withdrawal of open applications and mitigate the associated losses.

In the event that we do not deliver the FSLCs or exercise our option contracts, the instruments can be settled on a net basis. Net settlement entails paying or receiving cash based upon the change in market value of the existing instrument. All FSLCs and option contracts to buy securities are to be contractually settled within six months of the balance sheet date. FSLCs and options contracts for individual loans generally must be settled within 60 days.

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.

While we have not experienced any significant credit losses, in the event of a significant rising interest rate environment and/or economic downturn, mortgage and loan defaults may increase and result in credit losses that would adversely affect our liquidity and operating results.

Credit Spread Exposure

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.

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 June 30, 2005 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, estimates 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 value of 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 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 June 30, 2005. The other two scenarios assume interest rates are instantaneously 100 and 200 bps higher that those implied by market rates as of June 30, 2005.

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 repricing 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
June 30, 2005

Basis point increase

Base

+100

+200

Mortgage Portfolio

1.19 years

1.71 years

1.89 years

Borrowings (including hedges)

.57

Net

.62 years

1.14 years

1.32 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.

Liquidity and Funding Risk

Our mortgage lending operations require significant cash to fund loan originations. Our warehouse lending arrangements, including repurchase agreements, support the mortgage lending operation. Generally, our warehouse mortgage lenders allow us to borrow between 96% and 100% of the outstanding principal. Funding for the difference — generally 2% of the principal — must come from other cash inflows. Our operating cash inflows are predominately from cash flow from mortgage securities, principal and interest on mortgage loans, third party sales of originated loans that do not fit our portfolio investment criteria, and fee income from loan originations. Other than access to our financing facilities, proceeds from equity offerings have been used to support operations.

Loans financed with warehouse, aggregation and repurchase credit facilities are subject to changing market valuations and margin calls. The market value of our loans is dependent on a variety of economic conditions, including interest rates (and borrower demand) and end investor desire and capacity. There is no certainty that market values will remain constant. To the extent the value of the loans declines significantly, we would be required to repay portions of the amounts we have borrowed. The 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. 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 on either side of the valuation for such swaps, the counterparty can call/post margin. 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 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 fund operations and meet commitments on a timely and cost-effective basis. Our principal sources of liquidity are the repurchase agreement market, the issuance of CDOs, whole loan financing facilities as well as principal and interest payments from ARM assets. We believe that our liquidity level is in excess of that necessary to satisfy our operating requirements and we expect to continue to use diverse funding sources to maintain our financial flexibility.

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 generally do not originate loans that provide for a prepayment penalty if the loan is fully or partially paid off prior to scheduled maturity. 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 quarter ended June 30, 2005 , our mortgage assets paid down at an approximate average annualized Constant Paydown Rate (“CPR”) of 27%, compared to 22% for the quarter ended March 31, 2005 and 24% for the quarter ended December 31, 2004. The constant prepayment rate averaged approximately 20% during the first six months of operations ended December 31, 2004. 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 are 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.

We mitigate credit risk by directly underwriting our own loan originations and re-underwriting any loans originated through our correspondent networks. With regard to the purchased mortgage security portfolio, we rely on the guaranties of FannieMae, Freddie Mac or the AAA/Aaa rating established by the Rating Agencies.

With regard to loan originations, 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 loan originations 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. In addition, in the supply constrained housing markets we focus on, housing values tend to be high and, generally, underwriting standards for higher value homes require lower LTVs and thus more owner equity further mitigating credit risk. Finally, the higher housing value/mortgage loan financing markets allow for more cost efficient origination volume in terms of dollars and units. For our mortgage securities that are purchased, we rely on the FannieMae, Freddie Mac, Ginnie Mae and AAA-rating of the securities supplemented with additional due diligence.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. We carried out an evaluation 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 of June 30, 2005. 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 June 30, 2005.

Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in legal proceedings in the ordinary course of business. We do not believe that any of our current legal proceedings, individually or in the aggregate, will have a material adverse effect on our operations or financial condition.

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

None

Item 3. Defaults Upon Senior Securities

None

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


			Number of Shares
Directors	Term Expires in:		For		Withheld
David A. Akre		2006		17,614,598		32,373
David R. Bock		2006		17,398,338		248,633
Alan L. Hainey		2006		17,560,098		86,873
Steven G. Norcutt		2006		17,340,738		306,233
Mary Dwyer Pembroke		2006		15,412,448		2,234,523
Raymond A. Redlingshafer, Jr.		2006		17,608,598		38,373
Steven B. Schnall		2006		17,393,488		253,483
Jerome F. Sherman		2006		17,323,138		323,833
Thomas W. White		2006		17,559,098		89,873

Stockholders also approved the Company’s 2005 Stock Incentive Plan, which replaced the Company’s 2004 Stock Incentive Plan: 11,289,090 shares voted in favor; 2,460,870 shares voted against and 20,325 shares abstained

Item 5. Other Information

None

Item 6. Exhibits


No.		Description
31.1		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.

31.2		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.


No.		Description
31.3		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.

32.1		Certification of Co-Chief Executive Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.).

32.2		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 (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.).

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.


Date: August 15, 2005

		/s/ Steven B. Schnall

		Steven B. Schnall
		Chairman, President and Co-Chief Executive Officer

Date: August 15, 2005

		/s/ David A. Akre

		David A. Akre
		Vice Chairman and Co-Chief Executive Officer

Date: August 15, 2005

		/s/ Michael I. Wirth

		Michael I. Wirth
		Executive Vice President and Chief Financial Officer

EXHIBIT INDEX


No.		Description
31.1		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.

31.2		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.

31.3		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.

32.1		Certification of Co-Chief Executive Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.).

32.2		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 (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.).