SAXON CAPITAL INC - 10-K Annual Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001

SAXON CAPITAL, INC.
Incorporated in Delaware
4951 Lake Brook Drive
Suite 300
Glen Allen, Virginia 23060
(804) 967-7400

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

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 [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

The number of shares of common stock of the registrant outstanding as of February 28, 2002 was 28,080,502. The aggregate market value of common stock held by non-affiliates of the registrant as of February 28, 2002 was $236,074,922.

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2001. Portions of such proxy statement are incorporated by reference in Part III of this Form 10-K.

Certain information contained in this Report constitutes forward-looking statements under Section 27 of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Generally, forward-looking statements can be identified by the use of forward-looking terminology including, but not limited to, "may," "will," "expect," "intend," "should," "anticipate," "estimate," or "believe" or comparable terminology. All statements addressing our operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to net interest income growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements. The forward-looking statements are based upon management's views and assumptions, as of the date of this Report, regarding future events and operating performance, and are applicable only as of the dates of such statements. By their nature, all forward-looking statements involve risk and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, including but not limited to those discussed in "Item 1. Business—Risk Factors" as well as those discussed elsewhere in this Report.

Saxon Capital, Inc. is a Delaware corporation organized on April 23, 2001. Our original name was Saxon Capital Acquisition Corp., and we changed our name to Saxon Capital, Inc. on October 5, 2001. We acquired all of the issued and outstanding capital stock of SCI Services, Inc. ("SCI Services" or "Predecessor"), a Virginia corporation (formerly known as Saxon Capital, Inc.), from Dominion Capital, Inc. ("Dominion Capital"), a wholly owned subsidiary of Dominion Resources, Inc. ("Dominion Resources") on July 6, 2001. We maintain our principal executive offices at 4951 Lake Brook Drive, Suite 300, Glen Allen, Virginia 23060, and our telephone number is (804) 967-7400. Our common stock is listed on the Nasdaq National Market under the symbol "SAXN."

Our business is conducted through our operating subsidiaries. We conduct mortgage loan originations, purchases, and secondary marketing at Saxon Mortgage, Inc. ("Saxon Mortgage"), and retail loan origination activity at America's MoneyLine, Inc. ("America's MoneyLine"). We conduct mortgage loan servicing at Meritech Mortgage Services, Inc. ("Meritech"). Throughout our discussion of our business operations, words such as "we" and "our" are intended to include these operating subsidiaries and, for references to periods occurring prior to July 6, 2001, include our Predecessor.

We originate, purchase, securitize, and service primarily non-conforming residential mortgage loans derived through three separate channels. These loans are secured primarily by first mortgages. We believe we deliver superior value and service to our borrowers through our disciplined credit, pricing, and servicing processes throughout the lives of their loans, which we call our Life of the Loan Credit Risk Management strategy. Our borrowers typically have limited credit histories, have high levels of consumer debt, or have experienced credit difficulties in the past. Mortgage loans to such borrowers are generally classified as "sub-prime" because they generally do not conform to or meet the underwriting guidelines of one or more of the

government sponsored entities. We originate and purchase loans on the basis of the borrower's ability to repay the mortgage loan, the borrower's historical patterns of debt repayment, and the amount of equity in the borrower's property (as measured by the borrower's loan-to-value ratio or "LTV"). The interest rate and maximum loan amount are determined based upon our underwriting and risk-based pricing matrices. We have been originating and purchasing sub-prime mortgage loans since 1995, and believe the proprietary data that we have accumulated in our data warehouse enables us to analyze the characteristics that drive loan performance to ensure that we meet or exceed our return on investment requirements. We also believe our Life of the Loan Credit Risk Management strategy increases the consistency of our loan performance and financial returns.

We originate or purchase mortgage loans through three separate origination channels. Our wholesale channel originates or purchases loans through our network of approximately 3,000 brokers throughout the country. These brokers rely on our centralized processing teams who, we believe, provide them with superior and consistent customer service. Our retail channel originates mortgage loans directly to borrowers through our wholly-owned subsidiary, America's MoneyLine, which has a retail branch network of 17 locations and uses direct mail and the Internet to originate loans. Our correspondent channel purchases mortgage loans from approximately 300 correspondents following a complete re-underwriting of each mortgage loan. We believe that exceeding the expectations of our customers, whom we view as borrowers, brokers, and correspondents, is a key to our success. For the year ended December 31, 2001, we originated or purchased approximately $2.3 billion and securitized approximately $2.0 billion of residential mortgage loans.

We intend to access the asset-backed securitization market to provide long-term financing for our mortgage loans. We now generate earnings and cash flows primarily from the net interest income and fees that we earn from the mortgage loans we originate and purchase. We finance the loans initially under one of several different secured and committed warehouse financing facilities on a recourse basis. These loans are subsequently financed on a limited recourse basis using asset-backed securities we issue through a trust. The asset-backed securities will be repaid as the mortgage loans pay off. The trusts are required to create credit enhancement using excess cash flow (mortgage interest income, net of bond interest expenses, losses, and servicing fees) to repay the asset-backed securities of the trust faster than the underlying mortgage loans, thereby creating "overcollateralization" (that is, the outstanding balance of the mortgage loans exceeds the outstanding balance of the asset-backed securities). Once the overcollateralization meets predetermined levels, we will begin to receive the excess cash flow from the mortgage loans in the trust. Depending upon the structure of the asset-backed securities and the performance of the underlying mortgage loans, excess cash flow may not be distributed to us for 12 to 24 months or more. As a result of the overcollateralization and certain other credit enhancement features, the trust is able to issue highly rated investment grade asset-backed securities. In addition to the excess cash flow, we receive servicing and master servicing fees at annual rates equal to approximately 50 basis points and 3.5 basis points, respectively, as well as ancillary servicing-related fee income.

Since May 1996, we have securitized approximately $11.0 billion in mortgage loans through our quarterly securitization program. As of July 6, 2001, we now structure our securitizations as financing transactions. Accordingly, following a securitization, the mortgage

loans we originate or purchase remain on our balance sheet, and the securitization indebtedness replaces the warehouse debt associated with the securitized mortgage loans. Also, we now record interest income on the mortgage loans and interest expense on the securities issued in the securitization over the life of the securitization, instead of recognizing a gain or loss upon completion of the securitization. This change to "portfolio-based" accounting will significantly impact our future results of operations compared to our historical results. Therefore, our historical results and management's discussion of such results may not be indicative of our future results. This accounting treatment, however, more closely matches the recognition of income with the receipt of cash payments on the individual loans, and is expected to decrease our earnings volatility compared to structuring securitizations as sales in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Once we originate or purchase a mortgage loan, our wholly-owned subsidiary, Meritech begins the process of performing the day-to-day administrative services for the loan. These activities are called "servicing." Meritech seeks to ensure that the loan is repaid in accordance with its terms. Beginning with an introductory call made as soon as seven days following the origination or purchase of a mortgage loan, we attempt to establish a consistent payment relationship with the borrower. In addition, our call center uses a predictive dialer to create calling campaigns for delinquent loans based upon the borrower's historical payment patterns and the borrower's risk profile to the borrower. Our Life of the Loan Credit Risk Management strategy is applied to every loan in our servicing portfolio. The inherent risk of delinquency and loss associated with sub-prime loans requires active communication with our borrowers from origination through liquidation. Our technology delivers extensive data regarding the loan and the borrower to the desktop of the individual providing service to the borrower. Contact with our borrower is tailored to reflect the borrower's payment habit, loan risk profile, and loan status. Borrower contact is initiated through outbound telephone campaigns, monthly billing statements, and direct mail. Our Website provides borrowers with access to account information and online payment alternatives.

The residential mortgage market is the largest consumer finance market in the United States. Lenders in the United States originated over $2.04 trillion in single-family mortgage loans in 2001, and are expected to originate approximately $1.41 trillion in 2002. Generally, the industry is segmented by the size of the mortgage loans and credit characteristics of the borrowers. Mortgage loans that conform to the government sponsored entity, such as Fannie Mae and Freddie Mac, guidelines for both size and credit characteristics are called "conforming mortgages." All other mortgage loans are considered "non-conforming loans" because of the size of the loans (generally referred to as jumbo mortgages) or the credit profiles of the borrowers (generally referred to as sub-prime mortgages) or both. We believe the non-conforming segment of the mortgage industry can provide higher risk-adjusted returns on investment than the traditional conforming mortgage loan market, provided the lender has a comprehensive and sophisticated process for credit evaluation, risk-based pricing, and diligent servicing.

Our primary goal is to grow, on our balance sheet, a substantial portfolio of non-conforming mortgage loans that produce stable net interest and fee income and provide a superior risk adjusted return on investment for our industry. We believe we can achieve this goal by building upon our disciplined credit, proactive collections and customer service, and strong history of managing credit risk in the sub-prime mortgage market.

For 2002, management established the following key initiatives for our business channels. We expect that our business channels will focus appropriate resources on achieving these initiatives:

We originate and purchase loans in accordance with the underwriting criteria described below. The loans we originate and purchase generally do not meet conventional underwriting standards, such as the standards used by government sponsored entities, such as Fannie Mae or Freddie Mac. As a result, our loan portfolios are likely to have higher delinquency and foreclosure rates than loan portfolios based on conventional underwriting criteria. We have

established six classifications with respect to the credit profile of potential borrowers, and we assign a rating to each loan based on these classifications. Our underwriting guidelines are designed to help us evaluate a borrower's credit history and capacity to repay the loan, the value of the property that will secure the loan, and the adequacy of such property as collateral for the loan. In addition, we review credit scores derived from the application of one or more nationally recognized credit scoring models. Based on our analysis of these factors, we will determine loan terms, including the interest rate and maximum loan-to-value. We generally offer borrowers with less favorable credit ratings loans with higher interest rates and lower LTVs than borrowers with more favorable credit ratings based upon our assessment of the borrower's risk or probability of default.

Our underwriting philosophy is to analyze the overall situation of the borrower and to take into account compensating factors that may be used to offset certain areas of weakness. Specific compensating factors include:

We underwrite each loan individually. All underwriting decisions are the responsibility of each respective business channel's Vice President of Underwriting. The Vice Presidents of Underwriting generally have a minimum of ten years of industry experience and report directly to the Vice President in charge of the respective business channel. Reporting to each Vice President of Underwriting are Assistant Vice Presidents of Underwriting who have substantial industry experience. In addition to the daily supervision of all underwriting decisions, these Vice Presidents and Assistant Vice Presidents of Underwriting conduct regular training sessions on emerging trends in production, as well as provide feedback from the monthly default resolution and planning ("DRP") and risk management meetings, which some or all regularly attend. In addition to the business channels' Vice Presidents of Underwriting, the underwriting departments of the wholesale, retail, and correspondent channels have a total of 28, 21, and 18 underwriters, respectively. Our underwriting staff base their credit decisions upon the risk profile of the individual loan, even in instances where we purchase a group of mortgage loans in bulk.

Our underwriting guidelines are determined by our credit committee ("Credit Committee"), which is composed of our Chief Executive Officer, our President, our Chief Financial Officer, our Vice President of Capital Markets, our Vice President of Quality Control, the Vice President in charge of each business channel, the Vice President of Servicing, the Vice President of Underwriting for each business channel, and our Vice President of Pricing and Analytics and is advised by our General Counsel. The Credit Committee meets frequently to review proposed changes to underwriting guidelines. To the extent an individual loan does not qualify for a loan

program or credit grade, our underwriters can and will make recommendations for an approval of the loan by "underwriting exception." Our business channels' Vice Presidents and Assistant Vice Presidents of Underwriting have final approval of underwriting exceptions. Loan exceptions are tracked in our data warehouse and performance of loans with and without exceptions are monitored and reported monthly to management.

We underwrite every loan we originate or purchase. This means we thoroughly review the borrower's credit history, income documents (except to the extent our stated income and limited documentation loan programs do not require income documentation), and appraisal for accuracy and completeness. We use our automated credit decision system to provide pre-qualification decisions over the Internet. When using this system, the loan is still underwritten by one of our underwriters before funding. While we intend to continue to expand the functionality of our automated decision system, we will continue to use our staff to review credit, income, and appraisal documentation to ensure that the loan is underwritten in accordance with our guidelines.

Our underwriting standards are applied in accordance with applicable federal and state laws and regulations, and require a qualified appraisal of the mortgaged property conforming to Fannie Mae and Freddie Mac standards. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and a replacement cost analysis based on the current cost of building a similar home. The appraisal may not be more than 180 days old on the day the loan is originated. In most instances, we require a second field appraisal for properties that have a value of $300,000 to $500,000 and a second full appraisal for properties that have a value of more than $500,000.

We believe that one of the primary reasons for our strong historical loss and delinquency performance is our reliance upon Saxon Mortgage's Quality Control and Risk Management Department ("QC Department"). The QC Department's primary focus is to ensure that all loans are underwritten in accordance with our underwriting guidelines. The QC Department consists of 19 employees as of December 31, 2001, including our Vice President of Quality Control.

Each month, the QC Department reviews and re-underwrites generally 15% of all loans funded. Using a statistical based sampling system, the QC Department selects certain funded loans, re-underwrites those loans, re-verifies the sources of income, re-verifies employment, and reviews the appraisals to ensure collateral values for the loans are supported by the appraisals. In addition, the QC Department selects loans prior to funding for re-underwriting based upon collateral and borrower characteristics to further ensure that the quality of loans originated is consistent with our guidelines.

The QC Department also reviews any loan which becomes delinquent on its first or second payment due, as well as loans that go into default later in the loan's life and which the Meritech Loss Mitigation department believes may contain borrower or seller misrepresentations. To the extent the QC Department's review indicates that a loan contains material misrepresentations, the QC Department will make recommendations regarding the exercise of remedies available to us, including, where appropriate, requiring the originator to repurchase the loan from us. In addition, the QC Department will advise our business channels on methods to ensure that we do not fund loans with similar issues in the future.

All findings of the QC Department are reported on a monthly basis to members of senior management during the risk management meeting. During this meeting, management analyzes the results of the monthly QC Department audits as well as performance trends and servicing issues. Based upon this meeting, further analysis is undertaken and recommendations are made to the Credit Committee to modify underwriting guidelines or procedures.

Our full documentation program, which requires the highest level of credit documentation of all of our programs, is typically selected by those borrowers that are able to meet those requirements. Our limited documentation program is typically selected by self-employed borrowers, who may have encountered difficulty qualifying for Fannie Mae and Freddie Mac prime loans due to the requirements for W-2 forms, pay stubs, and similar employment-related documentation requirements associated with prime loans. Our stated income program is typically selected by borrowers who do not meet the requirements for independent verification of income associated with Fannie Mae and Freddie Mac prime loans. Both limited documentation and stated income program loans require specialized underwriting and involve higher degrees of risk; accordingly these loans generally require higher interest rates and lower loan to value ratios than would be available to borrowers that meet the requirements of our full documentation program.

We may, from time to time, apply underwriting criteria that are either more stringent or more flexible depending on the economic conditions of a particular market.

As described below, we have two loan programs for first and second mortgages and several niche programs for 100% combined LTV ("CLTV"), second mortgages, and manufactured homes. The key distinguishing features of each program are the documentation required to obtain a loan, the LTV, and credit scores necessary to qualify under a particular program. Nevertheless, each program uses maximum LTVs and loan amounts to mitigate risk.

Traditional Underwriting Program. In this program, we analyze loan risk by comparing the loan details with credit-grade-specific guidelines including mortgage history, secondary

credit history, bankruptcy history, and debt-to-income ratio. Careful consideration is given to borrower trends and benefits of the loan. Traditional first lien loans are available for mortgages secured by properties of all occupancy types, and all of our loan documentation programs.

In addition, each of our loan products has a maximum CLTV amount, which is the maximum encumbrance allowed on a specific mortgaged property. We permit three general categories of second liens that may be subordinate to a Saxon first lien. These are:

The maximum CLTV varies based on occupancy type, documentation type, credit grade, LTV, credit score, and loan amount. Our "A" credit grade second lien program allows for a maximum CLTV of 100% for fully documented loans secured by owner-occupied properties to borrowers with a minimum credit score of 640. Subordinate financing behind our traditional first lien program will allow maximum CLTVs of up to 110% for fully documented loans with a reduced first lien LTV and institutional financing on owner-occupied properties. For all products, subordinate financing on "C" and "D" credit grade first liens must be from an institutional lender.

ScorePlus Underwriting Program. Our ScorePlus underwriting program is a product that we developed to provide a faster and simpler credit qualification process to those customers willing to forego the flexibility offered by our traditional underwriting program by limiting the basis for our underwriting decisions to the following five factors:

These variables fit into parameters for maximum LTV and loan amount by occupancy, income documentation, and property type to assess rate and risk. This program is available for mortgage loans secured by properties of all occupancy types, and all of our loan documentation programs. Because the ScorePlus underwriting decision is based solely on the five factors listed above, the underwriting process can be more extensively automated for those customers for whom speed of decision is the paramount need. The ScorePlus program involves a lesser degree of individualized examination of traditional underwriting factors (other than the five factors listed above). To compensate this incremental credit risk, we have higher credit score and credit grade requirements in our ScorePlus program. Unlike our traditional underwriting program, ScorePlus does not offer the possibility of our allowing reasoned exceptions to any of the underwriting decision factors. For borrowers not able to meet the ScorePlus requirements, we

continue to offer the traditional underwriting that allows us to examine the borrower's specific circumstances and, where we can do so prudently and at an appropriately risk-adjusted price, extend credit based on reasoned exceptions.

We believe our ScorePlus program is our most successful product developed to date. We began development of the program during the fourth quarter of 2000 and introduced the product throughout Saxon on January 16, 2001. For the year ended December 31, 2001, ScorePlus generated $485 million in loan production or 20.79% of our total loan volume for 2001. We expect that ScorePlus's percentage of our total production will increase throughout 2002. We expect our cost to produce a loan to decrease as we use ScorePlus in conjunction with the automation of certain aspects of our underwriting process.

We also offer a number of other loan programs. Although each program contains individual characteristics, maximum LTVs and loan amounts are designed to minimize risk within credit grade categories. These programs include:

Second Liens. This credit score driven product, available for loans up to 100% CLTV, is concentrated on the home equity market and is available for loans secured by properties of all occupancy types and under all of our loan documentation programs. Second lien programs are most typically selected by borrowers who wish to borrow against the equity in their property without altering the provisions of their existing first lien financing.

Manufactured Housing First Liens. This product is designed specifically for double-wide or larger manufactured homes. It is limited to homes that are classified as real estate and meet our other guidelines for construction and permanent attachment to the land on which it resides. These loans are available for primary residences or second homes (available with mortgage insurance), to a maximum loan amount of $150,000 and a minimum credit score of 550.

We originate or purchase mortgage loans through three separate origination channels. Our wholesale channel originates or purchases loans through our network of approximately 3,000 brokers throughout the country. These brokers rely on our centralized processing teams who we believe provide superior and consistent customer service. Our retail channel originates mortgage loans directly to borrowers through our wholly-owned subsidiary, America's MoneyLine, which has a retail branch network of 17 locations and uses direct mail and the Internet to originate loans. Through our correspondent channel, we purchase mortgage loans from companies among our approximately 300 approved correspondents following a complete re-underwriting of each mortgage loan. For the year ended December 31, 2001, we originated or purchased approximately $2.3 billion and securitized approximately $2.0 billion of residential mortgage loans. Further discussion of each mortgage loan production channel follows on pages 55 to 63.

The following table sets forth selected information about our total loan originations and purchases for the years ended December 31, 2001, 2000, and 1999.

	For the Year Ended December 31
	2001	2000	1999
Average principal balance per loan	$111.9	$97.7	$99.2
Combined weighted average initial LTV	77.50%	77.46%	78.12%
Percentage of first mortgage loans owner occupied	95.54%	94.66%	93.49%
Percentage with prepayment penalty	83.46%	83.61%	76.65%
Weighted average credit score	593	580	591
Percentage fixed rate mortgages	46.45%	55.07%	53.99%
Percentage adjustable rate mortgages	53.55%	44.93%	46.01%
Weighted average interest rate:
Fixed rate mortgages	9.85%	10.98%	10.16%
Adjustable rate mortgages	9.93%	10.66%	9.98%
Margin – Adjustable rate mortgages	5.88%	6.20%	6.30%

The following table highlights the net cost to produce loans for our total loan originations and purchases for the years ended December 31, 2001, 2000, and 1999.

	For the Year Ended December 31,
	2001	2000	1999
Fees collected(1)	75	40	38
General and administrative production costs(1)(2)	225	226	221
Premium paid(1)	170	207	243
Net cost to produce(1)(3)	320	393	426

We originate and purchase both adjustable rate mortgages ("ARMs") and fixed rate mortgages ("FRMs"). The majority of our FRMs are 30-year mortgages. In turn, our ARM production is divided into two categories: floating ARMs and hybrid ARMs. A floating ARM is a loan on which the interest rate adjusts throughout the life of the loan, either every 6 or every 12-months. A hybrid ARM is a loan on which the interest rate is fixed for the initial 24 to 60-months on the loan term, and thereafter adjusts either every 6 or every 12-months. All of our ARMs adjust with reference to a defined index rate. The interest is determined by adding the "margin" amount to the "index" rate.

The interest rate on ARMs once the initial rate period has lapsed is determined by adding the "margin" amount to the "index" rate. The index most commonly used in our loan programs is the one-month London Inter-Bank Offered Rate ("LIBOR"). The margin is a predetermined percentage that, when added to the index, gives the borrower the rate that will eventually be due. It is common in the beginning stages of an ARM loan to allow the borrower to pay a rate lower than the rate that would be determined by adding the margin to the index. Over time, the rate adjusts upward such that eventually the interest rate the borrower pays will take into account the index plus the entire margin amount.

A substantial portion of our loans contain prepayment penalties. Borrowers who accept the prepayment penalty receive a lower interest rate on their mortgage loan. Borrowers always retain the right to refinance their loan, but may have to pay a charge of up to six-months interest on 80% of the remaining principal when prepaying their loans.

The following table sets forth information about our loan production based on product type (ARMs and FRMs) for the years ended December 31, 2001, 2000, and 1999.

		For the Year Ended December 31,
		2001	2000	1999
Product Type
ARMs	ARMs	0.05%	0.14%	1.84%
	Hybrids	53.50%	44.80%	44.17%
	Total ARMs	53.55%	44.94%	46.01%
FRMs	Fifteen year	4.22%	4.57%	4.51%
	Thirty year	20.43%	16.51%	21.91%
	Balloons	19.70%	33.98%	27.57%
	Other	2.10%	--	--
	Total FRMs	46.45%	55.06%	53.99%

The following table sets forth information about our loan production by borrower risk classification for the years ended December 31, 2001, 2000, and 1999.

	For the Year Ended December 31,
	2001	2000	1999
A+ Credit Loans(1)
Percentage of total purchases and origination	17.95%	6.63%	5.52%
Combined weighted average initial LTV	73.93%	77.46%	77.75%
Weighted average credit score	676	648	654
Weighted average interest rate:
FRMs	7.95%	9.49%	8.95%
ARMs	8.41%	9.85%	8.79%
Margin – ARMs	4.87%	4.90%	4.56%
A Credit Loans(1)
Percentage of total purchases and origination	18.51%	11.19%	14.57%
Combined weighted average initial LTV	79.85%	79.63%	78.10%
Weighted average credit score	619	620	630
Weighted average interest rate:
FRMs	9.68%	10.46%	9.37%
ARMs	8.95%	10.09%	9.51%
Margin – ARMs	5.20%	5.24%	5.27%
A- Credit Loans(1)
Percentage of total purchases and origination	35.66%	40.92%	44.48%
Combined weighted average initial LTV	81.09%	80.41%	80.83%
Weighted average credit score	578	590	598
Weighted average interest rate:
FRMs	10.33%	10.83%	10.22%
ARMs	9.77%	10.32%	9.69%
Margin – ARMs	5.75%	5.95%	6.11%

B Credit Loans(1)

Percentage of total purchases and origination	16.58%	23.05%	19.85%
Combined weighted average initial LTV	76.53%	76.81%	77.32%
Weighted average credit score	547	556	561
Weighted average interest rate:
FRMs	11.23%	11.32%	10.81%
ARMs	10.57%	10.69%	10.04%
Margin – ARMs	6.42%	6.32%	6.43%
C Credit Loans(1)
Percentage of total purchases and origination	9.34%	14.43%	12.91%
Combined weighted average initial LTV	71.45%	72.46%	73.40%
Weighted average credit score	531	539	549
Weighted average interest rate:
FRMs	12.40%	12.27%	11.53%
ARMs	11.58%	11.33%	10.58%
Margin – ARMs	6.92%	6.75%	6.81%
D Credit Loans(1)
Percentage of total purchases and origination	1.96%	3.78%	2.67%
Combined weighted average initial LTV	59.90%	62.20%	62.44%
Weighted average credit score	529	539	545
Weighted average interest rate:
FRMs	13.12%	13.49%	12.68%
ARMs	12.48%	12.26%	11.38%
Margin – ARMs	7.59%	7.37%	7.22%

The following table sets forth information about our loan production based on income documentation for the years ended December 31, 2001, 2000, and 1999.

	For the Year Ended December 31,
Income documentation	2001		2000		1999
	% of Originations	Average Credit Score	% of Originations	Average Credit Score	% of Originations	Average Credit Score
Full documentation	77.79%	590	76.00%	576	75.39%	586
Limited documentation	5.36%	607	6.41%	598	7.46%	612
Stated income	16.63%	602	17.11%	593	16.77%	605
Other	0.22%	613	0.48%	598	0.38%	611

The following table sets forth information about our loan production based on borrower purpose for the years ended December 31, 2001, 2000, and 1999.

	For the Year Ended December 31,
Borrower Purpose	2001	2000	1999
Cash-out refinance	69.86%	59.49%	55.15%
Purchase	20.93%	29.94%	31.30%
Rate or term refinance	9.21%	10.57%	13.55%

The following table sets forth information about our loan production based on borrowers' credit scores for the years ended December 31, 2001, 2000, and 1999.

	For the Year Ended December 31,
	2001	2000	1999
>700	7.41%	3.22%	4.72%
700 to 651	11.73%	8.39%	10.63%
650 to 601	22.98%	21.55%	23.64%
600 to 551	26.55%	31.38%	29.49%
550 to 501	24.29%	27.41%	21.35%
< 500	6.19%	5.88%	4.46%
Unavailable	0.85%	2.17%	5.71%
Average Credit Score	593	580	591

The following table sets forth the percentage of all loans originated or purchased by the Company by state for the periods shown.

	For the Year Ended December 31,
	2001	2000	1999
California	22.70%	22.37%	21.09%
Florida	5.24%	5.38%	5.10%
Michigan	4.25%	5.35%	3.66%
Illinois	3.74%	5.74%	4.63%
Colorado	3.25%	3.05%	3.20%
Minnesota	3.24%	2.07%	2.16%
Texas	3.13%	4.22%	5.22%
Washington	2.18%	3.23%	4.07%
Arizona	1.83%	2.36%	2.11%
Massachusetts	1.21%	0.91%	0.85%
Other	49.23%	45.32%	47.91%
Total	100.00%	100.00%	100.00%

As a fundamental part of our present business and financing strategy, we securitize almost all of our mortgage loans. From time to time, we may choose to sell loans rather than securitize them if we believe that market conditions present an opportunity to achieve better economic execution through such sales. We expect that such sales will continue to constitute a small percentage of our production. Since 1996, we have securitized approximately $11.0 billion of the loans we originated or purchased. We intend to continue utilizing the asset-backed securitization market to provide long-term financing for our mortgage loans. We will generate earnings and cash flows primarily from the net interest income and fees we earn from the mortgage loans we originate and purchase.

In a typical securitization, pools of mortgage loans, together with the right to receive all payments on the loans, are assembled and transferred to a trust. The trust issues certificates that

represent the right to receive a portion of the amounts collected on the loans each month. Most of the trust certificates (referred to as asset-backed securities) are offered for sale to the public, with the remainder either privately placed or retained by the company sponsoring the securitization. Many of the certificates are assigned ratings by rating agencies such as Moody's, Standard & Poor's, and Fitch. The trust agreement creating the securitization trust establishes various classes of certificates, and assigns an order of rights to priority of payment to each class. The trust agreement also provides for such administrative matters as the appointment of a trustee of the trust, the servicing of the mortgage loans, and the monthly distribution of funds and reports to the holders of the certificates.

We finance loans initially under one of several different secured and committed warehouse financing facilities. When the loans are securitized, we receive proceeds from the securities issued by the securitization trust, and we use those proceeds to, among other uses, pay off the related warehouse financing. Generally the company sponsoring the securitization is not legally obligated to make payments on the securities issued by the securitization trust, and we do not have this legal obligation with respect to our securitizations, although under GAAP applicable to our current portfolio-based accounting, such obligations are included as liabilities on our consolidated balance sheet. We do, however, make certain customary representations and warranties to each securitization trust, which, if violated, could legally obligate us to repurchase some or all of the securitized loans from the trust. The asset-backed securities issued by the securitization trust pay down as the securitized loans pay off.

We anticipate that the structure employed by our securitization transactions will require credit enhancement. By applying excess cash flow (mortgage interest income net of interest on the asset-backed securities, losses, and servicing fees) to pay down the asset-backed securities of the trust faster than the underlying mortgages, we are able to create any required overcollateralization. Once the overcollateralization meets predetermined levels, we will begin to receive the excess cash flow from the mortgage loans in the trust. Depending upon the structure of the asset-backed securities and the performance of the underlying loans, excess cash flow may not be distributed to us for 12 to 24 months or more. These excess amounts are derived from, and are affected by, the interplay of several economic factors:

We expect that our securitization trusts will also provide that, if certain delinquencies and/or losses exceed certain levels (which vary among the securitization trusts), as established by the applicable rating agencies (or the financial guaranty insurer, in the case of certain securitization trusts), the required level of overcollateralization may be increased or may be

prevented from decreasing as would otherwise be permitted if losses and/or delinquencies did not exceed such levels. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive excess cash flow from a securitization transaction. We cannot assure that the performance tests will be satisfied. Nor can we assure, in advance of completing negotiations with the rating agencies or other key transaction parties, the actual terms of such delinquency tests, overcollateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net asset income to us. Failure to negotiate such terms on a favorable basis may materially and adversely affect the availability of net excess income to us.

Generally, so long as excess cash flow is being directed to the senior securities of a securitization trust to achieve overcollateralization, we will not receive distributions from the related securitized pool. In addition, because the application of the excess cash flow to the senior securities of a securitization trust is dependent upon the performance of the related mortgage loans, there may be material variations in the amount, if any, of the excess cash flow distributed to us from period to period, and there may be extended periods when we do not receive excess cash flow. Any variations in the rate or timing of our receipt of distributions may adversely affect our financial condition.

We cannot assure that our securitizations will generate sufficient excess cash flow to ensure that targeted levels of overcollateralization will be achieved and maintained at all times. As described above, a high rate of delinquencies and defaults, or rapid rates of prepayments experienced by a securitized pool (or an increase in LIBOR or any other benchmark which may be utilized) may cause the amount of interest received on the mortgage loans to be less than the amount of interest payable on the securities of the securitization trust on the related payment date. In this case, the principal balance of such securities would decrease at a slower rate relative to the principal balance of the securitized pool, which would lead to a reduction of overcollateralization below targeted levels and result in no excess cash flow being paid to us.

For federal income tax purposes, we will elect to treat each of our securitizations as one or more real estate mortgage investment conduits ("REMICs"). As a result of this election, we will recognize taxable gain or loss on the sale of asset-backed securities even though we will not recognize gain or loss on securitization of mortgage loans for financial reporting purposes. For purposes of computing such gain or loss, we are required to allocate our tax basis in the mortgage loans contributed to the REMIC among the asset-backed securities issued by the REMIC, including any asset-backed securities we retain. We recognize such taxable gain or loss only with respect to the asset-backed securities we sell, utilizing the value of the retained interest as a component of the gain.

Historically, we have typically held, and may continue in the future to hold, the residual interests in some of the REMICs we create. A portion of the income we recognize that is attributable to such residual interests, referred to as excess inclusions, is subject to special tax treatment. Specifically, our taxable income for any taxable year can never be less than the sum of our excess inclusions for the year. Thus, if we have excess inclusions for any year, we will have to pay federal income tax even if the sum of our otherwise allowable deductions and losses for the year exceed our income (computed without regard to the excess inclusion rule) for the year.

We face intense competition in the business of originating, purchasing, securitizing, and servicing mortgage loans. Our competitors include consumer finance companies and other diversified financial institutions, mortgage banking companies, commercial banks, credit unions, savings and loans, credit card issuers, and insurance finance companies. Many traditional mortgage lenders have begun to offer products similar to those we offer to our borrowers. Fannie Mae and Freddie Mac have also expressed interest in adapting their programs to include non-conforming products, and have begun to expand their operations into the sub-prime market. We also expect increased competition over the Internet, as entry barriers are relatively low over the Internet. Many of these competitors, including large financial corporations taking advantage of consolidation opportunities in the industry, are substantially larger and have more capital, or greater access to capital at lower costs, and greater technical and marketing resources than we have. Efficiencies in the asset-backed securities market have generally created a desire for increasingly larger transactions, giving companies with greater volumes of originations a competitive advantage.

Competition in the industry can take many forms, including interest rate and cost of a loan, convenience in obtaining a loan, customer service, amount and term of a loan, and marketing and distribution channels. Additional competition may lower the rates we can charge borrowers and potentially lower our net interest margin.

Our competitive position may be affected by fluctuations in interest rates and general economic conditions. During periods of rising interest rates, competitors that have "locked in" low borrowing costs may have a competitive advantage. During periods of declining interest rates, competitors may solicit our borrowers to refinance their loans. During economic slowdowns or recessions, our borrowers may face new financial difficulties and may be receptive to refinancing offers by our competitors.

The mortgage lending industry is highly regulated. Our business is subject to extensive regulation and supervision by various federal, state, and local government authorities. As of December 31, 2001, we were licensed or exempt from licensing requirements by the relevant state banking or consumer credit agencies to originate first and second mortgages in 49 states and the District of Columbia. We do not originate loans in the State of Alabama.

Our mortgage lending and servicing activities are subject to the provisions of various federal and state statutes, including the Equal Credit Opportunity Act of 1974, as amended, the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, the Home Ownership and Equity Protection Act of 1994, the Fair Credit Reporting Act of 1970, as amended, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Home Mortgage Disclosure Act, the Fair Housing Act, and state statutes governing mortgage lending. Our business is subject to the rules and regulations of various federal, state, and local regulatory agencies in connection with originating, purchasing, processing, underwriting, securitizing, and servicing mortgage loans. These rules and regulations, among other things:

Failure to comply with these requirements can lead to, among other things, loss of approved licensing status, demands for indemnification or mortgage loan repurchases, certain rights of rescission for mortgage loans, class action lawsuits, administrative enforcement actions, and civil and criminal liability.

The federal Gramm-Leach-Bliley financial reform legislation enacted in 2000 imposes additional privacy obligations on us with respect to our applicants and borrowers. We have prepared appropriate controls and procedures to comply with the law. In addition, several states are also considering adopting privacy laws that are not entirely consistent with one another. The enactment of inconsistent state privacy legislation could substantially increase our compliance costs.

In addition, several federal, state, and local laws and regulations have been adopted or are under consideration that are intended to eliminate so-called "predatory" lending practices, such as "steering" borrowers into loans with high interest rates and away from more affordable

products, selling unnecessary insurance to borrowers, and "flipping" or repeatedly refinancing loans. Since 1999, a number of states and municipalities have adopted laws related to predatory lendi

Part I

Item 1.	Business	1
Item 2.	Properties	34
Item 3.	Legal Proceedings	35
Item 4.	Submission of Matters to a Vote of Stockholders	35

Part II

Item 5.	Market for the Registrant's Common Equity and Related Stockholder Matters	35
Item 6.	Selected Financial Data	37
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	77
Item 8.	Financial Statements and Supplementary Data	80
Item 9.	Changes in and Desagreements with Accountants on Accounting and Financial Disclosure	80

Part III

Item 10.	Directors and Executive Officers of the Registrant	80
Item 11.	Executive Compensation	81
Item 12.	Security Ownership of Certain Beneficial Owners and Management	81
Item 13.	Certain Relationships and Related Transactions	81

Part IV

Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	81
Signatures		82

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(1)	In basis points.
(2)	Excludes corporate overhead costs and is prior to the net deferral of origination costs. Includes depreciation expense.
(3)	Defined as general and administrative costs and premium paid, net of fees collected, divided by volume.

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(1)	The letter grade applied to each risk classification reflects our internal standards and do not necessarily correspond to classifications used by other mortgage lenders.