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EX-3.2 - EXHIBIT 3.2 - NEW YORK MORTGAGE TRUST INCex3-2.htm
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EX-32.1 - EXHIBIT 32.1 - NEW YORK MORTGAGE TRUST INCex32-1.htm
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EX-21.1 - EXHIBIT 21.1 - NEW YORK MORTGAGE TRUST INCex21-1.htm
EX-23.1 - EXHIBIT 23.1 - NEW YORK MORTGAGE TRUST INCex23-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
___________________
 
FORM 10-K
___________________

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the Fiscal Year Ended December 31, 2010
   
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
 
47-0934168
(State or other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)

52 Vanderbilt Avenue, New York, NY 10017
(Address of principal executive office) (Zip Code)
 
(212) 792-0107
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
 
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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

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.  x
 
 
 

 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
Large Accelerated Filer   o    Accelerated Filer o     Non-Accelerated Filer   o    Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  x
 
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2010 was $53,528,863.
 
The number of shares of the Registrant’s Common Stock outstanding on March 2, 2011 was 9,425,442.
 
 


 
2

 
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Document
 
Where
Incorporated
1.     Portions of the Registrant's Definitive Proxy Statement relating to its 2011 Annual Meeting of Stockholders scheduled for May 10, 2011 to be filed with the Securities and Exchange Commission by no later than April 30, 2011.
 
Part III, Items 10-14

 
3

 
 
NEW YORK MORTGAGE TRUST, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2010

TABLE OF CONTENTS
 
PART I
     
Item 1.
Business
5
Item 1A.
Risk Factors
20
Item 1B.
Unresolved Staff Comments
37
Item 2.
Properties
37
Item 3.
Legal Proceedings
37
Item 4.
(Removed and Reserved)
37
 
   
 
PART II
 
   
 
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
38
Item 6.
Selected Financial Data
40
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
68
Item 8.
Financial Statements and Supplementary Data
73
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
73
Item 9A.
Controls and Procedures
74
Item 9B.
Other Information
74
 
   
 
PART III
     
Item 10.
Directors and Executive Officers of the Registrant and Corporate Governance
75
Item 11.
Executive Compensation
75
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
75
Item 13.
Certain Relationships and Related Party Transactions and Director Independence
75
Item 14.
Principal Accounting Fees and Services
75
 
   
 
PART IV
 
   
 
Item 15.
Exhibits, Financial Statement Schedules
76

 
 
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PART I
Item 1. BUSINESS

In this Annual Report on Form 10-K we refer to New York Mortgage Trust, Inc., together with its consolidated subsidiaries, as “we,” “us,” “Company,” or “our,” unless we specifically state otherwise or the context indicates otherwise. We refer to Hypotheca Capital, LLC, our wholly-owned taxable REIT subsidiary (“TRS”) as “HC,” and New York Mortgage Funding, LLC, our wholly-owned qualified REIT subsidiary (“QRS”) as “NYMF.”  In addition, the following defines certain of the commonly used terms in this report: “RMBS” refers to residential adjustable-rate, hybrid adjustable-rate and fixed-rate mortgage-backed securities; “Agency RMBS” refers to RMBS that are issued or guaranteed by a federally chartered corporation (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”); “non-Agency RMBS” refers to RMBS backed by prime jumbo and Alternative A-paper (“Alt-A”) mortgage loans; “ARMs” refers to adjustable-rate residential mortgage loans; “prime ARM loans” refers to prime credit quality residential ARM loans (“prime ARM loans”) held in securitization trusts; and “CMBS” refers to commercial mortgage-backed securities.

General

We are a real estate investment trust, or REIT, in the business of acquiring, investing in, financing and managing primarily mortgage-related assets. Our principal business objective is to generate net income for distribution to our stockholders resulting from the spread between the interest and other income we earn on our interest-earning assets and the interest expense we pay on the borrowings that we use to finance our leveraged assets and our operating costs, which we refer to as our net interest income. We intend to achieve this objective by investing in a broad class of mortgage-related and financial assets that in aggregate will generate what we believe are attractive risk-adjusted total returns for our stockholders. Our targeted assets currently include:

 
·
Agency RMBS and non-Agency RMBS;

 
·
prime ARM loans held in securitization trusts; and

 
·
CMBS, commercial mortgage loans and other commercial real estate-related debt investments.
 
We also may opportunistically acquire and manage various other types of mortgage-related and financial assets that we believe will compensate us appropriately for the risks associated with them, including, among other things, certain non-rated residential mortgage assets and collateralized loan obligations (“CLO”) and certain mortgage-related derivatives. Subject to maintaining our qualification as a REIT, we also may invest in corporate debt or equity securities that may or may not be related to real estate.

Prior to 2009, our investment portfolio was primarily comprised of Agency RMBS, certain non-agency RMBS originally rated in the highest rating category by two rating agencies and prime ARM loans held in securitization trusts. The prime ARM loans held in our four securitization trusts were purchased from third parties or originated by us through HC. In early 2009, we commenced a repositioning of our investment portfolio to transition the portfolio from one primarily focused on leveraged Agency RMBS and prime ARM loans held in securitization trusts, which primarily involve interest rate risk, to a more diversified portfolio that includes elements of credit risk with reduced leverage. We believe this strategy will enable us to construct a diversified investment portfolio designed to provide attractive risk-adjusted returns across a variety of market conditions and economic cycles.  We further believe that this approach, together with our new investment initiative described below under “The Midway Residential Mortgage Portfolio Strategy,” will better position us to capitalize on attractive investment opportunities created by market dislocations for these assets. In addition, certain of these targeted assets may permit us to potentially utilize part of a significant net operating loss carry-forward held by HC, subject to Internal Revenue Code (“IRC”) Section 382 limitations.

We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended on December 31, 2004. As a result, we generally will not be subject to federal income tax on our taxable income that is distributed to our stockholders.

The financial information requirements required under this Item 1 may be found in our consolidated financial statements beginning on page F-1 of this Annual Report.
 
 
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Recent Developments

Initial Funding of Midway Residential Mortgage Portfolio Managed by The Midway Group

On February 11, 2011, we entered into an investment management agreement (the “Midway Management Agreement”) with The Midway Group, L.P. (“Midway”), pursuant to which Midway will serve as investment manager of a separate account established and owned by us. As such, we will own all of the assets and liabilities in the separate account. We refer to this separate account as the Midway Residential Mortgage Portfolio.

Midway is a private investment management group with an approximately 11-year history of investing in a broad spectrum of RMBS and derivatives.  On February 28, 2011, we provided $24.0 million of initial funding to the Midway Residential Mortgage Portfolio and we expect to contribute additional capital to the Midway Residential Mortgage Portfolio in the future, subject to various conditions. See “The Midway Residential Mortgage Portfolio Strategy” and “The Midway Management Agreement” below for more information.

Redemption of Series A Preferred Stock

Pursuant to the terms of the Articles Supplementary for our Series A Cumulative Convertible Redeemable Preferred Stock (“Series A Preferred Stock”), on December 31, 2010, we redeemed all 1,000,000 outstanding shares of Series A Preferred Stock, which were held by JMP Group Inc. and certain of its affiliates, at the $20.00 per share liquidation preference plus any accrued and unpaid dividends at that time.

 Our Investment Strategy

We intend to achieve our principal business objective of generating net income for distribution to our stockholders by building and managing a diversified investment portfolio comprised of a broad class of mortgage-related and financial assets that in the aggregate, will generate attractive risk-adjusted total returns for our stockholders. We have invested in the past and intend to invest in the future in assets that collectively allow us to maintain our REIT status and our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”). 

Since 2009, we have repositioned our investment portfolio away from one primarily focused on leveraged Agency RMBS and prime ARM loans held in securitization trusts, to a more diversified portfolio that includes elements of credit risk with reduced leverage, as evidenced by our investments in residential mortgage loans in 2010 and our establishment and initial funding of the Midway Residential Mortgage Portfolio in February 2011. In-line with our diversification strategy and focus on asset performance, we have in the recent past pursued and anticipate continuing to pursue in the future investment opportunities in the commercial mortgage market. We intend that our investment strategy will enable us to capitalize on current investment opportunities in both the residential and commercial mortgage markets that we believe will provide attractive risk adjusted returns to our stockholders over the long term. We anticipate contributing capital to both our residential mortgage strategy, particularly the Midway Residential Mortgage Portfolio, and a commercial mortgage strategy, in the future, such that these investments will become significant contributors to our revenues and earnings and will represent a significant portion of our total assets in the future.

While we intend to assemble a diversified portfolio, our investment strategy does not, subject to our continued compliance with applicable REIT tax requirements and the maintenance of our exemption from the Investment Company Act, limit the amount of our capital that may be invested in any of these investments or in any particular class or type of our targeted assets.  The investment and capital allocation decisions of our company and our external managers depend on prevailing market conditions and may change over time in response to opportunities available in different economic and capital market environments.  As a result, we cannot predict the percentage of our capital that will be invested in any particular investment at any given time. We believe that our diversified investment approach, when combined with our external managers’ expertise within these targeted asset classes, will enable us to exploit changes in the capital markets and provide attractive risk-adjusted returns.  In addition we may enter into joint ventures or other externally managed businesses with third parties that have special expertise or investment sourcing capabilities to the extent we believe such relationships will contribute to our achievement of our investment objectives.
 
 
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Our overall investment strategy is designed, among other things, to:

 
build a diversified investment portfolio of mortgage-related and financial assets that will provide attractive risk-adjusted returns to our stockholders across a variety of market conditions and economic cycles;

 
take advantage of pricing dislocations created by distressed sellers or distressed capital structures and other market inefficiencies;
     
 
identify investment opportunities that may permit us to utilize all or a portion of the net operating loss carry-forward held by HC;

 
capitalize on opportunities in niche markets that other investors may overlook or undervalue;
     
 
establish a more diversified risk profile that is not focused solely on interest rate or credit risk and properly manage financing, prepayment and other market risks;

 
manage cash flow so as to provide for regular quarterly distributions to stockholders;
     
 
allow us to maintain our qualification as a REIT; and
     
 
allow us to remain exempt from the registration requirements of the Investment Company Act.

If necessary, we will modify our investment strategy from time to time in the future as market conditions change in an effort to maximize the returns from our portfolio of investment assets. As a result, our targeted assets and allocation strategy may vary over time from those described herein.

The Midway Residential Mortgage Portfolio Strategy

Investment Strategy

The Midway Residential Mortgage Portfolio, which is externally managed by Midway, will focus on achieving long-term capital appreciation on our investments across various market cycles, including, various interest rate, yield curve, prepayment and credit market cycles, primarily through investments in a hedged portfolio of mortgage-related securities, contract rights and derivatives. In building this hedged portfolio, we expect the Midway Residential Mortgage Portfolio to invest in securities that are backed by prime or lesser credit quality first lien residential mortgage loans and to diversify loan characteristics across securities in the portfolio. Midway presently does not intend to invest in subprime securities. As part of its investment process for the Midway Residential Mortgage Portfolio, we expect that Midway will analyze significant amounts of data regarding the historical performance of mortgage-related securities transactions and collateral over various market cycles and granular level loan data to identify trends and attractive risk-adjusted investment and trading opportunities.

The Midway Residential Mortgage Portfolio’s targeted assets include Agency RMBS, non-Agency RMBS, and other derivative instruments. The Agency RMBS invested in under this portfolio may include whole pool pass-through certificates, collateralized mortgage obligations (“CMOs”), real estate mortgage investment conduits (“REMICs”) and interest only (“IOs”) and principal only (“POs”) securities issued or guaranteed by a GSE. The non-Agency RMBS invested in under this portfolio may also include IOs and POs. The Midway Residential Mortgage Portfolio may also invest a portion of its assets in other types of debt instruments, including investment-grade debt instruments and their related currencies as well as lower-grade securities. In the event Midway is unable to immediately invest any capital we contribute to the Midway Residential Mortgage Portfolio, Midway may invest the capital in an interest-bearing account or otherwise invest it in highly liquid cash equivalents.

Midway has agreed to not materially change the investment strategy and objectives described above without our written consent. As part of our internal risk management processes, our management team will monitor investment activity in and the performance of the Midway Residential Mortgage Portfolio. To the extent necessary, the investment strategy of the Midway Residential Mortgage Portfolio may be modified at our direction to ensure our continued qualification as a REIT and exemption from regulation as an investment company under the Investment Company Act.

 
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Financing Strategy

We expect that the Midway Residential Mortgage Portfolio will borrow money from banks and other financing counterparties and may trade on margin to leverage its investments, and in so doing, may pledge its assets as security for such borrowings. We generally anticipate targeting a leverage ratio of 3 to 1 for the Midway Residential Mortgage Portfolio; however, there may be occasional short-term increases or decreases in the amount of leverage used due to significant market events, and we may change our leverage strategy at any time.

We expect most of the Midway Residential Mortgage Portfolio’s borrowings will be through reverse repurchase agreements with terms typically not exceeding six months at commercial rates of interest. A reverse repurchase agreement arises when the Midway Residential Mortgage Portfolio sells a security to a bank or brokerage firm and simultaneously agrees to repurchase it on an agreed-upon future date. The repurchase price is greater than the sale price, reflecting an agreed upon market rate which is effective for the period of time the buyer’s money is invested in the security and which is not related to the coupon rate on the purchased security.

Hedging Strategy

We will use hedging instruments to reduce our risk associated with changes in interest rates, mortgage spreads, swap spreads, yield curve shapes, and market volatility. We expect that Midway will use multi-dimensional scenario analysis and stress testing that will simulate a wide spectrum of interest rate, volatility and refinancing environments, as well as macro and micro market dislocation events or shocks, to quantify and hedge the risks of the Midway Residential Mortgage Portfolio.

We expect to use mortgage derivatives and forward-settling purchases and sales of Agency RMBS where the underlying pools of mortgage loans are “To-Be-Announced,” or TBAs, Euro-dollar futures, interest rate options, swaps and U.S. treasuries to protect long-term returns. For example, we may utilize interest rate swaps to effectively extend the maturity of our short term borrowings to better match the interest rate sensitivity to the underlying assets being financed. Similarly, we may utilize TBAs to hedge the interest rate or yield spread risk inherent in our long Agency RMBS by taking short positions in TBAs that are similar in character. In a TBA transaction, we would agree to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are liquid and have quoted market prices and represent the most actively traded class of RMBS.

About Midway

The Midway Residential Mortgage Portfolio is externally managed and advised by Midway pursuant to the Midway Management Agreement. Midway was founded in 2000 by Mr. Robert Sherak, a mortgage industry veteran with more than 25 years experience, to serve as investment manager to the Midway Market Neutral Fund LLC, a private investment fund, and has an 11-year history of managing a hedged portfolio of mortgage-related securities.
 
Midway is responsible for administering the business activities and day-to-day operations of the Midway Residential Mortgage Portfolio. Midway has established portfolio management resources for each of the targeted assets described above and an established infrastructure supporting those resources. We expect that we will benefit from Midway’s highly analytical investment processes, broad-based deal flow, extensive relationships in the financial community and operational expertise. Moreover, during its 11-year history of investing in this space, we believe Midway has developed strong relationships with a wide range of dealers and other market participants that provide Midway access to a broad range of trading opportunities and market information.

For additional information regarding the Midway Management Agreement, see “The Midway Management Agreement” below.
 
 
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Strategy for Legacy Portfolio and Other Assets

Investment Strategy

While we expect to focus and direct our future capital allocations to the Midway Residential Mortgage Portfolio and commercial mortgage opportunities, we will continue to manage our legacy portfolio of investment securities, mortgage loans and other financial assets, and will continue to pursue assets outside of the targeted assets that we believe are a productive use of our capital and compensate us appropriately for the risks associated with them. These investments may include, among other things, certain non-rated residential mortgage assets or interests in a pool of such assets, CLOs, high yield corporate bonds, other debt and equity securities and similar assets. Pursuant to our investment guidelines, investments in certain of these assets require the approval of our board of directors. In addition, we expect to continue to engage in portfolio management transactions designed to help us satisfy applicable legal or regulatory requirements, which we sometimes refer to as “regulatory trades,” including the REIT qualification requirements and the requirements for exemption under the Investment Company Act. We expect that our regulatory trades will most commonly involve the purchase and sale of Agency RMBS.

For more information regarding our portfolio as of December 31, 2010, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Financing Strategy

We strive to maintain and achieve a balanced and diverse funding mix to finance our legacy investment portfolio. We rely primarily on repurchase agreements collateralized by Agency RMBS and CDOs in order to finance the Agency RMBS in our investment portfolio and prime ARM loans held in our securitization trusts. Repurchase agreements provide us with short-term borrowings that bear interest rates that are linked to the London Interbank Offered Rate (“LIBOR”), a short term market interest rate used to determine short term loan rates. Pursuant to these repurchase agreements, the financial institution that serves as a counterparty will generally agree to provide us with financing based on the market value of the securities that we pledge as collateral, less a “haircut.” Our repurchase agreements may require us to deposit additional collateral pursuant to a margin call if the market value of our pledged collateral declines or if unscheduled principal payments on the mortgages underlying our pledged securities increase at a higher than anticipated rate.

We have in the past leveraged, and expect in the future to leverage, borrowings collateralized by Agency RMBS. The extent that we finance our legacy Agency RMBS depends upon the particular characteristics of our portfolio at any given time. At December 31, 2010 our leverage ratio for our Agency RMBS investment portfolio, which we define as our outstanding indebtedness under repurchase agreements collateralized by Agency RMBS divided by total stockholders’ equity, was less than one to one.

With respect to the assets in our portfolio at December 31, 2010, excluding Agency RMBS and prime ARM loans held in our securitization trusts, due to market conditions, we have primarily financed, and expect for the foreseeable future to continue to finance, those investments with available cash from our balance sheet. However, should the prospects for stable, reliable and favorable financing for these assets develop in the future, we would expect to increase our borrowings against these assets.

For more information regarding our outstanding borrowings and debt instruments at December 31, 2010, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

 
 
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Hedging Strategy

A significant risk relating to the management of our legacy and regulatory trade portfolio is the risk that interest rates on our assets will not adjust at the same times or amounts that rates on our liabilities adjust. Many of the underlying hybrid ARM loans held in, or that back the RMBS in, our legacy and regulatory trade portfolio have initial fixed rates of interest for a period of time ranging from two to five years. However, our funding costs are variable and the maturities typically have shorter terms than those of our assets. We use hedging instruments to reduce the risk associated with changes in interest rates that could affect these assets. Typically, we utilize interest rate swaps to effectively extend the maturity of our short term borrowings to better match the interest rate sensitivity to the underlying assets being financed. By extending the maturities on our short term borrowings, we attempt to lock in a spread between the interest income generated by the RMBS and loans in our legacy and regulatory trade portfolio and the interest expense related to the financing of such assets in order to maintain a net duration gap of less than one year. We also seek to hedge interest rate risk in order to stabilize net asset values and earnings during periods of rising interest rates. To do so, we use hedging instruments in conjunction with our borrowings to approximate the re-pricing characteristics of such assets. We utilize a model based risk analysis system to assist in projecting portfolio performances over a variety of different interest rates and market stresses. The model incorporates shifts in interest rates, changes in prepayments and other factors impacting the valuations of our assets. However, given the uncertainties related to prepayment rates, it is not possible to definitively lock-in a spread between the earnings yield on this portfolio or the related cost of borrowings. Nonetheless, through active management and the use of evaluative stress scenarios, we believe that we can mitigate a significant amount of both value and earnings volatility.

About Harvest Capital Strategies

Harvest Capital Strategies LLC (“HCS”) provides investment advisory services to us and manages on our behalf “new program assets.” New program assets generally refers to those assets of our company that were sourced or acquired by HCS on our behalf after the effective date of the Amended and Restated Advisory Agreement between HCS, HC, NYMF and us, dated July 26, 2010 (the “HCS Advisory Agreement”) and whose acquisition was approved by HCS and us. New program assets will generally exclude all cash, RMBS, our legacy assets at July 26, 2010, and any assets acquired for the Midway Residential Mortgage Portfolio.

HCS has served as an external advisor to us and certain of our subsidiaries since January 2008 when we concurrently entered into the original advisory agreement with HCS (the “Prior Advisory Agreement”) and sold $20 million of our Series A Preferred Stock to JMP Group Inc. and certain of its affiliates in a private placement. On July 26, 2010, we entered into the HCS Advisory Agreement, which supersedes the Prior Advisory Agreement. During our transition to a diversified investment portfolio, HCS has been instrumental in identifying potential investment opportunities and providing financial and capital structuring expertise and thought leadership to our company. The chairman of our board of directors since January 2008, James J. Fowler, is a portfolio manager at HCS and a managing director of JMP Group Inc. Pursuant to the terms of the HCS Advisory Agreement, Mr. Fowler is also the chief investment officer of HC and NYMF. Mr. Fowler receives no direct compensation from us for his appointment to these positions.

HCS is a wholly-owned subsidiary of JMP Group Inc., that manages a family of single-strategy and multi-manager hedge fund products.  HCS also sponsors and partners with other investment firms. As of December 31, 2010, JMP Group Inc. had $1.8 billion in client assets under management. As discussed above, we redeemed all outstanding shares of our Series A Preferred Stock on December 31, 2010. As of February 14, 2011, JMP Group Inc. and certain of its affiliates owned approximately 15.3% of our outstanding shares of common stock.  For more information regarding our relationship with HCS and the HCS Advisory Agreement, see “The HCS Advisory Agreement” and “Conflicts of Interest with Our External Managers; Equitable Allocation of Opportunities” below.

Our Targeted Asset Classes

Set forth below is a list of the principal assets that our management and our external managers currently target by investment strategy, followed by a brief description of these assets.

Investment Strategy
Principal Assets
Midway Residential Mortgage Portfolio
Agency RMBS consisting of whole pool pass-through certificates, CMOs, REMICs, IOs and POs; non-Agency RMBS backed by prime jumbo and Alt-A paper and may include IOs and POs; and other derivative instruments.
   
Commercial Mortgage Portfolio
CMBS, commercial mortgage loans and other commercial real estate-related debt investments.
   
Legacy Portfolio and Other Assets
Agency RMBS, primarily whole pool pass-through certificates or CMOs issued by Fannie Mae or Freddie Mac and backed by hybrid ARM loans; non-Agency RMBS backed by prime jumbo and Alt-A; prime ARM loans held in securitization trusts; residential whole mortgage loans (including non-rated loans) or equity interests therein; CLOs and other corporate debt or corporate equity securities and other similar investments.

 
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Agency RMBS. Agency RMBS refers to residential mortgage-backed securities that are issued or guaranteed by a GSE, and includes pass-through certificates, CMOs, IOs, POs and REMICs. Most of the pass-through certificates and CMOs we have invested in historically are backed by ARM loans and hybrid ARM loans issued or guaranteed by an Agency. Pass-through certificates provide for a pass-through of the monthly interest and principal payments made by the borrowers on the underlying mortgage loans to the holders of the pass-through certificate. A CMO is a debt security that is backed by a pool of residential mortgages or RMBS with different principal and interest payment characteristics. ARMs have interest rates that reset monthly, quarterly and annually, based on the 12-month moving average of the one-year constant maturity U.S. Treasury rate or LIBOR. Hybrid ARMs have interest rates that are fixed for a longer initial period (typically three, five, seven or 10 years) and, thereafter, generally adjust annually to an increment over a pre-determined interest rate index. For additional information regarding IOs, POs and REMICs, see “— Real Estate Mortgage Investment Conduits” and “— Stripped RMBS” below.

Fannie Mae guarantees to the holder of Fannie Mae-issued RMBS that it will distribute amounts representing scheduled principal and interest on the mortgage loans in the pool underlying the Fannie Mae certificate, whether or not received, and the full principal amount of any such mortgage loan foreclosed or otherwise finally liquidated, whether or not the principal amount is actually received. Freddie Mac guarantees to each holder of certain Freddie Mac-issued certificates the timely payment of interest at the applicable pass-through rate and principal on the holder’s pro rata share of the unpaid principal balance of the related mortgage loans.

Non-Agency RMBS.  Non-Agency RMBS refers to RMBS that are backed by residential mortgage loans that do not generally conform to underwriting guidelines issued by Fannie Mae, Freddie Mac or Ginnie Mae due to certain factors, including a mortgage balance in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and insufficient documentation.  Consequently, the principal and interest on non-Agency RMBS are not guaranteed by GSEs, such as Fannie Mae and Freddie Mac, or in the case of Ginnie Mae, the U.S. Government. Non-Agency RMBS may include IOs and POs.

Real Estate Mortgage Investment Conduits. A REMIC is a trust, partnership, corporation, association or segregated pool of mortgages which has elected and qualified to be treated as a REMIC under applicable U.S. tax rules. A REMIC must consist of one or more classes of “regular interests,” some of which may be adjustable rate, and a single class of “residual interests.” The different classes may have different payment terms and rankings in terms of priority. To qualify as a REMIC, substantially all the assets of the entity must be assets principally secured, directly or indirectly, by interests in real property.

Stripped RMBS. Stripped RMBS are securities representing interests in a pool of mortgages the cash flow of which has been separated into its interest and principal components. IOs  receive the interest portion of the cash flow while POs receive the principal portion. Stripped RMBS may be issued by U.S. government agencies or by non-Agency issuers similar to those described with respect to REMICs.

CMO Residuals. The cash flow generated by the mortgage loans underlying a series of CMOs is applied first to make required payments of principal of and interest on the CMOs and second, if applicable, to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments, including mortgage servicing contracts. Some CMO residuals are subject to certain restrictions on transferability. Ownership of certain CMO residuals imposes liability on the purchaser for certain of the expenses of the related CMO issuer.

Prime ARM Loans Held in Securitization Trusts. Our portfolio also includes prime ARM loans held in securitization trusts. The loans held in securitization trusts are loans that primarily were originated by our discontinued mortgage lending business, and to a lesser extent purchased from third parties, that we securitized in 2005. These loans are substantially prime full documentation interest only hybrid ARMs on residential properties and are all are first lien mortgages. The Company maintained the ownership trust certificates, or equity, of these securitizations which includes rights to excess interest, if any. Subject to market conditions, we may acquire mortgage loans in the future and subsequently securitize these loans.

Commercial Mortgage-Backed Securities. We may invest in commercial mortgage-backed securities, or CMBS, through the purchase of mortgage pass-through notes.  CMBS are secured by, or evidence ownership interests in, a single commercial mortgage loan or a pool of mortgage loans secured by commercial properties. These securities may be senior, subordinated, investment grade or non-investment grade. We expect that most of our CMBS investments will be part of a capital structure or securitization where the rights of the class in which we invest are subordinated to senior classes but senior to the rights of lower rated classes of securities, although we may invest in the lower rated classes of securities if we believe the risk adjusted returns are attractive. We generally intend to invest in CMBS that will yield high current interest income and where we consider the return of principal to be likely. We may acquire CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, finance companies, investment banks and other entities.
 
 
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Whole Commercial Mortgage Loans. We may acquire mortgage loans, or portfolios of mortgage loans, secured by first or second liens on commercial properties or a preferred equity interest in an entity that owns the underlying mortgage loans, including office buildings, industrial or warehouse properties, hotels, retail properties, apartments and properties within other commercial real estate sectors, which may include performing, sub-performing and non-performing loans. In addition, we may originate whole mortgage loans that provide long-term mortgage financing to commercial property owners and developers. In some cases, we may originate and fund a first mortgage loan with the intention of structuring and selling a senior tranche, or A-Note, and retaining the subordinated tranche, or B-Note.

Mezzanine Loans. The origination or acquisition of loans made to property owners that are subordinate to mortgage debt and are secured by pledges of the borrower’s ownership interests in the property and/or the entity that owns the property.

High Yield Corporate Bonds. We may invest in high yield corporate bonds, which are below investment grade debt obligations of corporations and other nongovernmental entities. We expect that a significant portion of such bonds we may invest in will not be secured by mortgages or liens on assets, and may have an interest-only payment schedule, with the principal amount staying outstanding and at risk until the bond’s maturity. High yield bonds are typically issued by companies with significant financial leverage.
 
Collateralized Loan Obligations. We may invest in debentures, subordinated debentures or equity interests in a CLO. A CLO is secured by, or evidences ownership interests in, a pool of assets that may include RMBS, non-agency RMBS, CMBS, commercial real estate loans or corporate loans.  Typically a CLO is collateralized by a diversified group of assets either within a particular asset class or across many asset categories.  These securities may be senior, subordinated, investment grade or non-investment grade. We expect the majority of our CLO investments to be part of a capital structure or securitization where the rights of the class in which we will invest to receive principal and interest are subordinated to senior classes but senior to the rights of lower rated classes of securities, although we may invest in the lower rated classes of securities if we believe the risk adjusted return is attractive.
 
Equity Securities.  To a lesser extent, subject to maintaining our qualification as a REIT, we also may invest in common and preferred equity, which may or may not be related to real estate. These investments may include direct purchases of common or preferred equity or other equity type investments. We will follow a value-oriented investment approach and focus on the anticipated cash flows generated by the underlying business, discounted by an appropriate rate to reflect both the risk of achieving those cash flows and the alternative uses for the capital to be invested. We will also consider other factors such as the strength of management, the liquidity of the investment, the underlying value of the assets owned by the issuer and prices of similar or comparable securities.

Other Assets.  We also may from time to time opportunistically acquire other mortgage-related and financial assets that we believe will meet our investment objectives.

The Midway Management Agreement

We entered into an investment management agreement with Midway on February 11 2011. The Midway Management Agreement has a current term that expires on February 11, 2013, and will be automatically renewed for successive one-year terms thereafter unless a termination notice is delivered by either party to the other party at least six months prior to the end of the then current term. Pursuant to the Midway Management Agreement, Midway implements the Midway Residential Mortgage Portfolio strategy and has complete discretion and authority to manage the assets of the Midway Residential Mortgage Portfolio and its day-to-day business, subject to compliance with the written investment guidelines governing the Midway Residential Mortgage Portfolio and the other terms and conditions of the Midway Management Agreement, including our authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment Company Act. During the initial term of the Midway Management Agreement, Midway has agreed not to establish a separate account with any other publicly-listed residential or commercial mortgage REIT. Midway will provide performance reports to us on a monthly basis with respect to the performance of the Midway Residential Mortgage Portfolio.
 
 
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The following table summarizes the fees that we pay to Midway pursuant to the Midway Management Agreement. We will reimburse Midway for all transaction costs and expenses incurred in connection with the management and administration of the Midway Residential Mortgage Portfolio.
 
Type
 
Description
Base management fee
 
We pay a base management fee monthly in arrears in a cash amount equal to the product of (i) 1.50% per annum of our invested capital in the Midway Residential Mortgage Portfolio as of the last business day of the previous month, multiplied by (ii) 1/12th.
     
Incentive fee
 
In addition to the base management fee, Midway will be entitled to a quarterly incentive fee (the “Midway Incentive Fee”) that is calculated monthly and paid in cash in arrears. The Midway Incentive Fee is based upon the total market value of the net invested capital in the Midway Residential Mortgage Portfolio on the last business day of the quarter, subject to a high water mark equal to a 10% return on invested capital (the “High Water Mark”), and shall be payable in an amount equal to 40% of the dollar amount by which adjusted net income (as defined below) attributable to the Midway Residential Mortgage Portfolio, on a calendar 12-month basis and before accounting for the Midway Incentive Fee, exceeds an annual 15% rate of return on invested capital (the “Hurdle Rate”). The return rate for each calendar 12-month period (the “Calculation Period”) is determined by dividing (i) the adjusted net income for the Calculation Period by (ii) the weighted average of the invested capital paid into the Midway Residential Mortgage Portfolio during the Calculation Period. For the initial 12 months, adjusted net income will be calculated on the basis of each of the previously completed months on an annualized basis.
 
Adjusted net income, for purposes of the Midway Incentive Fee, is defined as net income (loss) calculated in accordance with generally accepted accounting principles in the United States (“GAAP”), excluding any unrealized gains and losses, after giving effect to certain expenses. All securities held in the Midway Residential Mortgage Portfolio will be valued in accordance with GAAP.
Like the Hurdle Rate, which is calculated on a calendar 12 month basis, the High Water Mark is calculated on a calendar 12 month basis, and will reset every 24 months. The High Water Mark will be a static dollar figure that Midway will be required to recoup, to the extent there was a deficit in the prior High Water Mark calculation period before it can receive a Midway Incentive Fee.

Although the Midway Residential Mortgage Portfolio is wholly owned by our company, we may only redeem invested capital in an amount equal to the lesser of 10% of the invested capital in the Midway Residential Mortgage Portfolio or $10 million as of the last calendar day of the month upon not less than 75 days written notice, subject to our authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment Company Act. Pursuant to the terms of the Midway Management Agreement, we are only permitted to make one such redemption request in any 75-day period. 
 
 
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The HCS Advisory Agreement

The HCS Amended and Restated Advisory Agreement became effective on July 26, 2010 and has an initial term that expires on June 30, 2012, subject to automatic annual one-year renewals thereafter. Pursuant to the terms of the HCS Advisory Agreement, HCS will provide investment advisory services to us and will manage on our behalf “new program assets” acquired after the effective date of the agreement. The terms and conditions for new program assets, including the compensation payable thereunder to HCS by us, will be negotiated on a transaction-by-transaction basis. New program assets will be identified by HCS and us as either “Managed Assets” or “Scheduled Assets”. For those new program assets identified as Scheduled Assets, HCS will receive the compensation, which may include base advisory and incentive compensation, agreed upon by HCS and us and set forth in a term sheet or other documentation. The following table summarizes the fees to be paid to HCS for Managed Assets, “legacy assets”, which refers to certain assets owned by us at July 26, 2010 that were deemed to be managed assets under the Prior Advisory Agreement, such as our CLOs, and certain other services:

Type
 
Description
Managed Assets:
   
     
Base management fee
 
HCS is entitled to receive a quarterly base advisory fee (payable in arrears) in an amount equal to the product of (i) 1/4 of the amortized cost of the Managed Assets as of the end of the quarter, and (ii) 2%.
     
Incentive fee
 
HCS is also eligible to earn incentive compensation on the Managed Assets for each fiscal year during the term of the HCS Advisory Agreement in an amount equal to 35% of the GAAP net income attributable to the Managed Assets for the full fiscal year (including paid interest and realized gains), after giving effect to all direct expenses related to the Managed Assets, including but not limited to, base advisory fees and the annual consulting fee, that exceeds a hurdle rate of 13% based on the average equity of our investment in Managed Assets during that particular year.
Legacy Assets:
   
Incentive fee
 
HCS is eligible to earn incentive compensation on “legacy assets” equal to 25% of the GAAP net income of HC and NYMF attributable to the investments that are deemed managed assets (as defined under the Prior Advisory Agreement) that exceed a hurdle rate equal to the greater of (a) 8.00% and (b) 2.00% plus the ten year treasury rate for such fiscal year. The incentive fee is payable in cash, quarterly in arrears.
Consulting and Support Services:
   
Consulting fee
 
During the term of the HCS Advisory Agreement, we will pay HCS an annual consulting fee equal to $1 million, subject to reduction in the event JMP Group’s equity investment in our company falls below certain thresholds, payable on a quarterly basis in arrears, for consulting and support services related to finance, capital markets, investment and other strategic activities.

We may terminate the HCS Advisory Agreement or elect not to renew the agreement, subject to certain conditions and subject to paying a termination fee equal to the product of (A) 1.5 and (B) the sum of (i) the average annual base advisory fee earned by HCS during the 24-month period preceding the effective termination date, and (ii) the annual consulting fee.
 
 
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Conflicts of Interest with Our External Managers; Equitable Allocation of Opportunities

Each of Midway and HCS manages, and is expected to continue to manage, other client accounts with similar or overlapping investment strategies. In connection with the services provided to those accounts, these managers may be compensated more favorably than for the services provided under our external management agreements, and such discrepancies in compensation may affect the level of service provided to us by our external managers. Moreover, each of our external managers may have an economic interest in the accounts they manage or the investments they propose and, in the case of HCS, may raise, advise or sponsor other REITs or other investment funds that invest in assets similar to our targeted assets. In addition, we have in the recent past engaged in certain co-investment opportunities  with an external manager or one of its affiliates and we may participate in future co-investment opportunities with our external managers or their affiliates. In these cases, it is possible that our interests and the interests of our external managers will not always be aligned and this could result in decisions that are not in the best interests of our company.

Each of Midway and HCS has agreed that, when making investment allocation decisions between us and its other client accounts, it will, in the case of HCS, adhere to the investment allocation policy for such assets and, in the case of Midway, seek to allocate investment opportunities on an equitable basis and in a manner it believes is in the best interests of its relevant accounts. Since certain of our targeted assets are typically available only in specified quantities and since certain of these targeted assets will also be targeted assets for other accounts managed by or associated with our external managers, our external managers may not be able to buy as much of certain assets as required to satisfy the needs of all of its clients’ or associated accounts. In these cases, we understand that the allocation procedures and policies of our external managers would typically allocate such assets to multiple accounts in proportion to, among other things, the objectives and needs of each account. Moreover, the investment allocation policies or our external managers may permit departure from proportional allocation when the total allocation would result in an inefficiently small amount of the security being purchased for an account.  Although we believe that each of our external managers will seek to allocate investment opportunities in a manner which it believes to be in the best interests of all accounts involved and will seek to allocate, on an equitable basis, investment opportunities believed to be appropriate for us and the other accounts it manages or is associated with, there can be no assurance that a particular investment opportunity will be allocated in any particular manner.

Midway is authorized to follow broad investment guidelines in determining which assets it will invest in. Although our board of directors will ultimately determine when and how much capital to allocate to the Midway Residential Mortgage Portfolio, we generally will not approve transactions in advance of their execution. Currently, our investment in any new program asset under the HCS Advisory Agreement requires the approval of our board of directors. However, our board of directors may elect to not review individual investments in new program assets in the future. In addition to conducting periodic reviews, we will rely primarily on information provided to us by our external managers.  Complicating matters further, our external managers may use complex investment strategies and transactions, which may be difficult or impossible to unwind. As a result, because our external managers have great latitude to determine the types of assets it may decide are proper investments for the Midway Residential Mortgage Portfolio or us, there can be no assurance that we would otherwise approve of these investments individually or that they will be successful.

Pursuant to the terms of the Midway Management Agreement, we may only redeem invested capital in an amount equal to the lesser of 10% of the invested capital in the Midway Residential Mortgage Portfolio or $10 million as of the last calendar day of the month upon not less than 75 days written notice, subject to our authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment Company Act, and we are only permitted to make one such redemption request in any 75-day period. In the event a significant market event or shock, we may be unable to effect a redemption of invested capital in greater amounts or at a greater rate unless we obtain the consent of Midway. Because a reduction of invested capital would reduce the base management fee under the Midway Management Agreement, Midway may be less inclined to consent to such redemptions.

Other than HCS, none of our external managers is obligated to dedicate any specific personnel exclusively to us, nor are they or their personnel obligated to dedicate any specific portion of their time to the management of our business. As a result, we cannot provide any assurances regarding the amount of time our external managers will dedicate to the management of our business. Moreover, each of our external managers has significant responsibilities for other investment vehicles and may not always be able to devote sufficient time to the management of our business. Consequently, we may not receive the level of support and assistance that we otherwise might receive if such services were provided internally by us.

To our knowledge, HCS beneficially owned approximately 15.3% of our outstanding common stock as of December 31, 2010. In addition, our chairman, Mr. Fowler, is also a managing director of JMP Group Inc. and a portfolio manager at HCS and, as a result, may have a conflict of interest in situations where the best interests of our company and our stockholders do not align with the interests of HCS or its affiliates.  This could result in decisions that are not in the best interests of our company or our stockholders.
 
 
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Company History
 
We were formed as a Maryland corporation in September 2003. In June 2004, we completed our initial public offering, or IPO, which resulted in approximately $122 million in net proceeds to our company. Following the completion of our IPO, we operated as a self-advised residential mortgage finance company that focused on originating, acquiring and investing in adjustable and variable rate mortgage (“ARM”) assets. Under this business model, we retained and either financed in our portfolio or sold to third parties selected ARM loans and hybrid ARM loans originated by HC, while continuing to sell all fixed-rate loans originated by HC to third parties. In the first quarter of 2007, with the mortgage lending business facing increasingly difficult operating conditions, we completed the sale of substantially all of the assets related to our retail and wholesale residential mortgage lending platform to IndyMac Bank, F.S.B., thereby marking our exit from the mortgage lending business. In connection with the sale of the mortgage lending business, HC recorded a significant net operating loss carry-forward, of which approximately $59 million remained at December 31, 2010, subject to limitation under Section 382 of the IRC.

Following our exit from the mortgage lending business, we focused our efforts on the business of investing, on a leveraged basis, in Agency RMBS, prime ARM loans and non-Agency RMBS, with a primary focus on growing our portfolio of Agency RMBS. In January 2008 we formed a strategic relationship with JMP Group Inc., by concurrently entering into The Prior Advisory Agreement with HCS and selling $20 million of our Series A. Preferred Stock to JMP Group Inc. and certain of its affiliates.  In February 2008, we received net proceeds of approximately $56.5 million from the issuance and sale of 7.5 million shares of our common stock to certain accredited investors in a private placement for which an affiliate of JMP Group Inc. served as placement agent. At the time, we anticipated that we would continue to grow a portfolio of Agency RMBS, while, together with HCS, opportunistically pursuing and acquiring “alternative” real estate-related and financial assets that would diversify our market risks and might permit us to potentially utilize all or part of the significant net operating loss carry-forward held by HC. Accordingly, we used the proceeds from our private offerings of common and preferred stock to acquire a significant portfolio of Agency RMBS during January and February of 2008.  Like other mortgage REITs and other industry participants, we were significantly affected by the market disruptions in 2008, particularly, the market disruption in March 2008, which caused us to liquidate a significant percentage of our Agency RMBS portfolio in an effort to reduce leverage and improve our liquidity position as credit markets tightened.

Since the market disruptions of 2008, we have endeavored to reposition our investment portfolio from one primarily focused on leveraged Agency RMBS and prime ARM loans held in securitization trusts, which primarily involve interest rate risk, to a more diversified portfolio that includes elements of credit risk with reduced leverage. Most recently, we announced the formation and initial funding of the Midway Residential Mortgage Portfolio. See “Our Investment Strategy” above.

Our Structure

We conduct our business through New York Mortgage Trust, Inc., which serves as the parent company, and several of our subsidiaries, including special purpose subsidiaries established for loan securitization purposes. In addition, we conduct certain of our portfolio investment operations through our TRS, HC, in order to utilize, to the extent permitted by law, some or all of a net operating loss carry-forward held in HC that resulted from HC’s exit from the mortgage lending business, and through NYMF, our QRS, which currently holds certain mortgage-related assets for regulatory compliance purposes. The Company consolidates all of its subsidiaries under generally accepted accounting principles in the United States of America (“GAAP”). 

Certain Federal Income Tax Considerations and Our Status as a REIT
 
We have elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code (IRC) of 1986, as amended, for federal income tax purposes, commencing with our taxable year ended December 31, 2004, and we believe that our current and proposed method of operation will enable us to continue to qualify as a REIT for our taxable year ended December 31, 2011 and thereafter. Accordingly, the net interest income we earn on these assets is generally not subject to federal income tax as long as we distribute at least 90% of our REIT taxable income in the form of a dividend to our stockholders each year and comply with various other requirements. Taxable income generated by HC, our taxable REIT subsidiary, or TRS, is subject to regular corporate income tax.
 
The benefit of REIT tax status is a tax treatment that avoids “double taxation,” or taxation at both the corporate and stockholder levels, that generally applies to distributions by a corporation to its stockholders. Failure to qualify as a REIT would subject our Company to federal income tax (including any applicable minimum tax) on its taxable income at regular corporate rates and distributions to its stockholders in any such year would not be deductible by our Company.
 
 
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Summary Requirements for Qualification
 
Organizational Requirements
 
A REIT is a corporation, trust, or association that meets each of the following requirements:
 
1) It is managed by one or more trustees or directors.

2) Its beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest.

3) It would be taxable as a domestic corporation, but for the REIT provisions of the federal income tax laws.

4) It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws.

5) At least 100 persons are beneficial owners of its shares or ownership certificates.

6) Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax laws define to include certain entities, during the last half of any taxable year.

7) It elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status.

8) It meets certain other qualification tests, described below, regarding the nature of its income and assets.
 
We must meet requirements 1 through 4 during our entire taxable year and must meet requirement 5 during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.
 
Qualified REIT Subsidiaries. A corporation that is a “qualified REIT subsidiary” is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction, and credit of a “qualified REIT subsidiary” are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A “qualified REIT subsidiary” is a corporation, all of the capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any “qualified REIT subsidiary” that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit.
 
Taxable REIT Subsidiaries. A REIT is permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries,” or TRSs. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.
 
A TRS will pay income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. We have elected for HC to be treated as a TRS. HC is subject to corporate income tax on its taxable income.
 
Qualified REIT Assets. On the last day of each calendar quarter, at least 75% of the value of our assets (which includes any assets held through a qualified REIT subsidiary) must consist of qualified REIT assets — primarily real estate, mortgage loans secured by real estate, and certain mortgage-backed securities (“Qualified REIT Assets”), government securities, cash, and cash items. We believe that substantially all of our assets are and will continue to be Qualified REIT Assets. On the last day of each calendar quarter, of the assets not included in the foregoing 75% asset test, the value of securities that we hold issued by any one issuer may not exceed 5% in value of our total assets and we may not own more than 10% of the voting power or value of any one issuer’s outstanding securities (with an exception for securities of a qualified REIT subsidiary or of a taxable REIT subsidiary). In addition, the aggregate value of our securities in taxable REIT subsidiaries cannot exceed 25% of our total assets. We monitor the purchase and holding of our assets for purposes of the above asset tests and seek to manage our portfolio to comply at all times with such tests.
 
We may from time to time hold, through one or more taxable REIT subsidiaries, assets that, if we held them directly, could generate income that would have an adverse effect on our qualification as a REIT or on certain classes of our stockholders.
 
 
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Gross Income Tests
 
We must meet the following separate income-based tests each year:
 
1.  The 75% Test. At least 75% of our gross income for the taxable year must be derived from Qualified REIT Assets. Such income includes interest (other than interest based in whole or in part on the income or profits of any person) on obligations secured by mortgages on real property, rents from real property, gain from the sale of Qualified REIT Assets, and qualified temporary investment income or interests in real property. The investments that we have made and intend to continue to make will give rise primarily to mortgage interest qualifying under the 75% income test.
 
2.  The 95% Test. At least 95% of our gross income for the taxable year must be derived from the sources that are qualifying for purposes of the 75% test, and from dividends, interest or gains from the sale or disposition of stock or other assets that are not dealer property.
 
Distributions
 
We must distribute to our stockholders on a pro rata basis each year an amount equal to at least (i) 90% of our taxable income before deduction of dividends paid and excluding net capital gain, plus (ii) 90% of the excess of the net income from foreclosure property over the tax imposed on such income by the Internal Revenue Code, less (iii) any “excess non-cash income.” We have made and intend to continue to make distributions to our stockholders in sufficient amounts to meet the distribution requirement for REIT qualification.

Competition
 
Our success depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. When we invest in mortgage-backed securities, mortgage loans and other investment assets, we compete with a variety of institutional investors, including other REITs, insurance companies, mutual funds, hedge funds, pension funds, investment banking firms, banks and other financial institutions that invest in the same types of assets. Many of these investors have greater financial resources and access to lower costs of capital than we do..

Corporate Offices and Personnel
 
Our corporate headquarters are located at 52 Vanderbilt Avenue, Suite 403, New York, New York, 10017 and our telephone number is (212) 792-0107.  As of December 31, 2010 we employed three full-time employees.
 
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 SEC. Our Corporate Governance Guidelines and Code of Business Conduct and Ethics 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 Secretary, 52 Vanderbilt Avenue, Suite 403, New York, New York, 10017. Information on our website is neither part of nor incorporated into this Annual Report on Form 10-K.
 
 
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 Some of the statements included in this Annual Report on Form 10-K constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “goal,” “objective,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.
 
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently in our possession. These beliefs, assumptions and expectations may change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of our portfolio and our business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should carefully consider these risks, along with the following factors that could cause actual results to vary from our forward-looking statements:
 
 
·
changes in our business and strategies;
 
 
·
our ability to successfully diversify our investment portfolio and identify suitable assets to invest in;
 
 
·
the effect of the Federal Reserve’s and the U.S. Treasury’s actions and programs, including future purchases or sales of Agency RMBS by the Federal Reserve or Treasury, on the liquidity of the capital markets and the impact and timing of any further programs or regulations implemented by the U.S. Government or its agencies;
 
 
·
any changes in laws and regulations affecting the relationship between Fannie Mae, Freddie Mac and Ginnie Mae and the U.S. Government;
 
 
·
increased prepayments of the mortgages and other loans underlying our investment securities;
 
 
·
the volatility of the markets for our targeted assets;
 
 
·
increased rates of default and/or decreased recovery rates on our assets;
 
 
·
mortgage loan modification programs and future legislative action;
 
 
·
the degree to which our hedging strategies may or may not protect us from, or expose us to, credit or interest rate risk;
 
 
·
changes in the availability, terms and deployment of capital;
 
 
·
changes in interest rates and interest rate mismatches between our assets and related borrowings;
 
 
·
our ability to maintain existing financing agreements, obtain future financing arrangements and the terms of such arrangements;
 
 
·
changes in economic conditions generally and the mortgage, real estate and debt securities markets specifically;
 
 
·
legislative or regulatory changes;
 
 
·
changes to GAAP; and
 
 
·
the other important factors identified in, or incorporated by reference into, this Annual Report, including, but not limited to those under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk,” and the various other factors identified in any other documents filed by us with the SEC.
 
 
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Item 1A.  RISK FACTORS
 
Set forth below are the risks that we believe are material to stockholders.  You should carefully consider the following risk factors and the various other factors identified in or incorporated by reference into any other documents filed by us with the SEC in evaluating our company and our business.  The risks discussed herein can adversely affect our business, liquidity, operating results, prospects, and financial condition.  This could cause the market price of our securities to decline.  The risk factors described below are not the only risks that may affect us.  Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, operating results, prospects, and financial condition.

Risks Related to Our Business and Our Company

Difficult conditions in the mortgage and residential real estate markets have caused and may cause us to experience losses and these conditions may persist for the foreseeable future.

Our business is materially affected by conditions in the residential mortgage market, the residential real estate market, the financial markets and the economy generally. In addition, we expect that as we acquire commercial mortgage-related assets in the future, our business will be increasingly affected by conditions in the commercial mortgage market and the commercial real estate market. Furthermore, we believe the risks associated with our investments will be more acute during periods of economic slowdown or recession, especially if these periods are accompanied by declining real estate values. Concerns about the residential and commercial mortgage markets and a declining real estate market generally, as well as inflation, energy costs, geopolitical issues and the availability and cost of credit have contributed to increased volatility and diminished expectations for the economy and markets going forward. The residential and commercial mortgage markets have been adversely affected by changes in the lending landscape, the severity of which was largely unanticipated by the markets. There is no assurance that these markets have stabilized or that they will not worsen.

In addition, a continued economic slowdown or delayed recovery may result in continued decreased demand for residential and commercial property, which would likely further compress homeownership rates and place additional pressure on home price performance, while forcing commercial property owners to lower rents on properties with excess supply. We believe there is a strong correlation between home price growth rates and mortgage loan delinquencies. Moreover, to the extent that a property owner has fewer tenants or receives lower rents, such property owners will generate less cash flow on their properties, which increases significantly the likelihood that such property owners will default on their debt service obligations. If the borrowers of our mortgage loans, or the loans underlying certain of our investment securities, default, we may incur losses on those loans or investment securities. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income and our ability to acquire our targeted assets in the future on favorable terms or at all. The further deterioration of the residential or commercial mortgage markets, the residential or commercial real estate markets, the financial markets and the economy generally may result in a decline in the market value of our investments or cause us to experience losses related to our assets, which may adversely affect our results of operations, the availability and cost of credit and our ability to make distributions to our stockholders.

We may change our investment strategy, hedging strategy and asset allocation and operational and management policies without stockholder consent, which may result in the purchase of riskier assets and materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We may change our investment strategy, hedging strategy and asset allocation and operational and management policies at any time without the consent of our stockholders, which could result in our purchasing assets or entering into hedging transactions that are different from, and possibly riskier than, the assets and hedging transactions described in this report. A change in our investment strategy or hedging strategy may increase our exposure to real estate values, interest rates and other factors. A change in our asset allocation could result in us purchasing assets in classes different from those described in this report. Our board of directors determines our operational policies and may amend or revise our policies, including those with respect to our acquisitions, growth, operations, indebtedness, capitalization and distributions or approve transactions that deviate from these policies without a vote of, or notice to, our shareholders. In addition, certain of our external managers have great latitude in making investment and hedging decisions on our behalf. Changes in our investment strategy, hedging strategy and asset allocation and operational and management policies could materially adversely affect our business, financial condition and results of operations and ability to make distributions to our stockholders.

 
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Interest rate mismatches between the interest-earning assets held in our investment portfolio and the borrowings used to fund the purchases of those assets may reduce our net income or result in a loss during periods of changing interest rates.

Certain of the assets held in our investment portfolio, particularly RMBS, have a fixed coupon rate, generally for a significant period, and in some cases, for the average maturity of the asset. At the same time, our repurchase agreements and other borrowings typically provide for a payment reset period of 30 days or less.  In addition, the average maturity of our borrowings generally will be shorter than the average maturity of the RMBS currently in our portfolio and shorter than the RMBS and other mortgage-related securities and loans in which we seek to invest. Historically, we have used swap agreements as a means for attempting to fix the cost of certain of our liabilities over a period of time; however, these agreements will generally not be sufficient to match the cost of all our liabilities against all of our investment securities. In the event we experience unexpectedly high or low prepayment rates on RMBS or other mortgage-related securities or loans, our strategy for matching our assets with our liabilities is more likely to be unsuccessful.

Interest rate fluctuations will also cause variances in the yield curve, which may reduce our net income.  The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on the RMBS and other interest-earning assets in our investment portfolio. For example, because the RMBS in our investment portfolio typically bear interest based on longer-term rates while our borrowings typically bear interest based on short-term rates, a flattening of the yield curve would tend to decrease our net income and the market value of these securities. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur significant operating losses.

Declines in the market values of assets in our investment portfolio may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.
 
The market value of the interest-bearing assets in which we invest, most notably RMBS and purchased prime ARM loans and any related hedging instruments, may move inversely with changes in interest rates. We anticipate that increases in interest rates will tend to decrease our net income and the market value of our interest-bearing assets.  A significant percentage of the securities within our investment portfolio are classified for accounting purposes as “available for sale.” Changes in the market values of trading securities will be reflected in earnings and changes in the market values of available for sale securities will be reflected in stockholders’ equity. As a result, a decline in market values may reduce the book value of our assets.  Moreover, if the decline in market value of an available for sale security is other than temporary, such decline will reduce earnings.
 
A decline in the market value of our interest-bearing assets may adversely affect us, particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan, which would reduce our liquidity and limit our ability to leverage our assets. In addition, if we are, or anticipate being, unable to post the additional collateral, we would have to sell the assets at a time when we might not otherwise choose to do so. In the event that we do not have sufficient liquidity to meet such requirements, lending institutions may accelerate indebtedness, increase interest rates and terminate our ability to borrow, any of which could result in a rapid deterioration of our financial condition and cash available for distribution to our stockholders. Moreover, if we liquidate the assets at prices lower than the amortized cost of such assets, we will incur losses.

Changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. government, may adversely affect our business.
 
Payments on the Agency RMBS in which we invest are guaranteed by Fannie Mae and Freddie Mac. As broadly publicized, Fannie Mae and Freddie Mac have experienced significant losses in recent years, causing the U.S. Government to place Fannie Mae and Freddie Mac under federal conservatorship and to inject significant capital in these businesses. Questions regarding the continued viability of Fannie Mae and Freddie Mac, as currently structured, including the guarantees that back the RMBS issued by them, and the U.S. Government’s participation in the U.S. residential mortgage market through the GSEs, continue to persist. In February 2011, the U.S. Department of the Treasury along with the U.S. Department Housing and Urban Development released a much-awaited report titled “Reforming America’s Housing Finance Market”, which outlines recommendations for reforming the U.S. housing system, specifically the roles of Fannie Mae and Freddie Mac and transforming the government’s involvement in the housing market and its relationship to Fannie Mae and Freddie Mac. It is unclear how future legislation may impact the housing finance market and the investing environment for mortgage-related securities and more specifically, Agency RMBS and non-Agency RMBS, as the method of reform is undecided and has not yet been defined by the regulators. New regulations and programs related to Fannie Mae and Freddie Mac, including those affecting the relationship between the GSEs and the U.S. Government, may adversely affect the pricing, supply, liquidity and value of RMBS and otherwise materially harm our business and operations.
 
 
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Our income could be negatively affected in a number of ways depending on the manner in which events related to Fannie Mae and Freddie Mac unfold. For example, the current credit support provided by the U.S. to Fannie Mae and Freddie Mac, and any additional credit support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from Agency RMBS, thereby tightening the spread between the interest we earn on those assets and our cost of financing those assets. A reduction in the supply of Agency RMBS could also negatively affect the pricing of RMBS by reducing the spread between the interest we earn on our RMBS and our cost of financing those assets. In addition, any law affecting these government-sponsored enterprises may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. As a result, such laws could increase the risk of loss on investments in Fannie Mae and/or Freddie Mac Agency RMBS.

Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns, on the interest-earning assets in which we invest.

In late 2008, the U.S. government, through the Federal Housing Authority and the Federal Deposit Insurance Corporation, or FDIC, commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures.  The programs involve, among other things, modifications of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans.  In addition, members of the U.S. Congress have indicated support for additional legislative relief for homeowners, including an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings.  These loan modification programs, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may as well as changes in the requirements necessary to qualify for refinancing a mortgage with Fannie Mae, Freddie Mac or Ginnie Mae adversely affect the value of, and the returns on, the interest-earning assets in which we invest, including through prepayments on the mortgage loans underlying our RMBS and other mortgage-related securities and loans, including mortgage loans held in our securitization trusts.

We have acquired and may acquire in the future non-Agency RMBS collateralized by subprime and Alt A mortgage loans, which are not guaranteed by any government-sponsored entity or agency and are subject to increased risks.

We have acquired and may acquire in the future non-Agency RMBS, which are backed by residential real estate property but, in contrast to Agency RMBS, their principal and interest are not guaranteed by a GSE such as Fannie Mae or Freddie Mac. We may acquire non-Agency RMBS backed by collateral pools of mortgage loans that have been originated using underwriting standards that are less restrictive than those used in underwriting “prime mortgage loans” and “Alt A mortgage loans.” These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to current economic conditions, including fluctuations in interest rates and lower home prices, as well as aggressive lending practices, many of the mortgage loans backing the non-Agency RMBS have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with these mortgage loans, the performance of non-Agency RMBS could be adversely affected, which could materially and adversely impact our results of operations, financial condition and business.

Prepayment rates can change, adversely affecting the performance of our assets.

The frequency at which prepayments (including both voluntary prepayments by the borrowers and liquidations due to defaults and foreclosures) occur on mortgage loans underlying RMBS is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Generally, borrowers tend to prepay their mortgages when prevailing mortgage rates fall below the interest rates on their mortgage loans. A significant percentage of the mortgage loans underlying our existing RMBS were originated in a relatively higher interest rate environment than currently in effect and, thus, could be prepaid if borrowers are eligible for refinancings.

In general, “premium” securities (securities whose market values exceed their principal or par amounts) are adversely affected by faster-than-anticipated prepayments because the above-market coupon that such premium securities carry will be earned for a shorter period of time. Generally, “discount” securities (securities whose principal or par amounts exceed their market values) are adversely affected by slower-than-anticipated prepayments. Since many RMBS will be discount securities when interest rates are high, and will be premium securities when interest rates are low, these RMBS may be adversely affected by changes in prepayments in any interest rate environment.
 
 
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During the first quarter of 2010, each of Fannie Mae and Freddie Mac announced that it was significantly increasing its repurchase of mortgage loans that are 120 or more days delinquent from mortgage pools backing Freddie Mac guaranteed RMBS or Fannie Mae guaranteed RMBS, as applicable. The initial effect of these repurchases was similar to a one-time or short-term increase in mortgage prepayment rates. The ongoing magnitude of the effect of these repurchases on a particular Agency RMBS depends upon the composition of the mortgage pool underlying each Agency RMBS, although for many Agency RMBS the effect has been, and we expect will continue to be, significant.
 
The adverse effects of prepayments may impact us in various ways. First, particular investments may experience outright losses, as in the case of IOs and in an environment of faster actual or anticipated prepayments. Second, particular investments may under-perform relative to any hedges that we may have constructed for these assets, resulting in a loss to us. In particular, prepayments (at par) may limit the potential upside of many RMBS to their principal or par amounts, whereas their corresponding hedges often have the potential for unlimited loss. Furthermore, to the extent that faster prepayment rates are due to lower interest rates, the principal payments received from prepayments will tend to be reinvested in lower-yielding assets, which may reduce our income in the long run. Therefore, if actual prepayment rates differ from anticipated prepayment rates our business, financial condition and results of operations and ability to make distributions to our shareholders could be materially adversely affected.

A flat or inverted yield curve may adversely affect prepayment rates on and supply of our RMBS.
 
Our net interest income varies primarily as a result of changes in interest rates as well as changes in interest rates across the yield curve.  We believe that when the yield curve is relatively flat, borrowers have an incentive to refinance into hybrid mortgages with longer initial fixed rate periods and fixed rate mortgages, causing our RMBS, or investment securities, to experience faster prepayments.  In addition, a flatter yield curve generally leads to fixed-rate mortgage rates that are closer to the interest rates available on hybrid ARMs and ARMs, possibly decreasing the supply of the RMBS we seek to acquire.  At times, short-term interest rates may increase and exceed long-term interest rates, causing an inverted yield curve.  When the yield curve is inverted, fixed-rate mortgage rates may approach or be lower than hybrid ARMs or ARM rates, further increasing prepayments on, and negatively impacting the supply of, our RMBS.  Increases in prepayments on our portfolio will cause our premium amortization to accelerate, lowering the yield on such assets.  If this happens, we could experience a decrease in net income or incur a net loss during these periods, which may negatively impact our distributions to stockholders.

Changes in interest rates could negatively affect the value of our assets, and increase the risk of default on our assets.

Currently, our assets primarily consist of RMBS. Most RMBS, especially most fixed-rate RMBS and most RMBS backed by fixed-rate mortgage loans, decline in value when long-term interest rates increase. Even in the case of Agency RMBS, the guarantees provided by GSEs do not protect us from declines in market value caused by changes in interest rates. In the case of RMBS backed by ARMs, increases in interest rates can lead to increases in delinquencies and defaults as borrowers become less able to make their mortgage payments following interest payment resets. At the same time, an increase in short-term interest rates would increase the amount of interest owed on our reverse repos.

RMBS backed by ARMs are typically subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase over the life of the security. Our borrowings typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while interest rate caps could limit the interest rates on our RMBS backed by ARMs. This problem is magnified for RMBS backed by ARMs and hybrid ARMs that are not fully indexed. Further, some RMBS backed by ARMs and hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, the payments we receive on RMBS backed by ARMs and hybrid ARMs may be lower than the related debt service costs. These factors could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our shareholders.

 
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Competition may prevent us from acquiring assets on favorable terms or at all, which could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive market for investment opportunities. Our net income largely depends on our ability to acquire our targeted assets at favorable spreads over our borrowing costs. In acquiring our targeted assets, we compete with other REITs, investment banking firms, savings and loan associations, banks, insurance companies, mutual funds, other lenders and other entities that purchase mortgage-related assets, many of which have greater financial resources than us. Additionally, many of our potential competitors are not subject to REIT tax compliance or required to maintain an exemption from the Investment Company Act. As a result, we may not in the future be able to acquire sufficient quantities of our targeted assets at favorable spreads over our borrowing costs, which could have a material adverse effect on our business, financial condition and results of operations.
 
We may experience periods of illiquidity for our assets which could adversely affect our ability to finance our business or operate profitably.
 
We bear the risk of being unable to dispose of our interest-earning assets at advantageous times or in a timely manner because these assets generally experience periods of illiquidity.  The lack of liquidity may result from the absence of a willing buyer or an established market for these assets, legal or contractual restrictions on resale or disruptions in the secondary markets.  This illiquidity may adversely affect our profitability and our ability to finance our business and could cause us to incur substantial losses.

Market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for us to analyze our investment portfolio.
 
Our success depends on our ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans that underlie our RMBS.  Changes in interest rates and prepayments affect the market price of the RMBS that we hold in our portfolio and in which we intend to invest.  In managing our investment portfolio, to assess the effects of interest rate changes and prepayment trends on our investment portfolio, we typically rely on certain assumptions that are based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions.  If the dislocations in the residential mortgage market over the last few years or other developments change the way that prepayment trends have historically responded to interest rate changes, our ability to (i) assess the market value of our investment portfolio, (ii) effectively hedge our interest rate risk and (iii) implement techniques to reduce our prepayment rate volatility would be significantly affected, which could materially adversely affect our financial position and results of operations.
 
A substantial majority of the RMBS within our investment portfolio is recorded at fair value as determined in good faith by our management based on market quotations from brokers and dealers.  Although we currently are able to obtain market quotations for assets in our portfolio, we may be unable to obtain quotations from brokers and dealers for certain assets within our investment portfolio in the future, in which case our management may need to determine in good faith the fair value of these assets.
 
Substantially all of the assets held within our investment portfolio are in the form of securities that are not publicly traded on a national securities exchange or quotation system.  The fair value of securities and other assets that are not publicly traded in this manner may not be readily determinable.  A substantial majority of the assets in our investment portfolio are valued by us at fair value as determined in good faith by our management based on market quotations from brokers and dealers.  Although we currently are able to obtain quotations from brokers and dealers for substantially all of the assets within our investment portfolio, we may be unable to obtain such quotations on other assets in our investment portfolio in the future, in which case, our manager may need to determine in good faith the fair value of these assets.  Because such quotations and valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a public market for these securities existed.  The value of our common stock could be adversely affected if our determinations regarding the fair value of these assets are materially higher than the values that we ultimately realize upon their disposal.  Misjudgments regarding the fair value of our assets that we subsequently recognize may also result in impairments that we must recognize.
 
 
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Loan delinquencies on our prime ARM loans held in securitization trusts may increase as a result of significantly increased monthly payments required from ARM borrowers after the initial fixed period.
 
The scheduled increase in monthly payments on certain adjustable rate mortgage loans held in our securitization trusts may result in higher delinquency rates on those mortgage loans and could have a material adverse affect on our net income and results of operations.  This increase in borrowers' monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans.  Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to fund available replacement loans at comparably low interest rates or at all.  A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance their loans or sell their homes.  In addition, these mortgage loans may have prepayment premiums that inhibit refinancing.
 
We may be required to repurchase loans if we breached representations and warranties from loan sale transactions, which could harm our profitability and financial condition.
 
Loans from our discontinued mortgage lending operations that were sold to third parties under sale agreements include numerous representations and warranties regarding the manner in which the loan was originated, the property securing the loan and the borrower.  If these representations or warranties are found to have been breached, we may be required to repurchase the loan.  We may be forced to resell these repurchased loans at a loss, which could harm our profitability and financial condition.

Residential whole mortgage loans, including subprime residential mortgage loans and non-performing and sub-performing residential mortgage loans, are subject to increased risks.

We may acquire and manage pools of residential whole mortgage loans. Residential whole mortgage loans, including subprime mortgage loans and non-performing and sub-performing mortgage loans, are subject to increased risks of loss. Unlike Agency RMBS, whole mortgage loans generally are not guaranteed by the U.S. Government or any GSE, though in some cases they may benefit from private mortgage insurance. Additionally, by directly acquiring whole mortgage loans, we do not receive the structural credit enhancements that benefit senior tranches of RMBS. A whole mortgage loan is directly exposed to losses resulting from default. Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower and the priority and enforceability of the lien will significantly impact the value of such mortgage. In the event of a foreclosure, we may assume direct ownership of the underlying real estate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover our cost basis in the loan, and any costs or delays involved in the foreclosure or liquidation process may increase losses.

Whole mortgage loans are also subject to “special hazard” risk (property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies), and to bankruptcy risk (reduction in a borrower’s mortgage debt by a bankruptcy court). In addition, claims may be assessed against us on account of our position as mortgage holder or property owner, including assignee liability, responsibility for tax payments, environmental hazards and other liabilities. In some cases, these liabilities may be “recourse liabilities” or may otherwise lead to losses in excess of the purchase price of the related mortgage or property.

Commercial mortgage loans are subject to risks of delinquency and foreclosure and risks of loss that may be greater than similar risks associated with residential mortgage loans.

We may acquire CMBS backed by commercial mortgage loans or directly acquire commercial mortgage loans. Commercial mortgage loans are secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with residential mortgage loans. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. If we incur losses on CMBS, or commercial mortgage loans, our business, financial condition and results of operations and our ability to make distributions to our stockholders may be materially adversely affected.

 
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The mezzanine loan assets that we may acquire or originate will involve greater risks of loss than senior loans secured by income-producing properties.

We may acquire or originate mezzanine loans, which take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. These types of assets involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property, because the loan may become unsecured as a result of foreclosure by the senior lender. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements between the holder of the mortgage loan and us, as the mezzanine lender, may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies and control decisions made in bankruptcy proceedings relating to borrowers. As a result, we may not recover some or all of our investment, which could result in losses. In addition, even if we are able to foreclose on the underlying collateral following a default on a mezzanine loan, we would be substituted for the defaulting borrower and, to the extent income generated on the underlying property is insufficient to meet outstanding debt obligations on the property, may need to commit substantial additional capital to stabilize the property and prevent additional defaults to lenders with existing liens on the property. Significant losses related to mezzanine loans originated or acquired by us could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.

We may invest in high yield or subordinated and lower rated securities that have greater risks of loss than other investments, which could adversely affect our business, financial condition and cash available for dividends.

We may invest in high yield or subordinated or lower rated securities, including subordinated tranches of CMBS and non-Agency RMBS, which involve a higher degree of risk than other investments.  Numerous factors may affect a company’s ability to repay its high yield or subordinated securities, including the failure to meet its business plan, a downturn in its industry or negative economic conditions.  These securities may not be secured by mortgages or liens on assets.  Our right to payment and security interest with respect to such securities may be subordinated to the payment rights and security interests of the senior lender.  Therefore, we may be limited in our ability to enforce our rights to collect these loans and to recover any of the loan balance through a foreclosure of collateral.

Our real estate assets are subject to risks particular to real property.
 
We own assets secured by real estate and may own real estate directly in the future, either through direct acquisitions or upon a default of mortgage loans. Real estate assets are subject to various risks, including:
 
·
acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses;
 
·
acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;
 
·
adverse changes in national and local economic and market conditions; and
 
·
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of  compliance with laws and regulations, fiscal policies and ordinances;
 
The occurrence of any of the foregoing or similar events may reduce our return from an affected property or asset and, consequently, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our shareholders.
 
 
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We are highly dependent on information systems and system failures could significantly disrupt our business, which may, in turn, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our shareholders.

Our business is highly dependent on communications and information systems. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities, including RMBS trading activities, which could materially adversely affect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all of the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead to losses.

Before acquiring certain assets, such as non-Agency RMBS, whole mortgage loans, CMBS or other mortgage-related or financial assets, we or the external manager responsible for the acquisition and management of such asset may decide to conduct (either directly or using third parties) certain due diligence. Such due diligence may include (i) an assessment of the strengths and weaknesses of the asset’s credit profile, (ii) a review of all or merely a subset of the documentation related to the asset, or (iii) other reviews that we or the external manager may deem appropriate to conduct. There can be no assurance that we or the external manager will conduct any specific level of due diligence, or that, among other things, the due diligence process will uncover all relevant facts or that any purchase will be successful, which could result in losses on these assets, which, in turn, could adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Lack of diversification in the number of assets we acquire would increase our dependence on relatively few individual assets.

Our management objectives and policies do not place a limit on the size of the amount of capital used to support, or the exposure to (by any other measure), any individual asset or any group of assets with similar characteristics or risks. In addition, because we are a small company, we may be unable to sufficiently deploy capital into a number of assets or asset groups.  As a result, our portfolio may be concentrated in a small number of assets or may be otherwise undiversified, increasing the risk of loss and the magnitude of potential losses to us and our stockholders if one or more of these assets perform poorly. For example, our portfolio of mortgage-related assets may at times be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations. To the extent that our portfolio is concentrated in any one region or type of security, downturns relating generally to such region or type of security may result in defaults on a number of our assets within a short time period, which may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders

Risk Related to Our Debt Financing

Our access to financing sources, which may not be available on favorable terms, or at all, especially in light of current market conditions, may be limited, and this may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We depend upon the availability of adequate capital and financing sources to fund our operations. However, as previously discussed, the capital and credit markets recently experienced unprecedented levels of volatility and disruption which exerted downward pressure on stock prices and credit capacity for lenders. If these levels of market volatility and disruption recur, it could materially adversely affect one or more of our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with financing, or to increase the costs of that financing, or to become insolvent. Moreover, we are currently party to repurchase agreements of a short duration and there can be no assurance that we will be able to roll over or re-set these borrowings on favorable terms, if at all. In the event we are unable to roll over or re-set our reverse repos, it may be more difficult for us to obtain debt financing on favorable terms or at all. In addition, if regulatory capital requirements imposed on our lenders change, they may be required to limit, or increase the cost of, financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price. Under current market conditions, securitizations are generally unavailable or limited, which has also limited borrowings under warehouse facilities and other credit facilities that are intended to be refinanced by such securitizations. Consequently, depending on market conditions at the relevant time, we may have to rely on additional equity issuances to meet our capital and financing needs, which may be dilutive to our stockholders, or we may have to rely on less efficient forms of debt financing that consume a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to our stockholders and other purposes. We cannot assure you that we will have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which may cause us to curtail our asset acquisition activities and/or dispose of assets, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
 
 
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We may incur increased borrowing costs related to repurchase agreements and that would adversely affect our profitability.
 
Currently, a significant portion of our borrowings are collateralized borrowings in the form of repurchase agreements.  If the interest rates on these agreements increase at a rate higher than the increase in rates payable on our investments, our profitability would be adversely affected.
 
Our borrowing costs under repurchase agreements generally correspond to short-term interest rates such as LIBOR or a short-term Treasury index, plus or minus a margin.  The margins on these borrowings over or under short-term interest rates may vary depending upon a number of factors, including, without limitation:
 
·
the movement of interest rates;
 
·
  the availability of financing in the market; and
 
·
  the value and liquidity of our mortgage-related assets.
 
During 2008 and 2009, many repurchase agreement lenders required higher levels of collateral than they had required in the past to support repurchase agreements collateralized by Agency RMBS. Although these collateral requirements have been reduced to more appropriate levels, we cannot assure you that they will not again experience a dramatic increase. If the interest rates, lending margins or collateral requirements under these repurchase agreements increase, or if lenders impose other onerous terms to obtain this type of financing, our results of operations will be adversely affected.
 
The repurchase agreements that we use to finance our investments may require us to provide additional collateral, which could reduce our liquidity and harm our financial condition.
 
We intend to use repurchase agreements to finance our investments. If the market value of the loans or securities pledged or sold by us to a funding source decline in value, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so. Posting additional collateral to support our repurchase agreements will reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase our borrowing rates, liquidate our collateral at inopportune times and terminate our ability to borrow. This could result in a rapid deterioration of our financial condition and possibly require us to file for protection under the U.S. Bankruptcy Code.
 
We intend to leverage our equity, which will exacerbate any losses we incur on our current and future investments and may reduce cash available for distribution to our stockholders.
 
We intend to leverage our equity through borrowings, generally through the use of repurchase agreements and CDOs, which are obligations issued in multiple classes secured by an underlying portfolio of securities, and we may, in the future, utilize other forms of borrowing.  The amount of leverage we incur varies depending on our ability to obtain credit facilities and our lenders’ estimates of the value of our portfolio’s cash flow. The return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that can be derived from the assets we hold in our investment portfolio. Further, the leverage on our equity may exacerbate any losses we incur.
 
Our debt service payments will reduce the net income available for distribution to our stockholders. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to sale to satisfy our debt obligations. A decrease in the value of the assets may lead to margin calls under our repurchase agreements which we will have to satisfy. Significant decreases in asset valuation, such as occurred during March 2008, could lead to increased margin calls, and we may not have the funds available to satisfy any such margin calls. Although we have established a target overall leverage amount for our Midway Residential Mortgage Portfolio strategy and our legacy assets, there is no established limitation, other than may be required by our financing arrangements, on our leverage ratio or on the aggregate amount of our borrowings.
 
 
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If we are unable to leverage our equity to the extent we currently anticipate, the returns on certain of our assets could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.
 
If we are limited in our ability to leverage certain of our assets, such as Agency RMBS, assets under the Midway Residential Mortgage Portfolio or certain commercial mortgage-related securities, the returns on these assets may be harmed. A key element of our strategy is our use of leverage to increase the size of our RMBS portfolio in an attempt to enhance our returns. Our repurchase agreements are not currently committed facilities, meaning that the counterparties to these agreements may at any time choose to restrict or eliminate our future access to the facilities and we have no other committed credit facilities through which we may leverage our equity. If we are unable to leverage our equity to the extent we currently anticipate, the returns on our portfolio could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.
 
If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term or if we default on our obligations under the repurchase agreement, we would incur losses.
 
When we engage in repurchase transactions, we generally sell RMBS to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same RMBS back to us at the end of the term of the transaction.  Because the cash we receive from the lender when we initially sell the RMBS to the lender is less than the value of those RMBS (this difference is referred to as the “haircut”), if the lender defaults on its obligation to resell the same RMBS back to us we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the RMBS). Further, if we default on one of our obligations under a repurchase transaction, the lender can terminate the transaction and cease entering into any other repurchase transactions with us. Our repurchase agreements contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default. Any losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.
 
Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or a lender files for bankruptcy.
 
Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without delay in the event that we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that a lender files for bankruptcy. Thus, the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender or us.

Our liquidity may be adversely affected by margin calls under our repurchase agreements because we are dependent in part on the lenders' valuation of the collateral securing the financing.

Each of these repurchase agreements allows the lender, to varying degrees, to revalue the collateral to values that the lender considers to reflect market value. If a lender determines that the value of the collateral has decreased, it may initiate a margin call requiring us to post additional collateral to cover the decrease. When we are subject to such a margin call, we must provide the lender with additional collateral or repay a portion of the outstanding borrowings with minimal notice. Any such margin call could harm our liquidity, results of operation and financial condition.  Additionally, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause it to incur further losses and adversely affect our results of operations and financial condition.

 
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Hedging against credit events and interest rate changes and other risks may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our shareholders.

We have in the past engaged in and intend to opportunistically pursue in the future, together with our external managers, various hedging strategies in an effort to reduce our exposure to losses from adverse changes in interest rates, credit events and other factors. Hedging against a decline in the values of our portfolio positions does not prevent losses if the values of such positions decline, or eliminate the possibility of fluctuations in the value of our portfolio. Hedging transactions generally will limit the opportunity for gain if the values of our portfolio positions should increase. Further, certain hedging transactions could result in our experiencing significant losses. Moreover, at any point in time we may choose not to hedge all or a portion of these risks, and we generally will not hedge those risks that we believe are appropriate for us to take at such time, or that we believe would be impractical or prohibitively expensive to hedge. Even if we do choose to hedge certain risks, for a variety of reasons we generally will not seek to establish a perfect correlation between our hedging instruments and the risks being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Our hedging activity will vary in scope based on the composition of our portfolio, our market views, and changing market conditions, including the level and volatility of interest rates. When we do choose to hedge, hedging may fail to protect or could materially adversely affect us because, among other things:

 
·
either we or our external managers may fail to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the assets in the portfolio being hedged;
 
 
·
either we or our external managers may fail to recalculate, re-adjust and execute hedges in an efficient and timely manner;
 
 
·
the hedging transactions may actually result in poorer over-all performance for us than if we had not engaged in the hedging transactions;
 
 
·
credit hedging can be expensive, particularly when the market is forecasting future credit deterioration and when markets are more illiquid;
 
 
·
interest rate hedging can be expensive, particularly during periods of volatile interest rates;
 
 
·
available hedges may not correspond directly with the risks for which protection is sought;
 
 
·
the durations of the hedges may not match the durations of the related assets or liabilities being hedged;
 
 
·
many hedges are structured as over-the-counter contracts with counterparties whose creditworthiness is not guaranteed, raising the possibility that the hedging counterparty may default on their payment obligations; and
 
 
·
to the extent that the creditworthiness of a hedging counterparty deteriorates, it may be difficult or impossible to terminate or assign any hedging transactions with such counterparty.

For these and other reasons, our hedging activity may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Hedging instruments and other derivatives historically have not, in many cases, been traded on regulated exchanges, or been guaranteed or regulated by any U.S. or foreign governmental authorities and involve risks and costs that could result in material losses.

Hedging instruments and other derivatives involve risk because they historically have not, in many cases, been traded on regulated exchanges and have not been guaranteed or regulated by any U.S. or foreign governmental authorities. Consequently, for these instruments there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. Neither we nor our external managers are restricted from dealing with any particular counterparty or from concentrating any or all of its transactions with one counterparty. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default under the hedging agreement. Default by a party with whom we enter into a hedging transaction may result in losses and may force us to re-initiate similar hedges with other counterparties at the then-prevailing market levels. Generally we will seek to reserve the right to terminate our hedging transactions upon a counterparty’s insolvency, but absent an actual insolvency, we may not be able to terminate a hedging transaction without the consent of the hedging counterparty, and we may not be able to assign or otherwise dispose of a hedging transaction to another counterparty without the consent of both the original hedging counterparty and the potential assignee. If we terminate a hedging transaction, we may not be able to enter into a replacement contract in order to cover our risk. There can be no assurance that a liquid secondary market will exist for hedging instruments purchased or sold, and therefore we may be required to maintain any hedging position until exercise or expiration, which could materially adversely affect our business, financial condition and results of operations.

 
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The U.S. Commodity Futures Trading Commission and certain commodity exchanges have established limits referred to as speculative position limits or position limits on the maximum net long or net short position which any person or group of persons may hold or control in particular futures and options. Limits on trading in options contracts also have been established by the various options exchanges. It is possible that trading decisions may have to be modified and that positions held may have to be liquidated in order to avoid exceeding such limits. Such modification or liquidation, if required, could materially adversely affect our business, financial condition and results of operation and our ability to make distributions to our stockholders.

Risks Related to Our Agreements with Our External Managers

We are dependent on our external managers and certain of their key personnel and may not find a suitable replacement if they terminate their respective management or advisory agreements with us or such key personnel are no longer available to us.
 
We historically were organized as a self-advised company that acquired, originated, sold and managed its assets; however, as we modified our business strategy and the targeted assets we seek to acquire in response to changing market conditions, we began to outsource the management of certain targeted asset classes for which we had limited internal resources or experience. We presently are a party to two separate management or advisory agreements that provide for the external management of certain of our assets and investment strategies. Each of our external managers, in some manner, identifies, evaluates, negotiates, structures, closes and monitors certain investments on our behalf. In each case, we have engaged these third parties because of the expertise of certain key personnel of our external managers. The departure of any of the senior officers of our external managers, or of a significant number of investment professionals or principals of our external managers, could have a material adverse effect on our ability to achieve our investment objectives.  We are subject to the risk that our external managers will terminate their respective management or advisory agreement with us or that we may deem it necessary to terminate such agreement or prevent certain individuals from performing services for us, and that no suitable replacement will be found to manage certain of our assets and investment strategies.

Pursuant to our management or advisory agreements, our external managers, in most cases, are entitled to receive a management fee that is payable regardless of the performance of the assets under their management.
 
We will pay Midway substantial base management fees, based on our invested capital (as such term is defined in the Midway Management Agreement), regardless of the performance of the assets under their management. Similarly, pursuant to the HCS Advisory agreement, we will pay HCS a base advisory fee if such assets are deemed “managed assets” under the HCS Advisory Agreement, and we may pay them, if agreed to by each party, base management fees for assets deemed “scheduled assets, regardless of the performance of the assets under their management. In addition, we will pay HCS an annual consulting fee, subject to certain conditions, that is in no way contingent upon the performance or management of any of our assets  The external managers’ entitlement in many cases to non-performance based compensation may reduce its incentive to devote the time and effort of its professionals to seeking profitable investment opportunities for our company, which could result in the under-performance of assets under their management and negatively affect our ability to pay distributions to our stockholders or to achieve capital appreciation.
 
Pursuant to the terms of our management and advisory agreements, our external managers are generally entitled to receive an incentive fee, which may induce them to make certain investments, including speculative or high risk investments.
 
In addition to the base management and, in some cases, consulting fees, payable to our external managers, our external managers are generally entitled to receive incentive compensation based, in part, upon the achievement of targeted levels of net income. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net income may lead our external managers to place undue emphasis on the maximization of net income at the expense of other criteria, such as preservation of capital, maintaining liquidity and/or management of credit risk or market risk, in order to achieve higher incentive compensation.  Investments with higher yield potential are generally riskier or more speculative.  In addition, Midway has broad discretion regarding the types of investments it will make pursuant to its management agreement with us.  This could result in increased risk to the value of our assets under the management of our external managers.
 
We compete with our external managers’ other clients for access to them.
 
Each of Midway and HCS manages, and is expected to continue to manage, other client accounts with similar or overlapping investment strategies. In connection with the services provided to those accounts, these managers may be compensated more favorably than for the services provided under our external management or advisory agreements, and such discrepancies in compensation may affect the level of service provided to us by our external managers. Moreover, each of our external managers may have an economic interest in the accounts they manage or the investments they propose and, in the case of HCS, may raise, advise or sponsor other REITs or other investment funds that invest in assets similar to our targeted assets. As a result, we will compete with these other accounts and interests for access to Midway and HCS and the benefits derived from those relationships. For the same reasons, the personnel of each of Midway and HCS may be unable to dedicate a substantial portion of their time managing our investments to the extent they manage or are associated with any future investment vehicles not related to us.
 
 
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There are conflicts of interest in our relationships with our external managers, which could result in decisions that are not in the best interests of our stockholders.

We may acquire or sell assets in which an external manager or its affiliates have or may have an interest. In recent years, we have engaged in certain co-investment opportunities with HCS or one of its affiliates and we may participate in future co-investment opportunities with our external managers or their affiliates. In these cases, it is possible that our interests and the interests of our external managers will not always be aligned and this could result in decisions that are not in the best interests of our company. Similarly, one of our external managers or its affiliates may acquire or sell assets in which we have or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, we may engage in transactions directly with our external managers or their affiliates, including the purchase and sale of all or a portion of a targeted asset.

Acquisitions made for entities with similar objectives may be different from those made on our behalf. Our external managers may have economic interests in or other relationships with others in whose obligations or securities we may acquire. In particular, such persons may make and/or hold an investment in securities that we acquire that may be pari passu, senior or junior in ranking to our interest in the securities or in which partners, security holders, officers, directors, agents or employees of such persons serve on boards of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result in securities laws restrictions on transactions in such securities and otherwise create conflicts of interest. In such instances, the external managers may, in their sole discretion, make recommendations and decisions regarding such securities for other entities that may be the same as or different from those made with respect to securities acquired by us and may take actions (or omit to take actions) in the context of these other economic interests or relationships, the consequences of which may be adverse to our interests.

The key personnel of our external managers and its affiliates devote as much time to us as our external managers deem appropriate, however, these individuals may have conflicts in allocating their time and services among us and their other accounts and investment vehicles. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from our external managers, other entities for which our external manager serves as a manager, or its accounts will likewise require greater focus and attention, placing the resources of our external managers in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed.

We, directly or through our external managers, may obtain confidential information about the companies or securities in which we have invested or may invest. If we do possess confidential information about such companies or securities, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action with respect to the securities of such companies. Our external managers’ management of other accounts could create a conflict of interest to the extent such external manager is aware of material non-public information concerning potential investment decisions and this in turn could impact our ability to make necessary investment decisions. Any limitations that develop as a result of our access to confidential information could therefore materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

HCS, which is a wholly-owned subsidiary of JMP Group Inc., is deemed to beneficially own approximately 15.3% of our outstanding common stock as of December 31, 2010. In evaluating opportunities for us and other management strategies, this may lead HCS to emphasize certain asset acquisition, disposition or management objectives over others, such as balancing risk or capital preservation objectives against return objectives. This could increase the risks, or decrease the returns, of your investment. In addition, the chairman of our board of directors, James J. Fowler, is a portfolio manager at HCS and a managing director of JMP Group Inc. As a result, Mr. Fowler may have a conflict of interest in situations where the best interests of our company and stockholders do not align with the interests of HCS, JMP Group, Inc. or its affiliates, which may result in decisions that are not in the best interests of all our stockholders.

There are limitations on our ability to withdraw invested capital from the account managed by Midway and our inability to withdraw our invested capital when necessary may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Pursuant to the terms of the Midway Management Agreement, we may only redeem invested capital in an amount equal to the lesser of 10% of the invested capital in the account managed by Midway or $10 million as of the last calendar day of the month upon not less than 75 days written notice, subject to our authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment Company Act. In addition, we are only permitted to make one such redemption request in any 75-day period. In the event a significant market event or shock, we may be unable to effect a redemption of invested capital in greater amounts or at a greater rate unless we obtain the consent of Midway. Moreover, because a reduction of invested capital would reduce the base management fee under the Midway Management Agreement, Midway may be less inclined to consent to such redemptions. If we are unable to withdraw invested capital as needed to meet our obligations in the future, our business and financial condition could be materially adversely affected.
 
 
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Termination of the HCS Advisory Agreement may be difficult and costly.
 
Termination of the HCS Advisory Agreement without cause is subject to several conditions which may make such a termination difficult and costly. The HCS Advisory Agreement provides that it may only be terminated without cause upon our election to not renew the agreement at the end of the initial term or upon the affirmative vote of at least two-thirds of our independent directors, based either upon unsatisfactory performance by HCS that is materially detrimental to us or upon a determination that the management fee payable to HCS is not fair, subject to HCS’s right to prevent such a termination by accepting a mutually acceptable reduction of management fees. HCS will be paid a termination fee equal to the product of (A) 1.5 and (B) the sum of (i) the average annual base advisory fee earned by HCS during the 24-month preceding the effective termination date, and (ii) the annual consulting fee.  Thus, in the event we elect not to renew the HCS Advisory Agreement for any reason other than cause (as defined in the HCS Advisory Agreement), we will be required to pay this termination fee.  These provisions may increase the effective cost to us of terminating the HCS Advisory Agreement, thereby adversely affecting our ability to terminate HCS without cause.

Risks Related to an Investment in Our Capital Stock
 
The market price and trading volume of our common stock may be volatile.
 
The market price of our common stock is highly volatile and subject to wide fluctuations.  In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur.  Some of the factors that could result in fluctuations in the price or trading volume of our common stock include, among other things:  actual or anticipated changes in our current or future financial performance; changes in market interest rates and general market and economic conditions.  We cannot assure you that the market price of our common stock will not fluctuate or decline significantly.
  
We have not established a minimum dividend payment level for our common stockholders and there are no assurances of our ability to pay dividends to common or preferred stockholders in the future.
 
We intend to pay quarterly dividends and to make distributions to our common stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed.  This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code of 1986, as amended, or Internal Revenue Code.  We have not established a minimum dividend payment level for our common stockholders and our ability to pay dividends may be harmed by the risk factors described herein.  From July 2007 until April 2008, our Board of Directors elected to suspend the payment of quarterly dividends on our common stock.  Our Board’s decision reflected our focus on the elimination of operating losses through the sale of our mortgage lending business and the conservation of capital to build future earnings from our portfolio management operations.  All distributions to our common stockholders will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Directors may deem relevant from time to time.  There are no assurances of our ability to pay dividends in the future at the current rate or at all.

Future offerings of debt securities, which would rank senior to our common stock and preferred stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
 
In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock.  Upon liquidation, holders of our debt securities and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our preferred stock and common stock, with holders of our preferred stock having priority over holders of our common stock.  Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both.  Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.  Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.

Future sales of our common stock could have an adverse effect on our common stock price.
 
We cannot predict the effect, if any, of future sales of common stock, or the availability of shares for future sales, on the market price of our common stock.  Sales of substantial amounts of common stock, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
 
 
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Risks Related to Our Company, Structure and Change in Control Provisions

Our directors have approved broad investment guidelines for us and do not approve each investment we make.
 
Certain of our external managers, including Midway, are authorized to follow broad investment guidelines, which were approved by our board of directors at the time we entered into our respective management agreements with these parties, in determining which assets they will invest in on our behalf.  Although our board of directors will ultimately determine when and how much capital to allocate to these strategies, we generally will not approve transactions in advance of their execution by these managers.  Currently, our investment in any new program asset under the HCS Advisory Agreement requires the approval of our board of directors. However, our board of directors may elect to not review individual investments in new program assets in the future. In addition, in conducting periodic reviews, we will rely primarily on information provided to us by our external managers. Complicating matters further, our external managers may use complex investment strategies and transactions, which may be difficult or impossible to unwind. As a result, because our external managers have great latitude to determine the types of assets it may decide are proper investments for us, there can be no assurance that we would otherwise approve of these investments individually or that they will be successful.

We are dependent on certain key personnel.
 
We are a small company and are dependent upon the efforts of certain key individuals, including James J. Fowler, the Chairman of our Board of Directors, and Steven R. Mumma, our Chief Executive Officer and President.  The loss of any key personnel or their services could have an adverse effect on our operations.
 
The stock ownership limit imposed by our charter may inhibit market activity in our common stock and may restrict our business combination opportunities.
 
In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of the issued and outstanding shares of our capital stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year (other than our first year as a REIT).  This test is known as the “5/50 test.”  Attribution rules in the Internal Revenue Code apply to determine if any individual or entity actually or constructively owns our capital stock for purposes of this requirement.  Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of each taxable year (other than our first year as a REIT).  To help ensure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.  Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and provides that, unless exempted by our Board of Directors, no person may own more than 5.0% in value of the outstanding shares of our capital stock.  The ownership limit contained in our charter could delay or prevent a transaction or a change in control of our company under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then current market price for our common stock or would otherwise be in the best interests of our stockholders.
 
 
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Certain provisions of Maryland law and our charter and bylaws could hinder, delay or prevent a change in control which could have an adverse effect on the value of our securities.
 
Certain provisions of Maryland law, our charter and our bylaws may have the effect of delaying, deferring or preventing transactions that involve an actual or threatened change in control.  These provisions include the following, among others:
 
·
our charter provides that, subject to the rights of one or more classes or series of preferred stock to elect one or more directors, a director may be removed with or without cause only by the affirmative vote of holders of at least two-thirds of all votes entitled to be cast by our stockholders generally in the election of directors;

·
our bylaws provide that only our Board of Directors shall have the authority to amend our bylaws;
 
·
under our charter, our Board of Directors has authority to issue preferred stock from time to time, in one or more series and to establish the terms, preferences and rights of any such series, all without the approval of our stockholders;
 
·
the Maryland Business Combination Act; and
 
·
the Maryland Control Share Acquisition Act.

Although our Board of Directors has adopted a resolution exempting us from application of the Maryland Business Combination Act and our bylaws provide that we are not subject to the Maryland Control Share Acquisition Act, our Board of Directors may elect to make the “business combination” statute and “control share” statute applicable to us at any time and may do so without stockholder approval.
 
Maintenance of our Investment Company Act exemption imposes limits on our operations.
 
We have conducted and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act.  We believe that there are a number of exemptions under the Investment Company Act that are applicable to us.  To maintain the exemption, the assets that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act.  In addition, we could, among other things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on our operations and the market price for our securities.

Tax Risks Related to Our Structure

Failure to qualify as a REIT would adversely affect our operations and ability to make distributions.
 
We have operated and intend to continue to operate so to qualify as a REIT for federal income tax purposes.  Our continued qualification as a REIT will depend on our ability to meet various requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income, and the amount of our distributions to our stockholders.  In order to satisfy these requirements, we might have to forego investments we might otherwise make.  Thus, compliance with the REIT requirements may hinder our investment performance.  Moreover, while we intend to continue to operate so to qualify as a REIT for federal income tax purposes, given the highly complex nature of the rules governing REITs, there can be no assurance that we will so qualify in any taxable year.

If we fail to qualify as a REIT in any taxable year and we do not qualify for certain statutory relief provisions, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates.  We might be required to borrow funds or liquidate some investments in order to pay the applicable tax.  Our payment of income tax would reduce our net earnings available for investment or distribution to stockholders.  Furthermore, if we fail to qualify as a REIT and do not qualify for certain statutory relief provisions, we would no longer be required to make distributions to stockholders.  Unless our failure to qualify as a REIT were excused under the federal income tax laws, we generally would be disqualified from treatment as a REIT for the four taxable years following the year in which we lost our REIT status.
 
 
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REIT distribution requirements could adversely affect our liquidity.
 
In order to qualify as a REIT, we generally are required each year to distribute to our stockholders at least 90% of our REIT taxable income, excluding any net capital gain.  To the extent that we distribute at least 90%, but less than 100% of our REIT taxable income, we will be subject to corporate income tax on our undistributed REIT taxable income.  In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary REIT income for that year, (ii) 95% of our REIT capital gain net income for that year, and (iii) 100% of our undistributed REIT taxable income from prior years.
 
We have made and intend to continue to make distributions to our stockholders to comply with the 90% distribution requirement and to 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 90% distribution requirement 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.  Such 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 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.

Further, our lenders could require us to enter into negative covenants, including restrictions on our ability to distribute funds or to employ leverage, which could inhibit our ability to satisfy the 90% distribution requirement.
 
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations.
 
The maximum U.S. federal income tax rate for dividends payable to domestic shareholders that are individuals, trust and estates is 15% (through 2012).  Dividends payable by REITs, however, are generally not eligible for the reduced rates.  Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rate applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common shares.
 
Complying with REIT requirements may limit our ability to hedge effectively.
 
The REIT provisions of the Code substantially limit our ability to hedge the RMBS in our investment portfolio.  Our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income.  As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS.  Any hedging income earned by a TRS would be subject to federal, state and local income tax at regular corporate rates.  This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.
 
 
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A decline in the value of the real estate securing the mortgage loans that back RMBS could cause a portion of our income from such securities to be nonqualifying income for purposes of the REIT 75% gross income test, which could cause us to fail to qualify as a REIT.
 
Pools of mortgage loans back the RMBS that we hold in our investment portfolio and in which we invest.  In general, the interest income from a mortgage loan is qualifying income for purposes of the 75% gross income test applicable to REITs to the extent that the mortgage loan is secured by real property.  If a mortgage loan has a loan-to-value ratio greater than 100%, however, then only a proportionate part of the interest income is qualifying income for purposes of the 75% gross income test and only a proportionate part of the value of the loan is treated as a “real estate asset” for purposes of the 75% asset test applicable to REITs.  This loan-to-value ratio is generally measured at the time that the REIT commits to acquire the loan.  Although the IRS has ruled generally that the interest income from non-collateralized mortgage obligation (“CMO”) RMBS is qualifying income for purposes of the 75% gross income test, it is not entirely clear how this guidance would apply if we purchase non-CMO RMBS in the secondary market at a time when the loan-to-value ratio of one or more of the mortgage loans backing the non-CMO RMBS is greater than 100%, and, accordingly, a portion of any income from such non-CMO RMBS may be treated as non-qualifying income for purposes of the 75% gross income test.  In addition, that guidance does not apply to CMO RMBS.  In the case of CMO RMBS, if less than 95% of the assets of the issuer of the CMO RMBS constitute “real estate assets,” then only a proportionate part of our income derived from the CMO RMBS will qualify for purposes of the 75% gross income test.  Although the law is not clear, the IRS may take the position that the determination of the loan-to-value ratio for mortgage loans that back CMO RMBS is to be made on a quarterly basis.  A decline in the value of the real estate securing the mortgage loans that back our CMO RMBS could cause a portion of the interest income from those RMBS to be treated as non-qualifying income for purposes of the 75% gross income test.  If such non-qualifying income caused us to fail the 75% gross income test and we did not qualify for certain statutory relief provisions, we would fail to qualify as a REIT.

Our ability to invest in and dispose of “to be announced” securities could be limited by our REIT status, and we could lose our REIT status as a result of these investments.

In connection with our investment in the Midway Residential Mortgage Portfolio, we may purchase Agency RMBS through TBAs, or dollar roll transactions. In certain instances, rather than take delivery of the Agency RMBS subject to a TBA, we will dispose of the TBA through a dollar roll transaction in which we agree to purchase similar securities in the future at a predetermined price or otherwise, which may result in the recognition of income or gains. We account for dollar roll transactions as purchases and sales. The law is unclear regarding whether TBAs will be qualifying assets for the 75% asset test and whether income and gains from dispositions of TBAs will be qualifying income for the 75% gross income test.

Until such time as we seek and receive a favorable private letter ruling from the IRS, or we are advised by counsel that TBAs should be treated as qualifying assets for purposes of the 75% asset test, we will limit our investment in TBAs and any non-qualifying assets to no more than 25% of our assets at the end of any calendar quarter. Further, until such time as we seek and receive a favorable private letter ruling from the IRS or we are advised by counsel that income and gains from the disposition of TBAs should be treated as qualifying income for purposes of the 75% gross income test, we will limit our gains from dispositions of TBAs and any non-qualifying income to no more than 25% of our gross income for each calendar year. Accordingly, our ability to purchase Agency RMBS through TBAs and to dispose of TBAs, through dollar roll transactions or otherwise, could be limited.

Moreover, even if we are advised by counsel that TBAs should be treated as qualifying assets or that income and gains from dispositions of TBAs should be treated as qualifying income, it is possible that the IRS could successfully take the position that such assets are not qualifying assets and such income is not qualifying income. In that event, we could be subject to a penalty tax or we could fail to qualify as a REIT if (i) the value of our TBAs, together with our non-qualifying assets for the 75% asset test, exceeded 25% of our gross assets at the end of any calendar quarter or (ii) our income and gains from the disposition of TBAs, together with our non-qualifying income for the 75% gross income test, exceeded 25% of our gross income for any taxable year.

Item 1B.   UNRESOLVED STAFF COMMENTS

None.
 
Item 2. PROPERTIES

Other than real estate owned, acquired through, or in lieu of, foreclosures on mortgage loans, the Company does not own any properties. As of December 31, 2010, our principal executive and administrative offices are located in leased space at 52 Vanderbilt Avenue, Suite 403, New York, New York 10017.
 
Item 3. LEGAL PROCEEDINGS
 
We are at times subject to various legal proceedings arising in the ordinary course of our business.  As of the date of this report, 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, financial condition or cash flows.
 
Item 4. (REMOVED AND RESERVED)
 
 
37

 

PART II
 
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

Our common stock is traded on the NASDAQ Capital Market under the trading symbol “NYMT”.  As of December 31, 2010, we had 9,425,442 shares of common stock outstanding and as of February 18, 2011, there were approximately 26 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

The following table sets forth, for the periods indicated, the high, low and quarter end closing sales prices per share of our common stock and the cash dividends paid or payable on our common stock on a per share basis.

 
Common Stock Prices
 
Cash Dividends
 
 
High
 
Low
 
Close
 
 
Declared
 
Paid or
Payable
 
Amount
per Share
 
Year Ended December 31, 2010
                       
Fourth quarter
  $ 6.96     $ 6.23     $ 6.96  
12/20/10
 
01/25/11
    $ 0.18  
Third quarter
    6.52       5.68       6.26  
10/04/10
 
10/25/10
      0.18  
Second quarter
    7.77       6.51       6.62  
06/16/10
 
07/26/10
      0.18  
First quarter
    8.03       6.54       7.55  
03/16/10
 
04/26/10
      0.25  

 
Common Stock Prices
 
Cash Dividends
 
 
High
 
Low
 
Close
 
Declared
 
Paid or
Payable
 
Amount
per Share
 
Year Ended December 31, 2009
                       
Fourth quarter
  $ 8.75     $ 5.74     $ 7.19  
12/21/09
 
01/26/10
    $ 0.25  
Third quarter
    8.03       5.05       7.60  
09/28/09
 
10/26/09
      0.25  
Second quarter
    5.97       2.23       5.16  
06/14/09
 
07/27/09
      0.23  
First quarter
    3.80       1.82       3.80  
03/25/09
 
04/27/09
      0.18  
   

We intend to continue to pay quarterly dividends to holders of shares of common stock. Future dividends will be at the discretion of the Board of Directors and will depend on our earnings and financial condition, maintenance of our REIT qualification, restrictions on making distributions under Maryland law and such other factors as our Board of Directors deems relevant.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
The Company has a share repurchase program, which it previously announced in November 2005. At management’s discretion, the Company is authorized to repurchase shares of Company common stock in the open market or through privately negotiated transactions through December 31, 2015. The plan may be temporarily or permanently suspended or discontinued at any time. The Company has not repurchased any shares since March 2006 and currently has no intention to recommence repurchases in the near-future.
 
 
38

 

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2010 with respect to compensation plans under which equity securities of the Company are authorized for issuance. The Company has no such plans that were not approved by security holders.
 
 
 
 
Plan Category
 
Number of Securities to
be Issued upon Exercise
of Outstanding Options,
Warrants and Rights
 
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
Equity compensation plans approved by security holders
 
 
$
 
1,182,823
 
 
39

 

Item 6.  SELECTED FINANCIAL DATA

We are a Smaller Reporting Company and, therefore, are not required to provide the information required by this Item.

 
40

 
 
Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

New York Mortgage Trust, Inc., together with its consolidated subsidiaries (“NYMT,” the “Company,” “we,” “our” and “us”), is a real estate investment trust, or REIT, in the business of acquiring, investing in, financing and managing primarily mortgage-related assets. Our principal business objective is to generate net income for distribution to our stockholders resulting from the spread between the interest and other income we earn on our interest-earning assets and the interest expense we pay on the borrowings that we use to finance our leveraged assets and our operating costs, which we refer to as our net interest income. We intend to achieve this objective by investing in a broad class of mortgage-related and financial assets that in aggregate will generate what we believe are attractive risk-adjusted total returns for our stockholders. Our targeted assets currently include Agency RMBS consisting of pass-through certificates, CMOs, REMICs, IOs and POs, non-Agency RMBS, which may include non-Agency IOs and POs, prime ARM loans held in securitization trusts, CMBS, commercial mortgage loans and other commercial real estate-related debt investments. We also may opportunistically acquire and manage various other types of mortgage-related and financial assets that we believe will compensate us appropriately for the risks associated with them.

Prior to 2009, our investment portfolio was primarily comprised of Agency RMBS, certain non-agency RMBS originally rated in the highest rating category by two rating agencies and prime ARM loans held in securitization trusts. In early 2009, we commenced a repositioning of our investment portfolio to transition the portfolio from one primarily focused on leveraged Agency RMBS and prime ARM loans held in securitization trusts, which primarily involve interest rate risk, to a more diversified portfolio that includes elements of credit risk with reduced leverage. During 2010, we continued to diversify our investment portfolio by opportunistically disposing of approximately $51.7 million of Agency RMBS and non-Agency RMBS, while investing approximately $19.4 million in a limited partnership formed to invest in and manage a pool of performing whole residential mortgage loans, and approximately $7.6 million of other mortgage-related investments. We intend to accelerate our portfolio diversification strategy in 2011 through the formation and funding of our recently announced Midway Residential Mortgage Portfolio. This portfolio will be externally managed by The Midway Group, L.P. We have initially provided $24 million to the Midway Residential Mortgage Portfolio and we anticipate contributing additional capital to this investment in the future, such that this investment will become a significant contributor to our revenues and earnings and will represent a significant portion of our total assets in the future. For more information regarding the investment, financing and hedging strategies of this investment, see “Item 1. Business ― Our Residential Mortgage Portfolio Strategy.” In addition, in-line with our diversification strategy and our focus on asset performance, we have in the recent past pursued, and anticipate continuing to pursue in the future, investment opportunities in the commercial mortgage market.

We have elected to be taxed as a REIT and have complied, and intend to continue to comply, with the provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), with respect thereto. Accordingly, we do not expect to be subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders if certain asset, income and ownership tests and recordkeeping requirements are fulfilled. Even if we maintain our qualification as a REIT, we may be subject to some federal, state and local taxes on our income generated in our taxable REIT subsidiary.
 
 
41

 
 
Factors that Affect our Results of Operations and Financial Condition

Our results of operations and financial condition are affected by various factors, including, among other things:

·
changes in interest rates;

·
rates of prepayment, default and recovery on our assets or the mortgages or loans underlying such assets;

·
general economic and financial and credit market conditions;

·
our leverage, our access to funding and our borrowing costs;

·
our hedging activities;

·
changes in the credit ratings of the loans, securities, and other assets we own;

·
the market value of our investments;

·
liabilities related to our discontinued operation, including repurchase obligations on the sales of mortgage loans;
   
·
actions taken by the U.S. Federal Reserve and the U.S. Government; and
   
·
requirements to maintain REIT status and to qualify for an exemption from registration under the Investment Company Act.

We earn income and generate cash through our investments. Our income is generated primarily from the net spread, which we refer to as net interest income, which is the difference between the interest income we earn on our investment portfolio and the cost of our borrowings and hedging activities and other operating costs, including management fees. Our net interest income will vary based upon, among other things, the difference between the interest rates earned on our interest-earning assets and the borrowing costs of the liabilities used to finance those investments, prepayment speeds and default and recovery rates on the assets or the loans underlying such assets.  Because changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to manage interest rate risks and prepayment risks effectively while maintaining our status as a REIT.

We anticipate that, for any period during which changes in the interest rates earned on our assets do not coincide with interest rate changes on our borrowings, such assets will reprice more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. With the maturities of our assets generally of longer duration than those of our liabilities, interest rate increases will tend to decrease the net interest income we derive from, and the market value of our interest rate sensitive assets (and therefore our book value). Such rate increases could possibly result in operating losses or adversely affect our ability to make distributions to our stockholders.

The yield on our assets may be affected by a difference between the actual prepayment rates and our projections. Prepayment rates, as reflected by the rate of principal paydown, and interest rates vary according to the type of investment, conditions in the economy and financial markets, competition and other factors, none of which can be predicted with any certainty. To the extent we have acquired assets at a premium or discount to par, or face value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our mortgage-related assets will likely increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income will be negatively impacted. The current climate of government intervention in the mortgage markets significantly increases the risk associated with prepayments.
 
While we historically have used, and intend to use in the future, hedging to mitigate some of our interest rate risk, we do not hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that will allow us to seek attractive net spreads on our assets.
 
 
42

 
 
In addition, our returns will be affected by the credit performance of our more credit-sensitive assets, such as non-agency RMBS, equity investment in a pool of mortgage loans and CLOs. These investments and other assets we intend to target under our Midway Residential Mortgage Portfolio strategy, as well as other assets we may acquire from time-to-time, expose us to credit risk. To mitigate the credit risks associated with these assets, we may acquire more senior pieces of the capital structure, purchase the assets at discounted prices or hedge with credit sensitive derivative instruments. Nevertheless, if credit losses on our investments, loans, or the loans underlying our investments exceed our expectations or our ability to adequately hedge against these losses, it may have an adverse effect on our performance and our earnings.

As it relates to loans sold previously under certain loan sale agreements by our discontinued mortgage lending business, we may be required to repurchase some of those loans or indemnify the loan purchaser for damages caused by a breach of the loan sale agreement. In the past, we have complied with the repurchase demands by repurchasing the loan with cash and reselling it at a loss, thus reducing our cash position. More recently, we have addressed these requests by negotiating a net cash settlement based on the actual or assumed loss on the loan in lieu of repurchasing the loans. As of December 31, 2010, the amount of repurchase requests outstanding was approximately $2.0 million, against which we had a reserve of approximately $0.3 million. We cannot assure you that we will be successful in settling the remaining repurchase demands on favorable terms, or at all. If we are unable to continue to resolve our current repurchase demands through negotiated net cash settlements, our liquidity could be adversely affected.
 
For more information regarding the factors and risks that affect our operations and performance, see “Item 1A. Risk Factors” above and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” below.
 
 
43

 

Current Market Conditions and Commentary

Government Actions.  In recent years, the residential housing, mortgage, credit and financial markets in the United States have experienced a variety of difficulties and changed economic conditions, including increased rates of loan defaults, significant credit losses and decreased liquidity. Currently, the U.S. economy appears to be in a weak recovery with little or no broad inflationary pressures. In response to these conditions, the U.S. Government, Federal Reserve, U.S. Treasury, Federal Deposit Insurance Corporation (FDIC) and other governmental and regulatory bodies have taken significant actions to stabilize or improve market and economic conditions.  These actions include, among other things, the conservatorship of, and other programs involving, Fannie Mae and Freddie Mac, the Emergency Economic Stabilization Act of 2008 (EESA), the Troubled-Asset Relief Program (TARP), the Capital Purchase Program (CPP), the Term Asset-Backed Securities Loan Facility (TALF), the American Recovery and Reinvestment Act of 2009 (ARRA), the Homeowner Affordability and Stability Plan (HASP), the Homeowner Affordable Modification Program (HAMP) and the Hope for Homeowners program. While the impact from many of these programs has not been as extensive as initially anticipated, a number of these programs have impacted and may in the future continue to impact our portfolio and our results of operations.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the U.S. Congress. This legislation aims to restore responsibility and accountability to the financial system. It is unclear how this legislation may impact the borrowing environment, investing environment for RMBS and other targeted assets, interest rate swaps and other derivatives as much of the legislation’s implementation has not yet been defined by regulators.

In November 2010, the U.S. Federal Reserve announced a program to purchase an additional $600 billion of longer-term U.S. Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. One of the effects of this program may be to increase the price of Agency RMBS, which may also decrease our net interest margin. Once the program is terminated it may cause a decrease in demand for these securities, which likely would reduce their market price.

Developments Related to Fannie Mae and Freddie Mac.  Payments on the Agency RMBS in which we invest are guaranteed by Fannie Mae and Freddie Mac. As broadly publicized, Fannie Mae and Freddie Mac have experienced significant losses in recent years, causing the U.S. Government to place Fannie Mae and Freddie Mac under federal conservatorship.  In February 2011, the U.S. Department of the Treasury along with the U.S. Department Housing and Urban Development released a much-awaited report titled “Reforming America’s Housing Finance Market”, which outlines recommendations for reforming the U.S. housing system, specifically the roles of Fannie Mae and Freddie Mac and transforming the government’s involvement in the housing market. It is unclear how future legislation may impact the housing finance market and the investing environment for mortgage-related securities and more specifically, Agency RMBS and non-Agency RMBS, as the method of reform is undecided and has not yet been defined by the regulators. The scope and nature of the actions that the U.S. Government will ultimately undertake with respect to the future of Fannie Mae and Freddie Mac are unknown and will continue to evolve. New regulations and programs related to Fannie Mae and Freddie Mac may adversely affect the pricing, supply, liquidity and value of RMBS and otherwise materially harm our business and operations.  A brief summary of certain other material developments involving Fannie Mae and Freddie Mac is set forth below:

  
·
The Federal Reserve’s Agency RMBS purchase program, which provided for purchases of up to $1.25 trillion of Agency RMBS, was completed on March 31, 2010.  While the market expectation was that the termination of this purchase program would cause a decrease in demand for Agency RMBS and, in turn, reduced market prices for Agency RMBS, we continue to see strong demand and pricing for these securities. In the event the U.S. Government decides to sell significant portions of its portfolio, then we may see meaningful price declines in Agency RMBS.

 
·
During the first quarter of 2010, Fannie Mae and Freddie Mac announced that they would execute wholesale repurchases of loans which they considered seriously delinquent from existing mortgage pools. Freddie Mac implemented its purchase program in February 2010 with actual purchases beginning in March 2010. Fannie Mae began their process in March 2010 and announced it would implement the initial purchases over a period of four months, beginning in April 2010. Further, both agencies announced that on an ongoing basis they would purchase loans from the pools of mortgage loans underlying their mortgage pass-through certificates that became 120 days delinquent. The impact of these programs thus far is reflected in the constant prepayment rate, or CPR, of our portfolio. These actions increased prepayments which decreased our income and book value in 2010. See “―Balance Sheet Analysis ―Prepayment Experience” below for further information.

 
·
During 2010, there were indications that Fannie Mae and Freddie Mac, as well as certain bond insurers and large private investors, intended to pursue more aggressively in the future, repurchase demands for breaches of representation and warranties involved in the sale of loans now in default. We could experience an increase in repurchase requests in the future if such large-scale repurchase demands become prevalent.
 
 
44

 
 
Mortgage and Other Asset Values. Throughout 2010, we continued to observe strong demand and high prices for Agency RMBS. Market demand for non-Agency RMBS has steadily increased since early 2009 and throughout 2010, with some recent flattening in terms of pricing. We believe the steadily increasing prices were due to increased demand and the reduced market yields for Agency RMBS. We also expect market values for certain of our other targeted assets, such as CMBS, CLOs, and residential and commercial whole loans to improve as the economic outlook in the U.S. and abroad improves.

Credit Quality. U.S. residential mortgage delinquency rates have continued to remain at high levels for various types of mortgage loans during the 2010 fourth quarter. Recent months have seen some stabilization or improvement of certain measures of credit quality, although this stabilization and/or improvement may ultimately prove to be temporary. While RMBS backed by subprime mortgages and option ARMs are experiencing the highest delinquency and loss rates, our portfolio of prime ARM loans held in securitization trusts continue to experience high delinquency rates.

Homeowner assistance programs such as HAMP, as well as future legislative or regulatory actions, may affect the value of, and the returns on, our RMBS portfolio.  To the extent that these programs are successful and fewer borrowers default on their mortgage obligations, the actual default rates realized on our non-Agency RMBS may be less than the default assumptions made by us at the purchase of such non-Agency RMBS, which, in turn, could cause the realized yields on our non-Agency RMBS portfolio to be higher than previously expected. Conversely, any forced reductions in principal that emanate from such programs could cause a reduction in the market value of RMBS, particularly non-Agency RMBS.

Financing Markets and Liquidity. The liquidity facilities created by the Federal Reserve during 2007 and 2008 and its lowering of the Federal Funds Target Rate to 0 – 0.25% have lowered our financing costs (which most closely correlates with the 30-day LIBOR) and stabilized the availability of repurchase agreement financing for Agency RMBS. The 30-day LIBOR, which was 0.26% as of December 31, 2010, has remained relatively unchanged since December 31, 2009.  The Federal Reserve has continued to reaffirm its plan to hold the Fed Funds Rate near zero percent.  While we expect interest rates to rise over the longer term, we believe that interest rates, and thus our financing costs, are likely to remain at these historically low levels until such time as the economic data begin to confirm a sustainable improvement in the overall economy.

Over the past year, many investment banks have resumed making term financing available for non-Agency RMBS. The return of financing availability and the stabilization of borrowing costs have somewhat improved liquidity in the market for these securities, although such financing is currently available only in limited amounts and with respect to only certain types of those securities, so such improved liquidity is likely to be limited in the near term.

In addition to an improved financing environment for Agency RMBS, the collateral requirements of our repurchase agreement lenders also improved throughout 2009 and 2010, with the average “haircut” related to our repurchase agreement financing declining to approximately 6% at December 31, 2010.  As of December 31, 2010, the Company had available cash of $19.4 million to meet short term liquidity requirements.

Prepayment rates.  As a result of various government initiatives, including HASP, HAMP and the reduction in intermediate and longer-term treasury yields, rates on conforming mortgages continue to be historically low.  While these trends have historically resulted in higher rates of refinancing and thus higher prepayment speeds, we have observed little impact from refinancing on the CPR for our portfolio.  However, and as discussed above, the CPR on our RMBS portfolio was negatively impacted during the year ended December 31, 2010, and in particular, during the three months ended June 30, 2010, by repurchase programs implemented by Freddie Mac and Fannie Mae as discussed above.  See “―Balance Sheet Analysis ―Prepayment Experience” below.
 
 
45

 

Note Regarding Discontinued Operation
 
In connection with the sale of our wholesale and retail mortgage lending platform assets in 2007, we classified our mortgage lending business as a discontinued operation.  As a result, we have reported revenues and expenses related to the mortgage lending business as a discontinued operation and the related assets and liabilities as assets and liabilities related to a discontinued operation for all periods presented in the accompanying consolidated financial statements. Certain assets, such as the deferred tax asset, and certain liabilities, such as subordinated debt and liabilities related to leased facilities not assigned, are part of our ongoing operations and accordingly, have not been classified as a discontinued operation. As of December 31, 2010 discontinued operations consist of $4.0 million in assets, including $3.8 million in loans held for sale, and $0.6 million in liabilities, down from $4.2 million in assets and $1.8 million in liabilities at December 31, 2009, and are included in receivables and other assets and accrued expenses and other liabilities in the consolidated balance sheets included in this Annual Report.

Prior to March 31, 2007, we originated a wide range of residential mortgage loan products including prime, alternative-A, and to a lesser extent sub-prime loans, home equity lines of credit, second mortgages, and bridge loans. Our sale of the mortgage lending platform assets on March 31, 2007 marked our exit from the mortgage lending business.
 
The discontinued operations had net income of $1.1 million and $0.8 million for the years ended December 31, 2010 and 2009, respectively.  The Company continues to wind down the discontinued operations and anticipates to be substantially complete by the end of 2011.
 
 
46

 

Financial Condition
 
As of December 31, 2010, we had approximately $374.3 million of total assets, as compared to approximately $488.8 million of total assets as of December 31, 2009. The decline in total assets is primarily a function of the repositioning of our investment portfolio away from a heavily weighted leveraged Agency RMBS portfolio to a more diversified portfolio with reduced leverage.

Balance Sheet Analysis
 
Investment Securities - Available for Sale.  At December 31, 2010 our securities portfolio consists of Agency RMBS, non-Agency RMBS and CLOs. At December 31, 2010, we had no investment securities in a single issuer or entity, other than Fannie Mae, that had an aggregate book value in excess of 10% of our total assets. The following tables set forth the balances of our investment securities available for sale as of December 31, 2010 and December 31, 2009:

Balances of Our Investment Securities (dollar amounts in thousands):

   December 31, 2010
 
Par
Value
   
Carrying
Value
   
% of
Portfolio
 
Agency RMBS
  $ 45,042     $ 47,529       55.3 %
Non-Agency RMBS
    11,104       8,985       10.4 %
Collateralized Loan Obligation
    45,950       29,526       34.3 %
Total
  $ 102,096     $ 86,040       100.0 %

   December 31, 2009
 
Par
Value
   
Carrying
Value
   
% of
Portfolio
 
Agency RMBS
  $ 110,324     $ 116,226       65.8 %
Non-Agency RMBS
    56,984       42,866       24.2 %
Collateralized Loan Obligation
    45,950       17,599       10.0 %
Total
  $ 213,258     $ 176,691       100.0 %
 
 
47

 
 
The following table sets forth the stated reset periods of our investment securities available for sale at December 31, 2010 and December 31, 2009 (dollar amounts in thousands):

   
Less than
6 Months
   
More than
6 Months
To 24 Months
   
More than
24 Months
To 60 Months
   
Total
 
December 31, 2010
 
Carrying
Value
   
Carrying
Value
   
Carrying
Value
   
Carrying
Value
 
Agency RMBS
  $ 25,816     $ 5,313     $ 16,400     $ 47,529  
Non-Agency RMBS
    8,985                   8,985  
Collateralized Loan Obligation
    29,526                   29,526  
Total
  $ 64,327     $ 5,313     $ 16,400     $ 86,040  
 
   
Less than
6 Months
   
More than
6 Months
To 24 Months
   
More than
24 Months
To 60 Months
   
Total
 
December 31, 2009
 
Carrying
Value
   
Carrying
Value
   
Carrying
Value
   
Carrying
Value
 
Agency RMBS
 
$
   
$
42,893
   
$
73,333
   
$
116,226
 
Non-Agency RMBS
   
22,065
     
4,865
     
15,936
     
42,866
 
Collateralized Loan Obligation
   
17,599
     
     
     
17,599
 
Total
 
$
39,664
   
$
47,758
   
$
89,269
   
$
176,691
 
 
 
48

 
 
Performance Characteristics of Non-Agency RMBS

The following table details performance characteristics of our non-Agency RMBS portfolio as of December 31, 2010 and 2009 (dollar amounts in thousands):
 
December 31, 2010
   
Acquired prior to
2009 (1)
 
Current par value
 
$
11,104
 
Collateral type
       
Fixed rate
 
$
10,495
 
ARMs
 
$
609
 
Weighted average purchase price
   
90.70
%
Weighted average credit support
   
3.32
%
Weighted average 60+ delinquencies (including 60+, REO and foreclosure)
   
6.64
%
Weighted average 3 month CPR
   
23.39
%
Weighted average 3 month voluntary prepayment rate
   
21.33
%

 
(1)
All non-Agency RMBS acquired after 2008 were sold during the year ended December 31, 2010.

December 31, 2009
 
   
Acquired after
2008
   
Acquired prior to
2009
 
Current par value
 
$
38,682
   
$
18,302
 
Collateral type
               
Fixed rate
 
$
3,738
   
$
17,693
 
ARMs
 
$
34,944
   
$
609
 
Weighted average purchase price
   
60.51
%
   
92.05
%
Weighted average credit support
   
8.76
%
   
4.06
%
Weighted average 60+ delinquencies (including 60+, REO and foreclosure)
   
20.61
%
   
3.66
%
Weighted average 3 month CPR
   
 16.24
%
   
17.46
%
Weighted average 3 month voluntary prepayment rate
   
9.78
%
   
15.84
%

Detailed Composition of Loans Securitizing Our CLOs

The following tables summarize the loans securitizing our CLOs grouped by range of outstanding balance and industry as of December 31, 2010 and 2009, respectively (dollar amounts in thousands).

  As of December 31, 2010  
As of December 31, 2009
Range of
Outstanding Balance
Number of Loans
 
Maturity Date
   
Total Principal
 
Number of Loans
 
Maturity Date
   
Total Principal
                             
$0 - $500
11
 
11/2014 – 11/2017
  $
5,404
   
7
 
03/2014 - 03/2017
  $
3,471
$500 - $2,000
72
 
5/2013 – 12/2017
   
95,704
   
18
 
12/2011 - 12/2015
   
24,722
$2,000 - $5,000
88
 
8/2012 – 11/2017
   
276,265
   
55
 
5/2011 - 2/2016
   
198,895
$5,000 - $10,000
11
 
11/2011 – 3/2016
   
77,366
   
28
 
11/2010 - 10/2014
   
202,080
+$10,000
 —
 
 —
   
 —
   
3
 
12/2009 - 10/2012
   
32,292
Total
182
      $
454,739
   
111
      $
461,460
 
 
49

 

December 31, 2010
 
Industry
Number of Loans
 
Outstanding Balance
 
% of Outstanding Balance
           
Healthcare, Education & Childcare
19
 
$
52,537
 
11.55%
Retail Store
10
   
29,388
 
6.46%
Electronics
10
   
29,148
 
6.41%
Telecommunications
13
   
26,410
 
5.81%
Leisure , Amusement, Motion Pictures & Entertainment
10
   
22,316
 
4.91%
Personal, Food & Misc Services
10
   
21,179
 
4.66%
Chemicals, Plastics and Rubber
9
   
20,962
 
4.61%
Beverage, Food & Tobacco
9
   
18,666
 
4.10%
Utilities
5
   
17,035
 
3.75%
Aerospace & Defense
7
   
16,468
 
3.62%
Insurance
3
   
16,245
 
3.57%
Hotels, Motels, Inns and Gaming
5
   
15,389
 
3.38%
Farming & Agriculture
5
   
14,983
 
3.29%
Cargo Transport
3
   
14,372
 
3.16%
Diversified/Conglomerate Mfg
6
   
13,914
 
3.06%
Personal &Non-Durable  Consumer Products
5
   
13,774
 
3.03%
Printing & Publishing
4
   
11,944
 
2.63%
Diversified/Conglomerate Service
5
   
10,841
 
2.38%
Broadcasting & Entertainment
4
   
10,037
 
2.21%
Ecological
4
   
8,763
 
1.93%
Finance
3
   
7,803
 
1.72%
Containers, Packaging and Glass
4
   
7,635
 
1.68%
Machinery (Non-Agriculture, Non-Construction & Non-Electronic)
4
   
7,482
 
1.65%
Personal Transportation
3
   
7,306
 
1.61%
Buildings and Real Estate
3
   
6,970
 
1.53%
Banking
2
   
6,750
 
1.48%
Automobile
5
   
6,544
 
1.44%
Mining, Steel, Iron and Non-Precious Metals
3
   
5,466
 
1.20%
Textiles & Leather
3
   
4,359
 
0.96%
Oil & Gas
2
   
3,994
 
0.88%
Grocery
3
   
3,808
 
0.84%
Diversified Natural Resources, Precious Metals and Minerals
1
   
2,251
 
0.49%
 
182
 
$
454,739
 
100.00%

 
50

 

December 31, 2009
 
Industry
Number of Loans
 
Outstanding Balance
 
% of Outstanding Balance
           
Healthcare, Education & Childcare
14
 
$
57,190
 
12.4%
Diversified/Conglomerate Service
6
   
42,348
 
9.2%
Personal, Food & Misc. Services
6
   
38,638
 
8.4%
Electronics
7
   
26,532
 
5.7%
Printing & Publishing
4
   
23,990
 
5.2%
Telecommunications
6
   
23,098
 
5.0%
Insurance / Finance
5
   
22,915
 
5.0%
Utilities / Oil & Gas
6
   
21,782
 
4.7%
Personal & Non-Durable Consumer Products
6
   
21,298
 
4.6%
Retail Store
6
   
21,211
 
4.6%
Aerospace & Defense
6
   
20,462
 
4.4%
Cargo Transport / Personal Transportation
3
   
19,499
 
4.2%
Chemicals, Plastics and Rubber
6
   
18,532
 
4.0%
Hotels, Motels, Inns and Gaming
4
   
18,183
 
3.9%
Broadcasting & Entertainment
3
   
16,496
 
3.6%
Beverage, Food & Tobacco
6
   
15,880
 
3.4%
Leisure, Amusement, Motion Pictures & Entertainment
4
   
11,146
 
2.4%
Other
13
   
42,260
 
9.3%
Total      
         111
 
 $
  461,460
 
100.0%
 
 
51

 
 
Prepayment Experience. The constant prepayment rate (“CPR”) on our overall portfolio averaged approximately 19% during 2010 and 2009.  CPRs on our purchased portfolio of investment securities averaged approximately 25% while the CPRs on loans held in our securitization trusts averaged approximately 16% during 2010, as compared to 18% and 19%, respectively, during 2009. When prepayment expectations over the remaining life of assets increase, we have to amortize premiums over a shorter time period resulting in a reduced yield to maturity on our investment assets. Conversely, if prepayment expectations decrease, the premium would be amortized over a longer period resulting in a higher yield to maturity. We monitor our prepayment experience on a monthly basis and adjust the amortization rate to reflect current market conditions.

Mortgage Loans Held in Securitization Trusts. Included in our portfolio are ARM loans that we originated or purchased in bulk from third parties that met our investment criteria and portfolio requirements and that we subsequently securitized. The Company has completed four securitizations; three were classified as financings and one, New York Mortgage Trust 2006-1, qualified as a sale, which resulted in the recording of residual assets and mortgage servicing rights. The Company sold all the residual assets related to the 2006-1 securitization during the third quarter ended September 30, 2009, incurring a realized loss of approximately $32,000.

At December 31, 2010, mortgage loans held in securitization trusts totaled approximately $228.2 million, or 61.0% of our total assets. The Company has a net equity investment of approximately $8.9 million in the three securitization trusts at December 31, 2010. Of the mortgage loans held in securitized trusts, 100% are traditional ARMs or hybrid ARMs, 80.9% of which are ARM loans that are interest only. On our hybrid ARMs, interest rate reset periods are predominately five years or less and the interest-only period is typically 10 years, which mitigates the “payment shock” at the time of interest rate reset. None of the mortgage loans held in securitization trusts are payment option-ARMs or ARMs with negative amortization.
 
The following table details mortgage loans held in securitization trusts at December 31, 2010 and December 31, 2009 (dollar amounts in thousands):
 
   
# of Loans
   
Par Value
   
Coupon
   
Carrying Value
 
December 31, 2010
   
559
   
$
229,323
     
3.16
%
 
$
228,185
 
December 31, 2009
   
647
   
$
277,007
     
5.19
%
 
$
276,176
 
 
 
52

 

Characteristics of Our Mortgage Loans Held in Securitization:

The following table sets forth the composition of our loans held in securitization trusts as of December 31, 2010 (dollar amounts in thousands):
 
   
Average
   
High
   
Low
 
General Loan Characteristics:
                 
Original Loan Balance (dollar amounts in thousands)
  $ 443     $ 2,950     $ 48  
Current Coupon Rate
    3.16 %     7.25 %     1.38 %
Gross Margin
    2.36 %     4.13 %     1.13 %
Lifetime Cap
    11.28 %     13.25 %     9.13 %
Original Term (Months)
    360       360       360  
Remaining Term (Months)
    292       300       259  
Average Months to Reset
    4       11       1  
Original Average FICO Score
    729       818       593  
Original Average LTV
    70.48 %     95.00 %     13.94 %
 
   
% of Outstanding Loan Balance
   
Weighted Average Gross Margin (%)
 
Index Type/Gross Margin:
           
One Month LIBOR
   
2.6
%
   
1.69
%
Six Month LIBOR
   
72.9
%
   
2.40
%
One Year LIBOR
   
16.6
%
   
2.26
%
One Year Constant Maturity Treasury
   
7.9
%
   
2.65
%
Total
   
100.0
%
   
2.36
%

The following table sets forth the composition of our loans held in securitization trusts as of December 31, 2009 (dollar amounts in thousands):
 
   
Average
   
High
   
Low
 
General Loan Characteristics:
                 
Original Loan Balance (dollar amounts in thousands)
$ 456    
$
2,950
   
$
48
 
Current Coupon Rate
 
5.19
%    
7.25
%
   
1.38
%
Gross Margin
 
2.37
   
5.00
%
   
1.13
%
Lifetime Cap
 
11.26
   
13.25
%
   
9.13
%
Original Term (Months)
 
360
     
360
     
360
 
Remaining Term (Months)
 
304
     
312
     
271
 
Average Months to Reset
 
6
     
12
     
1
 
Original Average FICO Score
 
732
     
820
     
593
 
Original Average LTV
 
70.3
     
95.0
     
13.9
 

   
% of Outstanding Loan Balance
   
Weighted Average Gross Margin (%)
 
Index Type/Gross Margin:
           
One Month LIBOR
   
3.0
%
   
1.67
%
Six Month LIBOR
   
71.8
%
   
2.40
%
One Year LIBOR
   
16.6
%
   
2.27
%
One Year Constant Maturity Treasury
   
8.6
%
   
2.66
%
Total
   
100.0
%
   
2.37
%
 
 
53

 
 
The following table details loan summary information for loans held in securitization trusts at December 31, 2010 (dollar amounts in thousands):
 
                                                 
Principal Amount of Loans
 
                                                 
Subject to
 
                                 
Periodic
             
Delinquent
 
Description
 
Interest Rate
 
Final Maturity
 
Payment
     
Original
 
Current
 
Principal
 
Property
     
Loan
                       
Term
 
Prior
 
Amount of
 
Amount of
 
or
 
Type
 
Balance
 
Count
 
Max
 
Min
   
Avg
 
Min
 
Max
 
(months)
 
Liens
 
Principal
 
Principal
 
Interest
 
Single
 
<= $100
 
12
 
3.88
 
2.63
   
3.21
 
12/01/34
 
11/01/35
 
360
 
NA
 
$
1,508
 
$
914
 
$
-
 
FAMILY
 
<= $250
 
70
 
6.25
 
2.63
   
3.40
 
09/01/32
 
12/01/35
 
360
 
NA
   
14,580
   
12,615
   
417
 
   
<= $500
 
103
 
6.50
 
2.63
   
3.23
 
10/01/32
 
01/01/36
 
360
 
NA
   
39,299
   
35,981
   
7,606
 
   
<=$1,000
 
39
 
5.75
 
1.50
   
3.01
 
08/01/33
 
12/01/35
 
360
 
NA
   
31,128
   
29,236
   
3,411
 
   
>$1,000
 
21
 
3.25
 
2.75
   
2.97
 
01/01/35
 
11/01/35
 
360
 
NA
   
37,357
   
36,857
   
10,162
 
   
Summary
 
245
 
6.50
 
1.50
   
3.22
 
09/01/32
 
01/01/36
 
360
 
NA
 
$
123,872
 
$
115,603
 
$
21,596
 
2-4
 
<= $100
 
1
 
3.88
 
3.88
   
3.88
 
02/01/35
 
02/01/35
 
360
 
NA
 
$
80
 
$
73
 
$
75
 
FAMILY
 
<= $250
 
7
 
4.00
 
2.75
   
3.25
 
12/01/34
 
07/01/35
 
360
 
NA
   
1,415
   
1,221
   
191
 
   
<= $500
 
15
 
7.25
 
2.13
   
3.53
 
09/01/34
 
01/01/36
 
360
 
NA
   
5,554
   
5,259
   
254
 
   
<=$1,000
 
-
 
-
 
-
   
-
 
01/01/00
 
01/01/00
 
360
 
NA
   
-
   
-
   
-
 
   
>$1,000
 
-
 
-
 
-
   
-
 
01/01/00
 
01/01/00
 
360
 
NA
   
-
   
-
   
-
 
   
Summary
 
23
 
7.25
 
2.13
   
3.46
 
09/01/34
 
01/01/36
 
360
 
NA
 
$
7,049
 
$
6,553
 
$
520
 
Condo
 
<= $100
 
15
 
3.50
 
2.75
   
3.04
 
01/01/35
 
12/01/35
 
360
 
NA
 
$
1,912
 
$
938
 
$
55
 
   
<= $250
 
74
 
6.38
 
2.75
   
3.35
 
02/01/34
 
01/01/36
 
360
 
NA
   
14,512
   
13,036
   
444
 
   
<= $500
 
64
 
6.25
 
1.50
   
3.20
 
09/01/32
 
12/01/35
 
360
 
NA
   
21,957
   
20,844
   
272
 
   
<=$1,000
 
21
 
4.00
 
1.63
   
2.96
 
08/01/33
 
10/01/35
 
360
 
NA
   
15,489
   
14,558
   
-
 
   
> $1,000
 
10
 
3.25
 
2.75
   
2.96
 
01/01/35
 
09/01/35
 
360
 
NA
   
14,914
   
14,654
   
-
 
   
Summary
 
184
 
6.38
 
1.50
   
3.21
 
09/01/32
 
01/01/36
 
360
 
NA
 
$
68,784
 
$
64,030
 
$
771
 
CO-OP
 
<= $100
 
4
 
3.00
 
2.63
   
2.84
 
10/01/34
 
08/01/35
 
360
 
NA
 
$
443
 
$
331
 
$
-
 
   
<= $250
 
19
 
6.13
 
2.25
   
3.16
 
10/01/34
 
12/01/35
 
360
 
NA
   
4,135
   
3,399
   
212
 
   
<= $500
 
26
 
6.38
 
1.38
   
3.16
 
08/01/34
 
12/01/35
 
360
 
NA
   
10,724
   
9,533
   
-
 
   
<=$1,000
 
12
 
3.25
 
2.75
   
2.91
 
12/01/34
 
10/01/35
 
360
 
NA
   
9,089
   
8,896
   
-
 
   
> $1,000
 
4
 
6.00
 
2.25
   
3.44
 
11/01/34
 
12/01/35
 
360
 
NA
   
5,659
   
5,339
   
-
 
   
Summary
 
65
 
6.38
 
1.38
   
3.16
 
08/01/34
 
12/01/35
 
360
 
NA
 
$
30,050
 
$
27,498
 
$
212
 
PUD
 
<= $100
 
1
 
3.00
 
3.00
   
3.00
 
07/01/35
 
07/01/35
 
360
 
NA
 
$
100
 
$
92
 
$
-
 
   
<= $250
 
16
 
6.50
 
2.63
   
3.66
 
01/01/35
 
12/01/35
 
360
 
NA
   
3,260
   
3,092
   
113
 
   
<= $500
 
14
 
6.13
 
2.63
   
3.37
 
08/01/32
 
12/01/35
 
360