UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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R
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the Fiscal Year Ended December 31, 2005
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the Transition Period From
to
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Commission
File Number 001-32216
NEW
YORK MORTGAGE TRUST, INC.
(Exact
name of registrant as specified in its charter)
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Maryland
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47-0934168
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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1301
Avenue of the Americas, New York, New York 10019
(Address
of principal executive office) (Zip Code)
(Registrant’s
telephone number, including area code)
(212)
634-9400
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $0.01 par value
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New
York Stock Exchange
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
£
No
R
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
£
No
R
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
R
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filers” and “large accelerated filers” in Rule 12b-2 of The Exchange Act. (check
one):
Large
Accelerated Filer £
Accelerated Filer R
Non-Accelerated Filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £
No
R
The
aggregate market value of voting stock held by non-affiliates of the registrant
as of June 30, 2005 was approximately $133.5 million based on the closing price
on such date of the registrant’s common stock as reported by the New York Stock
Exchange Composite Transactions.
The
number of shares of the Registrant’s Common Stock outstanding on March 1, 2006
was 18,258,221.
DOCUMENTS
INCORPORATED BY REFERENCE
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Document
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Where
Incorporated
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1.
Proxy
Statement for Annual Meeting of Stockholders to be held on June 14,
2006,
to be filed with the Securities and Exchange Commission
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Part
III
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NEW
YORK MORTGAGE TRUST, INC.
FORM
10-K
For
the Fiscal Year Ended December 31, 2005
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General
New
York
Mortgage Trust, Inc. together with its consolidated subsidiaries (“NYMT”, the
“Company”, “we”, “our”, and “us”) is a self-advised residential mortgage finance
company that originates, acquires and invests in adjustable and variable rate
mortgage (“ARM”) assets. We earn net interest income from residential
mortgage-backed securities and adjustable-rate mortgage loans and securities.
We
also earn gain on sale income and net interest income by originating a variety
of residential mortgage loan products through our wholly-owned subsidiary,
The
New York Mortgage Company, LLC (“NYMC”). NYMC also originates residential
mortgage loans as a broker for other mortgage bankers for the purpose of
obtaining broker fee income. NYMC, which originates residential mortgage loans
through a network of 28 full-service loan origination locations and 26 satellite
loan origination locations, is presently licensed or authorized to do business
in 43 states and the District of Columbia.
Our
residential mortgage investments are comprised of ARM loans, ARM securities
and
floating rate collateralized mortgage obligations (“CMO Floaters”). The ARM
loans and securities have interest rates that reset in a year or less and
“hybrid” ARM loans and securities have a fixed interest rate for an initial
period of two to seven years before converting to ARM loans and securities
whose
rates will reset each year or such shorter period for their remaining terms
to
maturity. ARM securities represent interests in pools of whole ARM loans. The
ARM securities are rated by at least one of two nationally recognized rating
agencies, Standard & Poor’s, Inc. or Moody’s Investors Service, Inc. (the
“Rating Agencies”), or issued by Freddie Mac (“FHLMC”), Fannie Mae (“FNMA”) or
Ginnie Mae (“GNMA”). The securitizations result in a series of rated mortgage
securities backed by the ARM loans. The CMO Floaters are mortgage securities
backed by a pool of FNMA, FHLMC or GNMA fixed rate mortgage loans which have
interest rates that adjust monthly. As an investor in residential mortgage
assets, our net income is generated primarily from the difference between the
interest income we earn on our mortgage assets and the cost of our borrowings
(net of hedging expenses), commonly referred as the “Net Spread.”. Our goal is
to maximize the long-term sustainable difference between the yield on our
investments and the cost of financing these assets through the following
strategies:
| • |
focusing
on originating high credit quality residential mortgage loans through
NYMC
that we believe can either be retained in our portfolio or sold at
a
profit;
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| • |
focusing
on maximizing our lending to home buyers rather than to home owners
seeking to refinance their mortgage loans, which we believe makes
our
business less vulnerable to declines in loan origination volume resulting
from increases in interest rates;
|
| • |
leveraging
our portfolio to increase its size with the intent to enhance our
returns
while at the same time managing the increased risk of loss associated
with
this leverage;
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| • |
utilizing
hedging strategies that we consider appropriate to minimize exposure
to
interest rate changes; and
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| • |
expanding
our retail and wholesale mortgage banking business through the hiring
of
additional loan officers, the opening of new retail branch offices
in new
markets and selectively pursuing strategic acquisitions in the mortgage
banking industry.
|
In
order
to be a full service provider to our customers, we originate mortgage loans
through NYMC. Licensed or exempt from licensing in 43 states and the District
of
Columbia and through a network of 28 full service branch loan origination
locations and 26 satellite loan origination locations, NYMC offers a broad
range
of residential mortgage products, with a primary focus on prime, or high credit
quality, residential mortgage loans. We either sell the fixed-rate loans that
we
originate to third parties and retain and finance in our portfolio selected
adjustable-rate and hybrid mortgage loans that we originate or we sell them
to
third parties. Our portfolio of loans is held at the real estate investment
trust (“REIT”) level or by a qualified REIT subsidiary (“QRS”). We rely on our
own underwriting criteria with respect to the mortgage loans we retain and
rely
on the underwriting criteria of the institutions to which we sell our loans
with
respect to the loans we intend to sell. In either case, we directly perform
the
underwriting of such loans with our own experienced underwriters.
Upon
completion of our initial public offering (“IPO”) in June 2004, we purchased or
invested, on a leveraged basis, residential mortgage-backed securities
guaranteed by FNMA or FHLMC or rated investment grade-AAA. Over time, as these
securities amortize and pay-off, they will be replaced by adjustable-rate and
hybrid mortgage loans that we originate or other qualifying loans or securities.
We may also supplement our portfolio with loans originated through our
correspondent network or purchased from third parties. We believe that our
return is enhanced by retaining loans that we originate as the basis for our
portfolio. We believe that mortgage investors that do not have their own
origination capabilities (a “passive portfolio investor”) must purchase their
mortgage loans from third parties at higher premiums than our cost of
originating the mortgage loans that we retain.
We
finance the purchases and originations of our ARM loans, ARM securities and
CMO
Floaters (collectively “ARM Assets”) with equity capital, unsecured debt and
short-term borrowings such as repurchase agreements, securitizations resulting
in floating-rate long-term collateralized debt obligations (“CDOs”) and other
collateralized financings. We enter into swap agreements whereby we receive
floating rate payments in exchange for fixed rate payments, effectively
converting the borrowings to a fixed rate. We believe our exposure and risks
related to changes in interest rates can be prudently managed through holding
ARM Assets and attempting to match the duration of our liabilities with the
duration of our ARM Assets. From a credit risk perspective, we retain high
quality assets and follow strict credit underwriting standards.
Unlike
banks, savings and loans or most mortgage originators, we are structured as
a
REIT for federal income tax purposes. We have elected to be taxed as a REIT
under Sections 856-860 of the Internal Revenue Code (IRC) of 1986, as amended,
commencing with our taxable year ended December 31, 2004, and we operate so
as
to qualify as a real estate investment trust (“REIT”) for federal income tax
purposes. We hold our investment in ARM Assets directly or in a QRS.
Accordingly, the net interest income we earn on our ARM 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. Failure to qualify as a REIT would
subject the Company to federal income tax (including any applicable minimum
tax)
on its taxable income at regular corporate rates and distributions to its
shareholders in any such year would not be deductible by the
Company.
Our
mortgage banking operations are performed at NYMC, a taxable REIT subsidiary
(“TRS”). The activities we conduct through NYMC, including sourcing and selling
mortgage loans sold to third parties, are subject to federal and state corporate
income tax. We may elect to retain any after tax income generated by NYMC,
and,
as a result, may increase our consolidated capital and grow our business through
retained earnings or distribute all or a portion of our after-tax NYMC earnings
to our stockholders.
Access
to our Periodic SEC Reports and Other Corporate
Information
Our
internet website address is www.nymtrust.com. We make available free of charge,
through our internet website, our annual report on Form 10-K, our quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments thereto
that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission (the “SEC”). Our Corporate Governance Guidelines 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 Chief Financial Officer and Secretary, 1301 Avenue
of
the Americas, 7th floor, New York, New York 10019. Information on our website
is
neither part of nor incorporated into this annual report on Form
10-K.
Corporate
Governance
We
operate our business with a focus on high standards in business practices and
professional conduct. The following are some of the highlights relating to
our
corporate governance:
| • |
Our
board of directors is composed of a super-majority of independent
directors. As per guidelines established by the SEC and NYSE, the
Audit,
Nominating/Governance and Compensation Committees are composed exclusively
of independent directors.
|
| • |
We
have adopted a Code of Business Conduct and Ethics and Corporate
Governance Guidelines that apply to all officers, directors and employees
(as well as a supplemental Code of Ethics for Senior Financial Officers)
to promote the highest standard of conduct and ethics in our dealings
with
our customers, stockholders, vendors, the public and our
employees.
|
| • |
Our
Insider Trading Policy prohibits any of the directors, officers or
employees of the Company from buying or selling our stock on the
basis of
material nonpublic information, and in conjunction with our Regulation
FD
policy, prohibits communicating material nonpublic information to
others.
Trading of our securities by directors, officers or employees is
allowed
only during a discreet narrow open period after our quarterly report
on
Form 10-Q or annual report on Form 10-K is filed with the
SEC.
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| • |
Generally,
we will “early adopt” new accounting standards promulgated by the
Financial Accounting Standards Board (“FASB”), the SEC or other standard
setting accounting body.
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| • |
We
have established a formal internal audit function to monitor and
test the
efficiency of our internal controls and procedures as well as the
implementation of Section 404 of the Sarbanes-Oxley Act of
2002.
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| • |
We
have made publicly available, through our website www.nymtrust.com,
the
charters of the independent committees of our Board of Directors
(Audit
Committee, Compensation Committee, Nominating and Corporate Governance
Committee) and other corporate governance materials, including our
Code of
Business Conduct and Ethics, our Corporate Governance Guidelines,
our
Insider Trading Policy, and other corporate governance
policies.
|
Company History
We
were
formed as a Maryland corporation in September 2003. On January 9, 2004, we
capitalized New York Mortgage Funding, LLC (“NYMF”) as a wholly-owned subsidiary
of our company. NYMF is a qualified REIT subsidiary, or QRS, in which we
accumulate mortgage loans that the Company intends to securitize. In June 2004,
we sold 15 million shares of our common stock in an IPO at a price to the public
of $9.00 per share, for net proceeds of approximately $122 million after
deducting the underwriters’ discount and other offering expenses. Concurrent
with our IPO, we issued 2,750,000 shares of common stock in exchange for the
contribution to us of 100% of the equity interests of NYMC. Prior to the IPO,
we
did not have recurring business operations.
Prior
to
being acquired by us, NYMC’s business strategy was to sell or broker all of the
loans it originated to third parties and the largest component of NYMC’s net
income was generated by the gain on sale of such loans. For accounting purposes
and reporting purposes, the combination of our company and NYMC is accounted
for
as a reverse merger and the related transfer of loans originated by NYMC to
us
is accounted for as a transfer of assets between entities under common control.
Accordingly, we have recorded assets and liabilities transferred from NYMC
at
their carrying amounts in the accounts of NYMC at the date of transfer. The
consolidated financial statements include the accounts of our company subsequent
to the IPO and also include the accounts of NYMC and NYMF prior to the IPO.
As a
result, our historical financial results prior to the IPO reflect the financial
operations of this prior business strategy of selling virtually all of the
loans
originated by NYMC to third parties. Furthermore, the ARM loans we originated
and securitized in the securitizations completed in 2005 were recorded at cost
with no gain on sale recognized, as would be the case if sold to third parties.
Since our IPO, our business strategy has been to invest in ARM loans and
securitize them to generate net interest income. As a result, our historic
operations prior to the IPO and current financial operations are not necessarily
comparable.
Our
Industry
Generally,
the residential mortgage industry is segmented by the size of the mortgage
loans
and credit characteristics of the borrowers. Mortgage loans that conform to
the
guidelines of entities such as FHLMC, FNMA or GNMA, for both size and credit
characteristics are often referred to as “conforming” mortgage loans. All other
mortgage loans are often referred to as non-conforming loans either because
the
size of the loan exceeds the guideline limit or the credit profiles of the
borrowers do not meet the guideline requirements. Our strategy focuses on
adjustable- and fixed-rate and hybrid first lien mortgage loans to borrowers
with strong credit profiles, which we refer to as prime mortgage loans. We
believe the adjustable-rate and hybrid segment of the prime residential mortgage
loan industry and our ability to originate such loans provides us the
opportunity to build a portfolio of our high quality self-originated prime
adjustable-rate and hybrid loans with the goal of generating higher
risk-adjusted returns on investment than would be available from a portfolio
based either on purchased loans or on fixed-rate or non-prime loans. We believe
that our experience as a mortgage loan originator with a comprehensive and
sophisticated process for credit evaluation, risk-based pricing and loss
mitigation will, over time, provide us with a significant advantage over other
portfolio investors who do not have comparable origination
capabilities.
We
believe changes are continuing to occur in the U.S. mortgage industry, resulting
in the shifting of investment capital and mortgage assets out of traditional
lending and savings institutions and into new forms of mortgage banking and
mortgage investment firms, including those that qualify as REITs under the
Internal Revenue Code. We believe that, while traditional mortgage investment
companies, such as banks, thrifts and insurance companies, generally have
greater diversification in their investments than we have as a REIT, they
provide less attractive investment structures for investing in mortgage assets
because of the costs associated with regulation, infrastructure and corporate
level taxation. As a REIT, we are generally able to pass through our REIT
earnings to our stockholders without incurring entity-level federal income
tax,
thereby allowing us to make relatively larger distributions than institutions
with similar investments because they are subject to federal income tax on
their
earnings.
Additionally,
with the development of highly competitive national mortgage markets (which
we
believe is partly due to the operations of FHLMC, FNMA or GNMA), local and
regional mortgage originators have lost market share to more efficient mortgage
originators who compete nationally. The growth of the secondary mortgage market,
including new securitization techniques, has also resulted in financing
structures that can be utilized efficiently to fund leveraged mortgage
portfolios and better manage interest rate risk.
Operating
Policies, Strategies and Business Segments
The
Company operates two segments:
| • |
Mortgage
Portfolio Management—
long-term investment in high-quality, adjustable-rate mortgage loans
and
residential mortgage-backed securities;
and
|
| • |
Mortgage
Lending—
mortgage loan originations as conducted by
NYMC.
|
Our
mortgage portfolio management operations primarily invest in adjustable-rate
agency and “AAA”— rated residential mortgage-backed securities and high-quality
mortgages that are originated by our mortgage operations or that may be acquired
from third parties. Our equity capital and borrowed funds are used to invest
in
residential mortgage-backed securities and loans held for subsequent
securitization, thereby producing net interest income.
Our
mortgage lending segment originates residential mortgage loans through our
taxable REIT subsidiary, NYMC. Loans are originated through NYMC’s retail and
internet branches as well as from independent mortgage brokers and generate
gain
on sale revenue when the loans are sold to third parties or revenue from
brokered loans when the loans are brokered to third parties.
Mortgage
Portfolio Management
Prior
to
the completion of our IPO on June 29, 2004, our operations were limited to
the
mortgage operations described in the section below entitled “Mortgage Lending.”
Beginning in July 2004, we began to implement our business plan of investing
in
high quality, adjustable rate mortgage loan securities. Our portfolio management
strategy is to originate and acquire ARM Assets to hold in our portfolio, fund
them using equity capital and borrowings and to generate net interest income
from the difference, or net spread, between the yield on these assets and our
cost of financing. In order to accomplish this, our:
| • |
Proceeds
from equity raising efforts are promptly invested in acquired ARM
Assets
in order to generate returns on the equity
investment.
|
| • |
Acquired
ARM Assets are replaced with high-quality, higher-yielding, lower
cost ARM
loans self-originated through NYMC retail channels or otherwise
acquired.
|
| • |
Mortgage
portfolio management operates with a long-term investment
outlook.
|
| • |
Short-term
financing of ARM loans to be securitized is provided by secured warehouse
and aggregation lines.
|
| • |
Ultimate
financing for ARM loans is provided by either issuing collateralized
debt
obligations or by repurchase financing
facilities.
|
We
believe we benefit from a cost advantage from self-originating loans and holding
these loans in securitized form in the REIT or our QRS:
| • |
through
self-origination, we avoid the intermediation costs associated with
purchasing mortgage assets in the capital markets;
and
|
| • |
the
net interest income generated in the REIT or our QRS generally will
not be
subject to tax, whereas, had we sold our loans in the capital markets
through our TRS, we would have been subject to tax on the gain on
sale of
loans.
|
We
believe, this strategy, together with prudent leverage to produce the
mortgage-backed securities we hold, will produce a greater return for our
stockholders in the long term relative to a purchased securities portfolio.
This
greater return is accomplished by a combination of the recognition of the
incremental lower cost to originate such loans and/or the ability to better
afford appropriate interest rate hedging strategies in order to provide a
similar return to a purchased securities portfolio but with a lower risk
profile.
We
seek
to have a portfolio consisting of high quality mortgage-backed securities and
loans. We believe that retaining high quality assets in our portfolio helps
us
mitigate risks associated with market disruptions. Our investment guidelines
define the following classifications for securities we own:
| • |
Category
I investments are mortgage-backed securities that are either rated
within
one of the two highest rating categories by at least one of the Rating
Agencies, or have their repayment guaranteed by FHLMC, FNMA or
GNMA.
|
| • |
Category
II investments are mortgage-backed securities with an investment
grade
rating of BBB/Baa or better by at least one of the Rating
Agencies.
|
| • |
Category
III investments are mortgage-backed securities that have no rating
from,
or are rated below investment grade by at least one of the Rating
Agencies.
|
We
retain
on our balance sheet a majority of the residential first lien adjustable-rate
and hybrid mortgage loans originated by NYMC that we believe have a low risk
of
default and resulting loss and are of the following types:
| • |
1
month adjustable-rate (various total terms);
|
| • |
6
month adjustable-rate (various total terms);
|
| • |
1
year adjustable-rate (various total terms);
|
| • |
2
year fixed-rate, adjustable-rate hybrid (various total
terms);
|
| • |
3
year fixed-rate, adjustable-rate hybrid (various total terms);
|
| • |
5
year fixed-rate, adjustable-rate hybrid (various total terms):
and
|
| • |
7
year fixed-rate, adjustable-rate hybrid (various total
terms).
|
The
investment policy adopted by our Board of Directors provides, among other
things, that:
| • |
no
investment shall be made which would cause us to fail to qualify
as a
REIT;
|
| • |
no
investment shall be made which would cause us to be regulated as
an
investment company;
|
| • |
at
least 70% of our assets will be Category I investments or loans that
back
or will back such investments; and
|
| • |
no
more than 7.5% of our assets will be Category III
investments.
|
Our
Board
of Directors may amend or waive compliance with this investment policy at any
time without the consent of our stockholders.
We
seek
to avoid many of the risks typically associated with companies that purchase
mortgage-backed securities in the capital markets.
| • |
For
our self-originated loan portfolio, we perform our own underwriting
rather
than rely on the underwriting of
others.
|
| • |
We
attempt to maintain a net duration, or duration gap, of one year
or less
on our ARM portfolio, related borrowings and hedging
instruments.
|
| • |
We
structure our liabilities to mitigate potential negative effects
of
changes in the relationship between short- and longer-term interest
rates.
|
| • |
We
may purchase or structure credit enhancements to mitigate potential
losses
from borrower defaults.
|
| • |
Substantially
all of the Company’s securities are backed by ARM loans. Because we are
focused on holding ARM loans rather than fixed-rate loans, we believe
we
will be adversely affected to a lesser extent by early repayments
due to
falling interest rates or a reduction in our net interest income
due to
rising interest rates.
|
Our
Board
of Directors has also established an investment and leverage committee for
the
purpose of approving certain investment transactions and the incurrence of
indebtedness. This committee is comprised of our co-chief executive officers,
our chief investment officer and chief operating officer, and our chief
financial officer. The committee has the authority to approve, without the
need
of further approval of our board of directors, the following transactions from
time to time, any of which may be entered into by us or any of our
subsidiaries:
| • |
the
purchase and sale of agency and private label mortgage-backed securities,
subject to the limitations described
above;
|
| • |
securitizations
of our mortgage loan portfolio;
|
| • |
the
purchase and sale of agency debt;
|
| • |
the
purchase and sale of U.S. Treasury securities;
|
| • |
the
purchase and sale of overnight investments;
|
| • |
the
purchase and sale of money market funds;
|
| • |
hedging
arrangements using:
|
| • |
interest
rate swaps and Eurodollar contracts;
|
| • |
caps,
floors and collars;
|
| • |
financial
futures; and
|
| • |
options
on any of the above; and
|
| • |
the
incurrence of indebtedness using:
|
| • |
repurchase
agreements;
|
| • |
bank
loans, up to an aggregate of $100 million; and
|
| • |
term
repurchase agreements.
|
Initially,
the loans held for investment are funded through warehouse facilities and
repurchase agreements. We ultimately finance the loans that we retain in our
portfolio through securitization transactions. Upon securitization, we expect
that a vast majority of the resulting mortgage-backed securities will become
eligible for inclusion in Category I.
The
only
subordinate classes of mortgage-backed securities that we will hold (Category
III investments) are subordinate classes that result from securitizations of
the
mortgage loans in our portfolio. We do not seek to acquire subordinated
mortgage-backed securities as investments but instead acquire them only in
connection with our mortgage loan securitizations or in order to help us meet
our asset tests as a REIT.
We
generally maintain an overall debt-to-equity ratio ranging from 8:1 to 12:1
on
the financing of our portfolio ARM Assets. Our liabilities are primarily termed
repurchase agreements with maturities ranging from one to twelve months. A
significant risk to our operations, relating to our portfolio management, is
the
risk that interest rates on our assets will not adjust at the same times or
amounts that rates on our liabilities adjust. Even though we retain and invest
in ARM loans, many of the hybrid ARM loans in our portfolio have fixed rates
of
interest for a period of time ranging from two to seven years. Our funding
costs
are generally not constant or fixed. As a result, we use interest rate swaps
to
extend the duration of our liabilities to attempt to match the duration of
our
assets and we use termed repurchase agreements with laddered maturities to
reduce the risk of a disruption in the repurchase market. Since we hold
primarily ARM Assets rated AAA and agency securities (FHLMC or FNMA), we believe
we are less susceptible to a disruption in the repurchase market as these types
of securities have typically been eligible for repurchase market financing
even
when repurchase financing was not available for other classes of mortgage assets
or asset backed bonds.
Mortgage
Lending
The
origination of mortgage loans through NYMC is significant to our financial
results in that it:
| • |
originates
many of the high quality mortgage loans that we retain and ultimately
collateralize as mortgage securities that we hold in portfolio or
issue as
collateralized debt obligations;
|
| • |
allows
us to be competitive by offering a broad range of residential mortgage
loan products; and
|
| • |
generates
gain on sale income at the TRS with the ability to sell to third
parties
any fixed-rate and ARM loans that are not eligible for retention
and
investment in the our portfolio.
|
Furthermore,
we believe our ability to originate ARM loans for securitization benefits us
by
providing:
| • |
the
ability to originate ARM loans at lower cost, so that the amount
of
premium (net cost over par) to be amortized will be reduced in the
event
of prepayment;
|
| • |
generally
higher yielding investments as our cost basis is lower; providing
the
ability to generate a higher return to shareholders and/or the ability
to
absorb the cost of additional interest rate hedges and thus reduce
the
inherent interest rate risk in our
portfolio;
|
| • |
greater
control over the quality and types of ARM loans in our portfolio
as we
directly perform our own underwriting of such loans and can encourage
our
loan officers to focus on certain types of ARM
products.
|
Through
NYMC, our loan origination business originates primarily first mortgages on
one-to-four family dwellings through our retail loan production offices and
is
supplemented by our wholesale division and internet channel
(www.MortgageLine.com).
We
believe that the substantial growth of NYMC’s mortgage banking business since
its inception has resulted from its commitment to providing exemplary service
to
its customers and its concentration on retail, referral-based, mortgage banking
to borrowers with strong credit profiles. Based on our past experience and
our
knowledge of the mortgage industry, we believe that referrals from realtors,
attorneys, accountants and other professionals and business from repeat
customers tend to generate a higher percentage of purchase mortgage loan
applications than refinance applications as compared to the loan applications
generated by advertising and other mass marketing efforts. For the year ended
December 31, 2005, our residential purchase loan originations represented 57.8%
of NYMC’s total residential mortgage loan originations as measured by principal
balance, as compared to an industry-wide percentage of 53.5% for one-to-four
family mortgage loans, according to the February 7, 2006 report of the Mortgage
Bankers Association, or MBA.
In
addition, we believe that the market for mortgage loans for home purchases
is
less susceptible than the refinance market to downturns during periods of
increasing interest rates, because borrowers seeking to purchase a home do
not
generally base their decision to purchase on changes in interest rates alone,
while borrowers that refinance their mortgage loans often make their decision
as
a direct result of changes in interest rates. Consequently, while our
referral-based marketing strategy may cause our overall loan origination volume
during periods of declining interest rates to lag our competitors who rely
on
mass marketing and advertising and who therefore capture a greater percentage
of
loan refinance applications during those periods, we believe our strategy will
enable us to sustain stronger home purchase loan origination volumes than those
same competitors during periods of flat to rising interest rates. In addition,
we believe that our referral-based business results in relatively higher gross
margins and lower advertising costs and loan generation expenses than most
other
mortgage companies whose business is not referral-based.
The
following table details the payment stream, loan purpose and documentation
type
of our mortgage loan originations for the year ended December 31,
2005:
MORTGAGE
LOAN ORIGINATION SUMMARY
For
the fiscal year ended December 31, 2005
|
(Dollar
amounts in thousands)
|
Number
of
Loans
|
Dollar
Value
|
%
of Total
|
|||||||
|
Payment
Stream
|
||||||||||
|
Fixed
Rate
|
||||||||||
|
FHA/VA
|
1,805
|
$
|
242,258
|
7.0
|
%
|
|||||
|
Conventional
Conforming
|
6,031
|
967,922
|
28.2
|
%
|
||||||
|
Conventional
Jumbo
|
581
|
351,971
|
10.2
|
%
|
||||||
|
Total
Fixed Rate
|
8,417
|
$
|
1,562,151
|
45.4
|
%
|
|||||
|
ARMs
|
||||||||||
|
FHA/VA
|
94
|
$
|
15,244
|
0.5
|
%
|
|||||
|
Conventional
|
6,202
|
1,859,976
|
54.1
|
%
|
||||||
|
Total
ARMs
|
6,296
|
1,875,220
|
54.6
|
%
|
||||||
|
Annual
Total
|
14,713
|
$
|
3,437,371
|
100.0
|
%
|
|||||
|
Loan
Purpose
|
||||||||||
|
Conventional
|
12,814
|
$
|
3,179,869
|
92.5
|
%
|
|||||
|
FHA/VA
|
1,899
|
257,502
|
7.5
|
%
|
||||||
|
Total
|
14,713
|
$
|
3,437,371
|
100.0
|
%
|
|||||
|
Documentation
Type
|
||||||||||
|
Full
Documentation
|
9,238
|
$
|
2,100,239
|
61.1
|
%
|
|||||
|
Stated
Income
|
2,489
|
696,789
|
20.3
|
%
|
||||||
|
Stated
Income/Stated Assets
|
1,346
|
320,624
|
9.3
|
%
|
||||||
|
No
Documentation
|
609
|
145,845
|
4.2
|
%
|
||||||
|
No
Ratio
|
437
|
83,013
|
2.4
|
%
|
||||||
|
Stated
Assets
|
13
|
2,315
|
0.1
|
%
|
||||||
|
Other
|
581
|
88,546
|
2.6
|
%
|
||||||
|
Total
|
14,713
|
$
|
3,437,371
|
100.00
|
%
|
|||||
Retail
Loan Origination
Our
loan
origination strategy is predominantly retail, referral-based, mortgage banking.
Our loan officers rely primarily on the various relationships they have
established with their clientele, realtors, attorneys and others who routinely
interact with those who may need mortgage financing. Retail loan origination
allows us to provide a variety of attractive and innovative mortgage products
at
competitive rates. Unlike many banks and financial institutions which focus
solely on loan products to retain in their portfolios, we offer a wide range
of
products — products that we can retain in portfolio and products that we will
sell to third parties if such loans do not meet our investment
parameters.
Because
we are predominately referral-based, our cost of sourcing potential retail
clients is less than an organization that relies heavily on concentrated
broadcast, print or internet media advertising. In order to remain compliant
with the Real Estate Settlement Procedures Act (“RESPA”), we do not pay referral
fees or enter into above market co-branding, co-marketing or shared facilities
relationships. By eliminating intermediaries between the borrower and us, we
can
both originate high quality mortgage loans for retention in our portfolio at
attractive yields or offer loans that may be sold to third parties, while at
the
same time offering our customers a variety of mortgage products at competitive
rates and fees.
Wholesale
Loan Origination
Our
wholesale lending strategy has historically been a small component of our loan
origination operations. We have a network of non-affiliated wholesale loan
brokers and mortgage lenders who submit loans to us. We maintain relationships
with these wholesale brokers and, as with retail loan originations, will
underwrite, process, and fund wholesale loans through our centralized facilities
and processing systems. In order to further diversify our origination network,
during 2005, we began to expand our wholesale loan origination capacity with
the
creation of a division specifically for wholesale loan
originations.
Correspondent
Lending
Through
our correspondent lending channels, we may acquire mortgage loans from
Company-approved correspondent lenders. We review our correspondents for the
soundness of their in-house mortgage lending procedures and their ability to
fulfill their representations and warranties to us. Generally, loans acquired
from correspondents are originated to our approved specifications including
our
internally developed loan products, credit and property guidelines, and
underwriting criteria. In addition, correspondents may sell their own loan
products to us that are originated according to the correspondents’ product
specifications and underwriting guidelines that we have approved and
accepted.
To
verify
product quality and compliance with our underwriting and investment guidelines,
we perform a full review of all of the loans generated by the correspondent
prior to the purchase thereof. A full underwriting review of each loan file,
including all credit and appraisal information, is performed as well as
documentation sufficiency and compliance. Similar to loans originated through
our retail and wholesale channels, these loans are also subjected to our quality
control reviews.
Underwriting
Historically,
NYMC’s underwriting philosophy has been to underwrite loans according to the
guidelines established by the available purchasers of its loans. However, the
Company underwrites to its own guidelines select ARM loans it retains for its
investment portfolio. We believe that proper underwriting for such loans is
critical to managing the credit risk inherent in a loan portfolio.
Typically,
mortgage underwriting guidelines provide a framework for determining whether
a
proposed mortgage loan to a potential borrower will be approved. The key points
in this framework are the borrower’s credit scores and other indicia of the
borrower’s ability and willingness to repay the loan, such as the borrower’s
employment and income, the amount of the borrower’s equity in and the value of
the borrower’s property securing the loan, the borrower’s debt to income and
other debt ratios, the loan to value (“LTV”) of the loan, the amount of funds
available to the borrower for closing and the borrower’s post-closing
liquidity.
We
continue to follow the underwriting guidelines established by available
purchasers with respect to the loans we intend to sell. Furthermore, for
mortgage loans we intend to retain, we follow a specific underwriting
methodology based on the following philosophy — first evaluate the borrower’s
ability and willingness to repay the loan, and then evaluate the value of the
property securing the loan. We seek only to retain mortgage loans that we
believe have low risk of default and resultant loss. As underwriting basically
seeks to predict future borrower payment patterns and ability based on the
borrower’s history and current financial information and the lender’s ability to
be made whole in the future through foreclosure in the event a default does
occur, no assurance can be made that every loan originated or purchased will
perform as anticipated.
The
key
aspects of our underwriting guidelines are as follows:
Borrower—
In
evaluating the borrower’s ability and willingness to repay a loan, we review and
analyze the following aspects of the borrower: credit score, income and its
source, employment history, debt levels in revolving, installment and other
mortgage loans, credit history and use of credit in the past, and finally the
ability and/or willingness to provide verification for the above. Credit scores,
credit history, use of credit in the past and information as to debt levels
can
be typically obtained from a third party credit report through a credit
repository. Those sources are used in all cases, as available. In certain cases,
borrowers have little or no credit history that can be tracked by one of the
primary credit repositories. In these cases, the reason for the lack of history
is considered and taken into account. In our experience, more than 95% of
prospective borrowers have accessible credit histories.
Property—
In
evaluating a potential property to be used as collateral for a mortgage loan,
we
consider all of the following aspects of the property: the loan balance versus
the property value, or LTV, the property type, how the property will be occupied
(a primary residence, second home or investment property), if the property’s
apparent value is supported by recent sales of similar properties in the same
or
a nearby area, any unique characteristics of the property and our confidence
in
the above data and their sources.
Other
Considerations—
Other
considerations that impact our decision regarding a borrower’s loan application
include the borrower’s purpose in requesting the loan (purchase of a home as
opposed to cashing equity out of the home through a refinancing for example),
the loan type (adjustable-rate, including adjustment periods and loan life
rate
caps, or fixed-rate), and any items unique to a loan that we believe could
affect credit performance.
In
addition, we work with nationally recognized providers of appraisal, credit,
and
title insurance. We oversee the activities of these service providers through
on-site visits, report monitoring, customer service surveys, post-closing
quality control, and periodic direct participation and conversations with our
customers. A significant amount of our settlement services are performed by
in-house professionals. We have an extensive quality control review process
that
is contracted with a third party in order to verify that selected loans were
properly underwritten, executed and documented. All loans retained in portfolio
and a selection of other loans sold to third parties also are quality control
reviewed internally as well.
Our
Loan Origination Financing Strategy
We
finance our loan originations utilizing warehouse agreements as well as other
similar financing arrangements. The agreements are each renewable annually,
but
are not committed, meaning that the counterparties to the agreements may
withdraw access to the credit facilities at any time.
Warehouse
Facilities—
Non-depository mortgage lenders, such as NYMC, typically rely on credit
facilities for capital needed to fund new mortgage loans. These facilities
are
typically lines of credit or master repurchase agreements from other financial
institutions that the mortgage banker can draw from in order to fund new
mortgage loans. These facilities are referred to as warehouse lines or warehouse
facilities.
Warehouse
lines are typically collateralized loans made to mortgage bankers that in turn
pledge the resulting loans to the warehouse lender. Third-party mortgage
custodians, usually large banks, typically hold the mortgage loans, including
the notes, mortgages and other important loan documentation, for the benefit
of
the mortgage lender who is deemed to own the loan and, if there is a default
under the warehouse line, for the benefit of the warehouse lender.
We
currently have a $250 million warehouse facility with Greenwich Capital
Financial Products, Inc. and a $200 million warehouse facility with Credit
Suisse First Boston Mortgage Capital, LLC. On December 13, 2005 we entered
into
a master repurchase agreement with Deutsche Bank Structured Products, Inc.
under
which we can enter into up to $300 million in loan repurchase arrangements.
This
facility became operational in January 2006.
Loan
Servicing
Loan
servicing is the administration function of a mortgage loan whereby an entity
collects monthly payments from a mortgage borrower and disburses those funds
to
the appropriate parties. The servicer has to account for all payments, maintain
balances in certain accounts for each loan, maintain escrow accounts for real
estate taxes and insurance, remit the correct amount of principal and interest
monthly to the holder of the loan and handle foreclosures as
required.
Any
loans
that we originate and retain for our portfolio have their servicing handled
by
Cenlar Federal Savings Bank (“Cenlar”), a wholesale bank specializing in
mortgage sub-servicing nationwide. Under this arrangement, Cenlar acts as an
intermediary between us and the borrower. It collects payments from borrowers,
handles accounting and remittance of the payments, handles escrow accounts
and
does certain tax reporting. As our retained loans are securitized, Cenlar
continues to service those loans and reports to the securities trustee or master
servicer, as appropriate.
For
a
loan originated and sold to third parties, the servicing rights are sold upon
the sale of the loan. We may choose to own, for periods usually not more than
90
days, certain loans designated as held for sale to third parties in order to
increase earnings. In these cases, we believe there is a large enough spread
between the mortgage loan interest rate and the interest rate paid on the
applicable warehouse line to make any additional risk in carrying those loans
on
our balance sheet worthwhile. In these cases, and during the interim period
between the time we fund (and subsequently own) a loan and sell the loan to
a
third party, we service loans through Cenlar as well.
Loan
servicing provided by Cenlar is provided on a private label basis, meaning
that
Cenlar employees will identify themselves as being our representatives and
correspondence regarding loans is on our letterhead. The benefit to us of this
arrangement is that we pay for loan services as we use them, without a
significant investment in personnel, systems and equipment. In addition, since
Cenlar sub-services on our behalf and reports directly to us, we are quickly
made aware of any customer wishing for an early payoff of their loan through
refinancing or sale of their home. As a result, we can quickly respond to
customer needs and make immediate efforts reestablishing customer contact in
order to capture the potential payoff of a customer’s loan with another loan
product (potential refinancing, modification or new purchase mortgage) that
suits their needs.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking statements. Forward
looking statements are those which are not historical in nature. They can often
be identified by their inclusion of words such as “will,” “anticipate,”
“estimate,” “should,” “expect,” “believe,” “intend” and similar expressions. Any
projection of revenues, earnings or losses, capital expenditures, distributions,
capital structure or other financial terms is a forward-looking statement.
Certain statements regarding the following particularly are forward-looking
in
nature:
| • |
our
business strategy;
|
| • |
future
performance, developments, market forecasts or projected
dividends;
|
| • |
projected
acquisitions or joint ventures; and
|
| • |
projected
capital expenditures.
|
It
is
important to note that the description of our business in general and our
investment in mortgage loans and mortgage-backed securities holdings in
particular, is a statement about our operations as of a specific point in time.
It is not meant to be construed as an investment policy, and the types of assets
we hold, the amount of leverage we use, the liabilities we incur and other
characteristics of our assets and liabilities are subject to reevaluation and
change without notice.
Our
forward-looking statements are based upon our management’s beliefs, assumptions
and expectations of our future operations and economic performance, taking
into
account the information currently available to us. Forward-looking statements
involve risks and uncertainties, some of which are not currently known to us
that might cause our actual results, performance or financial condition to
be
materially different from the expectations of future results, performance or
financial condition we express or imply in any forward-looking statements.
Some
of the important factors that could cause our actual results, performance or
financial condition to differ materially from expectations are:
| • |
our
limited operating history with respect to our portfolio
strategy;
|
| • |
our
proposed portfolio strategy may be changed or modified by our management
without advance notice to stockholders, and that we may suffer losses
as a
result of such modifications or
changes;
|
| • |
impacts
of a change in demand for mortgage loans on our net income and cash
available for distribution;
|
| • |
our
ability to originate prime and high-quality adjustable-rate and hybrid
mortgage loans for our portfolio or for sale to third
parties;
|
| • |
risks
associated with the use of leverage;
|
| • |
interest
rate mismatches between our mortgage-backed securities and our borrowings
used to fund such purchases;
|
| • |
changes
in interest rates and mortgage prepayment rates;
|
| • |
effects
of interest rate caps on our adjustable-rate mortgage-backed
securities;
|
| • |
the
degree to which our hedging strategies may or may not protect us
from
interest rate volatility;
|
| • |
potential
impacts of our leveraging policies on our net income and cash available
for distribution;
|
| • |
our
board’s ability to change our operating policies and strategies without
notice to you or stockholder
approval;
|
| • |
the
other important factors described in this Annual Report on Form 10-K,
including those under the captions “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” “Risk Factors,” and
“Quantitative and Qualitative Disclosures about Market
Risk.”
|
We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the events described
by
our forward-looking events might not occur. We qualify any and all of our
forward-looking statements by these cautionary factors. In addition, you should
carefully review the risk factors described in other documents we file from
time
to time with the Securities and Exchange Commission, including the Company’s
registration statement on Form S-11 (File No. 333-111668).
This
Annual Report on Form 10-K contains market data, industry statistics and other
data that have been obtained from, or compiled from, information made available
by third parties. We have not independently verified their data.
Seasonality
Loan
originations and payoffs are typically at their lowest levels during the first
and fourth quarters of the year due to a reduced level of home buying activity
during the colder months and while schools are in session. Loan originations
and
payoffs generally increase during the warmer months, beginning in March and
continuing through October. The Company typically experiences higher earnings
in
the second and third quarters and lower earnings in the first and fourth
quarters from its loan origination segment.
Competition
We
face
intense competition from finance and mortgage banking companies, other mortgage
REITs, internet-based lending companies where entry barriers are relatively
low,
and, to a growing extent, from traditional bank and thrift lenders that have
increased their participation in the mortgage industry. As we expand our loan
origination business further and build a portfolio of mortgage loans and
mortgage-backed securities, we face a significant number of additional
competitors, many of whom will be well established in the markets we seek to
operate. Some of our competitors are much larger than we are, have better name
recognition than we do and have far greater financial and other resources than
we do.
We
anticipate that the majority of our competition will be in the mortgage
industry. In addition to mortgage banking companies, internet-based lending
companies, traditional banks and thrift lenders, the government sponsored
entities Fannie Mae and Freddie Mac are also expanding their participation
in
the mortgage industry. While the government sponsored entities presently do
not
have the legal authority to originate mortgage loans, they do have the authority
to buy loans. If as a result of their purchasing practices, these government
sponsored entities experience significantly higher-than-expected losses, the
experience could adversely affect overall investor perception of the mortgage
industry.
Competition
in the industry can take many forms, including lower interest rates and fees,
less stringent underwriting standards, convenience in obtaining a loan, customer
service, amount and term of a loan and marketing and distribution channels.
The
need to maintain mortgage loan volume in this competitive environment creates
a
risk of price and quality competition in the mortgage industry. Price
competition could cause us to lower the interest rates that we charge borrowers,
which could lower the value of our loans we sell or retain in our portfolio.
If
our competitors adopt less stringent underwriting standards, we will be
pressured to do so as well. If we do not relax underwriting standards in
response to our competitors, we may lose market share. If we relax our
underwriting standards in response to price competition, we may be exposed
to
higher credit risk without receiving higher pricing to compensate for the higher
risk. Any increase in these pricing and underwriting pressures could reduce
the
volume of our loan originations and sales and significantly harm our business,
financial condition, liquidity and results of operations.
Personnel
The
Company recruits, hires and retains individuals with the specific skills that
complement its corporate growth and business strategies. As of December 31,
2005, we employed 802 people. Of this number, 329 were loan officers dedicated
to originating loans. The number of employees at December 31, 2004 was 782,
of
which 344 were loan officers dedicated to originating loans.
Certain
Federal Income Tax Considerations and Our Status as a REIT
We
have
elected to be taxed as a REIT under the federal income tax laws. As such, we
operate in such a manner as to qualify for taxation as a REIT under the federal
income tax laws, and we intend to continue to operate in such a manner, but
no
assurance can be given that we will operate in a manner so as to qualify or
remain qualified as a REIT.
As
a
REIT, we generally will not be subject to federal income tax on the REIT taxable
income that we distribute to our stockholders, but taxable income generated
by
NYMC, our taxable REIT subsidiary, 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.
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 20% 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 NYMC to be treated as a TRS. NYMC
is
subject to corporate income tax on its taxable income, which is its net income
from loan originations and sales.
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 20% 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
intend
to limit substantially all of the assets that we acquire to Qualified REIT
Assets. Our strategy to maintain REIT status may limit the type of assets,
including hedging contracts and other assets that we otherwise might
acquire.
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.
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.
An
investment in our securities involves various risks. You should carefully
consider the following risk factors before making an investment decision
involving our securities. 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 and could cause you
to
lose all or part of your investment. 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.
Our
business strategy partially depends on our ability to originate prime
adjustable-rate and hybrid mortgage loans for our portfolio.
Our
portfolio of prime adjustable-rate and hybrid mortgage loans will, over time,
be
comprised primarily of mortgage loans that we originate through NYMC. If NYMC
is
not able to originate prime adjustable-rate and hybrid mortgage loans that
meet
our investment criteria at the volumes we expect, the time required for, and
the
cost associated with, building our portfolio may be greater than expected,
which
could have an adverse effect on our results of operations and our ability to
make distributions to our stockholders.
We
may experience a decline in the market value of our assets
The
market value of the interest-bearing assets that we have acquired and intend
to
continue to acquire, most notably mortgage-backed securities and originated
or
purchased residential mortgage 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. A decline in the market
value of our investments may limit our ability to borrow or result in lenders
requiring additional collateral or initiating margin calls under our repurchase
agreements. As a result, we could be required to sell some of our investments
under adverse market conditions in order to maintain liquidity. If such sales
are made at prices lower than the amortized costs of such investments, we will
incur losses. A default under our repurchase agreements could also result in
the
liquidation of the underlying investments used as collateral and result in
a
loss equal to the difference between the value of the collateral and the amount
owed under our repurchase agreements.
Our
success will depend on our ability to obtain financing to leverage our
equity.
If
we are
limited in our ability to leverage our assets, the returns on our portfolio
may
be harmed. A key element of our strategy is our use of leverage to increase
the
size of our portfolio in an attempt to enhance our returns. As of
December 31, 2005, our leverage ratio, defined as total financing
facilities less subordinated debentures outstanding divided by total
stockholders’ equity plus subordinated debentures at December 31, 2005 was
11 to 1. 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.
Interest
rate fluctuations may cause losses.
We
believe our primary interest rate exposure relates to our mortgage loans,
mortgage-backed securities and variable-rate debt, as well as the interest
rate
swaps and caps that we utilize for risk management purposes. Changes in interest
rates may affect our net interest income, which is the difference between the
interest income we earn on our interest-earning assets and the interest expense
we incur in financing these assets. Changes in the level of interest rates
also
can affect our ability to originate or acquire mortgage loans or mortgage-backed
securities, the value of our assets and our ability to realize gains from the
sale of such assets. In a period of rising interest rates, our interest expense
could increase while the interest we earn on our assets would not change as
rapidly. This would adversely affect our profitability.
Our
operating results depend in large part on differences between income received
from our assets, net of credit losses, and our financing costs. We anticipate
that in most cases, for any period during which our assets are not match-funded,
the income from such assets will adjust more slowly to interest rate
fluctuations than the cost of our borrowings. Consequently, changes in interest
rates, particularly short-term interest rates, may significantly influence
our
net income. We anticipate that increases in interest rates will tend to decrease
our net income. Interest rate fluctuations resulting in our interest expense
exceeding our interest income would result in operating losses for us and may
limit or eliminate our ability to make distributions to our
stockholders.
Our
mortgage loan originations historically have been concentrated in specific
geographic regions and any adverse market or economic conditions in those
regions may have a disproportionately adverse effect on the ability of our
customers to make their loan payments.
Our
mortgage loan originations have been and may in the future be concentrated
in
specific geographic regions — predominantly in the mid-Atlantic, Northeast and
New England regions of the United States. Adverse market or economic conditions
in a particular region may disproportionately increase the risk that borrowers
in that region will be unable to make their mortgage payments. In addition,
the
market value of the real estate securing those mortgage loans could be adversely
affected by adverse market and economic conditions in that region. Any sustained
period of increased payment delinquencies, foreclosures or losses caused by
adverse market or economic conditions in that geographic region could adversely
affect both our net interest income from loans in our portfolio as well as
our
ability to originate, sell and securitize loans, which would significantly
harm
our revenues, results of operations, financial condition, and business
prospects.
A
prolonged economic slowdown, a lengthy or severe recession or declining real
estate values could harm our operations.
We
believe the risks associated with our business will be more acute during periods
of economic slowdown or recession if these periods are accompanied by declining
real estate values. Declining real estate values will likely reduce our level
of
new mortgage loan originations, since borrowers often use increases in the
value
of their existing home to support the refinancing of their existing mortgage
loans or the purchase of new homes at higher levels of borrowings. Further,
declining real estate values significantly increase the likelihood that we
will
incur losses on our loans in the event of default. Any sustained period of
increased payment delinquencies, foreclosures or losses could adversely affect
both our net interest income from loans in our portfolio as well as our ability
to originate, sell and securitize loans, which would significantly harm our
revenues, results of operations, financial condition, and business
prospects.
Our
past operating results have occurred during a period of rapid growth for the
residential mortgage industry and may not be indicative of our future operating
results.
The
growth rate of our origination platform has benefited from low interest rates,
a
long period of economic growth and strategic acquisitions of mortgage
origination platforms. NYMC’s loan originations for the year ending December 31,
2005 increased 86% over the prior period, aided in large part to our acquisition
of Guaranty Residential Lending, Inc., while according to the MBA’s February 7,
2006 Mortgage Finance Forecast, lender origination volume for 2005 was flat
versus the prior year. The MBA further projected that overall loan originations
will decline in 2006. These projected declines in overall volume of closed
loan
originations are likely to have a negative effect on our loan origination volume
and net income. Accordingly, our historical performance may not be indicative
of
future results, and our results of operations may be materially adversely
affected as interest rates rise. In addition, NYMC’s recent and rapid growth may
distort some of its ratios and financial statistics and our change in business
strategy to include the development of a portfolio of mortgage loans and
mortgage-backed securities makes period-to-period comparisons difficult. In
light of this growth and change in business strategy, our historical performance
and operating and origination data may be of little relevance in predicting
our
future performance.
Excessive
supply of or reduced demand for mortgage-backed securities in the market for
these securities may cause the market to require a higher yield on our
mortgage-backed securities and thereby cause a decline in the value of our
portfolio.
The
mortgage-backed securities we will own are also subject to spread risk. The
majority of these securities will be adjustable-rate securities valued based
on
a market credit spread to U.S. Treasury security yields. In other words, their
value is dependent on the yield demanded on such securities by the market based
on their credit relative to U.S. Treasury securities. Excessive supply of such
securities combined with reduced demand will generally cause the market to
require a higher yield on such securities, resulting in the use of a higher
or
wider spread over the benchmark rate (usually the applicable U.S. Treasury
security yield) to value such securities. Under such conditions, the value
of
our securities portfolio would tend to decline. Conversely, if the spread used
to value such securities were to decrease or tighten, the value of our
securities portfolio would tend to increase. Such changes in the market value
of
our portfolio could adversely affect our net equity, net income or cash flow
directly through their impact on unrealized gains or losses on
available-for-sale securities, and therefore our ability to realize gains on
such securities, or indirectly through their impact on our ability to borrow
and
access capital.
Furthermore,
shifts in the U.S. Treasury yield curve, which represents the market’s
expectations of future interest rates, would also affect the yield required
on
our securities and therefore their value. This would have similar effects on
our
portfolio and our financial position and results of operations as a change
in
spreads would.
Loan
prepayment rates may increase, adversely affecting yields on our planned
investments.
The
value
of the assets we have acquired and intend to continue to acquire may be affected
by prepayment rates on mortgage loans. Prepayment rates on mortgage loans are
influenced by changes in current interest rates and a variety of economic,
geographic and other factors beyond our control, and consequently, such
prepayment rates cannot be predicted with certainty. In periods of declining
mortgage loan interest rates, prepayments on mortgage loans generally increase.
If general interest rates decline as well, the proceeds of such prepayments
received during such periods are likely to be reinvested by us in assets with
lower yields than the yields on the assets that were prepaid. In addition,
the
market value of any mortgage assets may, because of the risk of prepayment,
benefit less than other fixed-income securities from declining interest rates.
Conversely, in periods of rising interest rates, prepayments on mortgage loans
generally decrease, in which case we would not have the prepayment proceeds
available to invest in assets with higher yields. Under certain interest rate
and prepayment scenarios, we may fail to recoup fully our cost of acquisition
of
certain investments.
Our
hedging transactions may limit our gains or result in losses.
We
use
derivatives, primarily interest rate swaps and caps, to hedge our liabilities
and this has certain risks, including the risk that losses on a hedging
transaction will reduce the amount of cash available for distribution to our
stockholders and that such losses may exceed the amount invested in such
instruments. Our board of directors has adopted a general policy with respect
to
the use of derivatives, and which generally allows us to use derivatives when
we
deem appropriate for risk management purposes, but does not set forth specific
guidelines. To the extent consistent with maintaining our status as a REIT,
we
may use derivatives, including interest rate swaps and caps, options, term
repurchase contracts, forward contracts and futures contracts, in our risk
management strategy to limit the effects of changes in interest rates on our
operations. However, a hedge may not be effective in eliminating the risks
inherent in any particular position. Our profitability may be adversely affected
during any period as a result of the use of derivatives in a hedging
transaction.
The
mortgage loans we typically invest in and the mortgage loans underlying the
mortgage-backed securities we typically invest in are subject to risks of
delinquency, foreclosure and loss, which could result in losses to
us.
Residential
mortgage loans are secured by residential properties and are subject to risks
of
delinquency and foreclosure, and risks of loss. The ability of a borrower to
repay a loan secured by residential property typically is dependent primarily
upon the income or assets of the borrower, but also may be affected by property
location and condition, competition and demand for comparable properties,
changes in zoning laws, environmental contamination, changes in national,
regional or local economic conditions, declines in regional or local real estate
values, increases in interest rates, real estate tax rates, changes in
governmental rules and regulations and acts of God, terrorism, social unrest
and
civil disturbances.
In
the
event of any default under a mortgage loan held directly by us, we will bear
a
risk of loss of principal to the extent of any deficiency between the value
of
the collateral that we can realize upon foreclosure and sale and the principal
and accrued interest of the mortgage loan. In the event of the bankruptcy of
a
mortgage loan borrower, the mortgage loan to such borrower will be deemed to
be
secured only to the extent of the value of the underlying collateral at the
time
of bankruptcy (as determined by the bankruptcy court), and the lien securing
the
mortgage loan will be subject to the avoidance powers of the bankruptcy trustee
or debtor-in-possession to the extent the lien is unenforceable under state
law.
Foreclosure of a mortgage loan can be an expensive and lengthy process. The
occurrence of an event of default or foreclosure could have a material adverse
effect on our cash flow from operations and could limit the amount we have
available for payment of our debt obligations and distribution to our
stockholders. Residential mortgage-backed securities evidence interests in
or
are secured by pools of residential mortgage loans. Accordingly, the
mortgage-backed securities we typically invest in are subject to all of the
risks of the underlying mortgage loans.
We
may be required to repurchase mortgage loans that we have sold or to indemnify
holders of our mortgage-backed securities.
If
any of
the mortgage loans that we originate and sell, or that we pledge to secure
mortgage-backed securities that we issue in our securitizations, do not comply
with the representations and warranties that we make about the characteristics
of the loans, the borrowers and the properties securing the loans, we may be
required to repurchase those loans in the case of the loans that we have sold,
or replace them with substitute loans or cash in the case of securitized loans.
If this occurs, we may have to bear any associated losses directly. In addition,
in the case of loans that we have sold, we may be required to indemnify the
purchasers of such loans for losses or expenses incurred as a result of a breach
of a representation or warranty made by us. Repurchased loans typically require
an allocation of working capital to carry on our books, and our ability to
borrow against such assets is limited, which could limit the amount by which
we
can leverage our equity. Any significant repurchases or indemnification payments
could significantly harm our cash flow and results of operations and limit
our
ability to make distributions to our stockholders.
We
may be subject to losses due to fraudulent and negligent acts on the part of
loan applicants, mortgage brokers, other vendors and our
employees.
When
we
originate mortgage loans, we rely upon information supplied by borrowers and
other third parties, including information contained in the applicant’s loan
application, property appraisal reports, title information and employment and
income documentation. If any of this information is misrepresented or falsified
and if we do not discover it prior to funding a loan, the actual value of such
loan may be significantly lower than anticipated. As a practical matter, we
generally bear the risk of loss associated with a misrepresentation whether
it
is made by the loan applicant, the mortgage broker, another third party or
one
of our employees. A loan subject to a material misrepresentation is typically
unsaleable or is subject to repurchase or substitution if it is sold or
securitized prior to detection of the misrepresentation. Although we may have
rights against persons and entities who made or knew about the
misrepresentation, those persons and entities may be difficult to locate, and
it
is often difficult to collect any monetary losses from them that we may have
suffered.
Our
operations are subject to a body of complex laws and regulations at the federal,
state and local levels.
We
must
comply with the laws, rules and regulations, as well as judicial and
administrative decisions, of all jurisdictions in which we originate mortgage
loans, as well as an extensive body of federal laws, rules and regulations.
The
volume of new or modified laws, rules and regulations applicable to our business
has increased in recent years and individual municipalities have also begun
to
enact laws, rules and regulations that restrict or otherwise affect loan
origination activities, and in some cases loan servicing activities. The laws,
rules and regulations of each of these jurisdictions are different, complex
and,
in some cases, in direct conflict with each other. It may be more difficult
to
identify comprehensively, to interpret accurately, to program properly our
information systems and to effectively train our personnel with respect to
all
of these laws, rules and regulations, thereby potentially increasing the risks
of non-compliance with these laws, rules and regulations.
Our
failure to comply with these laws, rules and regulations can lead
to:
| · |
civil
and criminal liability, including potential monetary
penalties;
|
| · |
loss
of state licenses or permits required for continued lending and servicing
operations;
|
| · |
legal
defenses causing delay or otherwise adversely affecting our ability
to
enforce loans, or giving the borrower the right to rescind or cancel
the
loan transaction;
|
|
·
|
demands
for indemnification or loan repurchases from purchasers of our
loans;
|
|
·
|
class
action lawsuits; and
|
|
·
|
administrative
enforcement actions.
|
We
commenced operations as a newly public company in June 2004 and have a limited
operating history.
NYMC,
our
mortgage banking subsidiary, has a substantial operating history, but we were
not formed until September 2003 and had no operations prior to closing our
IPO on June 29, 2004. As a result, we have a limited history managing a
portfolio of mortgage loans or mortgage-backed securities for you to determine
the likelihood of our achieving our investment objectives.
Our
executive officers have agreements that provide them with benefits in the event
their employment is terminated following a change in control.
We
have
entered into agreements with the members of our senior management team, Messrs.
Schnall, Akre, Wirth, Fierro and Mumma, that provide them with severance
benefits if their employment ends under specified circumstances following a
change in control. These benefits could increase the cost to a potential
acquirer of us and thereby prevent or discourage a change in control that might
involve a premium price for your shares or otherwise be in your best
interest.
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 of 1940,
as
amended. 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.
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 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.
If
we
fail to qualify as a REIT in any taxable year, we would be subject to federal
income tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates. In addition, if we do not qualify for certain
statutory relief provisions, 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. Failing to obtain, or losing, our REIT status would reduce our
net
earnings available for investment or distribution to stockholders because of
the
additional tax liability, and we would no longer be required to make
distributions to stockholders. Additionally, we might be required to borrow
funds or liquidate some investments in order to pay the applicable
tax.
None.
Our
principal executive and administrative offices are located at 1301 Avenue of
the
Americas, 7th floor, New York, New York 10019. We also operate retail loan
origination sales offices at 54 (28 branches and 26 branch satellite) locations
in 11 states. All of our facilities are leased. The aggregate annual rent for
these locations is approximately $5.0 million.
Further
details of our facilities is as follows:
|
Location
|
|
Business
Activity
|
Business
Segment
|
|
|
New
York City
|
Corporate
Headquarters and
Mortgage
Origination
|
Mortgage
Portfolio
Management
and
Mortgage
Lending
|
||
|
Bridgewater,
New Jersey
|
Wholesale
Lending
|
Mortgage
Lending
|
||
|
Various-54
locations in 11 states
|
Retail
Mortgage Origination
|
Mortgage
Lending
|
||
The
Company is at times subject to various legal proceedings arising in the ordinary
course of business. The Company does not believe that any of its current legal
proceedings, individually or in the aggregate, will have a material adverse
effect on its operations or financial condition.
None.
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
Our
common stock is traded on the New York Stock Exchange under the trading symbol
“NTR”. As of March 1, 2006, we had 18,258,221 shares of common stock
outstanding, and as of March
6,
2006, there were 88 holders of record. 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 common stock on the NYSE and the cash
dividends paid or payable per share of common stock.
|
|
Common
Stock Prices
|
Cash
Dividends
|
|||||||||||||||||
|
|
High
|
Low
|
Close
|
Declared
|
Paid
or
Payable
|
Amount
per
Share
|
|||||||||||||
|
Year
Ended December 31, 2005
|
|||||||||||||||||||
|
Fourth
quarter
|
$
|
7.50
|
$
|
5.51
|
$
|
6.62
|
12/09/05
|
1/26/06
|
$
|
0.21
|
|||||||||
|
Third
quarter
|
9.20
|
7.00
|
7.47
|
9/26/05
|
10/26/05
|
0.21
|
|||||||||||||
|
Second
quarter
|
10.23
|
9.04
|
9.07
|
6/02/05
|
07/26/05
|
0.25
|
|||||||||||||
|
First
quarter
|
11.30
|
9.90
|
10.22
|
03/11/05
|
04/26/05
|
0.25
|
|||||||||||||
|
Common
Stock Prices
|
Cash
Dividends
|
||||||||||||||||||
|
|
High
|
Low
|
Close
|
Declared
|
Paid
or
Payable
|
Amount
per
Share
|
|||||||||||||
|
Year
Ended December 31, 2004
|
|||||||||||||||||||
|
Fourth
quarter
|
$
|
11.34
|
$
|
8.90
|
$
|
11.20
|
12/16/04
|
1/26/05
|
$
|
0.24
|
|||||||||
|
Third
quarter
|
9.90
|
8.55
|
9.35
|
9/16/04
|
10/26/04
|
0.16
|
|||||||||||||
|
Second
quarter
|
9.15
|
8.69
|
8.86
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
||||||||||
| (1) |
The
Company closed its IPO on June 29, 2004. As a result, no dividend
for the
two days of the quarter ended June 30, 2004 was declared or
paid.
|
In
order
to qualify for the tax benefits accorded to a REIT under the Code, we intend
to
pay quarterly dividends such that all or substantially all of our taxable income
each year (subject to certain adjustments) is distributed to our stockholders.
All of the distributions that we make will be at the discretion of our Board
of
Directors and will depend on our earnings and financial condition, maintenance
of REIT status and any other factors that the Board of Directors deems
relevant.
During
2005, taxable dividend distributions
for the Company’s common stock were $0.95 per share. The Company’s common
stock is currently listed under the CUSIP #649604-10-5 and trades under the
NYSE
ticker symbol NTR. For tax reporting purposes, the 2005 taxable dividend
distributions will be classified as follows: $0.81532 as ordinary income
and
$0.13468 as a return of capital. The following table contains this
information on a quarterly basis.
|
Declaration
Date
|
Record
Date
|
Payment
Date
|
Cash
Distribution per share
|
Income
Dividends
|
Short-term
Capital Gain
|
Total
Taxable Ordinary Dividend
|
Return
of Capital
|
|||||||||||||||
|
12/16/04
|
1/6/05
|
1/26/05
|
$
|
0.24
|
$
|
0.21558
|
$
|
0.02076
|
$
|
0.23634
|
$
|
0.00366
|
||||||||||
|
3/11/05
|
4/6/05
|
4/26/05
|
$
|
0.25
|
$
|
0.18931
|
$
|
0.03005
|
$
|
0.21936
|
$
|
0.03064
|
||||||||||
|
6/2/05
|
7/14/05
|
7/26/05
|
$
|
0.25
|
$
|
0.15421
|
$
|
0.07059
|
$
|
0.22480
|
$
|
0.02520
|
||||||||||
|
9/26/05
|
10/6/05
|
10/26/05
|
$
|
0.21
|
$
|
0.13482
|
$
|
—
|
$
|
0.13482
|
$
|
0.07518
|
||||||||||
|
Total
2005 Cash Distributions
|
$
|
0.95
|
$
|
0.69392
|
$
|
0.12140
|
$
|
0.81532
|
$
|
0.13468
|
||||||||||||
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
The
Company has not purchased any of its registered equity securities in the twelve
months ended December 31, 2005.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth information as of December 31, 2005 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.
|
566,500
|
$
|
9.56
|
139,500
|
||||||
The
following selected consolidated financial data is derived from our audited
consolidated financial statements and the notes thereto for the periods
presented and should be read in conjunction with the more detailed information
therein and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included elsewhere in this annual report. Operating
results are not necessarily indicative of future performance.
The
selected financial data as of and for the year ended December 31, 2005 and
December 31, 2004 includes the operations of NYMT and its consolidated
subsidiaries. Included in the selected financial data for the year ended
December 31, 2004 are the results of NYMT for the period beginning June 29,
2004
(the closing date of our IPO) and NYMC for the year-to-date period beginning
January 1, 2004. Prior to our IPO, NYMT had no operations and, as a result,
for
all years prior to 2004, the financial data presented is for NYMC
only.
Selected
Consolidated Financial and Other Data
|
|
For
the Year Ended December 31,
|
|||||||||||||||
|
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
(Dollar
amounts in thousands, except per share data)
|
||||||||||||||||
|
Operating
Data:
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Interest
income
|
$
|
77,476
|
$
|
27,299
|
$
|
7,609
|
$
|
2,986
|
$
|
1,570
|
||||||
|
Interest
expense
|
60,104
|
16,013
|
3,266
|
1,673
|
1,289
|
|||||||||||
|
Net
Interest Income
|
17,372
|
11,286
|
4,343
|
1,313
|
281
|
|||||||||||
|
Gains
on sales of mortgage loans
|
26,783
|
20,835
|
23,031
|
9,858
|
6,429
|
|||||||||||
|
Brokered
loan fees
|
9,991
|
6,895
|
6,683
|
5,241
|
3,749
|
|||||||||||
|
Gain
on sale of securities and related hedges
|
2,207
|
774
|
—
|
—
|
—
|
|||||||||||
|
Impairment
loss on investment securities
|
(7,440
|
)
|
—
|
—
|
—
|
—
|
||||||||||
|
Miscellaneous
|
232
|
227
|
45
|
15
|
48
|
|||||||||||
|
Total
other income
|
31,773
|
28,731
|
29,759
|
15,114
|
10,226
|
|||||||||||
|
Expenses:
|
||||||||||||||||
|
Salaries
and benefits
|
30,979
|
17,118
|
9,247
|
5,788
|
3,644
|
|||||||||||
|
Brokered
loan expenses
|
7,543
|
5,276
|
3,734
|
2,992
|
2,174
|
|||||||||||
|
General
and administrative expenses
|
24,512
|
13,935
|
7,395
|
3,897
|
2,808
|
|||||||||||
|
Total
expenses
|
63,034
|
36,329
|
20,376
|
12,677
|
8,626
|
|||||||||||
|
(Loss)/income
before income tax benefit
|
(13,889
|
)
|
3,688
|
13,726
|
3,750
|
1,881
|
||||||||||
|
Income
tax benefit
|
8,549
|
1,259
|
—
|
—
|
—
|
|||||||||||
|
Net
(loss)/income
|
$
|
(5,340
|
)
|
$
|
4,947
|
$
|
13,726
|
$
|
3,750
|
$
|
1,881
|
|||||
|
Basic
(loss)/income per share
|
$
|
(0.30
|
)
|
$
|
0.28
|
—
|
—
|
—
|
||||||||
|
Diluted
(loss)/income per share
|
$
|
(0.30
|
)
|
$
|
0.27
|
—
|
—
|
—
|
||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
9,056
|
$
|
7,613
|
$
|
4,047
|
$
|
2,746
|
$
|
1,549
|
||||||
|
Mortgage
loans held in securitization trusts or held for investment
|
780,670
|
190,153
|
—
|
—
|
—
|
|||||||||||
|
Investment
securities available for sale
|
716,482
|
1,204,745
|
—
|
—
|
—
|
|||||||||||
|
Mortgage
loans held for sale
|
108,271
|
85,385
|
36,169
|
34,039
|
9,894
|
|||||||||||
|
Due
from loan purchasers and escrow deposits pending loan
closings
|
123,247
|
96,140
|
58,862
|
40,621
|
20,707
|
|||||||||||
|
Total
assets
|
1,791,293
|
1,614,762
|
110,081
|
83,004
|
34,561
|
|||||||||||
|
Financing
arrangements
|
1,391,685
|
1,470,596
|
90,425
|
73,016
|
29,705
|
|||||||||||
|
Collateralized
debt obligations
|
228,226
|
—
|
—
|
—
|
—
|
|||||||||||
|
Subordinated
debentures
|
45,000
|
—
|
—
|
—
|
—
|
|||||||||||
|
Subordinated
notes due to members
|
—
|
—
|
14,707
|
—
|
—
|
|||||||||||
|
Total
liabilities
|
1,690,335
|
1,495,280
|
110,555
|
76,504
|
30,891
|
|||||||||||
|
Equity
(deficit)
|
100,958
|
119,482
|
(474
|
)
|
6,500
|
3,670
|
||||||||||
|
Investment
Portfolio Data:
|
||||||||||||||||
|
Average
yield on investment portfolio
|
4.16
|
3.90
|
—
|
—
|
—
|
|||||||||||
|
Net
duration of interest earning assets to liabilities
|
0.91
|
0.42
|
—
|
—
|
—
|
|||||||||||
|
Originations
Data:
|
||||||||||||||||
|
Purchase
originations
|
$
|
1,985,651
|
$
|
1,089,499
|
$
|
803,446
|
$
|
469,404
|
$
|
374,454
|
||||||
|
Refinancing
originations
|
1,451,720
|
756,006
|
796,879
|
407,827
|
209,748
|
|||||||||||
|
Total
originations
|
$
|
3,437,371
|
$
|
1,845,505
|
$
|
1,600,325
|
$
|
877,231
|
$
|
584,202
|
||||||
|
Fixed-rate
originations
|
$
|
1,562,151
|
$
|
878,749
|
$
|
890,172
|
$
|
518,382
|
$
|
398,056
|
||||||
|
Adjustable-rate
originations
|
1,875,220
|
966,756
|
710,153
|
358,849
|
186,146
|
|||||||||||
|
Total
originations
|
$
|
3,437,371
|
$
|
1,845,505
|
$
|
1,600,325
|
$
|
877,231
|
$
|
584,202
|
||||||
|
Total
mortgage sales
|
$
|
2,875,288
|
$
|
1,435,340
|
$
|
1,234,848
|
$
|
633,223
|
$
|
404,470
|
||||||
|
Brokered
originations
|
562,083
|
410,165
|
|
365,477
|
|
244,008
|
|
179,732
|
||||||||
|
Total
originations
|
$
|
3,437,371
|
$
|
1,845,505
|
$
|
1,600,325
|
$
|
877,231
|
$
|
584,202
|
||||||
|
Originated
Mortgage Loans Retained for Investment:
|
||||||||||||||||
|
Par
amount
|
$
|
555.2
|
$
|
95.1
|
n/a
|
n/a
|
n/a
|
|||||||||
|
Weighted
average middle credit score
|
734
|
743
|
n/a
|
n/a
|
n/a
|
|||||||||||
|
Weighted
average LTV
|
69.62
|
%
|
66.58
|
%
|
n/a
|
n/a
|
n/a
|
|||||||||
|
Mortgage
Loans Sold:
|
||||||||||||||||
|
Weighted
average whole loan sales price over par - non-FHA(1)
|
1.34
|
%
|
1.70
|
%
|
1.75
|
%
|
1.51
|
%
|
1.34
|
%
|
||||||
|
Weighted
average whole loan sales price over par - FHA(1)
|
3.63
|
%
|
2.96
|
%
|
4.10
|
%
|
3.46
|
%
|
3.10
|
%
|
||||||
|
Weighted
average whole loan sales price over par - all mortgage loans
sold
|
1.52
|
%
|
2.02
|
%
|
1.75
|
%
|
1.52
|
%
|
1.37
|
%
|
||||||
|
Weighted
average middle credit score non-FHA(1)
|
704
|
715
|
—
|
—
|
—
|
|||||||||||
|
Weighted
average middle credit score FHA(1)
|
633
|
631
|
629
|
668
|
650
|
|||||||||||
|
Weighted
average middle credit score all mortgage loans sold
|
696
|
703
|
719
|
716
|
713
|
|||||||||||
|
Weighted
average LTV non-FHA(1)
|
74.58
|
%
|
71.95
|
%
|
68.47
|
%
|
67.23
|
%
|
71.38
|
%
|
||||||
|
Weighted
average LTV FHA(1)
|
92.76
|
%
|
92.12
|
%
|
88.82
|
%
|
91.78
|
%
|
86.82
|
%
|
||||||
|
Weighted
average LTV all mortgage loans sold
|
76.65
|
%
|
75.88
|
%
|
68.67
|
%
|
67.42
|
%
|
71.71
|
%
|
||||||
|
Operational/Performance
Data:
|
||||||||||||||||
|
Salaries,
general and administrative expense as a percentage of total loans
originated
|
1.61
|
%
|
1.68
|
%
|
1.04
|
%
|
1.10
|
%
|
1.10
|
%
|
||||||
|
Number
of state licensed or exempt from licensing at period end
|
43
|
40
|
15
|
13
|
7
|
|||||||||||
|
Number
of locations at period end
|
54
|
66
|
15
|
13
|
7
|
|||||||||||
|
Number
of employees at period end
|
802
|
782
|
335
|
184
|
147
|
|||||||||||
|
Dividends
declared per common share
|
$
|
0.92
|
$
|
0.40
|
—
|
—
|
—
|
|||||||||
| (1) |
Beginning
near the end of the first quarter of 2004, our volume of FHA loans
increased; prior to such time the volume of FHA loan originations
was
immaterial. Generally, FHA loans have lower average balances and
FICO
scores which are reflected in the statistics above. All FHA loans
are
currently and will be in the future sold or brokered to third
parties.
|
-21-
General
New
York
Mortgage Trust, Inc. (“NYMT,” the “Company,” “we,” “our” and “us”) is a
self-advised residential mortgage finance company that originates, acquires,
retains and securitizes mortgage loans and mortgage-backed securities. Our
wholly-owned taxable REIT subsidiary (“TRS”), The New York Mortgage Company, LLC
(“NYMC”), is a residential mortgage banking company that originates a wide range
of mortgage loans, with a particular focus on prime adjustable- and fixed-rate,
first lien, residential purchase mortgage loans. Prior to the simultaneous
completion of our acquisition of NYMC and our initial public offering (“IPO”) in
2004, NYMC sold all of the loans it originated to third parties, and also
brokered loans to other mortgage lenders prior to funding. NYMC, which
originates residential mortgage loans through a network of 28 full-service
loan
origination locations and 26 satellite loan origination locations, is presently
licensed or authorized to do business in 43 states and the District of
Columbia.
Strategic
Overview
We
are
considered an “active” mortgage REIT in that NYMC, our TRS, originates loans
that may either be held in portfolio, aggregated and subsequently securitized
for long-term investment or sold to third parties for gain on sale revenue.
When
we aggregate and securitize residential mortgage loans for investment, the
leveraged portfolio is comprised largely of prime adjustable-rate mortgage
loans
that we originate and that meet our investment objectives and portfolio
requirements, including adjustable-rate loans that have an initial fixed-rate
period, which we refer to as hybrid mortgage loans. We believe that our ability
to originate mortgage loans as the basis for our portfolio will enable us to
build a portfolio that generates a higher return than the returns realized
by
“passive” mortgage investors that do not have their own origination
capabilities, because the cost to originate and retain such mortgage loans
for
securitization is generally less than the premiums paid to purchase similar
assets from third parties. Our portfolio loans are held at the REIT level or
by
New York Mortgage Funding, LLC (“NYMF”), our qualified REIT subsidiary
(“QRS”).
We
aggregate a portfolio comprised mainly of high credit quality, adjustable-rate
mortgage loans until the portfolio reaches a size sufficient for us to
securitize such loans. We obtain the loans we securitize from either our TRS,
NYMC, or from third parties. Our first securitization occurred on February
25,
2005 and we completed our second and third loan securitizations on July 28,
2005
and December 20, 2005, respectively. These securitization transactions, through
which we financed the adjustable-rate and hybrid mortgage loans that we
retained, were structured as financings for both tax and financial accounting
purposes. Therefore, we do not expect to generate a gain or loss on sales from
these activities, and, following the securitizations, the loans are classified
on our consolidated balance sheet as assets. For our first two securitizations,
we retained all of the resultant securities and financed such securities with
repurchase agreements; for our third securitization we sold investment grade
securities and the securitization debt is recorded as a liability.
NYMC
also
originates and sells loans to third parties for gain on sale revenue rather
than
aggregating lower cost assets, depending on market conditions. We also,
depending on market conditions, retain in our portfolio selected adjustable-rate
and hybrid mortgage loans that we originate. Generally, we sell the fixed-rate
loans and any adjustable-rate and hybrid mortgage loans that do not meet our
investment criteria or portfolio requirements that we originate to third
parties. We rely on our own underwriting criteria with respect to the mortgage
loans we retain and rely on the underwriting criteria of the institutions to
which we sell our loans with respect to the loans we sell. The ability to
originate and sell loans for gain on sale revenue is another advantage of being
an active mortgage REIT.
We
earn
net interest income from purchased residential mortgage-backed securities and
adjustable-rate mortgage loans and securities originated through NYMC. We have
acquired and will seek to acquire additional assets that will produce
competitive returns, taking into consideration the amount and nature of the
anticipated returns from the investment, our ability to pledge the investment
for secured, collateralized borrowings and the costs associated with
originating, financing, managing, securitizing and reserving for these
investments.
Funding
Diversification.
We
strive to maintain and achieve a balanced and diverse funding mix to finance
our
investment portfolio and assets. As a mortgage lender, we rely primarily on
secured warehouse lines of credit for our funding needs on loans held for sale
to third parties. Since our IPO in June 2004, we rely primarily on repurchase
agreements in order to finance our investment portfolio of residential loans
and
mortgage-backed securities. As of December 31, 2005, we have $5.4 billion of
commitments to provide repurchase agreement financing through 23 different
counterparties. During 2005, we further diversified our sources of financing
with the issuance of $45 million of trust preferred securities classified as
subordinated debentures.
On
our
first two securitizations (collateralized debt obligations, or ”CDO”) of
mortgage loans, we retained 100% of the issued securities and financed such
securities with repurchase agreements. The creation of mortgage-backed
securities of our self-originated mortgage loans in this manner provides an
asset with better liquidity and longer-term financing at better rates as opposed
to financing whole loans through warehouse lines. In December, 2005 we completed
our third securitization of $235.0 million of self-originated ARM loans and
sold
the majority of the securities to third parties. Because we did not retain
all
of the resultant securities as in prior CDOs, this securitization eliminated
the
risk of short-term financing (reducing the asset to liability duration gap,
which is the difference between the estimated maturities or lives of our earning
assets and related financing facilities) and the mark-to-market pricing risk
inherent in financing through repurchase agreements or warehouse lines of
credit; as a result of this permanent financing we are not subject to margin
calls on the assets of this CDO.
Risk
Management.
As a
mortgage lender and a manager of mortgage loan investments, we must mitigate
key
risks inherent in these businesses, principally credit risk and interest rate
risk.
Exceptional
Investment Portfolio Credit Quality.
We
retain in our portfolio only selected, high-quality loans that we originate
or
may opportunistically acquire. As a result, our investment portfolio consists
of
high-quality loans that we have either securitized for our own portfolio or
that
collateralize our CDO financings. High credit quality creates significant
portfolio liquidity and provides for financing opportunities that are readily
available on generally favorable terms. When we retain loans for investment,
either whole loans being aggregated for securitization or CDOs in which we
retain all resultant securities or below A-rated tranches, we retain the risk
of
potential credit losses relative to the agency or higher rated securities we
may
purchase from time-to-time. Since we began our portfolio investment operations,
we have not experienced any credit losses in our portfolio.
We
believe that our credit performance is reflective of the high credit quality
of
the loans we originate or acquire for securitization, our prudent in-house
underwriting, property valuation methods and review, our overall investment
policies and prudent management of our delinquent loan portfolio. We believe
that our delinquencies of 0.25% of the total par balance of our investment
portfolio of residential loans at December 31, 2005 reflect strong credit
characteristics and the credit culture of our underwriting and investment
philosophy. The weighted average seasoning of loans in our investment portfolio
of mortgage loans was approximately 12 months at December 31, 2005.
Interest
Rate Risk Management.
Another
primary risk to our investment portfolio of mortgage loans and mortgage-backed
securities is interest rate risk. We have a match funding philosophy in which
we
use hedging instruments to fix or cap the interest rates on our short-term,
CDO
and other financing arrangements that finance our investment portfolio of
mortgage loans and securities. We hedge our financing costs in an attempt to
maintain a net duration gap of less than one year; as of December 31, 2005,
our
net duration gap was approximately 11 months.
As
we
originate loans held for investment or acquire mortgage-backed securities or
loans, we seek to employ our match funding strategy in order to stabilize net
asset values and earnings during periods of rising interest rates. To do so,
we
use hedging instruments in conjunction with our borrowings to approximate the
repricing characteristics of such assets. The Company utilizes a model based
risk analysis system to assist in projecting portfolio performances over a
scenario of different interest rates and market stresses. The model incorporates
shifts in interest rates, changes in prepayments and other factors impacting
the
valuations of our financial securities, including mortgage-backed securities,
repurchase agreements, interest rate swaps and interest rate caps. However,
given the prepayment uncertainties on our mortgage assets, it is not possible
to
definitively lock-in a spread between the earnings yield on our investment
portfolio and the related cost of borrowings. Nonetheless, through active
management and the use of evaluative stress scenarios of the portfolio, we
believe that we can mitigate a significant amount of both value and earnings
volatility. See further discussion of interest rate risk at the “Quantitative
And Qualitative Disclosures About Market Risk - Interest Rate Risk” section of
this document.
Other
Risk Considerations:
Our
business is affected by a variety of economic and industry factors. Management
periodically reviews and assesses these factors and their potential impact
on
our business. The most significant risk factors management considers while
managing the business and which could have a material adverse effect on our
financial condition and results of operations are:
| • |
a
decline in the market value of our assets due to rising interest
rates;
|
| • |
an
adverse impact on our earnings from a decrease in the demand for
mortgage
loans due to, among other things, a period of rising interest
rates;
|
| • |
our
ability to originate prime adjustable-rate and hybrid mortgage loans
for
our portfolio;
|
| • |
increasing
or decreasing levels of prepayments on the mortgages underlying our
mortgage-backed securities;
|
| • |
our
ability to obtain financing to fund and hold mortgage loans prior
to their
sale or securitization;
|
| • |
the
overall leverage of our portfolio and the ability to obtain financing
to
leverage our equity;
|
| • |
the
potential for increased borrowing costs and its impact on net
income;
|
| • |
the
concentration of our mortgage loans in specific geographic regions;
|
| • |
our
ability to use hedging instruments to mitigate our interest rate
and
prepayment risks;
|
| • |
a
prolonged economic slow down, a lengthy or severe recession or declining
real estate values could harm our
operations;
|
| • |
if
our assets are insufficient to meet the collateral requirements of
our
lenders, we might be compelled to liquidate particular assets
at inopportune times and at disadvantageous
prices;
|
| • |
if
we are disqualified as a REIT, we will be subject to tax as a regular
corporation and face substantial tax liability;
and
|
| • |
compliance
with REIT requirements might cause us to forgo otherwise attractive
opportunities.
|
Financial
Overview
Income.
Our
primary sources of income are net interest income on our loans and residential
investment securities and gain on sale of mortgage loans. Net interest income
is
the difference between interest income, which is the income that we earn on
our
loans and residential investment securities and interest expense, which is
the
interest we pay on borrowings and subordinated debt. Net interest income is
also
earned on the bankered loan origination production of our TRS for the period
of
time from when a loan is closed to the sale of such loan to a third
party.
Income
from the gain on sale of mortgage loans to third parties is the difference
between the sales price and the adjusted cost basis of originated loans when
title transfers. The adjusted cost basis of the loans includes the original
principal amount adjusted for deferrals of origination and commitment fees
received, net of direct loan origination costs (including commissions and
salaries for employees directly responsible for such originations)
paid.
Other
significant sources of income include fees received on brokered loans and income
from the sale of securities and related hedges.
Expenses.
Non-interest expenses we incur in operating our business consist primarily
of
salary and employee benefits, brokered loan expenses, occupancy and equipment
expenses, marketing and promotion expenses, and other general and administrative
expenses.
Salary
and employee benefits consist primarily of the salaries and wages paid to our
employees (exclusive of salaries and wages allocated to net gain on sale of
mortgage loans), payroll taxes and expenses for health insurance, retirement
plans and other employee benefits.
Brokered
loan expenses are primarily direct commissions and other costs associated with
brokered loans when such loans are closed with the borrower. Costs associated
with brokered loans are expensed when incurred.
Occupancy
and equipment expenses, which are the fixed and variable costs of buildings
and
equipment, consist of building lease expenses, furniture and equipment expenses,
maintenance, real estate taxes and other associated costs of
occupancy.
Marketing
and promotion expenses include the cost of print, radio and internet
advertisements, promotions, third-party marketing services, public relations
and
sponsorships.
Other
general and administrative expenses include expenses for professional fees,
office supplies, postage and shipping, telephone, insurance, travel and
entertainment and other miscellaneous operating expenses.
Many
of
our expenses are variable in nature and are relative to our loan origination
production volumes. Variable expenses include commissions on loan originations,
brokered loan costs and, to a lesser degree, office supplies, marketing and
promotion and other miscellaneous expenses. Fixed expenses are primarily
occupancy and equipment lease expenses and data processing and communications
expenses.
Description
of Businesses
Mortgage
Lending
Our
mortgage lending operations are important to our financial results as they
either produce the loans that will ultimately collateralize the mortgage
securities that we will hold in our portfolio or provide us the flexibility
to
sell the loans for gain on sale revenue. We primarily originate prime,
first-lien, residential mortgage loans and, to a lesser extent, second lien
mortgage loans, home equity lines of credit, and bridge loans. We originate
a
wide range of mortgage loan products including adjustable-rate mortgage (“ARM”)
loans which may have an initial fixed rate period, and fixed-rate mortgages.
Since the completion of our IPO, we sell or retain and aggregate our
self-originated, high-quality, shorter-term ARM loans in order to pool them
into
mortgage securities. The fixed rate loans we originate and any ARM loans not
meeting our investment criteria continue to be sold to third parties. For the
years ended December 31, 2005 and 2004, we originated $2.9 billion and $1.4
billion in mortgage loans for sale to third parties, respectively. We recognized
gains on sales of mortgage loans totaling $26.8 million and $20.8 million for
the years ended December 31, 2005 and 2004, respectively.
Subsequent
to our IPO in June 2004, we have sold or retained for our portfolio the high
quality, adjustable-rate mortgage loans that we originate. For the years ended
December 31, 2005 and 2004, we originated and retained $555.2 million and $95.1
million of such loans, respectively. When we retain mortgage loans that we
originate, we record such assets at GAAP (“GAAP” means generally accepted
accounting principles) cost. The GAAP cost is then amortized on the effective
interest method over the estimated lives of the retained loans. For the years
ended December 31, 2005 and 2004, the GAAP cost of loans was approximately
58
and 45 basis points over par, respectively. Furthermore, when we retain loans
that we originate, we are not able to recognize gain on sale revenues (and
thus
higher GAAP net income) as we would have if such loans were sold to third
parties. Instead, the value of the gain on sale revenue inures to the benefit
of
our investment portfolio in the form of a lower cost asset and thus
incrementally higher yield during the lives of retained loans. We estimate
that
the foregone premium we would have otherwise received had retained loans been
sold to third parties is approximately $7.5 million and $2.0 million for the
years ended December 31, 2005 and 2004, respectively.
Our
wholesale lending strategy has historically been a small component of our loan
origination operations. We have a network of non-affiliated wholesale loan
brokers and mortgage lenders who submit loans to us. We maintain relationships
with these wholesale brokers and, as with retail loan originations, will
underwrite, process, and fund wholesale loans through our centralized facilities
and processing systems. In order to further diversify our origination network,
during 2005, we began to expand our wholesale loan origination capacity with
the
creation of a division specifically for wholesale loan
originations.
We
also
sold broker loans to third party mortgage lenders for which we receive a broker
fee. For the years ended December 31, 2005 and 2004, we originated $562.1
million and $410.1 million in brokered loans, respectively. We recognized net
brokering income totaling $2.4 million and $1.6 million during the years ended
December 31, 2005 and 2004, respectively.
NYMC
originates all of the mortgage loans we sell or broker and some of the loans
that we retain for investment. On mortgages to be sold, we underwrite, process
and fund the mortgages originated by NYMC.
A
significant risk to our mortgage lending operations is liquidity risk - the
risk
that we will not have financing facilities and cash available to fund and hold
loans prior to their sale or securitization. We maintain lending facilities
with
large banking and investment institutions to reduce this risk. On a short-term
basis, we finance mortgage loans using warehouse lines of credit and repurchase
agreements. Details regarding available financing arrangements and amounts
outstanding under those arrangements are included in “Liquidity and Capital
Resources” below.
Mortgage
Portfolio Management
Prior
to
the completion of our IPO on June 29, 2004, our operations were limited to
the
mortgage operations described in the preceding section. Beginning in July 2004,
we began to implement our business plan of investing in high-quality, adjustable
rate mortgage related securities and residential loans. Our mortgage portfolio,
consisting primarily of residential mortgage-backed securities and mortgage
loans held for investment, currently generates a substantial portion of our
earnings. In managing our investment in a mortgage portfolio, we:
| • |
invest
in assets generated primarily from our self-origination of high-credit
quality, single-family, residential mortgage
loans;
|
|
•
|
invest
in mortgage-backed securities originated by others, including ARM
securities and collateralized mortgage obligation floaters (“CMO
Floaters”);
|
| • |
generally
operate as a long-term portfolio investor;
|
| • |
finance
our portfolio by entering into repurchase agreements and as we aggregate
mortgage loans for investment, issuing mortgage-backed
bonds from time to time; and
|
| • |
generate
earnings from the return on our mortgage securities and spread income
from
our mortgage loan portfolio.
|
A
significant risk to our operations, relating to our portfolio management, is
the
risk that interest rates on our assets will not adjust at the same times or
amounts that rates on our liabilities adjust. Even though we retain and invest
in ARMs, many of the hybrid ARM loans in our portfolio have fixed rates of
interest for a period of time ranging from two to seven years. Our funding
costs
are generally not constant or fixed. As a result, we use derivative instruments
(interest rate swaps and interest rate caps) to mitigate, but not eliminate,
the
risk of our cost of funding increasing or decreasing at a faster rate than
the
interest on our investment assets.
As
of
December 31, 2005, our mortgage securities portfolio consisted of 100% AAA-
rated or Fannie Mae, Freddie Mac or Ginnie Mae-guaranteed (“FNMA/FHLMC/GNMA”)
mortgage securities. This allows the company to obtain excellent financing
rates
as well as enhanced liquidity. The loans held in securitization trusts and
mortgage loans held for investment consisted of high-credit quality prime
adjustable rate mortgages with initial reset periods of no greater than seven
years with 99.7% with initial reset periods of five years or less. The loan
portfolio has had no credit losses to date. Our portfolio strategy for ARM
loan
originations is to acquire only high-credit quality ARM loans for our
securitization process thereby limiting future potential losses.
Such
assets are evaluated for impairment on a quarterly basis or, if events
or
changes in circumstances indicate that these assets or the underlying collateral
may be impaired, on a more frequent basis. We evaluate whether these
assets are considered impaired, whether the impairment is other-than-temporary
and, if the impairment is other-than-temporary, recognize an impairment
loss
equal to the difference between the asset’s amortized cost basis and its fair
value. We recorded an impairment loss of $7.4 million in the fourth
quarter of 2005 because we concluded that we no longer had the intent to
hold
certain lower-yielding mortgage-backed securities until their values
recovered. This impairment was not due to any underlying credit
issues but was related to our intent to no longer hold identified lower-yield
securities and to re-position our portfolio by selling such securities
and
replacing them with higher yield securities with similar credit characteristics
in order to earn higher net interest spread in the future.
-26-
Known
Material Trends and Commentary
Mortgage
Lending.
The U.S.
residential mortgage market has experienced considerable growth during the
past
ten years according to The Bond Market Association and the Federal Reserve.
According to the MBA’s February 7, 2006 Mortgage Finance Forecast, lenders
originated $2.8 trillion in 2005, unchanged from the amount originated in 2004.
However, the mix of origination volume changed substantially. In 2004, purchase
mortgages comprised 47% of total originations while in 2005; purchase mortgages
represented 58% of total originations. The chart below illustrates our
origination volume growth for the past two years relative to the MBA industry
projections:
For
the
year ended December 31, 2005, our total originations of residential mortgage
loans, aided in part by our acquisition of selected Guaranteed Residential
Lending (“GRL”) branches, increased by $1.6 billion, or 86%, versus the
comparable period for the prior year. This 86% increase in our mortgage
originations compares favorably to the marginal change for total U.S.
1-to-4-family mortgage originations for the period estimated in the February
7,
2006 Mortgage Finance Forecast. The following chart summarizes the our loan
origination volume and characteristics for each of the four quarters of 2005
relative to our 2004 historical origination production:
With
regard to purchase mortgage originations, statistics from the MBA indicate
that
since 1990, the volume of purchase mortgages year-after-year steadily increases
throughout various economic and interest rate cycles. While management is unable
to predict borrowing habits, we believe that historical trends indicate that
the
purchase mortgage market is relatively stable and our focus on retail based
purchase origination volume contributes to consistent originations growth.
For
the year ended December 31, 2005, our purchase mortgage originations, aided
in
part by our acquisition of GRL, have increased by $896.2 million, or 82%, over
the comparable period for the prior year. This increase presently exceeds the
13% increase forecasted in the MBA’s February 7, 2006 Mortgage Finance Forecast
for total U.S. 1-to-4-family purchase mortgage originations for the period.
The
following chart summarizes the our purchase loan origination volume and
characteristics for each of the four quarters of 2005 relative to our prior
year
purchase loan historical origination production:
For
the
year ended December 31, 2005, our originations of mortgage refinancings, aided
in part by our acquisition of GRL, have increased by $695.7, million or 92%,
versus the comparable period for the prior year. This 92% increase in our
origination of mortgage refinancings compares favorably to the 12% decrease
for
total U.S. 1-to-4-family refinance mortgage originations for the period
estimated in the MBA’s February 7, 2006 Mortgage Finance Forecast.
In
the
February 7, 2006 forecast, the MBA projected that mortgage loan volumes will
decrease to $2.2 trillion in 2006, primarily due to an expected continued
decline in the volume of loan refinancings. For the year ended December 31,
2005, NYMC’s residential purchase loan originations represented 58% of NYMC’s
total residential mortgage loan originations as measured by principal balance,
as compared to an industry-wide percentage of 54% for one-to-four family
mortgage loans as estimated in the MBA’s February 7, 2006 Mortgage Finance
Forecast. We believe that our concentration on purchase loan originations has
caused our loan origination volume to be less susceptible to the industry-wide
decline in origination volume that has resulted from rising interest rates.
We
believe that the market for mortgage loans for home purchases is less
susceptible than the refinance market to downturns during periods of increasing
interest rates, because borrowers seeking to purchase a home do not generally
base their decision to purchase on changes in interest rates alone, while
borrowers that refinance their mortgage loans often make their decision as
a
direct result of changes in interest rates. Consequently, while our
referral-based marketing strategy may cause our overall loan origination volume
during periods of declining interest rates to lag our competitors who rely
on
mass marketing and advertising and who therefore capture a greater percentage
of
loan refinance applications during those periods, we believe this strategy
enables us to sustain stronger home purchase loan origination volumes than
those
same competitors during periods of flat to rising interest rates. In addition,
we believe that our referral-based business results in relatively higher gross
margins and lower advertising costs and loan generation expenses than most
other
mortgage companies whose business is not referral-based.
State
and
local governing bodies are focused on certain practices engaged in by certain
participants in the mortgage lending business relating to fees borrowers incur
in obtaining a mortgage loan - generally termed “predatory lending” within the
mortgage industry. In several instances, states or local governing bodies have
imposed strict laws on lenders to curb such practices. To date, these laws
have
had an insignificant impact on our business. We have capped fee structures
consistent with those adopted by federal mortgage agencies and have implemented
rigid processes to ensure that our lending practices are not predatory in
nature.
Liquidity.
We
depend on the capital markets to finance the mortgage loans we originate. In
the
short-term, we finance our mortgage loans using “warehouse” lines of credit and
“aggregation” lines provided by commercial and investment banks. As we execute
our business plan of securitizing self-originated or purchased mortgage loans,
we have issued bonds from our loan securitizations and will own such bonds
although we may sell the bonds to large, institutional investors at some point
in the future. These bonds and some of our mortgage loans may be financed with
repurchase agreements with well capitalized commercial and investment banks.
Commercial and investment banks have provided significant liquidity to finance
our operations through these various financing facilities. While management
cannot predict the future liquidity environment, we are currently unaware of
any
material reason to prevent continued liquidity support in the capital markets
for our business. See “Liquidity and Capital Resources” below for further
discussion of liquidity risks and resources available to us.
The
mortgage REIT industry has seen a significant increase in capital raising in
the
public markets. Additionally, there have been several new entrants, to the
mortgage REIT business and other mortgage lender conversions (or proposed
conversions) to REIT status. While many of these entrants focus on sub-prime
and
nonconforming mortgage lending, there are also entrants which will compete
with
our focus on the high-quality and prime mortgage marketplace. This increased
activity may impact the pricing and underwriting guidelines within the
high-quality and prime marketplace. We have not changed our guidelines or
pricing in response to this activity nor do we have any plans to make such
changes at this time.
Significance
of Estimates and Critical Accounting Policies
We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America, or GAAP, many of which
require the use of estimates, judgments and assumptions that affect reported
amounts. These estimates are based, in part, on our judgment and assumptions
regarding various economic conditions that we believe are reasonable based
on
facts and circumstances existing at the time of reporting. The results of these
estimates affect reported amounts of assets, liabilities and accumulated other
comprehensive income at the date of the consolidated financial statements and
the reported amounts of income, expenses and other comprehensive income during
the periods presented.
Changes
in the estimates and assumptions could have a material effect on these financial
statements. Accounting policies and estimates related to specific components
of
our consolidated financial statements are disclosed in the notes to our
financial statements. In accordance with SEC guidance, those material accounting
policies and estimates that we believe are most critical to an investor’s
understanding of our financial results and condition and which require complex
management judgment are discussed below.
Revenue
Recognition.
Interest
income on our residential mortgage loans and mortgage-backed securities is
a
combination of the interest earned based on the outstanding principal balance
of
the underlying loan/security, the contractual terms of the assets and the
amortization of yield adjustments, principally premiums and discounts, using
generally accepted interest methods. The net GAAP cost over the par balance
of
self-originated loans held for investment and premium and discount associated
with the purchase of mortgage-backed securities and loans are amortized into
interest income over the lives of the underlying assets using the effective
yield method as adjusted for the effects of estimated prepayments. Estimating
prepayments and the remaining term of our interest yield investments require
management judgment, which involves, among other things, consideration of
possible future interest rate environments and an estimate of how borrowers
will
react to those environments, historical trends and performance. The actual
prepayment speed and actual lives could be more or less than the amount
estimated by management at the time of origination or purchase of the assets
or
at each financial reporting period.
Fair
Value.
Generally, the financial instruments we utilize are widely traded and there
is a
ready and liquid market in which these financial instruments are traded. The
fair values for such financial instruments are generally based on market prices
provided by five to seven dealers who make markets in these financial
instruments. If the fair value of a financial instrument is not reasonably
available from a dealer, management estimates the fair value based on
characteristics of the security that the Company receives from the issuer and
on
available market information.
In
the
normal course of our mortgage loan origination business, we enter into
contractual interest rate lock commitments, or (“IRLCs”), to extend credit to
finance residential mortgages. Mark-to-market adjustments on IRLCs are recorded
from the inception of the interest rate lock through the date the underlying
loan is funded. The fair value of the IRLCs is determined by an estimate of
the
ultimate gain on sale of the loans net of estimated net costs to originate
the
loan. To mitigate the effect of the interest rate risk inherent in issuing
an
IRLC from the lock-in date to the funding date of a loan, we generally enter
into forward sale loan contracts, or (“FSLCs”). Since the FSLCs are committed
prior to mortgage loan funding and thus there is no owned asset to hedge, the
FSLCs in place prior to the funding of a loan are undesignated derivatives
under
SFAS No. 133 and are marked to market with changes in fair value recorded to
current earnings.
Impairment
of and Basis Adjustments on Securitized Financial Assets. As
previously described herein, we regularly securitize our mortgage loans and
retain the beneficial interests created. In addition, we may purchase such
beneficial interests from third parties. Such assets are evaluated for
impairment on a quarterly basis or, if events or changes in circumstances
indicate that these assets or the underlying collateral may be impaired, on
a
more frequent basis. We evaluate whether these assets are considered impaired,
whether the impairment is other-than-temporary and, if the impairment is
other-than-temporary, recognize an impairment loss equal to the difference
between the asset’s amortized cost basis and its fair value. These evaluations
require management to make estimates and judgments based on changes in market
interest rates, credit ratings, credit and delinquency data and other
information to determine whether unrealized losses are reflective of credit
deterioration and our ability and intent to hold the investment to maturity
or
recovery. This other-than-temporary impairment analysis requires significant
management judgment and we deem this to be a critical accounting estimate.
We
recorded an impairment loss of $7.4 million during 2005, because we concluded
that we no longer had the intent to hold certain lower-yielding mortgage-backed
securities until their values recovered. At December 31, 2005, we have an
unrealized loss of $4.1 million on the remaining securities in our portfolio,
which we do not consider to represent an other than temporary
impairment.
Loan
Loss Reserves on Mortgage Loans. We
evaluate a reserve for loan losses based on management’s judgment and estimate
of credit losses inherent in our portfolio of residential mortgage loans held
for sale and mortgage loans held in securitization trusts. The estimation
involves the consideration of various credit-related factors including, but
not
limited to, current economic conditions, the credit diversification of the
portfolio, loan-to-value ratios, delinquency status, historical credit losses,
purchased mortgage insurance and other factors deemed to warrant consideration.
If the credit performance of our mortgage loans held for investment or held
in
the securitization trusts deviates from expectations, the allowance for loan
losses is adjusted to a level deemed appropriate by management to provide for
estimated probable losses in the portfolio. Two critical assumptions used in
estimating the loan loss reserve are frequency and severity. Frequency is the
assumed rate of default or the expected rate at which loans may go into
foreclosure over the life of the loans. Severity represents the expected rate
of
realized loss upon disposition/resolution of the collateral that has gone into
foreclosure. Based on the performance and credit characteristics of the loan
portfolio as of December 31, 2005, management established a loan loss reserve
of
$12.1 thousand.
Securitizations.
We
create
securitization entities as a means of either:
|
·
|
creating
securities backed by mortgage loans which we will continue to hold
and
finance that will be more liquid than holding whole loan assets; or
|
|
·
|
securing
long-term collateralized financing for our residential mortgage
loan
portfolio and matching the income earned on residential mortgage
loans
with the cost of related liabilities, otherwise referred to a match
funding our balance sheet.
|
Residential
mortgage loans are transferred to a separate bankruptcy-remote legal entity
from
which private-label multi-class mortgage-backed notes are issued. On a
consolidated basis, securitizations are accounted for as secured financings
as
defined by SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
and,
therefore, no gain or loss is recorded in connection with the securitizations.
Each securitization entity is evaluated in accordance with Financial
Accounting Standards Board Interpretation, or FIN, 46(R), Consolidation
of Variable Interest Entities,
and we
have determined that we are the primary beneficiary of the securitization
entities. As such, the securitization entities are consolidated into our
consolidated balance sheet subsequent to securitization. Residential
mortgage loans transferred to securitization entities collateralize the
mortgage-backed notes issued, and, as a result, those investments are not
available to us, our creditors or stockholders. All discussions relating
to securitizations are on a consolidated basis and do not necessarily reflect
the separate legal ownership of the loans by the related bankruptcy-remote
legal
entity.
Derivative
Financial Instruments -
The
Company has developed risk management programs and processes, which include
investments in derivative financial instruments designed to manage market
risk
associated with its mortgage banking and its mortgage-backed securities
investment activities.
All
derivative financial instruments are reported as either assets or liabilities
in
the consolidated balance sheet at fair value. The gains and losses associated
with changes in the fair value of derivatives not designated as hedges are
reported in current earnings. If the derivative is designated as a fair value
hedge and is highly effective in achieving offsetting changes in the fair
value
of the asset or liability hedged, the recorded value of the hedged item is
adjusted by its change in fair value attributable to the hedged risk. If
the
derivative is designated as a cash flow hedge, the effective portion of change
in the fair value of the derivative is recorded in OCI and is recognized
in the
income statement when the hedged item affects earnings. The Company calculates
the effectiveness of these hedges on an ongoing basis, and, to date, has
calculated effectiveness of approximately 100%. Ineffective portions, if
any, of
changes in the fair value or cash flow hedges are recognized in
earnings.
New
accounting pronouncements - In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” SFAS
154 changes the requirements for the accounting for and reporting of a change
in
accounting principle. Previous guidance required that most voluntary changes
in
accounting principle be recognized by including in net income of the period
of
the change the cumulative effect of changing to the new accounting principle.
SFAS 154 requires retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is impracticable
to
determine either the period-specific effects or the cumulative effect of
the
change. Management believes SFAS 154 will have no impact on the Company’s
financial statements.
In
February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments”. Key provisions of SFAS 155 include: (1) a broad
fair value measurement option for certain hybrid financial instruments that
contain an embedded derivative that would otherwise require bifurcation;
(2) clarification that only the simplest separations of interest payments
and principal payments qualify for the exception afforded to interest-only
strips and principal-only strips from derivative accounting under paragraph
14
of FAS 133 (thereby narrowing such exception); (3) a requirement that
beneficial interests in securitized financial assets be analyzed to determine
whether they are freestanding derivatives or whether they are hybrid instruments
that contain embedded derivatives requiring bifurcation; (4) clarification
that concentrations of credit risk in the form of subordination are not embedded
derivatives; and (5) elimination of the prohibition on a QSPE holding
passive derivative financial instruments that pertain to beneficial interests
that are or contain a derivative financial instrument. In general, these
changes
will reduce the operational complexity associated with bifurcating embedded
derivatives, and increase the number of beneficial interests in securitization
transactions, including interest-only strips and principal-only strips, required
to be accounted for in accordance with FAS 133. Management does not believe
that
SFAS 155 will have a material effect on the financial condition, results
of
operations, or liquidity of the Company.
Overview
of Performance
For
the
year ended December 31, 2005, we reported a net loss of $5.3 million, as
compared to net income of $4.9 million for the year ended December 31, 2004.
Our
revenues were driven largely from increases in interest income on
investments in mortgage loans and mortgage securities (our “mortgage portfolio
management” segment) and gain on sale income from loan originations sold to
third parties (our “mortgage lending” segment) during the period. The change in
net income is attributed to an increase in gain on sale revenues and net
interest income from our investment portfolio. These gains were offset by an
impairment charge of $7.4 million in
the
fourth quarter related to $388.3
million
of
available for sale
securities that we anticipate selling in 2006 in order to rebalance our
portfolio with higher yielding assets,
one-time
severance charges of $3.0 million, and increased expenses incurred for and
subsequent to the acquisition of multiple retail loan origination locations
during 2004. Also, the execution of our core business strategy to retain
selected self-originated loans in our portfolio (this involves foregoing the
gain on sale premiums we would have otherwise received when such loans are
sold
to third parties), which reduced the growth in gain on sale income from what
it
otherwise would have been.
As
upfront expenses related to the acquisition and/or infrastructure enhancements
of our loan origination capacity begin to result in higher production volume
and
lowered stabilized costs, the mortgage lending segment is expected to become
a
more meaningful contributor to our financial performance in the future. For
the
year ended December 31, 2005, total residential originations, including brokered
loans, were $3.4 billion as compared to $1.8 billion and $1.6 billion for the
same period of 2004 and 2003, respectively. The increase in our loan origination
levels for the year ended December 31, 2005 as compared to the same period
of
2004 and 2003 is the result of the addition of sales personnel and branch
offices primarily in new and underserved markets. Total employees increased
to
802 at December 31, 2005 from 782 at December 31, 2004; for 2005 we also had
the
benefit of a full year’s service from 275 employees related to our GRL
acquisition in November 2004. Included in the total number of employees, the
number of loan officers dedicated to originating loans decreased to 329 at
December 31, 2005 from 344 at December 31, 2004. Full-service loan origination
locations decreased to 28 offices and 26 satellite loan origination locations
at
December 31, 2005 from an aggregate of 66 locations at December 31,
2004.
Summary
of Operations and Key Performance Measurements
For
the
year ended December 31, 2005, our net income was dependent upon our mortgage
portfolio management operations and the net interest (interest income on
portfolio assets net of the interest expense and hedging costs associated with
the financing of such assets) generated from our portfolio of mortgage loans
held for investment, mortgage loans held in the securitization trusts and
residential mortgage-backed securities in our portfolio management segment.
The
following table presents the components of our net interest income from our
investment portfolio of mortgage securities and loans for the year ended
December 31, 2005:
|
|
Amount
|
Average
Outstanding
Balance
|
Effective
Rate
|
|||||||
|
(Dollar
s in Millions)
|
||||||||||
|
Net
Interest Income Components:
|
||||||||||
|
Interest
Income
|
||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$
|
60,988
|
$
|
1,361.2
|
4.48
|
%
|
||||
|
Mortgage
loans held for investment
|
7,778
|
146.6
|
5.31
|
%
|
||||||
|
Amortization
of premium
|
(6,041
|
)
|
—
|
(0.40
|
)%
|
|||||
|
Total
interest income
|
$
|
62,725
|
$
|
1,507.8
|
4.16
|
%
|
||||
|
Interest
Expense
|
||||||||||
|
Repurchase
agreements
|
$
|
43,107
|
$
|
1,283.3
|
3.31
|
%
|
||||
|
Warehouse
borrowings
|
5,847
|
142.7
|
4.04
|
%
|
||||||
|
Interest
rate swaps and caps
|
(1,106
|
)
|
—
|
(0.08
|
)%
|
|||||
|
Total
interest expense
|
$
|
47,848
|
$
|
1,426.0
|
3.31
|
%
|
||||
|
Net
Interest Income
|
$
|
14,877
|
0.85
|
%
|
||||||
The
key
performance measures for our portfolio management activities are:
| • |
net
interest spread on the portfolio;
|
| • |
characteristics
of the investments and the underlying pool of mortgage loans including
but
not limited to credit quality, coupon
and prepayment rates; and
|
| • |
return
on our mortgage asset investments and the related management of interest
rate risk.
|
For
the
year ended December 31, 2005, our net income was also dependent upon our
mortgage lending operations and originations from our mortgage lending segment,
which include the mortgage loan sales (“mortgage banking”) and mortgage
brokering activities on residential mortgages sold or brokered to third parties.
Our mortgage banking activities generate revenues in the form of gains on sales
of mortgage loans to third parties and ancillary fee income and interest income
from borrowers. Our mortgage brokering operations generate brokering fee
revenues from third party buyers. When we retain a portion of our loan
originations for our investment portfolio, we do not realize the gain on sale
premiums we would have otherwise recognized had these loans been sold to third
parties and such loans retained on our balance sheet at cost. As a result,
revenues in our mortgage banking segment are lower and the book value of these
assets on our balance sheet, which are accounted for on a cost basis, may differ
from their fair market value.
A
breakdown of our loan originations for the year ended December 31, 2005
follows:
|
Description
|
Number
of
Loans
|
Aggregate
Principal
Balance
($000’s)
|
Percentage
of
Total
Principal
|
Weighted
Average
Interest
Rate
|
Average
Loan
Size
|
|||||||||||
|
Purchase
mortgages
|
9,174
|
$
|
1,985.7
|
57.8
|
%
|
6.33
|
%
|
$
|
216,443
|
|||||||
|
Refinancings
|
5,539
|
1,451.7
|
42.2
|
%
|
5.99
|
%
|
262,091
|
|||||||||
|
Total
|
14,713
|
$
|
3,437.4
|
100.0
|
%
|
6.19
|
%
|
233,628
|
||||||||
|
Adjustable
rate or hybrid
|
6,296
|
$
|
1,875.2
|
54.6
|
%
|
6.00
|
%
|
297,843
|
||||||||
|
Fixed
rate
|
8,417
|
1,562.2
|
45.4
|
%
|
6.41
|
%
|
185,595
|
|||||||||
|
Total
|
14,713
|
$
|
3,437.4
|
100.0
|
%
|
6.19
|
%
|
233,628
|
||||||||
|
Bankered
|
12,654
|
$
|
2,875.3
|
83.6
|
%
|
6.25
|
%
|
227,224
|
||||||||
|
Brokered
|
2,059
|
562.1
|
16.4
|
%
|
5.84
|
%
|
272,988
|
|||||||||
|
Total
|
14,713
|
$
|
3,437.4
|
100.0
|
%
|
6.19
|
%
|
$
|
233,628
|
|||||||
The
key
performance measures for our origination activities are:
| • |
dollar
volume of mortgage loans originated;
|
| • |
relative
cost of the loans originated;
|
| • |
characteristics
of the loans, including but not limited to the coupon and credit
quality
of the loan, which will indicate their expected
yield; and
|
| • |
return
on our mortgage asset investments and the related management of interest
rate risk.
|
Management’s
discussion and analysis of financial condition and results of operations, along
with other portions of this report, are designed to provide information
regarding our performance and these key performance measures.
Year
Ended December 31, 2005 Financial Highlights
| • |
Net
income for the Company’s Mortgage Portfolio Management segment totaled
$6.2 million for the year ended December 31, 2005 after recognition
of an
impairment loss on investment securities of $7.4
million.
|
| • |
Consolidated
net loss totaled $5.3 million for the year ended December 31,
2005.
|
| • |
Completion
of three securitizations totaling $896.9 million in residential mortgage
loans, respectively.
|
| • |
Issuance
of $45.0 million of trust preferred
securities.
|
| • |
Total
assets increased to $1.8 billion as of December 31, 2005 from $1.6
billion
as of December 31, 2004.
|
| • |
Aided
in part by the GRL acquisition, 89% growth in loan originations of
$3.4
billion for the year ended December 31, 2005 as compared to $1.8
million
for the year ended December 31, 2004 and relative to an overall industry
increase of 0.7% for the year ended December 31, 2005 as projected
by the
MBA.
|
| • |
During
the second quarter the Company undertook cost-cutting initiatives
which
reduced its overall recurring annual compensation expenses by an
estimated
$3.7 million.
|
| • |
The
Company’s new wholesale lending division began
operations.
|
-32-
Financial Condition
Balance
Sheet Analysis - Asset Quality
Investment
Portfolio Related Assets
Mortgage
Loans Held in Securitization Trusts and Mortgage Loans Held for Investment.
We
retain
in our portfolio substantially all of the adjustable-rate mortgage loans that
we
originate and that meet our investment criteria and portfolio requirements.
These loans are classified as “mortgage loans held for investment” during a
period of aggregation and until the portfolio reaches a size sufficient for
us
to securitize such loans. Once securitized into sequentially rated classes,
loans are classified as “mortgage loans held in securitization
trusts.”
The
following table details Mortgage Loans Held for Investment at December 31,
2005
(dollar amounts in thousands):
|
Category
|
Par
Value
|
Coupon
|
Carrying
Value
|
Yield
|
|||||||||
|
Mortgage
Loans Held for Investment
|
$
|
4,054
|
5.84
|
%
|
$
|
4,060
|
5.56
|
%
|
|||||
During
2005, we securitized loan investments in three different
securitizations:
|
·
|
New
York Mortgage Trust 2005-1 (“NYMT ’05-1”), February 25, 2005; $419.0
million of loans
|
|
·
|
New
York Mortgage Trust 2005-2 (“NYMT ’05-2”), July 28, 2005; $242.9 million
of loans
|
|
·
|
New
York Mortgage Trust 2005-3 (“NYMT ’05-3”), December 20, 2005; $235.0 of
loans
|
The
following table details Mortgage Loans Held in Securitization Trusts (dollar
amounts in thousands):
|
Category
|
Par
Value
|
Coupon
|
Carrying
Value
|
Yield
|
|||||||||
|
Mortgage
Loans Held in Securitization Trusts
|
$
|
771,451
|
5.17
|
%
|
$
|
776,610
|
5.49
|
%
|
|||||
At
December 31, 2005 mortgage loans held for investment and mortgage loans held
in
securitization trusts totaled $780.7 million, or 44% of total assets. Of this
mortgage loan investment portfolio 100% are traditional or hybrid ARMs and
74.9%
are ARM loans that are interest only. On our hybrid ARMs, interest rate reset
periods are predominately seven years or less and the interest-only/amortization
period is typically 10 years, which mitigates the “payment shock” at the time of
interest rate reset. No loans in our investment portfolio of mortgage loans
are
option-ARMs or ARMs with negative amortization.
Prior
to
2005, we had no loans held in securitization trusts. The following table sets
forth the composition of our loans held for investment and in securitization
trusts as of December 31, 2005:
Characteristics
of Our Mortgage Loans Held for Investment and Securitization (dollar amounts
in
thousands):
|
|
#
of Loans
|
Par
Value
|
Carrying
Value
|
|||||||
|
Loan
Characteristics:
|
||||||||||
|
Mortgage
loans held in securitization trusts
|
1,609
|
$
|
771,451
|
$
|
776,610
|
|||||
|
Mortgage
loans held for investment
|
11
|
4,054
|
4,060
|
|||||||
|
Total
Loans Held
|
1,620
|
$
|
775,505
|
$
|
780,670
|
|||||
|
|
Average
|
High
|
Low
|
|||||||
|
General
Loan Characteristics:
|
||||||||||
|
Original
Loan Balance
|
$
|
486
|
$
|
3,500
|
$
|
25
|
||||
|
Coupon
Rate
|
5.26
|
%
|
7.75
|
%
|
3.00
|
%
|
||||
|
Gross
Margin
|
2.40
|
%
|
7.01
|
%
|
1.13
|
%
|
||||
|
Lifetime
Cap
|
11.08
|
%
|
13.75
|
%
|
9.00
|
%
|
||||
|
Original
Term (Months)
|
360
|
360
|
359
|
|||||||
|
Remaining
Term (Months)
|
348
|
360
|
319
|
|||||||
|
|
Percentage
|
|||
|
Arm
Loan Type
|
||||
|
Traditional
ARMs
|
4.7
|
%
|
||
|
2/1
Hybrid ARMs
|
5.3
|
%
|
||
|
3/1
Hybrid ARMs
|
32.4
|
%
|
||
|
5/1
Hybrid ARMs
|
57.3
|
%
|
||
|
7/1
Hybrid ARMs
|
0.3
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
Percent
of ARM loans that are Interest Only
|
74.9
|
%
|
||
|
Weighted
average length of interest only period
|
8.2
years
|
|||
|
|
Percentage
|
|||
|
Traditional
ARMs - Periodic Caps
|
||||
|
None
|
64.5
|
%
|
||
|
1%
|
19.4
|
%
|
||
|
Over
1%
|
16.1
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
|
Percentage
|
|||
|
Hybrid
ARMs - Initial Cap
|
||||
|
3.00%
or less
|
29.6
|
%
|
||
|
3.01%-4.00%
|
10.7
|
%
|
||
|
4.01%-5.00%
|
58.2
|
%
|
||
|
5.01%-6.00%
|
1.5
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
|
Percentage
|
|||
|
FICO
Scores
|
||||
|
650
or less
|
5.0
|
%
|
||
|
651
to 700
|
18.0
|
%
|
||
|
701
to 750
|
35.4
|
%
|
||
|
751
to 800
|
38.2
|
%
|
||
|
801
and over
|
3.4
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
Average
FICO Score
|
733
|
|||
|
|
Percentage
|
|||
|
Loan
to Value (LTV)
|
||||
|
50%
or less
|
9.5
|
%
|
||
|
50.01%-60.00%
|
9.4
|
%
|
||
|
60.01%-70.00%
|
28.6
|
%
|
||
|
70.01%-80.00%
|
49.7
|
%
|
||
|
80.01%
and over
|
2.8
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
Average
LTV
|
69.3
|
%
|
||
|
|
Percentage
|
|||
|
Property
Type
|
||||
|
Single
Family
|
53.7
|
%
|
||
|
Condominium
|
23.1
|
%
|
||
|
Cooperative
|
10.1
|
%
|
||
|
Planned
Unit Development
|
9.2
|
%
|
||
|
Two
to Four Family
|
3.9
|
%
|
||