UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
|
|
|
|
For
the Fiscal Year Ended December 31, 2007
|
|
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
|
|
|
|
For
the Transition Period From ____________ to
____________
|
|
|
|
Commission
File Number 001-32216
NEW
YORK MORTGAGE TRUST, INC.
(Exact
name of registrant as specified in its charter)
|
Maryland
|
|
47-0934168
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
1301
Avenue of the Americas, New York, New York 10019
(Address
of principal executive office) (Zip Code)
(212)
792-0107
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
None
|
|
N/A
|
Securities
registered pursuant to Section
12(g) of the Act:
Common
Stock
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act.
Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No o
Indicate
by check mark 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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of large “accelerated filers,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of The Exchange Act. (check
one):
Large
Accelerated Filer o Accelerated
Filer o Non-Accelerated
Filer x Smaller Reporting
Company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
The
aggregate market value of voting stock held by non-affiliates of the registrant
as of June 30, 2007 was approximately $29.9 million.
The
number of shares of the Registrant’s Common Stock outstanding on February 29,
2008 was 3,640,209.
DOCUMENTS
INCORPORATED BY REFERENCE
|
Document
|
|
Where
Incorporated
|
|
1.
Portions of the Registrant's Definitive Proxy
Statement relating to its 2008 Annual Meeting of
Stockholders scheduled
for June 2008 to be filed with the Securities and Exchange Commission
by
no later than April 30, 2008.
|
Part
III, Items 10-14
|
NEW
YORK MORTGAGE TRUST, INC.
FORM
10-K
For
the Fiscal Year Ended December 31, 2007
|
|
|
|
|
1
|
||
|
12
|
||
|
26
|
||
|
26
|
||
|
26
|
||
|
26
|
||
|
|
|
|
|
|
|
|
|
26
|
||
|
29
|
||
|
31
|
||
|
57
|
||
|
62
|
||
|
62
|
||
|
63
|
||
|
63
|
||
|
|
|
|
|
|
|
|
|
64
|
||
|
64
|
||
|
64
|
||
|
64
|
||
|
64
|
||
|
|
|
|
|
|
|
|
|
65
|
||
General
New
York
Mortgage Trust, Inc. together with its consolidated subsidiaries (“NYMT”, the
“Company”, “we”, “our”, and “us”) is a self-advised real estate investment
trust, or REIT, in the business of investing in residential adjustable rate
mortgage-backed securities issued by a United States government-sponsored
enterprise (“GSE” or “Agency”), such as the Federal National Mortgage
Association (“Fannie Mae”), or the Federal Home Loan Mortgage Corporation
(“Freddie Mac”), prime credit quality residential adjustable-rate mortgage
(“ARM”) loans, or prime ARM loans, and non-agency mortgage-backed securities. We
refer to residential adjustable rate mortgage-backed securities throughout
this
Annual Report on Form 10-K as “MBS” and MBS issued by a GSE as “Agency
MBS”. We
seek
attractive long-term investment returns by investing our equity capital and
borrowed funds in such securities. Our principal business objective is to
generate net income for distribution to our stockholders resulting from the
spread between the interest and other income we earn on our interest-earning
assets and the interest expense we pay on the borrowings that we use to finance
these assets, which we refer to as our net interest income.
Prior
to
the sale of our retail mortgage lending platform on March 31, 2007, a
significant part of our business involved the origination of mortgage loans,
which we either sold to third parties or retained in our portfolio of mortgage
securities. Since March 31, 2007, we have exclusively focused our resources
and
efforts on investing, on a leveraged basis, in MBS.
As
of
December 31, 2007, our assets were comprised of primarily Agency MBS
securities and prime ARM loans held in securitization trusts. As of December
31,
2007, we had approximately $809.3 million of total assets as compared to
$1.3 billion at December 31, 2006.
Recent
Events
Recent
Market Volatility
Recently,
the residential mortgage market in the United States has experienced
a variety
of difficulties and changed economic conditions, including recent
defaults,
credit losses and liquidity concerns. During March 2008, news of
potential and
actual security liquidations has increased the price volatility and
liquidity of
many financial assets, including Agency MBS and other high-quality
mortgage
securities and loans. As a result, market values for, and available
liquidity to
finance, certain mortgage securities, including some of our Agency
MBS and
AAA-rated non-Agency MBS, have been negatively impacted. As a response
to these
changed conditions, which have impacted a relatively broad range
of leveraged
public and private companies with investment and financing strategies
similar to
ours, the Company undertook a number of strategic actions to reduce
leverage and
raise liquidity in the portfolio of Agency MBS. Since March 7, 2008,
the Company
sold, in aggregate, approximately $598.9 million of Agency MBS that
comprised
$516.4 million of Agency hybrid ARM MBS and $82.5 million of Agency
CMO floating
rate MBS. These sales resulted in a loss of $15.4 million. Additionally,
as a
result of these sales of MBS, we terminated associated interest rate
swaps that
were used to hedge our liability costs with a notional balance of
$297.7 million
at a cost of $2.0 million. As of March 31, 2008, our MBS portfolio
totaled
approximately $507.0 million and was comprised of $259.6 million
of Agency
hybrid ARM MBS, $216.3 million of Agency CMO floating rate MBS (“CMO Floaters”)
and $31.1 million of AAA-rated non-Agency MBS. As of March 31, 2008,
in
aggregate, our Agency MBS portfolio was financed with approximately
$431.7
million of reverse repurchase agreement borrowings (referred to as
“repo”
borrowings) with an average advance rate of 91% that implies an average
haircut
of 9% for the entire portfolio. Within our total portfolio, our Agency
hybrid
ARM MBS is financed with $230.2 million of repo funding equating
to an advance
rate of 93% that implies a haircut of 7% and our Agency CMO Floaters
are
financed with $180.7 million of repurchase agreement financing equating
to an
advance rate of 88% that implies a haircut of 12%. The Company also
owns
approximately $401.4 million of adjustable rate mortgages that were
deemed to be
of “prime” or high quality at the time of origination. These loans are
permanently financed with approximately $388.3 million of collateralized
debt
obligations and are held in securitization trusts.
We
generally finance our portfolio of Agency MBS and non-Agency MBS
through
repurchase agreements. As a result of recent market disruptions that
included
company or hedge fund failures and securities portfolio foreclosures
by
repurchase agreement lenders, among other events, repurchase agreement
lenders
have tightened their lending standards and have done so in a manner
that now
distinguishes between “type” of Agency MBS. For example, during the month of
March 2008, lenders generally increased haircuts on Agency Hybrid
ARMs from 3%
to 7% and also increased haircuts on Agency CMO Floaters from 5%
to a range of
10% to 30%, largely dependent upon cash flow structure. Given the
volatility in
haircuts on Agency CMO Floaters, in March 2008 we sold approximately
$82.5
million of Agency CMO Floaters at a loss of $4.7 million rather than
meet the
significant increase in required haircuts on these securities. Although
we sold
the Agency CMO Floaters that were subject to the greatest increase
in haircuts,
we cannot assure you that the haircuts on the remaining Agency CMO
Floaters in
our MBS portfolio will not increase from their current haircut average
of 12%.A
material increase in haircuts on these securities (or on our Agency
hybrid ARM
MBS) would likely result in further securities sales that would likely
negatively affect our profitability, liquidity and the results of
operations.
Private
Placement
of Common Stock
On
February 21, 2008, we completed the issuance and sale of 15.0 million shares
of
our common stock to certain accredited investors (as such term is defined
in
Rule 501 of Regulation D of the Securities Act of 1933, as amended, or
Securities Act) at a price of $4.00 per share. This private offering of our
common stock generated net proceeds to us of approximately $57.0 million
after
payment of private placement fees, but before expenses. Prior to this
issuance of common stock, we had 3,640,209 shares of common stock outstanding.
Private
Placement of Convertible Preferred Stock to
JMP Group Inc. and Certain of its Affiliates
On
January 18, 2008, we issued 1.0 million shares of our Series A Cumulative
Redeemable Convertible Preferred Stock, which we refer to as our Series A
Preferred Shares, to JMP Group, Inc. and certain of its affiliates for an
aggregate purchase price of $20.0 million. The Series A Preferred Shares
entitle
the holders to receive a cumulative dividend of 10% per year, subject to
an
increase to the extent any future quarterly common stock dividends exceed
$0.10
per share. The Series A Preferred Shares mature on December 31, 2010, and
are
convertible into shares of our common stock based on a conversion price of
$4.00
per share of common stock, which represents a conversion rate of five shares
of
common stock for each Series A Preferred Share. Under certain circumstances,
the
Series A Preferred Shares will automatically convert into shares of our common
stock. In addition, under the terms of the Series A Preferred Shares, holders
have the option to convert, at any time, the Series A Preferred Shares into
shares of our common stock. The Series A Preferred Shares may also be redeemed
by the Company in connection with certain change of control events. The Series
A
Preferred Shares have voting rights that allow the holders to vote with the
common stock, voting together as a single class on an “as converted” basis, and
the holders have the right to appoint one additional “independent” director, as
such term is defined under the rules of the NASDAQ Stock Market, to stand
for
election to our board of directors at our next annual meeting of stockholders
in June 2008. At their option, the holders may purchase up to an additional
$20.0 million of Series A Preferred Shares, on identical terms, through April
4,
2008.
In
connection with this private offering of our Series A Preferred Shares, we
entered into a registration rights agreement under which we agreed to file
with
the SEC by no later than June 30, 2008, a resale shelf registration statement
to
register for resale the Series A Preferred Shares and the shares of our common
stock into which the Series A Preferred Shares are convertible. Under the
terms
of the Series A Preferred Shares, in the event we fail to file a resale
registration statement with the SEC on or before June 30, 2008, holders of
our
Series A Preferred Shares may be entitled to receive an additional cash dividend
at the rate of $0.10 per quarter per share for each calendar quarter after
June
30, 2008 until we file such resale registration statement.
Advisory
Agreement with JMP Asset Management LLC
Concurrent
with the issuance of the Series A Preferred Shares, we entered into an advisory
agreement with JMP Asset Management LLC (“JMPAM”), an affiliate of JMP Group,
Inc. Under the agreement, JMPAM advises two of our wholly-owned subsidiaries,
Hypotheca Capital, LLC, or HC (formerly known as The New York Mortgage Company,
LLC), and New York Mortgage Funding, LLC, as well as any additional subsidiaries
acquired or formed in the future to hold investments made on our behalf by
JMPAM. We refer to these subsidiaries throughout this Annual Report on Form
10-K
as the “Managed Subsidiaries.”
As described below under “Sale of Mortgage Lending Platform in 2007”,
we have
an approximately $62.0 million net operating loss carry-forward
that remains with the Company after the sale of our mortgage lending
business. As an advisor to the Managed Subsidiaries, we expect that JMPAM
will,
at some point in the future, focus on the acquisition of alternative mortgage
related investments on behalf of the Managed Subsidiaries. Some of
those investments may allow us to utilize all or a portion of the net
operating loss carry-forward, to the extent available by law. Because we
intend to focus our investment efforts on Agency MBS, we currently have no
plans
to acquire alternative mortgage related investments to be held in the Managed
Subsidiaries. The commencement of any activity by JMPAM must be approved
by the
board of directors and any subsequent investment on behalf of Managed
Subsidiaries must adhere to investment guidelines adopted by our board of
directors. For a description of the economic and other material terms of
the
advisory agreement,
see
“Advisory Agreement” below.
Changes
in the Composition of the Board of Directors
Upon
completion of the issuance and sale of the Series A Preferred Shares on January
18, 2008 and pursuant to the stock purchase agreement providing for the sale
of
the Series A Preferred Shares, James J. Fowler and Steven M. Abreu were
appointed to our board of directors, with Mr. Fowler being appointed the
non-executive chairman of our board of directors. Mr. Fowler also serves
as the
Chief Investment Officer of the Managed Subsidiaries. Mr. Fowler is a managing
director of JMPAM and president of JMP Realty Trust, Inc., a private REIT
that
is externally managed by JMPAM and an investor in our Series A Preferred
Shares.
In addition, concurrent with the completion of the issuance and sale of the
Series A Preferred Shares and pursuant to the stock purchase agreement, Steven
B. Schnall, Mary Dwyer Pembroke, Jerome F. Sherman and Thomas W. White resigned
as members of our board of directors. The board of directors is currently
comprised of seven directors, four of whom are “independent” (in accordance with
the applicable standards for independence prescribed by the rules of the
NASDAQ
Stock Market).
Sale
of Mortgage Lending Platform in 2007
Prior
to
March 31, 2007, a significant part of our business involved the origination
of
mortgage loans through HC. HC offered a broad range of residential mortgage
loan
products to consumers, with a primary focus on prime, or high credit quality,
residential mortgage loans. We historically sold all fixed-rate and most
of the
adjustable rate loans that we originated to third parties while retaining
selected adjustable-rate hybrid mortgage loans in our portfolio. However,
beginning in March 2006, we began to sell all loans originated by HC in an
effort to increase gain on sale revenue.
In
connection with our exploration of strategic alternatives and the significant
operating and financial challenges facing our mortgage lending
business, we completed two separate strategic transactions during the first
quarter of 2007 that resulted in our exit from the mortgage lending business.
On
February 22, 2007, we completed the sale of our wholesale lending business
to
Tribeca Lending Corp., or Tribeca Lending, a subsidiary of Franklin Credit
Management Corporation, for an estimated purchase price of $485,000. Shortly
thereafter, on March 31, 2007, we completed the sale of substantially all
of the
operating assets related to the retail mortgage lending platform of HC to
Indymac Bank, F.S.B., (“Indymac”), for a purchase price of approximately $13.5
million in cash and the assumption of certain of our liabilities. Pursuant
to
this transaction, Indymac purchased substantially all of the operating assets
related to HC’s retail mortgage lending platform, including, among other things,
leases held by HC for approximately 30 retail mortgage lending offices
(excluding our corporate headquarters), the tangible personal property located
in those retail mortgage banking offices, HC’s pipeline of residential mortgage
loan applications, or pipeline loans, and escrowed deposits related to the
pipeline loans. In addition, Indymac assumed the obligations of HC under
the
pipeline loans and substantially all of HC’s liabilities under the purchased
contracts and purchased assets arising after the closing date. Indymac also
agreed to pay (i) the first $500,000 in severance expenses with respect to
“transferred employees” (as defined in the asset purchase agreement for this
transaction) and (ii) severance expenses in excess of $1.1 million arising
after
the closing with respect to transferred employees. Under the terms of this
transaction with Indymac, approximately $2.3 million was placed in escrow
to
support warranties and indemnifications provided to Indymac by HC as well
as
other purchase price adjustments. As of January 28, 2008, approximately $970,000
has been paid to Indymac and approximately $469,000 has been released to
us from
the escrow account. We expect to pay Indymac an additional approximately
$150,000 out of the escrow account, with the remaining approximately $750,000
to
be released to us from escrow by not later than September 30, 2008. Indymac
hired substantially all of our branch employees and loan officers and a majority
of HC employees based out of our corporate headquarters. We have an
approximately $62.0 million gross operating loss carry-foward that remains
with
the Company after the sale of the mortgage lending business.
Although
we sold substantially all of our mortgage lending assets, we retain certain
liabilities associated with the mortgage lending business. Among these
liabilities are the costs associated with the disposal of the mortgage loans
held for sale, potential repurchase and indemnification obligations
(including early payment defaults) on previously sold mortgage loans and
remaining lease payment obligations on real and personal property.
In
connection with the sale of our mortgage lending assets, during the fourth
quarter of 2006 we classified substantially all of the assets, liabilities
and
operations of our mortgage lending business as a discontinued operation in
accordance with the provisions of Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(“SFAS No. 144”). As a result, we have reported revenues and expenses related to
the mortgage lending business as a discontinued operation and the
related assets and liabilities as assets and liabilities related to a
discontinued operation for all periods presented in the accompanying
consolidated financial statements. Certain assets, such as the deferred tax
asset that remains with the Company after the sale of the mortgage lending
business, and certain liabilities, such as subordinated debt and liabilities
related to leased facilities not assigned to Indymac, are considered part
of the
ongoing operations of our Company and accordingly, we have not classified
as a
discontinued in accordance with the provisions of SFAS No. 144. See
Note 9 in the notes of our consolidated financial
statements.
Our
Business
We
are a
self-advised REIT in the business of investing, on a leveraged basis, in
Agency
MBS, prime ARM loans and non-Agency MBS. We seek to acquire and manage
investment securities that will, over the long-term, generate positive net
interest income for our shareholders. We believe that the best approach to
generating a positive net interest income is to manage our liabilities,
principally in the form of short-term indebtedness (maturities of one year
or
less), in relation to the interest rate risks of our investments. To help
achieve this result, we employ repurchase agreement financing, generally
short-term, and over time will combine our financings with hedging techniques,
primarily interest rate swaps. We may, subject to maintaining our REIT
qualification, also employ other hedging techniques from time to time, including
interest rate caps, floors and swap options to protect against adverse interest
rate movements.
Our
Co-Chief Executive Officers have an average of 22 years experience managing
short duration MBS and mortgage loan portfolios through different economic
cycles and during past market dislocations. In particular, we believe our
reputation among and relationships with key financial institutions have helped
us to endure recent dislocation and uncertainty in the MBS liquidity
market.
As
of
December 31, 2007, our investment portfolio was comprised of approximately
$350.5 million in MBS, including $318.7 of Agency MBS, approximately $31.8
million of non-Agency MBS of which $30.6 million are rated in the highest
category by two rating agencies and $430.7 million of prime ARM loans held
in
securitization trusts.
Our
Investment Strategy
Since
inception, our investment portfolio strategy has focused on the acquisition
of
high-credit quality ARM loans and securities that we believe are likely to
generate attractive long-term risk-adjusted returns on capital invested.
In
managing our mortgage portfolio, we:
|
·
|
invest
in high-credit quality Agency and non-Agency MBS, including ARM
securities, collateralized mortgage obligation floaters, or CMO
Floaters,
and high-credit quality mortgage
loans;
|
|
·
|
finance
our portfolio by entering into repurchase agreements, or issuing
collateral debt obligations relating to our
securitizations;
|
|
·
|
generally
operate as a long-term portfolio investor;
and
|
|
·
|
generate
earnings from the return on our mortgage securities and spread
income from
our securitized mortgage loan
portfolio.
|
We
will
in the future focus on the acquisition of Agency MBS, 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 obtaining, financing and managing for these
investments.
We
entered into an advisory agreement with JMPAM pursuant to which JMPAM will
advise the Managed Subsidiaries and is expected, at some point in the future,
to
implement an alternative mortgage related investment strategy for the Managed
Subsidiaries. Although we currently have no plans to acquire alternative
mortgage related investments to be held in the Managed Subsidiaries, we do
expect that JMPAM will, in the future, as an advisor to the Managed
Subsidiaries, focus on the acquisition of alternative mortgage investments
on behalf of the Managed Subsidiaries that will allow us to utilize all or
a
portion of the net operating loss carry-forward to the extent available by
law. This strategy, if and when implemented, will vary from our core
strategy. We can make no assurance that we or JMPAM will be successful at
implementing any alternative investment strategy.
Our
Targeted Asset Class
With
respect to ARM and hybrid ARM securities, we typically purchase, and will
focus primarily on the purchase and management of hybrid MBS issued by
either Fannie Mae or Freddie Mac. Hybrid ARM MBS are adjustable rate mortgage
assets that have a rate that is fixed for a period of three to ten years
initially, before becoming annual or semi-annual adjustable rate mortgages.
Typically we seek to acquire hybrid ARM MBS with fixed periods of five years
of
less. In most cases we are required to pay a premium, a price above the par
value, for these assets, which generally is between 101% and 102% of the
par value, depending on the pass-through rates of the security, the months
remaining before it converts to an ARM, and other considerations.
Fannie
Mae guarantees to the holder of a Fannie Mae MBS that it will distribute
amounts
representing scheduled principal and interest on the mortgage loans in the
pool
underlying the Fannie Mae certificate, whether or not received, and the full
principal amount of any such mortgage loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually received. Freddie
Mac guarantees to each holder of certain Freddie Mac certificates the
timely payment of interest at the applicable pass-through rate and principal
on
the holder’s pro rata share of the unpaid principal balance of the related
mortgage loans. We prefer Fannie Mae hybrid ARM MBS due to their shorter
remittance cycle; the time between when a borrower makes a payment, and the
investor received the net payment.
The
obligations of Fannie Mae and Freddie Mac, under their respective guaranties
are
solely those of Fannie Mae and Freddie Mac respectively, and are not backed
by
the full faith and credit of the United States. If Fannie Mae or Freddie
Mac
were unable to satisfy their respective obligations, distributions to holders
of
the respective MBS would consist solely of payments and other recoveries
on the
underlying mortgage loans and, accordingly, defaults and delinquencies on
the
underlying mortgage loans would adversely affect monthly distributions to
holders of the respective MBS.
Our
investment portfolio also includes prime ARM Loans held in securitization
trusts. The loans held in securitization trusts are loans that primarily
were originated by our discontinued mortgage lending business, and to a lesser
extent purchased, that we securitized in 2005. These loans are substantially
prime full documentation interest only hybrid ARMs on residential properties
located in New York and Massachusetts. All are first lien
mortgages.
Our
Financing Strategy
To
finance our MBS investment portfolio, we generally seek to borrow between
eight
and 12 times the amount of our equity. At December 31, 2007 our leverage
ratio
for our MBS investment portfolio, which we define as our outstanding
indebtedness under repurchase agreements divided by total stockholders’ equity,
was 17.1 to one. This definition of the leverage ratio is consistent with
the
manner in which the credit providers under our repurchase agreement calculate
our leverage. The Company also has $45 million of subordinated trust preferred
securities outstanding and $417.0 million of collateralized debt obligations
outstanding both of which are not dependent on market values of pledged
securities or changing credit conditions by our lenders. As of March 31,
2008
our estimated leverage ratio was 7.2 to 1 for our MBS investment
portfolio.
We
strive
to maintain and achieve a balanced and diverse funding mix to finance our
investment portfolio and assets. We rely primarily on repurchase agreements
and
collateralized debt obligations, or CDOs, in order to finance our investment
portfolio. Repurchase agreements provide us with short-term borrowings that
are
secured by the securities in our investment portfolio. These short-term
borrowings bear interest rates that are closely linked to the LIBOR, a short
term market interest rate used to determine short term loan rates. Pursuant
to
these repurchase agreements, the financial institution that serves as a
counterparty will generally agree to provide us with financing based on to
the market value of the securities that we pledge as collateral less a haircut.
Our repurchase agreements may require us to deposit additional collateral
pursuant to a margin call if the market value of our pledged collateral declines
or if unscheduled principal payments on the mortgages underlying our pledged
securities increase at a higher than anticipated rate. To reduce the risk
that
we would be required to sell portions of our portfolio at a loss to meet
margin
calls, we intend to maintain a balance of cash or cash equivalent reserves
and a
balance of unpledged mortgage securities to use as collateral for additional
borrowings. As of December 31, 2007, we had repurchase agreements outstanding
with four different counterparties totaling $315.7 million.
As
of
December 31, 2007, we financed approximately $430.7 million of loans we hold
in
securitization
trusts permanently
with approximately $13.7 million of our own equity investment in the
securitization trusts and the issuance of approximately $417.0 million of
CDOs.
During 2007 we sold approximately $339.0 million of previously retained
securitizations resulting in the issuance of non-recourse debt and eliminating
any risk of counterparty financing changes, such as increased margins due
to declines in the market value of our securities or reduced
availability of liquidity. This CDO issuance replaced short-term
repurchase agreements freeing up approximately $17.5 million in capital needed
for repurchase agreement haircuts. See “Management’s
Discussion and Analysis of Results of Operations and Financial
Condition―Liquidity
and Capital Resources” for further discussion on our financing
activities.
Our
Hedging and Interest Rate Risk Management Strategies
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 securities, many of the underlying hybrid ARM loans in our securities
portfolio have initial fixed rates of interest for a period of time ranging
from
two to five years. Our funding costs are variable and the maturities are
short term in nature. We use hedging instruments to reduce our risk
associated with changes in interest rates that could affect our investment
portfolio of mortgage loans and securities. Typically, we utilize interest
rate
swaps to effectively extend the maturity of our short
term borrowings
to
better match the interest rate sensitivity to the underlying assets being
financed. By extending the maturities on our short term borrowings, we attempt
to lock in a spread between the interest income generated by the interest
earning assets in our investment portfolio and the interest expense related
to
the financing of such assets in order to maintain a net duration gap of less
than one year. As we acquire mortgage-backed securities, we seek to hedge
interest rate risk in order to stabilize net asset values and earnings during
periods of rising interest rates. To do so, we use hedging instruments in
conjunction with our borrowings to approximate the re-pricing characteristics
of
such assets. The Company utilizes a model based risk analysis system to assist
in projecting portfolio performances over a variety of different interest
rates
and market stresses. The model incorporates shifts in interest rates, changes
in
prepayments and other factors impacting the valuations of our 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.
Changes
in Strategies
Currently
we are following a portfolio strategy that is focused on
investments in Agency MBS. During the time we operated a mortgage lending
business we sought to invest in both Agency MBS and residential prime whole
loan
securitizations. We no longer intend to invest in residential whole loan
securitizations. Due to changes in market conditions and subject to our intent
to qualify for an exemption from registration under the Investment Company
Act
of 1940, as amended, or Investment Company Act, our board of directors may
vary
our investment strategy, our financing strategy, or our hedging strategy
at any
time.
Our
Investment Guidelines
In
acquiring assets for our portfolio and subsequently managing those assets,
we
adhere to certain investment guidelines and policies. 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 Freddie Mac, Fannie
Mae or
Ginnie Mae.
|
|
·
|
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.
|
The
Company's current investment strategy described above will only focus on
Category I investments.
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.
To
achieve our portfolio strategy and mitigate risk, we:
|
·
|
attempt
to maintain a net duration, or duration gap, of one year or less
on our
ARM portfolio, related borrowings and hedging
instruments;
|
|
·
|
structure
our liabilities to mitigate potential negative effects of changes
in the
relationship between short- and longer-term interest
rates;
|
|
·
|
focus
on holding hybrid ARM MBS and hybrid ARM loans in securitized trusts
rather than fixed-rate MBS or loans, as 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.
|
The
Co-Chief Executive Officers have the authority to approve, without the need
of
further authorization 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 non-Agency MBS, 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;
· term
repurchase agreements.
Our
Relationship with JMPAM and the Advisory Agreement
JMPAM,
an
external advisor to the managed subsidiaries, is a wholly-owned subsidiary
of JMP Group Inc., an investor in each of our two private offerings, and
manages
a family of single-strategy and multi-manager hedge fund products. JMPAM
also sponsors and partners with other alternative investment firms. JMPAM
was
founded by Joseph Jolson in 1999. As of December 31, 2007 JMPAM had $275.5
million in client assets under management.
Advisory
Agreement
As
described above, on January 18, 2008, we entered into an advisory agreement
with
JMPAM. The following is a summary of the key economic terms of the advisory
agreement:
|
Type
|
Description
|
|
|
Base
Advisory Fee
|
A
base advisory fee of 1.50% per annum of the “equity capital” of the
Managed Subsidiaries is payable by us to JMPAM in cash, quarterly
in
arrears.
Equity
capital of the Managed Subsidiaries is defined as, for any fiscal
quarter,
the greater of (i) the net asset value of the investments of the
Managed
Subsidiaries as of the end of the fiscal quarter, excluding any
investments made prior to the date of the advisory agreement and
any
assets contributed by us to the Managed Subsidiaries for the purpose
of
facilitating compliance with our exclusion from regulation under
the
Investment Company Act, or (ii) the sum of $20,000,000 plus 50%
of the net
proceeds to us or our subsidiaries of any offering of common or
preferred
stock completed by us during the term of the advisory agreement.
|
|
|
Incentive
Compensation
|
The
advisory agreement calls for incentive compensation to be paid
by us to
JMPAM under certain circumstances. If earned, incentive compensation
is
paid quarterly in arrears in cash;
provided, however,
that a portion of the incentive compensation may be paid in shares
of our
common stock.
For
the first three fiscal quarters of each fiscal year, 25% of the
core
earnings of the Managed Subsidiaries attributable to the investments
that
are managed by JMPAM that exceed a hurdle rate equal to the greater
of (i)
2.00% or (ii) 0.50% plus one-fourth of the ten year treasury rate
for such
quarter.
For
the fourth fiscal quarter of each fiscal year, the difference between
(i)
25% of the GAAP (as defined in Item 7 below) net income of the
Managed Subsidiaries attributable to the investments that are managed
by
JMPAM that exceeds a hurdle rate equal to the greater of (a) 8.00%
and (b)
2.00% plus the ten year treasury rate for such fiscal year, and
(ii) the
amount of incentive compensation paid for the first three fiscal
quarters
of such fiscal year.
|
|
|
Termination
Fee
|
If
we terminate the advisory agreement for cause, no termination fee
is
payable. Otherwise, if we terminate the advisory agreement or elect
not to
renew it, we will pay a cash termination fee equal to the sum of
(i) the
average annual base advisory fee and (ii) the average annual incentive
compensation earned during the 24-month period immediately preceding
the
date of termination.
|
As
of
March 1, 2008, JMPAM was not managing any assets in the Managed Subsidiaries,
but was earning a base advisory fee on the net proceeds to us from our private
offerings in each of January 2008 and February 2008.
Conflicts
of Interest with JMPAM; Equitable Allocation of Investment
Opportunities
JMPAM
manages, and is expected to continue to manage, other client accounts with
similar or overlapping investment strategies. JMPAM has agreed to make available
to the Managed Subsidiaries all investment opportunities that it determines,
in
its reasonable and good faith judgment, based on their investment objectives,
policies and strategies, and other relevant factors, are appropriate for
them in
accordance with JMPAM’s written allocation procedures and policies.
Since
many of the Managed Subsidiaries’ targeted investments are typically available
only in specified quantities and since many of their targeted investments
may
also be targeted investments for other JMPAM accounts, JMPAM may not be able
to
buy as much of any given investment as required to satisfy the needs of all
of
its clients’ accounts. In these cases, JMPAM’s allocation procedures and
policies would typically allocate such investments to multiple accounts in
proportion to the needs of each account. The policies permit departure from
proportional allocation when the total JMPAM allocation would result in an
inefficiently small amount of the security being purchased for an account.
In
that case, the policy allows for a “rotational” protocol of allocating
subsequent investments so that, on an overall basis, each account is treated
equitably.
JMPAM
is
authorized to follow broad investment guidelines. Our board of directors
will
periodically review the investment guidelines and the Managed Subsidiaries’
investment portfolios. However, our board of directors generally will not
review
individual investments. James J. Fowler became our non-executive chairman
of the
board upon closing of the Series A Preferred Shares on January 18, 2008 and
also
serves as the Chief Investment Officer of our Managed Subsidiaries. Mr. Fowler
is a managing director of JMPAM and president of JMP Realty Trust Inc., a
private REIT that is externally managed by JMPAM and one of the investors
in our
Series A Preferred Shares. In conducting periodic reviews of the investments
held by our Managed Subsidiaries, our directors will rely primarily on
information provided to them by JMPAM. Furthermore, the Managed Subsidiaries
may
use complex investment strategies and transactions, which may be difficult
or
impossible to unwind by the time they are reviewed by our directors. JMPAM
has
great latitude within our Managed Subsidiaries’ broad investment guidelines to
determine the types of assets it may decide are proper investments for the
Managed Subsidiaries. The investment guidelines do not permit JMPAM to invest
in
agency securities, since these investments are made by us. As of the date
of
this report, our board of directors has not authorized JMPAM to commence
the
acquisition of investment assets on behalf of the Managed
Subsidiaries.
The
advisory agreement does not restrict the ability of JMPAM or its affiliates
from
engaging in other business ventures of any nature (including other REITs),
whether or not such ventures are competitive with the Managed Subsidiaries’
business so long as JMPAM’s management of other REITs or funds does not
disadvantage us or the Managed Subsidiaries.
JMPAM
may
engage other parties, including its affiliates, to provide services to us
or our
subsidiaries; provided that any such agreements with affiliates of JMPAM
shall
be on terms no more favorable to such affiliate than would be obtained from
a
third party on an arm’s-length basis and, in certain circumstances, approved by
a majority of our independent directors. With respect to portfolio management
services, any agreements with affiliates shall be subject to our prior written
approval and JMPAM shall remain liable for the performance of such services.
With respect to monitoring services, any agreements with affiliates shall
be
subject to our prior written approval and the base advisory fee payable to
JMPAM
shall be reduced by the amount of any fees payable to such other parties,
although we will reimburse any out-of-pocket expenses incurred by such other
parties that are reimbursable by us.
Company
History
We
were
formed as a Maryland corporation in September 2003. In June 2004, we sold
15.0
million shares (or 3.0 million shares as adjusted for the reverse stock split)
of our common stock in an initial public offering, or IPO, at a price to
the
public of $9.00 (or $45.0 per share as adjusted for the reverse stock split)
per
share. 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 HC,
which, prior to our acquisition of such entity, sold or brokered all of the
loans it originated to third parties. Prior to the IPO, we did not have
recurring business operations. Effective with the completion of our IPO,
we
operated two business segments: (i) our mortgage portfolio management segment
and (ii) our mortgage lending segment. Under this business model, we would
retain and either finance in our portfolio selected adjustable-rate and hybrid
mortgage loans that we originated or we would sell them to third parties,
while
continuing to sell all fixed-rate loans originated by HC to third parties.
Commencing in March 2006, we stopped retaining all loans originated by HC
and
began to sell these loans to third parties. As set forth above, we exited
the
mortgage lending business on March 31, 2007 and now exclusively focus our
efforts and resources on our mortgage portfolio management
business.
Our
shares of common stock were listed on the New York Stock Exchange, or NYSE,
until September 11, 2007, at which time our common stock was de-listed from
the
NYSE because our average global market capitalization was less than $25 million
over a consecutive 30 trading day period. Commencing on September 11, 2007,
our
common stock began trading on the Over the Counter Bulletin Board (“OTCBB”). In
October 2007, we completed a 1-for-5 reverse stock split of our common stock.
As
of March 31, 2008, our common stock continued to trade on the OTCBB under
the
symbol “NMTR.OB.”
Certain
Federal Income Tax Considerations and Our Status as a REIT
We
have
elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue
Code (IRC) of 1986, as amended, for federal income tax purposes, commencing
with
our taxable year ended December 31, 2004, and we believe that our current
and
proposed method of operation will enable us to continue to qualify as a REIT
for
our taxable year ended December 31, 2007 and thereafter. We hold our mortgage
portfolio investments directly or in a qualified REIT subsidiary, or QRS.
Accordingly, the net interest income we earn on these assets is generally
not
subject to federal income tax as long as we distribute at least 90% of our
REIT
taxable income in the form of a dividend to our stockholders each year and
comply with various other requirements. Taxable income generated by HC, our
taxable REIT subsidiary, or TRS, is subject to regular corporate income tax.
The
benefit of REIT tax status is a tax treatment that avoids “double taxation,” or
taxation at both the corporate and stockholder levels, that generally applies
to
distributions by a corporation to its stockholders. Failure to qualify as
a REIT
would subject our Company to federal income tax (including any applicable
minimum tax) on its taxable income at regular corporate rates and distributions
to its stockholders in any such year would not be deductible by our
Company.
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 HC to be treated as a TRS. HC
is
subject to corporate income tax on its taxable income.
Qualified
REIT Assets
On
the
last day of each calendar quarter, at least 75% of the value of our assets
(which includes any assets held through a qualified REIT subsidiary) must
consist of qualified REIT assets — primarily, real estate, mortgage loans
secured by real estate, and certain mortgage-backed securities (“Qualified REIT
Assets”), government securities, cash, and cash items. We believe that
substantially all of our assets are and will continue to be Qualified REIT
Assets. On the last day of each calendar quarter, of the assets not included
in
the foregoing 75% asset test, the value of securities that we hold issued
by any
one issuer may not exceed 5% in value of our total assets and we may not
own
more than 10% of the voting power or value of any one issuer’s outstanding
securities (with an exception for securities of a qualified REIT subsidiary
or
of a taxable REIT subsidiary). In addition, the aggregate value of our
securities in taxable REIT subsidiaries cannot exceed 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.
Investment
Company Act Exemption
We
operate our business so as to be exempt from registration under the Investment
Company Act. We rely on the exemption provided by Section 3(c)(5)(C) of the
Investment Company Act. We monitor our portfolio periodically and prior to
each
investment to confirm that we continue to qualify for the exemption. To qualify
for the exemption, we make investments so that at least 55% of the assets
we own
consist of qualifying mortgages and other liens on and interests in real
estate,
which are collectively referred to as “qualifying real estate assets,” and so
that at least 80% of the assets we own consist of real estate-related assets
(including our qualifying real estate assets, both as measured on an
unconsolidated basis). We generally expect that our investments will be
considered either qualifying real estate assets or real estate-related assets
under Section 3(c)(5)(C) of the Investment Company Act. Qualification for
the Section 3(c)(5)(C) exemption may limit our ability to make certain
investments. In addition, we must ensure that each of our subsidiaries qualifies
for the Section 3(c)(5)(C) exemption or another exemption available under
the
Investment Company Act.
Competition
Our
success depends, in large part, on our ability to acquire assets at favorable
spreads over our borrowing costs. When we invest in mortgage-backed securities,
mortgage loans and other investment assets, we compete with a variety of
institutional investors, including other REITs, insurance companies, mutual
funds, hedge funds, pension funds, investment banking firms, banks and other
financial institutions that invest in the same types of assets. Many of these
investors have greater financial resources and access to lower costs of capital
than we do. The existence of these competitive entities, as well as the
possibility of additional entities forming in the future, may increase the
competition for the available supply of mortgage assets suitable for purchase,
resulting in higher prices and lower yields on assets.
Personnel
As
of
December 31, 2007 we employed eight people.
Corporate
Office
Our
corporate headquarters is located at 1301 Avenue of the Americas, New York,
New York and our telephone number is (212) 792-0107.
Access
to our Periodic SEC Reports and Other Corporate
Information
Our
internet website address is www.nymtrust.com. We make available free of charge,
through our internet website, our annual report on Form 10-K, our quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments thereto
that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. Our Corporate Governance
Guidelines and Code of Business Conduct and Ethics and the charters of our
Audit, Compensation and Nominating and Corporate Governance Committees are
also
available on our website and are available in print to any stockholder upon
request in writing to New York Mortgage Trust, Inc., c/o Secretary, 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.
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 and 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 proposed portfolio
strategy;
|
|
·
|
future
performance, developments, market forecasts or projected dividends;
and
|
|
·
|
projected
capital expenditures.
|
It
is
important to note that the description of our business 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
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;
|
|
·
|
market
changes in the terms and availability of repurchase agreements
used to
finance our investment portfolio
activities;
|
|
·
|
interest
rate mismatches between our mortgage-backed securities and our
borrowings
used to fund such purchases;
|
|
·
|
our ability to minimize losses associated with delinquent loans in our securitization trusts. |
|
·
|
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;
|
|
·
|
changes in the U.S. economy |
|
·
|
our
board's ability to change our operating policies and strategies
without
notice to you or stockholder
approval;
|
|
·
|
our
ability to manage, minimize or eliminate liabilities stemming from
the
discontinued operations including, among other things, litigation,
repurchase obligations on the sales of mortgage loans and property
leases;
|
|
·
|
there
are conflicts of interest in our relationship with JMPAM, which
could
result in decisions that are not in the best interests of our
stockholders;
|
|
·
|
termination
of the advisory agreement may be difficult and
costly;
|
|
·
|
we
may be required to pay liquidated damages in the event we fail
to satisfy
certain obligations under the Common Stock Registration Rights
Agreement; and
|
|
·
|
the
other important factors described in this Annual Report on Form
10-K,
including those under the captions “Item 1A. Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
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.
Set
forth below are the risks that we believe are material to stockholders.
You
should carefully consider the following risk factors and the various other
factors identified in or incorporated by reference into any other documents
filed by us with the SEC in evaluating our company and our business. The
risks
discussed herein can adversely affect our business, liquidity, operating
results, prospects, and financial condition. This could cause the market
price
of our securities to decline. The risk factors described below are not
the only
risks that may affect us. Additional risks and uncertainties not presently
known
to us also may adversely affect our business, liquidity, operating results,
prospects, and financial condition.
Risks
Related to Our Business
Interest
rate fluctuations may cause losses.
We
believe our primary interest rate exposure relates to our mortgage loans,
MBS
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 acquire mortgage loans or MBS, 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.
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 MBS and purchased prime ARM loans and
any
related hedging instruments, may move inversely with changes in interest
rates.
We anticipate that increases in interest rates will tend to decrease our
net
income. A decline in the market value of our investment securities,
such as
the decline we experienced during March 2008, primarily as a result of
news of
potential security liquidations, may adversely affect us, particularly
where we
have borrowed money based on the market value of those investment securities.
In
such
case, the lenders may require, and have required, us to post additional
collateral to support the borrowing. If we cannot post the additional
collateral, we may have to rapidly liquidate assets at a time when we might
not
otherwise choose to do so and we may still be unable to post the required
collateral, further harming our liquidity and subjecting us to liability
to our
lenders for the declines in the market values of the collateral. For example,
in
March 2008, due in part to decreases in the market value of certain of
our
investment securities and the anticipated increase in collateral requirements
by
our lenders as a result of such decrease in the market value of such securities,
we elected to increase our liquidity by reducing our leverage through the
sale
of an aggregate of approximately $598.9 million of Agency MBS, which resulted
in
an aggregate loss of approximately $15.4 million. If we liquidate investment
securities at prices lower than the amortized costs of such investment
securities, we will incur losses.
Changes
in prepayment rates on our investment securities may decrease our net
interest
income.
Pools
of
mortgage loans underlie the investment securities that we acquire. We
will
generally receive principal distributions from the principal payments
that are
made on these underlying mortgage loans. When borrowers repay their mortgage
loans faster than expected, this will result in prepayments that are
faster than
expected on the investment securities. Prepayment rates are influenced
by
changes in current interest rates and a variety of economic, geographic
and
other factors, all of which are beyond our control. Prepayment rates
generally
increase when interest rates fall and decrease when interest rates rise,
but
changes in prepayment rates are difficult to predict. Prepayment rates
also may
be affected by conditions in the housing and financial markets, general
economic
conditions and the relative interest rates on fixed-rate and adjustable-rate
mortgage loans. Faster than expected prepayments could adversely affect
our
profitability, including in the following ways:
|
·
|
We
have purchased, and may purchase in the future, investment
securities that
have a higher interest rate than the market interest rate at
the time of
purchase. In exchange for this higher interest rate, we are required
to pay a premium over the face amount of the security to acquire
the
security. In accordance with accounting rules, we amortize
this premium
over the anticipated term of the mortgage security. If principal
distributions are received faster than anticipated, we would
be required
to expense the premium faster. We may not be able to reinvest
the
principal distributions received on these investment securities
in similar
new mortgage-related securities and, to the extent that we
can do so, the
effective interest rates on the new mortgage-related securities
will
likely be lower than the yields on the mortgages that were
prepaid.
|
|
·
|
We
also may acquire investment securities at a discount. If the
actual
prepayment rates on a discount mortgage security are slower than
anticipated at the time of purchase, we would be required to
recognize the
discount as income more slowly than anticipated. This would adversely
affect our profitability. Slower than expected prepayments also
may
adversely affect the market value of a discount mortgage
security.
|
A
disproportionate rise in short-term interest rates as compared to longer-term
interest rates may adversely affect our income.
The
relationship between short-term and longer-term interest rates is often
referred
to as the “yield curve.” Ordinarily, short-term interest rates are lower than
longer-term interest rates. If short-term interest rates rise disproportionately
relative to longer-term interest rates (a flattening of the yield curve),
our
borrowing costs may increase more rapidly than the interest income earned
on our
assets. Because we expect our investments, on average, generally will bear
interest based on longer-term rates than our borrowings, a flattening of
the
yield curve would tend to decrease our net income and the market value
of our
net assets. Additionally, to the extent cash flows from investments that
return
scheduled and unscheduled principal are reinvested, the spread between
the
yields on the new investments and available borrowing rates may decline,
which
would likely decrease our net income. It is also possible that short-term
interest rates may exceed longer-term interest rates (a yield curve inversion),
in which event our borrowing costs may exceed our interest income and we
could
incur operating losses.
A
flat or inverted yield curve may adversely affect prepayment rates on and
supply
of our investment securities.
Our
net
interest income varies primarily as a result of changes in interest rates
as
well as changes in interest rates across the yield curve. We believe that
when
the yield curve is relatively flat, borrowers have an incentive to refinance
into hybrid mortgages with longer initial fixed rate periods and fixed
rate
mortgages, causing our investment securities to experience faster prepayments.
In addition, a flatter yield curve generally leads to fixed-rate mortgage
rates
that are closer to the interest rates available on hybrid ARMs and ARMs,
possibly decreasing the supply of the investment securities we seek to
acquire.
At times, short-term interest rates may increase and exceed long-term interest
rates, causing an inverted yield curve. When the yield curve is inverted,
fixed-rate mortgage rates may approach or be lower than hybrid ARMs or
ARM
rates, further increasing prepayments on, and negatively impacting the
supply
of, our investment securities. Increases in prepayments on our portfolio
will
cause our premium amortization to accelerate, lowering the yield on such
assets.
If this happens, we could experience a decrease in net income or incur
a net
loss during these periods, which may negatively impact our distributions
to
stockholders.
Interest
rate mismatches between our adjustable-rate agency securities and our borrowings
used to fund our purchases of these securities may reduce our income during
periods of changing interest rates.
Our
borrowings have interest rates that adjust more frequently than the interest
rate indices and repricing terms of the investment securities we seek to
acquire
and currently hold in our portfolio. Accordingly, if short-term interest
rates
increase, our borrowing costs may increase faster than the interest rates
on our
investment securities adjust. As a result, in a period of rising interest
rates,
we could experience a decrease in net income or a net loss.
Our
current portfolio is comprised primarily of, and we intend that most of
the
investment securities we acquire in the future will be, adjustable-rate
securities. This means that their interest rates may vary over time based
upon
changes in an identified short-term interest rate index. In most cases,
the
interest rate indices and repricing terms of the investment securities
that we
acquire and our borrowings will not be identical, thereby potentially creating
an interest rate mismatch between our investments and our borrowings. While
the
historical spread between relevant short-term interest rate indices has
been
relatively stable, there have been periods when the spread between these
indices
was volatile. During periods of changing interest rates, these interest
rate
index mismatches could reduce
our net income or produce a net loss, and adversely affect our dividends
and the
market price of our common stock.
Interest
rates are highly sensitive to many factors, including governmental, monetary
and
tax policies, domestic and international economic and political considerations
and other factors, all of which are beyond our control.
Interest
rate caps on our adjustable-rate investment securities may reduce our income
or
cause us to suffer a loss during periods of rising interest rates.
The
mortgage loans underlying our adjustable-rate investment securities typically
will be subject to periodic and lifetime interest rate caps. Additionally,
we
may invest in ARMs with an initial “teaser” rate that will provide us with a
lower than market interest rate initially, which may accordingly have lower
interest rate caps than ARMs without such teaser rates. Periodic interest
rate
caps limit the amount an interest rate can increase during a given period.
Lifetime interest rate caps limit the amount an interest rate can increase
through maturity of a mortgage loan. If these interest rate caps apply
to the
mortgage loans underlying our adjustable-rate investment securities, the
interest distributions made on the related securities will be similarly
impacted. Our borrowings may not be subject to similar interest rate caps.
Accordingly, in a period of rapidly increasing interest rates, the interest
rates paid on our borrowings could increase without limitation while caps
would
limit the interest distributions on our adjustable-rate investment securities.
Further, some of the mortgage loans underlying our adjustable-rate investment
securities may be subject to periodic payment caps that result in a portion
of
the interest on those loans being deferred and added to the principal
outstanding. As a result, we could receive less interest distributions
on
adjustable-rate investment securities, particularly those with an initial
teaser
rate, than we need to pay interest on our related borrowings. These factors
could lower our net interest income, cause us to suffer a net loss or cause
us
to incur additional borrowings to fund interest payments during periods
of
rising interest rates or sell our investments at a loss.
Continued
adverse developments in the residential mortgage market may adversely affect
the
value of the mortgage-related securities in which we invest and our ability
to
finance or sell any securities that we acquire.
Recently,
the residential mortgage market in the United States has experienced a
variety
of difficulties and changes in economic conditions, including recent
defaults, credit losses and liquidity concern. Securities backed by
residential mortgage loans originated in 2006 and 2007 have had a higher
and
earlier than expected rate of delinquencies, and many MBS have been downgraded
by the Rating Agencies since
the
2007 second quarter. In addition, during March 2008, news
of
potential security liquidations increased
the volatility of many financial assets, including Agency MBS and other
high-quality MBS assets. As a result, values for MBS assets, including
some of
our Agency MBS and other AAA-rated non-Agency MBS, have been negatively
impacted. Further increased volatility and deterioration in the broader
residential mortgage and MBS markets may adversely affect the performance
and
market value of the investment securities in our portfolio.
Fannie
Mae or Freddie Mac guarantee the payments on the Agency MBS we purchase
even if
the borrowers of the underlying mortgages default on their payments. However,
rising delinquencies, potential security liquidations or liquidity
concerns could negatively affect the value of our investment securities,
including Agency MBS, or create market uncertainty about their true value.
We
use our investment securities as collateral for our financings. Any decline
in
their value, or perceived market uncertainty about their value, would likely
make it more difficult for us to obtain financing on favorable terms or
at all,
or maintain our compliance with the terms of any financing arrangements
already
in place. At the same time, market uncertainty about residential mortgages
in
general could depress the market for mortgage-related securities, including
Agency MBS, making it more difficult for us to sell any securities we own
on
favorable terms, or at all. If market conditions result in a decline in
available purchasers, or the value, of any of the securities we hold in
or
acquire for our portfolio, our financial position and results of operations
could be adversely affected.
Competition
may prevent us from acquiring mortgage-related assets at favorable yields
and
that would negatively impact our profitability.
Our
net
income largely depends on our ability to acquire mortgage-related assets
at
favorable spreads over our borrowing costs. In acquiring mortgage-related
assets, we compete with other REITs, investment banking firms, savings
and loan
associations, banks, insurance companies, mutual funds, other lenders and
other
entities that purchase mortgage-related assets, many of which have greater
financial resources than us. As a result, we may not in the future be able
to
acquire sufficient mortgage-related assets at favorable spreads over our
borrowing costs which, would adversely affect our
profitability.
Because
assets we acquire may experience periods of illiquidity, we may lose profits
or
be prevented from earning capital gains if we cannot sell the investment
securities in our portfolio at an opportune time.
We
bear
the risk of being unable to dispose of the investment securities held in
our
portfolio at advantageous times or in a timely manner because these
mortgage-related assets generally experience periods of illiquidity. The
lack of
liquidity may result from the absence of a willing buyer or an established
market for these assets, as well as legal or contractual restrictions on
resale.
As a result, the illiquidity of mortgage-related assets may cause us to
lose
profits and the ability to earn capital gains.
We
currently leverage our equity, which will exacerbate any losses we incur
on our
current and future investments and may reduce cash available for distribution
to
our stockholders.
We
currently leverage our equity through borrowings, generally through the
use of
repurchase agreements and CDOs, which are obligations issued in multiple
classes
secured by an underlying portfolio of securities, and we may, in the future,
utilize bank credit facilities and other forms of borrowing. The amount
of
leverage we incur varies depending on our ability to obtain credit facilities
and our lenders’ estimates of the value of our portfolio’s cash flow. The return
on our investments and cash available for distribution to our stockholders
may
be reduced to the extent that changes in market conditions cause the cost
of our
financing to increase relative to the income that can be derived from the
assets
we hold in our investment portfolio. Further, the leverage on our equity
may
exacerbate any losses we incur.
Our
debt
service payments will reduce the net income available for distributions
to our
stockholders. We may not be able to meet our debt service obligations and,
to
the extent that we cannot, we risk the loss of some or all of our assets
to sale to satisfy our debt obligations. A decrease in the value of the
assets may lead to margin calls under our repurchase agreements which we
will
have to satisfy. Significant decreases in asset valuation, such as occurred
during March 2008, could lead to increased margin calls, and we may not
have the funds available to satisfy any such margin calls. We have a target
overall leverage amount of eight to 12 times our equity, but there is no
established limitation, other than may be required by our financing
arrangements, on our leverage ratio or on the aggregate amount of our
borrowings.
If
we are unable to leverage our equity to the extent we currently anticipate,
the
returns on our MBS portfolio could be diminished, which may limit or
eliminate our ability to make distributions to our
stockholders.
If
we are
limited in our ability to leverage 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 MBS portfolio in an attempt to enhance our returns. To
finance our MBS investment portfolio, we generally seek to borrow between
eight
and 12 times the amount of our equity. At December 31, 2007 our leverage
ratio
for our MBS investment portfolio, which we define as our outstanding
indebtedness under repurchase agreements divided by total stockholders’ equity,
was 17.1 to one. This definition of the leverage ratio is consistent with
the
manner in which the credit providers under our repurchase agreement calculate
our leverage. The Company also has $45 million of subordinated trust preferred
securities outstanding and $417.0 million of collateralized debt obligations
outstanding both of which are not dependent on market values of pledged
securities or changing credit conditions by our lenders. 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.
The
Company's loan delinquencies may increase as a result of significantly
increased
monthly payments required from ARM borrowers after the initial fixed
period.
The
scheduled increase in monthly payments on adjustable rate mortgage loans
may
result in higher delinquency rates on mortgage loans and could have a material
adverse affect on our net income and results of operations. This increase
in
borrowers' monthly payments, together with any increase in prevailing market
interest rates, may result in significantly increased monthly payments
for
borrowers with adjustable rate mortgage loans. Borrowers seeking to avoid
these
increased monthly payments by refinancing their mortgage loans may no longer
be
able to fund available replacement loans at comparably low interest rates.
A
decline in housing prices may also leave borrowers with insufficient equity
in
their homes to permit them to refinance their loans or sell their homes.
In
addition, these mortgage loans may have prepayment premiums that inhibit
refinancing.
We
may be required to repurchase loans if we breached representations and
warranties from loan sale transactions, which could harm our profitability
and
financial condition.
Loans
from our discontinued mortgage lending operations that were sold to third
parties under agreements include numerous representations and
warranties regarding the manner in which the loan was
originated, the property securing the loan and the borrower. If these
representations or warranties are found to have been breached, we may be
required to repurchase such loan. We may be forced to resell these repurchased
loans at a loss, which could harm our profitability and financial
condition.
We
are dependent on certain key personnel.
We
are
dependent upon the efforts of James J. Fowler, the Chairman of our board
of
directors. In addition, we are dependent upon the services of David A.
Akre, our Vice Chairman and Co-Chief Executive Officer, and Steven R. Mumma,
our
Co-Chief Executive Officer, President and Chief Financial Officer. The
loss of
any of these individuals or their services could have an adverse effect
on our
operations.
Risk
Related to Our Debt Financing
We
may incur increased borrowing costs related to repurchase agreements and
that
would harm our profitability.
Currently,
a significant portion of our borrowings are collateralized borrowings in
the
form of repurchase agreements. If the interest rates on these agreements
increase, that would harm our profitability.
Our
borrowing costs under repurchase agreements generally correspond to short-term
interest rates such as LIBOR or a short-term Treasury index, plus or minus
a
margin. The margins on these borrowings over or under short-term interest
rates
may vary depending upon:
| · |
the
movement of interest rates;
|
| · |
the
availability of financing in the market;
and
|
| · |
the
value and liquidity of our mortgage-related
assets.
|
If
we are unable to renew our borrowings at favorable rates, it may force
us to
sell assets and our profitability may be adversely
affected.
Since
we
rely primarily on borrowings under repurchase agreements to finance our
mortgage-backed securities, our ability to achieve our investment objectives
depends on our ability to borrow money in sufficient amounts and on favorable
terms and on our ability to renew or replace maturing borrowings on a continuous
basis. In
response to the recent mortgage securities market disruption, investors
and
financial institutions that lend in the mortgage securities repurchase
market,
including the lenders under our repurchase agreements, have further tightened
lending standards in an effort to reduce the leverage of their borrowers.
While
the haircut required by our lenders increased in 2007, primarily on non-Agency
MBS, during March 2008, we have experienced further increases in the amount
of
haircut required to obtain financing for both our Agency MBS and non-Agency
MBS.
Our ability to enter into repurchase agreements in the future will
depend
on the market value of our mortgage-backed securities pledged to secure
the
specific borrowings, the availability of adequate financing and other conditions
existing in the lending market at that time. If we are not able to
renew or replace maturing borrowings on favorable terms, we would be forced
to
sell some of our assets under possibly adverse market conditions, which
may
adversely affect our profitability.
Possible
market developments could reduce the amount of liquidity available to us
and
could cause our lenders to require us to pledge additional assets as collateral.
If we are unable to obtain sufficient short-term financing or our assets
are
insufficient to meet the collateral requirements, then we may be compelled
to
liquidate particular assets at an inopportune time.
Possible
market developments, including a sharp rise in interest rates, a change
in
prepayment rates or increasing market concern about the value or liquidity
of
one or more types of mortgage-related assets in which our portfolio is
concentrated may reduce the market value of our portfolio, which may reduce
the
amount of liquidity available to us or may cause our lenders to require
additional collateral. For
example, in March 2008, news
of
potential security liquidations by certain of our competitors negatively
impacted the market value of certain of the investment securities in our
portfolio. In
connection with this market disruption and the anticipated increase in
collateral requirements by our lenders as a result of such decrease in
the
market value of such securities, we elected to increase our liquidity by
reducing our leverage through the sale of an aggregate of approximately
$598.9
million of Agency MBS, which resulted in an aggregate loss of approximately
$15.4 million. If we are unable to obtain sufficient short-term financing
or our lenders start to require additional collateral, we may be compelled
to
liquidate our assets at a disadvantageous time similar to our sales in
March
2008, thus harming our operating results, net profitability and ability
to make
distributions to you.
Adverse
developments involving major financial institutions or involving one of
our
lenders could result in a rapid reduction in our ability to borrow and
adversely
affect our business and profitability.
The
recent turmoil in the financial markets as it relates to the solvency of
major
financial institutions has raised concerns that a material adverse development
involving one or more major financial institutions could result in our
lenders
reducing our access to funds available under our repurchase
agreements. Because all of our repurchase agreements are uncommitted,
such a disruption could cause our lenders to determine to reduce or terminate
our access to future borrowings, which could adversely affect our business
and
profitability.
If
a counterparty to our repurchase transactions defaults on its obligation
to
resell the underlying security back to us at the end of the transaction
term or
if we default on our obligations under the repurchase agreement, we would
incur
losses.
When
we
engage in repurchase transactions, we generally sell securities to lenders
(i.e., repurchase agreement counterparties) and receive cash from the
lenders. The lenders are obligated to resell the same securities back
to us at the end of the term of the transaction. Because the cash we
receive from the lender when we initially sell the securities to the lender
is
less than the value of those securities (this difference is referred to
as the
“haircut”), if the lender defaults on its obligation to resell the same
securities back to us we would incur a loss on the transaction equal to
the
amount of the haircut (assuming there was no change in the value of the
securities). Further, if we default on one of our obligations under a
repurchase transaction, the lender can terminate the transaction and cease
entering into any other repurchase transactions with us. Our
repurchase agreements contain cross-default provisions, so that if a default
occurs under any one agreement, the lenders under our other agreements
could
also declare a default. Any losses we incur on our repurchase
transactions could adversely affect our earnings and thus our cash available
for
distribution to our stockholders.
Our
use of repurchase agreements to borrow funds may give our lenders greater
rights
in the event that either we or a lender files for
bankruptcy.
Our
borrowings under repurchase agreements may qualify for special treatment
under
the bankruptcy code, giving our lenders the ability to avoid the automatic
stay
provisions of the bankruptcy code and to take possession of and liquidate
our
collateral under the repurchase agreements without delay in the event that
we
file for bankruptcy. Furthermore, the special treatment of repurchase agreements
under the bankruptcy code may make it difficult for us to recover our pledged
assets in the event that a lender files for bankruptcy. Thus, the use of
repurchase agreements exposes
our pledged assets to risk in the event of a bankruptcy filing by either
a
lender or us.
The
Company's liquidity may be adversely affected by margin calls under its
repurchase agreements because they are dependent in part on the lenders'
valuation of the collateral securing the financing.
Each
of
these repurchase agreements allows the lender, to varying degrees, to revalue
the collateral to values that the lender considers to reflect market value.
If a
lender determines that the value of the collateral has decreased, it may
initiate a margin call requiring the Company to post additional collateral
to
cover the decrease. When the Company is subject to such a margin call,
it must
provide the lender with additional collateral or repay a portion of the
outstanding borrowings with minimal notice. Any such margin call could
harm the
Company's liquidity, results of operation and financial condition. Additionally,
in order to obtain cash to satisfy a margin call, the Company may be required
to
liquidate assets at a disadvantageous time, which could cause it to incur
further losses and adversely affect its results of operations and financial
condition.
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.
Our
use of hedging strategies to mitigate our interest rate exposure may not
be
effective and may expose us to counterparty risks.
In
accordance with our operating policies, we may pursue various types of
hedging
strategies, including swaps, caps and other derivative transactions, to
seek to
mitigate or reduce our exposure to losses from adverse changes in interest
rates. Our hedging activity will vary in scope based on the level and
volatility of interest rates, the type of assets held and financing sources
used
and other changing market conditions. No hedging strategy, however,
can completely insulate us from the interest rate risks to which we are
exposed
or that the implementation of any hedging strategy would have the desired
impact
on our results of operations or financial condition. Certain of the
U.S. federal income tax requirements that we must satisfy in order to qualify
as
a REIT may limit our ability to hedge against such risks. We will not
enter into derivative transactions if we believe that they will jeopardize
our
qualification as a REIT.
Interest
rate hedging may fail to protect or could adversely affect us because,
among
other things:
| • |
interest
rate hedging can be expensive, particularly during periods
of rising and
volatile interest rates;
|
| • |
available
interest rate hedges may not correspond directly with the interest
rate
risk for which protection is sought;
|
| • |
the
duration of the hedge may not match the duration of the related
liability;
|
| • |
the
amount of income that a REIT may earn from hedging transactions
(other
than through taxable REIT subsidiaries (or TRSs)) to offset
interest rate
losses is limited by U.S. federal tax provisions governing
REITs;
|
| • |
the
credit quality of the party owing money on the hedge may be
downgraded to
such an extent that it impairs our ability to sell or assign
our side of
the hedging transaction; and
|
| • |
the
party owing money in the hedging transaction may default on
its obligation
to pay.
|
We
primarily use swaps to hedge against anticipated future increases in interest
rates on our repurchase agreements. Should a swap counterparty be
unable to make required payments pursuant to such swap, the hedged liability
would cease to be hedged for the remaining term of the swap. In
addition, we may be at risk for any collateral held by a hedging counterparty
to
a swap, should such counterparty become insolvent or file for
bankruptcy. Our hedging transactions, which are intended to limit
losses, may actually adversely affect our earnings, which could reduce
our cash
available for distribution to our stockholders.
Hedging
instruments involve risk since they often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S.
or
foreign governmental authorities. Consequently, there are no
requirements with respect to record keeping, financial responsibility or
segregation of customer funds and positions. Furthermore, the
enforceability of hedging instruments may depend on compliance with applicable
statutory and commodity and other regulatory requirements and, depending
on the
identity of the counterparty, applicable international
requirements. The business failure of a hedging counterparty with
whom we enter into a hedging transaction will most likely result in its
default. Default by a party with whom we enter into a hedging
transaction may result in the loss of unrealized profits and force us to
cover
our commitments, if any, at the then current market price. Although
generally we will seek to reserve the right to terminate our hedging positions,
it may not always be possible to dispose of or close out a hedging position
without the consent of the hedging counterparty and we may not be able
to enter
into an offsetting contract in order to cover our risk. We cannot
assure you that a liquid secondary market will exist for hedging instruments
purchased or sold, and we may be required to maintain a position until
exercise
or expiration, which could result in losses.
Since
we invest in Agency MBS that are guaranteed by Fannie Mae and Freddie Mac,
we
are subject to the risk that these U.S. Government-sponsored entities may
not be
able to fully satisfy their guarantee obligations, which may adversely
affect
the value of our investment portfolio and our ability to sell or finance
these
securities.
The
payments we receive on the Agency MBS in which we invest are guaranteed
by
Fannie Mae or Freddie Mac. Unlike the securities issued by Ginnie Mae,
the
principal and interest on securities issued by Fannie Mae and Freddie Mac
are
not guaranteed by the U.S. Government. The recent economic challenges in
the
residential mortgage market have affected the financial results of Fannie
Mae
and Freddie Mac. For the year ended December 31, 2007, both Fannie Mae
and
Freddie Mac reported substantial losses. Fannie Mae recently stated that
it
expects losses on guarantees of agency securities to continue and expects
significant increases in credit-related expenses and credit losses through
2008.
If Fannie Mae and Freddie Mac continue to suffer significant losses, their
ability to honor their respective agency securities guarantees may be adversely
affected. Further, any actual or perceived financial challenges at either
Fannie
Mae or Freddie Mac could cause the Rating Agencies to downgrade securities
issued by Fannie Mae or Freddie Mac. On January 9, 2008, Moody’s Investors
Service placed Freddie Mac’s A- bank financial strength rating, which measures
the likelihood it will require financial assistance from third parties,
on
review for possible downgrade. Any failure to honor guarantees on agency
securities by Fannie Mae or Freddie Mac or any downgrade of securities
issued by
Fannie Mae or Freddie Mac by the Rating Agencies could cause a significant
decline in the cash flow from, and the value of, any Agency MBS we may
own, and
we may then be unable to sell or finance Agency MBS on favorable terms
or at
all.
New
laws may be passed affecting the relationship between Fannie Mae and Freddie
Mac, on the one hand, and the U.S. Government, on the other, which could
adversely affect the price of agency securities.
Legislation
has been and may be proposed to change the relationship between Fannie
Mae and
Freddie Mac, on the one hand, and the U.S. Government, on the other hand,
or
that requires Fannie Mae and Freddie Mac to reduce the amount of mortgages
they
own or limit the amount of guarantees they provide on agency
securities.
If
any
such legislation is enacted into law, it may lead to market uncertainty
and the
actual or perceived impairment in the credit quality of securities issued
by
Fannie Mae or Freddie Mac. This may increase the risk of loss
on
investments in Fannie Mae- and/or Freddie Mac-issued securities. Any legislation
requiring Fannie Mae or Freddie Mac to reduce the amount of mortgages they
own
or for which they guarantee payments on agency securities could adversely
affect
the availability and pricing of agency securities and therefore, adversely
affect the value of our portfolio and our profitability.
Our
directors have approved broad investment guidelines for us and do not approve
each investment we make.
Our
board
of directors has given us substantial discretion to invest in accordance
with
our broad investment guidelines. Our board of directors periodically reviews
our
investment guidelines and our portfolio. However, our board of directors
does
not review each proposed investment. In addition, in conducting periodic
reviews, our directors rely primarily on information provided to them by
our
executive officers. Furthermore, transactions entered into by us may be
difficult or impossible to unwind by the time they are reviewed by our
directors. Our management substantial discretion within our broad investment
guidelines in determining the types of assets we may decide are proper
investments for us.
We
may change our investment strategy, operating policies and/or asset allocations
without stockholder consent.
We
may
change our investment strategy, operating policies and/or asset allocation
with
respect to investments, acquisitions, leverage, growth, operations,
indebtedness, capitalization and distributions at any time without the
consent
of our stockholders. A change in our investment strategy may increase
our exposure to interest rate and/or credit risk, default risk and real
estate
market fluctuations. Furthermore, a change in our asset allocation
could result in our making investments in asset categories different from
our
historical investments. These changes could adversely affect our
financial condition, results of operations, the market price of our common
stock
or our ability to pay dividends or distributions.
Risks
Related to the Advisory Agreement with JMPAM
We
are dependent on JMPAM and certain of its key personnel and may not find
a
suitable replacement if JMPAM terminates the advisory agreement or such
key
personnel are no longer available to us.
Pursuant
to the advisory agreement, subject to oversight by our board of directors,
JMPAM
advises the Managed Subsidiaries. JMPAM identifies, evaluates, negotiates,
structures, closes and monitors investments of the Managed Subsidiaries,
other
than assets that we contributed to the Managed Subsidiaries to facilitate
compliance with our exclusion from regulation under the Investment
Company Act. The departure of any of the senior officers of JMPAM, or of a
significant number of investment professionals or principals of JMPAM,
could
have a material adverse effect on our ability to achieve our investment
objectives. We are subject to the risk that JMPAM will terminate the advisory
agreement or that we may deem it necessary to terminate the advisory agreement
or prevent certain individuals from performing services for us, and that
no
suitable replacement will be found to manage the Managed
Subsidiaries.
Pursuant
to the advisory agreement, JMPAM is entitled to receive an advisory fee
payable
regardless of the performance of the assets of the Managed
Subsidiaries.
We
will
pay JMPAM substantial advisory fees, based on the Managed Subsidiaries’ equity
capital (as defined in the advisory agreement), regardless of the performance
of
the Managed Subsidiaries’ portfolio. In addition, pursuant to the advisory
agreement, we will pay JMPAM a base advisory fee even if they are not managing
any assets of the Managed Subsidiaries' portfolio. JMPAM’s entitlement to
non-performance based compensation may reduce its incentive to devote the
time
and effort of its professionals to seeking profitable opportunities for
the
Managed Subsidiaries’ portfolio, which could result in a lower performance of
their portfolio and negatively affect our ability to pay distributions
to our
stockholders or to achieve capital appreciation.
Pursuant
to the advisory agreement, JMPAM is entitled to receive an incentive fee,
which
may induce it to make certain investments, including speculative or high
risk
investments.
In
addition to its advisory fee, JMPAM is entitled to receive incentive
compensation based, in part, upon the Managed Subsidiaries’ achievement of
targeted levels of net income. In evaluating investments and other management
strategies, the opportunity to earn incentive compensation based on net
income
may lead JMPAM to place undue emphasis on the maximization of net income
at the
expense of other criteria, such as preservation of capital, maintaining
liquidity and/or management of credit risk or market risk, in order to
achieve
higher incentive compensation. Investments with higher yield potential
are
generally riskier or more speculative. In addition, JMPAM has broad discretion
regarding the types of investments it will make pursuant to the advisory
agreement. This could result in increased risk to the value of the Managed
Subsidiaries’ invested portfolio.
We
compete with JMPAM’s other clients for access to
JMPAM.
JMPAM
has
sponsored and/or currently manages other pools of capital and investment
vehicles with an investment focus that overlaps with the Managed Subsidiaries’
investment focus, and is expected to continue to do so in the future.
Furthermore, JMPAM is not restricted in any way from sponsoring or accepting
capital from new clients or vehicles, even for investing in asset classes
or
investment strategies that are similar to, or overlapping with, the Managed
Subsidiaries’ asset classes or investment strategies. Therefore, the Managed
Subsidiaries compete for access to the benefits that their relationship
with
JMPAM provides them. For the same reasons, the personnel of JMPAM may be
unable
to dedicate a substantial portion of their time managing the Managed
Subsidiaries’ investments if JMPAM manages any future investment
vehicles.
There
are conflicts of interest in our relationship with JMPAM, which could result
in
decisions that are not in the best interests of our
stockholders.
The
Managed Subsidiaries may have investments in securities in which JMPAM
has an
interest. Similarly, JMPAM may invest in securities in which the Managed
Subsidiaries have or may have an interest. Although such investments may
present
conflicts of interest, we nonetheless may pursue and consummate such
transactions. Additionally, the Managed Subsidiaries may engage in transactions
directly with JMPAM, including the purchase and sale of all or a portion
of a
portfolio investment.
JMPAM
may
from time to time simultaneously seek to purchase investments for the Managed
Subsidiaries and other entities with similar investment objectives for
which it
serves as a manager, or for its clients or affiliates and has no duty to
allocate such investment opportunities in a manner that favors the Managed
Subsidiaries. Additionally, such investments for entities with similar
investment objectives may be different from those made on the Managed
Subsidiaries’ behalf. JMPAM may have economic interests in or other
relationships with others in whose obligations or securities the Managed
Subsidiaries may invest. Each of such ownership and other relationships
may
result in securities laws restrictions on transactions in such securities
and
otherwise create conflicts of interest. In such instances, JMPAM may in
its
discretion make investment recommendations and decisions that may be the
same as
or different from those made with respect to the Managed Subsidiaries’
investments and may take actions (or omit to take actions) in the context
of
these other economic interests or relationships the consequences of which
may be
adverse to the Managed Subsidiaries’ interests.
Although
the officers and employees of JMPAM devote as much time to the Managed
Subsidiaries as JMPAM deems appropriate, the officers and employees may
have
conflicts in allocating their time and services among the Managed Subsidiaries
and JMPAM's and its affiliates' other accounts. In addition, JMPAM and
its
affiliates, in connection with their other business activities, may acquire
material non-public confidential information that may restrict JMPAM from
purchasing securities or selling securities for itself or its clients (including
the Managed Subsidiaries) or otherwise using such information for the benefit
of
its clients or itself.
Termination
of the advisory agreement may be difficult and
costly.
Termination
of the advisory agreement without cause is subject to several conditions
which
may make such a termination difficult and costly. The advisory agreement
provides that it may only be terminated without cause following the initial
three year period upon the affirmative vote of at least two-thirds of our
independent directors, based either upon unsatisfactory performance by
JMPAM
that is materially detrimental to us or upon a determination that the management
fee payable to JMPAM is not fair, subject to JMPAM’s right to prevent such a
termination by accepting a mutually acceptable reduction of management
fees.
JMPAM will be paid a termination fee equal to the amount of two times the
sum of
the average annual base advisory fee and the average annual incentive
compensation earned by it during the 24-month period immediately preceding
the
date of termination, calculated as of the end of the most recently completed
fiscal quarter prior to the date of termination. These provisions may increase
the effective cost to us of terminating the advisory agreement, thereby
adversely affecting our ability to terminate JMPAM without cause.
Risks
Related to an Investment in Our Common Stock
Our
common stock is currently quoted for trading on the Over the Counter Bulletin
Board which may adversely impact the liquidity of our shares and reduce
the
value of an investment in our stock.
Effective
September 11, 2007, our common stock was delisted from quotation on the
New York
Stock Exchange and on the same day our common stock became quoted on the
Over
the Counter Bulletin Board, or OTCBB. We have applied to list our common
stock
on another national securities exchange, however, we can provide no assurance
that our common stock will be approved for listing on another national
securities exchange in the future. Our common stock has historically been
sporadically or “thinly traded” (meaning that the number of persons interested
in purchasing our shares at or near ask prices at any given time may be
relatively small or non-existent) and no assurances can be given that a
broader
or more active public trading market for our common stock will develop
or be
sustained in the future or that current trading levels will be sustained.
A
substantial sale, or series of sales, of our common stock could have a
material
adverse effect on the market price of our common stock.
You may
be unable to sell at or near ask prices or at all if you desire to liquidate
your shares. This situation is attributable to a number of factors, including,
among other things, the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others
in
the investment community that generate or influence sales volume. As a
consequence, there may be periods of several days or more when trading
activity
in our shares is minimal or non-existent, as compared to a seasoned issuer
which
has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price.
The
market price and trading volume of our common stock may be
volatile.
The
market price of our common stock is highly volatile and subject to wide
fluctuations. In addition, the trading volume in our common stock may fluctuate
and cause significant price variations to occur. Some of the factors that
could
result in fluctuations in the price or trading volume of our common stock
include, among other things: actual or anticipated changes in our current
or
future financial performance; changes in market interest rates and general
market and economic conditions. We cannot assure you that the market price
of
our common stock will not fluctuate or decline significantly.
We
have not established a minimum dividend payment level for our common
stockholders and there are no assurances of our ability to pay dividends
to them
in the future.
We
intend
to pay quarterly dividends and to make distributions to our common stockholders
in amounts such that all or substantially all of our taxable income in
each
year, subject to certain adjustments, is distributed. This, along with
other
factors, should enable us to qualify for the tax benefits accorded to a
REIT
under the Code. We have not established a minimum dividend payment level
for our
common stockholders and our ability to pay dividends may be harmed by the
risk
factors described herein. Beginning in July 2007, our board of directors
elected to suspend the payment of quarterly dividends on our common stock
and,
as of the date of this report, has yet to reinstate a quarterly
dividend. The board of directors' decision reflected our focus on
the elimination of operating losses through the sale of our mortgage
lending business with a view to conserving capital to build future earnings
from our portfolio management operations. All distributions to our common
stockholders will be made at the discretion of our board of directors and
will
depend on our earnings, our financial condition, maintenance of our REIT
status
and such other factors as our board of directors may deem relevant from
time to
time. There are no assurances of our ability to pay dividends in the
future.
Upon
conversion of our Series A Preferred Shares, we will be required to issue
shares
of common stock to holders of our Series A Preferred Shares, which will
dilute
the holders of our outstanding common stock. Our outstanding Series A Preferred
Shares are senior to our common stock for purposes of dividend and liquidation
distributions and have voting rights equal to those of our common
stock.
On
January 18, 2008, we completed the issuance and sale of 1.0 million Series
A
Preferred Shares to a group of investors that are affiliated with JMP Group
Inc.
for an aggregate purchase price of $20.0 million. The Series A Preferred
Shares
entitle the holders to receive a cumulative dividend of 10% per year, subject
to
an increase to the extent any future quarterly common stock dividends exceed
$0.10 per share. Holders of our Series A Preferred Shares have dividend
and
liquidating distribution preferences over holders of our common stock,
which may
negatively affect your ability to receive dividends or liquidating distributions
on your Shares. The Series A Preferred Shares also have voting rights equal
to
the voting rights attached to our common stock, except that each Series
A
Preferred Share is entitled to a number of votes equal to the conversion
rate
for the Series A Preferred Shares.
The
Series A Preferred Shares are convertible into shares of our common stock
based
on a conversion price of $4.00 per share of common stock, which represents
a
conversion rate of five shares of common stock for each Series A Preferred
Share. Upon conversion of the Series A Preferred Shares, we will issue
common
stock to the holders of our Series A Preferred Shares, which will dilute
the
holders of our outstanding common stock. Additionally, the holders of our
Series
A Preferred Shares have the ability to purchase an additional $20.0 million
of
Series A Preferred Shares, on identical terms, through April 4,
2008.
The
Series A Preferred Shares represent approximately 21% of our outstanding
capital
stock, on a fully diluted basis, as of March 1, 2008, excluding the purchase
option that expires on April 4, 2008. Therefore, the holders of our Series
A
Preferred Shares have voting control over us.
The
Series A Preferred Shares represent approximately 21% of our outstanding
capital
stock, on a fully diluted basis, as of March 1, 2008, excluding the purchase
option described below. The Series A Preferred Shares also have voting
rights
equal to the voting rights attached to our common stock, except that each
Series
A Preferred Share is entitled to a number of votes equal to the conversion
rate.
In addition, the holders of our Series A Preferred Shares have the ability
to
purchase an additional $20.0 million of Series A Preferred Shares, on identical
terms, through April 4, 2008. Therefore, the holders of our Series A Preferred
Shares have voting control over us, which may limit your ability to effect
corporate change through the shareholder voting process.
Future
offerings of debt securities, which would rank senior to our common stock
upon
our liquidation, and future offerings of equity securities, which would
dilute
our existing stockholders and may be senior to our common stock for the
purposes
of dividend and liquidating distributions, may adversely affect the market
price
of our common stock.
In
the
future, we may attempt to increase our capital resources by making offerings
of
debt or additional offerings of equity securities, including commercial
paper,
medium-term notes, senior or subordinated notes and classes of preferred
stock
or common stock. Upon liquidation, holders of our debt securities and shares
of
preferred stock and lenders with respect to other borrowings will receive
a
distribution of our available assets prior to the holders of our common
stock.
Additional equity offerings may dilute the holdings of our existing stockholders
or reduce the market price of our common stock, or both. Our preferred
stock, if
issued, could have a preference on liquidating distributions or a preference
on
dividend payments that could limit our ability to make a dividend distribution
to the holders of our common stock. Because our decision to issue securities
in
any future offering will depend on market conditions and other factors
beyond
our control, we cannot predict or estimate the amount, timing or nature
of our
future offerings. Thus, holders of our common stock bear the risk of our
future
offerings reducing the market price of our common stock and diluting their
stock
holdings in us.
Future
sales of our common stock could have an adverse effect on our stock
price.
We
cannot
predict the effect, if any, of future sales of common stock, or the availability
of shares for future sales, on the market price of our common stock. For
example, upon conversion of our Series A Preferred Shares, we will be required
to issue shares of our common stock to holders of our Series A Preferred
Shares,
which will increase the number of shares available for sale and dilute
existing
holders of our common stock. Sales of substantial amounts of common stock,
or
the perception that such sales could occur, may adversely affect prevailing
market prices for our common stock.
Under
the registration rights agreement we entered in connection with our private
placement of common stock in February 2008, we will pay liquidated damages
to
the holders of the shares of common stock purchased in that private placement
if
we breech certain provisions.
Under
the
registration rights agreement we entered in connection with our private
placement of common stock in February 2008, we will pay liquidated damages
if
any of the following events occur: (i) we fail to file a registration statement
covering all of the shares sold in that private placement before the filing
deadline; (ii) a registration statement covering all of the shares sold
in that private placement is not declared effective prior to the
effectiveness deadline; (iii) the registration statement is not continuously
kept effective, except during an allowable grace period; (iv) a grace period
exceeds the allowable grace period under the registration rights agreement;
or
(v) the
shares
sold in that private placement may
not
be sold pursuant to Rule 144 under the Securities Act due to our failure
to
satisfy the adequate public information condition of Rule 144(c) under
the
Securities Act.
The
liquidated damages will be payable in an amount equal to the product of
one-thirtieth of (i) 0.5% multiplied by $4.00 for each day that such events
shall occur and be continuing during the first 90 days of such non-compliance,
and (ii) 1.0% multiplied by $4.00 for each day after the 90th
day of
such non-compliance for
each
share sold in the February 2008 private placement which is then held by
the
investors in that offering.
Risks
Related to Our Company, Structure and Change in Control
Provisions
Our
Co-Chief 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 our Co-Chief Executive Officers, David A. Akre
and Steven R. 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.
The
stock ownership limit imposed by our charter may inhibit market activity
in our
common stock and may restrict
our business combination opportunities.
In
order
for us to maintain our qualification as a REIT under the Internal Revenue
Code,
not more than 50% in value of the issued and outstanding shares of our
capital
stock may be owned, actually or constructively, by five or fewer individuals
(as
defined in the Internal Revenue Code to include certain entities) at any
time
during the last half of each taxable year (other than our first year as
a REIT).
Attribution rules in the Internal Revenue Code apply to determine if any
individual or entity actually or constructively owns our capital stock
for
purposes of this requirement. Additionally, at least 100 persons must
beneficially own our capital stock during at least 335 days of each taxable
year
(other than our first year as a REIT). To help ensure that we meet these
tests,
our charter restricts the acquisition and ownership of shares of our capital
stock. Our charter, with certain exceptions, authorizes our directors to
take
such actions as are necessary and desirable to preserve our qualification
as a
REIT and provides that, unless exempted by our board of directors, no person
may
own more than 9.9% in value of the outstanding shares of our capital stock.
Our
board of directors may grant an exemption from that ownership limit in
its sole
discretion, subject to such conditions, representations and undertakings
as it
may determine. This ownership limit could delay or prevent a transaction
or a
change in control of our company under circumstances that otherwise could
provide our stockholders with the opportunity to realize a premium over
the then
current market price for our common stock or would otherwise be in the
best
interests of our stockholders.
Certain
provisions of Maryland law and our charter and bylaws could hinder, delay
or
prevent a change in control which could have an adverse effect on the value
of
our securities.
Certain
provisions of Maryland law, our charter and our bylaws may have the effect
of
delaying, deferring or preventing transactions that involve an actual or
threatened change in control. These provisions include the following, among
others:
| · |
our
charter provides that, subject to the rights of one or more
classes or
series of preferred stock to elect one or more directors, a
director may
be removed with or without cause only by the affirmative vote
of holders
of at least two-thirds of all votes entitled to be cast by
our
stockholders generally in the election of
directors;
|
| · |
our
bylaws provide that only our board of directors shall have
the authority
to amend our bylaws;
|
| · |
under
our charter, our board of directors has authority to issue
preferred stock
from time to time, in one or more series and to establish the
terms,
preferences;
|
| · |
and
rights of any such series, all without the approval of our
stockholders;
|
| · |
the
Maryland Business Combination Act;
and
|
| · |
the
Maryland Control Share Acquisition
Act.
|
Although
our board of directors has adopted a resolution exempting us from application
of
the Maryland Business Combination Act and our bylaws provide that we are
not
subject to the Maryland Control Share Acquisition Act, our board of directors
may elect to make the “business combination” statute and “control share” statute
applicable to us at any time and may do so without stockholder
approval.
Maintenance
of our Investment Company Act exemption imposes limits on our
operations.
We
have
conducted and intend to continue to conduct our operations so as not to
become
regulated as an investment company under the Investment Company Act. We
believe
that there are a number of exemptions under the Investment Company Act
that are
applicable to us. To maintain the exemption, the assets that we acquire
are
limited by the provisions of the Investment Company Act and the rules and
regulations promulgated under the Investment Company Act. In addition,
we could,
among other things, be required either (a) to change the manner in which
we
conduct our operations to avoid being required to register as an investment
company or (b) to register as an investment company, either of which could
have
an adverse effect on our operations and the market price for our
securities.
Tax
Risks Related to Our Structure
Failure
to qualify as a REIT would adversely affect our operations and ability
to make
distributions.
We
have
operated and intend to continue to operate so to qualify as a REIT for
federal
income tax purposes. Our continued qualification as a REIT will depend
on our
ability to meet various requirements concerning, among other things, the
ownership of our outstanding stock, the nature of our assets, the sources
of our
income, and the amount of our distributions to our
stockholders.
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. 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.
REIT
distribution requirements could adversely affect our
liquidity.
In
order
to qualify as a REIT, we generally are required each year to distribute
to our
stockholders at least 90% of our REIT taxable income, excluding any net
capital
gain. To the extent that we distribute at least 90%, but less than 100%
of our
REIT taxable income, we will be subject to corporate income tax on our
undistributed REIT taxable income. In addition, we will be subject to a
4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by us with respect to any calendar year are less than the sum of (i)
85% of
our ordinary REIT income for that year, (ii) 95% of our REIT capital gain
net
income for that year, and (iii) 100% of our undistributed REIT taxable
income
from prior years.
We
have
made and intend to continue to make distributions to our stockholders to
comply
with the 90% distribution requirement and to avoid corporate income tax
and the
nondeductible excise tax. However, differences in timing between the recognition
of REIT taxable income and the actual receipt of cash could require us
to sell
assets or to borrow funds on a short-term basis to meet the 90% distribution
requirement and to avoid corporate income tax and the nondeductible excise
tax.
Certain
of our assets may generate substantial mismatches between REIT taxable
income
and available cash. Such assets could include mortgage-backed securities
we hold
that have been issued at a discount and require the accrual of taxable
income in
advance of the receipt of cash. As a result, our taxable income may exceed
our
cash available for distribution and the requirement to distribute a substantial
portion of our net taxable income could cause us to:
| · |
sell
assets in adverse market
conditions,
|
| · |
borrow
on unfavorable terms or
|
| · |
distribute
amounts that would otherwise be invested in future acquisitions,
capital
expenditures or repayment of debt in order to comply with the
REIT
distribution requirements.
|
Further,
amounts distributed will not be available to fund investment activities.
We
expect to fund our investments generally through borrowings from financial
institutions, along with securitization financings. If we fail to obtain
debt or
equity capital in the future, it could limit our ability to grow, which
could
have a material adverse effect on the value of our common
stock.
Dividends
payable by REITs do not qualify for the reduced tax rates on dividend income
from regular corporations.
The
maximum U.S. federal income tax rate for dividends payable to domestic
shareholders that are individuals, trust and estates is 15% (through 2008).
Dividends payable by REITs, however, are generally not eligible for the
reduced
rates. Although the reduced U.S. federal income tax rate applicable to
dividend
income from regular corporate dividends does not adversely affect the taxation
of REITs or dividends paid by REITs, the more favorable rate applicable
to
regular corporate dividends could cause investors who are individuals,
trusts
and estates to perceive investments in REITs to be relatively less attractive
than investments in the stocks of non-REIT corporations that pay dividends,
which could adversely affect the value of the shares of REITs, including
our
common shares.
None.
Other
than real estate owned, acquired through, or in lieu of, foreclosures on
mortgage loans, the Company does not own any properties. As of December 31,
2007, our principal executive and administrative offices are located in leased
space at 1301 Avenue of the Americas, 7th floor, New York, New York 10019.
On
November 13, 2006, the Company entered into an Assignment and Assumption of
Sublease and an Escrow Agreement, each with Lehman Brothers Holdings, Inc.
(“Lehman”). Under these agreements, the Company assigned and Lehman has assumed
the sublease for the Company’s corporate headquarters at 1301 Avenue of the
Americas. Pursuant to the agreements, Lehman has funded an escrow account for
the benefit of HC such that if the Company vacates the leased space before
February 1, 2008, the Company will receive $3.2 million. The escrow amount
shall
be reduced by $0.2 million for each month the Company remains in the leased
space beginning February 1, 2008. The entire remaining amount held in the escrow
account will be released to the Company when it vacates the leased space.
Pursuant to the provisions of the sale transaction with IndyMac, beginning
August 1, 2007, so long as IndyMac continues to occupy and use the leased space
at the Company’s corporate headquarters, IndyMac will pay rent equal to
Company’s cost, including any penalties and forgone bonuses resulting from the
delayed vacation of the leased premises. Until February 1, 2008, the Company’s
lease cost, including penalties and foregone bonuses, was
approximately $0.2 million per month. The
Company anticipates vacating the premises on or before June 1, 2008, and
accordingly, Indymac’s monthly payment starting on February 1, 2008 includes
both the monthly lease cost of approximately of $0.2 million as well as the
penalty assessment of $0.2 million. The Company intends to relocate its
corporate headquarters to a smaller facility at a location that is yet to be
determined.
The
Company is at times subject to various legal proceedings arising in the ordinary
course of business, other than as described below, 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, financial condition
or cash flows.
On
December 13, 2006, Steven B. Yang and Christopher
Daubiere ("Plaintiffs"), filed suit in the United States District Court for
the
Southern District of New York against HC and us, alleging that we failed to
pay
them, and similarly situated employees, overtime in violation of the Fair Labor
Standards Act ("FLSA") and New York State law. The Plaintiffs, each of
whom were former employees in our discontinued mortgage lending business,
purported to bring a FLSA "collective action" on behalf of similarly situated
loan officers in our now discontinued mortgage lending business and sought
unspecified amounts for alleged unpaid overtime wages, liquidated damages,
attorney's fee and costs.
On
December 30, 2007 we entered into an agreement in principle with the Plaintiffs
to settle this suit.
The
proposed settlement terms resulted in a charge of approximately $1.0
million in our 2007 fourth quarter. The terms of the settlement remain
subject to court approval. We anticipate closing of the settlement during
the first half of 2008.
None.
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
Our
common stock is traded
on
the OTCBB
under the trading symbol “NMTR”. The
OTCBB
is a regulated quotation service that displays real-time quotes, last-sale
prices, and volume information in over-the-counter (OTC) equity securities.
As
of
December 31, 2007, we had 3,640,209
shares
of common stock outstanding and as of March 1, 2008, there were 25 holders
of
record. This figure does not reflect the beneficial ownership of shares held
in
nominee name. The Company completed
a one
for five reverse stock split of common stock providing shareholders of
record as of October 9, 2007, with one share of common stock for every five
shares owned.
The
following table sets forth, for the periods indicated, the high, low and quarter
end closing sales prices per share of our common stock and the cash dividends
paid or payable per share of common stock. All stock prices reflect the one
for five reverse stock split described above. Data per
Bloomberg.
|
|
Common Stock Prices(1)
|
Cash Dividends
|
|||||||||||||||||
|
|
High
|
Low
|
Close
|
Declared
|
Paid or
Payable
|
Amount
per Share
|
|||||||||||||
|
Year
Ended December 31, 2007
|
|||||||||||||||||||
|
Fourth
quarter
|
$
|
5.00
|
$
|
3.01
|
$
|
4.30
|
omitted
|
||||||||||||
|
Third
quarter
|
9.63
|
1.55
|
4.20
|
omitted
|
|||||||||||||||
|
Second
quarter
|
14.80
|
8.85
|
9.55
|
omitted
|
|||||||||||||||
|
First
quarter
|
16.95
|
11.70
|
12.70
|
3/14/07
|
4/26/07
|
$
|
0.25
|
||||||||||||
|
Common Stock Prices(1)
|
Cash Dividends
|
||||||||||||||||||
|
High
|
Low
|
Close
|
Declared
|
Paid or
Payable
|
Amount
per Share
|
||||||||||||||
|
Year Ended December
31, 2006
|
|||||||||||||||||||
|
Fourth
quarter
|
$
|
20.25
|
$
|
13.00
|
$
|
15.25
|
12/18/06
|
1/26/07
|
$
|
0.25
|
|||||||||
|
Third
quarter
|
24.25
|
17.95
|
19.30
|
9/18/06
|
10/26/06
|
0.70
|
|||||||||||||
|
Second
quarter
|
27.80
|
19.00
|
20.00
|
6/15/06
|
7/26/06
|
0.70
|
|||||||||||||
|
First
quarter
|
34.40
|
20.75
|
27.00
|
3/6/06
|
4/26/06
|
0.70
|
|||||||||||||
| (1) | Commencing September 11, 2007, our common stock was delisted from the New York Stock Exchange and began reporting on the OTCBB. |
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.
Beginning in July 2007, our board of directors elected to suspend the payment
of
quarterly dividends on our common stock and, as of the date of this
report, has yet to reinstate a quarterly dividend. The board of
directors' decision reflected our focus on elimination of operating losses
through the sale of our mortgage lending business with a view to conserving
capital to build future earnings from our portfolio management operations.
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
2007, dividend distributions for the Company’s common stock were $.50 per
share (as adjusted for the reverse stock split). As of December 31,
2007, the Company’s common stock was listed under the CUSIP
#649604-20-44 and traded under the ticker symbol NMTR. For tax reporting
purposes, 2007 taxable dividend distributions will be classified as follows:
$0.00 as ordinary income and $0.50 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
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
12/18/06
|
1/5/07
|
1/26/07
|
$
|
0.25
|
$
|
0.00000
|
$
|
0.00000
|
$
|
0.00000
|
$
|
0.25
|
|
|||||||||
|
3/14/07
|
4/9/07
|
4/26/07
|
$
|
0.25
|
$
|
0.00000
|
$
|
0.00000
|
$
|
0.00000
|
$
|
0.25
|
|
|||||||||
|
Total
2007 Cash Distributions
|
$
|
0.50
|
$
|
0.00000
|
$
|
0.00000
|
$
|
0.00000
|
$
|
0.50
|
|
|||||||||||
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
The
Company currently has a share
repurchase program, which it previously announced in November 2005.
At
management’s discretion, the Company is authorized to repurchase shares of
Company common stock in the open market or through privately negotiated
transactions through December 31, 2015. The plan may be temporarily or
permanently suspended or discontinued at any time. The Company has not
repurchased any shares since March 2006.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth information as of December 31, 2007 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
|
-
|
$
|
-
|
271,887
|
||||||
Performance
Graph
The
following line graph sets forth, for the period from
June 23, 2004 through December 31, 2007, a comparison of the percentage change
in the cumulative total stockholder return on the Company's common stock
compared to the cumulative total return of the NYSE Composite Index and the
National Association of Real Estate Investment Trusts ("NAREIT") Mortgage REIT
Index. The graph assumes that the shares of the Company's common stock were
bought at the price of $100 per share and that the value of the investment
in
each of the Company's common stock and the indices was $100 at the beginning
of
the period.
The
foregoing graph and chart shall not be deemed incorporated by reference by
any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934, except to the extent we specifically incorporate this
information by reference, and shall not otherwise be deemed filed under those
acts.
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.
In
connection with the sale of the Company's wholesale mortgage origination
platform assets on February 22, 2007 and the sale of its retail mortgage
origination platform assets on March 31, 2007, we are required to classify
our
mortgage lending business as a discontinued operation in accordance with
Statement of Financial Accounting Standards No. 144 (see note 9 in the
notes to our consolidated financial statements). In connection with this
reclassification, we have presented selected financial data below in two
different formats. Table 1 and Table 2 provide summary level data for the
continuing and discontinued business operations of our company (after giving
effect to the reclassification of the mortgage lending business).
The
selected financial data as of and for the years ended December 31, 2007,
December 31, 2006 and December 31, 2005, include 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 HC for the year-to-date period
beginning January 1, 2004. Prior to our IPO, NYMT had no operations and, as
a
result, for the year 2003, the financial data presented is for HC
only.
Table
1:
|
|
As
of and
For the Year Ended December 31,
|
|||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
|
(Dollar amounts in thousands, except per share data)
|
|||||||||||||||
|
Operating
Data:
|
||||||||||||||||
|
Net
interest income
|
$
|
477
|
$
|
4,784
|
$
|
12,873
|
$
|
7,924
|
$
|
—
|
||||||
|
(Loss)
income from continuing operations
|
(20,790
|
)
|
2,166
|
3,322
|
6,899
|
—
|
||||||||||
|
(Loss)
income from discontinued operation-net of tax
|
(34,478
|
)
|
(17,197
|
)
|
(8,662
|
)
|
(1,952
|
)
|
13,726
|
|||||||
|
Net
(loss)/income
|
(55,268
|
)
|
(15,031
|
)
|
(5,340
|
)
|
4,947
|
13,726
|
||||||||
|
Basic
(loss) income per share
|
(15.23
|
)
|
(4.17
|
)
|
(1.49
|
)
|
1.40
|
—
|
||||||||
| Balance Sheet Data: | ||||||||||||||||
|
Total
assets continuing operations
|
800,385
|
1,110,103
|
1,542,422
|
1,413,729
|
—
|
|||||||||||
|
Total
assets discontinued operation
|
8,876
|
212,805
|
248,871
|
201,034
|
110,081
|
|||||||||||
|
Total
liabilities continuing operations
|
785,010
|
1,063,631
|
1,458,410
|
1,306,185
|
—
|
|||||||||||
|
Total
liabilities discontinued operation
|
$
|
5,833
|
$
|
187,705
|
$
|
231,925
|
$
|
189,095
|
$
|
110,555
|
||||||
Table
2:
|
|
As
of and For the Year Ended December 31,
|
|||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
|
(Dollar
amounts in thousands, except per share data)
|
|||||||||||||||
|
Operating
Data:
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Interest
income
|
$
|
50,564
|
$
|
64,881
|
$
|
62,725
|
$
|
20,394
|
$
|
—
|
||||||
|
Interest
expense
|
50,087
|
60,097
|
49,852
|
12,470
|
—
|
|||||||||||
|
Net
Interest Income
|
477
|
4,784
|
12,873
|
7,924
|
—
|
|||||||||||
|
|
||||||||||||||||
|
Loan
losses
|
(1,683
|
)
|
(57
|
)
|
—
|
—
|
—
|
|||||||||
|
(Loss)
gain on sale of securities and related hedges
|
(16,830
|
)
|
(529
|
)
|
2,207
|
167
|
—
|
|||||||||
|
Impairment
loss on investment securities
|
—
|
—
|
(7,440
|
)
|
—
|
—
|
||||||||||
|
Total
other income
|
(18,513
|
)
|
(586
|
)
|
(5,233
|
)
|
167
|
—
|
||||||||
|
Expenses:
|
||||||||||||||||
|
Salaries
and benefits
|
865
|
714
|
1,934
|
382
|
—
|
|||||||||||
|
General
and administrative expenses
|
1,889
|
1,318
|
2,384
|
810
|
—
|
|||||||||||
|
Total
expenses
|
2,754
|
2,032
|
4,318
|
1,192
|
—
|
|||||||||||
|
(Loss)
income before income tax benefit
|
(20,790
|
)
|
2,166
|
3,322
|
6,899
|
—
|
||||||||||
|
(Loss)
income discontinued operation – net of tax
|
(34,478
|
)
|
(17,197
|
)
|
(8,662
|
)
|
(1,952
|
)
|
13,726
|
|||||||
|
Net
(loss) income
|
$
|
(55,268
|
)
|
$
|
(15,031
|
)
|
$
|
(5,340
|
)
|
$
|
4,947
|
$
|
13,726
|
|||
|
Basic
(loss) income per share
|
$
|
(15.23
|
)
|
$
|
(4.17
|
)
|
$
|
(1.49
|
)
|
$
|
1.40
|
$
|
—
|
|||
|
Diluted
(loss) income per share
|
$
|
(15.23
|
)
|
$
|
(4.17
|
)
|
$
|
(1.49
|
)
|
$
|
1.35
|
$
|
—
|
|||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
5,508
|
$
|
969
|
$
|
9,056
|
$
|
7,613
|
$
|
—
|
||||||
|
Investment
securities available for sale
|
350,484
|
488,962
|
716,482
|
1,204,745
|
—
|
|||||||||||
|
Mortgage
loans held in securitization trusts or held for investment
|
430,715
|
588,160
|
780,670
|
190,153
|
—
|
|||||||||||
|
Assets
related to discontinued operation
|
8,876
|
212,805
|
248,871
|
201,034
|
110,081
|
|||||||||||
|
Total
assets
|
809,261
|
1,322,908
|
1,791,293
|
1,614,762
|
110,081
|
|||||||||||
|
Financing
arrangements
|
315,714
|
815,313
|
1,166,499
|
1,115,809
|
—
|
|||||||||||
|
Collateralized
debt obligations
|
417,027
|
197,447
|
228,226
|
—
|
—
|
|||||||||||
|
Subordinated
debentures
|
45,000
|
45,000
|
45,000
|
—
|
—
|
|||||||||||
|
Liabilities
related to discontinued operation
|
5,833
|
187,705
|
231,925
|
189,095 |
110,555
|
|||||||||||
|
Total
liabilities
|
790,843
|
1,251,336
|
1,690,335
|
1,495,280
|
110,555
|
|||||||||||
|
Equity/(deficit)
|
$
|
18,418
|
$
|
71,572
|
$
|
100,958
|
$
|
119,482
|
$
|
(474
|
)
|
|||||
|
Investment
Portfolio Data:
|
||||||||||||||||
|
Average
yield on investment portfolio
|
5.56 |
%
|
5.10
|
%
|
4.05
|
%
|
3.90
|
%
|
—
|
|||||||
|
Net
duration of interest earning assets to liabilities
|
0.12 | yrs |
0.52
|
yrs |
0.91
|
yrs |
0.42
|
yrs |
—
|
|||||||
|
Operational/Performance
Data:
|
||||||||||||||||
|
Number
of employees at period end
|
8
|
616
|
802
|
782
|
335
|
|||||||||||
|
Dividends
declared per common share
|
$
|
0.25
|
$
|
2.35
|
$
|
4.60
|
$
|
2.00
|
$
|
—
|
||||||
General
New
York
Mortgage Trust, Inc. (“NYMT,” the “Company,” “we,” “our” and “us”) is a
self-advised real estate investment trust (“REIT”) in the business of
investing in residential adjustable rate mortgage-backed securities issed by
a
United States government-sponsored enterprise ("GSE"), such as the Federal
National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage
Corporation, or Freddie Mac, prime credit quality residential adjustable-rate
mortgage ("ARM") loans, or prime ARM loans, and non-agency mortgage-backed
securities. We refer to residential adjustable rate mortgage-backed
securities throughout this Annual Report on Form 10-K as "MBS" and MBS issued
by
a GSE as "Agency MBS". Our MBS securities are principally issued by either
Fannie Mae and Freddie Mac, (collectively, the "Agencies").
On
March
31, 2007 the Company sold the majority of the assets related to the
mortgage lending business of its wholly-owned taxable REIT subsidiary (“TRS”),
Hypotheca Capital, LLC (“HC”), formerly known as The New York Mortgage Company,
LLC. Since March 31, 2007, we have exclusively focused our resources and efforts
on investing, on a leveraged basis, in MBS.
HC
was a
residential mortgage banking company that primarily originated a wide range
of
residential mortgage loans on a retail basis, with a focus on prime residential
first lien loans, and to a lesser extent, residential mortgage loans on a
wholesale basis.
Recent
Events
Recent
Market Volatility
Recently,
the residential mortgage market in the United States has experienced a
variety
of difficulties and changed economic conditions, including recent defaults,
credit losses and liquidity concerns. During March 2008, news of potential
and
actual security liquidations has increased the price volatility and liquidity
of
many financial assets, including Agency MBS and other high-quality mortgage
securities and loans. As a result, market values and available liquidity
to
finance mortgage securities, including some of our Agency MBS and AAA-rated
non-Agency MBS, have been negatively impacted. As a response to these changed
conditions, which have impacted a relatively broad range of leveraged public
and
private companies with investment and financing strategies similar to ours,
the
Company undertook a number of strategic actions to reduce leverage and
raise
liquidity in the portfolio of Agency MBS. Since March 7, 2008, the Company
sold,
in aggregate, approximately $598.9 million of Agency MBS that comprised
$516.4
million of Agency hybrid ARM MBS and $82.5 million of Agency CMO floating
rate
MBS. These sales resulted in a loss of $15.4 million. Additionally, as
a result
of these sales of MBS, we terminated associated interest rate swaps that
were
used to hedge our liability costs with a notional balance of $297.7 million
at a
cost of $2.0 million. After the sales of MBS, on March 31, 2008, our Agency
MBS
portfolio totaled approximately $507.0 million that comprised of $259.6
million
of Agency hybrid ARM MBS, $216.3 million of Agency CMO floating rate MBS
and
$31.1 million of AAA-rated non-Agency MBS. As of March 31, 2008, in aggregate,
our Agency MBS portfolio was financed with approximately $431.7 million
of
reverse repurchase agreement borrowings (referred to as “repo” borrowings) with
an average advance rate of 91% that implies an average haircut of 9% for
the
entire portfolio. Within our total portfolio, our Agency hybrid ARM MBS
is
financed with $230.2 million of repo funding equating to an advance rate
of 93%
that implies a haircut of 7% and our Agency CMO floating rate MBS is financed
with $180.7 million of repo funding equating to an advance rate of 88%
that
implies a haircut of 12%. The Company also owns approximately $401.4 million
of
adjustable rate mortgages that were deemed to be of “prime” or high quality at
the time of origination. These loans are permanently financed with approximately
$388.3 million of collateralized debt obligations and are held in securitization
trusts.
We
generally finance our portfolio of Agency MBS and non-Agency MBS through
repurchase agreements. As a result of recent market disruptions that included
company or hedge fund failures and securities portfolio foreclosures by
repo
lenders, among other events, securities repo lenders have tightened their
lending standards and have done so in a manner that now distinguishes between
“type” of Agency MBS. For example, during the month of March 2008, lenders
generally increased haircuts on Agency Hybrid ARMs from 3% to 7% and also
increased haircuts on Agency floating rate CMO MBS from 5% to a range of
10% to
30% largely dependent upon cash flow structure. Given the volatility in
haircuts
in Agency floating rate CMO MBS, in March 2008 we sold approximately $82.5
million of Agency floating rate CMO MBS at a loss of $4.7 million rather
than
meet the significant increase in required haircuts. While we believe we
have
sold those Agency floating rate CMO MBS that have recently been subject
to the
greatest increase in haircuts, we cannot guarantee that the haircuts on
our
remaining Agency floating rate CMO MBS will not increase from their current
haircut average of 12% and that a material increase in haircuts on these
securities (or our Agency hybrid ARM MBS) would likely result in further
securities sales that would likely negatively affect our profitability,
liquidity and the results of operations.
Company
Completes Two Private Stock
Offerings in 2008
On
February 21, 2008, the Company completed the issuance and sale of 15.0 million
shares of its common stock to certain accredited investors (as such term is
defined in Rule 501 of Regulation D of the Securities Act of 1933, as amended,
or Securities Act) at a price of $4.00 per share. This private offering of
the Company's common stock generated net proceeds to the Company of
approximately $57.0 million after payment of private placement fees, but before
expenses. Pursuant to a registration rights agreement between the Company
and the investors in this private offering, the Company is required to pay
liquidated damages upon the occurrence of certain events, including, among
other
things, the Company's failure to file a registration statement covering all
of
the shares before the filing deadline. The liquidated damages are payable
in an amount equal to the product of one-thirtieth of (i) 0.5% multiplied by
$4.00 for each day that such events shall occur and be continuing during the
first 90 days of such non-compliance, and (ii) 1.0% multiplied by $4.00 for
each
day after the 90th day of such non-compliance for each share then held by the
investors in the private offering.
On
January 18, 2008, the Company issued 1.0 million
shares of its Series A Cumulative Redeemable Convertible Preferred Stock, which
we refer to as our Series A Preferred Shares, to JMP Group Inc. and certain
of
its affiliates for an aggregate purchase price of $20.0 million. The Series
A
Preferred Shares entitle the holders to receive a cumulative dividend of 10%
per
year, subject to an increase to the extent any future quarterly common stock
dividends exceed $0.10 per share. The Series A Preferred Shares mature on
December 31, 2010, and are convertible into shares of the Company's common
stock
based on a conversion price of $4.00 per share of common stock, which represents
a conversion rate of five shares of common stock for each Series A Preferred
Share. At their option, the holders may purchase up to an additional $20.0
million of Series A Preferred Shares, on identical terms, through April 4,
2008. As set forth above in Item 1, pursuant to a registration rights
agreement between the Company and the investors in this private offering, in
the
event the Company fails to file a resale registration statement with the SEC
on
or before June 30, 2008, holders of our Series A Preferred Shares may be
entitled to receive an additional cash dividend at the rate of $0.10 per quarter
per share for each calendar quarter after June 30, 2008 until we file such
resale registration statement.
The
net
proceeds from both of these private offerings were used to purchase an aggregate
of approximately $712.4 million of Agency hybrid MBS. These acquisitions were
financed in part with repurchase agreements and hedged with interest rate swaps.
See note 1 in the notes of our consolidated financial statements.
Concurrent
with the issuance of the Series A Preferred
Shares, the Company and two of its wholly-owned subsidiaries entered into an
advisory agreement with JMPAM, pursuant to which JMPAM advises HC and New York
Mortgage Funding, LLC regarding the acquisition and management of certain
mortgage-related investment assets, as well as any additional subsidiaries
acquired or formed in the future to hold investments made on the Company's
behalf by JMPAM (collectively, the "Managed Subsidiaries"). Pursuant to the
advisory agreement, JMPAM will
receive a
base
advisory fee in an amount equal the equity of the Managed Subsidiaries
multiplied by 1.50%. Equity is defined to mean the greater of (i) the net asset
value of the investments of the Subsidiaries, excluding investments made prior
to the date of the advisory agreement and certain other assets, or (ii) the
sum
of $20.0 million plus 50% of the net proceeds to the Company or its
subsidiaries of any offering of common or preferred stock completed by the
Company during the term of the advisory agreement. JMPAM is also eligible to
earn incentive compensation for performance in excess of certain
benchmarks. Because the Company presently intends to focus its investment
efforts on the acquisition of Agency MBS, the Company's board of directors
has
not authorized, and will not authorize, JMPAM to commence the acquisition of
alternative mortgage related investment assets until the risk adjusted returns
and financing environment for such assets warrant the investment of capital
in
such manner. As of March 1, 2008, JMPAM was not managing any assets in the
Managed Subsidiaries, but was earning a base advisory fee on the net proceeds
to
the Company from these private offerings.
Significant
Developments in 2007
Sale
of Mortgage Lending Business and Change
in Our Business Strategy
In
connection with the Company's exploration of
strategic alternatives and the significant operating and financial challenges
facing the mortgage origination business, the Company completed two separate
strategic transactions during the first quarter of 2007 that resulted in its
exit from the mortgage lending business. On February 22, 2007, the
Company completed the sale of the operating assets of its wholesale lending
business to Tribeca Lending Corp., or Tribeca Lending, a subsidiary of Franklin
Credit Management Corporation, for an estimated purchase price of $485,000.
Shortly thereafter, on March 31, 2007, the Company completed the sale of
substantially all of the operating assets related to the retail mortgage lending
platform of HC to Indymac Bank, F.S.B., ("Indymac"), for a purchase price
of approximately $13.5 million in cash and the assumption of certain of our
liabilities. Pursuant to this transaction, Indymac purchased substantially
all of the operating assets related to HC's retail mortgage lending
platform, including, among other things, leases held by HC for
approximately 30 retail mortgage lending offices (excluding our corporate
headquarters). In addition, Indymac assumed the obligations of HC under
HC's pipeline loans and substantially all of HC's liabilities arising after
March 31, 2007 under the contracts and assets purchased by Indymac in the
transaction. Indymac also agreed to pay (i) the first $500,000 in
severance expenses with respect to "transferred employees" (as defined in the
asset purchase agreement for this transaction) and (ii) severance expenses
in excess of $1.1 million arising after the closing with respect to transferred
employees. Under the terms of this transaction with Indymac, approximately
$2.3 million was placed in escrow to support warranties and indemnifications
provided to Indymac by HC as well as other purchase price
adjustments. As of January 28, 2008, approximately $970,000 has been
paid to Indymac and approximately $469,000 has been released to us from the
escrow account. We expect to pay Indymac an additional approximately $150,000
out of the escrow account, with the remaining approximately $750,000 to
be released to us from escrow by not later than September
30, 2008. Indymac hired substantially all of our brance employees and
loan officers and a majority of HC employees based out of our corporate
headquarters.
Note
Regarding Discontinued Operation
In
connection with the sale of our wholesale mortgage lending platform assets
on February 22, 2007 and the sale of our retail mortgage lending platform assets
to Indymac on March 31, 2007, during the fourth quarter of 2006, we classified
our mortgage lending business as a discontinued operation in accordance with
the
provisions of SFAS No. 144. As a result, we have reported revenues and
expenses related to the mortgage lending business as a discontinued operation
and the related assets and liabilities as assets and liabilities related to
a
discontinued operation for all periods presented in the accompanying
consolidated financial statements. Certain assets, such as the deferred tax
asset, and certain liabilities, such as subordinated debt and liabilities
related to leased facilities not assigned to Indymac will become part of the
ongoing operations of NYMT and accordingly, we have not classified as
a discontinued operation in accordance with the provisions of SFAS
No. 144. See Note 9 in the notes to our consolidated financial
statements.
Strategic
Overview
We
earn
net interest income from purchased Agency MBS, prime ARM loans held in
securitization trust and non-agency MBS. We have acquired and over time 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 financing, the affects of prepayments
on the asset returns, and managing and reserving for these investments. We
intend to focus our efforts on managing our existing portfolio
and on the acquisition of Agency MBS.
As
of
December 31, 2007, our investment portfolio was comprised of approximately
$350.5 million in MBS, including $318.7 of Agency MBS, approximately $31.8
million of non-Agency MBS of which $30.6 million are rated in the highest
category by two rating agencies and $430.7 million of prime ARM loans held
in
securitization trusts.
Funding
Diversification.
We
strive to maintain and achieve a balanced and diverse funding mix to finance
our
investment portfolio. We rely primarily on repurchase agreements in order to
finance our investment portfolio of MBS and on collateralized debt obligations
(“CDO”) to finance our loans held in securitization trusts.
During
2005 we issued $45 million of trust preferred securities classified as
subordinated debentures that remain outstanding as of December 31,
2007.
Risk
Management.
As a
manager of MBS and mortgage loan investments, we attempt to mitigate key risks
inherent in these businesses, principally interest rate risk, prepayment risk,
and credit risk, while maintaining positive earnings.
Interest
Rate Risk Management.
A
primary risk to our investment portfolio of MBS and mortgage loans is interest
rate risk. We use hedging instruments to extend the maturities of, or cap the
interest rates on, our short-term repurchase agreement obligations, CDOs and
other financing arrangements. We hedge our financing costs in an attempt to
maintain a net duration gap of less than one year; as of December 31, 2007,
our
net duration gap was approximately three months.
As
we
acquire mortgage-backed securities, we seek to hedge interest rate risk in
order
to stabilize net asset values and earnings. To accomplish this, we use hedging
instruments in conjunction with our borrowings to approximate the re-pricing
characteristics of our ARM assets. The Company utilizes a model based
risk analysis system to assist in projecting portfolio performances over a
variety of different interest rates and market stresses. The model incorporates
shifts in interest rates, changes in prepayments and other factors impacting
the
valuations of our financial securities, including MBS, repurchase agreements,
interest rate swaps and interest rate caps. However, given the prepayment
uncertainties of 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 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
in
Item 7A. “Quantitative And Qualitative Disclosures About Market Risk - Interest
Rate Risk” section of this report.
Prepayment
Risk Management. Prepayment
risk, which is the risk that some or all of our investment portfolio assets
may
prepay prior to their maturities, is another important risk that we seek to
manage. Historically, prepayment risk has been most influenced by borrowers
that refinance their current mortgage loans in an attempt to reduce their
monthly mortgage payment. Because we use hedging instruments to extend the
maturities of our short-term repurchase agreement obligations, prepayments
that
exceed our modeled assumptions could deteriorate our portfolio margin as higher
yielding assets would be the most likely to refinance and prepay. In an attempt
to mitigate prepayment risk, we seek to limit the premium we pay for MBS assets
to approximately 102% of current balance, and look to purchase MBS securities
that exhibit characteristics that we feel will reduce their likelihood to
prepay. We believe the following Agency MBS characteristics can help mitigate
prepayment risk: low average loan size, high average loan-to-value ratios,
low
average borrower credit score, and high percentage of loans from underperforming
real estate markets.
Liquidity
Risk. Liquidity
is a measure of our ability to meet potential cash requirements, including
ongoing commitments to repay borrowings, fund and maintain investments, pay
dividends to our stockholders and other general business needs. We recognize
the
need to have funds available to operate our business. It is our policy to have
adequate liquidity at all times. We plan to meet liquidity through normal
operations with the goal of avoiding unplanned sales of assets or emergency
borrowing of funds.
Investment
Portfolio Credit Quality. We
retain
in securitization trusts high-quality prime ARM loans that we originated or
acquired from third parties. These loans are permanently financed with the
issuance of collateralized debt obligations (“CDO”). Despite the financing of
these loans, we retain the risk of credit losses for loans that default, up
to
the amount of equity we have invested in these securitizations, which
is approximately $13.7 million. Since we began our mortgage
portfolio investment operations in June 2004, we have incurred
approximately $85,000 of credit losses. As of December 31, 2007, approximately
2.04% of loans in securitization trusts are 60 days or more delinquent and
approximately $4.1 million of loans have gone through the foreclosure process,
resulting in real estate owned (“REO”).
The
weighted average seasoning of loans in our investment portfolio of mortgage
loans was approximately 30 months at December 31, 2007. Delinquencies for prime
loans typically peak in the fourth to sixth year. Losses that may result from
loans that become delinquent will normally lag the initial delinquency
event by six to twenty four months due, in part, to the fact that the
foreclosure process in many states, involves a relatively high degree of
consumer protection.
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:
|
·
|
the
overall leverage of our portfolio and the ability to obtain financing
to
leverage our equity;
|
|
·
|
a
prolonged economic slow down, a recession or declining real estate
values
could cause increased credit losses;
|
|
·
|
a decline in the market value of our portfolio assets due to changes in interest rates; |
|
·
|
increasing
or decreasing levels of prepayments on the mortgages underlying our
mortgage-backed securities;
|
|
·
|
the concentration of our mortgage loans held in securitization trusts in specific geographic regions; |
|
·
|
the
possibility that our assets are insufficient to meet the collateral
requirements of our lenders forcing us to liquidate those assets
at
inopportune times and at disadvantageous
prices;
|
|
·
|
if
we are disqualified as a REIT, we will be subject to taxation as
a regular corporation and would face substantial tax liability; and
compliance with REIT requirements might cause us to forgo otherwise
attractive opportunities.
|
|
·
|
a quick increase or decrease in interest rates due to an unforeseen, or exogenous event. |
Financial
Overview
Revenues.
Our
primary source of income is net interest income on our portfolio of mortgage
assets. Net interest income is the difference between interest income, which
is
the income that we earn on our MBS and loans in securitization trusts and
interest expense, which is the interest we pay on borrowings and subordinated
debt. Prior to our exit from the mortgage lending business, net interest
income was also earned on the majority of loan originations by HC for the period
of time commencing upon the closing of a loan and ending upon the
sale of such loan to a third party.
Other
Income (Expense).
Loan
losses include reserves for, or actual costs incurred with respect
to, the disposition of non-performing or early payment default loans we
have originated or purchased from third parties or from losses incurred on
non-performing loans held in securitization trusts.
Prior
to
our exit from the mortgage lending business, other sources of other income
(expense) included fees received by HC 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, occupancy and equipment expenses, and other
general and administrative expenses. Salary and employee benefits consist
primarily of the salaries and wages paid to our employees, payroll taxes and
expenses for health insurance, retirement plans and other employee benefits.
Occupancy and equipment expenses, furniture and equipment expenses,
maintenance, real estate taxes and other associated costs of occupancy. 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.
Prior
to
our exit from the mortgage lending business, expenses also included brokered
loan expenses, loan loss reserves, marketing, and variable expense. Brokered
loan expenses primarily involved direct commissions and other costs
associated with brokered loans when such loans were closed with the borrower.
Marketing and promotion expenses included the cost of print, radio and internet
advertisements, promotions, third-party marketing services, public relations
and
sponsorships. Variable expenses included commissions on loan originations and
certain office supplies, promotions and other miscellaneous
expenses.
Loss
from discontinued operation:
Loss
from discontinued operation includes all revenues and expenses related to our
discontinued mortgage lending business excluding those costs that will be
retained by us, which are primarily expenses related to rent expense for
leased locations not assigned as part of the disposition of our mortgage
lending business and certain allocated payroll expenses for employees remaining
with us.
Description
of Business
Mortgage
Portfolio Management
Our
business plan consists of investing in and managing a portfolio of MBS and
prime ARM loans and, to a lesser extent, non-Agency MBS. Our mortgage
portfolio currently generates all or our current earnings. In managing our
portfolio of mortgage assets we:
|
·
|
invest
in high-credit quality Agency MBS and non-Agency MBS, including ARM
securities, collateralized mortgage obligation floaters (“CMO Floaters”),
and high-credit quality mortgage loans;
|
|
·
|
generally
operate as a long-term portfolio
investor;
|
|
·
|
finance
our portfolio by entering into repurchase agreements or issuing CDOs
relating to our loan securitizations;
and
|
|
·
|
generate
earnings from the return on our mortgage securities and spread income
from
our mortgage loan portfolio.
|
We
will
in the future focus on the acquisition of Agency MBS, 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 obtaining, financing and managing for these
investments.
We
entered into an advisory agreement with JMPAM pursuant to which JMPAM will
advise the Managed Subsidiaries and is expected, at some point in the future,
to
implement an alternative mortgage related investment strategy for the Managed
Subsidiaries. Although we currently have no plans to acquire alternative
mortgage related investments to be held in the Managed Subsidiaries, we do
expect that JMPAM will, in the future, as an advisor to the Managed
Subsidiaries, focus on the acquisition of alternative mortgage investments
on behalf of the Managed Subsidiaries that will allow us to utilize a portion
of
the net operating loss carry-forward to the extent available by law. This
strategy, if and when implemented, will vary from our core strategy. We can
make
no assurance that we or JMPAM will be successful at implementing any alternative
investment strategy.
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 Agency MBS and ARM loans in our portfolio are hybrid
ARM securities or loans that have fixed rates of interest for a period of time
ranging from two to five years. Our funding costs are variable and the
maturities are short term in nature. As a result, we use derivative instruments
(interest rate swaps and interest rate caps) to mitigate 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, 2007, our investment portfolio was comprised of approximately
$350.5 million in MBS, including $318.7 of Agency MBS, approximately $31.8
million of non-Agency MBS of which $30.6 million are rated in the highest
category by two rating agencies and $430.7 million of prime ARM loans held
in
securitization trusts.
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.
During
March 2008, news of potential security liquidations significantly increased
the
volatility of many financial assets, including those held in our
portfolio. Specifically, the liquidation of several large
financial institutions in early March 2008 caused a significant decline in
the fair market value of the CMO Floaters held in our portfolio. The
CMO Floaters in our portfolio are pledged as collateral for borrowings under
our
repurchase agreements. As a result of the significant decline in the fair
market value of our CMO Floaters, as determined by the lenders under our
repurchase agreements, the haircut required by our lenders to obtain new
or
additional financing on these securities experienced a significant
increase. As a result of the combination of lower fair market values on our
CMO Floaters and rising haircut requirements to finance those securities,
we
elected to improve our liquidity position by selling approximately $82.5
million of CMO Floaters from our portfolio in March 2008. Given the
continued volatility in the mortgage securities market, we determined that
we
may not be able to hold the CMO Floaters or other MBS securities in our
portfolio for the foreseeable future because we may sell them to satisfy
margin calls from our lenders or to otherwise manage our liquidity
position. Therefore, we have determined that losses on our entire MBS
securities portfolio were considered to be other than temporary impairments
as of December 31, 2007 and have taken a $8.5 million impairment charge in
the fourth quarter of 2007 as a result.
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.
Mortgage
Lending (Discontinued Operation)
Until
March 31, 2007, our discontinued mortgage lending operation contributed to
our
then current period financial results. Subsequent to March 31, 2007, our
discontinued mortgage lending operation has impacted our financial results
due
to liabilities remaining after the sale of the operation’s assets. As of
December 31, 2007 discontinued operations consist of $8.9 in assets and $5.8
in
liabilities down from $212.8 million in assets and $187.7 million in liabilities
as of December 31, 2006.
We
originated a wide range of mortgage loan products including prime,
alternative-A, and to a lesser extent sub-prime loans, home equity lines of
credit, second mortgages, and bridge loans. During 2005 and the first quarter
of
2006 we aggregated certain high-quality, shorter-term ARM loans in order to
hold
such loans on a long term basis in our investment portfolio. For the years
ended
December 31, 2007 and 2006, we originated $0.4 billion and $2.5 billion in
mortgage loans, respectively. We recognized gains on sale of mortgage loans
totaling $2.5 million and $18.0 million for the years ended December 31, 2007
and 2006, respectively.
Our
wholesale lending strategy had been a small component of our loan lending
operations. On February 22, 2007, we sold substantially all of the assets
of our wholesale operations to Tribeca Lending.
Known
Material Trends and Commentary Regarding Fiscal Year 2007
Declines
in the prices of mortgage assets.
Investors’ appetite for U.S. mortgage assets decreased globally in 2007. Higher
delinquencies, resulted in numerous credit rating downgrades on non-Agency
MBS
collateralized by residential mortgage loans, principally loans that were
originated in 2006 and 2007. Non-Agency MBS lack the direct backing of
Government Sponsored Enterprises (“GSE”), principally Fannie Mae and Freddie
Mac, and are subject to changes in their credit ratings. As a result of both
the
higher delinquencies and downgrades, many institutional holders of mortgage
assets sold their holdings of MBS, principally non-Agency holdings. This
selling, along with decreased demand for these assets among investors, caused
mortgage asset prices to decline.
Increased
prepayment rates. Prepayment
rates generally increase when interest rates fall and decrease when interest
rates rise; however, changes in prepayment rates are difficult to accurately
predict. When interest rates fall, RMBS prepayment rates rise, which can
impact
our net income. We seek to mitigate this risk by purchasing a mix of assets
with
both a premium and discount price.
Tightening
in the financing markets and reduced liquidity.
As
prices of mortgage assets decreased, many lenders that finance mortgage assets
began to take measures to insure their liquidity needs would not be compromised.
Principally, many financial institutions began to withdraw financing and
liquidity that they typically offered clients as part of their daily business
operations. The most common forms of liquidity provided to the mortgage market
are in the form of repurchase agreements for MBS, and warehouse lines for
lenders. This reduced availability of financing led to numerous failures
on the
part of mortgage lenders, specialty finance companies, hedge funds, and a
small
number of non-U.S. banks. Forced liquidations due to failure or financial
stress
have exacerbated the problem.
Despite
these liquidity concerns in the market, we were able to finance our Agency
MBS
with repurchase agreements throughout 2007. Decreased loan amounts relative
the
value of the securities, also known as an increase in “haircut”, were seen in
the second half of 2007. We were able to meet all increased haircuts on the
MBS
we financed. Generally, haircuts on our Agency MBS increased from 3% to 5%,
and
market values attributed to our Agency MBS by repurchase agreement
counterparties decreased by approximately 2% to 3%. As with increases in
haircuts, decreases in market value reduce the amount we are able to borrow
against our assets.
Volatility
in financing costs.
The
dislocations in the mortgage market led to increased volatility in the cost
of
financing. The relationships between certain short-term interest rates, normally
very consistent, became less so in the second half of 2007. The Federal Funds
rate, an interest rate used by banks for overnight loans to each other and
determined by the Federal Reserve Board, is a benchmark used by others to
determine similar short term rates. The London Inter Bank Offered Rate
(“LIBOR”), a market determined rate for short term loans, normally 0.10% higher
than the Federal Funds rate, averaged well above that for most of the second
half of 2007. As our repurchase agreements have rates determined by one month
LIBOR, our costs of financing increased on a relative basis, in the second
half
of 2007. The Federal Funds rate averaged 40 basis points lower in the second
half of the 2007 as compared to the first half of 2007, LIBOR only experienced
a
14 basis point decline. The Company’s funding is generally determined by a
spread to the LIBOR interest rate.
Hedging.
We
generally seek to reduce the volatility of our net income by entering into
interest rate swap agreements. As of December 31, 2007, we had entered into
interest rate swap agreements with an aggregate notional amount of $220 million.
Although we believe this hedging strategy will be effective under normal
interest rate environments and over longer periods, the unprecedented market
environment described above during the second half of 2007 caused this strategy
to be less effective than expectations. Typically interest rate swaps are
used
to offset price declines in our investment portfolio, however, over the second
half of the year the interest rate swaps and investment portfolio experienced
price declines resulting in a larger than expected increase in the Other
Comprehensive Loss component of our equity. The Company discontinued hedge
accounting treatment for the interest rate swap positions during the forth
quarter of 2007 as part of strategic portfolio realignment related to the
JMP
capital investment in the Company. (See note 18) Accordingly, the unrealized
loss was recorded as an unrealized loss in the Statement of Operations and
no
longer reflected as part of other comprehensive income in the Balance Sheet.
Changes
in the U.S. economy.
Changes
in the U.S. economy also affected us. The U.S. economy in the second half
of
2007 began to show signs of slowing. Adverse trends in the housing market
and
increased stress on borrowers, including in particular, residential mortgage
borrowers, has had a ripple effect throughout the U.S. economy. The Federal
Reserve began to reduce short term interest rates in September of 2007.
Recently, increased concern regarding inflation has arisen principally due
to
increases in commodity prices globally. The concern with inflation kept longer
term interest rates high relative to short term rates. This so called steep
yield curve generally results in increased returns on equity for companies
that
employ our Agency MBS strategy. The possibility of an increase in inflation
however increases the possibility of interest rates moving higher.
Loan
repurchase requests.
Higher
delinquency rates, as noted earlier, were due primarily to lax underwriting
standards on loans originated in 2006 and 2007. Increased delinquencies lead
to
increased requests for loan repurchases from purchasers of loans. Requests
for
loan repurchases for loans originated and sold by our discontinued mortgage
lending business affected our results in 2007. At their height, as measured
by
loan balance, repurchase requests totaled approximately $25.2 million as
of June
30, 2007. As of December 31, 2007, we had $4.4 million of outstanding repurchase
requests. During 2007, we repurchased a total of $6.7 million of mortgage
loans
due to repurchase requests from loan investors. We resold most of these
repurchased loans at discounts, increasing our loss for 2007. For loans we
did
not repurchase, we were able to eliminate repurchase requests by entering
into
settlement agreements with the parties requesting the repurchases. The
settlements provided for a payment of a negotiated amount based on assumed
or
actual loss, further increasing our losses for 2007. The settlements in a
majority of the cases also provided for a release from all future
claims.
For
a
discussion of additional risks relating to our business see “Risk Factors” and
“—Quantitative and Qualitative Disclosures About Risk.”
Results
of Operations.
We
expect that our revenues will derive primarily from the difference between
the
interest income we earn on the mortgage assets in our portfolio and
the costs of our borrowings, net of hedging expenses. We expect our operating
expenses to be significantly lower in the future due to the reduction
in personnel resulting from the sale of our discontinued mortgage lending
operation. The sale of each of our retail and wholesale mortgage banking
platforms has resulted in gross proceeds to NYMT of approximately $13.5
million before fees and expenses, and before deduction of approximately
$2.3 million, which is being held in escrow to support warranties and
indemnifications provided to Indymac by HC as well as other purchase price
adjustments. HC recorded a one time taxable gain of $4.4 million on the sale
of
its assets to Indymac.
Liquidity.
We
depend
on the capital markets to finance our investments in MBS. As it relates to
our
investment portfolio, we use a combination of repurchase agreements, loan
securitizations, cash from our operations and the issuance of common and
preferred equity to finance our portfolio of MBS and mortgage loans. Prior
to
exiting the mortgage lending business in March 2007, we used “warehouse”
facilities provided by commercial or investment banks to finance the mortgage
loans held for sale that were originated by HC. These warehouse lines
have been terminated in connection with our exit from the mortgage lending
business.
Commercial
and investment banks have provided significant liquidity to finance our
operations. Due
to
recent credit market developments, the availability of short-term collateralized
borrowing through repurchase agreements tightened considerably beginning in
the
second half of 2007 and continuing through the date of this Annual Report.
Possible market developments, including a sharp rise in interest rates, a change
in prepayment rates or increasing market concern about the value or liquidity
of
one or more types of mortgage-related assets in which our portfolio is
concentrated may reduce the market value of our portfolio, which may reduce
the
amount of liquidity available to us or may cause our lenders to require
additional collateral. This may require the Company to sell assets at
disadvantaged prices. Although we presently expect the short-term collateralized
borrowing markets to continue providing us with necessary financing through
repurchase agreements, we cannot assure you that this form of financing will
be
available to us in the future on comparable terms, if at all.See
“Liquidity and Capital Resources” below for further discussion of liquidity
risks and resources available to us.
Loan
Loss Reserves on Mortgage Loans. As
with any mortgage asset, or a liability related to a mortgage asset in either
NYMT or HC, we have policies and procedures in place to determine the
appropriate levels of loan loss reserves relative to non-performing assets.
Loan
loss reserves are taken against non-performing loans held in securitizations
trust and non-performing loans held for sale in our discontinued mortgage
lending operation. We use a slightly different methodology to determine loan
loss reserves for loans held in securitizations trusts as compared to loans
held
in HC. We consider a loan to be non-performing once it becomes 60 days
delinquent. We also reserve for possible losses against loans we have been
asked to repurchase from investors, and for loans in which we have indemnified
investors against loss in accordance with the policy described
below.
In
determining loan loss reserves we generally rely on management’s estimate of
loan loss severity. Management’s
estimation involves, most importantly, the loan-to-value ratios (“LTV”) of a
loan, historical credit loss severity rates, property appreciation or
depreciation rates for the property’s market, purchased mortgage insurance, the
borrower’s credit and other factors deemed to warrant consideration. Comparing
the current loan balance to the current property value determines the current
loan-to-value ratio of the loan. We utilize various internet based property
data
services to look at comparable properties in the same area, or consult with
a
realtor in the property’s area to determine the current value of the property
securing the delinquent loans.
For
loans
held in securitization trusts, generally we estimate that any loan that goes
through foreclosure and results in Real Estate Owned (“REO”) by us results in
proceeds returned to the Company equal to 68% of the property’s current value at
the time the loan became 60 days delinquent, which is based on historical
experience. Thus, for a first lien loan that is 60 or more days delinquent
we
will take the difference between the current loan’s balance and 68% of the
property’s current value as a loan loss reserve. The difference determines the
base loan loss reserve taken for that loan. This base reserve for a particular
loan may be adjusted if we are aware of specific circumstances that may affect
the outcome of the loss mitigation process for that loan. Predominately,
however, we use the base reserve number for our loan loss reserve.
Loans
that were originated and sold by HC to various investors and for which we
(i) have been asked to repurchase, (ii) held for sale in HC, or (iii)
indemnified the investor against losses for some specified time period, may
also
require a loan loss reserve. A large portion of the repurchase requests,
commonly resulting from early payment defaults (“EPDs”) came as a result of
borrowers failing to timely make their first three loan payments. Similar to
the
above description of our reserve procedures for loans held in securitization
trusts, we compare the current balance of loans for which we have been asked
to
repurchase, and loans in which we have indemnified the investor to the current
value of the property securing the mortgage note. Different however for this
group of loans, we assume that we only receive proceeds equal to 65% of the
property’s current value at such time that the loan becomes 60 days
delinquent.
Given
the current economic environment, the Company has reserved 100% for all
non-performing second mortgages and 60% for all performing second
mortgages. As of December 31, 2007, the Company had $1.4 million in second
mortgages with a total reserve of $1.2 million with net exposure of $0.2
million.
While
we believe these policies are prudent, we can make no assurance that they
will be adequate to cover future losses.
Significance
of Estimates and Critical Accounting Policies
We
prepare our consolidated 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
consolidated 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 exists a ready and liquid market. 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.
Recent
events in the financial and credit markets have resulted in significant numbers
of investment assets offered in the marketplace with limited financing available
to potential buyers. In addition, there has been a lack of confidence among
potential investors regarding the validity of the ratings provided by the
major
rating agencies. This increase in available investment assets and investors’
diminished confidence in assessing the credit profile of investments has
resulted in significant price volatility in previously stable asset classes,
including our AAA-rated non-Agency MBS portfolio. As a result, the pricing
process for certain investment classes has become more challenging and may
not
necessarily represent what we could receive in an actual trade. The Company
had
$31.8 million on non-Agency MBS as of December 31, 2007.
In
the
normal course of our discontinued mortgage lending business, we entered into
contractual interest rate lock commitments, or (“IRLCs”), to extend credit to
finance residential mortgages. Mark-to-market adjustments on IRLCs were
recorded from the inception of the interest rate lock through the date the
underlying loan was 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 entered into forward sale loan contracts, or (“FSLCs”). Since the
FSLCs were committed prior to mortgage loan funding and thus there was no
owned asset to hedge, the FSLCs in place prior to the funding of a
loan were 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, during 2005 and early 2006, we regularly
securitized our mortgage loans and retained the beneficial interests created
by
such securitization. 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.
During
March 2008, news of potential security liquidations significantly increased
the
volatility of many financial assets, including those held in our
portfolio. Specifically, the liquidation of several large
financial institutions in early March 2008 caused a significant decline in
the fair market value of the CMO Floaters held in our portfolio. The
CMO Floaters in our portfolio are pledged as collateral for borrowings under
our
repurchase agreements. As a result of the significant decline in the fair
market value of our CMO Floaters, as determined by the lenders under our
repurchase agreements, the haircuts required by our lenders to obtain new
or
additional financing on these securities experienced a significant
increase. As a result, of the combination of lower fair market values on
our CMO Floaters and rising haircut requirements to finance those securities,
we
elected to improve our liquidity position by selling approximately $82.5
million of CMO Floaters from our portfolio in March 2008. Given the
continued volatility in the mortgage securities market, we determined that
we
may not be able to hold the CMO Floaters or other MBS securities in our
portfolio for the foreseeable future because we may sell them to satisfy
margin calls from our lenders or to otherwise manage our liquidity
position. Therefore, we have determined that losses on our entire MBS
securities portfolio of CMO Floaters were considered to be other than
temporary impairments as of December 31, 2007 and have taken a $8.5 million
impairment charge in the fourth quarter of 2007 as a result.
Loan
Loss Reserves on Mortgage Loans.
We
evaluate reserves 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. If the credit performance
of any of our mortgage loans 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. One of the critical assumptions
used
in estimating the loan loss reserve is severity. Severity represents the
expected rate of realized loss upon disposition/resolution of the collateral
that has gone into foreclosure.
Securitizations.
We have in the past created securitization entities as a means of
either:
|
·
|
creating
securities backed by mortgage loans which we held and financed;
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 as 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-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 as other comprehensive
income 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 September 2006, the FASB
issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value, and enhances fair value
measurement disclosure. In February 2008, the FASB issued FASB Staff Position
157-1, “Application of FASB SFAS 157 to FASB SFAS 13 and Other Accounting
Pronouncements that Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under SFAS 13 and FASB Staff Position 157-2,
“Effective Date of FASB SFAS 157.” FASB Staff Position 157-1 amends SFAS 157 to
remove certain leasing transactions from its scope. FASB Staff Position 157-2
delays the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed
at
fair value in the financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of fiscal year 2009. The measurement
and disclosure requirements related to financial assets and financial
liabilities are effective for the Company beginning in the first quarter of
fiscal year 2008. The adoption of SFAS 157 for financial assets and financial
liabilities will not have a significant impact on the Company’s consolidated
financial statements. However, the resulting fair values calculated under SFAS
157 after adoption may be different from the fair values that would have been
calculated under previous guidance. SFAS 157 will be applied to non-financial
assets and non-financial liabilities beginning January 1, 2009, and is not
expected to have a material impact on the Company’s consolidated financial
statements.
On
January 1, 2007, the Company adopted FIN 48,
Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109 (“FIN
48”),
which clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements, FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of tax position taken
or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. Interest and penalties are accrued and
reported as interest
expenses and other expenses reported in the consolidated statement
of
income are booked when incurred. In addition, the 2003-2006 tax years remain
open to examination by major taxing jurisdictions. The adoption of FIN 48
has
had no material impact on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
No. 159”), which provides companies with an option to report selected financial
assets and liabilities at fair value. The objective of SFAS No. 159 is to
reduce
both complexity in accounting for financial instruments and the volatility
in
earnings caused by measuring related assets and liabilities differently.
SFAS
No. 159 establishes presentation and disclosure requirements and requires
companies to provide additional information that will help investors and
other
users of financial statements to more easily understand the effect of the
company's choice to use fair value on its earnings. SFAS No. 159 also requires
entities to display the fair value of those assets and liabilities for which
the
company has chosen to use fair value on the face of the balance sheet. SFAS
No.
159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company did not elect the fair value option
for any
existing financial assets on the effective date.
In
June
2007, the EITF reached consensus on Issue No. 06-11,
Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards
("EITF
06-11"). EITF 06-11 requires that the tax benefit related to dividend
equivalents paid on restricted stock units, which are expected to vest, be
recorded as an increase to additional paid-in capital. EITF 06-11 is to be
applied prospectively for tax benefits on dividends declared in fiscal years
beginning after December 15, 2007, and the Company expects to adopt the
provisions of EITF 06-11 beginning in the first quarter of 2008. The Company
is
currently evaluating the potential effect on the consolidated financial
statements of adopting EITF 06-11.
In
June
2007, the AICPA issued SOP No. 07-1, Clarification
of the Scope of the Audit and Accounting Guide Investment
Companies and Accounting by Parent Companies and Equity Method Investors for
Investments in Investment Companies (“SOP
07-1”). SOP 07-1 addresses whether the accounting principles of the AICPA Audit
and Accounting Guide Investment
Companies may be applied to an entity by clarifying the
definition of an investment company and whether those accounting principles
may
be retained by a parent company in consolidation or by an investor in the
application of the equity method of accounting. In October of 2007, the
provisions of SOP 07-1 were deferred indefinitely.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interest in
Consolidated Financial Statements—an Amendment of Accounting Research Bulletin
No. 51. SFAS 160 amends Accounting Research Bulletin 51 to
establish accounting and reporting standards for the noncontrolling interest
in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 changes the way the consolidated income statement
is presented. It requires consolidated net income to be reported at amounts
that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated statement
of income, of the amounts of consolidated net income attributable to the
parent
and to the noncontrolling interest. SFAS 160 will become effective for the
Company on January 1, 2009, and is not expected to have a material impact
on the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business
Combinations. SFAS 141 retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. SFAS 141(R) requires an acquirer
to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured
at
their fair values as of that date. SFAS 141(R) requires costs incurred to
effect
the acquisition and restructuring costs to be recognized separately from
the
acquisition. SFAS 141(R) applies to business combinations for which the
acquisition date is on or after January 1, 2009.
Overview
of Performance
For
the
year ended December 31, 2007, we reported a net loss of $55.3 million, as
compared to a net loss of $15.0 million for the year ended December 31, 2006.
The increase in net loss of $40.3 was due to the following factors: an $18.4
million non cash charge to reserve 100% of the deferred tax asset resulting
from
the sale of our mortgage lending business, an $8.5 million non cash impairment
related to the investment portfolio, a decrease in net interest margin of
$4.3
million, an increase of $7.8 million related to losses on sale of securities
and
hedges and an increase in loan losses of $1.6 million related to loans held
in
securitization trust.
For
the year ended December 31, 2007, total mortgage originations, including
brokered loans, were $0.4 billion as compared to $2.5 billion and $3.4 billion
for the same period of 2006 and 2005, respectively. Total employees decreased
to eight at December 31, 2007 from 616 at
December
31, 2006.
Summary
of Operations and Key Performance Measurements
For
the
year ended December 31, 2007, 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 in the securitization trusts and residential mortgage-backed securities
in
our mortgage portfolio. 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, 2007:
| Net Interest Income Portfolio: | ||||||||||
|
|
Amount
|
Average
Outstanding
Balance
|
Effective
Rate
|
|||||||
|
|
|
(Dollars
in Millions)
|
|
|||||||
|
Net
Interest Income Components:
|
||||||||||
|
Interest
Income
|
||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$
|
52,180
|
$
|
907.0
|
5.74
|
%
|
||||
|
Amortization
of premium
|
(1,616
|
)
|
2.4
|
(0.18
|
)%
|
|||||
|
Total
interest income
|
$
|
50,564
|
$
|
909.4
|
5.56
|
%
|
||||
|
Interest
Expense
|
||||||||||
|
Repurchase
agreements
|
$
|
48,105
|
$
|
864.7
|
5.49
|
%
|
||||
|
Interest
rate swaps and caps
|
(1,576
|
)
|
|
(0.18
|
)%
|
|||||
|
Total
interest expense
|
$
|
46,529
|
$
|
864.7
|
5.31
|
%
|
||||
|
Net
Interest Income
|
$
|
4,035
|
|
0.25
|
%
|
|||||
The
key
performance measures for our portfolio management activities are:
| · |
the
net interest spread on the portfolio;
|
|
·
|
the
characteristics of the investments and the underlying pool of mortgage
loans including but not limited to credit quality, coupon and prepayment
rates; and
|
| · | the return on our mortgage asset investments and the related management of interest rate risk. |
For
the
year ended December 31, 2007, our net income was also affected by losses in
our
discontinued mortgage lending operation, which includes the mortgage loan sales
and mortgage brokering activities on mortgages sold or brokered to third
parties. Our mortgage banking activities generated 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 generated
brokering fee revenues from third party buyers.
Financial
Condition
Balance
Sheet Analysis - Asset Quality
Investment
Portfolio Related Assets
Mortgage
Loans Held in Securitization Trusts and Mortgage Loans Held for
Investment.
Included
in our portfolio are ARM loans that we originated or purchased in bulk from
third parties that met our investment criteria and portfolio requirements.
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. If the securitization qualifies as a financing for
SFAS No. 140 purposes, the loans are then re-classified as “mortgage loans
held in securitization trusts.”
New
York
Mortgage Trust 2006-1, our most recent securitization, qualified as a
sale under SFAS No. 140, which resulted in the recording of residual assets
and
mortgage servicing rights. The residual assets total $1.2 million and are
included in investment securities available for sale.
Except
for the loans in securitization trusts, there were no mortgage loans held for
investment at December 31, 2007 or December 31, 2006.
The
following table details mortgage loans held in securitization trusts at December
31, 2007 and December 31, 2006 (dollar amounts in thousands):
|
|
Par Value
|
Coupon
|
Carrying Value
|
Yield
|
|||||||||
|
December
31, 2007
|
$
|
429,629
|
5.74
|
%
|
$
|
430,715
|
5.36
|
%
|
|||||
|
December
31, 2006
|
$
|
584,358
|
5.56
|
%
|
$
|
588,160
|
5.56
|
%
|
|||||
At
December 31, 2007 mortgage loans held in securitization trusts totaled
approximately $431 million, or 55% of our total assets. Of this mortgage loan
investment portfolio 100% are traditional ARMs or hybrid ARMs and 79% are ARM
loans that are interest only. On our hybrid ARMs, interest rate reset periods
are predominately five years or less and the interest-only/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.
Characteristics
of Our Mortgage Loans Held in Securitization Trusts and Retained Interest in
Securitization:
The
following table sets forth the composition of our loans held in securitization
trusts as of December 31, 2007 (dollar amounts in thousands):
|
|
# of Loans
|
Par Value
|
Carrying Value
|
|||||||
|
Loan
Characteristics:
|
||||||||||
|
Mortgage
loans held in securitization trusts
|
972
|
$
|
429,629
|
$
|
430,715
|
|||||
|
Retained
interest in securitization (included in Investment securities
available for sale)
|
391
|
209,455
|
3,394
|
|||||||
|
Total
Loans Held
|
1,363
|
$
|
639,084
|
$
|
434,109
|
|||||
|
|
Average
|
High
|
Low
|
|||||||
|
General
Loan Characteristics:
|
||||||||||
|
Original
Loan Balance
|
$
|
490
|
$
|
3,500
|
$
|
48
|
||||
|
Current
Coupon Rate
|
5.79
|
%
|
9.93
|
%
|
4.00
|
%
|
||||
|
Gross
Margin
|
2.34
|
%
|
6.50
|
%
|
1.13
|
%
|
||||
|
Lifetime
Cap
|
11.19
|
%
|
13.75
|
%
|
9.00
|
%
|
||||
|
Original
Term (Months)
|
360
|
360
|
360
|
|||||||
|
Remaining
Term (Months)
|
330
|
339
|
295
|
|||||||
The
following table sets forth the composition of our loans held in securitization
trusts as of December 31, 2006 (dollar amounts in thousands):
|
|
# of Loans
|
Par Value
|
Carrying Value
|
|||||||
|
Loan
Characteristics:
|
||||||||||
|
Mortgage
loans held in securitization trusts
|
1,259
|
$
|
584,358
|
$
|
588,160
|
|||||
|
Mortgage
loans held for investment
|
458
|
249,627
|
23,930
|
|||||||
|
Total
Loans Held
|
1,717
|
$
|
833,985
|
$
|
612,090
|
|||||
|
|
Average
|
High
|
Low
|
|||||||
|
General
Loan Characteristics:
|
||||||||||
|
Original
Loan Balance
|
$
|
501
|
$
|
3,500
|
$
|
25
|
||||
|
Current
Coupon Rate
|
5.67
|
%
|
8.13
|
%
|
3.88
|
%
|
||||
|
Gross
Margin
|
2.36
|
%
|
6.50
|
%
|
1.13
|
%
|
||||
|
Lifetime
Cap
|
11.14
|
%
|
13.75
|
%
|
9.00
|
%
|
||||
|
Original
Term (Months)
|
360
|
360
|
360
|
|||||||
|
Remaining
Term (Months)
|
341
|
351
|
307
|
|||||||
|
|
December 31, 2007
Percentage
|
December 31, 2006
Percentage
|
|||||
|
Arm
Loan Type
|
|||||||
|
Traditional
ARMs
|
2.3
|
%
|
2.9
|
%
|
|||
|
2/1
Hybrid ARMs
|
1.6
|
%
|
3.8
|
%
|
|||
|
3/1
Hybrid ARMs
|
10.2
|
%
|
16.8
|
%
|
|||
|
5/1
Hybrid ARMs
|
83.4
|
%
|
74.5
|
%
|
|||
|
7/1
Hybrid ARMs
|
2.5
|
%
|
2.0
|
%
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
|||
|
Percent
of ARM loans that are Interest Only
|
77.3 | % |
75.9
|
%
|
|||
|
Weighted
average length of interest only period
|
8.3 years |
8.0
years
|
|||||
|
|
December 31, 2007
Percentage
|
December 31, 2006
Percentage
|
|||||
|
Traditional
ARMs - Periodic Caps
|
|||||||
|
None
|
72.9
|
%
|
61.9
|
%
|
|||
|
1%
|
1.4
|
%
|
8.8
|
%
|
|||
|
Over
1%
|
25.7
|
%
|
29.3
|
%
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
|||
|
|
December 31, 2007
Percentage
|
December 31, 2006
Percentage
|
|||||
|
Hybrid
ARMs - Initial Cap
|
|||||||
|
3.00%
or less
|
8.3
|
%
|
14.8
|
%
|
|||
|
3.01%-4.00%
|
5.1
|
%
|
7.5
|
%
|
|||
|
4.01%-5.00%
|
85.6
|
%
|
76.6
|
%
|
|||
|
5.01%-6.00%
|
1.0
|
%
|
1.1
|
%
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
|||
|
|
December 31, 2007
Percentage
|
December 31, 2006
Percentage
|
|||||
|
FICO
Scores
|
|||||||
|
650
or less
|
3.9
|
%
|
3.8
|
%
|
|||
|
651
to 700
|
17.0
|
%
|
16.9
|
%
|
|||
|
701
to 750
|
32.4
|
%
|
34.0
|
%
|
|||
|
751
to 800
|
42.5
|
%
|
41.5
|
%
|
|||
|
801
and over
|
4.2
|
%
|
3.8
|
%
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
|||
|
Average
FICO Score
|
738
|
737
|
|||||
|
|
December 31, 2007
Percentage
|
December 31, 2006
Percentage
|
|||||
|
Loan
to Value (LTV)
|
|||||||
|
50%
or less
|
9.5
|
%
|
9.8
|
%
|
|||
|
50.01%-60.00%
|
8.9
|
%
|
8.8
|
%
|
|||
|
60.01%-70.00%
|
27.3
|
%
|
28.1
|
%
|
|||
|
70.01%-80.00%
|
52.2
|
%
|
51.1
|
%
|
|||
|
80.01%
and over
|
2.1
|
%
|
2.2
|
%
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
|||
|
Average
LTV
|
69.7
|
%
|
69.4
|
%
|
|||
|
|
December 31, 2007
Percentage
|
December 31, 2006
Percentage
|
|||||
|
Property
Type
|
|||||||
|
Single
Family
|
51.3
|
%
|
52.3
|
%
|
|||
|
Condominium
|
22.8
|
%
|
22.9
|
%
|
|||
|
Cooperative
|
9.8
|
%
|
8.8
|
%
|
|||
|
Planned
Unit Development
|
13.0
|
%
|
13.0
|
%
|
|||
|
Two
to Four Family
|
3.1
|
%
|
3.0
|
%
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
|||
|
|
Decemb | ||