Edgar Filing: NEW YORK MORTGAGE TRUST INC

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, 2008

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

	For the Transition Period From ____________ to ____________

Commission File Number 001-32216

NEW YORK MORTGAGE TRUST, INC .

(Exact name of registrant as specified in its charter)

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

52 Vanderbilt Avenue, New York, NY 10017

(Address of principal executive office) (Zip Code)

(212) 792-0107

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark 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 filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer 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, 2008 was approximately $48.6 million.

The number of shares of the Registrant’s Common Stock outstanding on March 20, 2009 was 9,320,094.

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DOCUMENTS INCORPORATED BY REFERENCE

Document		Where Incorporated
1. Portions of the Registrant's Definitive Proxy Statement relating to its 2009 Annual Meeting of Stockholders scheduled for June 9, 2009 to be filed with the Securities and Exchange Commission by no later than April 30, 2009.		Part III, Items 10-14

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NEW YORK MORTGAGE TRUST, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2008

TABLE OF CONTENTS

PART I

Item 1.	Business	1
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	35
Item 2.	Properties	35
Item 3.	Legal Proceedings	35
Item 4.	Submission of Matters to a Vote of Security Holders	35

PART II

Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
Item 6.	Selected Financial Data	39
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	67
Item 8.	Financial Statements and Supplementary Data	71
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	71
Item 9A.	Controls and Procedures	72
Item 9B.	Other Information	72

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	73
Item 11.	Executive Compensation	73
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	73
Item 13.	Certain Relationships and Related Transactions, and Director Independence	73
Item 14.	Principal Accountant Fees and Services	73

PART IV

Item 15.	Exhibits and Financial Statement Schedules	74

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PART I

Item 1. BUSINESS

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, that invests primarily in real estate-related assets, including residential adjustable-rate mortgage-backed securities, which includes collateralized mortgage obligation floating rate securities (“RMBS”), and prime credit quality residential adjustable-rate mortgage (“ARM”) loans (“prime ARM loans”), and to a lesser extent, in certain alternative real estate-related and financial assets that present greater credit risk and less interest rate risk than our investments in RMBS and prime ARM loans. 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.

Our investment strategy historically has focused on investments in RMBS issued or guaranteed by a U.S. government agency (such as the Government National Mortgage Association, or Ginnie Mae), or by a U.S. Government-sponsored entity (such as the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac), prime ARM loans, and non-agency RMBS. We refer throughout this Annual Report on Form 10-K to RMBS issued by a U.S. government agency or U.S. Government-sponsored entity as “Agency RMBS”. Starting with the completion of our initial public offering in June 2004, we began building a leveraged investment portfolio comprised largely of RMBS purchased in the open market or through privately negotiated transactions, and prime ARM loans originated by us or purchased from third parties that we securitized and which are held in our securitization trusts. Since exiting the mortgage lending business on March 31, 2007, we have exclusively focused our resources and efforts on investing, on a leveraged basis, in RMBS and, since August 2007, we have employed a portfolio strategy that focuses on investments in Agency RMBS. We refer to our historic investment strategy throughout this Annual Report on Form 10-K as our “principal investment strategy.”

In January 2008, we formed a strategic relationship with JMP Group Inc., a full-service investment banking and asset management firm, and certain of its affiliates (collectively, the “JMP Group”), for the purpose of improving our capitalization and diversifying our investment strategy away from a strategy exclusively focused on investments in Agency RMBS, in part to achieve attractive risk-adjusted returns, and to potentially utilize all or part of a $64.0 million net operating loss carry-forward that resulted from our exit from the mortgage lending business in 2007. In connection with this strategic relationship, the JMP Group made a $20.0 million investment in our Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock)” in January 2008 and purchased approximately $4.5 million of our common stock in a private placement in February, 2008. In addition, in connection with the JMP Group’s strategic investment in us, James J. Fowler, a managing director of HCS (defined below), became our Non-Executive Chairman of the Board of Directors. As of December 31, 2008, JMP Group Inc. and its affiliates beneficially owned approximately 33.7% of our outstanding common stock. The 33.7% includes shares of Series A preferred stock which may be converted into common stock.

In an effort to diversify our investment strategy, we entered into an advisory agreement with Harvest Capital Strategies LLC (“HCS”), formerly known as JMP Asset Management LLC, concurrent with the issuance of our Series A Preferred Stock to the JMP Group, pursuant to which HCS will implement and manage our investments in alternative real estate-related and financial assets. Pursuant to the advisory agreement, HCS is responsible for managing investments made by two of our wholly-owned subsidiaries, Hypotheca Capital, LLC (“HC,” also 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 HCS. We refer to these subsidiaries in our periodic reports filed with the Securities and Exchange Commission (“SEC”) as the “Managed Subsidiaries.” Due to market conditions and other factors in 2008, including the significant disruptions in the credit markets, we elected to forgo making investments in alternative real estate-related and financial assets and instead, exclusively focused our resources and efforts on preserving capital and investing in Agency RMBS. However, we expect to begin the diversification of our investment strategy in 2009 by opportunistically investing in certain alternative real estate-related and financial assets, or equity interests therein, including, without limitation, certain non-Agency RMBS and other non-rated mortgage assets, commercial mortgage-backed securities, commercial real estate loans, collateralized loan obligations and other investments. We refer throughout this Annual Report on Form 10-K to our investment in alternative real estate-related and financial assets, other than Agency RMBS, prime ARM loans and non-Agency RMBS that is already held in our investment portfolio, as our “alternative investment strategy” and such assets as our “alternative assets.” Generally, we expect that our investment in alternative assets will be made on a non-levered basis, will be conducted through the Managed Subsidiaries and will be managed by HCS. Currently, we have established for our alternative assets a targeted range of 5% to 10% of our total assets, subject to market conditions, credit requirements and the availability of appropriate market opportunities.

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We expect to benefit from the JMP Group’s and HCS’ investment expertise, infrastructure, deal flow, extensive relationships in the financial community and financial and capital structuring skills. Moreover, as a result of the JMP Group’s and HCS’ investment expertise and knowledge of investment opportunities in multiple asset classes, we believe we have preferred access to a unique source of investment opportunities that may be in discounted or distressed positions, many of which may not be available to other companies that we compete with. We intend to be selective in our investments in alternative assets, seeking out co-investment opportunities with the JMP Group where available, conducting substantial due diligence on the alternative assets we seek to acquire and any loans underlying those assets, and limiting our exposure to losses by investing in alternative assets on a non-levered basis. By diversifying our investment strategy, we intend to construct an investment portfolio that, when combined with our current assets, will achieve attractive risk-adjusted returns and that is structured to allow us to maintain our qualification as a REIT and the requirements for exclusion from regulation under the Investment Company Act of 1940, as amended, or Investment Company Act.

Because we intend to continue to qualify as a REIT for federal income tax purposes and to operate our business so as to be exempt from regulation under the Investment Company Act, we will be required to invest a substantial majority of our assets in qualifying real estate assets, such as agency RMBS, mortgage loans and other liens on and interests in real estate. Therefore, the percentage of our assets we may invest in corporate investments and other types of instruments is limited, unless those investments comply with various federal income tax requirements for REIT qualification and the requirements for exclusion from Investment Company Act regulation.

The financial information requirements required under this Item 1 may be found in the Company’s audited consolidated financial statements beginning on page F-3.

Subsequent Events

Restructuring of Principal Investment Portfolio

As of December 31, 2008, our principal investment portfolio included approximately $197.7 million of collateralized mortgage obligation floating rate securities issued by Fannie Mae or Freddie Mac, which we refer to as Agency CMO Floaters. Following a review of our principal investment portfolio, we determined in March 2009 that the Agency CMO Floaters held in our portfolio were no longer producing acceptable returns, and as a result, we decided to initiate a program to dispose of these securities on an opportunistic basis overtime. As of March 25, 2009, the Company had sold approximately $149.8 million in current par value of Agency CMO Floaters under this program resulting in a net gain of approximately $0.2 million. As a result of these sales and our intent to sell the remaining Agency CMO Floaters in our principal investment portfolio, we concluded the reduction in value at December 31, 2008 was other-than-temporary and recorded an impairment charge of $4.1 million for the quarter and year ended December 31, 2008.

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Our Investment Strategy

The following discusses the investments we have made and that we expect to make in the future:

Our Principal Investment Strategy

Our principal investment strategy has focused on the acquisition of high-credit quality ARM loans and RMBS that we believe are likely to generate attractive long-term risk-adjusted returns on capital invested. In managing our principal investment portfolio, we:

invest in high-credit quality Agency and non-Agency RMBS, including ARM securities, 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 RMBS and spread income from our securitized mortgage loan portfolio.

Under this investment strategy, we recently have and will continue to focus on the acquisition of Agency RMBS, 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 these investments. As noted above, following a review of our principal investment portfolio, we determined in March 2009 that the Agency CMO Floaters held in our portfolio were no longer producing acceptable returns and initiated a program to dispose of these securities on an opportunistic basis; however, we may invest in Agency CMO Floaters in the future should the returns on such securities become attractive.

Targeted Assets Under Our Principal Investment Strategy

Hybrid ARM RMBS Issued by Fannie Mae or Freddie Mac. Agency RMBS consist of Agency pass-through certificates and CMOs issued or guaranteed by an Agency. Pass-through certificates provide for a pass-through of the monthly interest and principal payments made by the borrowers on the underlying mortgage loans. CMOs divide a pool of mortgage loans into multiple tranches with different principal and interest payment characteristics.

Since March 31, 2007, we have exclusively focused our resources and efforts on the purchase and management of hybrid ARM RMBS issued by either Fannie Mae or Freddie Mac (which has included both pass-through certificates and CMO Floaters). Hybrid ARM RMBS 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. Because the coupons earned on ARM RMBS adjust over time as interest rates change (typically after an initial fixed-rate period), the market values of these assets are generally less sensitive to changes in interest rates than are fixed-rate RMBS. In addition, the ARMs collateralizing our RMBS typically have interim and lifetime caps on interest rate adjustments.

Fannie Mae guarantees to the holder of Fannie Mae RMBS that it will distribute amounts representing scheduled principal and interest on the mortgage loans in the pool underlying the Fannie Mae certificate, whether or not received, and the full principal amount of any such mortgage loan foreclosed or otherwise finally liquidated, whether or not the principal amount is actually received. Freddie Mac guarantees to each holder of certain Freddie Mac 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 RMBS due to their shorter remittance cycle; the time between when a borrower makes a payment and the investor receives the net payment. There can be no assurance that the guarantee structure of Fannie Mae and Freddie Mac issued securities will continue in the future.

Typically, we seek to acquire hybrid ARM RMBS with fixed periods of five years or 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 103% 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.

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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 from third parties, that we securitized in 2005 and early 2006. These loans are substantially prime full documentation interest only hybrid ARMs on residential homes and all are first lien mortgages. The Company maintains the ownership trust certificates, or equity, of these securitizations, which includes rights to excess interest, if any.

As of December 31, 2008, our principal investment portfolio was comprised of approximately $477.4 million in RMBS, of which approximately $455.9 million was Agency RMBS and $21.5 million was non-Agency RMBS, and approximately $348.3 million of prime ARM loans held in securitization trusts. Of the non-Agency RMBS held in our portfolio at December 31, 2008, approximately $21.4 million was rated in the highest category by Moody’s Investor Service and Standard & Poor’s (collectively, the “Rating Agencies”).

Our Alternative Investment Strategy

During 2008, our alternative investment strategy was primarily focused on equity investments in unaffiliated third party entities that acquire or manage a portfolio of non-Agency RMBS. As of December 31, 2008, we had yet to make any investments under our alternative investment strategy. Beginning in 2009, our alternative investment strategy will expand the types of assets under investment consideration. The alternative investment strategy will focus on opportunistic investments in certain alternative financial assets, or equity interests therein, including, without limitation, certain non-agency RMBS, commercial mortgage-backed securities, commercial real estate loans, collateralized loan obligations and other investments, that are distressed or can be purchased at a discount and that we believe are likely to generate attractive risk-adjusted returns. Investments in alternative assets will generally expose us to greater credit risk and less interest rate risk than investments in Agency RMBS.

Pursuant to investment guidelines adopted by our Board of Directors in March 2009, each alternative investment must be approved by our Board of Directors. Our alternative investment strategy will vary from our principal investment strategy and we can provide no assurance that we will be successful at implementing this alternative investment strategy or that it will produce positive returns.

Potential Assets Under Our Alternative Investment Strategy

Non-Agency RMBS. The Company may invest in residential non-Agency RMBS, including investment-grade (AAA through BBB rated) and non-investment grade (BB and B rated and unrated) classes. The mortgage loan collateral for residential non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by Fannie Mae, Freddie Mac or Ginnie Mae due to certain factors, including a mortgage balance in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and insufficient documentation.

Commercial Mortgage-Backed Securities. We may invest in commercial mortgage-backed securities, or CMBS, through the purchase of mortgage pass-through notes. CMBS are secured by, or evidence ownership interests in, a single commercial mortgage loan or a pool of mortgage loans secured by commercial properties. These securities may be senior, subordinated, investment grade or non-investment grade. We expect that most of our CMBS investments will be part of a capital structure or securitization where the rights of the class in which we invest are subordinated to senior classes but senior to the rights of lower rated classes of securities, although we may invest in the lower rated classes of securities if we believe the risk adjusted return is attractive. We generally intend to invest in CMBS that will yield high current interest income and where we consider the return of principal to be likely. We may acquire CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, finance companies, investment banks and other entities.

The yields on CMBS depend on the timely payment of interest and principal due on the underlying mortgage loans and defaults by the borrowers on such loans may ultimately result in defaults on the CMBS. In the event of a default, the trustee for the benefit of the holders of CMBS has recourse only to the underlying pool of mortgage loans and, if a loan is in default, to the mortgaged property securing such mortgage loan. After the trustee has exercised all of the rights of a lender under a defaulted mortgage loan and the related mortgaged property has been liquidated, no further remedy will be available. However, holders of relatively senior classes of CMBS will be protected to a certain degree by the structural features of the securitization transaction within which such CMBS were issued, such as the subordination of the more junior classes of the CMBS.

High Yield Corporate Bonds. We may invest in high yield corporate bonds, which are below investment grade debt obligations of corporations and other nongovernmental entities. We expect that a significant portion of such bonds we may invest in will not be secured by mortgages or liens on assets, and may have an interest-only payment schedule, with the principal amount staying outstanding and at risk until the bond’s maturity. High yield bonds are typically issued by companies with significant financial leverage.

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Collateralized Loan Obligations. We may invest in debentures, subordinated debentures or equity interests in a collateralized loan obligation, or CLO. A CLO is secured by, or evidences ownership interests in, a pool of assets that may include RMBS, non-agency RMBS, CMBS, commercial real estate loans or corporate loans. Typically a CLO is collateralized by a diversified group of assets either within a particular asset class or across many asset categories. These securities may be senior, subordinated, investment grade or non-investment grade. We expect the majority of our CLO investments to be part of a capital structure or securitization where the rights of the class in which we will invest to receive principal and interest are subordinated to senior classes but senior to the rights of lower rated classes of securities, although we may invest in the lower rated classes of securities if we believe the risk adjusted return is attractive. The Company would generally make CLO investments on a non-levered basis to reduce liquidity risks as these investments are generally less liquid in nature.

Equity Securities. To a lesser extent, subject to maintaining our qualification as a REIT, we also may invest in common and preferred equity, which may or may not be related to real estate. These investments may include direct purchases of common or preferred equity as well as purchases of interests in LLCs or other equity type investments. We will follow a value-oriented investment approach and focus on the anticipated cash flows generated by the underlying business, discounted by an appropriate rate to reflect both the risk of achieving those cash flows and the alternative uses for the capital to be invested. We will also consider other factors such as the strength of management, the liquidity of the investment, the underlying value of the assets owned by the issuer and prices of similar or comparable securities.

Our Financing Strategy

To finance the RMBS in our principal investment portfolio, we generally seek to borrow between seven and nine times the amount of our equity. At December 31, 2008 our leverage ratio for our RMBS investment portfolio, which we define as our outstanding indebtedness under repurchase agreements divided by sum of total stockholders’ equity and our Series A Preferred Stock, was 6.8 to 1. This definition of the leverage ratio is consistent with the manner in which the credit providers under our repurchase agreements calculate our leverage. The Company also has $44.6 million of subordinated trust preferred securities outstanding and $335.6 million of collateralized debt obligations outstanding, both of which are not dependent on market values of pledged assets or changing credit conditions by our lenders.

We strive to maintain and achieve a balanced and diverse funding mix to finance our principal investment portfolio. We rely primarily on repurchase agreements and collateralized debt obligations (“CDOs”) in order to finance our principal investment portfolio. Repurchase agreements provide us with short-term borrowings that are secured by the securities in our principal investment portfolio, primarily RMBS. These short-term borrowings bear interest rates that are linked to LIBOR, a short term market interest rate used to determine short term loan rates. Pursuant to these repurchase agreements, the financial institution that serves as a counterparty will generally agree to provide us with financing based on the market value of the securities that we pledge as collateral, less a “haircut.” Our repurchase agreements may require us to deposit additional collateral pursuant to a margin call if the market value of our pledged collateral declines or if unscheduled principal payments on the mortgages underlying our pledged securities increase at a higher than anticipated rate. 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, 2008, we had repurchase agreements outstanding with six different counterparties totaling $402.3 million. As of December 31, 2008, we financed approximately $348.3 million of loans we hold in securitization trusts permanently with approximately $12.7 million of our own equity investment in the securitization trusts and the issuance of approximately $335.6 million of CDOs.

We expect to finance our alternative assets on a non-levered basis with available capital from operations. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition― Liquidity and Capital Resources” for further discussion on our financing activities.

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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 principal investment 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 principal investment portfolio of prime ARM loans and RMBS. 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 principal 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 RMBS, 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. We utilize a model based risk analysis system to assist in projecting portfolio performances over a variety of different interest rates and market stresses. The model incorporates shifts in interest rates, changes in prepayments and other factors impacting the valuations of our financial securities, including mortgage-backed securities, repurchase agreements, interest rate swaps and interest rate caps. However, given the prepayment uncertainties on our RMBS, it is not possible to definitively lock-in a spread between the earnings yield on our principal 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.

Our Investment Guidelines

In acquiring assets for our portfolio and subsequently managing those assets, management is required to adhere to the following investment guidelines, unless such guidelines are amended, repealed, modified or waived by our Board of Directors. Pursuant to our investment guidelines, we will focus on investments in securities in the following categories:

Category I investments are mortgage-backed securities that are either rated within one of the two highest rating categories by either Moody’s Investor Services or Standard and Poor’s, or have their repayment guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae;

Category II investments are all residential mortgage-related securities that do not fall within Category I; and

Category III investments are all commercial mortgage-backed securities and non-mortgage-related securities, including, without limitation, subordinated debentures or equity interests in a collateralized loan obligation, high yield corporate bonds and equity securities.

The investment guidelines provide the following investment limitations:

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 or our subsidiaries to register as an investment company under the Investment Company Act of 1940;

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Certain of our 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 Category I investments, subject to the limitations described above;

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; and

· term repurchase agreements.

Until further modified by our Board of Directors, all Category II and Category III investments (regardless of the size of the investment) under our alternative investment strategy requires the prior approval of our Board of Directors.

Our Relationship with HCS and the Advisory Agreement

HCS, an external advisor to the managed subsidiaries, is a wholly-owned subsidiary of JMP Group Inc. that manages a family of single-strategy and multi-manager hedge fund products. HCS also sponsors and partners with other alternative investment firms. HCS was founded by Joseph Jolson in 1999. As of December 31, 2008, HCS had $443.0 million in client assets under management.

Concurrent and in connection with the issuance of our Series A Preferred Stock on January 18, 2008, we entered into an advisory agreement with HCS pursuant to which HCS advises the Managed Subsidiaries and manages our alternative investment strategy. Currently, any investment in Category II and III investments on behalf of the Managed Subsidiaries by HCS will require board approval and must adhere to investment guidelines adopted by our Board of Directors. HCS earns a base advisory fee of 1.5% of the “equity capital” (as defined in the advisory agreement) of the Managed Subsidiaries and is also eligible to earn incentive compensation if the Managed Subsidiaries achieve certain performance thresholds. As of December 31, 2008, HCS was not managing any assets in the Managed Subsidiaries, but was earning a base advisory fee on the net proceeds to our Company from our private offerings in each of January 2008 and February 2008.

In addition, pursuant to the stock purchase agreement providing for the sale of the Series A Preferred Stock to the JMP Group, 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, who also serves as the non-compensated Chief Investment Officer of HC and New York Mortgage Funding, LLC, is a managing director of HCS, a subsidiary of JMP Group Inc.

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On February 21, 2008, we completed the issuance of 7.5 million shares of our common stock in a private placement to certain accredited investors, resulting in $56.5 million in net proceeds to our company. JMP Securities LLC, an affiliate of HCS and the JMP Group, served as the sole placement agent for the transaction and was paid a $3.0 million placement fee from the gross proceeds.

As of December 31, 2008, each of HCS, JMP Group Inc. and Joseph A. Jolson, the Chairman and Chief Executive Officer of JMP Group Inc., beneficially owned approximately 16.8%, 12.2% and 9.5%, respectively, of our outstanding common stock. In addition, in November 2008 our Board of Directors approved an exemption from the ownership limitations contained in our charter to permit Mr. Jolson to beneficially own up to 25% of the aggregate value of our outstanding capital stock. As a result these stockholders exert significant influence over us.

Advisory Agreement

As described above, on January 18, 2008, we entered into an advisory agreement with HCS. 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 HCS 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 HCS 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 HCS 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 HCS 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.

Pursuant to the advisory agreement, HCS was paid $0.7 million in management fees for the twelve months ended December 31, 2008.

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Conflicts of Interest with HCS; Equitable Allocation of Investment Opportunities; Other Information Regarding the Advisory Agreement

HCS manages, and is expected to continue to manage, other client accounts with similar or overlapping investment strategies. HCS 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 HCS’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 HCS accounts, HCS 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, HCS’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 HCS 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.

We expect that HCS will source substantially all of our investments in alternative assets as advisor to the Managed Subsidiaries. Pursuant to the advisory agreement, HCS is authorized to follow broad investment guidelines in determining which alternative assets the Managed Subsidiaries will invest in. Currently, our investment guidelines require the Board of Directors to approve each investment in alternative assets pursuant to our investment guidelines. However, as our alternative investment portfolio expands in the future, our Board of Directors may elect to not review individual investments or grant HCS greater investment discretion. In conducting their review of the investments held by our Managed Subsidiaries, our directors will rely primarily on information provided to them by HCS and our management. Furthermore, the Managed Subsidiaries may use complex investment strategies and transactions, which may be difficult or impossible to unwind. Although our Board of Directors must first approve an alternative investment opportunity, HCS has great latitude within our Managed Subsidiaries’ broad investment guidelines to determine the types of assets it will recommend to our Board of Directors as proper investments for the Managed Subsidiaries. Some of these investment opportunities may present a conflict of interest for HCS and Mr. Fowler, particularly in the case of certain co-investment opportunities where affiliates of the JMP Group will be co-investment partners. The investment guidelines do not permit HCS to invest in Agency RMBS, since these investments are made by us.

The advisory agreement does not restrict the ability of HCS 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 HCS’s management of other REITs or funds does not disadvantage us or the Managed Subsidiaries.

HCS may engage other parties, including its affiliates, to provide services to us or our subsidiaries; provided that any such agreements with affiliates of HCS 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 HCS 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 HCS 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.

Pursuant to a Schedule 13D filed with the SEC on February 17, 2009, HCS and JMP Group, Inc., beneficially owned approximately 16.8% and 12.2%, respectively, of our outstanding common stock as of December 31, 2008. In addition, pursuant to a Schedule 13G/A filed with the SEC on December 4, 2008, Joseph A. Jolson, the Chairman and Chief Executive Officer of JMP Group Inc. and HCS, beneficially owned approximately 9.5% of our outstanding common stock. HCS is an investment adviser that manages investments and trading accounts of other persons, including certain accounts affiliated with JMP Group, Inc., and is deemed the beneficial owner of shares of our common stock held by these accounts. As noted above, Mr. Fowler is a managing director of HCS, which is a wholly-owned subsidiary of JMP Group, Inc. As a result of the combined voting power of HCS, JMP Group, Inc. and Joseph A. Jolson, these stockholders exert significant influence over matters submitted to a vote of stockholders, including the election of directors and approval of a change in control or business combination of our company, and strategic direction of our Company. This concentration of ownership may result in decisions affecting us that are not in the best interests of all our stockholders. In addition, Mr. Fowler may have a conflict of interest in situations where the best interests of our company and stockholders do not align with the interests of HCS, JMP Group, Inc. or its affiliates, which may result in decisions that are not in the best interests of all our stockholders.

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Company History

We were formed as a Maryland corporation in September 2003. In June 2004, we completed our initial public offering, or IPO, that resulted in approximately $122 million in net proceeds to our company. Prior to the IPO, we did not have recurring business operations. As part of our formation transactions, concurrent with our IPO, we acquired 100% of the equity interests in HC, which at the time was a residential mortgage origination company that historically had sold or brokered all of the mortgage loans it originated to third parties. 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. With the mortgage lending business facing increasingly difficult operating conditions, we began considering strategic alternatives for our business in mid-2006. After an extensive review of the Company’s strategic and financial alternatives, our Board of Directors determined that the sale of substantially all of the assets of our retail and wholesale residential mortgage lending platform was in the best interests our stockholders and company. On February 22, 2007, we completed the sale of our wholesale lending business to Tribeca Lending Corp., a subsidiary of Franklin Credit Management Corporation, for an estimated purchase price of $0.5 million. 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. Since this sale, which effectively marked our exit from the mortgage lending business, we have exclusively focused our resources and efforts on investing, on a leveraged basis, in RMBS.

During 2007, due in part to continued difficult operating conditions and our small market capitalization as compared to our peers, our Board of Directors continued to consider and review our strategic and financial alternatives. In January 2008 we formed a strategic relationship with the JMP Group, whereby HCS became the contractual advisor to the Managed Subsidiaries and the JMP Group purchased 1.0 million shares of our Series A Preferred Stock for an aggregate purchase price of $20.0 million. We formed this relationship with the JMP Group for the purpose of improving our capitalization and diversifying our investment portfolio. The Series A Preferred Stock entitles 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 $0.20 per share. The Series A Preferred Stock is convertible into shares of the Company's common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 ½) shares of common stock for each share of Series A Preferred Stock. The Series A Preferred Stock matures on December 31, 2010, at which time any outstanding shares must be redeemed by the Company at the $20.00 per share liquidation preference. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No.150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, because of this mandatory redemption feature, the Company classifies these securities as a liability on its balance sheet.

Upon completion of the issuance and sale of the Series A Preferred Stock to the JMP Group on January 18, 2008 and pursuant to the stock purchase agreement providing for the sale of the 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. In addition, concurrent with these actions, Steven B. Schnall, Mary Dwyer Pembroke, Jerome F. Sherman and Thomas W. White resigned as members of our Board of Directors.

On February 21, 2008, we completed the issuance and sale of 7.5 million shares of our common stock to certain accredited investors in a private placement at a price of $8.00 per share. This private offering of our common stock generated net proceeds to us of $56.5 million after payment of private placement fees and expenses. In connection with this private offering of our common stock, we entered into a registration rights agreement, pursuant to which we were required to file with the Securities and Exchange Commission, or SEC, a resale shelf registration statement registering for resale the 7.5 million shares sold in the private offering. We filed a resale shelf registration statement on Form S-3 on April 4, 2008, which was declared effective by the SEC on April 18, 2008. We used substantially all of the net proceeds from the January and February 2008 offerings to acquire approximately $712.4 million of Agency RMBS for our principal investment portfolio.

On February 3, 2009, David A. Akre resigned his positions as our Co-Chief Executive Officer and as a member of our Board of Directors. In connection with Mr. Akre’s resignation, Steven R. Mumma, our Co-Chief Executive Officer, President and Chief Financial Officer, was appointed as our Chief Executive Officer, effective immediately. Mr. Mumma also retained his other positions with the Company and will continue to serve as a member of our Board of Directors.

Since June 5, 2008 the Company’s shares of common stock have been listed on the NASDAQ Capital Market (“NASDAQ”) under the symbol “NYMT.” The Company’s common stock was previously listed on the New York Stock Exchange (“NYSE”) from the time of our IPO until September 11, 2007, at which time our common stock was de-listed from the NYSE because our average market capitalization was less than $25 million over a consecutive 30-trading day period. Between September 11, 2007 and June 5, 2008, our common stock was reported on the Over-the-Counter Bulletin Board (“OTCBB”).

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In connection with the minimum listing price requirements of NASDAQ, we have completed two separate reverse stock splits on our common stock. In October 2007, we completed a 1-for-5 reverse split of our common stock, and in May 2008, we completed a 1-for-2 reverse split of our common stock. The information in this Annual Report on Form 10-K gives effect to these reverse stock splits as if they occurred at the Company’s inception.

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, 2008 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.

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Qualified REIT Subsidiaries . A corporation that is a “qualified REIT subsidiary” is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction, and credit of a “qualified REIT subsidiary” are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A “qualified REIT subsidiary” is a corporation, all of the capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any “qualified REIT subsidiary” that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit.

Taxable REIT Subsidiaries . A REIT is permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries,” or TRSs. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. Overall, no more than 25% (20% for taxable years prior to 2009) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.

A TRS will pay income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. We have elected for HC to be treated as a TRS. HC is subject to corporate income tax on its taxable income.

Qualified REIT Assets

On the last day of each calendar quarter, at least 75% of the value of our assets (which includes any assets held through a qualified REIT subsidiary) must consist of qualified REIT assets — primarily, real estate, mortgage loans secured by real estate, and certain mortgage-backed securities (“Qualified REIT Assets”), government securities, cash, and cash items. We believe that substantially all of our assets are and will continue to be Qualified REIT Assets. On the last day of each calendar quarter, of the assets not included in the foregoing 75% asset test, the value of securities that we hold issued by any one issuer may not exceed 5% in value of our total assets and we may not own more than 10% of the voting power or value of any one issuer’s outstanding securities (with an exception for securities of a qualified REIT subsidiary or of a taxable REIT subsidiary). In addition, the aggregate value of our securities in taxable REIT subsidiaries cannot exceed 25% of our total assets. We monitor the purchase and holding of our assets for purposes of the above asset tests and seek to manage our portfolio to comply at all times with such tests.

We may from time to time hold, through one or more taxable REIT subsidiaries, assets that, if we held them directly, could generate income that would have an adverse effect on our qualification as a REIT or on certain classes of our stockholders.

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.

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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 and other investment assets suitable for purchase, resulting in higher prices and lower yields on assets.

Personnel

As of December 31, 2008 we employed six people.

Corporate Office

Our corporate headquarters are located at 52 Vanderbilt Avenue, Suite 403, New York, New York, 10017 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, 52 Vanderbilt Avenue, Suite 403, New York, New York, 10017. Information on our website is neither part of nor incorporated into this Annual Report on Form 10-K.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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 strategy;

future performance, developments, market forecasts or projected dividends;

projected acquisitions or joint ventures; and

projected capital expenditures.

It is important to note that the description of our business is general and our investment in real estate-related and certain alternative assets in particular, is a statement about our operations as of a specific point in time and is not meant to be construed as an investment policy. The types of assets we hold, the amount of leverage we use or the liabilities we incur and other characteristics of our assets and liabilities disclosed in this report as of a specified period of time 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 and many of which are beyond our control and 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 portfolio strategy and operating strategy may be changed or modified by our management without advance notice to you or stockholder approval and 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;

reduced demand for our securities in the mortgage securitization and secondary markets;

interest rate mismatches between our interest-earning assets and our borrowings used to fund such purchases;

changes in interest rates and mortgage prepayment rates;

changes in the financial markets and economy generally, including the continued or accelerated deterioration of the U.S. economy;

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;

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

our ability to successfully implement and grow our alternative investment strategy and to identify suitable alternative assets;

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;

actions taken by the U.S. and foreign governments, central banks and other governmental and regulatory bodies for the purpose of stabilizing the financial credit and housing markets, and economy generally, including loan modification programs;

changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac; and

the other important factors identified, or incorporated by reference into this report, including, but not limited to those under the captions “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk”, and those described in Part I, Item 1A – “Risk Factors,” and the various other factors identified in any other documents filed by us with the SEC.

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 SEC.

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Item 1A. RISK FACTORS

Set forth below are the risks that we believe are material to stockholders. You should carefully consider the following risk factors and the various other factors identified in or incorporated by reference into any other documents filed by us with the SEC in evaluating our company and our business. The risks discussed herein can adversely affect our business, liquidity, operating results, prospects, and financial condition. This could cause the market price of our securities to decline. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, operating results, prospects, and financial condition.

Risks Related to Our Business and Our Company

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

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

Interest rate fluctuations will also cause variances in the yield curve, which may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on the RMBS and other interest-earning assets in our investment portfolio. Because the RMBS in our investment portfolio typically bear interest based on longer-term rates while our borrowings typically bear interest based on short-term rates, a flattening of the yield curve would tend to decrease our net income and the market value of these securities. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur significant operating losses. A flat or inverted yield curve may also result in an adverse environment for adjustable-rate RMBS volume, as there may be little incentive for borrowers to choose the underlying mortgage loans over a longer-term fixed-rate loan. If the supply of adjustable-rate RMBS decreases, yields may decline due to market forces.

Declines in the market values of assets in our investment portfolio may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

The market value of the interest-bearing assets in which we invest, most notably RMBS and purchased prime ARM loans and any related hedging instruments, may move inversely with changes in interest rates. We anticipate that increases in interest rates will tend to decrease our net income and the market value of our interest-bearing assets. Substantially all of the RMBS within our investment portfolio is classified for accounting purposes either as “trading securities” or as “available for sale.” Changes in the market values of trading securities will be reflected in earnings and changes in the market values of available for sale securities will be reflected in stockholders’ equity. As a result, a decline in market values may reduce the book value of our assets. Moreover, if the decline in market value of an available for sale security is other than temporary, such decline will reduce earnings.

A decline in the market value of our RMBS and other interest-bearing assets, such as the decline we experienced during the market disruption in March 2008, may adversely affect us, particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan, which would reduce our liquidity and limit our ability to leverage our assets.

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In March 2008, due in part to decreases in the market value of certain of the RMBS held in our portfolio caused by the March 2008 market disruption and the related increase in collateral requirements by our lenders, we elected to improve our liquidity position by selling an aggregate of approximately $598.9 million of Agency RMBS, resulting in a net loss in earnings during that quarter. Similar to March 2008, if we are, or anticipate being, unable to post the additional collateral, we would have to sell the assets at a time when we might not otherwise choose to do so. In the event that we do not have sufficient liquidity to meet such requirements, lending institutions may accelerate indebtedness, increase interest rates and terminate our ability to borrow, any of which could result in a rapid deterioration of our financial condition and cash available for distribution to our stockholders. Moreover, if we liquidate the assets at prices lower than the amortized cost of such assets, we will incur losses.

We may change our investment strategy, operating policies and/or asset allocations without stockholder consent, any of which could result in losses.

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, which may result in riskier investments. Although we have most recently employed a portfolio strategy that focuses on investments in Agency RMBS, we expect to commence investments under our alternative investment strategy in 2009. In connection with a $20.0 million preferred equity investment in our company by JMP Group, Inc. and certain of its affiliates in January 2008, we entered into an advisory agreement with HCS, pursuant to which HCS will manage any alternative investment strategy conducted through the Managed Subsidiaries during the term of the advisory agreement. Since entering into the advisory agreement, we have explored and will continue to consider alternative investments, including those outside of our targeted asset class, that we believe will be accretive to earnings and may allow us to utilize all or a portion of an approximately $64.0 million net operating loss carry-forward. Such alternative investments may include, without limitation, lower rated non-Agency RMBS, CMBS and corporate CLO securities as well as equity participations in funds or companies that invest in similar type assets. 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 and in which we have limited or no investment experience. These changes could result in a decline in earnings or losses which could adversely affect our financial condition, results of operations, the market price of our common stock or our ability to pay dividends.

Continued adverse developments in the residential mortgage market, and the economy generally, may adversely affect our business, particularly our ability to acquire Agency RMBS and the value of the Agency RMBS that we hold in our portfolio as well as our ability to finance or sell our Agency RMBS.

In recent years, the residential mortgage market in the United States has experienced a variety of difficulties and changed economic conditions, including declining home values, heightened defaults, credit losses and liquidity concerns. Over the past year, news of potential and actual security liquidations has increased the volatility of many financial assets, including Agency RMBS and other high-quality residential MBS assets. These recent disruptions have materially adversely affected the performance and market value of the RMBS in our portfolio and prime ARM loans held in securitization trusts, as well as other interest-earning assets that we may consider acquiring in the future. Securities backed by residential mortgage loans originated in 2006 and 2007 have had higher and earlier than expected rates of delinquencies. In addition, the U.S. economy is presently mired in a recession, with housing prices that continue to fall in many areas around the country while unemployment rates continue to rise, further increasing the risk for higher delinquency rates. Many RMBS and other interest-earning assets have been downgraded by rating agencies in recent years, and rating agencies may further downgrade these securities in the future. Lenders have imposed additional and more stringent equity requirements necessary to finance these assets and frequent impairments based on mark-to-market valuations have generated substantial collateral calls in the industry. As a result of these difficulties and changed economic conditions, many companies operating in the mortgage specialty finance sectors have failed and others, including Fannie Mae and Freddie Mac, are facing serious operating and financial challenges. While the U.S. Federal Reserve has taken certain actions in an effort to ameliorate the current market conditions, and the U.S. Treasury and the Federal Housing Finance Agency, or FHFA, which is the federal regulator now assigned to oversee Fannie Mae and Freddie Mac, are also taking actions, these efforts may be ineffective. As a result of these factors, among others, the market for these securities may be adversely affected for a significant period of time.

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During the past year, housing prices and appraisal values in many states have declined or stopped appreciating, after extended periods of significant appreciation. A continued decline or an extended flattening of those values may result in additional increases in delinquencies and losses on residential mortgage loans generally, particularly with respect to second homes and investor properties and with respect to any residential mortgage loans, the aggregate loan amounts of which (including any subordinate liens) are close to or greater than the related property values.

Fannie Mae and Freddie Mac guarantee the payments of principal and interest on the Agency RMBS in our portfolio even if the borrowers of the underlying mortgage loans default on their payments. However, rising delinquencies and market perception can still negatively affect the value of our Agency RMBS or create market uncertainty about their true value. While the market disruptions have been most pronounced in the non-Agency RMBS market, the impact has extended to Agency RMBS. During a significant portion of 2008, the value of Agency RMBS were unstable and relatively illiquid compared to prior periods.

Agency RMBS guaranteed by Fannie Mae and Freddie Mac are not supported by the full faith and credit of the United States. Fannie Mae and Freddie Mac have suffered significant losses and on September 6, 2008, FHFA placed Fannie Mae and Freddie Mac into conservatorship. Despite these steps, Fannie Mae and Freddie Mac could default on their guarantee obligations which would materially and adversely affect the value of our Agency RMBS or other Agency indebtedness in which we may invest in the future.

We generally post our Agency RMBS as collateral for our borrowings under repurchase agreements. Any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on favorable terms or at all, or to maintain our compliance with the terms of any financing arrangements. The value of Agency RMBS may decline for several reasons, including, for example, rising delinquencies and defaults, increases in interest rates, falling home prices and credit uncertainty at Fannie Mae or Freddie Mac. In addition, since early 2008, repurchase lenders have been requiring higher levels of collateral to support loans collateralized by Agency RMBS than they have in the past, making borrowings more difficult and expensive. At the same time, market uncertainty about residential mortgage loans in general could continue to depress the market for Agency RMBS, which means that it may be more difficult for us to sell Agency RMBS on favorable terms or at all. Further, a decline in the value of Agency RMBS could subject us to margin calls, for which we may have insufficient liquidity to support, resulting in forced sales of our assets at inopportune times. If market conditions result in a decline in available purchasers of Agency RMBS or the value of our Agency RMBS, our financial position and results of operations could be adversely affected.

The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. government, may adversely affect our business.

The payments we expect to receive on the Agency RMBS we hold in our portfolio and in which we invest depend upon a steady stream of payments on the mortgages underlying the securities and are guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie Mae is part of a U.S. government agency and its guarantees are backed by the full faith and credit of the United States. Fannie Mae and Freddie Mac are U.S. government-sponsored enterprises, but their guarantees are not backed by the full faith and credit of the United States.

Since 2007, Fannie Mae and Freddie Mac have reported substantial losses and a need for substantial amounts of additional capital. In response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the recent credit market disruption, Congress and the U.S. Treasury undertook a series of actions to stabilize these government-sponsored entities and the financial markets, generally, including placing Fannie Mae and Freddie Mac into conservatorship on September 7, 2008. The conservatorship of Fannie Mae and Freddie Mac and certain other actions taken by the U.S. Treasury and U.S. Federal Reserve were designed to boost investor confidence in Fannie Mae’s and Freddie Mac’s debt and mortgage-backed securities. The U.S. government program includes contracts between the U.S. Treasury and each government-sponsored enterprise to seek to ensure that each enterprise maintains a positive net worth. Each contract has a capacity of $100 billion and provides for the provision of cash by the U.S. Treasury to the government-sponsored enterprise if FHFA determines that its liabilities exceed its assets. Each of Fannie Mae and Freddie Mac has already requested or expects to request significant funds from these facilities. It is possible that each of Freddie Mac and Fannie Mae may seek and require amounts in excess of the $100 billion capacity and such amounts may be unavailable. In addition to these contracts between the U.S. Treasury and each of Fannie Mae and Freddie Mac that provide for an infusion of capital, the U.S. Treasury has established a secured credit facility for these entities and initiated a temporary program to purchase Agency RMBS issued by Fannie Mae and Freddie Mac. Although the U.S. government has described some specific steps and reforms that it intends to take as part of the conservatorship process, Fannie Mae and Freddie Mac have continued to incur losses and efforts to stabilize these entities may not be successful and the outcome and impact of these events remain highly uncertain.

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Although the U.S. government has committed capital to Fannie Mae and Freddie Mac, there can be no assurance that the credit facilities and other capital infusions will be adequate for their needs. If the financial support is inadequate, these companies could continue to suffer losses and could fail to honor their guarantees and other obligations. Since Fannie Mae and Freddie Mac were placed in conservatorship, then-current U.S. Treasury Secretary Paulson began urging Congress to re-examine the fundamental structure of Fannie Mae and Freddie Mac. Mr. Paulson later commented that allowing the two companies to return to their previous operating approach was not a viable option. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be considerably limited relative to historical measurements. Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes Agency RMBS and could have broad adverse implications for the market and for our business.

Recently, Federal Reserve indicated that it will purchase up to an additional $750 billion of Agency RMBS, bringing its total purchase commitments to $1.25 trillion. The U.S. Treasury also implemented a temporary program to purchase RMBS. Purchases under the U.S. Treasury’s program began in September 2008 and the Federal Reserve’s program in January 2009, but there is no certainty that the U.S. Treasury or the Federal Reserve will continue to purchase additional Agency RMBS in the future. Each of the U.S. Treasury and the Federal Reserve may hold its portfolio of Agency RMBS to maturity, and, based on mortgage market conditions, may make adjustments to the portfolio. This flexibility may adversely affect the pricing and availability for our target assets. It is also possible that the U.S. Treasury’s commitment to purchase Agency RMBS in the future could create additional demand that would increase the pricing of Agency RMBS held in our portfolio and in which we invest.

The U.S. Treasury could also stop providing credit support to Fannie Mae and Freddie Mac in the future. The U.S. Congress granted the U.S. Treasury authority to purchase RMBS and to provide financial support to Fannie Mae and Freddie Mac in The Housing and Economic Recovery Act of 2008. This authority expires on December 31, 2009. The problems faced by Fannie Mae and Freddie Mac resulting in their being placed into conservatorship have stirred debate among some federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans. Following expiration of the current authorization, each of Fannie Mae and Freddie Mac could be dissolved and the U.S. government could determine to stop providing liquidity support of any kind to the mortgage market. If Fannie Mae or Freddie Mac were eliminated, we would not be able, or if their structures were to change radically, we might not be able, to acquire Agency RMBS from these companies, which would adversely affect our current business model.

Our income also could be negatively affected in a number of ways depending on the manner in which related events unfold. For example, the current credit support provided by the U.S. Treasury to Fannie Mae and Freddie Mac, and any additional credit support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from the Agency RMBS in our portfolio and in which we invest, thereby tightening the spread between the interest we earn on our portfolio of targeted assets and our cost of financing that portfolio. A reduction in the supply of Agency RMBS could also negatively affect the pricing of the Agency RMBS held in our portfolio and in which we invest by reducing the spread between the interest we earn on our portfolio of targeted assets and our cost of financing that portfolio.

As indicated above, recent legislation has changed the relationship between Fannie Mae and Freddie Mac and the U.S. government. Future legislation could further change the relationship between Fannie Mae and Freddie Mac and the U.S. government, and could also nationalize or eliminate such entities entirely. Any law affecting these government-sponsored enterprises may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. As a result, such laws could increase the risk of loss on investments in Fannie Mae and/or Freddie Mac Agency RMBS. It also is possible that such laws could adversely impact the market for such securities and spreads at which they trade. All of the foregoing could materially adversely affect our business, operations and financial condition.

There can be no assurance that the actions taken by the U.S. and foreign governments, central banks and other governmental and regulatory bodies for the purpose of seeking to stabilize the financial markets will achieve the intended effect or benefit our business, and further government or market developments could adversely affect us.

In response to the financial issues affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, EESA was enacted by the U.S. Congress. EESA provides the Secretary of the U.S. Treasury with the authority to establish TARP to purchase from financial institutions up to $700 billion of residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008. In addition, under TARP, the U.S. Treasury, after consultation with the Chairman of the Board of Governors of the U.S. Federal Reserve, may purchase any other financial instrument deemed necessary to promote financial market stability, upon transmittal of such determination, in writing, to the appropriate committees of the U.S. Congress. EESA also provides for a program that would allow companies to insure their troubled assets.

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The U.S. Treasury used the first $350 billion available under TARP to make preferred equity investments in certain financial institutions rather than purchase illiquid mortgage-related assets held by these financial institutions. On February 10 ,2009, the Secretary of the U.S. Treasury announced the U.S. government’s plan for the remaining balance of funds available under TARP, which includes a capital assistance program for banking institutions, a public-private investment fund that is expected to purchase certain illiquid mortgage-related assets, a consumer and business lending initiative that will improve the flow of credit to businesses and consumers, and a commitment to the continued purchase of RMBS issued by GSEs. On February 18, 2009, the President of the United States announced a plan designed to reverse the trend of increasing home foreclosures, which will be funded under TARP. The U.S. government has indicated that the new plan will involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans, an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings, and an additional $200 billion capital infusion to Fannie Mae and Freddie Mac to improve credit availability for residential mortgages. However, the U.S. government has provided few specific details regarding this new foreclosure mitigation plan. On March 23, 2009, the U.S. Treasury announced the creation of a public-private investment program designed to attract private capital to purchase eligible legacy loans from participating banks and eligible legacy securities in the secondary market through FDIC debt guarantees, equity co-investment by the U.S. Treasury and government-supported term asset-backed loan facilities as applicable. It remains unclear whether this initiative will achieve its intended effects.

On November 25, 2008, the U.S. Federal Reserve announced that it would initiate a program to purchase $500 billion in Agency RMBS backed by Fannie Mae, Freddie Mac and Ginnie Mae. The U.S. Federal Reserve stated that its actions are intended to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally. The purchases of Agency RMBS began on January 5, 2009. In March 2009, the Federal Reserve announced that it would purchase up to an additional $750 billion of Agency RMBS, bringing its total purchase commitment for Agency RMBS to $1.25 trillion. The U.S. Federal Reserve’s program to purchase Agency RMBS could cause an increase in the price of Agency MBS, which would negatively impact the net interest margin with respect to the Agency RMBS that we may acquire in the future.

There can be no assurance that EESA or the U.S. Federal Reserve’s actions will have a beneficial impact on the financial markets. To the extent the markets do not respond favorably to TARP, or TARP does not function as intended, our business may not receive the anticipated positive impact from the legislation and such result may have broad adverse market implications. In addition, U.S. and foreign governments, central banks and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis, such as the U.S. government’s recent passage of a $787 billion economic stimulus plan. We cannot predict whether or when such actions may occur or what effect, if any, such actions could have on our business, results of operations and financial condition.

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

During the six months ended December 31, 2008, the U.S. government, through the Federal Housing Authority and the Federal Deposit Insurance Corporation, or FDIC, commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. More recently, on February 18, 2009, the President of the United States announced the Homeowner Affordability and Stability Plan, or HASP, which is intended to stabilize the housing market by providing relief to distressed homeowners in an effort to reduce or forestall home foreclosures. Among other things, the HASP is designed to (i) enable responsible homeowners to refinance in certain instances where their home value has fallen below the amount outstanding on the homeowner’s mortgage, (ii) address certain “at-risk” homeowners by providing cash incentives to lenders to refinance the homeowner’s mortgage to a lower interest rates and subsidizing in part a reduction in the outstanding mortgage principal, (iii) provide for an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings and (iv) support lower mortgage interest rates by increasing the U.S. Treasury’s preferred stock investment in each of Fannie Mae and Freddie Mac to $200 billion, increasing the size of the companies’ retained mortgage portfolios to $900 billion each and reaffirming its commitment to continue purchasing Fannie Mae and Freddie Mac issued RMBS. This new U.S. government program, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the interest-earning assets in which we invest.

Changes in prepayment rates on our RMBS may decrease our net interest income.

Pools of mortgage loans underlie the mortgage-backed securities that we hold in our investment portfolio and in which we invest. 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 related-RMBS. 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:

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We have purchased RMBS, 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 RMBS or other 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 flat or inverted yield curve may adversely affect prepayment rates on and supply of our RMBS.

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

Interest rate caps on our adjustable-rate RMBS may reduce our income or cause us to suffer a loss during periods of rising interest rates.

The mortgage loans underlying our adjustable-rate RMBS 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 RMBS, the interest distributions made on the related RMBS 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 RMBS. Further, some of the mortgage loans underlying our adjustable-rate RMBS 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 RMBS, 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.

Competition may prevent us from acquiring mortgage-related assets at favorable yields, which 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.

We may experience periods of illiquidity for our assets which could adversely affect our ability to finance our business or operate profitably.

We bear the risk of being unable to dispose of our interest-earning assets at advantageous times or in a timely manner because these assets generally experience periods of illiquidity. The lack of liquidity may result from the absence of a willing buyer or an established market for these assets, legal or contractual restrictions on resale or disruptions in the secondary markets. This illiquidity may adversely affect our profitability and our ability to finance our business and could cause us to incur substantial losses.

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An increase in interest rates can have negative effects on us, including causing a decrease in the volume of newly-issued, or investor demand for, RMBS, which could harm our financial condition and adversely affect our operations.

An increase in interest rates can have various negative affects on us. Increases in interest rates may negatively affect the fair market value of our RMBS and other interest-earning assets. When interest rates rise, the value of RMBS and fixed-rate investment securities generally declines. Typically, as interest rates rise, prepayments on the underlying mortgage loans tend to slow. The combination of rising interest rates and declining prepayments may negatively affect the price of RMBS, and the effect can be particularly pronounced with fixed-rate RMBS. In accordance with GAAP, we will be required to reduce the carrying value of our RMBS by the amount of any decrease in the fair value of our RMBS compared to amortized cost. If unrealized losses in fair value occur, we will either have to reduce current earnings or reduce stockholders’ equity without immediately affecting current earnings, depending on how we classify our assets under GAAP. In either case, our net stockholders’ equity will decrease to the extent of any realized or unrealized losses in fair value and our financial position will be negatively impacted.

Furthermore, rising interest rates generally reduce the demand for consumer and commercial credit, including mortgage loans, due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of RMBS available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives. Rising interest rates may also cause Agency RMBS and other interest-earning assets that were issued prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of Agency RMBS and other interest-earning assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends, may be materially and adversely affected.

Changes in interest rates, particularly higher interest rates, can also harm the credit performance of our interest-earning assets. Higher interest rates could reduce the ability of borrowers to make interest payments or to refinance their loans and could reduce property values, all of which could increase our credit losses. In the event we experience a significant increase in credit losses as a result of higher interest rates, our earnings and financial condition will be materially adversely affected.

Recent market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for us to analyze our investment portfolio.

Our success depends on our ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans that underlie our Agency RMBS. Changes in interest rates and prepayments affect the market price of the Agency RMBS that we hold in our portfolio and in which we intend to invest. In managing our investment portfolio, to assess the effects of interest rate changes and prepayment trends on our investment portfolio, we typically rely on certain assumptions that are based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. If the recent dislocations in the residential mortgage market or other developments change the way that prepayment trends have historically responded to interest rate changes, our ability to (i) assess the market value of our investment portfolio, (ii) effectively hedge our interest rate risk and (iii) implement techniques to reduce our prepayment rate volatility would be significantly affected, which could materially adversely affect our financial position and results of operations.

A substantial majority of the RMBS within our investment portfolio is recorded at fair value as determined in good faith by our management based on market quotations from brokers and dealers. Although we currently are able to obtain market quotations for assets in our portfolio, we may be unable to obtain quotations from brokers and dealers for certain assets within our investment portfolio in the future, in which case our management may need to determine in good faith the fair value of these assets.

Substantially all of the assets held within our investment portfolio are in the form of securities that are not publicly traded on a national securities exchange or quotation system. The fair value of securities and other assets that are not publicly traded in this manner may not be readily determinable. A substantial majority of the assets in our investment portfolio are valued by us at fair value as determined in good faith by our management based on market quotations from brokers and dealers. Although we currently are able to obtain quotations from brokers and dealers for assets within our investment portfolio, we may be unable to obtain such quotations on other assets in our investment portfolio in the future, in which case, our manager may need to determine in good faith the fair value of these assets. Because such quotations and valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a public market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these assets are materially higher than the values that we ultimately realize upon their disposal. Misjudgments regarding the fair value of our assets that we subsequently recognize may also result in impairments that we must recognize.

Loan delinquencies on our prime ARM loans held in securitization trusts may increase as a result of significantly increased monthly payments required from ARM borrowers after the initial fixed period.

The scheduled increase in monthly payments on certain adjustable rate mortgage loans held in our securitization trusts may result in higher delinquency rates on those mortgage loans and could have a material adverse affect on our net income and results of operations. This increase in borrowers' monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to fund available replacement loans at comparably low interest rates or at all. A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance their loans or sell their homes. In addition, these mortgage loans may have prepayment premiums that inhibit refinancing.

We may be required to repurchase loans if we breached representations and warranties from loan sale transactions, which could harm our profitability and financial condition.

Loans from our discontinued mortgage lending operations that were sold to third parties under agreements include numerous representations and warranties regarding the manner in which the loan was originated, the property securing the loan and the borrower. If these representations or warranties are found to have been breached, we may be required to repurchase the loan. We may be forced to resell these repurchased loans at a loss, which could harm our profitability and financial condition.

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Under our alternative investment strategy, the mortgage loans we may invest directly in and those underlying our CMBS and RMBS are subject to delinquency, foreclosure and loss, which could result in losses to us.

Under our alternative investment strategy, we may invest in CMBS, non-Agency RMBS and other mortgage assets, including mortgage loans. Commercial mortgage loans are secured by multi-family or commercial property. They are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Such income can be affected by many factors.

Residential mortgage loans are secured by single-family residential property. They are subject to risks of delinquency and foreclosure, and risks of loss. The ability of a borrower to repay a loan secured by a residential property depends on the income or assets of the borrower. Many factors may impair borrowers’ abilities to repay their loans. ABS are bonds or notes backed by loans or other financial assets.

In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan. This could impair our cash flow from operations. In the event of the bankruptcy of a mortgage loan borrower, the loan will be deemed secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court). The lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

Foreclosure of a mortgage loan can be expensive and lengthy. This could impair our anticipated return on the foreclosed mortgage loan. Moreover, RMBS represent interests in or are secured by pools of residential mortgage loans and CMBS represent interests in or are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. To the extent a foreclosure or loss occurs on the underlying mortgage loan, we will receive less principal and interest from that security in the future. Accordingly, the CMBS and non-Agency RMBS we may invest in are subject to all of the risks of the underlying mortgage loans.

Our investments in subordinated CMBS or RMBS could subject us to increased risk of losses.

Under our alternative investment strategy, we may invest in securities that represent subordinated tranches of CMBS or non-Agency RMBS. In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by any cash reserve fund or letter of credit provided by the borrower, and then by the first loss subordinated security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit—and any classes of securities junior to those in which we invest—we may not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy delinquent interest and principal payments due on the related CMBS or RMBS, the securities in which we invest may effectively become the first loss position behind the more senior securities, which may result in significant losses to us.

The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying mortgage-backed securities to make principal and interest payments or to refinance may be impaired. In this case, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities.

Our alternative assets may include high yield or subordinated corporate securities that have greater risks of loss than other investments, which could adversely affect our business, financial condition and cash available for dividends.

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

Our due diligence may not reveal all the liabilities associated with an alternative investment and may not reveal other investment performance issues.

Before investing in an alternative asset, we review the loans or other assets comprising the investment and other factors that we believe are material to the performance of the investment. In this process, we rely on the resources available to us and, in some cases, an investigation by HCS, its affiliates or third parties. This process is particularly important and subjective with respect to new or private companies because there may be little or no information publicly available about them. Our due diligence processes might not uncover all relevant facts, thus resulting in investment losses.

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Risk Related to Our Debt Financing

Continued adverse developments in the residential mortgage market and financial markets, including recent mergers, acquisitions or bankruptcies of potential repurchase agreement counterparties, as well as defaults, credit losses and liquidity concerns, could make it difficult for us to borrow money to fund our investment strategy or continue to fund our investment portfolio on a leveraged basis, on favorable terms or at all, which could adversely affect our profitability.

We rely on the availability of financing to acquire Agency RMBS and to fund our investment portfolio on a leveraged basis. Since March 2008, there have been several announcements of proposed mergers, acquisitions or bankruptcies of investment banks and commercial banks that have historically acted as repurchase agreement counterparties. This has resulted in a fewer number of potential repurchase agreement counterparties operating in the market and reduced financing capacity. In addition, many commercial banks, investment banks and insurance companies have announced extensive losses from exposure to the residential mortgage market. These losses have reduced financial industry capital, leading to reduced liquidity for some institutions. Institutions from which we seek to obtain financing may have owned or financed RMBS which have declined in value and caused them to suffer losses as a result of the recent downturn in the residential mortgage market. If these conditions persist, these institutions may be forced to exit the repurchase market, merge with another counterparty, become insolvent or further tighten their lending standards or increase the amount of equity capital or haircut required to obtain financing. Moreover, because our equity market capitalization places us at the low end of market capitalization among all mortgage REITs, continued adverse developments in the residential mortgage market may cause some of our lenders to reduce or terminate our access to future borrowings before those of our competitors. Any of these events could make it more difficult for us to obtain financing on favorable terms or at all. Our profitability will be adversely affected if we are unable to obtain cost-effective financing for our investments.

We may incur increased borrowing costs related to repurchase agreements and that would adversely affect our profitability.

Currently, a significant portion of our borrowings are collateralized borrowings in the form of repurchase agreements. If the interest rates on these agreements increase at a rate higher than the increase in rates payable on our investments, our profitability would be adversely affected.

Our borrowing costs under repurchase agreements generally correspond to short-term interest rates such as LIBOR or a short-term Treasury index, plus or minus a margin. The margins on these borrowings over or under short-term interest rates may vary depending upon a number of factors, including, without limitation:

the movement of interest rates;

the availability of financing in the market; and

the value and liquidity of our mortgage-related assets.

Currently, repurchase agreement lenders are requiring higher levels of collateral than they have required in the past to support repurchase agreements collateralized by Agency RMBS and if this continues it will make our borrowings and use of leverage less attractive and more expensive. Many financial institutions have increased lending margins for Agency RMBS to approximately 5.0% on average, which means that we are required to pledge Agency RMBS having a value of 105% of the amount of our borrowings. These increased lending margins may require us to post additional cash collateral for our Agency RMBS. If the interest rates, lending margins or collateral requirements under these repurchase agreements increase, or if lenders impose other onerous terms to obtain this type of financing, our results of operations will be adversely affected.

Failure to procure adequate debt financing, or to renew or replace existing debt financing as it matures, would adversely affect our results and may, in turn, negatively affect the value of our common stock and our ability to distribute dividends.

We use debt financing as a strategy to increase our return on investments in our investment portfolio. However, we may not be able to achieve our desired debt-to-equity ratio for a number of reasons, including the following:

our lenders do not make debt financing available to us at acceptable rates; or

our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do.

The dislocations in the residential mortgage market and credit markets have led lenders, including the financial institutions that provide financing for our investments, to heighten their credit review standards, and, in some cases, to reduce or eliminate loan amounts available to borrowers. As a result, we cannot assure you that any, or sufficient, debt funding will be available to us in the future on terms that are acceptable to us. In the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the value of our common stock and our ability to make distributions, and you may lose part or all of your investment.

Furthermore, because we rely primarily on short-term borrowings to finance our investment portfolio, our ability to achieve our investment objective depends not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. As of December 31, 2008, substantially all of our borrowings under repurchase agreements bore maturities of 30 days or less. If we are not able to renew or replace maturing borrowings, we will have to sell some or all of our assets, possibly under adverse market conditions.

The repurchase agreements that we use to finance our investments may require us to provide additional collateral, which could reduce our liquidity and harm our financial condition.

We intend to use repurchase agreements to finance our investments. If the market value of the loans or securities pledged or sold by us to a funding source decline in value, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so. Posting additional collateral to support our repurchase agreements will reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase our borrowing rates, liquidate our collateral at inopportune times and terminate our ability to borrow. This could result in a rapid deterioration of our financial condition and possibly require us to file for protection under the U.S. Bankruptcy Code.

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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 other forms of borrowing. The amount of leverage we incur varies depending on our ability to obtain credit facilities and our lenders’ estimates of the value of our portfolio’s cash flow. The return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that can be derived from the assets we hold in our investment portfolio. Further, the leverage on our equity may exacerbate any losses we incur.

Our debt service payments will reduce the net income available for distribution to our stockholders. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to sale to satisfy our debt obligations. A decrease in the value of the assets may lead to margin calls under our repurchase agreements which we will have to satisfy. Significant decreases in asset valuation, such as occurred during March 2008, could lead to increased margin calls, and we may not have the funds available to satisfy any such margin calls. We have a target overall leverage amount for our RMBS investment portfolio of seven to nine 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 RMBS 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 RMBS portfolio in an attempt to enhance our returns. To finance our RMBS investment portfolio, we generally seek to borrow between seven and nine times the amount of our equity. At December 31, 2008 our leverage ratio for our RMBS investment portfolio, which we define as our outstanding indebtedness under repurchase agreements divided by total stockholders’ equity and our Series A Preferred Stock, was 6.8:1. This definition of the leverage ratio is consistent with the manner in which the credit providers under our repurchase agreement calculate our leverage. Our repurchase agreements are not currently committed facilities, meaning that the counterparties to these agreements may at any time choose to restrict or eliminate our future access to the facilities and we have no other committed credit facilities through which we may leverage our equity. If we are unable to leverage our equity to the extent we currently anticipate, the returns on our portfolio could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.

If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term or if we default on our obligations under the repurchase agreement, we would incur losses.

When we engage in repurchase transactions, we generally sell RMBS to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same RMBS back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the RMBS to the lender is less than the value of those RMBS (this difference is referred to as the “haircut”), if the lender defaults on its obligation to resell the same RMBS back to us we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the RMBS). Further, if we default on one of our obligations under a repurchase transaction, the lender can terminate the transaction and cease entering into any other repurchase transactions with us. Our repurchase agreements contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default. Any losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.

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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.

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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.

Risks Related to the Advisory Agreement with HCS

We are dependent on HCS and certain of its key personnel and may not find a suitable replacement if HCS 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, HCS advises the Managed Subsidiaries. HCS 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 HCS, or of a significant number of investment professionals or principals of HCS, could have a material adverse effect on our ability to achieve our investment objectives. We are subject to the risk that HCS 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, HCS is entitled to receive an advisory fee payable regardless of the performance of the assets of the Managed Subsidiaries.

We will pay HCS 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 HCS a base advisory fee even if they are not managing any assets of the Managed Subsidiaries' portfolio. HCS’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, HCS 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, HCS 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 HCS 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, HCS 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.

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We compete with HCS’s other clients for access to HCS.

HCS 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, HCS 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 HCS provides them. For the same reasons, the personnel of HCS may be unable to dedicate a substantial portion of their time managing the Managed Subsidiaries’ investments if HCS manages any future investment vehicles.

There are conflicts of interest in our relationship with HCS, which could result in decisions that are not in the best interests of our stockholders.

The Managed Subsidiaries may have or pursue investments in securities in which HCS has or is seeking an interest. Similarly, HCS 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 HCS, including the purchase and sale of all or a portion of a portfolio investment.

HCS 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. HCS 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, HCS 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 HCS devote as much time to the Managed Subsidiaries as HCS deems appropriate, the officers and employees may have conflicts in allocating their time and services among the Managed Subsidiaries and HCS’s and its affiliates' other accounts. In addition, HCS and its affiliates, in connection with their other business activities, may acquire material non-public confidential information that may restrict HCS 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.

HCS and JMP Group, Inc. beneficially owned approximately 16.8% and 12.2%, respectively, of our outstanding common stock as of December 31, 2008. HCS is an investment adviser that manages investments and trading accounts of other persons, including certain accounts affiliated with JMP Group, Inc., and is deemed the beneficial owner of shares of our common stock held by these accounts. James J. Fowler, the Non-Executive Chairman of our Board of Directors and also the non-compensated chief investment officer of the Managed Subsidiaries, is a managing director of HCS. HCS is an affiliate of JMP Group, Inc. Joseph A. Jolson, the Chairman and Chief Executive Officer of JMP Group Inc. and HCS, beneficially owned approximately 9.5% of the Company’s outstanding common stock as of December 3, 2008. In addition, in November 2008, our Board of Directors approved an exemption from the ownership limitations contained in our Charter, to permit Mr. Jolson to beneficially own up to 25% of the aggregate value of our outstanding capital stock. As a result of the combined voting power of HCS, JMP Group, Inc. and Mr. Jolson, these stockholders exert significant influence over matters submitted to a vote of stockholders, including the election of directors and approval of a change in control or business combination of our company. This concentration of ownership may result in decisions affecting us that are not in the best interests of all our stockholders. In addition, Mr. Fowler may have a conflict of interest in situations where the best interests of our company and stockholders do not align with the interests of HCS, JMP Group, Inc. or its affiliates, which may result in decisions that are not in the best interests of all our stockholders.

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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 HCS that is materially detrimental to us or upon a determination that the management fee payable to HCS is not fair, subject to HCS’s right to prevent such a termination by accepting a mutually acceptable reduction of management fees. HCS will be paid a termination fee equal to the 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 HCS without cause.

Risks Related to an Investment in Our Capital Stock

The market price and trading volume of our common stock may be volatile.

The market price of our common stock is highly volatile and subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could result in fluctuations in the price or trading volume of our common stock include, among other things: actual or anticipated changes in our current or future financial performance; changes in market interest rates and general market and economic conditions. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly.

No active trading market for the Series A Preferred Stock currently exists and one may not develop in the future.

The shares of Series A Preferred Stock were issued in a private placement transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended, and are not listed on the NASDAQ Capital Market or any other market. Furthermore, even if the Series A Preferred Stock is accepted for listing on the NASDAQ Capital Market or another securities exchange, an active trading market may not develop and the market price of the Series A Preferred Stock may be volatile. As a result, an investor in our Series A Preferred Stock may be unable to sell his/her shares of Series A Preferred Stock at a price equal to or greater than that which the investor paid, if at all.

We have not established a minimum dividend payment level for our common stockholders and there are no assurances of our ability to pay dividends to common or preferred stockholders in the future.

We intend to pay quarterly dividends and to make distributions to our common stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code of 1986, as amended, or Internal Revenue Code. We have not established a minimum dividend payment level for our common stockholders and our ability to pay dividends may be harmed by the risk factors described herein. From July 2007 until April 2008, our Board of Directors elected to suspend the payment of quarterly dividends on our common stock. Our Board’s decision reflected our focus on the elimination of operating losses through the sale of our mortgage lending business and the conservation of capital to build future earnings from our portfolio management operations. All distributions to our common stockholders will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Directors may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future.

In addition, in the event that we do not have legally available funds, or any of our financing agreements in the future restrict our ability, to pay cash dividends on shares of our Series A Preferred Stock, we will be unable to pay cash dividends on our Series A Preferred Stock, unless, in the case of restrictions imposed by our financing agreements, we can refinance amounts outstanding under those agreements. Although the dividends on our Series A Preferred Stock would continue to accrue, we may pay dividends on shares of our Series A Preferred Stock only if we have legally available funds for such payment.

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Upon conversion of our Series A Preferred Stock, we will be required to issue shares of common stock to holders of our Series A Preferred Stock, which will dilute the holders of our outstanding common stock. Our outstanding shares of Series A Preferred Stock 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 shares of Series A Preferred Stock to the JMP Group for an aggregate purchase price of $20.0 million. The Series A Preferred Stock entitles 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 $0.20 per share. Holders of our Series A Preferred Stock have dividend and liquidating distribution preferences over holders of our common stock, which may negatively affect a Series A Preferred Stockholder’s ability to receive dividends or liquidating distributions on his or her shares. The Series A Preferred Stock also has voting rights equal to the voting rights attached to our common stock, except that each share of Series A Preferred Stock is entitled to a number of votes equal to the conversion rate for the Series A Preferred Stock.

The shares of Series A Preferred Stock are convertible into shares of our common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 ½) shares of common stock for each share of Series A Preferred Stock. Upon conversion of the Series A Preferred Stock, we will issue common stock to the holders of our Series A Preferred Stock, which will dilute the holders of our outstanding common stock.

The Series A Preferred Stock represents approximately 21% of our outstanding capital stock, on a fully diluted basis, as of March 1, 2009. Therefore, the holders of our Series A Preferred Stock have voting control over us.

The Series A Preferred Stock represents approximately 21% of our outstanding capital stock, on a fully diluted basis, as of March 1, 2009. The Series A Preferred Stock also has voting rights equal to the voting rights attached to our common stock, except that each share of Series A Preferred Stock is entitled to a number of votes equal to the conversion rate. Therefore, the holders of our Series A Preferred Stock 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 and preferred stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. Upon liquidation, holders of our debt securities and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our preferred stock and common stock, with holders of our preferred stock having priority over holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our Series A Preferred Stock has 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, and any preferred stock issued by us in the future could have similar terms. 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.

We may not be able to pay the redemption price of our Series A Preferred Stock on the redemption date.

We have an obligation to redeem any remaining outstanding shares of our Series A Preferred Stock on or about December 31, 2010, at a redemption price equal to 100% of the $20.00 per share liquidation preference, plus all accrued and unpaid dividends. We may be unable to finance the redemption on favorable terms, or at all. Consequently, we may not have sufficient cash to purchase the shares of our Series A Preferred Stock.

We may not issue preferred stock that is senior to the Series A Preferred Stock without the consent of the holders of 66 2/3% of the shares of Series A Preferred Stock, which limits the flexibility of our capital structure.

As long as the Series A Preferred Stock is outstanding, we may not issue preferred stock that is senior to the Series A Preferred Stock with respect to dividend or liquidation rights without the consent of the holders of 66 2/3% of the shares of Series A Preferred Stock. This limitation restricts the flexibility of our capital structure and may prevent us from issuing equity that would otherwise be in the best interests of our company and common stockholders.

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Future sales of our common stock could have an adverse effect on our common stock price.

We cannot predict the effect, if any, of future sales of common stock, or the availability of shares for future sales, on the market price of our common stock. For example, upon conversion of our Series A Preferred Stock, we will be required to issue shares of our common stock to holders of our Series A Preferred Stock, 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.

Risks Related to Our Company, Structure and Change in Control Provisions

Our directors have approved broad investment guidelines for us and do not approve each investment we make.

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 and HCS. Furthermore, transactions entered into by us may be difficult or impossible to unwind by the time they are reviewed by our directors. Our management and HCS have substantial discretion within our broad investment guidelines in determining the types of assets we may decide are proper investments for us.

We are dependent on certain key personnel.

We are a small company and are dependent upon the efforts of certain key individuals, including James J. Fowler, the Chairman of our Board of Directors, and Steven R. Mumma, our Chief Executive Officer, President and Chief Financial Officer. The loss of any key personnel or their services could have an adverse effect on our operations.

Our Chief Executive Officer has an agreement with us that provides him with benefits in the event his employment is terminated following a change in control.

We have entered into an agreement with our Chief Executive Officer, Steven R. Mumma, that provides him with severance benefits if his 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). This test is known as the “5/50 test.” Attribution rules in the Internal Revenue Code apply to determine if any individual or entity actually or constructively owns our capital stock for purposes of this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of each taxable year (other than our first year as a REIT). To help ensure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock. Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and provides that, unless exempted by our Board of Directors, no person may own more than 9.9% in value of the outstanding shares of our capital stock. The ownership limit contained in our charter could delay or prevent a transaction or a change in control of our company under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then current market price for our common stock or would otherwise be in the best interests of our stockholders.

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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. In November 2008, our Board of Directors granted an exemption from the ownership limit to permit Joseph A. Jolson, the Chairman and Chief Executive Officer of JMP Group, Inc., to beneficially own up to 25% of the aggregate value of our outstanding capital stock. Because all other individuals who own our stock are permitted to own up to 9.9% in value of the outstanding shares of our capital stock, it is possible that four other individuals acquired between November 2008 and December 31, 2008, or could acquire during the last half of a taxable year, a sufficient amount of our stock to cause us to violate the 5/50 rule. In connection with the ownership waiver granted by us to Mr. Jolson, we intend to submit a proposal to our stockholders to amend our charter to reduce the 9.9% ownership limit to a percentage that will allow us to satisfy the 5/50 test with no uncertainty while also accommodating the exemption applicable to Mr. Jolson. Although we believe that we satisfy and will continue to satisfy the 5/50 test, there can be no assurance that our stockholders will approve an amendment to the charter reducing the 9.9% ownership limit prior to July 1, 2009 or that, absent such approval, we will continue to satisfy the 5/50 test on and after July 1, 2009.

Certain provisions of Maryland law and our charter and bylaws could hinder, delay or prevent a change in control which could have an adverse effect on the value of our securities.

Certain provisions of Maryland law, our charter and our bylaws may have the effect of delaying, deferring or preventing transactions that involve an actual or threatened change in control. These provisions include the following, among others:

our charter provides that, subject to the rights of one or more classes or series of preferred stock to elect one or more directors, a director may be removed with or without cause only by the affirmative vote of holders of at least two-thirds of all votes entitled to be cast by our stockholders generally in the election of directors;

our bylaws provide that only our Board of Directors shall have the authority to amend our bylaws;

under our charter, our Board of Directors has authority to issue preferred stock from time to time, in one or more series and to establish the terms, preferences and rights of any such series, all without the approval of our stockholders;

the Maryland Business Combination Act; and

the Maryland Control Share Acquisition Act.

Although our Board of Directors has adopted a resolution exempting us from application of the Maryland Business Combination Act and our bylaws provide that we are not subject to the Maryland Control Share Acquisition Act, our Board of Directors may elect to make the “business combination” statute and “control share” statute applicable to us at any time and may do so without stockholder approval.

Maintenance of our Investment Company Act exemption imposes limits on our operations.

We have conducted and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act. We believe that there are a number of exemptions under the Investment Company Act that are applicable to us. To maintain the exemption, the assets that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act. In addition, we could, among other things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on our operations and the market price for our securities.

Tax Risks Related to Our Structure

Failure to qualify as a REIT would adversely affect our operations and ability to make distributions.

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

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If we fail to qualify as a REIT in any taxable year and we do not qualify for certain statutory relief provisions, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. We might be required to borrow funds or liquidate some investments in order to pay the applicable tax. Our payment of income tax would reduce our net earnings available for investment or distribution to stockholders. Furthermore, if we fail to qualify as a REIT and do not qualify for certain statutory relief provisions, we would no longer be required to make distributions to stockholders. Unless our failure to qualify as a REIT were excused under the federal income tax laws, we generally would be disqualified from treatment as a REIT for the four taxable years following the year in which we lost our REIT status.

REIT distribution requirements could adversely affect our liquidity.

In order to qualify as a REIT, we generally are required each year to distribute to our stockholders at least 90% of our REIT taxable income, excluding any net capital gain. To the extent that we distribute at least 90%, but less than 100% of our REIT taxable income, we will be subject to corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary REIT income for that year, (ii) 95% of our REIT capital gain net income for that year, and (iii) 100% of our undistributed REIT taxable income from prior years.

We have made and intend to continue to make distributions to our stockholders to comply with the 90% distribution requirement and to avoid corporate income tax and the nondeductible excise tax. However, differences in timing between the recognition of REIT taxable income and the actual receipt of cash could require us to sell assets or to borrow funds on a short-term basis to meet the 90% distribution requirement and to avoid corporate income tax and the nondeductible excise tax.

Certain of our assets may generate substantial mismatches between REIT taxable income and available cash. Such assets could include mortgage-backed securities we hold that have been issued at a discount and require the accrual of taxable income in advance of the receipt of cash. As a result, our taxable income may exceed our cash available for distribution and the requirement to distribute a substantial portion of our net taxable income could cause us to:

sell assets in adverse market conditions,

borrow on unfavorable terms or

distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt in order to comply with the REIT distribution requirements.

Further, our lenders could require us to enter into negative covenants, including restrictions on our ability to distribute funds or to employ leverage, which could inhibit our ability to satisfy the 90% distribution requirement.

Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations.

The maximum U.S. federal income tax rate for dividends payable to domestic shareholders that are individuals, trust and estates is 15% (through 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.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code substantially limit our ability to hedge the RMBS in our investment portfolio. Our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS. Any hedging income earned by a TRS would be subject to federal, state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

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A decline in the value of the real estate securing the mortgage loans that back RMBS could cause a portion of our income from such securities to be nonqualifying income for purposes of the REIT 75% gross income test, which could cause us to fail to qualify as a REIT.

Pools of mortgage loans back the RMBS that we hold in our investment portfolio and in which we invest. In general, the interest income from a mortgage loan is qualifying income for purposes of the 75% gross income test applicable to REITs to the extent that the mortgage loan is secured by real property. If a mortgage loan has a loan-to-value ratio greater than 100%, however, then only a proportionate part of the interest income is qualifying income for purposes of the 75% gross income test and only a proportionate part of the value of the loan is treated as a “real estate asset” for purposes of the 75% asset test applicable to REITs. This loan-to-value ratio is generally measured at the time that the REIT commits to acquire the loan. Although the IRS has ruled generally that the interest income from non-collateralized mortgage obligation (“CMO”) RMBS is qualifying income for purposes of the 75% gross income test, it is not entirely clear how this guidance would apply if we purchase non-CMO RMBS in the secondary market at a time when the loan-to-value ratio of one or more of the mortgage loans backing the non-CMO RMBS is greater than 100%, and, accordingly, a portion of any income from such non-CMO RMBS may be treated as non-qualifying income for purposes of the 75% gross income test. In addition, that guidance does not apply to CMO RMBS. In the case of CMO MBS, if less than 95% of the assets of the issuer of the CMO RMBS constitute “real estate assets,” then only a proportionate part of our income derived from the CMO RMBS will qualify for purposes of the 75% gross income test. Although the law is not clear, the IRS may take the position that the determination of the loan-to-value ratio for mortgage loans that back CMO RMBS is to be made on a quarterly basis. A decline in the value of the real estate securing the mortgage loans that back our CMO RMBS could cause a portion of the interest income from those RMBS to be treated as non-qualifying income for purposes of the 75% gross income test. If such non-qualifying income caused us to fail the 75% gross income test and we did not qualify for certain statutory relief provisions, we would fail to qualify as a REIT.

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Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Other than real estate owned, acquired through, or in lieu of, foreclosures on mortgage loans, the Company does not own any properties. As of December 31, 2008, our principal executive and administrative offices are located in leased space at 52 Vanderbilt Avenue, Suite 403, New York, New York 10017

Item 3. LEGAL PROCEEDINGS

The Company is at times subject to various legal proceedings arising in the ordinary course of business. As of the date of this report, 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 (the “Plaintiffs”), filed suit in the United States District Court for the Southern District of New York against HC and the Company, alleging that HC 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 the Company's discontinued mortgage lending business, purported to bring a FLSA “collective action” on behalf of similarly situated loan officers of HC and sought unspecified amounts for alleged unpaid overtime wages, liquidated damages, attorney’s fees and costs.

On December 30, 2007, the Company entered into an agreement in principle with the Plaintiffs to settle this suit and on June 2, 2008, the court granted preliminary approval of the settlement. Upon completion of a fairness hearing on September 18, 2008, the court certified the class and approved the settlement, excluding Plaintiffs' counsel's application for attorney fees, which remained subject to final approval by the court. As part of the preliminary settlement, the Company funded the settlement in the amount of $1.35 million into an escrow account for the Plaintiffs. Plaintiffs’ counsel's fee was determined by the court and final approval for distributions of the settlement amount and Plaintiffs’ counsel's fees was granted on November 7, 2008. The Company previously reserved and expensed this amount in the year ended December 31, 2007. In December 2008, amounts held in the escrow account were disbursed in satisfaction of the settlement amounts and fees owed to Plaintiffs’ counsel, thereby resulting in the termination of this suit.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II

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

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

Our common stock is traded on NASDAQ under the trading symbol “NYMT”. As of December 31, 2008, we had 9,320,094 shares of common stock outstanding and as of March 1, 2009, there were approximately 38 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name. We completed a one-for-two reverse stock split of our common stock in May 2008, which provided stockholders of record as of May 29, 2008 with one share of common stock for every two shares owned. In October 2007, we completed a one-for-five reverse stock split of our common stock, which provided stockholders of record as of October 9, 2007 with one share of common stock for every five shares owned.

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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 and dividends set forth immediately below reflect the Company’s reverse stock splits as if they had occurred on January 1, 2007. The data below has been sourced from http://www.bloomberg.com.

	Common Stock Prices (1)						Cash Dividends
	High		Low		Close		Declared	Paid or Payable	Amount per Share
Year Ended December 31, 2008
Fourth quarter	$	4.37	$	1.51	$	2.20	12/23/08	01/26/09	$	0.10
Third quarter		5.99		2.50		3.17	09/29/08	10/27/08		0.16
Second quarter		6.24		4.00		6.20	06/30/08	7/25/08		0.16
First quarter		9.80		4.40		5.40	04/21/08	05/15/08		0.12

	Common Stock Prices (2)						Cash Dividends
	High		Low		Close		Declared	Paid or Payable		Amount per Share
Year Ended December 31, 2007
Fourth quarter	$	10.00	$	6.02	$	8.60				—
Third quarter		19.26		3.10		8.40				—
Second quarter		29.60		17.70		19.10				—
First quarter		33.90		23.40		25.40	3/14/07	4/26/07	$	0.50

(1)

Our common stock was reported on the OTCBB from January 1, 2008 through June 4, 2008. Our common stock has been listed on the NASDAQ since June 5, 2008.

(2)

Our common stock was listed on the NYSE from the date of our IPO until September 11, 2007, at which time our common stock was delisted from the NYSE. Our common stock was reported on the OTCBB beginning on September 11, 2007.

During 2008, dividend distributions for the Company’s common stock were $0.44 per share (as adjusted for the reverse stock splits). As of December 31, 2008, the Company’s common stock trades under the ticker symbol NYMT and was listed under CUSIP Nos. 649604501 and 649604600. For tax reporting purposes, 2008 taxable dividend distributions will be classified as follows: $0.2597 as ordinary income and $0.1803 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

04/21/08	04/30/08	05/15/08	$	0.1200	$	0.0941	$	0.0000	$	0.0941	$	0.0259
06/30/08	07/10/08	07/25/08	$	0.1600	$	0.1600	$	0.0000	$	0.1600	$	0.0000
09/29/08	10/10/08	10/27/08	$	0.1600	$	0.0056	$	0.0000	$	0.0056	$	0.1544
Total 2008 Cash Distributions			$	0.4400	$	0.2597	$	0.0000	$	0.2597	$	0.1803

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.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2008 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	—		$	—		103,111

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Performance Graph

The following line graph sets forth, for the period from June 23, 2004, the date of our IPO, through December 31, 2008, 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 value of the investment in the Company's common stock and each of the indices was $100 as of June 23, 2004.

*$100 invested on 6/24/04 in stock & index-including reinvestment of dividends.

Fiscal year ended December 31.

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.

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Item 6. SELECTED FINANCIAL DATA

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.

	As of and For the Year Ended December 31,
(Dollar amounts in thousands, except per Share Amounts)	2008			2007			2006			2005			2004
Operating Data:
Revenues:
Interest income	$	44,123		$	50,564		$	64,881		$	62,725		$	20,394
Interest expense		36,260			50,087			60,097			49,852			12,470
Net Interest Income		7,863			477			4,784			12,873			7,924
Provision for loan losses		(1,462	)		(1,683	)		(57	)		—			—
(Loss) gain on sale of securities and related hedges		(19,977	)		(8,350	)		(529	)		2,207			167
Impairment loss on investment securities		(5,278	)		(8,480	)		—			(7,440	)		—
Total other expense		(26,717	)		(18,513	)		(586	)		(5,233	)		167
Expenses:
Salaries and benefits		1,869			865			714			1,934			382
General and administrative expenses		5,041			1,889			1,318			2,384			810
Total expenses		6,910			2,754			2,032			4,318			1,192
(Loss) income from continuing operations		(25,764	)		(20,790	)		2,166			3,322			6,899
Income (loss) discontinued operations – net of tax (1)		1,657			(34,478	)		(17,197	)		(8,662	)		(1,952	)
Net (loss) income (2)	$	(24,107	)	$	(55,268	)	$	(15,031	)	$	(5,340	)	$	4,947
Basic and diluted (loss) income per common share from continuing operations	$	(3.11	)	$	(11.46	)	$	1.20		$	1.85		$	3.85
Basic and diluted income (loss) per common share from discontinued operations	$	0.20		$	(19.01	)	$	(9.53	)	$	(4.81	)	$	(1.09	)
Basic and diluted (loss) income per common share	$	(2.91	)	$	(30.47	)	$	(8.33	)	$	(2.96	)	$	2.76
Dividends per common share	$	0.54		$	0.50		$	4.70		$	9.20		$	4.00
Balance Sheet Data:
Cash and cash equivalents	$	9,387		$	5,508		$	969		$	9,056		$	7,613
Investment securities available for sale		477,416			350,484			488,962			716,482			1,204,745
Mortgage loans held in securitization trusts or held for investment (net)		348,337			430,715			588,160			780,670			190,153
Assets related to discontinued operations		5,854			8,876			212,805			248,871			201,034
Total assets		853,300			808,606			1,321,979			1,789,943			1,614,762
Financing arrangements		402,329			315,714			815,313			1,166,499			1,115,809
Collateralized debt obligations		335,646			417,027			197,447			228,226			—
Subordinated debentures		44,618			44,345			44,071			43,650			—
Convertible preferred debentures		19,702			—			—			—			—
Liabilities related to discontinued operations		3,566			5,833			187,705			231,925			189,095
Total liabilities		814,052			790,188			1,250,407			1,688,985			1,495,280
Total stockholders’ equity	$	39,248		$	18,418		$	71,572		$	100,958		$	119,482

(1)

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, the Company is required to classify its mortgage lending business as a discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 (see note 8 in the notes to our consolidated financial statements).

(2)

The selected financial data as of and for the years ended December 31, 2008, 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 period January 1, 2004 to June 29, 2004.

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

General

In an effort to diversify our investment strategy, we entered into an advisory agreement with Harvest Capital Strategies LLC (“HCS”), formerly known as JMP Asset Management LLC, concurrent with the issuance of our Series A Preferred Stock to the JMP Group, pursuant to which HCS will implement and manage our investments in alternative real estate-related and financial assets. Pursuant to the advisory agreement, HCS is responsible for managing investments made by two of our wholly-owned subsidiaries, Hypotheca Capital, LLC (“HC,” also 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 HCS. We refer to these subsidiaries in our periodic reports filed with the Securities and Exchange Commission (“SEC”) as the “Managed Subsidiaries.” Due to market conditions and other factors in 2008, including the significant disruptions in the credit markets, we elected to forgo making investments in alternative real estate-related and financial assets and instead, exclusively focused our resources and efforts on preserving capital and investing in Agency RMBS. However, we expect to begin the diversification of our investment strategy in 2009 by opportunistically investing in certain alternative real estate-related and financial assets, or equity interests therein, including, without limitation, certain non-Agency RMBS and other non-rated mortgage assets, commercial mortgage-backed securities, commercial real estate loans, collateralized loan obligations and other investments. We refer throughout this Annual Report on Form 10-K to our investment in alternative real estate-related and financial assets, other than Agency RMBS, prime ARM loans and non-Agency RMBS that are already held in our investment portfolio, as our “alternative investment strategy” and such assets as our “alternative assets.” Generally, we expect that our investment in alternative assets will be made on a non-levered basis, will be conducted through the Managed Subsidiaries and will be managed by HCS. Currently, we have established for our alternative assets a targeted range of 5% to 10% of our total assets, subject to market conditions, credit requirements and the availability of appropriate market opportunities.

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Factors that Affect our Results of Operations and Financial Condition

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

changes in interest rates;

rates of prepayment and default on our assets or the mortgages or loans that underlie such assets;

general economic and financial and credit market conditions;

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

our hedging activities;

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

the market value of our investments;

liabilities related to our discontinued operations, including repurchase obligations on the sales of mortgage loans; and

requirements to maintain REIT status and to qualify for an exemption from registration under the Investment Company Act.

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

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

The yield on our assets may be affected by a difference between the actual prepayment rates and our projections. Prepayment rates, as reflected by the rate of principal paydown, and interest rates vary according to the type of investment, conditions in the economy and financial markets, competition and other factors, none of which can be predicted with any certainty. To the extent we have acquired assets at a premium or discount to par, or face value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our assets will likely increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income will be negatively impacted. The current climate of government intervention in the mortgage markets significantly increases the risk associated with prepayments.

While we historically have used, and intend to use in the future, hedging to mitigate some of our interest rate risk, we do not hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that will allow us to seek attractive net spreads on our assets.

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In addition, our returns will be affected by the credit performance of our non-agency RMBS and other investments. If credit losses on our investments, loans, or the loans underlying our investments increase, it may have an adverse effect on our performance.

As it relates to loans sold previously under certain loan sale agreements by our discontinued mortgage lending business, we may be required to repurchase some of those loans or indemnify the loan purchaser for damages caused by a breach of the loan sale agreement. While in the past we complied with the repurchase demands by repurchasing the loan with cash and reselling it at a loss, thus reducing our cash position; more recently we have addressed these requests by negotiating a net cash settlement based on the actual or assumed loss on the loan in lieu of repurchasing the loans. As of December 31, 2008, the amount of repurchase requests outstanding was approximately $1.8 million, against which we had a reserve of approximately $0.4 million. We cannot assure you that we will be successful in settling the remaining repurchase demands on favorable terms, or at all. If we are unable to continue to resolve our current repurchase demands through negotiated net cash settlements, our liquidity could be adversely affected. In addition, we may be subject to new repurchase requests from investors with whom we have not settled or with respect to repurchase obligations not covered under the settlement.

For more information regarding the factors and risks that affect our operations and performance, see “Item 1A. Risk Factors” above and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” below.

Current Market Conditions and Known Material Trends

General. The well publicized disruptions in the credit markets that began in 2007 escalated throughout 2008 and spread to the financial markets and the greater economy. During the year, global financial markets came under increased stress as problems in the U.S. real estate and residential mortgage market spread to the broader economy and the global financial sector. In addition, fears of a global recession increased and were exacerbated by further declines in the housing and credit markets in the U.S. and Europe, which heightened concerns over the creditworthiness of some financial institutions. As a result, most sectors of the financial markets experienced significant declines during the year, including international equity and credit markets, driven, in part, by deleveraging and difficulty pricing risk in the market that has been affecting investors all over the world.

In response, various initiatives by the U.S. Government have been implemented to address credit and liquidity issues. Among other things, in September 2008, Fannie Mae and Freddie Mac were placed under conservatorship by the FHFA and the U.S. Treasury Department (“the Treasury”) announced it would purchase senior preferred stock in Fannie Mae or Freddie Mac, if needed, to a maximum of $100.0 billion per company in order that each maintains a positive net worth. In October 2008, the U.S. Treasury created the “capital purchase program” as part of the $700.0 billion Troubled Asset Relief Program, allocating $350.0 billion to invest in U.S. financial institutions to help stabilize and strengthen the U.S. financial system. In November 2008, the Federal Reserve Bank of New York (“the Federal Reserve”) announced that it would buy up to $500.0 billion of Agency RMBS from Fannie Mae, Freddie Mac and Ginnie Mae, and in January 2009, the Federal Reserve began to purchase Agency RMBS in accordance with this initiative. In March 2009, the Federal Reserve announced that it was increasing its purchase commitment for Agency RMBS by up to an additional $750 billion. We believe that the stronger backing for the guarantors of Agency RMBS, resulting from the conservatorship of Fannie Mae and Freddie Mac and the U.S. Treasury’s commitment to purchase senior preferred stock in these companies has, and are expected to continue to, positively impact the value of our Agency RMBS. Although the U.S. government has committed capital to Fannie Mae and Freddie Mac, there can be no assurance that the credit facilities and other capital infusions will be adequate for their needs. If the financial support is inadequate, these companies could continue to suffer losses and could fail to honor their guarantees and other obligations.

On February 18, 2009, the President of the United States announced the Homeowner Affordability and Stability Plan, or HASP, which is intended to stabilize the housing market by providing relief to distressed homeowners in an effort to reduce or forestall home foreclosures. Among other things, the HASP is designed to (i) enable responsible homeowners to refinance in certain instances where their home value has fallen below the amount outstanding on the homeowner’s mortgage, (ii) address certain “at-risk” homeowners by providing cash incentives to lenders to refinance the homeowner’s mortgage to a lower interest rate and subsidizing in part a reduction in the outstanding mortgage principal, (iii) provide for an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings and (iv) support lower mortgage interest rates by increasing the U.S. Treasury’s preferred stock investment in each of Fannie Mae and Freddie Mac to $200 billion, increasing the size of the companies’ retained mortgage portfolios to $900 billion each and reaffirming its commitment to continue purchasing Fannie Mae and Freddie Mac issued RMBS. This new U.S. government program, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the Agency RMBS in which we invest.

On March 23, 2009, the U.S. Treasury announced the creation of a public–private investment program designed to attract private capital to purchase eligible legacy loans from participating banks and eligible legacy securities in the secondary market through FDIC debt guarantees equity co-investment by the U.S. Treasury and government-supported term asset-backed loan facilities, as applicable.

The outcome of these events remain highly uncertain and we cannot predict whether or when such actions may occur or what impact, if any, such actions could have on our business, results of operations and financial condition.

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Mortgage asset values. Investors’ appetite for U.S. mortgage assets remained weak throughout 2008. Due to liquidations of large investment portfolios of mortgage assets in connection with forced and voluntary de-leveraging in the mortgage asset industry in March 2008, along with decreased demand for these assets among investors mortgage asset prices declined significantly in March 2008. Prices improved during the second quarter of 2008 as Fannie Mae and Freddie Mac increased buying of Agency securities for their portfolio. However, during the third quarter prices were negatively impacted by events involving the conservatorship of Fannie Mae and Freddie Mac and the bankruptcy of Lehman Brothers Holdings Inc. More recently, the Federal Reserve’s announcement on January 9, 2009 that it had begun to buy Agency RMBS, resulted in an increase in the value of Agency RMBS. We believe that the stronger backing for the guarantors of Agency RMBS, resulting from the conservatorship of Fannie Mae and Freddie Mac, along with the U.S. Treasury’s commitment to purchase senior preferred stock in these companies and the Federal Reserve’s Agency RMBS purchase program has, and are expected to continue to, positively impact the value of our Agency RMBS.

Financing markets and liquidity - In connection with the market disruption of March 2008, many financial institutions withdrew or reduced financing and liquidity that they typically offered clients as part of their daily business operations. Significant events in the financial markets in the second half of 2008 caused further tightening of lending standards and reduced overall market liquidity. In March 2008, the market experienced extreme liquidity dislocations as a result of a major broker dealer failure and several large hedge fund liquidations. As a result of these events the secured borrowing terms changed significantly, increased haircuts along with reduced credit availability caused most leveraged investors to significantly reduce their portfolio leverage. The Company’s average haircut increased to approximately 8.8% at March 31, 2008 from 5.6% at December 31, 2007. As of December 31, 2008, the Company’s average haircut was 9.2%.

Financing costs and interest rates - The overall credit market deterioration since August 2007 has also affected prevailing interest rates. For example, interest rates have been unusually volatile since the third quarter of 2007. Since September 18, 2007, the U.S. Federal Reserve has lowered the target for the Federal Funds Rate from 5.25% to a range between 0% and 0.25%. Historically, the 30-day London Interbank Offered Rate, or LIBOR, has closely tracked movements in the Federal Funds Rate. Our funding costs under repurchase agreements have traditionally tracked 30 day LIBOR. The spread between LIBOR and the Fed Funds Rate was unusually volatile during 2008, but narrowed considerably toward the end of 2008. As of December 31, 2008, 30-day LIBOR was 0.44% while the Fed Funds Rate was 0.25%. Because of continued uncertainty in the credit markets and U.S. economic conditions, we expect that interest rates are likely to experience continued volatility.

Prepayment rates. As a result of various government initiatives, rates on conforming mortgages have declined, nearing historical lows. Hybrid and adjustable-rate mortgage originations have declined substantially, as rates on these types of mortgages are comparable with rates available on 30-year fixed-rate mortgages. While such significant decreases in mortgage rates would typically foster mortgage refinancing, such activity has not occurred. We believe that the decline in home values, increases in the jobless rate and the resulting deterioration in borrowers creditworthiness have limited refinance activity to date. The recent creation of the HASP is aimed to further assist homeowners in refinancing and to reduce potential foreclosures. Although we expect that the constant prepayment rate, or CPR, will trend upward during 2009 based on current market interest rates, future CPRs will be affected by the success of HASP and the timing and purpose of any future legislation, if any, and the resulting impact on borrowers’ ability to refinance, mortgage interest rates in the market and home values.

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Significant Events in 2008

Strategic Relationship Established With JMP Group Inc.

On January 18, 2008, we issued 1.0 million shares of our Series A Preferred Stock to JMP Group Inc. and certain of its affiliates for an aggregate purchase price of $20.0 million. Concurrent with our issuance of the Series A Preferred Stock, we entered into an advisory agreement with HCS, which is an affiliate of JMP Group Inc., to manage investments made by the Managed Subsidiaries. We expect that HCS will assist us with the implementation of our alternative investment strategy, and once implemented, will manage our alternative investment strategy, as described more fully in Item 1 of this Annual Report on Form 10-K. In acting as our advisor, HCS will play a key role in the sourcing of our alternative investment opportunities. As of the date of this report, HCS had yet to manage any of our assets. For more information regarding the terms of the advisory agreement, see “Our Relationship with HCS and the Advisory Agreement” in Item 1 of this Annual Report on Form 10-K and the advisory agreement itself, which is filed an exhibit to this Annual Report on Form 10-K.

The Series A Preferred Stock entitles 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 $0.20 per share. The Series A Preferred Stock matures on December 31, 2010, has a redemption value of $20.00 per share, and is convertible into shares of the Company's common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 ½) shares of common stock for each share of Series A Preferred Stock.

Completion of $60.0 Million Offering of Common Stock

On February 21, 2008, the Company completed the issuance and sale of 7.5 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 $8.00 per share. This private offering of the Company's common stock generated gross proceeds to the Company of $60.0 million, and net proceeds to the Company of approximately $56.6 million. Pursuant to a registration rights agreement, the Company filed a resale shelf registration statement registering the resale of the shares sold in this offering, which became effective in April 2008. Pursuant to the registration rights agreement, we paid $0.7 million in liquidated damages in 2008 to the investors in the offering for not filing a resale shelf registration statement by the date required in the registration rights agreement and not obtaining NASDAQ listing for our common stock on or prior to the effective date of the resale shelf registration statement. We do not expect to incur future penalty fees under the registration rights agreement.

In accordance with our investment plan, we promptly deployed the net proceeds from our January and February 2008 equity offerings by purchasing an aggregate of approximately $714.1 million of Agency hybrid RMBS during January and February 2008. These acquisitions were financed in part with repurchase agreements and hedged with interest rate swaps.

March 2008 Credit Market Disruption

During March 2008, news of potential and actual security liquidations negatively impacted market values for, and available liquidity to finance, certain mortgage securities, including some of our Agency RMBS and AAA-rated non-Agency RMBS, resulting in a significant deleveraging event for a relatively broad range of leveraged public and private companies with investment and financing strategies similar to ours. In response to these significantly changed conditions, we undertook a number of strategic actions to reduce leverage and increase liquidity in our portfolio of Agency RMBS. During March 2008, the Company sold, in aggregate, approximately $592.8 million of Agency RMBS from its investment portfolio that was comprised of $516.4 million of Agency hybrid ARM RMBS and $76.4 million of Agency CMO floating rate securities (“CMO Floaters”), resulting in a loss of $15.0 million. As a result of these sales of RMBS, we also 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. We believe these proactive steps taken by our management team to reduce leverage and increase liquidity enabled our company to successfully navigate the extremely difficult operating and credit conditions facing companies with investment and financing strategies similar to ours.

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Subsequent Events – March 2009

Restructuring of Principal Investment Portfolio. As of December 31, 2008, our principal investment portfolio included approximately $197.7 million of collateralized mortgage obligation floating rate securities issued by an Agency, which we refer to as Agency CMO Floaters. Following a review of our principal investment portfolio, we determined in March 2009 that the Agency CMO Floaters held in our portfolio were no longer producing acceptable returns, and as a result, we decided to initiate a program to dispose of these securities on an opportunistic basis. As of March 25, 2009, the Company had sold approximately $149.8 million in current par value of Agency CMO Floaters under this program resulting in a net gain of approximately $0.2 million. As a result of these sales and our intent to sell the remaining Agency CMO Floaters in our principal investment portfolio, we concluded the reduction in value at December 31, 2008 was other-than-temporary and recorded an impairment charge of $4.1 million for the quarter and year ended December 31, 2008.

In addition, we also determined that $6.1 million in current par value of non-agency RMBS, which includes $2.5 million in current par value of retained residual interest, had suffered an other-than-temporary impairment and, accordingly, recorded an impairment charge of $1.2 million for the quarter and year ended December 31, 2008.

Note Regarding Discontinued Operations

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 Bank, F.S.B. (“Indymac”) on March 31, 2007, during the fourth quarter of 2006, we classified our mortgage lending business as a discontinued operations 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 operations and the related assets and liabilities as assets and liabilities related to a discontinued operations 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 are part of our ongoing operations and accordingly, we have not classified as a discontinued operations in accordance with the provisions of SFAS No. 144. See note 8 in the notes to our consolidated financial statements.

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, 2008, discontinued operations consist of $5.9 million in assets and $3.6 million in liabilities, down from $8.9 million in assets and $5.8 million in liabilities as of December 31, 2007.

Prior to March 31, 2007, we originated a wide range of residential mortgage loan products including prime, alternative-A, and to a lesser extent sub-prime loans, home equity lines of credit, second mortgages, and bridge loans. We originated $0.4 billion in mortgage loans during three months ended March 31, 2007. Our sale of the mortgage lending platform assets on March 31, 2007 marked our exit from the mortgage lending business.

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Balance Sheet Analysis

Investment Securities - Available for Sale. Our securities portfolio consists of Agency RMBS or primarily AAA-rated residential RMBS. At December 31, 2008, we had no investment securities in a single issuer or entity, other than Fannie Mae or Freddie Mac, that had an aggregate book value in excess of 10% of our total assets. The following tables set forth the credit characteristics of our principal investment securities portfolio as of December 31, 2008 and December 31, 2007:

Credit Characteristics of Our Investment Securities (dollar amounts in thousands):

December 31, 2008	Sponsor or Rating	Par Value		Carrying Value		% of Portfolio			Coupon			Yield
Credit
Agency Hybrid ARMs	FNMA	$	251,810	$	258,196		54	%		5.15	%		3.93	%
Agency REMIC CMO Floating Rate	FNMA/FHLMC		203,638		197,675		41	%		1.83	%		8.54	%
Private Label Floating Rate	AAA		23,289		18,118		4	%		1.27	%		15.85	%
Private Label Floating Rate	Aa		3,648		2,828		1	%		2.30	%		4.08	%
NYMT Retained Securities	AAA-BBB		609		530		0	%		5.80	%		8.56	%
NYMT Retained Securities	Below Investment Grade		2,462		69		0	%		5.67	%		16.99	%
Total/Weighted Average		$	485,456	$	477,416		100	%		3.55	%		6.51	%

December 31, 2007	Sponsor or Rating	Par Value		Carrying Value		% of Portfolio			Coupon			Yield
Credit
Agency REMIC CMO Floating Rate	FNMA/FHLMC/GNMA	$	324,676	$	318,689		91	%		5.98	%		5.55	%
Private Label Floating Rate	AAA		29,764		28,401		8	%		5.66	%		5.50	%
NYMT Retained Securities	AAA-BBB		2,169		2,165		1	%		6.31	%		6.28	%
NYMT Retained Securities	Below Investment Grade		2,756		1,229		0	%		5.68	%		12.99	%
Total/Weighted Average		$	359,365	$	350,484		100	%		5.95	%		5.61	%

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The following table sets forth the stated reset periods and weighted average yields of our investment securities at December 31, 2008 and December 31, 2007 (dollar amounts in thousands):

	Less than 6 Months					More than 6 Months To 24 Months					More than 24 Months To 60 Months					Total
December 31, 2008	Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield
Agency Hybrid ARMs	$	—		—	%	$	66,910		3.69	%	$	191,286		4.02	%	$	258,196		3.93	%
Agency REMIC CMO Floating Rate		197,675		8.54	%		—		—	%		—		—	%		197,675		8.54	%
Private Label Floating Rate		20,946		14.25	%		—		—	%		—		—	%		20,946		14.25	%
NYMT Retained Securities		530		8.56	%		—		—	%		69		16.99	%		599		15.32	%
Total/Weighted Average	$	219,151		9.21	%	$	66,910		3.69	%	$	191,355		4.19	%	$	477,416		6.51	%

	Less than 6 Months					More than 6 Months To 24 Months					More than 24 Months To 60 Months					Total
December 31, 2007	Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield

Agency REMIC CMO Floating Rate	$	318,689		5.55	%	$	—		—	%	$	—		—	%	$	318,689		5.55	%
Private Label Floating Rate		28,401		5.50	%		—		—	%		—		—	%		28,401		5.50	%
NYMT Retained Securities		2,165		6.28	%		—		—	%		1,229		12.99	%		3,394		10.03	%
Total/Weighted Average	$	349,255		5.55	%	$	—		—	%	$	1,229		12.99	%	$	350,484		5.61	%

Prepayment Experience. The constant prepayment rate (“CPR”) on our overall portfolio averaged approximately 12% during 2008 as compared to 19% during 2007. CPRs on our purchased portfolio of investment securities averaged approximately 9% while the CPRs on loans held in our securitization trusts averaged approximately 19% during 2008. When prepayment expectations over the remaining life of assets increase, we have to amortize premiums over a shorter time period resulting in a reduced yield to maturity on our investment assets. Conversely, if prepayment expectations decrease, the premium would be amortized over a longer period resulting in a higher yield to maturity. We monitor our prepayment experience on a monthly basis and adjust the amortization rate to reflect current market conditions.

Mortgage Loans Held in Securitization Trusts. Included in our portfolio are ARM loans that we originated or purchased in bulk from third parties that met our investment criteria and portfolio requirements. The Company completed four securitizations; three were classified as financings per SFAS No. 140 and one qualified as a sale under SFAS No. 140, which resulted in the recording of residual assets and mortgage servicing rights. The residual assets carrying value total $0.1 million and are included in investment securities available for sale.

The following table details mortgage loans held in securitization trusts at December 31, 2008 and December 31, 2007 (dollar amounts in thousands):

	Par Value		Coupon			Carrying Value		Yield
December 31, 2008	$	347,546		5.56	%	$	348,337		3.96	%
December 31, 2007	$	429,629		5.74	%	$	430,715		5.36	%

At December 31, 2008 mortgage loans held in securitization trusts represented approximately 41% 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.

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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 and loans backing the retained interests from our REMIC securitization as of December 31, 2008 (dollar amounts in thousands):

	# of Loans		Par Value		Carrying Value
Loan Characteristics:
Mortgage loans held in securitization trusts		793	$	347,546	$	348,337
Retained interest in REMIC securitization (included in Investment securities available for sale)		337		177,442		599
Total Loans Held		1,130	$	524,988	$	348,936

	Average			High			Low
General Loan Characteristics:
Original Loan Balance	$	491		$	3,500		$	48
Current Coupon Rate		5.67	%		8.13	%		4.00	%
Gross Margin		2.34	%		5.00	%		1.13	%
Lifetime Cap		11.19	%		13.38	%		9.13	%
Original Term (Months)		360			360			360
Remaining Term (Months)		319			327			283

	# 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

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	December 31, 2008 Percentage			December 31, 2007 Percentage
Arm Loan Type
Traditional ARMs		2.2	%		2.3	%
2/1 Hybrid ARMs		1.1	%		1.6	%
3/1 Hybrid ARMs		7.8	%		10.2	%
5/1 Hybrid ARMs		86.3	%		83.4	%
7/1 Hybrid ARMs		2.6	%		2.5	%
Total		100.0	%		100.0	%
Percent of ARM loans that are Interest Only		78.6	%		77.3	%
Weighted average length of interest only period	8.3 years			8.3 years

	December 31, 2008 Percentage			December 31, 2007 Percentage
Traditional ARMs - Periodic Caps
None		79.4	%		72.9	%
1%		1.2	%		1.4	%
Over 1%		19.4	%		25.7	%
Total		100.0	%		100.0	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Hybrid ARMs - Initial Cap
3.00% or less		6.7	%		8.3	%
3.01%-4.00%		4.0	%		5.1	%
4.01%-5.00%		88.2	%		85.6	%
5.01%-6.00%		1.1	%		1.0	%
Total		100.0	%		100.0	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Original FICO Scores
650 or less		4.4	%		3.9	%
651 to 700		18.0	%		17.0	%
701 to 750		32.7	%		32.4	%
751 to 800		40.9	%		42.5	%
801 and over		4.0	%		4.2	%
Total		100.0	%		100.0	%
Average FICO Score		736			738

	December 31, 2008 Percentage			December 31, 2007 Percentage
Original Loan to Value (LTV)
50% or less		9.7	%		9.5	%
50.01%-60.00%		8.2	%		8.9	%
60.01%-70.00%