Edgar Filing: NEW YORK MORTGAGE TRUST INC

nymt_10q-093011.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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, Suite 403, New York, New York 10017

(Address of Principal Executive Office) (Zip Code)

(212) 792-0107

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No 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 o

Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares of the registrant’s common stock, par value $.01 per share, outstanding on November 1, 2011 was 11,178,273.

NEW YORK MORTGAGE TRUST, INC.

FORM 10-Q

PART I. Financial Information	2
Item 1. Condensed Consolidated Financial Statements	2
Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010	2
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and September 30, 2010	3
Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2011	4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and September 30, 2010	5
Unaudited Notes to the Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures about Market Risk	52
Item 4. Controls and Procedures	56
PART II. OTHER INFORMATION	57
Item 1. Legal Proceedings	57
Item 1A. Risk Factors	57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3. Defaults Upon Senior Securities	58
Item 4. (Removed and Reserved).	58
Item 5. Other Information	58
Item 6. Exhibits	58
SIGNATURES	59

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share amounts)

	September 30,			December 31,
	2011			2010
ASSETS	(unaudited)

Investment securities available for sale, at fair value (including pledged securities of $133,008 and $38,475, respectively)	$	170,393		$	86,040
Mortgage loans held in securitization trusts (net)		210,423			228,185
Mortgage loans held for investment		5,117			7,460
Investments in limited partnership and limited liability company		16,887			18,665
Cash and cash equivalents		11,679			19,375
Receivable for securities sold		5,400			5,653
Derivative assets		75,053			-
Receivables and other assets		29,587			8,916
Total Assets	$	524,539		$	374,294

LIABILITIES AND EQUITY
Liabilities:
Financing arrangements, portfolio investments	$	111,500		$	35,632
Collateralized debt obligations		203,054			219,993
Derivative liabilities		3,619			1,087
Payable for securities purchased		79,585			-
Accrued expenses and other liabilities		5,360			4,095
Subordinated debentures (net)		45,000			45,000
Total liabilities		448,118			305,807
Commitments and Contingencies
Equity:
Stockholders' equity
Common stock, $0.01 par value, 400,000,000 authorized, 11,178,273 and 9,425,442, shares issued and outstanding, respectively	$	112		$	94
Additional paid-in capital		140,843			135,300
Accumulated other comprehensive income		12,453			17,732
Accumulated deficit		(77,971	)		(84,639	)
Total stockholders' equity		75,437			68,487
Noncontrolling interest		984			-
Total equity		76,421			68,487
Total Liabilities and Equity	$	524,539		$	374,294

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share amounts)

(unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2011			2010			2011			2010


INTEREST INCOME	$	7,431		$	4,536		$	17,607		$	15,942

INTEREST EXPENSE:
Investment securities and loans held in securitization trusts		732			1,211			2,161			3,887
Subordinated debentures		471			563			1,407			1,995
Convertible preferred debentures		-			537			-			1,737
Total interest expense		1,203			2,311			3,568			7,619

NET INTEREST INCOME		6,228			2,225			14,039			8,323

OTHER (EXPENSE) INCOME:
Provision for loan losses		(435	)		(734	)		(1,459	)		(1,336	)
Income from investment in limited partnership and limited liability company		479			150			1,762			150
Realized gain on investment securities and related hedges		2,526			1,860			8,000			3,958
Unrealized loss on investment securities and related hedges		(8,027	)		-			(8,762	)		-
Total other (expense) income		(5,457	)		1,276			(459	)		2,772

General, administrative and other expenses		717			2,222			6,464			6,185

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		54			1,279			7,116			4,910
Income tax expense		56			-			419			-
(LOSS) INCOME FROM CONTINUING OPERATIONS		(2	)		1,279			6,697			4,910
Income from discontinued operation - net of tax		19			298			23			877
NET INCOME		17			1,577			6,720			5,787
Net income attributable to noncontrolling interest		32			-			52			-
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(15	)	$	1,577		$	6,668		$	5,787

Basic income per common share	$	-		$	0.17		$	0.67		$	0.61
Diluted income per common share	$	-		$	0.17		$	0.67		$	0.61
Dividends declared per common share	$	0.25		$	-		$	0.65		$	0.43
Weighted average shares outstanding-basic		11,146			9,425			10,015			9,421
Weighted average shares outstanding-diluted		11,146			9,425			10,015			9,421

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(dollar amounts in thousands)

(unaudited)

									Accumulated
			Additional						Other			Non-
	Common		Paid-In			Accumulated			Comprehensive			controlling		Comprehensive
	Stock		Capital			Deficit			Income/(Loss)			Interest		Income			Total
Balance, December 31, 2010	$	94	$	135,300		$	(84,639	)	$	17,732		$	-	$	-		$	68,487
Net income		-		-			6,668			-			52		6,668			6,720
Stock issuance		18		12,475			-			-			-		-			12,493
Costs associated with issuance of common stock		-		(359	)		-			-			-		-			(359	)
Dividends declared		-		(6,573	)		-			-			-		-			(6,573	)
Increase in non-controlling interests related to consolidation of interest in a mortgage loan held for investment		-		-			-			-			932		-			932
Reclassification adjustment for net gain included in net income		-		-			-			(3,886	)		-		(3,886	)		(3,886	)
Decrease in net unrealized gain on available for sale securities		-		-			-			(1,996	)		-		(1,996	)		(1,996	)
Increase in fair value of derivative instruments utilized for cash flow hedges		-		-			-			603			-		603			603
Comprehensive income		-		-			-			-			-	$	1,389			-
Balance, September 30, 2011	$	112	$	140,843		$	(77,971	)	$	12,453		$	984				$	76,421

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(unaudited)

	For the Nine Months Ended
	September 30,
	2011			2010
Cash Flows from Operating Activities:
Net income	$	6,720		$	5,787
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		102			627
Net accretion on investment securities and mortgage loans held in securitization trusts		2,463			(2,223	)
Realized gain on securities and related hedges		(8,000	)		(3,958	)
Unrealized loss on securities and related hedges		8,762			-
Net decrease in loans held for sale		24			24
Provision for loan losses		1,459			1,336
Income from investment in limited partnership and limited liability company		(1,762	)		(150	)
Interest distributions from investment in limited partnership and limited liability company		910			-
Stock issuance		202			139
Changes in operating assets and liabilities:
Receivables and other assets		(3,574	)		76
Accrued expenses and other liabilities		167			(526	)
Net cash provided by operating activities		7,473			1,132

Cash Flows from Investing Activities:
Restricted cash		(17,349	)		690
Proceeds from sales of investment securities		168,055			33,113
Purchases of investment securities		(267,815	)		-
Issuance of mortgage loans held for investment		(2,520	)		-
Purchase of investment in limited partnership and limited liability company		(5,322	)		(10,000	)
Proceeds from investment in limited partnership and limited liability company		7,952			-
Proceeds from mortgage loans held for investment		5,002			-
Principal repayments received on mortgage loans held in securitization trusts		16,438			38,761
Principal paydowns on investment securities - available for sale		14,139			44,588
Net cash (used in) provided by investing activities		(81,420	)		107,152

Cash Flows from Financing Activities:
Proceeds from (payments of) financing arrangements		75,868			(46,641	)
Stock issuance		12,291			-
Dividends paid		(5,475	)		(6,405	)
Payments made on collateralized debt obligations		(17,006	)		(39,246	)
Capital contributed by noncontrolling interest		932			-
Costs associated with common stock subscribed		(359	)		-
Net cash provided by (used in) financing activities		66,251			(92,292	)
Net (Decrease) Increase in Cash and Cash Equivalents		(7,696	)		15,992
Cash and Cash Equivalents - Beginning of Period		19,375			24,522
Cash and Cash Equivalents - End of Period	$	11,679		$	40,514

Supplemental Disclosure:
Cash paid for interest	$	3,466		$	7,269

Non-Cash Investment Activities:
Sale of investment securities not yet settled	$	5,400		$	7,743

Purchase of investment securities not yet settled	$	79,585		$	-

Non-Cash Financing Activities:
Dividends declared to be paid in subsequent period	$	2,795		$	-

Grant of restricted stock	$	-		$	30

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(unaudited)

Summary of Significant Accounting Policies

Organization - New York Mortgage Trust, Inc., together with its consolidated subsidiaries (“NYMT,” the “Company,” “we,” “our” and “us”), is a real estate investment trust, or REIT, in the business of acquiring, investing in, financing and managing primarily mortgage-related assets. Our principal business objective is to generate net income for distribution to our stockholders resulting from the spread between the interest and other income we earn on our interest-earning assets and the interest expense we pay on the borrowings that we use to finance our leveraged assets and our operating costs. We also may opportunistically acquire and manage various other types of financial assets that we believe will compensate us appropriately for the risks associated with them.

The Company conducts its business through the parent company, NYMT, and several subsidiaries, including special purpose subsidiaries established for loan securitization purposes, a taxable REIT subsidiary ("TRS") and qualified REIT subsidiaries ("QRS"). The Company conducts certain of its portfolio investment operations through its wholly-owned TRS, Hypotheca Capital, LLC (“HC”), in order to utilize, to the extent permitted by law, a portion of a net operating loss carry-forward held in HC that resulted from the Company's exit from the mortgage lending business. Prior to March 31, 2007, the Company conducted substantially all of its mortgage lending business through HC. One of the Company's wholly-owned QRS, New York Mortgage Funding, LLC (“NYMF”), currently holds certain mortgage-related assets for regulatory compliance purposes. The Company also may conduct certain other portfolio investment operations through NYMF. The Company utilizes one of its wholly-owned QRS, RB Commercial Mortgage LLC (“RBCM”), for its investments secured by commercial real estate and other structured investments such as seasoned or distressed commercial loan portfolios, net leased properties or subordinate commercial mortgage-backed securities. The Company consolidates all of its subsidiaries under generally accepted accounting principles in the United States of America (“GAAP”).

The Company is organized and conducts its operations so as to qualify as a REIT for federal income tax purposes. As such, the Company will generally not be subject to federal income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by the due date of its federal income tax return and complies with various other requirements.

Basis of Presentation - The condensed consolidated balance sheet as of December 31, 2010, has been derived from audited financial statements. The condensed consolidated balance sheet at September 30, 2011, the condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, the condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2011 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010 are unaudited. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the operating results for the full year.

The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; significant intercompany accounts and transactions have been eliminated.

Investment Securities Available for Sale - The Company's investment securities, where the fair value option has not been elected and which are reported at fair value with unrealized gains and losses reported in other comprehensive income (“OCI”), include residential mortgage-backed securities (“RMBS”) that are issued by government sponsored enterprises (“GSE”), which, together with RMBS issued or guaranteed by other GSEs or government agencies, is referred to as “Agency RMBS,” non-Agency RMBS and collateralized loan obligations (“CLOs”). Our investment securities are classified as available for sale securities. Realized gains and losses recorded on the sale of investment securities available for sale are based on the specific identification method and included in realized gain (loss) on sale of securities and related hedges in the condensed consolidated statements of operations. Purchase premiums or discounts on investment securities are amortized or accreted to interest income over the estimated life of the investment securities using the effective yield method. Adjustments to amortization are made for actual prepayment activity.

When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired. The Company assesses its impaired securities on at least a quarterly basis, and designates such impairments as either “temporary” or “other-than-temporary.” If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then it must recognize an other-than-temporary impairment through earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date. If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the other-than-temporary impairment related to credit losses is recognized through earnings with the remainder recognized as a component of other comprehensive income (loss) on the condensed consolidated balance sheet. Impairments recognized through other comprehensive income (loss) do not impact earnings. Following the recognition of an other-than-temporary impairment through earnings, a new cost basis is established for the security, which may not be adjusted for subsequent recoveries in fair value through earnings. However, other-than-temporary impairments recognized through earnings may be accreted back to the amortized cost basis of the security on a prospective basis through interest income. The determination as to whether an other-than-temporary impairment exists and, if so, the amount considered other-than-temporarily impaired is subjective, as such determinations are based on both factual and subjective information available at the time of assessment. As a result, the timing and amount of other-than-temporary impairments constitute material estimates that are susceptible to significant change.

The Company’s investment securities available for sale also includes its investment in a wholly owned account referred to as the Midway Residential Mortgage Portfolio. The Midway Residential Mortgage Portfolio investments primarily include interest only and inverse interest only securities (collectively referred to as “IOs”). The Midway Residential Mortgage Portfolio investments include derivative investments not designated as hedging instruments, with unrealized gains and losses recognized through earnings in the condensed consolidated statements of operations. The Company has elected the fair value option for these investment securities which also measures unrealized gains and losses through earnings in the condensed consolidated statements of operations, as the Company believes this accounting treatment more accurately and consistently reflects their results of operations.

Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.

Receivables and Other Assets - Receivables and other assets totaled $29.6 million as of September 30, 2011, and consist primarily of $18.8 million of restricted cash held by third parties, $4.0 million of assets related to discontinued operations, $2.2 million of accrued interest receivable, $1.7 million related to escrow advances, $1.4 million of prepaid expenses, $0.6 million of capitalized expenses related to equity and bond issuance cost, $0.5 million of real estate owned (“REO”) in securitization trusts, $0.3 million of other assets and $0.1 million of deferred tax asset. The restricted cash held by third parties of $18.8 million includes $11.0 million held in its Midway Residential Mortgage Portfolio to be used for trading purposes, $7.6 million held by counterparties as collateral for hedging instruments and $0.2 million as collateral for a letter of credit related to the lease of the Company’s corporate headquarters. Receivables and other assets totaled $8.9 million as of December 31, 2010, and consist of $4.0 million of assets related to discontinued operations, $1.4 million of restricted cash held by third parties, $1.1 million related to escrow advances, $0.7 million of real estate owned (“REO”) in securitization trusts, $0.6 million of capitalized expenses related to equity and bond issuance cost, $0.6 million of accrued interest receivable, $0.4 million of prepaid expenses and $0.1 million of deferred tax asset. The restricted cash held by third parties of $1.4 million includes $1.2 million held by counterparties as collateral for hedging instruments and $0.2 million as collateral for a letter of credit related to the lease of the Company’s corporate headquarters.

Mortgage Loans Held in Securitization Trusts - Mortgage loans held in securitization trusts are certain adjustable rate mortgage (“ARM”) loans transferred to New York Mortgage Trust 2005-1, New York Mortgage Trust 2005-2 and New York Mortgage Trust 2005-3 that have been securitized into sequentially rated classes of beneficial interests. Mortgage loans held in securitization trusts are carried at their unpaid principal balances, net of unamortized premium or discount, unamortized loan origination costs and allowance for loan losses.

Interest income is accrued and recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in no case when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Mortgage Loans Held for Investment - Mortgage loans held for investment are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in interest income. Loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Based on the facts and circumstances of the individual loans being impaired, loan specific valuation allowances are established for the excess carrying value of the loan over either: (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price.

Allowance for Loan Losses on Mortgage Loans Held in Securitization Trusts - We establish an allowance for loan losses based on management's judgment and estimate of credit losses inherent in our portfolio of mortgage loans held in securitization trusts.

Estimation involves the consideration of various credit-related factors including but not limited to, macro-economic conditions, the current housing market conditions, loan-to-value ratios, delinquency status, historical credit loss severity rates, purchased mortgage insurance, the borrower's current economic condition and other factors deemed to warrant consideration. Additionally, we look at the balance of any delinquent loan and compare that to the current value of the collateralizing property. We utilize various home valuation methodologies including appraisals, broker pricing opinions (“BPOs”), internet-based property data services to review comparable properties in the same area or consult with a realtor in the property's area.

Comparing the current loan balance to the property value determines the current loan-to-value (“LTV”) ratio of the loan. Generally, we estimate that a first lien loan on a property that goes into a foreclosure process and becomes real estate owned (“REO”), results in the property being disposed of at approximately 84% of the current appraised value. This estimate is based on management's experience as well as realized severity rates since issuance of our securitizations. During 2008, as a result of the significant deterioration in the housing market, we revised our policy to estimate recovery values based on current home valuations less expected costs to dispose. These costs typically approximate 16% of the current home value. It is possible given continued difficult real estate market conditions in many geographic regions that we may realize less than that return in certain cases. Thus, for a first lien loan that is delinquent, we will adjust the property value down to approximately 84% of the current property value and compare that to the current balance of the loan. The difference determines the base provision for the loan loss taken for that loan. This base provision for a particular loan may be adjusted if we are aware of specific circumstances that may affect the outcome of the loss mitigation process for that loan. Predominately, however, we use the base reserve number for our reserve.

The allowance for loan losses will be maintained through ongoing provisions charged to operating income and will be reduced by loans that are charged off. As of September 30, 2011 and December 31, 2010, the allowance for loan losses held in securitization trusts totaled $3.3 million and $2.6 million, respectively.

Investment in Limited Partnership and Limited Liability Company – The Company has equity investments in a limited partnership and a limited liability company. In circumstances where the Company has a non-controlling interest but either owns a significant interest or is able to exert influence over the affairs of the enterprise, the Company utilizes the equity method of accounting. Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity’s earnings and decreased for cash distributions and a proportionate share of the entity’s losses.

Management periodically reviews its investments for impairment based on projected cash flows from the entity over the holding period. When any impairment is identified, the investments are written down to recoverable amounts.

Financing Arrangements, Portfolio Investments - Investment securities available for sale are typically financed with repurchase agreements, a form of collateralized borrowing which is secured by the securities on the balance sheet. Such financings are recorded at their outstanding principal balance with any accrued interest due recorded as an accrued expense.

Revenue Recognition - Interest income on our mortgage loans and mortgage-backed securities is a combination of the interest earned based on the outstanding principal balance of the underlying loan/security, the contractual terms of the assets and the amortization of yield adjustments, principally premiums and discounts, using generally accepted interest methods. The net GAAP cost over the par balance of self-originated loans held for investment and premium and discount associated with the purchase of mortgage-backed securities and loans are amortized into interest income over the lives of the underlying assets using the effective yield method as adjusted for the effects of estimated prepayments. Estimating prepayments and the remaining term of our interest yield investments require management judgment, which involves, among other things, consideration of possible future interest rate environments and an estimate of how borrowers will react to those environments, historical trends and performance. The actual prepayment speed and actual lives could be more or less than the amount estimated by management at the time of origination or purchase of the assets or at each financial reporting period.

With respect to interest rate swaps and caps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps and caps will be recognized in current earnings.

Collateralized Debt Obligations (“CDOs”) - We use CDOs to permanently finance our loans held in securitization trusts. For financial reporting purposes, the ARM loans held as collateral are recorded as assets of the Company and the CDO is recorded as the Company’s debt. The Company has completed four securitizations since inception, the first three were accounted for as a permanent financing and the fourth was accounted for as a sale, and accordingly, not included in the Company’s financial statements.

Subordinated Debentures (Net) - Subordinated debentures are trust preferred securities that are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities are classified as subordinated debentures in the liability section of the Company’s condensed consolidated balance sheet.

Convertible Preferred Debentures (Net) - The Company issued $20.0 million in Series A Convertible Preferred Stock that matured on December 31, 2010. The outstanding shares were redeemed by the Company at the $20.00 per share liquidation preference plus accrued dividends on December 31, 2010.

Derivative Financial Instruments - The Company has developed risk management programs and processes, which include investments in derivative financial instruments designed to manage interest rate and prepayment risk associated with its securities investment activities.

Derivative instruments contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. The Company minimizes its risk exposure by limiting the counterparties with which it enters into contracts to banks and investment banks who meet established credit and capital guidelines. Management does not expect any counterparty to default on its obligations and, therefore, does not expect to incur any loss due to counterparty default. In addition, all outstanding interest rate swap agreements have bi-lateral margin call capabilities, meaning the Company will require margin for interest rate swaps that are in the Company’s favor, minimizing any amounts at risk.

The Company invests in To-Be-Announced securities (“TBAs”) through its Midway Residential Mortgage Portfolio. TBAs are forward-settling purchases and sales of Agency RMBS where the underlying pools of mortgage loans are “To-Be-Announced.” Pursuant to these TBA transactions, we agree to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. For TBA contracts that we have entered into, we have not asserted that physical settlement is probable, therefore we have not designated these forward commitments as hedging instruments. Realized and unrealized gains and losses associated with these TBAs are recognized through earnings in the condensed consolidated statements of operations.

Termination of Hedging Relationships - The Company employs a number of risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item.

Additionally, the Company may elect to un-designate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair value with changes recorded in current earnings.

Interest Rate Risk - The Company hedges the aggregate risk of interest rate fluctuations with respect to its borrowings, regardless of the form of such borrowings, which require payments based on a variable interest rate index. With respect to interest rate risk, the Company generally intends to hedge the risk related to changes in the benchmark London Interbank Offered Rate (“LIBOR”). The Company applies hedge accounting for certain interest rate hedges utilizing the cash flow hedge criteria.

In order to reduce such interest rate risk, the Company enters into swap agreements whereby the Company receives floating rate payments in exchange for fixed rate payments, effectively converting the borrowing to a fixed rate. The Company also enters into cap agreements whereby, in exchange for a premium, the Company is reimbursed for interest paid in excess of a certain capped rate.

To qualify for cash flow hedge accounting, interest rate swaps and caps must meet certain criteria, including:

	●	the items to be hedged expose the Company to interest rate risk; and

	●	the interest rate swaps or caps are expected to be highly effective in reducing the Company's exposure to interest rate risk.

The fair values of the Company's interest rate swap agreements and interest rate cap agreements are based on values provided by dealers who are familiar with the terms of these instruments. Correlation and effectiveness are periodically assessed at least quarterly based upon a comparison of the relative changes in the fair values or cash flows of the interest rate swaps and caps and the items being hedged.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instruments are reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instruments in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.

In addition to utilizing interest rate swaps and caps, we may purchase or sell short U.S. Treasury securities or enter into Eurodollar or other futures contracts or options to help mitigate the potential impact of changes in interest rates on the performance of the Midway Residential Mortgage Portfolio. We may borrow U.S. Treasury securities to cover short sales of U.S. Treasury securities under reverse repurchase agreements. For instruments that are not designated or qualify as a cash flow hedge, such as our use of U.S. Treasury securities or Eurodollar futures contracts, any realized and unrealized gains and losses associated with these instruments are recognized through earnings in the condensed consolidated statement of operations.

With respect to futures contracts, initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments are made or received periodically, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Company records a realized gain or loss equal to the difference between the proceeds of the closing transaction and the Company’s basis in the contract.

The Company uses TBAs to hedge interest rate risk associated with its Midway Residential Mortgage Portfolio. For example, we may utilize TBAs to hedge the interest rate or yield spread risk inherent in our long Agency RMBS by taking short positions in TBAs that are similar in character. In a TBA transaction, we would agree to purchase or sell for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. The Company typically does not take delivery of TBAs, but rather settles with its trading counterparties on a net basis. TBAs are liquid and have quoted market prices and represent the most actively traded class of RMBS.

Prepayment Risk - When borrowers repay the principal on their mortgage loans before maturity or faster than their scheduled amortization, the effect is to shorten the period over which interest is earned, and thereby, reduce the yield for mortgage assets purchased at a premium to their then current balance. Conversely, mortgage assets purchased for less than their then current balance exhibit higher yields due to faster prepayments. Generally, when market interest rates decline, borrowers have a tendency to refinance their mortgages, thereby increasing prepayments.

In an increasing prepayment environment, the timing difference between the actual cash receipt of principal paydowns and the announcement of the principal paydown may result in additional margin requirements from our repurchase agreement counterparties.

We mitigate prepayment risk by constantly evaluating our mortgage assets relative to prepayment speeds observed for our mortgage assets, including the investments in our Midway Residential Mortgage Portfolio. The Midway Residential Mortgage Portfolio is designed to outperform in a rising rate or slower prepayment environment, off-setting possible exposures in our other mortgage related assets. Furthermore, we stress-test the portfolio as to prepayment speeds and interest rate risk in order to further develop or make modifications to our hedge balances.

Other Comprehensive Income (Loss) - Other comprehensive income (loss) is comprised primarily of income (loss) from changes in value of certain of the Company’s available for sale securities and the impact of deferred gains or losses on changes in the fair value of certain derivative contracts that hedges future cash flows.

Employee Benefits Plans - The Company sponsors a defined contribution plan (the “Plan”) for all eligible domestic employees. The Plan qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Plan, participating employees may defer up to 15% of their pre-tax earnings, subject to the annual Internal Revenue Code contribution limit. The Company may match contributions up to a maximum of 25% of the first 5% of salary. Employees vest immediately in their contribution and vest in the Company’s contribution, if any, at a rate of 25% after two full years and then an incremental 25% per full year of service until fully vested at 100% after five full years of service. The Company made no contributions to the Plan for the nine months ended September 30, 2011 and 2010.

Stock Based Compensation - Compensation expense for equity based awards is recognized over the vesting period of such awards, based upon the fair value of the stock at the grant date.

Income Taxes - The Company operates so as to qualify as a REIT under the requirements of the Internal Revenue Code. Requirements for qualification as a REIT include various restrictions on ownership of the Company’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders, of which 85% plus any undistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise tax. The remaining distribution balance may extend until the timely filing of the Company’s tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.

HC is a TRS and therefore subject to corporate federal income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base upon the change in tax status. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Accounting Standards Codification Topic 740 Accounting for Income Taxes (“ASC 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. In situations involving uncertain tax positions related to income tax matters, we do not recognize benefits unless it is more likely than not that they will be sustained. ASC 740 was applied to all open taxable years as of its effective date. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based on factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company will recognize interest and penalties, if any, related to uncertain tax positions as income tax expense.

Earnings Per Share - Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

Loans Sold to Third Parties – The Company sold its discontinued mortgage lending business in March 2007. In the normal course of business, the Company is obligated to repurchase loans based on violations of representations and warranties in the loan sale agreements. The Company did not repurchase any loans during the nine months ended September 30, 2011 and 2010.

The Company periodically receives repurchase requests based on alleged violations of representations and warranties, each of which management reviews to determine, based on management’s experience, whether such requests may reasonably be deemed to have merit. As of September 30, 2011, we had a total of $2.0 million of unresolved repurchase requests that management concluded may reasonably be deemed to have merit, against which the Company has a reserve of approximately $0.3 million. The reserve is based on one or more of the following factors; historical settlement rates, property value securing the loan in question and specific settlement discussions with third parties.

A Summary of Recent Accounting Pronouncements Follows:

Receivables (ASC 310)

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of ASU 2011-02 did not have an effect on our financial condition, results of operations and disclosures.

Transfers and Servicing (ASC 860)

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. FASB Accounting Standards Codification (“Codification”) Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. We are assessing the impact of ASU 2011-03 on our financial condition, results of operations and disclosures.

Fair Value Measurements (ASC 820)

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurements. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. The amendments in this ASU are required to be applied prospectively, and are effective for interim and annual periods beginning after December 15, 2011. We do not expect that the adoption of ASU 2011-04 will have a significant impact on our financial condition, results of operations and disclosures.

Comprehensive Income (ASC 220)

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of ASU 2011-05 will not have an impact on our financial position, results of operations and disclosures as it only requires a change in the format of the current presentation.

2. Investment Securities Available for Sale

Investment securities available for sale consist of the following as of September 30, 2011 (dollar amounts in thousands):

	Amortized Costs		Unrealized Gains		Unrealized Losses			Carrying Value
Agency RMBS	$	147,584	$	3,212	$	(7,980	)	$	142,816
Non-Agency RMBS		6,356		—		(1,494	)		4,862
CLOs		9,056		13,659		—			22,715
Total	$	162,996	$	16,871	$	(9,474	)	$	170,393

Securities included in investment securities available for sale held in our Midway Residential Mortgage Portfolio that are measured at fair value through earnings consist of the following as of September 30, 2011 (dollar amounts in thousands):

	Amortized Costs		Unrealized Gains		Unrealized Losses			Carrying Value
Interest only securities included in Agency RMBS:
Federal National Mortgage Association (“Fannie Mae”)	$	32,902	$	854	$	(3,393	)	$	30,363
Federal Home Loan Mortgage Corporation (“Freddie Mac”)		20,369		472		(1,970	)		18,871
Government National Mortgage Association (“Ginnie Mae”)		22,446		308		(2,385	)		20,369
Total	$	75,717	$	1,634	$	(7,748	)	$	69,603

Investment securities available for sale consist of the following as of December 31, 2010 (dollar amounts in thousands):

	Amortized Costs		Unrealized Gains		Unrealized Losses				Carrying Value
Agency RMBS	$	45,865	$	1,664		$	—		$	47,529
Non-Agency RMBS		10,071		80			(1,166	)		8,985
CLOs		11,286		18,240			—			29,526
Total	$	67,222	$	19,984		$	(1,166	)	$	86,040

The following table sets forth the stated reset periods of our investment securities available for sale at September 30, 2011 (dollar amounts in thousands):

September 30, 2011	Less than 6 Months		More than 6 Months to 24 Months		More than 24 Months		Total
	Carrying Value		Carrying Value		Carrying Value		Carrying Value
Agency RMBS	$	81,043	$	30,841	$	30,932	$	142,816
Non-Agency RMBS		4,862		—		—		4,862
CLO		22,715		—		—		22,715
Total	$	108,620	$	30,841	$	30,932	$	170,393

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

December 31, 2010	Less than 6 Months		More than 6 Months to 24 Months		More than 24 Months		Total
	Carrying Value		Carrying Value		Carrying Value		Carrying Value
Agency RMBS	$	25,816	$	5,313	$	16,400	$	47,529
Non-Agency RMBS		8,985		—		—		8,985
CLO		29,526		—		—		29,526
Total	$	64,327	$	5,313	$	16,400	$	86,040

The following tables present the Company’s investment securities available for sale in an unrealized loss position reported through OCI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands):

September 30, 2011	Less than 12 Months				Greater than 12 Months				Total
	Carrying Value		Gross Unrealized Losses		Carrying Value		Gross Unrealized Losses		Carrying Value		Gross Unrealized Losses
Agency RMBS	$	30,312	$	232	$	—	$	—	$	30,312	$	232
Non-Agency RMBS		—		—		4,862		1,494		4,862		1,494
Total	$	30,312	$	232	$	4,862	$	1,494	$	35,174	$	1,726

December 31, 2010	Less than 12 Months				Greater than 12 Months				Total
	Carrying Value		Gross Unrealized Losses		Carrying Value		Gross Unrealized Losses		Carrying Value		Gross Unrealized Losses
Non-Agency RMBS	$	—	$	—	$	6,436	$	1,166	$	6,436	$	1,166
Total	$	—	$	—	$	6,436	$	1,166	$	6,436	$	1,166

As of September 30, 2011 and December 31, 2010, respectively, the Company did not have unrealized losses in investment securities that were deemed other-than-temporary.

During the three and nine months ended September 30, 2011, the Company received total proceeds of approximately $0.2 million and $20.8 million, respectively, realizing approximately $0 and $5.0 million, respectively, of profit before incentive fee from the sale of certain CLO investments, certain Agency RMBS and U.S. Treasury securities. During the three and nine months ended September 30, 2010, the Company received total proceeds of approximately $7.9 million and $40.8 million, respectively, realizing approximately $1.9 million and $4.0 million, respectively, of profit before incentive fee from the sale of certain Agency RMBS and non-Agency RMBS.

3. Mortgage Loans Held in Securitization Trusts and Real Estate Owned

Mortgage loans held in securitization trusts (net) consist of the following as of September 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands):

	September 30, 2011			December 31, 2010
Mortgage loans principal amount	$	212,404		$	229,323
Deferred origination costs – net		1,338			1,451
Reserve for loan losses		(3,319	)		(2,589	)
Total	$	210,423		$	228,185

Allowance for Loan losses - The following table presents the activity in the Company's allowance for loan losses on mortgage loans held in securitization trusts for the nine months ended September 30, 2011 and 2010, respectively (dollar amounts in thousands):

	Nine Months Ended September 30,
	2011			2010
Balance at beginning of period	$	2,589		$	2,581
Provisions for loan losses		1,191			1,210
Transfer to real estate owned		(16	)		(449	)
Charge-offs		(445	)		(534	)
Balance at the end of period	$	3,319		$	2,808

On an ongoing basis, the Company evaluates the adequacy of its allowance for loan losses. The Company’s allowance for loan losses at September 30, 2011 was $3.3 million, representing 156 basis points of the outstanding principal balance of loans held in securitization trusts as of September 30, 2011, as compared to 113 basis points as of December 31, 2010. As part of the Company’s allowance for loan losses adequacy analysis, management will assess an overall level of allowances while also assessing credit losses inherent in each non-performing mortgage loan held in securitization trusts. These estimates involve the consideration of various credit related factors, including but not limited to, current housing market conditions, current loan to value ratios, delinquency status, the borrower’s current economic and credit status and other relevant factors.

Real Estate Owned – The following table presents the activity in the Company’s real estate owned held in securitization trusts for the nine months ended September 30, 2011 and the year ended December 31, 2010 (dollar amounts in thousands):

	September 30, 2011			December 31, 2010
Balance at beginning of period	$	740		$	546
Write downs		(62	)		(193	)
Transfer from mortgage loans held in securitization trusts		218			1,398
Disposal		(372	)		(1,011	)
Balance at the end of period	$	524		$	740

Real estate owned held in securitization trusts are included in receivables and other assets on the balance sheet and write downs are included in provision for loan losses in the statement of operations for reporting purposes.

All of the Company’s mortgage loans and real estate owned held in securitization trusts are pledged as collateral for the CDOs issued by the Company. As of September 30, 2011 and December 31, 2010, the Company’s net investment in the securitization trusts, which is the maximum amount of the Company’s investment that is at risk to loss and represents the difference between the carrying amount of the loans and real estate owned held in securitization trusts and the amount of CDOs outstanding, was $7.9 million and $8.9 million, respectively.

Delinquency Status of Our Mortgage Loans Held in Securitization Trusts

As of September 30, 2011, we had 41 delinquent loans with an aggregate principal amount outstanding of approximately $22.0 million categorized as Mortgage Loans Held in Securitization Trusts (net). Of the $22.0 million in delinquent loans, $18.0 million, or 82%, are currently under some form of modified payment plan. As these borrowers are not current, they continue to be reported as delinquent even though they are working towards a credit resolution. The table below shows delinquencies in our portfolio of loans held in securitization trusts, including real estate owned through foreclosure (REO), as of September 30, 2011 (dollar amounts in thousands):

Days Late	Number of Delinquent Loans		Total Dollar Amount		% of Loan Portfolio
30-60		3	$	1,526		0.72	%
61-90		1		246		0.12	%
90+		37		20,183		9.48	%
Real estate owned through foreclosure		2		570		0.27	%

As of December 31, 2010, we had 46 delinquent loans with an aggregate principal amount outstanding of approximately $25.1 million categorized as Mortgage Loans Held in Securitization Trusts (net). Of the $25.1 million in delinquent loans as of December 31, 2010, $17.8 million, or 71%, were under some form of modified payment plan. Because these borrowers were not current as of December 31, 2010, they have been reported as delinquent even though they were working towards a credit resolution. The table below shows delinquencies in our portfolio of loans held in securitization trusts, including real estate owned through foreclosure (REO), as of December 31, 2010 (dollar amounts in thousands):

Days Late	Number of Delinquent Loans		Total Dollar Amount		% of Loan Portfolio
30-60		7	$	2,515		1.09	%
61-90		4		4,362		1.89	%
90+		35		18,191		7.90	%
Real estate owned through foreclosure		3		894		0.39	%

4. Investment in Limited Partnership and Limited Liability Company

The Company has a non-controlling, unconsolidated limited partnership interest in an entity that is accounted for using the equity method of accounting. Capital contributions, distributions, and profits and losses of the entity are allocated in accordance with the terms of the limited partnership agreement. The Company owns effectively 100% of the equity of the limited partnership, but has no decision-making powers, and therefore does not consolidate the limited partnership. Our maximum exposure to loss in this variable interest entity is $11.3 million at September 30, 2011. During the third and fourth quarters of 2010, HC invested, in exchange for limited partnership interests, $19.4 million in this limited partnership that was formed for the purpose of acquiring, servicing, selling or otherwise disposing of first-lien residential mortgage loans. The pool of mortgage loans was acquired by the partnership at a significant discount to the loans’ unpaid principal balance.

At September 30, 2011, the Company had an investment in this limited partnership of $11.5 million. For the three and nine months ended September 30, 2011, the Company recognized income from the investment in limited partnership of $0.3 million and $1.6 million, respectively. For the three and nine months ended September 30, 2011, the Company received distributions from the investment in limited partnership of $3.9 million and $8.8 million, respectively.

The condensed balance sheet of the investment in limited partnership at September 30, 2011 and December 31, 2010, respectively, is as follows (dollar amounts in thousands):

Assets	September 30, 2011		December 31, 2010
Cash	$	2,095	$	152
Mortgage loans held for sale (net)		8,690		18,072
Other assets		694		478
Total Assets	$	11,479	$	18,702

Liabilities & Partners’ Equity
Other liabilities	$	180	$	37
Partners’ equity		11,299		18,665
Total Liabilities and Partners’ Equity	$	11,479	$	18,702

The condensed statement of operations of the investment in limited partnership for the three and nine months ended September 30, 2011, respectively, is as follows (dollar amounts in thousands):

	Three Months Ended			Nine Months Ended
Statement of Operations	September 30, 2011			September 30, 2011
Interest income	$	302		$	1,063
Realized gain		208			993
Total Income		510			2,056
Other expenses		(181	)		(496	)
Net Income	$	329		$	1,560

During the second quarter of 2011, RBCM invested $5.3 million in a limited liability company that was formed for the purpose of investing in two tranches of securities. For the three and nine months ended September 30, 2011, the Company recognized income from the investment in limited liability company of $0.2 million. For the three and nine months ended September 30, 2011, the Company received distributions from the investment in limited liability company of $0.1 million.

5. Derivatives and Other Hedging Instruments

The following table presents the fair value of derivative instruments designated as hedging instruments and their location in the Company’s condensed consolidated balance sheets at September 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands):

Derivatives Designated as Hedging Instruments		Balance Sheet Location		September 30, 2011			December 31, 2010
Interest Rate Swaps		Derivative Liabilities		$	484		$	1,087

The following table presents the impact of the Company’s derivative instruments on the Company’s accumulated other comprehensive income (loss) for the nine months ended September 30, 2011 and 2010, respectively (dollar amounts in thousands):

	Nine Months Ended September 30,
Derivatives Designated as Hedging Instruments	2011			2010
Accumulated other comprehensive income (loss) for derivative instruments:
Balance at beginning of the period	$	(1,087	)	$	(2,905	)
Unrealized gain on interest rate caps		—			390
Unrealized gain on interest rate swaps		603			878
Reclassification adjustment for net gains (losses) included in net income for hedges		—			—
Balance at the end of the period	$	(484	)	$	(1,637	)

The Company estimates that over the next 12 months, approximately $0.4 million of the net unrealized losses on the interest rate swaps will be reclassified from accumulated other comprehensive income (loss) into earnings.

The following table presents the fair value of derivative instruments held in our Midway Residential Mortgage Portfolio that were not designated as hedging instruments and their location in the Company’s condensed consolidated balance sheets at September 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands):

Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	September 30, 2011		December 31, 2010
TBA securities	Derivative Asset	$	74,120	$	—
U.S. Treasury futures	Derivative Asset		632		—
Eurodollar futures	Derivative Liabilities		3,135		—
Options on U.S. Treasury futures	Derivative Asset		301		—

The tables below summarize the activity of derivative instruments not designated as hedges for the three and nine months ended September 30, 2011, respectively (dollar amounts in thousands). There were no derivative instruments not designated as hedges for the same periods in 2010.

	For the Three Months Ended September 30, 2011
Derivatives Not Designated as Hedging Instruments	Notional Amount as of June 30, 2011			Additions		Settlement, Expiration or Exercise			Notional Amount as of September 30, 2011
TBA securities	$	14,000		$	149,000	$	(92,000	)	$	71,000
U.S. Treasury futures		15,600			220,000		(231,100	)		4,500
Short sales of Eurodollar futures		(2,746,000	)		807,000		(928,000	)		(2,867,000	)
Options on U.S. Treasury futures		88,000			191,400		(170,500	)		108,900

	For the Nine Months Ended September 30, 2011
Derivatives Not Designated as Hedging Instruments	Notional Amount as of December 31, 2010		Additions		Settlement, Expiration or Exercise			Notional Amount as of September 30, 2011
TBA securities	$	—	$	193,000	$	(122,000	)	$	71,000
U.S. Treasury futures		—		279,700		(275,200	)		4,500
Short sales of Eurodollar futures		—		1,201,000		(4,068,000	)		(2,867,000	)
Options on U.S. Treasury futures		—		377,900		(269,000	)		108,900

The use of TBAs exposes the Company to market value risk, as the market value of the securities that the Company is required to purchase pursuant to a TBA transaction may decline below the agreed-upon purchase price. Conversely, the market value of the securities that the Company is required to sell pursuant to a TBA transaction may increase above the agreed upon sale price. For the three and nine months ended September 30, 2011, respectively, we recorded net realized gains of $1.1 million. For the three and nine months ended September 30, 2011, respectively, we recorded no net unrealized gains. There were no realized or unrealized gains or losses from TBAs for the same periods in 2010.

The Eurodollar futures swap equivalents in our Midway Residential Mortgage Portfolio are accounted for at fair value with both realized and unrealized gains and losses included in other income (expense) in our condensed consolidated statements of operations. For the three and nine months ended September 30, 2011, we recorded net realized losses of $0.9 million and $1.1 million, respectively, and net unrealized losses of $1.4 million and $3.1 million, respectively, in our Eurodollar futures contracts. The Eurodollar futures consist of 2,867 contracts with expiration dates ranging between December 2011 and September 2014 and have a fair market value derivative liability of $3.1 million. There were no realized or unrealized gains of losses from Eurodollars for the same periods in 2010.

The U.S. Treasury futures and options in our Midway Residential Mortgage Portfolio are accounted for at fair value with both realized and unrealized gains and losses included in other income (expense) in our condensed consolidated statements of operations. For the three and nine months ended September 30, 2011, respectively, we recorded net realized gains of $2.4 million and $2.9 million, respectively, and net unrealized gains of $0.6 million and $0.5 million. There were no realized or unrealized gains or losses from U.S. Treasury futures and options for the same periods in 2010.

The following table details the impact of the Company’s interest rate swaps and interest rate caps included in interest expense for the three and nine months ended September 30, 2011 and 2010, respectively (dollar amounts in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010
Interest Rate Caps:
Interest expense-investment securities and loans held in securitization trusts	$	—	$	86		$	—		$	303
Interest expense-subordinated debentures		—		—			—			92
Interest Rate Swaps:
Interest expense-investment securities and loans held in securitization trusts		213		596			716			1,983

Interest Rate Swaps, Futures Contracts and TBAs - The use of interest rate swaps “Swaps” exposes the Company to counterparty credit risks in the event of a default by a Swap counterparty. If a counterparty defaults under the applicable Swap agreement, the Company may be unable to collect payments to which it is entitled under its Swap agreements, and may have difficulty collecting the assets it pledged as collateral against such Swaps. The Company currently has in place with all outstanding Swap counterparties bi-lateral margin agreements thereby requiring a party to post collateral to the Company for any valuation deficit. This arrangement is intended to limit the Company’s exposure to losses in the event of a counterparty default.

The Company is required to pledge assets under a bi-lateral margin arrangement, including either cash or Agency RMBS, as collateral for its interest rate swaps, futures contracts and TBAs, whose collateral requirements vary by counterparty and change over time based on the market value, notional amount, and remaining term of the agreement. In the event the Company is unable to meet a margin call under one of its agreements, thereby causing an event of default or triggering an early termination event under one of its agreements, the counterparty to such agreement may have the option to terminate all of such counterparty’s outstanding transactions with the Company. In addition, under this scenario, any close-out amount due to the counterparty upon termination of the counterparty’s transactions would be immediately payable by the Company pursuant to the applicable agreement. The Company believes it was in compliance with all margin requirements under its agreements as of September 30, 2011 and December 31, 2010. The Company had $7.6 million and $1.2 million of restricted cash related to margin posted for its agreements as of September 30, 2011 and December 31, 2010, respectively. The restricted cash held by third parties is included in receivables and other assets in the accompanying condensed consolidated balance sheets.

The following table presents information about the Company’s interest rate swaps as of September 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands):

	September 30, 2011					December 31, 2010
Maturity (1)	Notional Amount		Weighted Average Fixed Pay Interest Rate			Notional Amount		Weighted Average Fixed Pay Interest Rate
Within 30 Days	$	1,570		3.03	%	$	24,080		2.99	%
Over 30 days to 3 months		1,570		3.02			2,110		3.03
Over 3 months to 6 months		15,190		3.02			2,280		3.03
Over 6 months to 12 months		750		2.93			5,600		3.03
Over 12 months to 24 months		8,820		2.93			16,380		3.01
Over 24 months to 36 months		—		—			8,380		2.93
Total	$	27,900		2.99	%	$	58,830		3.00	%

(1)	The Company enters into scheduled amortizing interest rate swap transactions whereby the Company pays a fixed rate of interest and receives one month LIBOR.

Interest Rate Caps – Interest rate caps were designated by the Company as cash flow hedges against interest rate risk associated with the Company’s CDOs and the subordinated debentures. The interest rate caps associated with the CDOs are amortizing contractual schedules determined at origination. The Company had $0 and $76.0 million of notional interest rate caps outstanding as of September 30, 2011 and December 31, 2010, respectively. These interest rate caps were utilized to cap the interest rate on the CDOs at a fixed-rate when one month LIBOR exceeds a predetermined rate. The interest rate caps expired on April 25, 2011.

6. Financing Arrangements, Portfolio Investments

The Company has entered into repurchase agreements with third party financial institutions to finance its investment portfolio. The repurchase agreements are short-term borrowings that bear interest rates typically based on a spread to LIBOR, and are secured by the securities which they finance. At September 30, 2011, the Company had repurchase agreements with an outstanding balance of $111.5 million and a weighted average interest rate of 0.61%. As of December 31, 2010, the Company had repurchase agreements with an outstanding balance of $35.6 million and a weighted average interest rate of 0.39%. At September 30, 2011 and December 31, 2010, securities pledged by the Company as collateral for repurchase agreements had estimated fair values of $133.0 million and $38.5 million, respectively. All outstanding borrowings under our repurchase agreements mature within 30 days. As of September 30, 2011, the average days to maturity for all repurchase agreements is 18 days.

The following table summarizes outstanding repurchase agreement borrowings secured by portfolio investments, which are included in financing arrangements, portfolio investments on the condensed consolidated balance sheets, as of September 30, 2011 and December 31, 2010, respectively (dollar amount in thousands):

Repurchase Agreements by Counterparty
	September 30, 2011		December 31, 2010
Counterparty Name
Cantor Fitzgerald, L.P.	$	9,720	$	4,990
Credit Suisse First Boston LLC		11,331		12,080
Jefferies & Company, Inc.		18,542		9,476
JPMorgan Chase & Co.		45,594		—
South Street Securities LLC		26,313		9,086
Total Financing Arrangements, Portfolio Investments	$	111,500	$	35,632

As of September 30, 2011, the outstanding balance under our repurchase agreements was funded at an advance rate of 85% that implies an average haircut of 15%. The weighted average “haircut” related to our repurchase agreement financing for our Agency IOs, CLOs and other Agency RMBS was approximately 25%, 35% and 5%, respectively, for a total weighted average “haircut” of 15%. The amount at risk for Credit Suisse First Boston LLC, South Street Securities LLC, Jefferies & Company, Inc., Cantor Fitzgerald, L.P., and JPMorgan Chase & Co. are $0.9 million, $1.0 million, $1.0 million, $3.9 million and $14.7 million, respectively. As of September 30, 2011, the Company had $11.7 million in cash and $37.4 million in unencumbered investment securities to meet additional haircut or market valuation requirements, including $25.0 million of RMBS, of which $20.2 million are Agency RMBS. The $11.7 million of cash and the $25.0 million in RMBS (which, collectively, represents 33% of our financing arrangements, portfolio investments) are liquid and could be monetized to pay down or collateralize the liability immediately. There is also an additional $11.0 million held in overnight deposits in our Midway Residential Mortgage Portfolio included in restricted cash that is available to meet margin calls as it relates to our repurchase agreements.

7. Collateralized Debt Obligations

The Company’s CDOs, which are recorded as liabilities on the Company’s balance sheet, are secured by ARM loans pledged as collateral, which are recorded as mortgage loans held in securitization trusts in the condensed consolidated balance sheets. As of September 30, 2011 and December 31, 2010, the Company had CDOs outstanding of $203.1 million and $220.0 million, respectively. As of September 30, 2011 and December 31, 2010, the current weighted average interest rate on these CDOs was 0.62% and 0.65%, respectively. The CDOs are collateralized by ARM loans with a principal balance of $212.4 million and $229.3 million at September 30, 2011 and December 31, 2010, respectively. The Company retained the owner trust certificates, or residual interest, for three securitizations and, as of September 30, 2011 and December 31, 2010, had a net investment in the securitization trusts, after loan loss reserves and including real estate owned, of $7.9 million and $8.9 million, respectively.

8. Discontinued Operation

In connection with the sale of our mortgage origination platform assets during the quarter ended March 31, 2007, we classified our mortgage lending segment as a discontinued operation. As a result, we have reported revenues and expenses related to the segment as a discontinued operation for all periods presented in the accompanying condensed consolidated financial statements. Certain assets, such as the deferred tax asset, and certain liabilities, such as the subordinated debentures and liabilities related to lease facilities not sold, are part of our ongoing operations and accordingly, we have not included these items as part of the discontinued operation. Assets and liabilities related to the discontinued operation are $4.0 million and $0.5 million, respectively, at September 30, 2011, and $4.0 million and $0.6 million, respectively, and December 31, 2010, and are included in receivables and other assets and accrued expenses and other liabilities in the condensed consolidated balance sheets.

Statements of Operations Data

The statements of operations of the discontinued operation for the three and nine months ended September 30, 2011 and 2010, respectively, are as follows (dollar amounts in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010
Revenues	$	59	$	368		$	160		$	1,115
Expenses		40		70			137			238
Income from discontinued operation-net of tax	$	19	$	298		$	23		$	877

9. Commitments and Contingencies

Loans Sold to Third Parties - The Company sold its discontinued mortgage lending business in March 2007. In the normal course of business, the Company is obligated to repurchase loans based on violations of representations and warranties in the loan sale agreements. The Company did not repurchase any loans during the nine months ended September 30, 2011.

The Company periodically receives repurchase requests based on alleged violations of representations and warranties, each of which management reviews to determine, based on management’s experience, whether such requests may reasonably be deemed to have merit. As of September 30, 2011, we had a total of $2.0 million of unresolved repurchase requests that management concluded may reasonably be deemed to have merit and against which the Company has a reserve of approximately $0.3 million. The reserve is based on one or more of the following factors: historical settlement rates, property value securing the loan in question and specific settlement discussions with third parties.

Outstanding Litigation - The Company is at times subject to various legal proceedings arising in the ordinary course of business. As of September 30, 2011, 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.

10. Concentrations of Credit Risk

At September 30, 2011 and December 31, 2010, respectively, there were geographic concentrations of credit risk exceeding 5% of the total loan balances within the mortgage loans held in the securitization trusts and the real estate owned as follows:

	September 30, 2011			December 31, 2010
New York		37.6	%		37.9	%
Massachusetts		25.0	%		25.0	%
New Jersey		9.1	%		8.7	%
Florida		5.7	%		5.6	%
Connecticut		5.0	%		4.7	%

11. Fair Value of Financial Instruments

The Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters, including interest rate yield curves.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities Available for Sale (RMBS) - Fair value for the RMBS in our portfolio is based on quoted prices provided by dealers who make markets in similar financial instruments. The dealers will incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security. If quoted prices for a security are not reasonably available from a dealer, the security will be re-classified as a Level 3 security and, as a result, management will determine the fair value based on characteristics of the security that the Company receives from the issuer and based on available market information. Management reviews all prices used in determining valuation to ensure they represent current market conditions. This review includes surveying similar market transactions, comparisons to interest pricing models as well as offerings of like securities by dealers. The Company's investment securities that are comprised of RMBS are valued based upon readily observable market parameters and are classified as Level 2 fair values.

Investment Securities Available for Sale (CLO) - The fair value of the CLO notes, prior to December 31, 2010, was based on management’s valuation determined using a discounted future cash flows model that management believes would be used by market participants to value similar financial instruments. At each of September 30, 2011 and December 31, 2010, the fair value of the CLO notes was based on quoted prices provided by dealers who make markets in similar financial instruments. The CLO notes were previously classified as Level 3 fair values and were re-classified as Level 2 fair values in the fourth quarter of 2010.

Investment Securities Available for Sale (Midway) - The fair value of other investment securities available for sale, such as IOs and U.S. Treasury securities, is based on quoted prices provided by dealers who make markets in similar financial instruments. The Company’s IOs and U.S. Treasury securities are classified as Level 2 fair values.

Derivative Instruments - The fair value of interest rate swaps, caps, options, futures and TBAs are based on dealer quotes. The Company’s derivatives are classified as Level 1 and 2 fair values.

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):

	Measured at Fair Value on a Recurring Basis at September 30, 2011
	Level 1		Level 2		Level 3		Total
Assets carried at fair value:
Investment securities available for sale:
Agency RMBS	$	—	$	142,816	$	—	$	142,816
Non-Agency RMBS		—		4,862		—		4,862
CLO		—		22,715		—		22,715
Derivative Asset		—		75,053		—		75,053
Total	$	—	$	245,446	$	—	$	245,446

Liabilities carried at fair value:
Derivative liabilities (interest rate swaps and Eurodollar futures)	$	3,135	$	484	$	—	$	3,619
Total	$	3,135	$	484	$	—	$	3,619

	Measured at Fair Value on a Recurring Basis at December 31, 2010
	Level 1		Level 2		Level 3		Total
Assets carried at fair value:
Investment securities available for sale:
Agency RMBS	$	—	$	47,529	$	—	$	47,529
Non-Agency RMBS		—		8,985		—		8,985
CLO		—		29,526		—		29,526
Total	$	—	$	86,040	$	—	$	86,040

Liabilities carried at fair value:
Derivative liabilities (interest rate swaps)	$	—	$	1,087	$	—	$	1,087
Total	$	—	$	1,087	$	—	$	1,087

The following table details changes in valuation for the Level 3 assets for the nine months ended September 30, 2011 and 2010, respectively (amounts in thousands):

Investment securities available for sale: CLO

	Nine Months Ended September 30,
	2011		2010
Balance at beginning of period	$	—	$	17,599
Total gains (realized/unrealized)
Included in earnings (1)		—		1,496
Included in other comprehensive income/(loss)		—		4,854
Balance at the end of period (2)	$	—	$	23,949

(1) - Amounts included in interest income.

(2) - The CLOs were re-classified from Level 3 to Level 2 fair values during the fourth quarter of 2010 due to management determining that there is a reliable market for these assets based upon quoted prices provided by dealers who make markets in similar investments.

Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, the Company continues to refine its valuation methodologies. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of each reporting date, which may in the future include periods of market dislocation, during which time price transparency may be reduced. This condition could cause the Company’s financial instruments to be reclassified from Level 2 to Level 3 in future periods.

The following table presents assets measured at fair value on a non-recurring basis as of September 30, 2011 and December 31, 2010, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):

	Assets Measured at Fair Value on a Non-Recurring Basis at September 30, 2011
	Level 1			Level 2			Level 3			Total
Mortgage loans held for investment		$	—		$	—		$	5,117		$	5,117
Mortgage loans held for sale – included in discontinued operations (net)			—			—			3,787			3,787
Mortgage loans held in securitization trusts – impaired loans (net)			—			—			6,825			6,825
Real estate owned held in securitization trusts			—			—			524			524

	Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2010
	Level 1			Level 2			Level 3			Total
Mortgage loans held for investment		$	—		$	—		$	7,460		$	7,460
Mortgage loans held for sale – included in discontinued operations (net)			—			—			3,808			3,808
Mortgage loans held in securitization trusts – impaired loans (net)			—			—			6,576			6,576
Real estate owned held in securitization trusts			—			—			740			740

The following table presents losses incurred for assets measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2011 and 2010, respectively, on the Company’s condensed consolidated statements of operations (dollar amounts in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2011		September 30, 2010		September 30, 2011			September 30, 2010
Mortgage loans held in securitization trusts – impaired loans (net)	$	435	$	734		$	1,234		$	1,336

The following table presents the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands):

	September 30, 2011				December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	11,679	$	11,679	$	19,375	$	19,375
Investment securities available for sale		170,393		170,393		86,040		86,040
Mortgage loans held in securitization trusts (net)		210,423		186,342		228,185		206,560
Derivative assets		75,053		75,053		—		—
Assets related to discontinued operation-mortgage loans held for sale (net)		3,787		3,787		3,808		3,808
Mortgage loans held for investment		5,117		5,117		7,460		7,460
Receivable for securities sold		5,400		5,400		5,653		5,653

Financial liabilities:
Financing arrangements, portfolio investments	$	111,500	$	111,500	$	35,632	$	35,632
Collateralized debt obligations		203,054		171,187		219,993		185,609
Derivative liabilities		3,619		3,619		1,087		1,087
Payable for securities purchased		79,585		79,585		—